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PRINCIPLES 
 
 OF 
 
 POLITICAL ECONOMY 
 
 BY 
 
 SIMON NEWCOMB, Ph.D., LL.D. 
 
 PROFESSOR OF MATHEMATICS, U. S. NAVY; PROFESSOR IN THE JOHNS HOPKINS UNIVERSITY 
 
 
 ' 
 
 NEW YORK 
 HARPER & BROTHERS, FRANKLIN SQUARE 
 
 18S6 
 
 
i 
 
 '; 
 
 Copyright, 1885, by Harper & Brothers. 
 
 All rights reserved. 
 

 PKEFAOE. 
 
 The following work is intended to embody an exposition of 
 those principles of economic science which must be mastered 
 by every one who would form an intelligent judgment of the 
 causes which influence the public well-being. The main im- 
 provement which the author has attempted is the presentation 
 of the subject in a scientific form as an established body of 
 principles. It has seemed to him that, from a s^entific stand- 
 point, the most unsatisfactory feature of the current teaching 
 of economics is the presentation of too many opposing views 
 and arguments. He has endeavored to exclude all mere views, 
 and substitute independent investigation for argument. Where 
 investigation leads to a positive result, that result is stated in 
 the form of a point gained ; where the result is still uncertain, 
 the deficiency is pointed out, with hints of what new knowl- 
 edge is wanting to supply it. It is hoped that the principles 
 laid down in the first four books will be accepted by all who 
 understand the subject as forming a well - ascertained, even 
 if limited, body of doctrine. The very fact that the proposi- 
 tions are well established leads to their being reached, not by 
 dogmatic statements, but by courses of thought which leave 
 the reader free at every step to compare the ideas presented 
 
Iv PREFACE. 
 
 to him with all the facts he may have learned from observa- 
 tion. 
 
 The author takes a more hopeful view of the future develop- 
 ment of economics than that commonly found in current dis- 
 cussion. He holds that nothing is needed to give the subject 
 a recognized place among the sciences except to treat and 
 develop it as a science. Of course this can be done only by 
 men trained in the work of scientific research and at the same 
 time conscious of the psychological basis on which economic 
 doctrine must rest. To such investigators a most interesting 
 and hopeful field of research is opened in the study of the laws 
 growing out of the soeietary circulation. If the same amount 
 and kind of research which have been applied to the develop- 
 ment of the laws of electricity were applied to this subject, 
 there is every reason to suppose that it would either settle 
 many questions now in dispute, or would at least show how 
 they were to be settled. 
 
 In order not to obliterate in the mind of the reader the dis- 
 tinction between the scientific and the practical sides of the 
 subject, all questions of public policy have been condensed into 
 the concluding book. Here the author has allowed himself 
 more freedom of discussion and treatment than elsewhere, but 
 still encourages the reader to reach his own conclusions by his 
 own methods of thought. This book would have been entirely 
 omitted, as detracting from the purely scientific character of 
 the work, were it not that applications of a science are essential 
 to a good mastery of its first principles. The author trusts that 
 little or nothing of a partisan character will be found even here, 
 and that the student will leave the subject with a feeling that 
 he must rely upon his own investigations for his practical con- 
 clusions. 
 
PREFACE. V 
 
 Possibly some apology may be needed for the very elemen- 
 tary and perhaps fragmentary outline of logical method in 
 science which forms the bulk of the first book. This outline 
 was suggested by the belief that much of the confusion and 
 difficulty which surround the subject arise from want of 
 insight into the true significance and use of scientific proposi- 
 tions. The author hopes that it will aid the student in seeing 
 the relation between the logical and the practical sides of the 
 subject, and in making each of these sides help the other. 
 
 The general scope of the work has been determined by the 
 principle of condensing into it that which is most valuable to 
 the student in the sense of combining utility with difficulty of 
 acquirement. He holds that the great want of the citizen who 
 is to exercise an important influence upon the policy of the 
 nation is understanding rather than knowledge. The latter he 
 will be sure to acquire by his experience of the world, whether 
 he is or is not educated ; but it will be barren of results with- 
 out guiding principles by which to interpret and arrange the 
 facts he observes. On the other hand, a command of prin- 
 ciples requires a course of training and study which can seldom 
 be undertaken with success after one has entered upon the 
 serious business of life. It has therefore the highest elements 
 of value to the student. It is hoped that the student who has 
 mastered the first four books of the following work will feel 
 able to proceed intelligently, either in the study of more ad- 
 vanced branches, or in the explanation of those economic 
 phenomena which will be of daily occurrence in the course of 
 his active life. 
 
 The questions found at the ends of some chapters are 
 intended as exercises in applying the teachings of the chap- 
 ters preceding them, and may serve to test the student's com- 
 
Vi PBEFAOE. 
 
 m'and of the subject. Some of them may afford material for 
 extended class discussion. In the conduct of such discussions 
 a danger is to be guarded against. If they lead the student 
 into the habit of arguing rather than investigating, they may do 
 him more harm than good. It is essential that he should see 
 in each case what the point at issue really is, and should be 
 taught to recognize and avoid that large and alluring class of 
 questions in which there is no point at issue. 
 
 Plow far the work can be regarded as an original contribu- 
 tion to economic science is to be determined by the critical 
 reader. It may not, however, be inappropriate to indicate one 
 or two points in which it has seemed to the author that the 
 existing form of the subject admitted of improvement. He 
 conceives that in current economic literature there is a triple 
 confusion of things, with rights of property in things, and with 
 the written evidences of those rights of property. This sub- 
 ject he has discussed in connection with the conceptions of 
 wealth, capital, and money. 
 
 He has also felt the want of names for certain general con- 
 cepts, among which the following may be mentioned : 
 
 A name for everything which men receive in return for money 
 paid, whether it be wealth transferred or services rendered. 
 
 A general name for that which is transferred in payment, 
 whether it be money or credit. 
 
 A general term to express those operations of industry and 
 commerce whereby human wants are satisfied, comprising pro- 
 duction, transportation, and transfers of ownership. 
 
 He has deemed it proper to leave to higher authorities the 
 task of supplying this nomenclature, though, as the reader will 
 notice, he has felt obliged to use several existing terms in a 
 much wider sense than that commonly assigned them. 
 
TABLE OF CONTENTS. 
 
 BOOK I. 
 
 LOGICAL BASIS AND METHOD OF ECONOMIC 
 
 SCIENCE. 
 
 PAGE 
 
 Chapter I. Introductory View of the Subject -3 
 
 1. Objects of human activity. 2. The social organism. 3. Moving 
 force of the social organism. 4. The law of labor. 5. Origin 
 of the social feature. 6. Limitations upon the conception of 
 an organism. 
 
 Chapter II. Definition of the Field of Political Econ- 
 omy 
 
 7. The sciences growing out of human desires. 8. Illustrations. 
 9. Definitions of economics. 
 
 10 
 
 Chapter III. Of Scientific Method 14: 
 
 10. What scientific method is. 11. The problem of scientific meth- 
 od. 12. Form of general propositions. 13. Induction and de- 
 duction. 14. Succession of cause and effect. 15. Abstraction. 
 16. Pure and applied science. 
 
 Chapter IY. 'Special Feature* of Economic Method 22 
 
 17. The foundation of economics in human nature. 18. Funda- 
 mental hypotheses. 19. The deductive method. 20. Requi- 
 sites for the deductive method. 21. Limitations on our knowl- 
 edge of the fundamental data. 22. The law of averages. 
 23. Unknown economical causes. 24. Summary of results. 
 
yiii CONTENTS. 
 
 PAGE 
 
 Chapter V. Fallacious Views of Economic Method. ... 32 
 25. Example of misinterpretation. 26. The doctrinaire's error. 
 27, 28. The popular error. 29. Illustration of the popular 
 error. 30. Comparison of economics with meteorology. 
 31. The scientific spirit. Illustrations and exercises. 
 
 BOOK II. 
 
 DESCRIPTION OF THE SOCIAL ORGANISM. 
 
 DIVISION A.— DEFINITIONS AND OUTLINE. 
 
 Chapter I. Of Wealth and its Associated Concepts 47 
 
 1 Remarks on economic nomenclature. 2. Labor. 3. Wealth. 
 4. Property or ownership. 5. Forms of ownership. 6. Credit. 
 7. Divided property. 8. Difference between wealth and prop- 
 erty. 9. Transfer of ownership. 10. Commodity. 11. Capi- 
 tal. Note on the definition of the word property. 
 
 Chapter II. Other Definitions 57 
 
 12. Production. 13. Transfer of ownership, exchange, barter, pur- 
 chase, and sale. 14. Consumption productive and unproduc- 
 tive. 15. On economic processes. 16. Value. 17. Value as 
 a mathematical quantity. Notes and exercises. 
 
 DIVISION B.— THE MECHANISM OF PRODUCTION. 
 
 Chapter III. The Requisites of Production 70 
 
 18. Requisites of production illustrated. 19. Of knowledge as a 
 requisite of production. 20, 21. Classification of knowledge. 
 
 Chapter IV. Of Natural Agents as Requisites of Pro- 
 duction , 77 
 
 22. Raw material and land. 23. Of appropriation. 24. Necessity 
 of right of property in natural agents, and objections to it. 
 
CONTENTS. i x 
 
 PAGE 
 
 Chapter V. Of Capital 82 
 
 25, 26. Distinction between capital and sustenance. 27. Classifica- 
 tion and examples of capital. 28. Fixed and circulating capital. 
 29. The function of capital. 30. Capital the result of absti- 
 nence. 31. Divided ownership of capital. Questions. 
 
 Chapter YI. Of Labor 93 
 
 32. The economic laboring unit. 33. Distinction of laborer and 
 capitalist. 34. Wages of labor. 35. Of the different kinds of 
 labor. 36. The modern organization of labor. 37. The division 
 of labor. 38. Labor-saving machinery. 39. Steam- transpor- 
 tation. 40. The organizers of labor. 41. Efficiency of the la- 
 borer. 42. Friction of exchange. 
 
 Chapter YII. The Increase of Population 107 
 
 43, 44. Law of geometrical increase. 45, 46. Checks upon the 
 increase of population. 47. The Malthusian theory of popu- 
 lation. 
 
 Chapter YIII. Of Fluctuations in Production and 
 
 Consumption 114 
 
 48. Introductory remarks. 49. Changes in the direction of labor. 
 50. Competing and non-competing groups. 51. Transforma- 
 bility of capital. 52. Inequalities in economic processes. 
 
 Chapter IX. Production and Consumption from a Com- 
 munistic Point of View 127 
 
 53, 54. The communistic view. 55. Regulations necessary to the 
 common good. 56. Conditions of general prosperity. 
 
 Chapter X. Changes in the Social Organism with the 
 
 Advance of Society 137 
 
 57. Increase of knowledge and formation of habits. 58, 59. Im- 
 provements in production. 60. Increase in the urban popula- 
 tion. 61. Differentiation and integration. Questions. 
 
CONTENTS. 
 
 DIVISION C— THE MECHANISM OF EXCHANGE. 
 
 PAGE 
 
 Chapter XI. Of Money 145 
 
 62. Necessity of exchange. 63. Requirements of the medium of 
 exchange. 64. Gold and silver as money. 65, 66. Coinage. 
 67. Legal tender. 68. The monometallic and bimetallic sys- 
 tems. 69. Limited bimetallism. 70. The subsidiary coinage. 
 71. Volume of the currency. 
 
 Chapter XII. Banks and Credit-money 157 
 
 72. Nature of credits. 73. How banks arise. 74-76. Bank de- 
 posits and cheques. 77. Individual deposits. 78. Capital stock. 
 79. Discount functions. 80. Deposits as currency. 81. Bank 
 circulation. 82. Ulterior development. 
 
 Chapter XIII. Organization of Banks in Detail 168 
 
 83. Weakness of banking. 84, 85. Fluctuations of business. 
 86. Suspension of specie payments. 87-90. The national bank- 
 ing system. 91. The Bank of England. 
 
 Chapter XIY. The Clearing-house and Foreign Ex- 
 change 1*9 
 
 92. Functions of the clearing-house. 93. Analogy to exchanges in 
 society. 94, 95. Foreign exchange. 
 
 Chapter XY. Conclusions respecting the Volume of the 
 
 Currency 187 
 
 96. Kinds of currency. 97. Items to be included and excluded. 
 98. Credit-money. 99. Relation of bank cheques to the cur- 
 rency. Exercises. 
 
 BOOK III. 
 
 THE LAWS OF SUPPLY AND DEMAND. 
 
 Chapter I. The Conception of Value 199 
 
 1. Conception of value. 2. Relation of value to utility. 3. Jevons's 
 theory of value. 4. Economic view of value. 5. Relation of 
 value to human needs. 
 
CONTENTS. xi 
 
 PAGE 
 
 Chapter II. The Standard of Value 205 
 
 6, 7. Mathematical conceptions. 8, 9. Scale of prices. 10. An 
 absolute standard. 11, 12. The tabular standard of value. 
 
 Chapter III. The Relation of Price and Demand 215 
 
 13. Features of a market. 14. The law of price and demand. 
 15. Sensitive and insensitive commodities. 16. Reaction of 
 demand on price. 17. Modifications. 18. Equilibrium of sup- 
 ply and demand. 19. Discounting the market. 20. Is the rise 
 of price consequent on increase of demand temporary or per- 
 manent? 21. Application to the purchasing power of money. 
 Illustrations and exercises. 
 
 Chapter IY. Monopolized Requisites of Production . . . 230 
 22. Introductory remarks. 23. The monopoly element. 24. Three 
 classes of monopolies distinguished. 25. Limitations upon 
 monopolies. 26. Temporary monopolies. 27. Recapitulation. 
 28, 29. Effect of monopolies upon supply and price. Exer- 
 cises. 
 
 Chapter Y. The Rent of Zand 241 
 
 30. Opposing views. 31. Illustration of Ricardo's theory. 32. Fer- 
 tility. 33. Relation of rent to prices. Exercises. 
 
 Chapter VI. On Competition as determining Cost 248 
 
 34. Of competition. 35. Of prices not determined by competition. 
 36. Cases where competition is difficult. 37-39. Competition 
 among business managers. 
 
 Chapter VII. Of Profits and Cost of Production 257 
 
 40. The old view. 41. Gross cost. 42. Net cost. 43. Profits. 
 
 Chapter VIII. Preservation of Equilibrium between 
 
 Supply and Demand 263 
 
 44. The East India method. 45. Graduated cost of production. 
 46. Illustrative example. 47. Modifications. Questions. 
 
x ii CONTENTS. 
 
 PAGE 
 
 Chapter IX. Equilibrium between Supply and Demand 
 
 in the case of Absolute Monopolies 271 
 
 48. Review. 49. Case of ownership by a single person or combi- 
 nation. 50. Case of patented machines. 51. Case in which 
 the supply is absolutely limited. 
 
 Chapter X. International Supply and Demand 278 
 
 52, 53. Equilibrium of prices. 54. Relative advantages of different 
 countries in production. 55. Balance of trade by foreign ex- 
 change. 56. Tax and cost of transportation. 57, 58. Balance 
 of trade between two countries. 59. Total balance of trade 
 with all countries. 60. Theories and nomenclature of the bal- 
 ance of trade. 61. Advantages of international trade. Illus- 
 trations and exercises. 
 
 Chapter XI. Effect of Taxes iipon Supply, Demand, 
 and International Trade 290 
 
 62-66. Laws of division of taxes between producer and consumer. 
 67, 68. Effect of taxes on international trade. 69. Special case 
 of monopolized elements. 70, 71. Effect of import duties on 
 the balance of trade. Exercises. 
 
 Chapter XII. Causes which determine the Hate of In- 
 terest. 302 
 
 72. The usury question. 73. Equilibrium of supply and demand. 
 74, 75. Causes of the rate of interest. 76. The minimum rate. 
 77. Risk as affecting the rate of interest. 78. Nature of capi- 
 tal and cause of interest. Exercises. 
 
 BOOK IV. 
 
 THE SOCIETART CIRCULATION". 
 
 Chapter I. The Monetary Flow 315 
 
 1. Exchanges in their totality. 2. The dual measure of an economic 
 quantity as a fund and a flow. 3. Legal persons. 4. Flow of 
 the currency. 5. Relation between the volume and the flow. 
 6. Rapidity of circulation. Illustration of the wage-fund. 
 
CONTENTS. xiii 
 
 PAGE 
 
 Chapter II. The Equation of Societary Circulation .... 326 
 
 7. The industrial circulation. 8. Equation of societary circulation. 
 9, 10. Quantity of the industrial circulation. 11. Exceptions 
 to the equation. 12. Illustrations of the societary circulation. 
 Illustrations and exercises. 
 
 Chapter III. Variations in the Equation of Societary 
 Circulation 338 
 
 13. Summary of results. 14. Changes in the volume of currency. 
 15. Changes in rapidity of circulation. 16. Changes in the 
 quantity of the industrial circulation and the scale of prices. 
 17. Effects of changes in the volume of the currency. 18. Ef- 
 fect of varying indebtedness. 19. Law of value of the cur- 
 rency. Exercises. 
 
 Chapter IY. The Measure of Demand by Absolute 
 
 Value 348 
 
 20. Definition and measure of demand. 21-23. The two measures 
 of demand. 21. Popular view of demand. 25. Relation of 
 demand to prosperity. 
 
 Chapter Y. Individual Income and Expenditure 359 
 
 26,27. Measure of income. 28. Expenditure of income. 29. First 
 law of income. 30. Second law of income. 
 
 Chapter YI. Demand as the Director of Industry 369 
 
 31. Summary of previous conclusions. 32. Subdivisions of the 
 monetary flow. 33. Purchase of commodities and demand for 
 labor. 34. Fundamental law of employment. 35. Case of 
 non-competing groups. 36. Other forms of expenditure. Ex- 
 ercises. 
 
 Chapter YII. Effect of a Diminution in the Flow of 
 
 the Currency 380 
 
 37. Immediate and ultimate effects of the diminution. 38. Con- 
 tinual changes unavoidable. 39, 40. Exceptions to the ten- 
 dency. 
 
x iv CONTENTS. 
 
 PAGE 
 
 Chapter VIII. Effect of Labor-saving Processes 388 
 
 41. Effect of labor-saving upon the demand for labor. 42-44. Ef 
 feet of improvements in production upon different classes. 
 45. Another view of the subject. 
 
 Chapter IX. The Functions of the Capitalist 396 
 
 46-48. Investments do not change the demand for labor. 49. The 
 same conclusion from the communistic stand-point. 50. Sus- 
 tenance and capital. 51. The non-capitalist cannot consume 
 a greater value than he produces. Exercises. 
 
 Chapter X. The Relation of Capital to Labor 408 
 
 52. Capital as the means of employing labor. 53. Funded capital 
 of a factory. 54. Capital as a fund and a flow. 55. The two 
 measures of the benefit of capital. 
 
 Chapter XI. ' Laws of a Heterogeneous Currency 413 
 
 56. How one currency may displace another. 57. Gresham's law. 
 58. The law of displacement. Illustration. 
 
 Chapter XII. Economic Fallacies 419 
 
 59, 60. The labor fallacy. 61. The money fallacy. 62, 63. Illus- 
 trations of the two fallacies. Illustration. Exercises. 
 
 Appendix to Book TV 434 
 
 Demand for commodities versus demand for labor. 
 
 BOOK V. 
 
 APPLICATIONS OF ECONOMIC SCIENCE. 
 
 Chapter I. The Let-alone Principle 443 
 
 1, 2. Nature and significance of laissez-faire. 3. The principle con- 
 sidered as a fact. 4. Grounds of laissez-faire as a matter of 
 right and a matter of policy. 5. Criticism and defence of the 
 policy. 6. Limitations on the preceding criticisms. 7. Limits 
 of application — The keep-out policy. 8. Relative applications 
 of the two principles. 9. Example of a difficulty. Illustrations 
 and exercises. 
 
CONTENTS. xv 
 
 Chapter II. The Policy of a Protective Tariff 459 
 
 10. General aspect and grounds of the policy. 11. Possible benefits 
 from a protective tariff. 12. The argument for free trade. 
 
 13. First argument for protection : the home-industry argument. 
 
 14. The point at issue. 15. Second argument for protection: 
 the wages argument. 16. Example from a glass factory. 
 17. How far is foreign competition possible? 18. A protec- 
 tive policy mutual and reciprocal. Illustrations and exercises. 
 
 Chapter III. On Taxation 479 
 
 19. General considerations. 20. General features of all taxation. 
 21. Comparison of taxation with loans. 22,23. Effects of vari- 
 ous modes of government expenditure. 24. Different kinds of 
 taxes. 25. Double classification of taxes. 26. Results of levy- 
 ing a tax. 27. An income-tax. 28. The taxation of wealth. 
 29. Hints on improving our system. 
 
 Chapter IY. Monometallism and Bimetallism 494 
 
 30. The two systems. 31. The bimetallist compared with the mono- 
 metallist view. 32. Criticism of the arguments. 33. Peculiar- 
 ity of the bullion supply. 34. Analysis of the bimetallist 
 . argument. 
 
 Chapter Y. Regulation of the Currency 501 
 
 35. The question stated. 36. Supposed economy of bank notes. 
 37. General effects of a bank currency. 38. Irredeemable 
 paper money. 39. Current views of the subject. 40. Condi- 
 tions of value in an irredeemable currency. 41. Regulation by 
 banks. 42. The general question at issue. 
 
 Chapter YI. Of Socialistic Ideas 512 
 
 43. General character of socialism. 44. Current errors. 45. Equity 
 of our present system. 46. Limitations upon its equity. 
 47, 48. Possibility of an improvement on our system. 49. Com- 
 munistic view. 50. Fundamental difficulties. 
 
XVI 
 
 CONTENTS. 
 
 Chapter VII. Of Charitable Effort 526 
 
 51. General considerations. 52. Alms-giving a form of demand. 
 53,54. Mendicity a result of charity. 55. What can be done? 
 56. Capital as a charitable agent. 57. Concluding considera- 
 tions. 
 
 ADDENDUM. 539 
 
 Summary of the Leading Principles of Economics as set 
 forth in the Present Work. 
 
BOOK I. 
 LOGICAL BASIS AND METHOD 
 
 OF 
 
 ECONOMIC SCIENCE. 
 
POLITICAL ECONOMY. 
 
 BOOK L— LOGICAL BASIS AND METHOD OF 
 ECONOMIC SCIENCE. 
 
 CHAPTER I. 
 
 INTRODUCTORY VIEW OF THE SUBJECT. 
 
 1. When we enter upon the study of a new subject it is 
 sometimes best to begin by divesting our minds of all precon- 
 ceived notions respecting it, and to make our first examination 
 of it from the most wide-reaching point of view. Let us then 
 commence our study of Political Economy by comparing cer- 
 tain processes now going forward on the surface of this con- 
 tinent with the corresponding ones of four centuries ago. 
 
 If at so distant an epoch we had been able to survey the 
 whole area now covered by the United States we should have 
 seen no form of human activity except the pursuits of savage 
 life. The principal occupation of the inhabitants would have 
 been making war upon each other, and hunting wild animals 
 for food. The soil and the forests would have been in their 
 natural state, and neither ocean nor river would have borne 
 any vessel larger than a canoe. 
 
 Let us next suppose such a survey to be made at the present 
 time by a being gifted with intelligence but not acquainted 
 with the minds°of men. This intelligent being would now see 
 a network of railways covering the greater part of the country. 
 Steamers would be ploughing the rivers, cities would be build- 
 
4 BASIS AND METHOD OF ECONOMIC SCIENCE. [1. 1. 
 
 ing, immense quantities of material of all kinds would be seen 
 carried from place to place by locomotives, trains would be 
 running in every direction, stores of goods would be piled in 
 warehouses, and the prairies would be covered with fields of 
 wheat which at certain seasons would be found undergoing the 
 process of reaping, threshing, and transportation to the sea- 
 board. 
 
 It would be evident that this new activity was totally differ- 
 ent in kind from anything which had before been going on. 
 In past geological ages the rocks had been ploughed by glaciers, 
 new mountains had arisen, rivers had changed their courses, 
 new lakes had formed and old ones had sunk. But the intelli- 
 gent being could form no idea why this new kind of activity 
 had arisen until he became aware that it was all the work of 
 other intelligent beings called men. Having learned this, let 
 us suppose him to descend to the earth and seek out some one 
 of the men engaged in the activity in order to learn its cause. 
 He first finds the engineer of a locomotive making its way 
 across the country. " Why do you run this locomotive ?" he 
 inquires. The answer would be, " I run it in order to earn 
 money." "But what do you want of money?" "I want to 
 buy food, clothing, and shelter for myself and my family." 
 Seeking out a farmer harvesting wheat on the prairie, he would 
 get nearly the same answer. Go where he would, every one 
 would tell him that he was working for himself, and that the 
 object of all his labor was to secure an increase or a better sup- 
 ply of certain articles necessary to his well-being, the most im- 
 portant of which would serve for food, clothing, shelter, pleas- 
 ure, and education. Every one he met would ostensibly have 
 only his own interest in view. 
 
 But further examination would show that, notwithstanding 
 this apparent universal selfishness, all were engaged in working 
 for the good of others. Suppose our intelligent being to 
 alight on the plains of Texas and there find a body of men 
 herding cattle. He sees that they kill the cattle and give 
 their hides to other men to be carried to the sea-coast. Here 
 
1. 2.] INTRODUCTORY VIEW OF TEE SUBJECT. 5 
 
 others put them on board a ship on which they are conveyed 
 to England. In England another set of men tan the hides, 
 and yet others make them into boots and shoes. Wishing to 
 see what becomes of the boots and shoes, he traces them to the 
 feet of a miner in Cornwall. The miner daily goes deep 
 under ground to take out tin. Tracing this tin to its destina- 
 tion, he finds it worked by countless hands, follows it across' 
 the Atlantic to New York, into a freight-car, into a tinsmith's 
 shop, finally seeing it end its long journey in the form of 
 utensils for the use of the herdsman in Texas. 
 
 "How did you know that that Cornwall miner wanted a pair 
 of boots ?" he says to the herdsman. " How did you know that 
 herdsman in Texas wanted a tin dipper?" he says to the miner. 
 To his astonishment he finds each in entire ignorance of what 
 becomes of his property after it leaves his hand. The herds- 
 man does not know that his hides were even taken to the sea- 
 shore ; the man who put them on board ship did not even know 
 where the ship was going ; and not a man on the ship knew 
 who purchased the hides in England. At Cornwall the miner 
 did not know what became of his tin. In a word, nearly every 
 one would be found ignorant of the final destination of the 
 things he was making. 
 
 2. By continuing his investigations our intelligent being 
 will be led to the following conclusions : 
 
 1. The operations which he has been studying are those of a 
 single harmonious system. 
 
 2. The object of this system is to supply each individual man 
 with certain objects brought to him from all parts of the world 
 and necessary to his existence, health, and pleasure. 
 
 3. The harmonious working of the system leads to its being 
 thought of as one great piece of mechanism. 
 
 4. But this mechanism has no directing head to move it. 
 Its operations are kept up by an infinity of internal forces, 
 each of which operates only within a very limited sphere. 
 
 We shall call this mechanism the social organism. 
 
6 BASIS AND METHOD OF ECONOMIC SCIENCE. [1. 4. 
 
 3. Moving Force of the Social Organism. "We are now 
 led to inquire into the general nature of the force which 
 moves the organism. The matter may be summed up in the 
 following fundamental proposition : 
 
 The one force which keeps every part of the social organism 
 in activity is the desire of each individual man to enjoy cer- 
 tain results of the labor of others, which he can command only 
 by himself laboring for others. 
 
 The more highly developed the man is, the greater the 
 number and variety of the wants which he requires to be sup- 
 plied by the social organism. In the lower scale even of civil- 
 ized society, it suffices if he can gain the food requisite to 
 maintain his strength, and such clothing and shelter as will pro- 
 tect him from the elements. But as he ascends in the scale he 
 wants more palatable food, finer clothes, and a larger house. 
 After enjoying these, his house must be embellished with every 
 ornament that can please the eye, and furnished with every 
 appliance that can give bodily ease. If he can command yet 
 more from the social organism, the whole world must be 
 searched to find food and drink for his table, and the clothing 
 required to keep his body at the most agreeable temperature. 
 Finall} 7 , after commanding everything which even the most 
 cultivated man can desire, he will accumulate property merely 
 for the love of possessing it, for the power which it gives him, 
 and for the good to his fellow-man which he may be able to do 
 by its means. 
 
 4. The Law of Labor. Nature does not directly furnish 
 man with the objects of desire now under consideration. She 
 supplies only the raw material by which these objects may be 
 obtained through, the instrumentality of human exertion. 
 Through such exertion, bodily and mental, the wool of the 
 sheep becomes clothing for man, the stone in the quarry be- 
 comes the foundation for his house, the clay in the fields 
 becomes the material for its walls, the wood of the forest is 
 transformed into chairs and tables, and the material of the soil 
 
1. 6.] INTRODUCTORY VIEW OF TUB SUBJECT. 7 
 
 becomes food. His desires being unlimited, while his means, 
 that is, his labor, is limited to a few hours daily, he seeks to 
 economize the latter so as to secure the greatest number of 
 objects of desire. Hence a second fundamental proposition : 
 
 Mankind continually endeavors to satisfy each separate 
 want with the least possible expenditure of labor. 
 
 On this simple law of human action is founded the science of 
 political economy. The law is not a mere hypothesis, but a 
 truth which is nearly universal so far as civilized men are con- 
 cerned. Among partially civilized communities, whose desires 
 are limited, the laws of political economy do not necessarily 
 find any application. 
 
 5. Origin of the Social Feature in the Want-supplying Me- 
 chanism. If each man had to depend on himself for all his 
 means of enjoyment, lie would, as compared with his actual 
 condition, be as good as helpless. It is only by exchanging 
 services with his fellow-man that the great mass of objects of 
 desire can be attained. How important an element of civiliza- 
 tion this is any one will see by looking around him and remark- 
 ing how few even of the necessaries of life he would be able 
 to command if they were not supplied him by his fellow-man. 
 How many of us could make our own bread or clothes, or 
 build ourselves the rudest kind of a house? 
 
 Indeed, from the point of view of political economy, the 
 great difference between civilized and savage communities is 
 that in the latter each individual for the most part works for 
 himself, while in the former each one labors for all the others. 
 
 6. Let us see how far we may carry the conception of so- 
 ciety as an organism. An organism is something which is not 
 designed, but grows, and in which the acting forces seem to 
 reside in all the molecules which make up the organism. For 
 example, in the human body every corpuscle of the blood and 
 every nervous fibre is endowed with certain activities which 
 enable it to perform its own functions, and to minister to the 
 
8 BASIS AND METHOD OF ECONOMIC SCIENCE. [1. 6. 
 
 good of the whole body. So in society. The molecules are 
 individual men. The forces which bring about the great 
 movements of commerce have their origin in individual de- 
 sires — just as the nutrition of the body has its origin in the 
 minute molecules of blood. As the will of a man does not 
 determine how his blood shall circulate, nor how nutrition 
 shall go on, so there is no one authority in the world who wills 
 in what way men shall employ their labor or render services 
 to each other. Leaving out individual cases, this is wholly a 
 matter of private agreement between man and man, or between 
 one body of men and another. We may compare the igno- 
 rance of the workman as to who shall enjoy the products of his 
 labor with the lack of knowledge on the part of each corpuscle 
 of the blood as to the effect of its nutritive power. 
 
 Although we may consider society as an organism, we 
 must not carry the analogy with living organisms too far. 
 There is one very important point in which society or the 
 social organism differs from a plant or animal. We think of 
 every plant and animal as having an individuality of its own, 
 distinct from the conglomeration of organs which form it. 
 Moreover, we cannot add to or subtract from the parts of the 
 plant or animal without detracting from its character. A man 
 cannot have three legs, and if he has only one he is imperfect. 
 But there is no such completeness in the social organism. We 
 can add new men to any extent, or we may divide a country 
 into two without changing the character of the organism. In 
 other words, it has no such attribute as individuality. By 
 assigning such an attribute to it, and giving it a name, we may 
 be led into confusion of thought. The people of each country 
 and of each city may be considered to form a separate organism, 
 but at the same time steam transportation has brought most of 
 the world into such close communication that we may consider 
 all these little organisms as parts of a great one, including the 
 whole human race. 
 
 The more closely and intelligently we look into the opera- 
 tions of human society the more we shall marvel at the perfec- 
 
1. 6.] INTRODUCTORY VIEW OF THE SUBJECT. 9 
 
 tion of its working. No man could ever have contrived such 
 a svstem ; and had it been contrived, no men or combination of 
 men could direct its work, any more than they could send the 
 blood through the body of an animal. To the thinking man 
 it forms one of the most interesting objects of study. There 
 is nothing in the wonders of the heavens or the mysteries of 
 chemical combination better fitted to kindle our curiosity, and 
 to gratify our desire to understand what is going on around us, 
 than the study of the social organism. 
 
 We shall proceed in this study on a plan not unlike that 
 which the physician follows in acquiring a knowledge of the 
 human body. But as a preliminary step we shall have to enter 
 upon some considerations of scientific method not necessary 
 to the work of the physician. The reason of this is that our 
 object of study is farther removed from the immediate sphere 
 of sense than is that of the medical student. The latter studies 
 the bodies of animals by actual dissection and by observation 
 with his eye and with the microscope. But the economist can- 
 not dissect society and make its component parts visible in the 
 same way. The dissection is indeed to be performed, but only 
 in imagination, by describing the different parts of which 
 society is made up, and bringing in, not the real men who sur- 
 round us, but abstract and generalized forms of these men, 
 which bear the same relation to living men that a mental im- 
 age does to a real object. To compensate for this substitu- 
 tion of mental sight for eyesight, we need scientific method. 
 The order of our studies will not be materially different from 
 that of the medical student. Our first consideration is the 
 anatomy of the organism, the forces which move it, and the 
 manner in which the various parts are combined into a single 
 harmonious whole. Having got a clear idea of what the or- 
 ganism is, we have then to go into many details respecting the 
 laws according to which it operates. Finally, we shall have to 
 apply our knowledge of these laws so as to form intelligent 
 conclusions respecting the effect of governmental action upon 
 the interests of society at large. 
 
10 BASIS AND METHOD OF ECONOMIC SCIENCE. [I. 7. 
 
 CHAPTER II. 
 
 DEFINITION OF THE FIELD OF POLITICAL ECONOMY. 
 
 7. Fkom what was said in the last chapter it will be seen 
 that Political Economy treats of human desires, and the laws 
 and conditions of their gratification under the circumstances 
 in which men actually find themselves. But the field of 
 human desires is by no means all included in Political Econo- 
 my. Confusion of ideas often arises from not considering the 
 limits of the subject. We therefore point out certain branches 
 of thought which, though sometimes confounded with Political 
 Economy, do not belong to it. 
 
 There is a wide field of investigation included under the 
 general term Sociology, or the science of society. The consid- 
 eration of human desires in some of their aspects belongs to 
 this field. Although the subjects treated of under the general 
 head of Sociology all run into each other by insensible grada- 
 tions, yet in that principal branch of the subject growing out 
 of human desires we may recognize at least three divisions. 
 
 Firstly, we may inquire how human desires originate, and 
 how they are modified by the circumstances which surround 
 the individual. Among these circumstances are his ancestry, 
 his education, the community which surrounds him, and the 
 government and institutions under which he lives. But this 
 inquiry into the origin and growth of human desires is quite 
 distinct from Political Economy. The latter takes the man up, 
 ready-made as it were, and has nothing to do with the question 
 how he got to be what he is. The reason for this distinction 
 may be seen at once by reflecting that the laws which control 
 the formation of character are distinct from those which de- 
 termine the acts of men after their characters are formed, and 
 therefore must not be confounded with them. 
 
I. 8.] DEFINITION OF TEE FIELD. H 
 
 Secondly, we may analyze the desires and appetites of men, 
 investigate their various good and evil tendencies, set forth 
 their uses and abuses, and trace their ultimate effects upon the 
 welfare of the individual and of society. This, however, is not 
 the object of Political Economy, but of Moral Science. 
 
 Thirdly, taking the desires and appetites just as they are, and 
 regarding them merely as forces which impel men to action, we 
 may investigate the laws of human activity to which they give 
 rise. In other words, having given a community of men 
 moved by certain desires, we trace out the laws which govern 
 their efforts in seeking to gratify those desires. This and this 
 alone is the object of Political Economy as a pure science. 
 
 8. Illustrations. As an illustration of the difference be- 
 tween the fields of inquiry just described, let us consider the 
 case of a laborer who works industriously all day and then 
 spends his earnings in strong drink. 
 
 The sociologist, who is concerned with the laws of develop- 
 ment, searches out the history of the man and his parents, and 
 shows how, by the hereditary transmission of appetite, by 
 early indulgence of his morbid taste, by the influence of evil 
 companions, and by a lack of proper mental stimulus combined 
 with exhausting bodily labor, his present deplorable character 
 has been formed. The results which may be gained by this 
 investigation will be of the greatest importance to one seeking 
 the amelioration of humanitj 7 , but they will not belong to 
 Political Economy. The political economist looks at the pile of 
 earth thrown up by the man's shovel, shows that love of strong 
 drink was one of the moving forces that inspired him, and 
 reckons how much less work would have been done if he had 
 not expected the tavern to be open that night. 
 
 The moralist shows the man the destructive effect of his 
 conduct upon his highest interests, and the suffering to which 
 he exposes his family, and thus hopes to dissuade him from 
 further indulgence. 
 
 Finding his preaching vain, the moralist goes to the sociol- 
 
12 BASIS AND METHOD OF ECONOMIC SCIENCE. [I. 8. 
 
 o^ist for instruction. Here lie learns that warnings are of no 
 avail to one whose appetites are his master. The ever-pres- 
 ent thirst overcomes all dread of the future. The man must, 
 either by medical treatment or by physical restraint, be kept 
 from gratifying the morbid appetite. The moralist desiring to 
 employ only effective means, now appeals to the political econo- 
 mist to know what effect various plans for foiling the aims of 
 the drunkard will have. Perhaps he thinks that if he can in- 
 duce the man's employer not 'to pay him in money but in 
 bread-tickets, he will be no longer able to gratify his appe- 
 tite. But the economist -will point out that this plan will 
 be ineffective, because the man can exchange his tickets for 
 money, and thus obtain the means of buying liquor. Again, 
 the moralist will inquire whether by levying a heavy tax on 
 spirituous liquor and thus advancing its price the man will not 
 be discouraged from indulging it. To answer this question the 
 economist collects statistics showing to what extent men are 
 prevented from indulging their appetites by increasing the 
 cost of the indulgence. As the result of an immense collection 
 of facts he will show the moralist that nothing can be expected 
 from this remedy. Perhaps his conclusion would be that the 
 higher the price of liquor the more the man would spend upon 
 it, and therefore the less money he would have for his family. 
 
 The economist might say in conclusion, that within the 
 range of his science no remedy could be found. His reason- 
 ing might be : " It is very clear from the man's actions that 
 he desires strong drink more than he desires bread or clothinsr 
 for his family. I know of no way in which a man can be made 
 to accept that which he desires less in preference to that which 
 he desires more, except positive restraint." 
 
 In all this the political economist would not be expressing 
 any opinion upon the good or evil of the drunkard's desires. 
 It is his sole business to trace cause to effect, and in doing so 
 to accept things as they exist. But it must not be supposed 
 that his conclusions are therefore of no value to the moralist. 
 On the contrary, what the moralist most needs is to know 
 
I. 9.] DEFINITION OF TEE FIELD. 13 
 
 the ultimate effect of the different remedial measures which 
 may be proposed. It does not follow that because a benevo- 
 lent man or a charitable association desires to do good its ex- 
 ertions will really result in benefiting the community. For 
 instance, it is now very generally recognized by thinking men 
 that indiscriminate charity is a source of evil, in that it en- 
 courages mendicancy and general helplessness. Whether all 
 charity as actually practised does not in this way do as much 
 harm as good is still an open question, and one which can be 
 decided only by the investigations of the political economist. 
 Economical science, therefore, considers man simply as an 
 adapter of means to ends, but does not inquire how these ends 
 arise, nor whether they are really the ends towards which men 
 should strive. If this limitation seems unsatisfying to the 
 reader, he must remember that the mixing up of different 
 branches of inquiry is productive of confusion of thought, 
 and that the questions whether an end is good and how an 
 end can best be attained are totally different. 
 
 9. It is neither necessary nor important, even were it pos- 
 sible, that we should define with entire precision the point at 
 which political economy stops in carrying out the line of in- 
 vestigation we have indicated. A sufficient idea of its field 
 may be given by saying that it includes the general subject of 
 the laws of human welfare so long as we consider welfare to 
 be only the gratification of desires. 
 
 Wealth being directly or indirectly a potent instrument for 
 commanding objects of desire, political economy is sometimes 
 called the Science of Wealth. 
 
 Again, objects of wealth being nearly all obtained by pur- 
 chase and sale in public markets, the science has also been called 
 the Science of Exchanges. 
 
 "Economics" is a term introduced by recent English writers 
 which has the double advantage of brevity and of avoiding 
 the serious objections brought against the current term Politi- 
 cal Economy. 
 
14 BASIS AND METHOD OF ECONOMIC SCIENCE. [1. 10. 
 
 CHAPTER III. 
 
 OF SCIENTIFIC METHOD. 
 
 10. As a general rule the opinions of men on those sub- 
 jects which immediately concern their interests as individuals, 
 and in which the truth of the conclusions can be speedily 
 tested by experience, are sound and correct. But when men 
 step outside this limited field by entering upon the investiga- 
 tion of wider-reaching subjects and more remote interests, 
 error is the rule rather than truth. The reason of this prone- 
 ness to error is that in all such cases there is but one way of 
 being right, while the ways of being wrong are innumerable. 
 A course of reasoning may change from right to wrong at 
 any step, and thus the chances of being right at the end are 
 very small unless thought is aided by correct guiding prin- 
 ciples. Such principles are afforded by scientific method. 
 
 In treating this subject we must begin by correcting a seri- 
 ous misapprehension. This misapprehension consists in think- 
 ing of scientific method as something wholly different from the 
 method of drawing conclusions in every-day life. Although 
 the following may not be considered a logically exact defi- 
 nition of the subject, it is a description which the student 
 should carefully bear in mind. 
 
 Scientific method consists in applying to those subjects 
 which lie without the range of our immediate experience those 
 same common-sense methods of reasoning which successful 
 men of the world apply in judging of matters which concern 
 their own interests. 
 
 It is not therefore some difficult and intricate theory to be 
 learned, but rather the practice of a restraining discipline to 
 keep the mind from wandering into vague speculation, and 
 confine it to the analysis of each special case in hand. A 
 
I. 11.] OF SCIENTIFIC METHOD. 15 
 
 distinguished English writer condensed the above description 
 by defining science as simply " organized common-sense." 
 
 11. The Problem of Scientific Method. Let us now 
 look at the problem which faces us with a view of seeing 
 how we are to apply common-sense methods to its solution. 
 The situation is this : every man who reads the newspapers 
 transacts business, and studies history is brought from day to 
 day into contact with a great mass of facts. He sees going on 
 before him the great operations of manufacture and commerce 
 which we have summarily described in the opening chapter. 
 The longer he lives the greater the number of events he will 
 have in his mind. But the mere knowledge that such and 
 such things have happened, that certain cities have been built, 
 new states populated, new markets opened up, fluctuations in 
 prices taken place, and particular changes in the tariff been 
 made, is in itself of no use to him. The poorest day-laborer 
 may know almost as much about what has been going on as 
 he does himself. What the man wants to be able to do is to 
 see into the future. If it is proposed to build a new railway, 
 he wants to know what effect this railway will have upon the 
 supply of goods brought to market. If a new silver-mine is 
 discovered, he wants to know the effect upon the supply of 
 silver and upon the coinage of money. If Congress changes 
 the tariff, he wants to know the effect of this change upon the 
 wages or profits he can earn, and upon the prices of the 
 clothes he wears, of the food he eats, and of the goods he 
 .buys and sells. Thus the problem before him is, by means 
 of such knowledge as he has acquired from reading and ex- 
 perience, to foresee in what way his interests or the interests 
 of the country at large are going to be affected by changes 
 and improvements in manufactures, commerce, and govern- 
 mental policy. 
 
 Here it is that scientific method must come into play. It 
 shows him how he actually does go to work to form conclu- 
 sions about the familiar facts of his daily life, and then it 
 
16 BASIS AND METHOD OF ECONOMIC SCIENCE. [I. 12. 
 
 shows liim how to apply the same method to the larger problem 
 before him. 
 
 12. Form of General Propositions. In the application 
 of scientific method all our conclusions must ultimately rest 
 upon facts. But, as just shown, we cannot draw any sound 
 conclusion from facts unless the circumstances are properly 
 analyzed. If we have a fact or a series of facts we must in- 
 quire, How did they arise ? According to what general rule 
 did these things happen % These questions are answered, 
 sometimes in a very imperfect way, and at other times more 
 satisfactorily, by establishing certain relations between events; 
 which relations are known by the name of laws of nature, or 
 simply laws. 
 
 A law of nature can only be expressed in the form of a 
 conditional proposition. Its general form is : 
 
 If a certain state of things be true, 
 Then a certain result will follow. 
 
 Examples of such propositions are as follows : 
 
 If you touch gunpowder Math fire, then it will explode. 
 
 If you leave a heavy body unsupported, then it will fall to 
 the ground. 
 
 If you bring a large extra supply of goods to market, then 
 the prices will fall. 
 
 If you lessen a man's income, then he will economize in his 
 expenditures. 
 
 If you increase the import duty on goods from abroad, 
 then their prices will rise. 
 
 If you give a man perfect freedom, then he will follow the 
 course indicated by his feelings and his judgment. 
 
 In these general statements, that which is supposed true and 
 taken as the basis of the argument is called the Hypothesis ; 
 that which then follows is called the conclusion. 
 
 ISfow notice certain characteristics of all these propositions. 
 In the first place, the conclusion is only hypothetically true. 
 The hypothesis, commencing with an "if," is presupposed, 
 
1. 13.] OF SCIENTIFIC METHOD. 17 
 
 and if it is not true the conclusion may fail. For example : 
 if there is no heavy body, or, the body existing, if we keep 
 it supported, there is no falling. Gunpowder has never ex- 
 ploded within a hundred miles of the north pole. And in 
 general all scientific conclusions are to be regarded, not as 
 particular truths, but only as things which are or would be true 
 under certain assumed conditions. The question whether 
 these conditions do or do not exist is a matter of fact always 
 open to challenge, and which we always have to decide in the 
 best way we can. All that we can ask of the scientific state- 
 ment is that the connection between the hypothesis and the 
 conclusion shall be true. 
 
 Again, we must never forget that, in addition to the hypothe- 
 sis which we state, we always have to presume the negative 
 hypothesis that nothing happens to change the conclusion. For 
 example, when we say if gunpowder is touched with fire it 
 will explode, then, in addition to the expressed hypotheses that 
 the gunpowder exists and that you touch it with fire, we have 
 the implied hypothesis that it is dry and in good order as we 
 are accustomed to find it. When we say that an unsupported 
 heavy body falls to the ground, we must implicitly assume that 
 it is heavier than its own bulk of air, because if lighter than 
 air, like a balloon, it will rise instead of falling. "We also 
 assume that it is not held up by electrical or any other attrac- 
 tion. If it is fired up from a cannon it will not fall to the 
 ground immediately, though it must ultimately. Time will 
 be required for the effect to follow. Thus, every general 
 proposition may need to be modified in an infinity of ways 
 when we consider it in its application to special cases. 
 
 13. Induction and Deduction. General propositions can 
 only be learned in the first place by a study of the facts of 
 experience. The process by which we infer a general law 
 from observed facts is logical induction. Induction is therefore 
 the first step in the acquisition of exact knowledge. 
 
 Deduction. The process of reaching a conclusion by means 
 
 2 
 
18 BASIS AND METHOD OF ECONOMIC SCIENCE. [1. 14. 
 
 of general propositions is called logical deduction. In strict- 
 ness the process of deduction consists in chaining together a 
 series of hypothetical propositions, the conclusion of each step 
 being in whole or part the hypothesis of the step next follow- 
 in o\ As a simple example of how a deductive process may be 
 applied without thinking of logic, let us take our conclusion 
 as to what will become of a piece of meat which a child drops 
 over the surface of a pond stocked with fish. To reach the 
 conclusion we have unconsciously in mind the separate propo- 
 sitions, "An unsupported bod}' held over water will drop to 
 the surface of the water ;" " A body heavier than water will 
 sink ;" " If edible matter comes within reach of a fish he will 
 eat it." By joining these several propositions we have the 
 single proposition, " Heavy edible matter left unsupported over 
 a pond stocked with fish will be eaten by the fish." But we 
 must never forget to preserve a distinction between this gen- 
 eral and hypothetical proposition and the concrete particular 
 propositions, " This pond is stocked with fish;" "Mary let a 
 piece of meat drop into the pond." We can reach a conclu- 
 sion as to the actual matter of fact only by assuring ourselves 
 of two things : first, that the existing state of things corre- 
 sponds to the hypothesis ; and secondly, that there is a true 
 general connection between the lrvpothesis and conclusion. 
 
 14. Succession of Cause and Effect. In the process of 
 deduction we suppose that there is a state of things corre- 
 sponding to one or more of our hypotheses. From this suppo- 
 sition we conclude, by the aid of the law, that another state of 
 things, or conclusion, will follow. In this process, 
 
 The first state of things is called the catise / 
 
 The second state of things is called the effect. 
 
 And, as already indicated, that general statement which ex- 
 presses the relation between the cause and the effect is called 
 the law. 
 
 The distinction of cause and effect is only relative, not ab- 
 solute ; an event is an effect in its relation to the preceding 
 
I. 15.] OF SCIENTIFIC METHOD. 19 
 
 events out of which it arose ; but it is also a cause of the events 
 which follow it in pursuance of a law. As a general rule, 
 everything that happens is both a cause and an effect. 
 
 It must be remembered that the relation of cause and effect 
 is not one of mere succession, but of succession in pursuance 
 of a general law. When a countryman at an inn pulled a bell, 
 and immediately heard the gong sound for dinner, he inferred 
 a relation of cause and effect between his effort and the sound 
 which followed. He was clearly correct in his facts. "What 
 was his error ? It consisted in inferring a general law of con- 
 nection between the pull and the sound, when in reality there 
 was no such law. 
 
 15. Abstraction. All science presupposes that the events 
 with which it is concerned are parts of a regular series of 
 causes and effects, following each other in pursuance of general 
 laws. Most events which actually occur in the world are the 
 product of a very complex combination of causes, in which 
 the silent hypothesis, " other conditions being equal," does 
 not hold true, and in which the operation of every cause is 
 altered by the concurrent action of a multitude of other 
 causes. These causes are continually changing, so that it is 
 generally impossible to infer a law from mere observation. To 
 reach a rational result, we have to begin by considering the ac- 
 tion of each cause separately. We are then said to make ab- 
 straction of all the causes which we do not consider. 
 
 The first steps in the construction of a deductive science 
 consist in the abstraction of all but the most fundamental 
 and widely diffused causes, and in investigating the succession 
 of cause and effect as it would be if the action of these causes 
 were not modified in any way. As an example of this let us 
 take the science of mechanics. 
 
 The motion of every body on the surface of the earth is the 
 result of a great number of forces. We get at the effect of 
 these forces by such a succession of steps as the following: 
 
 First Hypothesis. We suppose a body acted on by no force. 
 
20 BASIS AND METHOD OF ECONOMIC SCIENCE. [1. 15. 
 
 The conclusion is, the body will move forward in a straight 
 line forever. 
 
 Second Hypothesis. Wc suppose the body to fall under the 
 influence of gravity, which we suppose constant. 
 
 Conclusion. The body will fall a certain distance the first 
 second, three times as far the next second, five times as far the 
 third, and so on. 
 
 Let it be remembered that neither of these hypotheses is 
 ever fulfilled in nature. We never saw a body either acted 
 on by no force, or moving under the influence of no force but 
 gravity. Gravity itself is not the same at different heights. 
 The same thing is true of all the fundamental conceptions of 
 physics. We talk and think of bodies having no size ; of 
 "material points;" of machines without friction, and so forth. 
 We do all this to lay a foundation for further studies in which 
 the causes first abstracted may be considered. 
 
 So in Political Economy. We begin with a hypothetical 
 man, animated by the one motive of gaining all the satisfaction 
 he can by his labor, alive to his own interests, ready to turn 
 his hand to a variety of things, and of such sound judgment 
 that he makes no mistakes in his calculations. In other words, 
 we at first make abstraction of all the little imperfections and 
 variations from this ideal. We then make further hypotheses 
 respecting the occupations he can engage in, and the appli- 
 ances he can command, taking care to come as near as possible 
 to the general average condition of mankind. Then we con- 
 sider one by one the several variations from our first hypothe- 
 ses, until we have gone as far as we deem necessary. 
 
 Such hypotheses and the laws with which we connect them 
 tell us nothing about quantities, and therefore do not suffice 
 to reach practical conclusions. To answer the question, How 
 much ? we have to study statistics of all kinds, and thus learn, 
 with as much exactness as we may, the numerical quantities of 
 all kinds, whether the numbers of various kinds of men, or the 
 quantities of various productions, which enter into the prob- 
 lems of our science. 
 
1. 16.] OF SCIENTIFIC METHOD. 21 
 
 16. Pure and Applied Science. The preceding method 
 leads to a distinction between pure and applied science. 
 
 A pure science is one in which we consider only those 
 causes whose action we can trace with clearness and certainty, 
 and make abstraction of all others. 
 
 An applied science is one in which we consider, in the best 
 way we can, all the causes which come into play in some special 
 class of cases, and thus, reach conclusions which we believe to 
 need no further modification. 
 
 Thus, there is a pure science of thermo-dynamics, formed 
 on ideal kinds of matter, having properties never found in real 
 matter. And there is an applied science of steam-engineering 
 in which the special properties of the iron in the engine, the 
 coal it consumes, and the steam it generates are considered. 
 
 So with Political Economy. Pure economics is an ideal or 
 hypothetical science in which we consider only the general 
 characters of great classes of men, and those widely diffused 
 causes whose action we can trace in the social condition of com- 
 munities and in the great movements of agriculture, manufac- 
 tures, and commerce. We thus form a single consistent system. 
 
 In applied political economy we superpose upon the system 
 of pure economics the causes which operate in some special 
 case, and find how the conclusions of pure economics are thus 
 modified. We may consider, for example, some peculiar state 
 of things in a German town, or the economic effect of estab- 
 lishing homes for newsboys in New York, or the effect of a 
 strike in the building trade upon the interests of those engaged 
 in it. 
 
 The distinction between a pure and an applied science can- 
 not be made a sharp one. As our knowledge expands, pure 
 science is made to include a wider and wider field, and we can 
 never say exactly where the line should be drawn. 
 
BASIS AND METHOD OF ECONOMIC SCIENCE. [I. 17. 
 
 CHAPTER IV. 
 
 SPECIAL FEATURES OF ECONOMIC METHOD. 
 
 1*7. Although the processes just described are common to 
 all science, yet in the case of political economy they have to 
 be applied in a way entirely different from that of physical 
 science. The reason of this difference is that one great object 
 of political economy is to foresee how men will act. Now, 
 human acts are not governed by necessary and invariable laws 
 of the class recognized in physics, but by will and choice. 
 There is no law of nature which compels goods to be sent to 
 the best market, or which requires men to dig mines and build 
 steamships. Should we attempt to reduce the phenomena of 
 manufactures, commerce, mining, etc., to the same kind of laws 
 which prevail in inanimate nature, we should never get at any 
 certain result, but might be wrong as often as right. Hence 
 an investigator ignoring human will and motives and studying 
 the work of mankind as if it were a product of natural forces 
 would be at a great disadvantage. 
 
 But we have a resource which compensates this disadvantage 
 in our knowledge of the operations of our own minds. We 
 each know individually that in deciding how we shall employ 
 our time we are governed b}' a consideration of the relative 
 benefits and evils of the various courses of action between which 
 we have to choose. As a rule we choose that course which 
 will yield us most good or pleasure. Looking at our fellow- 
 men, we are irresistibly led to the belief that their acts proceed 
 from like motives. We instinctively trace their actions to 
 hopes, fears, and desires similar to those which animate our- 
 selves. We feel that, like ourselves, they seek to reap the 
 maximum of enjoyment from the minimum of disagreeable 
 labor. 
 
1. 18.] SPECIAL FEATURES OF ECONOMIC METHOD. 23 
 
 This conclusion is verified by universal experience. We 
 never see men voluntarily wasting their labor unless the labor 
 itself is a source of enjoyment. In no case do they spend more 
 money or time on an object than is necessary for the purpose. 
 
 The significance of our knowledge of human nature is this : 
 it gives us an understanding of the forces at work in the social 
 organism which we cannot command in the case of those living 
 organisms with which we are familiar. We have already seen 
 that the forces which animate the former are the desires and 
 activities of individual men who bear the same relation to the 
 whole organism that the molecules which make up an animal 
 body bear to the body itself. But in the case of an animal we 
 know nothing about the vital forces which animate the mole- 
 cules, and can only study the organism from outside, as it were, 
 while in economics we do know all about the motives which 
 animate men in general, and can see how these motives lead 
 to all the forms of human activity. The economist therefore 
 has a great advantage over the physiologist in being able to 
 understand the working of the minute machinery of which the 
 physiologist remains entirely ignorant. 
 
 18. The fundamental and most general hypotheses of po- 
 litical economy may now be formulated as follows : 
 
 1. That man is a being moved to action by an unlimited 
 series of desires. 
 
 2. That these desires can be partially satisfied by the exer- 
 tion of those faculties, bodily and mental, with which the Crea- 
 tor has endowed him. 
 
 3. That he is a reasonable being capable of adapting means 
 to ends. 
 
 4. That in consequence of being a reasonable being he will 
 exert his faculties in such a way as to secure the maximum 
 gratification of desires with the minimum of inconvenience 
 under the circumstances in which he is actually placed. 
 
 Our science therefore recognizes all the complicated ma- 
 chinery by which human wants are gratified as the result of 
 
24 BASIS AND METHOD OF ECONOMIC SCIENCE. [1. 18. 
 
 the single prime moving force defined in § 2, namely, human 
 desires. These desires are to be regarded as the first cause of 
 economic effects. And this cause, considered in its relation 
 to the effects produced, is not of the kind commonly investi- 
 gated in physical science, but belongs to the class of final causes. 
 The laws which prescribe how railroads shall be built, or when 
 ships shall sail, or where manufactories shall arise, can only be 
 laws of human action ; and such actions are determined by a 
 final cause, the will of man. They are subjects of scientific 
 investigation only because, as assumed in the third and fourth 
 of the preceding hypotheses, we can foresee how men will act 
 under given circumstances, by knowing what, from their point 
 of view, will be the course of action best adapted to lead to 
 their ends. 
 
 It is sometimes considered that political economy makes ab- 
 straction of every human passion or motive except the desire 
 of wealth and aversion to labor, and that it represents man as a 
 perfectly selfish being. But this is true only under a great 
 modification of the sense in which we are to understand the 
 terms used. Man is considered as a selfish being to this extent, 
 and to this only, that he has his own desires which he is exert- 
 ing himself to gratify. The desires themselves may be of the 
 most benevolent kind. The labor of the Sunday scholar who 
 is trying to earn a few pennies to put into the missionary-box 
 may be included in the domain of political economy as well as 
 any other labor. A man may spend his entire income in send- 
 ing missionaries to the heathen or in charitable objects with- 
 out violating the laws of political economy ; for it is certain 
 that he will not spend his money in this way unless he desires 
 to have the heathen converted or the wants of his fellow-men 
 relieved. These benevolent desires are part of the man's na- 
 ture as much as the desire for a good dinner is. They lead 
 him into making the best bargains he can for himself in buy- 
 ing and selling, just as other desires do, because the better 
 bargain he makes the more money he will have for the heathen 
 and the poor. 
 
I. 20.] SPECIAL FEATURES OF ECONOMIC METHOD. 25 
 
 19. The Deductive Method. In so far as we can construct 
 a purely deductive science of economics, based on the above 
 hypotheses, our methods may be stated in the form of answers 
 to two problems, as follows : 
 
 Problem I. To foresee how men will proceed to attain any 
 given end by their industry. 
 
 Method of Solution. Discover, from the condition in which 
 they are placed and with the knowledge which they possess, 
 what seems to them the easiest way of attaining that end : that 
 way they will adopt. 
 
 Problem II. To find how men will spend their labor. 
 
 Method of Solution. Discover, from the condition in which 
 they are placed and from the character of their desires, in 
 what way they can derive the maximum of enjoyment from 
 their labor, in what way they will spend it. 
 
 "Were our knowledge of the whole world, including every 
 man in it, complete in every particular, and were we able to 
 apply all this knowledge at every moment, we might imagine 
 ourselves to predict all economic phenomena by this method 
 much as the astronomer predicts the motions of the planets. 
 Our knowledge being obviously so imperfect that we cannot 
 predict in this way, the preceding solutions express, not our 
 method of discovering facts, but our method of arranging them 
 after they are discovered. That is to say, having learned from 
 the statistics of manufactures and commerce what employments 
 men engage in, we conclude that these are the employments 
 from which they derive the maximum of enjoyment. We thus 
 can put together our deductive chain by a reverse or inductive 
 process. But, so far as the form of our conclusions is con- 
 cerned, the final result is the same whether we reason in one 
 direction or the other. 
 
 20. Requisites for the Deductive Method. In order to 
 apply the above method the economist must be supplied with 
 three classes of data. 
 
 First, the conditions which surround mankind. 
 
26 BASIS AND METHOD OF ECONOMIC SCIENCE. [I. 20. 
 
 Secondly, the nature and objects of human desires. 
 
 Thirdly, the extent and kind of knowledge which men 
 possess on the subject of how they may secure the satisfaction 
 of their desires. 
 
 These several data can be found only by observation, and 
 their discovery is therefore a process of induction into which 
 abstract reasoning should not enter. Let us see in a general 
 way what these data are. 
 
 I. The general condition of man is one in which nature 
 offers him an infinite variety of services, provided he will adopt 
 the proper means to command those services. She offers him 
 land by cultivating which he can supply himself with food ; 
 she offers him coal on condition that he will dig it, and ores by 
 smelting which he can supply himself with metals. She rewards 
 him for every improvement which he will make in his tools. 
 If he builds and properly equips a mill, she will turn it by the 
 power of the wind ; if a steam-engine, she provides him with 
 the expansive force of steam. But she offers very differ- 
 ent gifts to different countries. One she supplies with a fer- 
 tile soil : here man expends his energies in raising Avheat and 
 corn. Another she supplies with coal and iron : here man 
 becomes a miner. Another she supplies with timber and 
 water-power : here man becomes a manufacturer. 
 
 Men will find out for themselves these natural advantages 
 very much sooner than a political economist can discover 
 them for him; no inductive logic is therefore necessary for 
 their discovery. 
 
 II. The Character and Objects of Human Desire. The de- 
 sire of men for special objects is in general to be learned from 
 observation of their acts on a large scale, so that no general 
 conclusion can be stated. But in the case of civilized men 
 there is one general characteristic which lies at the bottom of 
 the difference between his state and that of the savage. It is 
 that he seeks to provide against his future wants, as well as 
 to gratify his present ones. Hence his future happiness is an 
 object of present desire. We shall see hereafter that without 
 
1. 21.] SPECIAL FEATURES OF ECONOMIC METHOD. 27 
 
 this regard for the future no accumulation of wealth would be 
 possible. 
 
 Yet another feature of the desires of civilized man is that 
 they are practically unlimited. If every man were satisfied 
 as soon as he had accumulated the things necessary to supply 
 his current wants, the whole fabric of economics would be 
 changed. Our science takes account of the fact that great 
 numbers of men accumulate all the riches they can, regardless 
 of their already having enough for their own uses. 
 
 III. Influence of Knowledge. Man seeks his ends, not 
 necessarily in that way which is absolutely the easiest, but in 
 the easiest way he knows. As his knowledge increases he 
 discovers ways of increasing his power which he did not 
 before know; and so important is this knowledge that it has 
 been more instrumental in enabling him to improve his con- 
 dition than his labor has. Thus, our knowledge of the expan- 
 sive power of steam has caused the labor spent in making 
 engines to be almost infinitely more efficient than would have 
 been the same amount of labor without that knowledge. 
 
 21. Limitations on our Knowledge of the Fundamental 
 Data. Supposing ourselves to be equipped with a complete 
 knowledge of all the preceding data, we might be able by 
 deductive reasoning to predict and explain all human acts 
 devoted to the production and enjoyment of wealth. Unfortu- 
 nately, however, our knowledge is so limited that we cannot 
 make absolute predictions as we can in a physical science. 
 The reason is that many of the data belong to the future and 
 therefore cannot be foreseen. Moreover, we know very little 
 about individual men, and so we have to reason about them in 
 large masses. Thus two limitations are placed npon our 
 powers of foresight, which at first glance might appear fatal 
 to our success as investigators, namely : 
 
 I. ¥e know very little about each separate man ; we cannot 
 tell what notion may enter his head, or how absurdly he may 
 behave. 
 
28 BASIS AND METHOD OF ECONOMIC SCIENCE. [I. 22. 
 
 II. "We do not know what causes may, to-morrow or next 
 year, come into play to upset or alter our conclusions. 
 
 But an examination will show that after all there is a great 
 deal of value which we can learn, and that these limitations 
 are not so destructive to satisfactory conclusions as they at first 
 sight appear. Let us begin with a consideration of general 
 or average results, to which we are confined by the first limi- 
 tation. 
 
 22. The Law of Averages. "What we are concerned with 
 in political economy is, not the interests of single individuals, 
 but those of society at large ; that is, the average interests of 
 great masses of individuals. It is true, and we must never 
 lose sight of this truth, that the community is made up of 
 individuals, and that nothing can be beneficial to a community 
 unless it be beneficial to some or all of its members. But 
 since we cannot consider all the members individually, we 
 must take general averages. 
 
 Now it is a familiar fact that many events which considered 
 individually are matters of pure chance occur witli extreme 
 regularity in the long-run. A familiar example is the propor- 
 tion of misdirected letters and of letters without direction 
 which are dropped into great post-offices like those of London 
 and New York. The number of such letters increases almost 
 as regularly, from year to year, as the number of letters posted. 
 
 Another example is afforded by the tables of mortality. 
 Although out of the hundred thousand members of our largest 
 Life Insurance Company it is impossible to say who will be 
 living and who dead at the end of five years, the actuary can 
 nevertheless predict the total number who will die within that 
 time with hardly a possibility of being wrong by 5 per cent. 
 
 As a third example the curious student may enumerate the 
 names found in the directory of any large city, and find what 
 proportion of them are Smith. This proportion, in cases 
 where the numbers are large enough, will be found to vary 
 wonderfully little from 1 in 85. At the census of 1880 the 
 
I. 23.] SPECIAL FEATURES OF ECONOMIC METHOD. 29 
 
 population of Chicago was 500,000. This proportion would 
 give 5882 Smiths, and we may conclude with much confidence 
 that this result is within 5 per cent of the truth. 
 
 The limitations to which economic investigations are sub- 
 jected, so far as the law of averages is concerned, may be 
 defined as follows : 
 
 I. In cases where some individual opinion or habit is alone 
 concerned, we cannot apply scientific method to determine what 
 conclusion the individual will reach. For example, there is 
 no law by which the economist can determine beforehand the 
 salary which a railway manager or the President of the United 
 States can command. Presidents are too few in number, and 
 railway managers too diverse in the character of the operations 
 which they control, to enable any reliable average to be fixed. 
 
 II. But where the acts of thousands or millions of men are 
 concerned, and where the question is to reach a conclusion 
 respecting sums total in which the part of each separate in- 
 dividual is so small as to be lost in the mass, we may apply 
 scientific method. This is the case with nearly everything 
 which concerns the great operations of agriculture, manu- 
 facture, and commerce, the settlement of the country, the 
 cultivation of the land, the raising of crops, their transporta- 
 tion to market, the growth of manufactories, the prices of 
 goods, and countless other results of human effort. When 
 considered in the mass, these processes go on in accordance with 
 definite and fixed laws, which scientific method enables us to 
 understand and investigate. 
 
 23. Unknown .Economical Causes. Suppose that we de- 
 sire to know what a ton of Bessemer steel will be worth three 
 years from the present time. It would be impossible for any 
 economist to answer the question owing to the multiplicity of 
 unknown causes on which the price may depend. The supply 
 of crude iron, the discovery of new processes of manufacture, 
 the number of railways to be built, the tariff to be levied, the 
 wages to be paid, all come in to influence the result. 
 
30 BASIS AND METHOD OF ECONOMIC SCIENCE. [I. 23. 
 
 But this does not prevent us from predicting what effect any 
 given cause will have on the price with almost as much certainty 
 as we can predict the properties of a chemical compound or the 
 power of an engine. Suppose, for instance, that an economist 
 is asked what effect a diminution of ten per cent in the tariff 
 would have. Assuming him to be a master of scientific method 
 and to have all the attainable data, he could give his answer 
 with sufficient precision to afford a basis for action. The same 
 remark would apply if asked what effect a rise in wages would 
 have upon the price, or how the latter would be influenced by 
 the building of a railway across the Asiatic continent which 
 should require a great amount of the metal. In a word, the 
 fact that we do not know all the causes does not prevent us 
 from predicting the effect of those causes which we do know. 
 In this respect political economy may be compared to a science 
 which tells a traveller exactly how fast a vehicle of an}' kind 
 will convey him, and at what cost per mile, but cannot give him 
 any estimate of the total expense of his journey because its 
 length is unknown. The science will be of value to him be- 
 cause it will enable him to seek the cheapest and easiest con- 
 veyance notwithstanding his ignorance of the absolute expense. 
 We may even say that any criterion which will enable him to 
 learn which conveyance is the quickest will be of the same 
 value whether the length of the journey is known or unknown. 
 
 Physiology and hygiene teach men the laws of healthy living, 
 by following which they will be enabled to prolong their lives. 
 But no science will tell a man whether he will be living or 
 dead at the end of ten years. This, however, does not dimin- 
 ish the value of the knowledge he actually possesses respecting 
 the laws of health. So the economist may be able to say to 
 the statesman who consults him about a proposed reduction of 
 one dollar a ton in the tariff on iron, " I do not know what the 
 price will be after the reduction you propose ; but this I do 
 know, it will be fifty cents a ton lower than it will be if you 
 leave the tariff unchanged, and the importation from abroad 
 will be thirty per cent greater." 
 
I. 24.] SPECIAL FEATURES OF ECONOMIC METHOD. 31 
 
 24. Summary of Results. The conclusions to which we 
 are led by these considerations may be summed up as follows : 
 
 I. The ability of mankind to secure those objects of desire 
 for which they spend a considerable portion of the labor of 
 their lives is subject to certain laws and limitations, and is 
 affected by a multitude of causes. 
 
 Examples of economic causes are : the greater or less abun- 
 dance of the crops ; the building of new railways ; improve- 
 ments in machinery and manufactures; changes in the fash- 
 ions and public tastes on the subject of clothing; changes in 
 the tariff on imported goods ; laws to regulate labor ; combina- 
 tions among workmen ; increase of population ; the discovery 
 of new mines of gold, silver, or other metals. 
 
 II. Some of these causes cannot be known until after they 
 occur ; others can to a greater or less extent be foreseen ; while 
 yet others are the acts of individuals or of governments. 
 
 III. Economics is the science which shows us how these 
 numerous causes act, and thus enables us to predict the effects 
 when the causes become known. This is done by taking the 
 machinery of the social organism all to pieces, as it were, exam- 
 ining its component parts, studying their mutual action and 
 interaction, so as to learn the separate action of each cause. 
 
 TV. But such predictions are generally confined, in the first 
 place, to general average results as affecting either the whole 
 mass of the community, or great classes of men, as farmers, me- 
 chanics, laborers, etc. Their effects upon each individual may 
 thus to a certain extent be foreseen, but we need not attempt 
 to predict how any given individual will act in consequence. 
 
 V. Such predictions are subject to the further limitation 
 that the final result is liable to be modified by the coming into 
 play of unknown or unforeseen causes. But this does not gen- 
 erally alter the relative effect. 
 
 YI. The economist has completely attained the object of 
 his science when he has learned how to predict the effect of 
 any cause whatever upon the interests of each class of men 
 and not before. 
 
32 BASIS AND METHOD OF ECONOMIC SCIENCE. [I. 25. 
 
 CHAPTER Y. 
 
 FALLACIOUS VIEWS OF ECONOMIC METHOD. 
 
 25. The object of the present chapter is to point out cer- 
 tain misapprehensions respecting economic method, which are 
 closely related to the subject of the preceding chapter. The 
 most common mistake made by those interested in the subject 
 is that of looking upon the propositions of political economy 
 as real or pretended absolute truths which can be applied 
 without regard to time, place, or circumstances. The fact is 
 that these propositions are true only under certain conditions, 
 which conditions may or may not admit of specification. Hence 
 no one can correctly apply the method of economics without a 
 clear appreciation at each step of the conditions which may 
 modify the conclusion. The following is an instructive illus- 
 tration : 
 
 It is a general fact, accepted as the basis of an extended 
 branch of economics, that by increasing the price offered for 
 an article its manufacture is stimulated. The traders in a cer- 
 tain South American port once found a profitable business in 
 purchasing a particular kind of basket which the natives sup- 
 plied at a very cheap rate. The price for which the traders could 
 sell these baskets in their own country was so many times greater 
 than that which they paid for them that they thought to in- 
 crease their profits by offering a double price to the natives 
 for the articles. The result was, however, that instead of the 
 natives being stimulated to produce more of these baskets the 
 supply was actually reduced to one half. Investigation showed 
 that the natives needed only a limited quantity of the trinkets 
 or money which they received for their baskets, and that they 
 could not be induced to make more baskets than would supply 
 them with this minimum. Accordingly, when they found that 
 
1.27.] FALLACIOUS VIEWS OF ECONOMIC METHOD. 33 
 
 they could get their supplies in exchange for half as many- 
 baskets as they had formerly made, their inherent idleness led 
 them to reduce their manufacture. 
 
 Here, then, was a case in which a law of economics was 
 completely reversed. The explanation is that this law tacitly 
 presupposes a state of things which exists only among civi- 
 lized men, namety, a desire for all the money one can get and 
 a little more. Change this condition, make man want nothing 
 but coarse food, coarse clothing and shelter, and the whole sci- 
 ence of economics will have to be reconstructed. 
 
 26. The Doctrinaire's Error. Through failing to see this 
 dependence of all economic propositions upon certain con- 
 ditions men fall into two opposite errors. The first error is 
 that of the "doctrinaire," who makes and applies sweeping 
 generalizations without a detailed examination of the causes 
 which may act to modify the results which he so confidently 
 predicts. There can be no absolute conclusions in economics, 
 and no result can be asserted as positive, until all the causes 
 which may affect it have been considered. What the science 
 does for us is, not to predict the result, but to show us the 
 methods by which we can predict it ourselves when we know 
 the causes and have measured the influence of each cause. It 
 is not like a map in which is laid down every stone and pitfall 
 in some mammoth cave, but rather like a lantern in the hands 
 of an explorer by the aid of which he can discover till the 
 stones and pitfalls for himself. 
 
 27. The Popular Error. There is a large and influential 
 body of men who view the subject from the same point as the 
 doctrinaire ; that is, they assume that economic science should 
 be, or at least that it pretends to be, a complete body of doc- 
 trine which will enable the inquirer to get at truth by purely 
 deductive reasoning. When they find this supposed pretension 
 to be wholly unfounded, they conclude that we must either 
 reject or completely reconstruct the science. We call this 
 
 3 
 
34 BASIS AND METHOD OF ECONOMIC SCIENCE. [1. 27. 
 
 view the popular one because it is one which men seem 
 naturally prone to take. When the men who have studied 
 economics in college go out into the world, they find that the 
 phenomena they actually meet with are much more complex, 
 and are affected by a much more intricate combination of 
 causes, than are presupposed in the science they have learned 
 from their books. In studying the latter they have been led 
 to consider the science as something exact and positive ; and as 
 they gradually find by experience of the world that it is neither 
 exact nor positive, and that the actual course of trade often de- 
 viates from that which they supposed to be marked out by eco- 
 nomical theories, they too hastily conclude that the latter are 
 worthless. The fact is that this defect is inherent in all science 
 when we consider the latter in its practical applications. For 
 example, the engineer student begins by learning a science 
 which is called mechanics. If he applies the results of this 
 science without any modification or allowance for circum- 
 stances, he will find his calculations contradicted by the facts. 
 
 Owing to this necessary defect a disposition to undervalue 
 the practical usefulness of pure science is prevalent among all 
 classes. Yet without science we should have nothing but 
 vague speculation, inconclusive reasoning, and general confu- 
 sion of thought ; while with it we have a collection of princi- 
 ples which, although they cannot be blindly applied, are never- 
 theless of inestimable value to one who understands them. 
 
 A careful consideration of the process of abstraction (§ 15) 
 will enable the student to see the origin of this difficulty in 
 applying scientific conclusions. It is that the conclusions of 
 pure science necessarily presuppose that no other cause than 
 those which it considers comes into play. Now it is impos- 
 sible in economics to consider every possible cause which may 
 modify the result. All we can do is to trace out the action of 
 general far-reaching causes as they affect great bodies of peo- 
 ple, leaving it to the individual himself to see how they are 
 modified by the peculiar circumstances of each case. 
 
 Some writers require much more of our science than that it 
 
1.28] FALLACIOUS VIEWS OF ECONOMIC METHOD. 35 
 
 shall be applicable without modification to the most complex 
 phenomena of human society. They also demand that it shall 
 be applicable to every state of things which their imagination 
 can invent or their research discover. It is sufficient to say 
 that such a requirement can proceed from nothing but defec- 
 tive knowledge, since no science whatever in any form could 
 fulfil such a condition. 
 
 28. If, in thus rejecting all economic propositions, men had 
 nothing to substitute for them, their views would have at least 
 the merit of consistency. But there is a popular method of 
 thinking on the subject which consists in tacitly assuming that 
 whatever is seen to follow any cause is the effect of that cause. 
 For example : to the question, "How would you determine the 
 effect of a change in the tariff ?" the answer of the majority is, 
 " I would wait and see the effect." This method is defective 
 because every fact that we can observe is the product of a mul- 
 tiplicity of different causes. For example, a fall in the price 
 of iron may arise from the discovery and opening up of new 
 mines, from a falling off in the building of railways, from a di- 
 minished demand from abroad, from the discovery at home or 
 abroad of improved methods of manufacture, as well as from a 
 change in the tariff. In consequence it might well happen 
 that after the tariff on imported iron was raised the iron would 
 be cheaper than before, and that it might be dearer after the 
 tariff was lowered. It would therefore be illogical to conclude 
 that the fluctuations in price were due to any one cause until 
 all the causes were investigated. This example should make 
 it perfectly clear to the student that there is no rational method 
 of tracing cause and effect in economics, except to begin by con- 
 sidering the action of the various causes one at a time. 
 
 But the main defect of the popular method is that of ignor- 
 ing what we may call the self-sufficiency of man, and of looking 
 upon man as a victim of blind forces which he follows as a leaf 
 follows the course of the wind. The fact is that men in mak- 
 ing their bargains and doing their work are not the creatures 
 
36 BASIS AND METHOD OF ECONOMIC SCIENCE. [I. 29. 
 
 of any such, forces. They may be relied upon to take the best 
 possible measures for guarding their own interests, and their 
 movements are determined by their own wills and not by any 
 blind laws which we can formulate from statistics. 
 
 29. This way of looking at economic phenomena is so natu- 
 ral that some illustrations of its dangers may be adduced. Let 
 us suppose an investigator seeking to learn the relation between 
 quinine and the public health by statistical observation. He 
 might reason thus: "If quinine conduces to the cure of inter- 
 mittent fever, then where people take most quinine they will 
 have least intermittent fever, and each new importation of 
 quinine will be followed by an improvement in the public 
 health. But looking at the facts of the case, we find them to 
 be directly the reverse of this. In the low lands along the 
 lower part of the Mississippi valley and among the swamps of 
 the Gulf States people take more quinine than anywhere else 
 in the country. Yet, far from being more healthy, the}^ suffer 
 from intermittent fever more than any other people. Not only 
 so, but we find that the large importations of quinine which 
 take place annually in the summer are regularly followed in 
 the autumn by an increase in the frequency of intermittent 
 fevers. Therefore let the advocates of quinine propound what 
 abstract reasons they please, the facts are against them and 
 show conclusively that quinine causes intermittent fever in- 
 stead of curing it." 
 
 This example belongs to the class which the reader who 
 desires to train himself in habits of accurate thought should 
 study very closely. What is the defect in the logical process 
 by which the conclusion is reached ? We have a phenomenon, 
 intermittent fever; we have a cause, quinine. The relation of 
 the two is fully proved. The only question that can arise is 
 whether the fever is the cause of the quinine or the quinine 
 the cause of the fever. Since the introduction of the quinine 
 precedes the annual breaking out of the fever, we have in the 
 former hypothesis the apparent difficulty tliat the effect comes 
 
1.30.] FALLACIOUS VIEWS OF ECONOMIC METHOD. 37 
 
 before the cause. To the average unthinking man, looking at 
 society from the outside, this difficulty would be insurmounta- 
 ble. But when we recognize in men the quality of adapting 
 means to future ends, we see that if we arrange events accord- 
 ing to the order in which we observe them the effect may pre- 
 cede the cause. The general cause of the annual importation 
 of quinine is the belief on the part of great bodies of men that 
 the fever will break out. !Now, belief is a mental state leading 
 to action on the part of men ; and if we ignore it, and the con- 
 sequent adaptation of means to future ends, we not only lose 
 a valuable means of explaining economic phenomena, but we 
 run the danger of falling into error. 
 
 The reader may inquire whether there is really any danger 
 that people should fall into errors so gross as that above sup- 
 posed. We reply by asking, Why do they not fall into that 
 very error ? The reply to this last question is that the error 
 itself is so obvious that there is no danger of falling into it. 
 The common-sense of the average man familiarizes him with 
 the whole process. Common-sense is the lantern by which he 
 sees the relation of things. But if the process is not familiar 
 to him, if this lantern does not shine, then he is in darkness 
 so far as this way of seeing his error is concerned, and he will 
 inevitably fall into mistakes of the kind above illustrated. We 
 have only to read the newspapers and the writings of great 
 numbers of intelligent men to find any quantity of reasoning 
 of the form of that above given ; and how are we to know when 
 its conclusions are right and when they are wrong? 
 
 30. At first sight it may seem discouraging to the student 
 to ask him to devote much close thought to a science all of 
 whose rules and conclusions are imperfect. But there is no 
 occasion for such discouragement. If he has carefully mastered 
 the spirit of this and of the preceding chapter, he will see that 
 the imperfections which we have just been describing are only 
 those which are common to all human knowledge. No knowl- 
 edge of the future affairs of mankind is perfect, because we 
 
38 BASIS AND METHOD OF ECONOMIC SCIENCE. [I. 30. 
 
 cannot possibly tell what causes may come into play to disap- 
 point our expectations. But notwithstanding these imperfec- 
 tions, we can form more or less probable judgments of the 
 action of causes and effects in the world generally which are of 
 the greatest value. The imperfections of political economy are 
 less than those of meteorology. 
 
 We may compare the prediction of a specific future eco- 
 nomic event to an attempt to predict the weather on the 8th 
 of January of some future year. "We can make no such pre- 
 diction with any approach to certainty. Are we to conclude 
 from this that no attempt to foresee changes of weather and of 
 seasons is of any value ? Not at all. We know that the sea- 
 sons go through an annual course ; that the weather is hot in 
 July and August, and then on the average grows colder until 
 January. We make our plans for seed-time and harvest, for 
 winter fuel and summer journeys, with well-founded confi- 
 dence that the changes of seasons will go through their regular 
 course. Now, rejecting the conclusions of political economy 
 on the ground that, being uncertain, they can be of no practi- 
 cal value is like rejecting all the rules about seed-time and 
 harvest because meteorology can never tell us what kind of 
 weather we shall have on any particular day. We must do in 
 economics just as we would do in the scientific investigation of 
 all other general causes. We must frame hypotheses which 
 shall come as nearly as possible to the general average of things 
 as they exist in the world. Every observing man has fairly 
 clear ideas as to how men in general act ; that is to say, he has 
 a certain conception of an average or typical man. From this 
 type every man we meet may differ in some detail, yet it strikes 
 a general average amongst them. But it does not at all follow 
 that we are to stop here and assume that no other man than 
 this average one exists. We may go on and classify men in 
 regard to their differences from the average man to any extent 
 we please. What we have to do is to be careful that our classi- 
 fication corresponds as nearly as possible to the actual charac- 
 teristics of men. 
 
LSI.] FALLACIOUS VIEWS OF ECONOMIC METHOD. 39 
 
 We have to carry the same system through our whole study. 
 We must at every step distinguish between far and wide reach- 
 ing average causes affecting large classes of men, and the tem- 
 porary disturbing causes which sometimes act in one direction 
 and sometimes in another. By proceeding in this way we shall 
 find human society to be a most interesting and satisfactory 
 object of study, in which we can trace the action of cause and 
 effect with nearly as much certainty as we can trace out any 
 system of natural operations going on in the world. 
 
 31. With fallacies respecting economic method we may 
 associate certain imperfections in ways of thinking to which 
 mankind are prone, and which every student of science should 
 carefully train himself to avoid. The most common defect of 
 this kind is that of confounding statements of how things are 
 with statements how we would like them to be, or how things 
 might or ought to be. Those who pursue inquiries in a purely 
 partisan spirit, for the purpose of proving some theory or 
 bringing about some result, are naturally prone to this defect. 
 The defect sometimes reaches such proportions that the person 
 affected by it becomes incapable of understanding a truth sim- 
 ply as a truth, and cannot conceive the state of mind of one 
 who describes things as they are without any ulterior purpose. 
 
 Now science is primarily concerned with things as they are. 
 Just as no astronomer ever claimed that Jupiter was any too 
 large, or that those nearly invisible little planets which are 
 being discovered every year are a great deal too small, so the 
 economist, considered as a purely scientific inquirer, pursues 
 his investigations without any spirit of praise or depreciation. 
 His business is to describe human society exactly as it is, feel- 
 ing that the question how he would like it to be, or how it 
 ought to be, belongs to another branch of the subject. 
 
 It does not follow from all this that the student of economics 
 or any one else should divest himself of human sympathies and 
 refuse to consider what men ought to do to promote their in- 
 terests. It is not necessary that he should absolutely confine 
 
40 BASIS AND METHOD OF ECONOMIC SCIENCE. [I. 31. 
 
 himself to what we have above defined as the field of scientific 
 economics. But what he must carefully do is to distinguish be- 
 tween his thoughts as a scientific economist and his feelings as 
 a promoter of human welfare. The defect we have described 
 does not consist in a person feeling an interest in how things 
 ought to be, and how ends can be attained, but it consists in 
 confusing this feeling with statements of fact. We cannot 
 form the best judgment of what society ought to do to promote 
 its own welfare until we understand as well as possible what 
 the state of things in society really is. We must therefore 
 begin by studying economical causes without any sentiment of 
 praise or blame, and without any feeling that we wish they were 
 otherwise or that we are glad they are as we find them. When 
 we have done this, and not before, we shall be able to form an 
 intelligent judgment about questions of the policy which society 
 ought to pursue in order to secure its own well-being. 
 
 A common mistake is that the conclusions of the plain un- 
 lettered man differ from those of economists in being more 
 immediately founded on observed facts and less on deduction. 
 The truth is that the plain unlettered man is more prone to 
 rely on deduction from unproved hypotheses than the econo- 
 mist is. All classes must equally use deduction, because it is 
 only by this logical process that we form any conclusion about 
 the future effect of any present cause. Drawing the conclu- 
 sion that rain will follow a certain direction of the wind with 
 certain appearances of the clouds is an act of logical deduction. 
 The main point in which men's logical methods differ lies in 
 the care with which hypotheses are formed by induction from 
 observed facts, and the readiness of men to test them. Now 
 it is the plain man who is most prone to form hasty generaliza- 
 tions from insufficient facts, to consider the conclusions which 
 he thence deduces as final, and to be blind to all facts which do 
 not tally with his theory. One object of science is to train 
 men into the habit of carefully taking account of all facts 
 whether they do or do not agree with, their hypotheses. 
 
ILLUSTRATIONS AND EXERCISES. A\ 
 
 ILLUSTRATIONS AND EXERCISES. 
 
 1. By virtue of the force of gravitation acting on its waters, a river 
 tends to flow in a smooth and equable course from its source to the sea. 
 
 The doctrinaire is one who hence concludes that all rivers flow in straight 
 lines to the sea, and rejects all testimony that the course of many rivers is 
 exceedingly tortuous. 
 
 The "practical" or unscientific economist is one who, finding the river 
 to wind about in all directions, denies or ignores any special tendency in 
 its waters to approach the sea, and regards the idea of those waters being 
 urged forward by any one single force, like that of gravitation, as entirely 
 illusory. 
 
 The common-sense economist is one who recognizes all the meander- 
 ings of the river, yet never forgets that its waters are at every point of their 
 course urged toward the sea by the single force of gravitation, and that they 
 change their direction, not because the force is nullified, but because its 
 direction is modified by the hills, rocks, and other obstacles it is continually 
 encountering. So, in economics, he never forgets that the one cause which 
 keeps all the wealth-getting processes in operation is the desire of wealth by 
 each individual man, and never fails to recognize any case in which the 
 action of this cause is modified by circumstances. 
 
 2. It is laid down as a general principle in economics that there can- 
 not be two rates of wages in the same community for the same kind 
 of work. A man was discovered in New York who paid his coachman 
 twice the wages that other people paid for the same services for no better 
 reason than that the coachman had been a favorite of his father's. To what 
 extent, if at all, is it necessary to modify the doctrine of the equality of 
 wages in consequence of this discovery ? 
 
 3. Can you give any reasons for or illustrations of the proposition 
 that the impartial study of things as they are must precede our considera- 
 tion of any or all questions of policy? 
 
 4. Consider the following view of the cause why men tend to congre- 
 gate in great cities; state your opinion of its correctness, and, if you think 
 it wrong, state the cause in a form which you consider correct: 
 
 "Men tend of necessity to gravitate towards their fellow-men ; the greater 
 the number collected in a given space the greater is the attraction there 
 exerted — as is seen to have been the case with the great cities of the ancient 
 world, and is now seen in the great cities of modern times. London and 
 Paris may be regarded as the rival suns of our system, which exercise a 
 strong attractive force; and were it not for the existence of a counter-attrac- 
 tion of local centres like Vienna and Berlin, Florence and Naples, etc., 
 
42 BASIS AND METHOD OF ECONOMIC SCIENCE. 
 
 Europe would present to view one great centralized system, the population 
 of which was always tending towards those two cities, there to make all 
 their exchanges and thence to receive their laws." (Carey, Principles of 
 Social Science, Chap. II. Sec. I.) 
 
 Consider principally the question whether if the lesser capitals did not 
 exist there would be a greater tendency towards the great ones. Is there 
 any such attraction as that described, and, if so, what is its nature? 
 
 5. "Science requires laws, and laws are but universal truths, truths 
 to which no exceptions can be found." (Ibid., Chap. I. Sec. VI.) 
 
 State under what limitations of meaning, if any, this proposition is cor- 
 rect. Can you think of any law which will enable you to foresee what will 
 happen to-morrow with absolute certainty? Is there any law to which no 
 exception can be found? If not, is it fair to suppose that laws are of no 
 use? 
 
 6. Were you to invent a new form of steam-engine" and could you find 
 but two persons to consult with, the one a practical engineer who had spent 
 his life in running a particular kind of engine but knew nothing of the 
 theories of thermo-dynamics, the other a mathematician who had mastered 
 thermodynamics but had never seen an engine at work, which would you 
 regard as the better authority for advising you how your engine would be 
 likely to succeed ? 
 
 Can you form any general definitions of the class of questions which 
 could ba best answered by the mathematician and the class which could 
 best be answered by the engineer ? 
 
 7. Can you apply any general principles of the kind suggested by the 
 preceding question to the case of advising a government on a financial 
 question ? If the Mexican Government desired to raise a loan in the New 
 York money market, would it act more wisely in consulting the bankers of 
 New York or the political economists ? If it proposed to introduce a new 
 system of currency such as had never before been tried, ought it to consult 
 the bankers or the economists ? 
 
 8. In continuation of the same subject. If we admit the principle that men 
 of most experience should always be consulted upon a difficult question, 
 in what class of questions should we say that practical bankers had more 
 experience than economists, and in what class should we say that economists 
 were more experienced than bankers ? 
 
 9. Examine and criticise the following objection to the practical value 
 of scientific method: 
 
 Scientific method considers the course of events as going on in accord- 
 ance with certain formal laws the results of which it shows us how to 
 predict. Now if all the phenomena with which men are concerned went 
 
ILLUSTRATIONS AND EXERCISES. 43 
 
 on in this formal way, our scientific method would be very valuable. But 
 in fact, a great majority of the events with which men are concerned are the 
 result of such a multitude of causes that they cannot be reduced to these 
 simple laws. Scientific method is of no value in such cases, and the result 
 must be a matter of practical judgment. 
 
 Consider the soundness of this proposition in the light of such questions 
 as the following: 
 
 Is scientific method more or less necessary because we cannot formulate 
 a set of principles which can be applied without modification to all cases ? 
 If a new kind of railway bridge is to be built, it may be found that no ex- 
 perience gained from other bridges and no calculations made for them will 
 apply to the case of the new bridge under contemplation. Does this inap- 
 plicability of experience render scientific method more or less necessary in 
 making calculations for the proposed bridge ? 
 
 10. Compare the following two cases: first, that of a miserly selfish man 
 whose energies are devoted entirely to the accumulation of wealth for him- 
 self; secondly, that of a man who devotes his labor and his fortune to the 
 relief of suffering humanity. Is there any difference in the method of in- 
 vestigation which we have to apply to the two cases? Is it or is it not true 
 that the men are equally following the bent of their nature ; and that the 
 relation between their nature and the acts which we see them perform are 
 the same in the two cases ? 
 
 Nearly all of us contemn the first of the above men and love the other. 
 Is the existence of these sentiments of love and contempt of use or benefit 
 in the work of analyzing the nets of the men ? 
 
 11. Examine and criticise the following objections to the method and 
 hypotheses of political economy as laid down in Chapter IV. : 
 
 I. We cannot make these general hypotheses of human nature the basis 
 of any reliable investigation into economic phenomena, because these phe- 
 nomena depend upon a great variety of circumstances not included in the 
 hypotheses. Every successive generation is placed under new conditions, 
 and the circumstances which surround every people are different in impor- 
 tant points from those which surround other peoples. 
 
 II. It is very unsafe to assume that men always act reasonably in 
 adapting means to ends. The fact is, man is a very uncertain and variable 
 being, and it is a good deal safer to assume that we find him just as we 
 see him act than to frame any theories founded on his nature or mental 
 constitution. 
 
 III. The conditions of different nations being different, we cannot frame 
 any system of political economy which will apply to more than one nation. 
 Hence any idea that there is a general science of economics is without 
 foundation. 
 
 "With reference to the first objection, consider and decide whether in 
 
44 BASIS AND METHOD OF ECONOMIC SCIENCE. 
 
 assuming the hypothesis of § 18 we are obliged to ignore any of the con- 
 ditions or circumstances which surround mankind. 
 
 In reference to the third question, consider whether there is anything 
 common in the economic phenomena of different civilized nations. Is 
 the general system of producing, transporting, and selling goods radically 
 different in Germany, England, and America — that is to say, are there any 
 features of these processes common to all these countries? 
 
 12. What is the fallacy, if any, in the following reasoning ? 
 
 Where we see fine marble houses, public fountains, and paved streets 
 we know that people are wealthy. Therefore if a community would be- 
 come wealthy as fast as possible it must proceed to the erection of marble 
 buildings, the paving of streets, and the construction of fountains as rapidly 
 as possible. 
 
 13. When in 1885 the government invited bids for supplying iron beams 
 for the new War Department building in Washington, it was found that 
 the lowest bidder knowingly agreed to supply the beams below the lowest 
 price at which he could buy them. Is it to be supposed that he did this 
 from patriotism, from a desire to benefit his country, or from other motives 
 forming an exception to the hypotheses of economics? 
 
BOOK II. 
 STRUCTURE AND FUNCTIONS 
 
 OF THE 
 
 SOCIAL ORGANISM. 
 
BOOK IL— DESCRIPTION OF THE SOCIAL 
 ORGANISM. 
 
 Division A.— Definitions and Outline. 
 
 CHAPTEK I. 
 
 OF WEALTH AND ITS ASSOCIATED CONCEPTS. 
 
 1. Remarks on Economic Nomenclature. An exact no- 
 menclature is one of the first requirements of an exact science. 
 But economics is so peculiar in its nature as to render this 
 requirement very difficult of fulfilment. In most other sci- 
 ences things are classified according to their own inherent 
 qualities. But in the present one things have to be classified, 
 not merely with respect to such qualities, but rather according 
 to their relation to human desires. We have to associate things 
 so purely mental as human hopes and fears with things so 
 purely material as ships, ploughs, and steam-hammers. Thus 
 we encounter the necessity of arranging things with reference 
 to the mental emotions which they are calculated to excite. 
 One consequence of this is that an object which may belong- 
 to one class if owned by one person may belong to a different 
 class when he sells it to his neighbor. Such anomalies are 
 inherent in the subject, and can be reduced to order only by 
 the reader keeping well in mind what is meant in each par- 
 ticular case where terms of peculiar signification are applied. 
 
 As a rule, no new words have been introduced into econo- 
 mics. What has been done is to extend and generalize the 
 meaning of familiar words. Such words we shall now proceed 
 to define. • 
 
48 DESCRIPTION OF TEE SOCIAL ORGANISM. [II. 3. 
 
 2. Labor. In its widest economic sense labor is any ex- 
 ertion of the human faculties for the attainment of a definite 
 object. This definition is merely an extension of the familiar 
 one. The latter includes only physical exertion. But in 
 economics the exercise of the judgment and imagination finds 
 as important a place as that of the body. Hence the mental 
 occupations of the lawyer, the author, the. clergyman, and the 
 actor belong to the same class as the bodily exertions of the 
 common laborer. The}' are equally necessary to the gratifica- 
 tion of the general desires of the community. 
 
 Although no harm would result from our using the word 
 labor in the above extended sense, yet in practice we limit it 
 as follows : Labor is exertion of the human faculties devoted 
 to the production of any object or effort for which other per- 
 sons than the laborer are, or might be, willing to pay. In 
 familiar language, labor is all that any one does in order to 
 make a living. 
 
 3. Wealth. In economics the term wealth, in its widest 
 sense, designates all those things which men gain by labor, and 
 employ to gratify their desires. 
 
 Economists have sometimes been divided on the question 
 how far anything not material could be considered wealth, and 
 also whether the term should be confined to objects the use of 
 which could be transferred from one person to another. It 
 will not be profitable at the present time to enter into a dis- 
 cussion of this question further than to say that it seems advan- 
 tageous to consider the word in its more extended sense ; but, 
 at the same time, to confine it to actual objects of desire, 
 material or immaterial, transferable or not. The understand- 
 ing of the definition will be facilitated by enumerating the 
 principal classes of objects which may be included in the 
 term. They are : 
 
 L All the lands and mines of the country to which labor 
 has been applied to make them productive of edible plants, of 
 animals, or of minerals. 
 
II. 4.] OF WEALTH AND ITS ASSOCIATED CONCEPTS. 49 
 
 II. The improvements in and upon the land designed to 
 facilitate production, such as roads, fences, storehouses, barns, 
 etc. 
 
 III. All appliances which men have made for the manufac- 
 ture, transportation, preservation, and sale of the products of 
 industry, including railways, manufactories, etc. 
 
 IY. The houses in which we live, together with the furni- 
 ture, pictures, and everything else which they contain intended 
 to promote our ease and pleasure. 
 
 Y. All products undergoing the processes of manufacture, 
 transportation, and sale to those who finally use them. 
 
 YI. Clothing, food, books, and all other manufactured pro- 
 ducts in possession of those who are to wear or use them. 
 
 YII. The skill, business ability, or knowledge which enable 
 their possessors to contribute to the enjoyment of others, includ- 
 ing the talents of the actor, the ability of the man of business, 
 the knowledge of the lawyer, and the skill of the physician, 
 are to be considered wealth when we use the term in its most 
 extended sense. 
 
 If, instead of discussing the definition in detail, we inquire 
 what is the understood sense in which the word is used in eco- 
 nomics, we shall find the definition to be : Wealth is that for 
 the use or enjoyment of which people pay money. 
 
 4t. Of Property or the Right to or Ownership of Wealth. 
 It is necessary in every branch of economics to bear carefully in 
 mind the distinction between the objects, material or immate- 
 rial, which constitute wealth, and the ownership of 'or rights in 
 those objects, which secures the proper party in the enjoyment of 
 the wealth. In many cases it is difficult to make the distinction, 
 owing to the very general or abstract nature of the object pos- 
 sessed ; but its importance requires a very careful and critical 
 examination on the part of the student. The understanding of 
 the subject will be facilitated by taking it up in special cases, 
 beginning with the most familiar ones, before we proceed to 
 any generalization. 
 4 
 
50 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 5. 
 
 Here is a suit of clothes. That suit of clothes is capable 
 of protecting some one person from .the inclemency of the 
 weather. Since it can protect only one person at a time, it 
 follows that there must be some law or general understanding 
 to determine a person having an exclusive right to it. The 
 person so determined is called the owner of the clothing ; the 
 clothing is called his property ; he has the sole right to the 
 use and enjoyment of the clothing, and this right is called 
 ownership. We have thus four words all of which are rela- 
 tive : owner, which designates the person, but which also im- 
 plies his relation to the clothing ; property, which designates 
 the clothing in its relation to the owner; ownership, which 
 designates the relation between the two ; and right, which 
 may be considered as giving force to this relation. The word 
 wealth, on the other hand, designates the object absolutely ; 
 that is, not in its relations to any particular person. So far as 
 the mere object is concerned, property means the same thing 
 as wealth ; it differs in being relative to some owner. 
 
 If this distinction of absolute and relative terms for the 
 same object offers any difficulty to the student, he may make 
 the subject clear by considering that a body of men may all be 
 brothers. Hence to a certain extent man and brother may 
 mean the same thing. The difference is that the word man 
 is an absolute term designating the individual just as he stands, 
 whereas when we call him brother we imply his relation to 
 somebody else, either a sister or another brother. Of the same 
 general nature is the difference between the word wealth, 
 which is either absolute, or relative only to the community at 
 large, and property, which considers it relative to the owner. 
 
 5. Of the Owners of Property. The owner of property 
 may be an individual, a society, or an indefinite number of in- 
 dividuals called the public, whose collective personality is em- 
 bodied in a conception called society, the government, or the 
 state. Any individual or society legally capable of becoming 
 an owner of property is called a legal person, or simply a 
 
II. 5.] OF WEALTH AND ITS ASSOCIATED CONCEPTS. 51 
 
 person. Examples of such persons are mercantile firms, 
 banking and railway companies, and incorporated societies, as 
 well as individuals of legal age. 
 
 Different Forms of Ownership. Considered in its relation 
 to the three classes of owners, property may be divided into 
 public, joint or corporate, and individual. 
 
 Public property we may consider to be owned by the state, 
 or by society at large. The roads on which we travel in the 
 country, the streets and pavements of a city, the fountains and 
 statues which ornament it, and the pipes which supply it with 
 water, are examples of this sort of property. That is, all 
 these kinds of w r ealth are equally possessed and enjoyed by 
 everybody who can use them. 
 
 Joint property is that the owner of which is any definite 
 body of persons. When this body is specially organized by 
 law it is called an incorporated company, and the property is 
 called corporate. In economics we have no occasion for any 
 distinction between corporate and other forms of joint prop- 
 erty. 
 
 Individual property is that owned by an individual. Each 
 member of an association has an indirect or secondary right in 
 the wealth owned by the association, so that there are two 
 distinct orders of ownership. An example of this is afforded 
 by a railway. The wealth is not only the railway itself, 
 but the buildings, engines, cars, and other appliances neces- 
 sary to its running. The owner of the railway as a whole 
 is a body of men called a railway company. Considered in its 
 relation to this owner, the property in the railway is called 
 stock, and the stock is divided up into small parts called 
 shares. The shares again are possessed separately by the in- 
 dividual men who form the company, each man owning a cer- 
 tain number, which are then his individual property. Here 
 we have no difficulty in distinguishing between the stock or 
 shares, which make up the several properties of the indi- 
 vidual owners and the wealth consisting of the railway it- 
 self and the various appurtenances connected with it, which 
 
52 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 6. 
 
 exists independently of changes in the ownership. The same 
 principles apply to manufacturing and commercial companies. 
 The individual ownership of wealth is subject to an infinite 
 variety of modifications. In economics the most important 
 modified forms are credit and divided, ownership, which we 
 shall next define. 
 
 6. Credit. The right held by the owner of credit is that 
 of requiring from some other person or owner at a future time 
 the payment of a designated sum of money. The holder of 
 the right is called the creditor • the person against whom he 
 holds it, the debtor. The debtor, whom we may consider as 
 the present owner of the money to be paid, may be any kind 
 of legal person, an individual, a company, or a government. 
 But the right possessed by the creditor is apparently neither 
 the ownership of anything which comes under our defini- 
 tion of wealth, nor that of any material object. The right to 
 demand money from another party is not the same thing as 
 the ownership of money. Let us take for example a promis- 
 sory note by which the drawer, D, is under an obligation to 
 pay the holder, A, a sum of money. Now although ideally 
 this sum of money is a certain weight of gold or silver, yet 
 there are no particular pieces of gold or silver which con- 
 stitute the wealth. It may very well happen that the sum of 
 all the moneys to which the members of the community have 
 rights expressed by promissory notes exceeds many times over 
 the money which actually exists in the community. 
 
 The difficulty in this case will be avoided, and the case 
 brought under our general definitions, by looking at another 
 feature of the case. Every right of this class is accompanied 
 by a corresponding obligation on the side of another party ; and 
 the right and obligation are mutual and equal in amount: 
 where one ceases the other ceases also. There cannot be a 
 creditor without a debtor. Now the most accurate way to 
 consider the subject is to regard the right possessed by the 
 creditor as algebraically positive property, and the equal 
 
II. 7.] OF WEALTH AND ITS ASSOCIATED CONCEPTS. 53 
 
 obligation on the part of the debtor as algebraically negative 
 property. The sum total of property possessed by the com- 
 munity is not altered by one member owing another ; because 
 equal credits and debits cancel each other, just as positive and 
 negative quantities do in algebra when they are added. 
 
 Thus, if D is indebted to C in the sum of x dollars, we 
 conceive that D's ownership does not extend to the whole of 
 the money or other wealth which is in his possession, because 
 such ownership is diminished x dollars by the debt. If w 
 represents the whole quantity of money which he is to possess 
 when the debt becomes due, his property in that money is 
 w — x, and C's property is x. The sum of these properties 
 makes up w, the quantity of money in question. 
 
 7. Divided Property. Credit involves a special kind of 
 divided property. But there are modified ownerships of 
 many kinds, of which the following is the most important. 
 
 A person may have a right of property in an estate, not 
 by virtue of owning any part or share of it, but by enjoying 
 the right to demand from its owner, no matter who he may be, 
 a sum of money, and to seize the estate, or require its sale, in 
 case the corresponding obligation on the part of the owner is 
 not fulfilled. The property owned in this case is in the nat- 
 ure of credit, but it differs from the credits described in the 
 last article in that the property inheres in a particular piece of 
 wealth, namely, the estate which is pledged to the payment of 
 the debt. The property is then divided between the two 
 owners as follows : if x be the total value of the estate, and 
 n the amount of the debt upon it, the creditor's share will be 
 n and the owner's share of the estate will be x — n. Both 
 values together will make up the value e of the estate, as it 
 should. The method of representing the property algebrai- 
 cally is the same in the case of simple credit. 
 
 Debts of all kinds come under the rule that they are 
 necessarily offset by corresponding obligations on the part of 
 some one, and therefore form no part of the total property of 
 
54 DESCRIPTION OF TEE SOCIAL ORGANISM. [II. 8. 
 
 the community. In the case of government, state or muni- 
 cipal bonds of any kind, the debtors comprise all the property- 
 owners in the community, who must be taxed to pay the debt, 
 and in any estimate of the total value of property each man's 
 share of the amount due should be subtracted from the value 
 of his individual possessions. The result of the correct appli- 
 cation of all these principles is that we can form an estimate 
 of the total value of all the wealth of the country which shall 
 be quite independent of the particular rights of property in 
 that wealth. 
 
 8. Illustration of the Difference detween Wealth and Prop- 
 erty. The importance of keeping in mind the nature of 
 wealth, irrespective of the rights of property in it, will be made 
 clear by an illustration. In the year 1837 a commercial crisis 
 unparalleled in its intensity swept over this country : failures 
 in business were seen on all sides ; those who did not fail had 
 the greatest difficulty in making good their debts; workmen 
 were thrown out of employment, and a large majority of the 
 people felt that they had suddenly become poor. In ordinary 
 language, their wealth was swept away as by a hurricane, and 
 in all descriptions of the crisis it was alluded to as a destroyer 
 of wealth. 
 
 And yet if we look at the case from a common-sense point 
 of view we shall see that no wealth at all was destroyed. 
 There were just as many suits of clothes in the country the day. 
 after the crisis as there were before, and they were just as well 
 fitted for wearing. The mills and factories were all in as good 
 order, the farms as fertile, and the crops as large before the 
 supposed hurricane as after. The houses remained standing, 
 the wood was in the woodsheds ready for burning, and the 
 food in the larder ready for cooking, just as it had been left. 
 In a word, every appliance for the continued enjoyment of the 
 fruits of labor remained as perfect as it ever was. It is true 
 that many found it difficult to purchase the necessary food and 
 clothing although it existed in the granary and shops. But 
 
II. 11.] OF WEALTH AND ITS ASSOCIATED CONCEPTS. 55 
 
 this is simply saying that there was a difficulty in arranging 
 the terms and conditions of sales between the owners of the 
 food and clothing and the people who wanted them. What 
 the change in the state of things really consisted in cannot be 
 explained until we have reached a more advanced stage of the 
 subject, but it is perfectly clear at this stage that it did not 
 consist of any destruction of wealth. 
 
 9. Transfer of Ownership. In most cases the ownership 
 of property can be transferred by some simple process from 
 one person to another. This transfer consists in one person 
 taking the place of another in that right to the wealth which 
 is called ownership. It is made in various ways. In the famil- 
 iar case of sale of personal property, the first owner, called the 
 seller, places the property in the possession of the second one, 
 called the purchaser. In case where the purchaser cannot con- 
 veniently take possession of the property it is transferred by 
 an instrument in writing known under various names : a deed 
 or conveyance when the property transferred is real estate ; a 
 bill of sale when it is personal property ; a cheque or bill of 
 exchange when it is credit. 
 
 10. Commodity. The term commodity, in economics, 
 means any special kind or collection of wealth. It is usually 
 confined to goods for sale in the public markets, such as cloth- 
 ing and food, and in general to particular portions of wealth 
 considered in their relation to any one who wants to possess 
 and enjoy them. 
 
 11. Capital. Capital is a kind of wealth. That is, all 
 capital is wealth, but not all wealth is capital. But what kinds 
 of wealth shall be considered capital and what not is a ques- 
 tion which cannot be fully understood until after a thorough 
 study of the subject. It will suffice at present to say that capi- 
 tal consists of all that wealth which the owner is keeping, not 
 for its own sake, but in order that he may by its means make 
 
56 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 11. 
 
 it the instrument of acquiring further wealth. For example, 
 tools are not kept because they satisfy any desire of the owner, 
 but because they can be used in making things which do fulfil 
 this object. Hence they are capital. The term also includes 
 machinery, buildings designed for manufacturing purposes, 
 and the raw material which is stored away in order to be 
 manufactured into articles of utility. But the clothes we wear, 
 the food we have stored in our houses for eating, and the beds 
 on which we sleep are not capital, because they are kept in 
 order to be immediately useful. 
 
 To the beginner it will not be evident why this distinction 
 should be made between wealth which is and wealth which is 
 not capital, but we shall see later that it is of fundamental im- 
 portance in questions involving the interests of society. 
 
 Note on the Definition of tlie Word Property. This word is used in the 
 present chapter in its popular rather than in its strictly legal sense. In the 
 latter sense such words as " property," "estate," and "farm " do not mean 
 tilings, but rights. An estate is not fields and buildings, but the right to own- 
 ership in fields, buildings, or other wealth. A. farm does not mean a culti- 
 vated piece of ground, but the right to cultivate the ground and dispose of the 
 crops. So property is not wealth, but the exclusive right to the possession 
 of wealth. Whether it would conduce to clear thinking in economics to 
 confine such words to their purely legal sense is a question well worthy of 
 consideration. Mr. Henry Dunning McLeod in his Elements of Economics 
 insists very strongly on the legal meaning of these words, and considers it 
 a positive error to apply them to things. It is certain that in the case in 
 question the general and popular meaning of the words referred to is wealth, 
 considered not in itself, but in relation to its owner. Since this relation 
 necessarily implies the right of the owner to it, the two ideas of right and 
 thing in which the right inheres are inseparable. It does not therefore seem 
 that any confusion will arise from the double sense in which the word is 
 used. AVhen one transfers property, it amounts to the same thing whether 
 we say that what he transfers is the right or the thing. On the other hand, 
 the restriction put upon the definition by Mr. McLeod has led him to con- 
 clude that wealth may comprise "abstract rights, quite separate and sev- 
 ered from any material substances," which does not sufficiently distinguish 
 the risiht from the thing. 
 
II. 13.] OTHER DEFINITIONS. 57 
 
 CHAPTER II. 
 
 OTHER DEFINITIONS. 
 
 12. Production. The act or process of applying labor in 
 such a way as to bring wealth into existence is called produc- 
 tion. 
 
 As commonly used this word applies only to changes in the 
 raw material of which an article is composed. If we watch 
 the process through which a lump of iron ore is changed into a 
 keg of nails, we shall find the material smelted, hammered, put 
 into a car, conveyed to a city, and passed through a machine. 
 All these operations are included under the term 'production. 
 It is true that transportation from one place to another is not, 
 in familiar language, called production, but it must be so called 
 in scientific nomenclature, because in order to enjoy an article 
 it must be brought within our reach, and the act of so bring- 
 ing it belongs to the same class with that of making it. 
 
 13. Exchange. In the most general sense of the term 
 exchange consists in a mutual transfer of the ownership of 
 two properties. A transfers to B his (A's) right of property in 
 some commodity in consideration of B's transfer to him of 
 some other and equivalent right. 
 
 The necessity of exchange arises from the circumstance that 
 no one person can produce more than a minute fraction of the 
 wealth which he desires to enjoy. When, as in the savage 
 state, each individual or each family supplies its own wants, 
 there can be no considerable enjoyment of wealth. If each 
 man among us should attempt to make boots, clothing, and 
 hats, to build houses, to paint and plaster them, and to furnish 
 them with everything necessary for comfort, he would miser- 
 ably fail. But when, as in civilized society, each person de- 
 
58 DESCRIPTION OF TEE SOCIAL ORGANISM. [II. 13. 
 
 votes himself to the production of a particular kind of wealth, 
 the sum total of wealth produced is incalculably greater than 
 when each person tries to make everything. Now in order 
 that this increased production of each kind of commodity may 
 be enjoyed by others than its immediate producer, there must 
 be a transfer of ownership from the producer to the persons 
 who are to enjoy the commodity. Hence arises a system of 
 mutual exchange in which each receives a sujjposed equiva- 
 lent for what he gives. 
 
 Exchange is of two kinds, barter and sale. 
 
 Barter is the exchange of one commodity for another, in 
 the case when each party receives from the other some com- 
 modity which he desires to make use of. For instance, if the 
 owner of a yoke of oxen desires to exchange them for a horse, 
 and finds a person who having a horse desires a yoke of oxen, 
 the exchange of ownership would be barter. 
 
 The necessity in barter that each party shall find another be- 
 tween whom and himself there shall be a mutual desire for the 
 exchange of commodities renders it impracticable on any con- 
 siderable scale in a developed society. Occasionally we hear 
 of a man bartering a horse for a carriage, or a farm for a city 
 residence, but the transaction is too rare to be specially consid- 
 ered in economics. 
 
 In all societies advanced beyond the barbarous state exchange 
 is affected by the use of a metal to which the term money is 
 applied. The exchange of a commodity for money is called 
 sale in relation to the one party and purchase in relation 
 to the other. To illustrate the great advantage of sale over 
 barter, let us suppose that the maker of a pair of boots desires 
 to exchange them for a hat. It would be necessary for him to 
 search diligently for some one person who wanted a pair of 
 boots and who had a spare hat to exchange for them. Perhaps 
 he could find no such person. He might find a number of 
 owners of spare hats and a number of seekers of boots, but 
 unless the two desires to part with the hat and to receive a 
 pair of boots were merged in one person his search would be 
 
II. 14] OTHER DEFINITIONS. 59 
 
 useless. But by the use of money it is only necessary that he 
 should first find some one who desires his boots and then some 
 one else who has a spare hat, and by sale in the one case and 
 purchase in the other the desired exchange is effected. For 
 this reason money is often called the mediiiHi of ex- 
 change. 
 
 14. Consumption. It is a universal characteristic of wealth 
 that it is gradually used up or consumed in the very act of grati- 
 fying the desires of its owners. The gradual wearing out of a 
 coat and its consequent reduction to the state of rags is typical 
 of this process in its ultimate form. The length of time occu- 
 pied by wealth in the processes of consumption is, however, 
 very different with different kinds of wealth. The words and 
 gestures of the actor are consumed at the moment, and die in 
 the very act of pleasing his audience. The faculties and skill 
 of men die away in old age and entirely disappear at death. 
 Clothing is consumed in a few months or years according to 
 circumstances. In the case of houses a continual process of 
 consumption is going on through the decay and disintegration 
 of material produced by time and the weather. But for many 
 years and even centuries this consumption may be neutralized 
 by new acts of production in the form of repairs to the house. 
 Ships and machinery wear out in the course of a few years. A 
 canal so far as we know may be preserved through indefinite 
 periods with the aid of occasional repairs. "Without this it will 
 in the course of time be effaced through the operations of 
 nature. This wearing out of wealth is called consumption. 
 
 Productive and Unproductive Consumption. In the case 
 of houses, furniture, clothing, food, and other articles the com- 
 modity is gradually consumed in the very act of gratifying the 
 consumer, and eventually disappears as wealth. The house 
 after decaying, the coat after being worn out, and the food 
 after being eaten no longer have the properties of house, 
 clothing, or food. This process of losing useful properties 
 is called unproductive consumption. But in the process of 
 
60 DESCRIPTION OF TEE SOCIAL ORGANISM. [II. 14. 
 
 manufacture wealth is continually being consumed for the pur- 
 pose of reappearing in a new and more useful form. For 
 example, the wool of the sheep disappears as wool when it 
 is woven into cloth. The cloth can no longer be used or sold 
 as cloth after it is made into a coat. We conceive in these 
 cases that the wool and cloth are really consumed to reappear 
 in the improved forms of cloth and a coat respectively. This 
 disappearance to reappear in a new form is called productive 
 consumption. 
 
 The question may be asked, Since the material of the wool 
 remains through the whole process, and actually exists in the 
 coat, why talk of consumption at all ? We answer this ques- 
 tion by viewing the case in other aspects. Consumption does 
 not consist in the annihilation of matter, for if it did there 
 would be no consumption at all. The ultimate molecules of 
 matter do not admit of change or decay. Consumption con- 
 sists only in a change of the form and relations of the mole- 
 cules. Nearly all the cotton that went into your shirt is still 
 there after the shirt is a pile of rags in the paper-mill. In no 
 case, therefore, is consumption anything but a change in the 
 form of matter. We therefore say, in economics, that any 
 particular kind of material is consumed when its form is so 
 changed that it loses its original properties or qualities. ISTow, 
 after the wool is made into cloth it has lost the property of 
 being conveniently carded and spun and is no longer available 
 for many purposes to which it could originally have been put. 
 It is therefore consumed. So, also, the cloth after being made 
 into a coat is good for nothing except as a coat ; it can no longer 
 be used as blanket or made into a pair of pantaloons. We 
 therefore say that it is consumed. But because in the act of 
 consumption a more useful form of wealth has been produced 
 we call the consumption productive. 
 
 In order that consumption may be productive it is not nec- 
 essary that the identical wealth consumed should be repro- 
 duced in the new form. The consumption of oats and hay by 
 a horse may be productive. The new form of oats and hay 
 
II. 15.] OTHER DEFINITIONS. 61 
 
 will bo whatever wealth the horse may be enabled to produce. 
 If he takes wheat to the mill to be ground, the food he has 
 eaten may be considered as reappearing in the form of flour. 
 The consumption of the iron and brass which enter into the 
 machinery of a cotton-mill results in the formation of cloth, and 
 not in any new form of the metals which went into the ma- 
 chinery. 
 
 The distinction between the two kinds of consumption may 
 be condensed as follows : "Wealth being necessarily consumed 
 in the process of satisfying the wants of man, we say : 
 
 If the owner of wealth is consuming it, or allowing it to be 
 consumed, not for his own immediate satisfaction, but in order 
 that he may sell the result of the consumption to others, then 
 the consumption is productive. 
 
 But if he is consuming it for his own satisfaction or that of 
 his family or friends, the consumption is unproductive. 
 
 15. We perceive that the object and result of the opera- 
 tions we have described is that men may enjoy wealth. These 
 various operations may be divided into three classes — -produc- 
 tion, transportation, and exchange. The first consists in me- 
 chanical operations upon the sheep, the wool, the yarn, and the 
 cloth, which operations were performed by labor with the aid 
 of capital, and are called tending, shearing, combing, spinning, 
 weaving, cutting, making up, etc. Since each of these opera- 
 tions adds to the value of the product, they are all productive. 
 
 The earlier economists were divided over the question 
 whether transportation should also be included in the same 
 class as production. It is, however, obvious that the transpor- 
 tation was just as necessary a condition of the coat being worn 
 as anything else ; it should therefore also be considered as pro- 
 duction. But exchange has always been considered separate 
 from production. Yet so far as the mere operation is concerned, 
 the process of exchange is just as necessary to our having the 
 coat as any other process was. It involved a certain amount of 
 labor, namely, the labor of building a warehouse to hold the 
 
62 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 16. 
 
 cloth or the coat until we should want it, and the labor of tak- 
 ing care of it during this interval, as well as that of doing it up 
 in proper shape and receiving the money paid for it. It is 
 convenient to have a separate term for this necessary labor in- 
 volved in the mere operation of exchange. We shall therefore 
 call it friction of exchange. 
 
 The operation of exchange, however, involves something 
 more than the mere performance of labor, namely, the use of 
 money and credit. Money and credit may be considered as 
 forming a certain mechanism by which exchange is effected ; 
 they have therefore been treated under the head of the me- 
 chanism of exchange. This mechanism involves other forces 
 than friction. Being one of the essentials to our enjoying the 
 coat, it is an element in the social organism of the same impor- 
 tance with capital and labor. 
 
 1.6. Value. We can readily understand that under a sys- 
 tem of barter the question would continually arise how much 
 of one commodity should be given in exchange for another. If 
 a man with a pair of boots to barter found one person offering 
 him a hat in exchange, a second a coat, and a third a barrel of 
 flour, he would have no ready means of deciding which offer 
 was the best, or whether any of them would be advantageous. 
 But when a commodity is sold, the owner receives a definite 
 amount of money in exchange for it, and the best sale is that for 
 most money. In effecting the sale he has before him a definite 
 object, namely, to get as much money in exchange as he can.» 
 The buyer has before him another definite object — to get the 
 commodity as cheaply as he can. Thus, in each case, a certain 
 order of choice is presented, the highest amount of money in 
 the case of the seller, and the largest amount of goods in the 
 case of the buyer, being preferred. From this order of prefer- 
 ence arises the conception of a mathematical quantity called 
 value. 
 
 It is a general rule, applicable not only to economics, but to 
 all the mathematical sciences, that the definition of an object 
 
II. 17.] OTHER DEFINITIONS. 63 
 
 or of a magnitude of any kind does not include a description 
 of how it shall be measured. As a general rule the quantity 
 itself and the system of measuring it are to be defined sepa- 
 rately. Now what is termed the theory of value includes not 
 only these two definitions, but at least a third subject. We 
 thus have, 
 
 First, the definition of value as a simple quality or object, 
 without respect to how it shall be measured. That is, we must 
 know what value is. 
 
 Secondly, we have to describe or define how value shall he 
 measured. 
 
 Thirdly, we have to study all the causes on which value de- 
 pends. 
 
 The last does not belong to the present stage of the subject, 
 and the first can be better considered at a future stage. We 
 have therefore only to deal with the second by considering 
 how value is measured in practice. 
 
 17. Value as a Mathematical Quantity. In economics 
 price is considered as the measure of value. The price of a com- 
 modity is the number of units of money which the commodity 
 can be exchanged for in the public market. The monetary 
 unit is a dollar in America, a pound in England, a franc in 
 France, a mark in Germany, etc. 
 
 We are careful to say, not that price is value, but that price 
 is the measure of value. It is the measure of value just as 
 length is the measure of a line, weight the measure of iron in 
 the market, and volume the measure of things which sell by 
 the bushel. We have now to consider the method of measure- 
 ment. 
 
 I. In mathematics quantity of any kind is measured by 
 taking a certain standard portion of the quantity as a unit and 
 determining to how many of these units the quantity measured 
 is equivalent. For instance, the length of a board may be ex- 
 pressed by taking a standard unit called the foot, and stating 
 how many feet will make a length equal to the board. 
 
64 DESCRIPTION OF TEE SOCIAL ORGANISM. [II. 17. 
 
 II. When we measure a quantity we leave out of considera- 
 tion all the qualities of the thing measured except those which 
 pertain to the special quality which is measured. For exam- 
 ple, in estimating length the measuring unit may be made of 
 iron, boxwood, brass, or any other material. The tiling 
 measured may be wood, iron, rope, or any other substance ; 
 may be of any color and have any weight. But all such quali- 
 ties as color, weight, etc., are left out of consideration in the 
 estimate of length. So with weight. Our unit of weight, 
 which may be a pound or a kilogram, may be of any mate- 
 rial whatever ; and the thing weighed may be of an}' length, 
 any color, or any substance. But in stating the weight we 
 make abstraction of all qualities except weight. 
 
 So with value. In stating the value of a commodity we 
 have no reference to its color, magnitude, or weight, but only 
 to the degree in which it possesses the attribute of command- 
 ing money in the public market. Just as we have a certain 
 measure called a foot which we take as the unit of length, or 
 a certain weight called a pound as a unit of weight, so we have 
 a piece of gold which we call a dollar, the value of which we 
 take as the unit of value. Again, as we measure length by 
 applying a foot-rule, and weight by balancing two things in 
 the scales, so we measure any commodity in terms of the unit 
 of value by ascertaining how many units of value it will ex- 
 change for in the public market. 
 
 Relativity of Value. It follows from this that, like all 
 other expressions of quantity, values are not absolute, but rela- 
 tive to some unit of value. If we are asked for the value of 
 a loaf of bread, we can answer only by saying that it is equal 
 to a certain number of cents. The value of one cent is then 
 the term of comparison or the unit of measure. If we express 
 the value of a house in dollars, the dollar is the term of com- 
 parison or unit of value. 
 
 Absolute Value. It does not follow from this that there is 
 no such thing as absolute value, but only that we have no way 
 of stating what the absolute value of anything is. Here again 
 
II. 17.] OTHER DEFINITIONS. 65 
 
 our conceptions will be assisted by an analogy with sensible 
 objects. "We have here a piece of rope. It has a certain 
 length. I may inform you what that length is by telling you 
 that it is 2 yards, 6 feet, or 180 centimetres. Then the yard, 
 the foot, or the centimetre is the term of comparison. Yet 
 when I think abont the rope, I conceive its length as remain- 
 ing the same no matter which term of comparison we use. So 
 with value. The value of a barrel of flour to a certain person 
 under given conditions is the same, though we may call it one 
 pound, five dollars, twenty marks, or twenty-five francs. 
 
 Effect of Changing the Unit of Measure. This principle 
 has an important application. The number which expresses 
 value, that is, the price, depends upon the unit of comparison, 
 and in fact varies inversely as that unit varies. For example : 
 A barrel of flour is worth four times as many marks as dol- 
 lars, because the mark is only worth one fourth as much as 
 the dollar. Now if all the foot-measures of the country were 
 liable to change, either by an act of Congress or by a natural 
 shrinkage or expansion over which men had no control, it is 
 evident that the expression for all lengths would vary inversely 
 as the measures. If the yard-stick were reduced to one half, 
 a piece of cloth, unchanged in absolute length, would measure 
 twice as many yards. So, in the case of value, we are com- 
 pelled to admit that our measuring unit, the dollar, is subject 
 "to changes like changes of length in a yard-stick. The prices 
 of commodities will then change in the inverse ratio. But we 
 are not therefore to look upon their absolute values as being 
 altered by this cause, though their value relatively to the dol- 
 lar is altered. The consideration of these changes belongs to 
 a later part of the subject ; what we have at present to do is to 
 fix in the mind the measure of value as a mathematical quan- 
 tity, namely : 
 
 The value of a commodity is expressed by the number of 
 monetary units it will exchange for in the public market. 
 
 5 
 
66 DESCRIPTION OF TEE SOCIAL ORGANISM. 
 
 NOTES AND EXERCISES. 
 
 1. The business forms and evidences of credit belong rather to the subject 
 of business and finance than to that of economics; but as a knowledge of 
 them is essential to the study of the latter science, the following explana- 
 tions may be of use to the student. 
 
 We call to mind that credit, as already explained, means the right on the 
 part of the creditor to require a payment of money at some future time, 
 and of course implies a corresponding obligation on the part of the debtor. 
 The written or printed instruments by which such obligations are certified 
 are classified in various ways, depending upon the class of persons to 
 which the creditor belongs, and upon the nature of his obligation. 
 
 The legal obligation on the part of an individual or a firm to make a 
 payment is certified by a promissory note. Such a note is commonly ex- 
 pressed in the following form: 
 
 New York, December 1, 1885. 
 
 Six months after date I promise to pay to John Smith or order the sum of 
 $700, toith interest from date, for value received. 
 
 William S. Bartlett. 
 
 The expression "for value received" is necessary because payment can- 
 not be enforced at law unless the promise was made in consideration of 
 some act performed by the other party. 
 
 The term "or order" indicates that the drawee or creditor (Smith) may 
 transfer his right, by indorsement on the note, to any other person, this 
 person to another, and so on indefinitely. The transfer is effected by each 
 holder writing on the back of the note an order to pay some other holder 
 and signing it, which order is called an indorsement. 
 
 When the debt is due from an incorporated company or a government, 
 the evidence of obligation is called a bond. The principal difference be- 
 tween bonds and promissory notes consists in the persons who issue 
 them, and in the fact that in a bond is commonly given a statement of the 
 laws or other authority under which it is issued. Sometimes, as in the case 
 of United States bonds, the principal of the debt is payable at a future defi- 
 nite time, with interest payable semi-annually. In the case of bonds issued 
 by most European governments, the time of payment of the principal is so 
 far from being definitely fixed that the value of the bonds depends mainly 
 upon the rate of interest, and the obligation is that of paying a certain sum 
 annually for an undefined period of time. 
 
 Next to government bonds, railway bonds have become the most common 
 in recent times. When a railway is to be built, the stockholders generally 
 borrow a considerable part of the money necessary for the work. The 
 bonds in which the obligation to pay principal and interest of the money is 
 certified are called railway bonds. 
 
EXERCISES. 67 
 
 Mortgages. The conditional right to property pledged in payment of a 
 debt, which has been described in § 7, is called a mortgage. Railway 
 bonds are always secured by a mortgage upon the property held by the 
 railway company. Then, in case the company fails to make good its obli- 
 gations, the bond-holders have the right to take possession of all the prop- 
 erty owned by the railway company, and to apply it in paying their bonds 
 or otherwise securing their rights. The familiar case of a mortgage of real 
 or personal property by an individual may also be mentioned, but need 
 not be discussed. 
 
 2. Mr. H. D. MacLeod divides wealth into three classes, as follows : 
 
 I. "Material or corporeal things. There are material things, such as 
 lands, houses, money, corn, timber, cattle and herds of all sorts, jewelry, 
 minerals, and innumerable things of this nature which can be bought and 
 sold, and whose value is measured in money. 
 
 II. ' ' Immaterial wealth. A person may sell his labor or services in many 
 capacities for money, such as a ploughman, an artisan, a carpenter, or as a 
 physician, an advocate, an engineer, an actor, or a soldier; and when he 
 receives a definite sum of money for such labor or service, its value is 
 measured in money, as precisely as if it were a material chattel. 
 
 "We have already cited, in a previous chapter, the dialogue called the 
 Eryxias, to show that labor of any sort which is paid for is wealth, for the 
 very same reason that gold and silver are wealth. 
 
 III. ' ' Incorporeal wealth. There are vast masses of property which exist 
 only in the form of abstract rights, quite separate and severed from any 
 material substances, which can all be bought and sold, and whose value 
 can be measured in money, exactly like that of any material chattel." 
 
 Is the above classification satisfactory? In the second class can labor 
 be properly considered as wealth? Must not something, if it be no more 
 material or durable than musical sounds, be produced by the labor? If so, 
 in what does the wealth inhere? Is labor, apart from a result, ever paid for? 
 
 In respect to the third class, can any abstract rights have market value 
 unless they are rights to or in some object, now existing or hereafter to 
 exist, material or immaterial? Consider in succession the case of govern- 
 ment bonds, railway stocks and bonds, bank stocks, promissory notes, and 
 tickets to a theatre. Can you, in all these cases, form distinct conceptions 
 of the right, and of the object in which it inheres? If so, you are to con- 
 sider the latter, whatever it may be, as the wealth, and the former as 
 nothing more than the right to the wealth. 
 
 3. To what extent, if at all, do you think any of the following things 
 should be considered wealth? Give your reasons in each case, but remem- 
 ber at the same time that since we are concerned only with definitions, and 
 since definitions, in the last analysis, are arbitrary, we are to consider only 
 the question whether it is convenient and conducive to clear thinking to 
 consider the things as wealth. 
 
68 DESCRIPTION OF THE SOCIAL ORGANISM. 
 
 I. The acquired skill of the artisan. 
 II. A strong and active population. 
 
 III. The moral qualities of the people. 
 
 IV. The sounds produced by a musician. 
 
 V. The Washington monument at Washington. 
 VI. A good business reputation. 
 
 4. What persons can be said to enjoy or use the Washington monument? 
 
 5. A farmer owns a farm valued at $10,000. A railway company «of 
 which the stock is divided into 50,000 shares has a mortgage of $6000 on 
 the farm. If the company consists of 1000 shareholders, each holding 50 
 shares of the stock, how is the property in the farm divided amongst the 
 various parties concerned? 
 
 6. The net earnings of a railway having 10,000 shares of stock are such 
 as to justify a gross valuation of $2,000,000. It has out, however, 1500 
 mortgage bonds of $1000 each. What will be the value of the following 
 properties in the railway and its bonds held by the following three per- 
 sons? 
 
 A. A person holding 50 shares of the stock. 
 
 B. A person holding 60 shares of the stock and 5 of the bonds. 
 
 C. A person holding 10 shares of the stock and 20 of the bonds. 
 
 7. If the inhabitants of a city should borrow a sum of $5000 and expend 
 it in improving their streets, in what respect would the amount of public 
 and private property of the city and its inhabitants be changed after the 
 improvement was made? Consider separately the cases when the money 
 is borrowed from persons outside the city and when the citizens themselves 
 loan the money. 
 
 8. A farmer borrows $1000 from his neighbor, and expends it in barns 
 and other improvements on his farm. In what respect has the wealth 
 owned by the farmer and his neighbor respectively been changed? Has 
 the total value possessed by either been changed? 
 
 9. If all the members of a community should lose all their money, but 
 still have an ample supply of all the necessaries and luxuries of life stored 
 up in their warehouses, would they be completely impoverished by the 
 loss of their money? In what way would you expect them to proceed in 
 order to make use of their wealth? 
 
 10. If, in levying a tax, every holder of a promissory note secured by 
 mortgage of farms is taxed upon the whole amount of the note, while the 
 owners of the farms are taxed for the full value of the farms, is there any 
 inequality or injustice in the tax? 
 
 11. When we say of a rich man "he has plenty of money," or " he owns 
 a million of dollars," do we make a correct use of language? Do you con- 
 ceive that there is any person in the country who now owns, or ever did 
 
EXERCISES. 69 
 
 own, a million of dollars in either gold or silver? Define precisely what it 
 is we mean when we speak of a rich man as owning money. 
 
 12. Can any person but the owner of a' private collection of pictures 
 enjoy the use of the pictures? Can he enjoy them equally with the owner? 
 
 13. When a hospitable man gives an expensive dinner - party to his 
 friends, describe the compensation which he receives for the expenditure 
 of his money. 
 
 II. From an economic point of view, what does the contributor to a 
 charitable society receive in exchange for his gifts? 
 
 15. Do you consider that in either of the last two cases there are any 
 sound reasons for making a distinction between the enjoyment received for 
 the expenditure and the enjoyment received when one purchases goods in 
 the market? 
 
 16. Do you consider that the country at large is richer or poorer when, 
 in consequence of a scarcity in the wheat-crop, the price of wheat rises in 
 a yet greater proportion, so that the crop is worth more than before? 
 
 17. Suppose Congress should call in all the silver and gold of the country 
 and re-coin it, putting just half as much metal in the coin as before, so that 
 twice as many dollars would be in circulation, but each dollar would only 
 have half as much metal. Can you judge what effect this measure would 
 have upon price? Do you conceive that values would be affected by it? 
 If so, how, or in what sense? 
 
 18. When one buys a ticket to the theatre, what is to be regarded as the 
 wealth he is paying for? 
 
 19. During the few years after .the gold discoveries in California and 
 Australia, prices generally were higher the world over. Did this indicate 
 a change in real values, and, if so, in the value of what? 
 
 20. When we speak of the value of a good name, do we use the word 
 "value" in an economic sense? Supposing it to be interpreted in an 
 economic sense, how would you measure it? 
 
 21. Are the following cases of consumption productive or unproductive? 
 I. The consumption of wheat to produce flour. 
 
 II. The consumption of flour to make bread. 
 
 III. The consumption of bread to support life. 
 
 IV. The burning of coal in an engine. 
 
 V. The burning of coal to warm a house. 
 YI. The burning of coal to warm a factory. 
 
 22. What would the economist mean by the consumption of horses and 
 cattle? In what cases is the consumption productive, and in what cases 
 unproductive? 
 
 23. What different kinds of wealth have to be consumed in the produc- 
 tion of wheat? In that of wealth? 
 
70 DESCRIPTION OF TEE SOCIAL ORGANISM. [II. 18. 
 
 Division B.— The Mechanism of Production. 
 
 CHAPTER III. 
 
 THE REQUISITES OF PRODUCTION. 
 
 18. To see what we mean by the requisites of production, 
 let us return to our starting-point. We see in man a being 
 moved to action by innumerable wants. The satisfaction of 
 these wants constitutes his well-being, and the exertions which 
 he makes to attain this well-being are called his labor. The pro- 
 cess of employing his labor so as to produce the greatest well- 
 being requires certain agencies which are included under the 
 term wealth. The operation of bringing wealth into existence 
 and making it available for well-being is called production. 
 Now if men could at any moment produce all the wealth they 
 wanted without regard to conditions, the state of the world 
 would be entirely different from what it is. As a matter of 
 fact, the successful production of wealth requires the employ- 
 ment of objects and agencies of various kinds. Any object or 
 agency which conduces to production is called a requisite of 
 production. To illustrate the requisites of production, let us see 
 what had to be done in order that a coat should be made for a 
 man to wear. 
 
 In the first place, sheep had to be reared, pastured, and sheared 
 in order that the wool necessary for the coat should be ob- 
 tained. The breeding of the sheep required a considerable 
 expanse of land on some western prairie or in the interior of 
 Australia. It is obvious that without land there could be no 
 grass and therefore no wool. ISTow land is in its original state a 
 gift of nature which men cannot make at all. In the further pro- 
 
11.18.] TEE REQUISITES OF PRODUCTION. 71 
 
 cess of manufacture a factory had to be erected and machinery 
 of brass and iron employed. A particular kind of earth was 
 necessary to make the bricks out of which the factory was 
 built, and the iron had to be extracted from iron ore. Both 
 these materials had to be taken out of the earth, and their own- 
 ership is associated with that of land. If the machinery was 
 run by water-power, a river was necessary ; if by steam-power, 
 coal had to be dug from the earth to make the fires which pro- 
 duced the steam. 
 
 If we take up any other article of wealth and inquire how it 
 was made, we shall find that we start in the same way with 
 natural products, such as soil, metallic ores, beds of coal, rivers 
 and oceans. These products are at the basis of production, 
 and the most important of them are found under or in the 
 ground. We therefore have the two following propositions : 
 I. Natural products are the first requisites of production. 
 
 II. The principal natural products which are material in 
 form are found under or are derived from the soil. 
 
 Another requisite to the coat is capital, of which the material 
 and machinery may be considered typical. They are appliances 
 which have no use in themselves, but without which the coat 
 cannot be made. • Capital is therefore another requisite of pro- 
 duction. 
 
 Yet another requisite is labor. Everybody sees that a coat 
 cannot be made unless the drovers, shearers, railway employes, 
 operators, dealers, and merchants all perform certain functions; 
 and such performance we call labor. 
 
 But there is yet another condition which may be to a certain 
 extent included under labor and skill, but which nevertheless 
 has a basis distinct from either. This something is organiza- 
 tion. It probably took many hundred men to make the coat. 
 Only one man out of all these knew who the coat was for, and 
 he did not know it until the owner went to buy it or to order 
 it. All these hundred men must work in unison, and must 
 acquire certain habits and customs in order to do their work to 
 the best advantage. The men who direct them, especially those 
 
72 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 19. 
 
 who bought and sold the goods, required long experience to 
 know just whither the wool and the cloth should be taken, and 
 to whom they should be sold, in order that the wearer might get 
 his coat in the most economical way. These habits, this knowl- 
 edge, and this business skill are things of slow growth from 
 generation to generation, and being necessary to the coat should 
 be considered requisites of production. 
 
 19. Of Knowledge as a Requisite of Production. Pro- 
 ceeding with our inquiry, we see that another requisite equally 
 necessary, though often forgotten, is knowledge. In knowl- 
 edge we may include skill of any kind. 
 
 If men do not know how to cultivate the ground, to shear 
 sheep, to spin and weave economically, and to manage all the 
 complicated machinery necessary in applying the powers of 
 nature, there could be no coat made, or at least only a very 
 inferior and costly article. Knowledge is therefore an indis- 
 pensable requisite, and one for which large sums of money may 
 be paid. The owners of a silver-mine will readily give thou- 
 sands of dollars to an expert geologist merely to be informed of 
 the probable amount and situation of the ore which may be 
 contained within their property. What they pay for in this 
 case is nothing but knowledge, since the geologist they employ 
 is not expected to do anything but give them information. 
 Knowledge is a product of labor, since, omitting exceptional 
 cases, no one can acquire it without that exertion of the facul- 
 ties called labor. The acquisition of knowledge may therefore 
 be regarded as an act of production. But there are two es- 
 sential points in which the acquisition of knowledge differs from 
 other kinds of production. 
 
 I. Diffusibility of Knowledge. In general when wealth is 
 produced it can be transferred only to a limited number of per- 
 sons. What one person gets another cannot have. But valu- 
 able knowledge may, by speaking, writing, or printing, be rapid- 
 ly diffused over the whole world. The producer of knowledge 
 may indeed keep it to himself and seek to derive the whole 
 
11.20.] KNOWLEDGE A REQUISITE OF PRODUCTION. 73 
 
 benefit of it. But as a general rule little benefit will be ac- 
 quired unless lie transmits the knowledge to others. Among 
 men professionally engaged in the increase of knowledge it is 
 generally a matter of honor to make known to the world every- 
 thing that they discover. 
 
 II. Tentative Character of the Labor of acquiring Knowl- 
 edge. The second point in which the acquisition of knowledge 
 differs from other kinds of production is that the acquirer neces- 
 sarily works in the dark to a greater or less extent. As a general 
 rule the person who is engaged in production knows exactly 
 what he is going to produce, and can estimate in advance with 
 more or less accuracy the amount of labor which he must ex- 
 pend to attain a given end. But in the pursuit of knowledge 
 the very fact that the investigator is intent on discovering 
 something not before known implies a greater or less degree of 
 ignorance as to what he is going to learn. In consequence 
 there will sometimes, though not always, be doubt whether he 
 is going to learn anything of value. Searching after knowl- 
 edge is generally like seeking to discover whether a country 
 does or does not abound in mineral wealth. Labor must be 
 spent in investigation, and until the work is done it must be 
 doubtful whether any discovery of value will be made. 
 
 20. Classification of Knowledge. To understand the rela- 
 tions of the different classes of knowledge to the prosperity of 
 mankind we must examine more in detail the different kinds of 
 knowledge. We frequently hear the term " useful knowledge" 
 employed. The use of this term implies the antithetical idea 
 of useless knowledge. From a purely economic point of view 
 this distinction has a certain foundation. Some kinds of knowl- 
 edge have been applied so as to increase the production of 
 wealth, while other kinds have not. The former may be called 
 useful, and the latter, so far as the production of wealth is con- 
 cerned, may be called useless. It is therefore very common, 
 especially among men of narrow views, to ask what is the use 
 of scientific investigation or of any kind of learning which does 
 
74 DESCRIPTION OF TEE SOCIAL ORGANISM. [II. 20. 
 
 not evidently conduce to the production of wealth. The reply 
 to this is that it is impossible to decide whether a result of 
 investigation is or is not useless until it is fully mastered and 
 understood. Even then years or generations may elapse before 
 we can ascertain how it is to be applied in promoting the 
 good of mankind. As a matter of fact, it is rarely found that 
 investigations made with an immediate utilitarian object in 
 view lead to any result which is of extended utility. The gen- 
 eral experience of mankind shows that, in order to attain re- 
 sults of permanent value and capable of the widest applications, 
 the ruling motive must be the mere desire of learning and not 
 the acquisition of useful results. The explanation of this seem- 
 ing paradox is found in the tentative character of the search 
 after knowledge already described. We cannot know how a 
 result is going to be useful until we have fully mastered it. 
 
 A body of knowledge collected and arranged with respect to 
 its intrinsic completeness, and without respect to its economi- 
 cal applications, is called a science. The relation which we 
 have described between science and the production of wealth 
 may be illustrated by a glance at the history of electricity. 
 When, two centuries ago, pliysical philosophers began to inves- 
 tigate the attractions and repulsions which were noticed be- 
 tween bodies after being rubbed together, it was impossible to 
 foresee how these facts could be turned to any useful purpose. 
 A hundred years later the experiments of Franklin were looked 
 upon with comparative indifference by his neighbors. The 
 same thing remained true when Galvani and Yolta began to 
 experiment on the contraction of the muscles of a frog's leg 
 produced when pieces of metal were brought into contact with 
 it. Mathematicians devoted great labor to investigating the 
 laws of the electric currents before any utilitarian application of 
 the principles could be foreseen. Thus, out of pure curiosity 
 and a desire for thoroughness of knowledge, a science was con- 
 structed without any reference to utility. 
 
 But as the science became perfected it was found susceptible 
 of uses which its founders could never have dreamed of. First 
 
11.21.] KNOWLEDGE A REQUISITE OF PRODUCTION. 75 
 
 came the electric telegraph, which has been gradually per- 
 fected by the laws discovered by mathematicians. Then came 
 the dynamo machine, by which a curious transformation of 
 physical forces was perfected. Instead of getting light di- 
 rectly from combustion we may now burn the coal, turn the 
 heat thus generated into energy by an engine, turn this energy 
 into electricity by a dynamo machine, and finally turn the 
 electricity into heat of great intensity, and thus generate an 
 amount of light exceeding many times over what could have 
 been obtained from the original combustion of the coal. What 
 we are to remember is that all the benefits now or hereafter to 
 be obtained from electricity would never have been known had 
 not several generations of philosophers, out of pure curiosity, 
 devoted themselves to the investigation of the laws of that 
 agent. The same thing is to a greater or less extent true of all 
 the modern applications of scientific principles to production. 
 The knowledge of these principles originates in investiga- 
 tion undertaken from the desire of acquiring thorough and 
 complete knowledge, and not with the object of reaching any 
 evidently useful result. 
 
 21. The knowledge just described is that of the laws of nat- 
 ure. But after the laws of nature are discovered another class of 
 investigation comes in. It is necessary to discover by measure- 
 ment and observation the constant quantities which enter into 
 the expressions of these laws. For example, it is a law of 
 nature that heavy bodies are attracted towards the centre of 
 the earth. The mere knowledge of this law does not tell us 
 how strong the attraction is. But when we learn by experi- 
 ment that a heavy body in a vacuum falls sixteen feet in one 
 second, we have an exact quantity which it is necessary to 
 know in order to apply our knowledge. The attractive forces 
 of electricity under different circumstances, the boiling points 
 of liquids, the pressure of gas and vapors at various tempera- 
 tures and densities, the electric resistances of various materials, 
 and the distances of the heavenly bodies, are examples of an 
 
76 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 21. 
 
 indefinite number of physical constants which must be known 
 in order that natural laws may be applied so as to secure the 
 greatest results with the least expenditure of labor. 
 
 Statistical and geographical knowledge, maps of the country, 
 and tables of fertility of the soil may be considered as belong- 
 in o- to the same class with the knowledge of the constants of 
 nature. What distinguishes this class of knowledge is that it 
 is not pursued in the dark as one has to pursue the discovery 
 of new laws. In determining a chemical constant, making a 
 map of a country, or analyzing a soil, one may know before- 
 hand exactly what he has to do and what the general character 
 of his result will be. 
 
 It is an essential characteristic of all the knowledge just de- 
 scribed that when once found it may be transmitted to man- 
 kind in general. But there is something closely allied to 
 knowledge which is not thus transferable. It may perhaps 
 be called individual skill and power of judgment, rather than 
 knowledge. The skill of the mechanic, the administrative 
 abilities of the president of a railroad, and the business knowl- 
 edge and skill of a merchant belong to this class. All are 
 essential to the most efficient production. In nearly every 
 branch of business a person possessed of the proper talents 
 gradually acquires a sort of knowledge by which he in- 
 stinctively avoids mistakes, forms correct judgments of what 
 should be done under various circumstances, and thus acquires 
 a wealth-producing power which inexperienced persons would 
 not possess. If all the producers of the country should lose 
 the special skill and faculties which they have acquired by 
 experience, a severe blow would be struck at the production 
 of wealth. 
 
11.22.] OF NATURAL AGENTS AS REQUISITES. 77 
 
 CHAPTEK IV. 
 
 OF NATURAL AGENTS AS REQUISITES OF PRODUCTION. 
 
 22. We Lave seen that raw material and natural produc- 
 tions are the first and most necessary requisites of production. 
 Were these requisites obtainable by all the world in unlimited 
 quantities, the state of society would be entirely different from 
 what it is. But if we look around us we shall see that while 
 the supply of some agents is substantially unlimited, that of 
 others is either limited in quantity or accessibility. The supply 
 of air is unlimited. The limitations upon the supply of water 
 for household purposes are so few as to be hardly worth taking 
 into account. But the case is very different with land and 
 metalliferous ores. The farms are necessarily limited to the 
 forty or fifty million of square miles comprising the surface of 
 the continents and islands of the earth ; and if we take out those 
 portions which are either uninhabited or useless, the actual 
 available supply of land will be much smaller. Ores and min- 
 erals are yet more limited in quantity. The streams which 
 can furnish water-power are generally few in any one country. 
 The result of this is that it is physically impossible for every 
 one to command all of these requisites of production which he 
 needs or may think he needs. 
 
 In a primitive state of society we might imagine every man 
 to be allowed to avail himself of his share of the raw material 
 supplied by nature without money and without price. There 
 are enthusiasts who advocate the trial of such a system at the 
 present time. But a slight examination will show us that it 
 would be contrary to the instincts of human nature which 
 rule us in such cases, and would be impracticable of execution 
 as things now exist. We have first to show by what instincts 
 of human nature the right of property in an object supplied 
 by nature is recognized. 
 
78 DESCRIPTION OF TEE SOCIAL ORGANISM. [II. 23. 
 
 23. Of Appropriation. If we look back into history to 
 learn how land, minerals, and other agents supplied by nature 
 could be owned by individuals, we shall find it to be through 
 the right of appropriation. There is a natural feeling in the 
 breast of each man that if he discovers something which was 
 not previously known, or at least was not valued or used by 
 any one else, he has the right to claim it as his property, so far 
 at least as he is able to take possession of it. This right, how- 
 ever, speedily becomes limited and regulated by governments, 
 which claim the right to make laws on the subject. The gen- 
 eral rule is that if an island or any new land is discovered by a 
 citizen of any country, the government of that country claims 
 the right to ownership. Thus a large part of the American 
 continent was at one time considered the property of one or 
 another of the governments of Europe which had sent out ex- 
 peditions for its discovery. Thus also England at various times 
 became the owner of numerous islands which were discovered 
 by her navigators in every part of the globe. In new coun- 
 tries the land is considered the property of the government, 
 which sells it to individuals. Thus in most of the British 
 colonies there are large tracts of land, known as crown lands, 
 not yet occupied by settlers, but which may be sold to them as 
 they require it. So, also, the United States Government owns 
 large tracts known as " public lands" in the western Territories, 
 and derives an income of several million dollars per annum 
 from their sale. When the land thus becomes the property of 
 the individual, his right to dispose of it is, with some excep- 
 tions, as absolute as his right to dispose of anything he has 
 himself made. 
 
 The government claims not only the land, but all the min- 
 erals which may be concealed beneath it; an individual be- 
 comes the owner of such wealth by first discovering that it 
 exists. He goes out "prospecting" on some portion of the 
 public lands where his geological knowledge may lead him 
 to infer the existence of minerals, and if he thinks he has dis- 
 covered ores of value he may purchase from the government 
 
11.24.] OF NATURAL AGENTS AS REQUISITES. 79 
 
 the right to dig a mine and appropriate all the ores he finds 
 to his own use. Nearly the same rule holds in the case of 
 diamonds. When, for example, the great diamond-fields were 
 discovered in South Africa, the exclusive right to gather them 
 was granted to certain companies. Thus we perceive the 
 operation of the fundamental principle already alluded to, that, 
 by the instincts of our nature, the act of discovering and 
 taking possession of land gives the right of ownership, subject 
 to such limitations as the supreme power may enact. Now this 
 system has both its abuses and its reasons. Let us consider first 
 the reasons for it. 
 
 24. Necessity of the Bight of Property in Natural Agents. 
 If the condition of land and minerals were such that each indi- 
 vidual could avail himself of them without labor, the case would 
 be much stronger in favor of those who would restrict or deny 
 the right of appropriation. But a little consideration will show 
 that, as a matter of fact, it is impossible to make any arrange- 
 ments for the possession of natural agents without devoting 
 labor to them. Take first the case of land. Before a crop can 
 be raised from it, trees must be cut down, fences built, barns 
 and other structures erected, and fertilizers purchased and ap- 
 plied to the fields. It is not worth while to make these im- 
 provements unless the person who makes them is to have the 
 benefit of them. But it is impossible to separate them from 
 the land. He cannot carry away the house, the stables, the 
 fences, or the fertilizers. Thus he cannot be deprived of his 
 right in the land without interfering with his exclusive right 
 to the product of his own labor. 
 
 In the case of anything concealed beneath the soil, discovery 
 is necessary before it can be utilized. Now the process of dis- 
 covery is one which requires skill and may involve great labor 
 and hardship. No one is going to subject himself to this hard- 
 ship unless he is to reap the fruit of his discovery. Practi- 
 cally, therefore, the right of appropriation in natural agents 
 cannot be denied without denying the right of property in the 
 
80 DESCRIPTION OF TEE SOCIAL ORGANISM. [II. 24. 
 
 product of one's own labor. Moreover, the right to find a mine 
 or to preempt a farm is not confined to any particular persons 
 or class of persons, but is equally enjoyed by every one who 
 chooses to avail himself of his opportunities. Thus natural 
 agents become private property by a logical necessity which 
 mankind have in all ages been obliged to accept. 
 
 Objections stated. It must be recognized that as the popu- 
 lation of a region increases, notwithstanding the necessity just 
 shown, the supply of natural agents becomes scarce. The 
 general rule is that when land is first occupied, or any natural 
 product discovered, its value is very slight. ~No limitation is 
 placed upon the quantity which any one person may own, and 
 thus there is nothing in the way of an individual possessing 
 himself of entire counties and perhaps owning the whole of a 
 valuable mine. Now if population did not increase there would 
 be no objection to this. But it often happens that the land so 
 little valued by one generation is of the greatest importance to 
 subsequent generations who come into the world finding that 
 their ancestors have permitted this valuable gift of nature to 
 be inherited by a few individuals. Thus in England more than 
 half the land is nominally owned by a comparatively small 
 number of people. In every part of the world valuable mines 
 of coal and of iron, the products of which are most necessary 
 to the community at large, are held by a few individuals or com- 
 panies, who can command a price for what was originally a gift 
 of nature. Hence the view that this system is wrong, and that 
 the right of every human being to his share of the gifts of 
 nature should be recognized, is not an unreasonable one. 
 
 But when we examine more closely we shall see that this 
 evil is to a great extent compensated in various ways. We can 
 at present only indicate the compensations in a general way, 
 because the full treatment of the subject requires a knowledge 
 of economical theories yet to be acquired. In the first place, 
 we readily see that if every one were allowed at pleasure to 
 avail himself of all the raw materials of nature, they would be 
 speedily exhausted, so that none might be left for posterity. 
 
11.24.] OF NATURAL AGENTS AS REQUISITES. 81 
 
 Hence it would be necessary to prescribe how much coal or 
 iron or other minerals each individual should have. The 
 practical difficulties in doing this would be insurmountable. 
 But under our actual system the care which every prudent 
 person takes of his own property is extended by the owners 
 of natural agents to their property, and thus the contents of 
 the great storehouses of nature are protected from waste. 
 
 Again, self-interest prompts the owners to allow the public 
 the benefit of their possessions on nearly as good terms as the 
 public could command if the property were public. It is true, 
 theoretically at least, that if the right of the land-owner is 
 completely unrestricted he could fence in his land and forbid 
 its being applied to any useful purpose. Practically, however, 
 this cannot be done. Should it be attempted, we may be sure 
 that society would find a way of remedying the matter. An 
 example of how readily law is provided to meet a difficult case 
 is afforded by the decisions affecting the rights and obligations 
 of irrigating companies in the arid regions west of the Rocky 
 Mountains, and especially on the Pacific coast. Here the very 
 existence of the farming population depends upon a supply of 
 water from mountain-streams which are in the possession of 
 companies who have collected the water in reservoirs and con- 
 structed the conduits and other appliances necessary to supply 
 the farms. Suits by the farmers against the companies are not 
 uncommon, and the general result has been a body of law which 
 insures to every farmer his supply of water on the same terms 
 that his neighbors get it, and as completely as if the works of 
 the irrigating companies were public property. In England 
 the rights of the landlord are far more restricted than in 
 America. Neither law nor public opinion allows him to charge 
 as much as he pleases for his land, as he may do with us. 
 
 "When we are in doubt between opposing reasons we may 
 often appeal with advantage to the instincts of human nature. 
 The fact that men of all races are ready to fight for their land 
 may decide the question for us. 
 
"82 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 25. 
 
 CHAPTEE V. 
 
 OF CAPITAL. 
 
 25. The use and importance of capital arise from the fact 
 that men cannot, by the direct application of their labor to the 
 materials furnished by nature, produce those articles which they 
 desire. For example, they cannot with their own hands make 
 cotton into a shirt. They must have a loom to effect the trans- 
 formation. The farmer cannot raise wheat without the aid of 
 spades, ploughs, or machinery to till the ground ; and after his 
 wheat is raised he needs a mill to grind it into flour^ In these 
 cases the loom, the spade, the plough, and the mill are not de- 
 sired for their own sake, but only because they are useful in 
 producing objects of desire. If we continue this analysis we 
 shall see that the wealth of the country may be divided into 
 two portions : 
 
 1. "Wealth which is desired and possessed by its owner for 
 its own sake, because it contributes directly to the gratification 
 of the owner. Examples of such wealth are the houses in 
 which we live, the furniture, books, and pictures which adorn 
 our walls, the clothes we wear, the food we eat, and the coal 
 which is to keep us warm. This kind of wealth we shall call 
 sustenance. 
 
 2. Wealth which is desired, not for its own sake, but in order 
 that by it we may obtain such wealth as we do desire for its own 
 sake. Wealth desired, not for its own sake, but for the sake 
 of the sustenance which it will enable us to produce is called 
 capital. 
 
 The distinction between capital and sustenance, though logi- 
 cally a sharp one, cannot be sharply drawn in practice. We 
 cannot always decide without question whether any given kind 
 of wealth is or is not capital. We shall also have to recognize 
 
II. 25.] OF CAPITAL. 83 
 
 the principle that wealth may possess the quality of capital in 
 different degrees, and may be capital or not according to its re- 
 lations to its owner. 
 
 There is another definition of capital which at first sight may 
 seem to have no relation to the one just given, but which, 
 when we examine it more closely, we shall see to be equiva- 
 lent as a consequence of human nature. It is as follows : 
 Capital is that wealth from the enjoyment of which the own- 
 ers are abstaining in order to gain a future profit. 
 
 To show how these two definitions amount to the same thin a- 
 let us take first the case of the savage who possesses no power 
 of abstaining from present enjoyment for the sake of future 
 good. He will not try to make any sort of machineiy, because 
 before he can get any good from the machinery he will have to 
 wait a long time, and he is not willing to spend his labor for 
 any benefit to accrue only in the distant future. ' He would 
 rather chase a buffalo and thus get a skin which he can put on 
 to-morrow than undertake any labor which will not yield him 
 good clothes until next year. If he has corn, he will pound it 
 between two stones, because then he can enjoy the product of 
 his labor the same day when he sits down to his evening meal. 
 But he will not sow it to raise a crop for the next year. 
 
 Coming next to civilized men, we find that large numbers of 
 them, even among the well-to-do classes, rarely attempt to ac- 
 quire wealth except for its own sake. They expend all their 
 income on house -rent, furniture, coal, food, clothing, and 
 other things desired for their own sake. Hence they never 
 save. But if a person wants to save up money and gain inter- 
 est on it, he must get something which he does not want for 
 its own sake, but for the sake of something else to be obtained 
 in the future. "We may therefore say that wealth from which 
 the owner is abstaining for a future profit is identical with the 
 wealth which is desired, not for its own sake, but in order by 
 its means to obtain more wealth. 
 
84 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 27. 
 
 26. Use of the Term Sustenance. We have spoken of 
 wealth which is desired by the owner for its own sake, and is 
 called sustenance. The most important wealth of this kind is 
 the food and clothing which every man must have in order to 
 live, and the house which shelters him from the weather. In 
 the case of the laborer who saves nothing, this is the only kind 
 of wealth which he works for or seeks to possess. 
 
 It might at first sight appear proper to confine this term to 
 the food, clothing, and shelter absolutely necessary to sustain 
 the life, health, and physical vigor of the laborer. But it is 
 well known that we cannot draw any sharp line between the 
 necessaries and luxuries of life ; nor can we draw any such line 
 between those who are laborers and those who are not. We 
 must therefore include in the term sustenance not only what 
 sustains life, but everything which a person requires or can 
 command for the purpose of unproductive consumption by 
 himself and his family. It includes pictures, furniture and 
 books, and indeed everything which does not produce other 
 wealth in the act of being consumed. 
 
 27. Classification and Examples of Capital. Differences 
 of opinion sometimes arise as to whether special kinds of 
 wealth should or should not be considered capital. To recon- 
 cile these differences, we must admit that capital is in part a 
 relative term, depending not merely upon the wealth itself, 
 but on its relation to its owner. If it is something which the 
 owner is not keeping for its own sake, but from the enjoyment 
 of which he is abstaining, then it is capital so far as he is con- 
 cerned, though it may not be capital when considered in relation 
 to the person who is enjoying it. A difficult question of this 
 sort arises in connection with dwelling-houses. When a person 
 lives in his own house, the house is not capital. He is not 
 abstaining from the enjoyment which the house might afford, 
 and he is keeping the house for its own sake ; hence it is not 
 capital. But if he rents the house to some one else, then he is 
 abstaining from the enjoyment of it; and he is not using it for 
 
II. 27.] OF CAPITAL. 85 
 
 its own sake, but for the annual rent which he is receiving, or, 
 more exactly, for the sake of the things which he may buy with 
 the rent. Hence the house is capital in its relation to him. But 
 it is not capital in relation to the community at large, for it is 
 clear that houses are built for their own sake, and not to help 
 future production. No more cloth is made and no more wheat 
 brought to market after a house is built than before. 
 
 This leads us to say that the quality of capital considered as 
 a relative term may be algebraically negative as well as positive. 
 Relative to the tenant who lives in the house, the house is 
 negative capital, because he is enjoying more wealth than he 
 owns. The idea of capital as a mathematical quantity may be 
 reached by the following course of thought: 
 
 Let us compare the wealth owned with the sustenance en- 
 joyed by any person. If we subtract from the total wealth 
 which he owns all that wealth which he employs as suste- 
 nance, or is making use of for his own enjoyment, the remain- 
 der will, by definition, be capital, because it is that portion of 
 his wealth from the enjoyment of which he is abstaining. 
 
 But it may happen that the individual is enjoying more 
 sustenance than he owns. In this case the definition will re- 
 quire us to subtract a greater quantity from a less, the result of 
 which will be algebraically negative. This is the case with the 
 improvident man. He has perhaps spent every cent he ever 
 earned on objects of desire, and thus has not a dollar saved in 
 the world ; yet he may be living in a house which cost ten thou- 
 sand dollars. Then he not only never saved anything, but he is 
 enjoying what somebody else, namely, the owner of the house, 
 has saved. Thus he is an algeoraically negative capitalist. 
 
 The question may arise whether by limiting capital to things 
 not wanted for their own sake we do not find that after all 
 scarcely anything will be left except capital. For example, 
 the barrel of flour in my pantry, it may be said, is not wanted 
 for its own sake, but for the sake of the bread which will be 
 made from it. One may go even farther, and inquire whether 
 the coal in my cellar is not wanted for the sake of the heat 
 
86 DESCRIPTION OF TEE SOCIAL ORGANISM. [II. 28. 
 
 it is to furnish, and is not therefore capital. The reply to this 
 is that we must give a special interpretation to the first defi- 
 nition of capital. We regard wealth as wanted for its own 
 sake whenever it has reached the hands of the owner who is 
 keeping it for his own exclusive use and is not abstaining from 
 it for the sake of the profit to be gained thereby. Hence when 
 the barrel of flour reaches the family who are to use it it ceases 
 to be capital, though it is capital in the store of the grocer, be- 
 cause he keeps it to get something else with. And, in general, 
 all the wealth of the country which is going through the pro- 
 cesses of manufacture, sale, and transportation may be consid- 
 ered capital. 
 
 28. Fixed and Circulating Capital. Economists divide 
 capital into fixed and circulating. Fixed capital comprises ma- 
 chinery and public and private works which are employed as 
 agencies in production. Ploughs, fences, and working animals 
 on a farm ; factories and the machinery which they contain ; 
 railways with all their rolling-stock ; ships and storehouses, 
 are examples of fixed capital. 
 
 Circulating capital consists of the money which is circulated 
 from hand to hand in the channels of trade, the material under- 
 going the process of manufacture, transportation and sale, and 
 the stores of food and clothing which have not reached their 
 consumers. Following through the process of production as 
 we have already done, we may say that the wheat in the gran- 
 ary, the sheep on the prairie, their wool after it is shorn, the 
 cotton in the factory, the cloth in the hands of the dealer, and 
 the clothes in the clothing-store are all circulating capital. 
 
 One difference between the two capitals is that the one is a 
 direct aid to production, while the other is not. They there- 
 fore possess the quality of capital in different degrees. A loom 
 is a direct aid to production ; without it we could not make 
 cloth. The plough with its team of horses is a direct aid ; with- 
 out it the farmer would have to use a spade, which would be: 
 far less advantageous. The warehouse is such an aid because, 
 
II. 28.] OF CAPITAL. 87 
 
 although it does not help the production, it preserves the goods 
 from being spoiled by the rain or carried o2 by thieves. Ships 
 and locomotives are direct aids in transportation. On the other 
 hand, the wool and the cloth are not mere aids to production, 
 but rather the material on which the work of production is 
 performed. They are requisites of production, but not aids 
 to it. 
 
 "We may also consider circulating capital as that a definite 
 quantity of which is consumed in the production of a definite 
 quantity of any commodity. Thus, to make a coat a definite 
 quantity of cloth is required. To make one yard of cloth of a 
 certain kind a definite amount of wool is required. Thus we 
 can trace the quantity of the substance through from the be- 
 ginning to the end of a series of productive acts. On £he 
 other hand, the needle with which the tailor sews the cloth 
 may be lost before one coat is finished, or it may make a hun- 
 dred coats without being worn out. "We cannot therefore say 
 just how many needles are consumed in making a given num- 
 ber of coats. 
 
 A very important part of circulating capital is the store of 
 food, clothing, and other necessaries of life which is laid up in 
 the country for the consumption of the population generally. 
 In fact, from the point of view of some economists, food is to 
 be regarded as the primitive form of all capital. For, before 
 the primitive farmer or mechanic could have made a plough, 
 he must have collected the food to eat while he was making 
 the utensil. During the process of manufacture the food dis- 
 appeared and the plough appeared. We shall hereafter see 
 that this idea materially assists us in understanding the subject 
 by connecting labor with capital. From this point of view a 
 pair of boots is simply a product of the following requisites : 
 
 I. A certain quantity of leather, pegs, tacks, thread, wax, 
 and other materials which went into the boot. 
 
 II. A certain amount of wear and tear of tools, rent of work- 
 shop, etc. 
 
 III. The food which the shoemaker ate, the clothes which 
 
88 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 29. 
 
 lie wore out, and the house-rent which he paid while he was 
 making the boots. 
 
 Since the pair of boots is the product of the consumption of 
 this leather, furniture, workshop, house, food, and clothing, we 
 may establish a certain equivalent between them which will as- 
 sist us in further researches. The labor of the shoemaker was 
 merely the agency which combined the three elements just enu- 
 merated into a pair of boots. 
 
 29. The Function of Capital. The great purpose of capi- 
 tal, as indicated in its definition, is of fundamental importance 
 and should be well understood. We may state it in the terms, 
 Capital is employed as a labor-saving agent. 
 
 To show how this is, let us take the case of the primitive 
 farmer who tills the ground with a spade. As his condition 
 improves, or as the country around him improves, he is enabled 
 to substitute a plough and a pair of horses for the spade. To find 
 whether this change is advantageous we have to compare the debit 
 and credit side of the account. The plough and horses cost 
 money, or, which amounts to the same thing, they required that 
 the farmer should spend a certain amount of labor in procuring 
 them and taking care of them. This is the debit side of the ac- 
 count. The increased land which they enabled him to cultivate, 
 or the diminished labor with which they enabled him to culti- 
 vate his field, forms the credit side of the account. Unless the 
 gain compensates for the labor spent in procuring the team, the 
 latter has not paid for itself. In common language, it has been 
 a bad investment. 
 
 Again, in making cloth : a barbarian can make a robe out of 
 coarse material with great labor. By spending his labor in 
 making a loom he will be enabled thereafter to make a better 
 robe with far less labor. If he, or the community to which he 
 belongs, is able to construct a factory and use steam or water 
 power, a still greater saving of labor is effected. But in all 
 cases the labor saved must more than compensate for the labor 
 of producing the capital. Unless the person who produces 
 
II. 30.J OF CAPITAL. 89 
 
 the capital expects to save labor, lie would have had no object 
 in producing it. 
 
 If we look around us we will see that nature may be consid- 
 ered as offering to those who will save, a perpetual interest upon 
 their savings, if they employ them judiciously. An example 
 is seen in the case of great public works. By the expendi- 
 ture of a certain sum of money in digging the Suez Canal there 
 is a perpetual saving not only for ourselves, but for future 
 generations, in the number of ships, the quantity of sails and 
 coal, and the labor of sailors necessary to transport goods 
 from Europe to the East. By digging the Panama Canal there 
 will be a similar perpetual saving of the voyage around Cape 
 Horn. In each case the annual interest or profits on the 
 canal will be the excess of the saving above the cost of work- 
 ing the canal and keeping it in its original good condition. 
 By tunnelling mountains a perpetual saving is made for the 
 future in the cost of transporting goods across them. Every 
 railway which is built diminishes the cost of transporting goods 
 overland. Thus until men have dug every useful canal, built 
 every necessary railway, and tunnelled every mountain which 
 obstructs the transportation of goods from place to place, nature 
 will offer to those who choose to save their earnings a per- 
 petual interest upon their savings, provided they will employ 
 them in such works. 
 
 30. Capital the Result of Abstinence. It is clear that, in 
 order to effect the gain thus described, the labor of producing 
 the capital must have been withdrawn from the production 
 of objects of immediate enjoyment. The primitive farmer 
 who spent all his time in spading the ground in order to 
 obtain a bare support for his family would never save money 
 to buy a plough and team. He must do without a certain 
 amount of the products of his labor as a condition precedent 
 of being able to make the improvement. He may indeed 
 buy his capital on credit, but, apart from the difficulty that 
 his credit may not be good, it is then necessary that some one 
 
90 DESCRIPTION OF TEE SOCIAL ORGANISM. [II. 81. 
 
 else shall have abstained from the enjoyment of the fruits 
 of his labor, in order to produce the plough and horses. This 
 last illustrates the case with the vast majority of men. They 
 are in the enjoyment of a large amount of the previous labor 
 of other men, for which they pay a profit. Thus the profit of 
 capital, commonly called interest, is what is paid to the capi- 
 talist, not for his labor, but for his abstinence from the enjoy- 
 ment of the products of his labor, and his willingness to allow 
 others to use his capital. 
 
 It may be asked how circulating capital can be considered 
 either as saving labor or as resulting from abstinence, and 
 whether if it does not save labor it does not fail to perform 
 the essential function of capital. It is true that it does not 
 directly operate as a labor-saving agent, but only as an absolute 
 necessity to the progress of the work. But it is a requisite of 
 production which is not intended for the owner's own use, 
 and in order to procure this requisite he must expend money 
 which he otherwise could have spent in his own enjoyment. 
 Since he practises abstinence, and since that practice is itself 
 something which can command money in the public market, it 
 follows that he must be compensated for it, and thus a profit 
 must be paid on this investment just as it is paid on the in- 
 vestment of machinery in production. 
 
 31. Divided Ownership of Capital. The forms of capital 
 which we have just considered include only material agencies 
 actually employed in production. But in the language of 
 business the word is used in what is apparently a much wider 
 sense. Whenever men come to bankers to purchase bonds, or 
 other credit property yielding interest, they are said to bring 
 " capital." in order to invest it. In this case the idea is that 
 the entity called capital is something which the owner puts 
 into or invests in the bonds or other things which he purchases. 
 But if we look closely into the matter we shall see that in this 
 case the word is used to designate the money which one has 
 saved up to pay for the bonds or stocks which he purchases. 
 
II. 81.] OF CAPITAL, 91 
 
 But these bonds and stocks are also called capital. They 
 may be government bonds, railway bonds, mortgages on real 
 estate, or any immaterial rights by which one gains interest. 
 We thus have two distinct meanings of the word in addition to 
 that which we have already assigned it. This threefold use 
 leads to a confusion which must be cleared up. In the origi- 
 nal and proper sense of the word capital consists of nothing 
 but wealth, namely, that wealth which is devoted to further 
 production, or employed in such a way as to yield a profit to 
 its owner. But we have shown that wealth may also be con- 
 sidered in relation to its owner, and when thus considered we 
 have called it property. We have also shown how a given 
 piece of wealth may have various owners who have separate 
 kinds of rights in it, and who may transfer these rights of 
 ownership to other persons. 
 
 Now the only difference between material capital actually 
 employed in production and the bonds, stocks, notes, and other 
 securities which people invest in is that the one is wealth, while 
 the other is right of property in wealth. For the most part, 
 the wealth to which this right pertains is material capital of 
 some kind. Some illustrations will make this clear. 
 
 Let us first notice the relation of railway bonds to the railway 
 itself. Such a bond is not a part of the railway, but it is a 
 right to a certain definite income from the earnings of the rail- 
 way. In the same way railway stock is a right of property in 
 the railway itself and its net earnings after its debts due thp 
 bond-holders are paid. In these cases the wealth or real capi- 
 tal is the railway itself, while the stocks and bonds are merely 
 the evidences of certain rights in the earnings of the railway. 
 
 Shares of stock in a company which loans money at inter- 
 est consist in a right to receive a share of the income from 
 the profits made upon forms of material capital, whether rail- 
 ways, ships, or factories, which the company loaned their 
 money to build. It is therefore property in capital, but not 
 the capital itself. 
 
 Since the money which one has saved up to invest is prop- 
 
92 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 31. 
 
 erly considered a part of his wealth, we may call it capital, 
 because he is going to buy capital with it, although it is not a 
 direct aid to production. No confusion need arise from this 
 extension of meaning. We now see that the word capital is 
 used in three senses, closely associated, yet not equivalent : 
 
 I. In the economic sense, as wealth employed for further 
 production. This may be called absolute capital. 
 
 II. To express the rights of ownership in absolute capital, 
 which rights are secured by certain written and printed instru- 
 ments called bonds, certificates, etc. 
 
 III. To indicate the money which one has saved up and 
 which he brings into market to purchase stocks, bonds, or other 
 property in capital. 
 
 QUESTIONS. 
 
 1. Is it your opinion that the knowledge and skill in production which a 
 man may acquire hy long practice and study should he regarded as a part 
 of his capital? Compare the cases of two men, one of whom has saved his 
 wages to he invested in bonds, while the other has employed his in educating 
 himself so as to command higher wages. What would be the points of 
 similarity and difference in the two cases? Point out the economic im- 
 portance of exchangeability in such cases. 
 
 2. A farmer who has annually expended $100 in the wages of men to 
 thresh his wheat-crop concludes to invest $500 in a threshing-machine. The 
 machine lasts him ten years, and at the end of that time can be sold for only 
 $100. Its care and management have cost him $50 a year. Was it or was it 
 not profitable? Would it have been profitable had he borrowed the pur- 
 chase-money at 15 per cent per annum interest? At 20 per cent per 
 annum? 
 
 3. Our newer cities frequently borrow money for the purpose of improve- 
 ments. By what criterion would you judge whether they were to be re- 
 garded as negative capitalists? 
 
 4. Are the street-cars and public carriages which run in our cities a part 
 of the capital of the country? If not, in respect to whom are they algebrai- 
 cally positive, and in respect to whom algebraically negative, capital? 
 
 5. In what case are the books in a private library to be regarded as capital? 
 
 6. Taking the view of the transformation of capital shown at the end of 
 § 28, what has a railway manager to show for the sustenance he consumes? 
 
 7. Give some examples additional to those in § 29 of permanent improve- 
 ments yielding a profit. 
 
II. 32.] OF LABOR. 93 
 
 CHAPTER VI. 
 
 OF LABOR. 
 
 In the sense of the definition of labor given in § 2 it will 
 be seen that nearly all men are laborers, because they are 
 nearly all engaged in doing something for a living. The ex- 
 ceptions would be capitalists who live entirely from the inter- 
 est upon their investments, and owners of real estate who live 
 entirely upon their rents. But the capitalist or owner gene- 
 rally has a large surplus income which he has to manage, and 
 in this case the work of managing it might legitimately be con- 
 sidered labor. It is, however, little more than a question of 
 taste whether to call it so or not. Leaving out of consideration 
 this and other exceptional cases, we may see that every able 
 adult man is doing something to make a living, and so may be 
 called a laborer. 
 
 32. The Economic Laboring Unit. Only a minority of the 
 population which inhabits a country is actually engaged in 
 economic production. The general rule is that the laborer has 
 a wife and family to support. The former is lending him ma- 
 terial help by cooking his food and mending his clothes; but 
 there is no need of our complicating the matter by considering 
 her a separate agent in production. The subject will be most 
 easily treated by considering the laborer and his family as a 
 unit in the social organism. The producing power of this unit 
 is in our own country the work of the laborer himself. Its 
 consumption is not only his individual consumption, but that 
 of his whole family. Hence when, as in the last chapter, we 
 consider the food and clothing consumed by the shoemaker as 
 elements which go into the making up of a pair of boots, we 
 ouo-ht to add the food and clothing consumed by his family. 
 
94 DESCRIPTION OF TEE SOCIAL ORGANISM. [II. 33. 
 
 In most European countries the wife and even the chil- 
 dren of the laborer are obliged to take part in the work of 
 production. In this case we cannot so well consider the fami- 
 ly as a unit, and in fact it would be rather difficult to define 
 the unit with precision. Perhaps the best course would be to 
 consider the number of men who could do the work of the 
 whole family as representing the number of laboring units in- 
 cluded in the family. We should then have to divide the 
 consuming power of the family into that number of parts in 
 order to get the relation of the productive and consuming 
 powers. 
 
 33. Distinction of Laborer and Capitalist. The typical 
 laborer is a man who saves nothing from his income to assist 
 him in future production, and who is therefore dependent upon 
 some one else for the capital to render his labor effective. 
 This definition applies not merely to the day-laborer, but to 
 many in the higher walks of life ; to any one, in fact, who does 
 not save money for investment, or own property or capital 
 engaged in production. Such a person may be a physician, 
 a lawyer, a clergyman, or a general. The philanthropic ten- 
 dencies of society, which we shall hereafter have to consider, 
 lead men to look upon those who live by manual labor as form- 
 ing a class distinct from those who practise the professions or 
 perform only mental labor. In economics this distinction is 
 of secondary importance. Tet we should recognize it wher- 
 ever any essential question depends upon it. 
 
 It will be seen that the above definition of laborer would 
 not include a shoemaker who owned his own tools and leather. 
 He would be at the same time laborer and capitalist. Although 
 the laborer and capitalist are so often identical, there is an 
 advantage in considering them as economically distinct. We 
 must therefore separate the functions of laborers from those of 
 capitalists, even when they are united in the same person. 
 
II. 35.] OF LABOR. 95 
 
 34. The Wages of Labor. If we define wages as mean- 
 ing in the widest sense the gainings of the laborer, then we 
 should consider all classes of laborers as receiving wages. The 
 wages of the farmer and mechanic would be the value of his 
 product sold after paying all the costs of raw material, rent, 
 etc. It would therefore depend entirely upon his own abili- 
 ty and exertions whether his wages were great or little. But, 
 in the ordinary acceptation of the term, wages include only 
 the moneys paid the laborer by an employer. This pay may 
 be either according to the time employed, so much per day, 
 month, or year, or it may be by the piece, as in the case of the 
 physician and of many mechanical trades. In the first case the 
 rate of wages would be defined as the amount paid by the em- 
 ployer to the laborer per unit of time in exchange for the 
 laborer's services. 
 
 Although the term wages is in ordinary language thus re- 
 stricted, yet the wider sense, which includes all earnings by 
 the use of one's faculties, would be the more proper one in the 
 general problems of political economy. When we have to con- 
 sider the case of a person who is obliged to work for somebody 
 else, in contradistinction to the person who is not, then, and 
 then only, is a distinction between wages and other earnings 
 necessary. 
 
 35. Of the Different Kinds of Labor. Prof. F. A. Walker 
 divides labor and laborers into the following five classes : 
 
 I. The class who work for themselves and by themselves, 
 either on their own land or in mechanical trades. This class 
 would include small farmers taking part in the cultivation of 
 their own ground, shoemakers who owned and sold their 
 own products, as well as many other workers in mechanical 
 trades. These persons combine the functions of laborer and 
 capitalist. 
 
 II. The tenant occupier of land who owns the whole pro- 
 duce, subject only to the deduction for rent. 
 
 III. Persons who render personal services for pay, but not 
 
96 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 35. 
 
 in order to assist their employers in production. Such per- 
 sons are domestic servants, soldiers, and clergymen. 
 
 IV. Persons working for hire who are paid out of the 
 product of their industry, and whose employers expect to make 
 a profit out of their services. 
 
 V. Persons who employ and manage labor, and who conduct 
 and control business operations. 
 
 There is, however, no one classification which will answer all 
 the purposes of economics : the various kinds and conditions 
 of labor merge into each other in such a way that a scientific 
 classification is scarcely possible. Prom the point of view of 
 practical politics the most important distinction is that between 
 laborers who work by time, that is, who are employed by the 
 hour, daj r , or month, and those whose gains depend entirely upon 
 what they produce, irrespective of the time it has taken them 
 to produce it. The importance of this distinction arises from 
 the liability of workers by time to be dissatisfied with their 
 wages. When one's gains depend upon what he actually does, 
 he can more readily decide upon the justice or injustice of 
 what he receives than when he works by time. Whether the 
 day-laborer talks about his own wages, or whether the philan- 
 thropic public talk about his wrongs, there is in either case 
 an entire want of perception of the relation between the money 
 he receives and the wealth which he is helping to produce. 
 When one works by the piece for an employer, the evil is less- 
 ened, though not entirely done away with. It may be difficult, 
 and even impossible, for the laborer to decide to his own satis- 
 faction whether what his employer pays him per piece is the 
 just equivalent of what he does on that piece. Yet the rela- 
 tion between his labor and what he receives from the product 
 is more evident than in the case of the day-laborer. 
 
 The man who sells the products of his labor directly to the 
 public is on a higher plane than either of the preceding : he 
 buys such materials as he needs where he can get them on the 
 best terms, he labors as much or as little as he pleases, and he 
 sells to the best advantage he can. His position is therefore 
 
11.36.] OF LABOR. . 97 
 
 such as to give him a much more accurate view of his relations 
 to society than if lie is subject to an employer. In buying his 
 material he feels that he has the whole market to choose from, 
 and that it is wise to be satisfied with the price which he is 
 obliged to pay. If he finds that his product will not command 
 so high a price this week as it did last, he accepts the result 
 as one of the obvious necessary drawbacks of society, and does 
 not fight against the inevitable as the day-laborer sometimes 
 does. If he finds an increase in the price of his product, he 
 takes prompt advantage of it, and does not see the employer 
 get all the advantage of it as the day-laborer does. 
 
 From the laborer's point of view it is unimportant whether, 
 when he works under an employer, he is engaged in productive 
 or unproductive work. That is to say, it makes no difference 
 whether he is merely administering to his employer's gratifica- 
 tion by taking care of his horses, beautifying his grounds, and 
 administering to his wants, or whether he is making things for 
 him to sell. But from an economic point of view this dis- 
 tinction is the most important one of all. In other words, 
 Walker's third class, whose services to society terminate with 
 their employers, form economically a class by themselves, hav- 
 ing entirely different functions from those of all other classes. 
 
 36. The Modem Organization of Labor. If we compare 
 our industry with that of past ages we shall see that its most 
 remarkable feature is the large scale on which manufacturing 
 operations are conducted, and the number of persons who con- 
 tribute to each product. Necessarily connected with this is a 
 complexity of operations formerly unknown. A hundred years 
 ago there was only one best way known to make every part of 
 a gun, and that way had been known and followed for so many 
 generations that any person of fair mechanical talent could 
 learn to make a gun as well as any one else. In nearly all the 
 trades a regular apprenticeship was gone through with ; the 
 boy became a journeyman, and the journeyman in time be- 
 came a master- workman. Each did his work as generations 
 7 
 
98 DESCRIPTION OF TEE SOCIAL ORGANISM. [II. 37. 
 
 before him had done it, and each supplied only a limited com- 
 munity immediately around him. Transportation was so cost- 
 ly that nearly all bulky commodities had to be produced near 
 the place where they were consumed, and none but those which 
 had great value in a small space could be transported to any 
 great distance overland, except at a corresponding disadvantage. 
 Modern inventions, especially the steam-engine, the railway, 
 and labor-saving machinery, have changed all this. Three new 
 factors have come into play: 
 
 I. The division and combination of labor. Instead of one 
 man finishing an article for himself, he may do only a minute 
 part of it, and it may go through scores of hands before being 
 finished. 
 
 II. The substitution of labor-saving machinery for human 
 hands in production. Single pieces of machinery will do 
 work which would have required hundreds of men ; thus pro- 
 duction on a large scale is facilitated. 
 
 III. The construction of railways, whereby it has become 
 possible to collect and manufacture most articles in great cen- 
 tral establishments. 
 
 These three factors are inseparably connected. "Without 
 cheap transportation manufacture on a large scale could not 
 have been advantageous. Labor-saving machinery can be used 
 only when the sale of the commodity is sufficiently great to 
 justify the construction of the machine. 
 
 3 1 ?. The Division of Tabor. The term division of labor 
 is applied to that system under which, instead of each laborer 
 completing an article of manufacture, a number of laborers 
 divide the work up in such a way that each person shall do re- 
 peatedly a small portion of it. A striking example is seen in 
 a modern American watch-factory. Instead of one person 
 making a whole watch, hundreds of hands unite their labors. 
 Each different kind of wheel is made independently by a sep- 
 arate person. Each person who makes these separate parts 
 puts his product in a little case by itself. An operative takes 
 
II. 38.] OF LABOR 99 
 
 from each case the parts necessary to make one watch, and 
 puts them in a box. He is doing this nearly all the time. The 
 box containing the parts necessary to one watch is handed to 
 an operative near one end of a long table. This operative puts 
 together a certain portion of the watch, and passes it to the 
 next one. The operation is repeated as the box goes from 
 hand to hand, and thus, in a few minutes, what at one end of 
 the table had been a miscellaneous pile of screws, wheels, and 
 pieces of brass appears at the other end of the table a finished 
 watch. 
 
 The advantage of the division of labor is that a given num- 
 ber of persons can complete a much larger product than they 
 could working singly. The reason of this is that a skill is ac- 
 quired in the performance of one operation which could not 
 be acquired if the person had to learn a great many operations, 
 and that the time of passing from one to the other is saved. 
 Moreover, the number of tools and other appliances required 
 is greatly diminished. If one person had to finish the product, 
 he would need to command all the tools necessary for all the 
 processes. When doing but a single process, he only needs the 
 tools necessary for that one. 
 
 The disadvantage of the division of labor is that when car- 
 ried to the fullest extent it dwarfs the mental development 
 of the individual. But lamentations over the sad lot of the 
 man who spends his whole life in making the tenth part of a 
 pin belong to the moralist and philanthropist, rather than to 
 the economist. Such a man may be regarded as an extreme 
 example of the effects of civilization, since his life contrasts 
 most strongly with that of the savage roaming at pleasure 
 over the plains. 
 
 38. Labor-saving Machinery. Before the invention of cot- 
 ton-spinning machinery and power looms, wool had to be spun 
 and cloth woven by hand. " Each weaver's cottage formed a 
 separate and independent little factory. The yarn for his warp 
 was bought by him in a prepared state, the wool for his welt 
 
100 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 39. 
 
 was carded and spun by the female members of his family, and 
 the cloth was woven by himself and his sons." * Of course the 
 present system was not substituted for this ancient one at a 
 single step. The greatest step, however, and that from which 
 it is usual to date our modern cotton manufacture, was the 
 invention of the spinning-jenny and throstle, by Hargreaves 
 and Arkwright, about 1770. The result of this is that more 
 cloth is now manufactured by a limited number of operatives 
 than without machinery could be produced by the united labor 
 of the whole world. 
 
 The invention and application of labor-saving machinery is 
 a process which is continually going on, and to which it is dif- 
 ficult to see any limit. The mere enumeration of the kinds of 
 machinery now used in special branches of manufacture would 
 fill a book. The boots on our feet, the coats on our backs, the 
 watches in our pockets, the furniture in our houses, are now 
 mostly made by machinery, and all that human hands have to 
 do is to direct and feed the machine. 
 
 39. Steam Transportation. A century ago the number of 
 people who could be supplied with any but the lightest articles 
 of manufacture from a single point was greatly limited by the 
 cost of transportation. It is difficult for us to imagine a state 
 of things in which goods could be brought overland from one 
 point to another only in wagons drawn by horses, mules, or 
 oxen. Steam navigation has done much to facilitate trans- 
 portation across the ocean, but has been more effective in facil- 
 itating intercourse between men than it has in transporting 
 goods, since even now the heavier and cheaper style of goods 
 are still carried across oceans by sailing-ships. But on land 
 the railway has worked a complete revolution. The most 
 important effect of this revolution is this : that all but the 
 heaviest goods can be carried a thousand miles at a cost which 
 is comparatively small compared with that of their manufac- 
 
 * Encyclopaedia Britannica, 9th edition. Art. Cotton. 
 
II. 40.] OF LABOR. 101 
 
 ture on a small scale. Roughly speaking, the cost of trans- 
 portation over long distances on the competing lines of rail- 
 ways is from three quarters of a cent to two cents per ton per 
 mile. A pound weight is carried from one to two thousand 
 miles at the cost of a single cent. If a pair of boots be made 
 in New York and delivered in Chicago, the additional cost due 
 to transportation will not be ten cents. 
 
 Thus arises a tendency to concentrate in great establish- 
 ments the manufacture of those articles which are widely used 
 and are not very heavy. We may imagine that ten millions 
 of people scattered over a tract a thousand miles broad could 
 have all their clothing, boots, furniture, and books made at one 
 central point. This would enable the division of labor to be 
 carried to the greatest extent, the most improved forms of 
 machinery to be introduced, and all the advantages of manu- 
 facturing on a large scale to be made available. Although this 
 state of things is by no means reached, we see a continual 
 approximation towards it, in the increasing number of great 
 manufacturing establishments which can supply large tracts of 
 country with goods more cheaply than they can be made in 
 the place where wanted. 
 
 To do this successfully requires organization. In organiza- 
 tion two elements are necessary : there must be willingness on 
 the part of laborers to become parts of the organization, and to 
 work conscientiously and persistently in that capacity, and 
 there must be organizers of their labor. To the latter class 
 our attention is next to be directed. 
 
 40. Tlie Organizers of Labor. If the laborers whose 
 work is to be combined in the modern system could all work 
 together in unison, and do everything necessary to success 
 without any one to guide and direct them, modern society 
 would be very different from what it is. But as a matter of 
 fact they cannot do this. Thus the necessity of an organizing 
 power arises. This organizing power is as important as the 
 labor itself; and in one sense it is more so, because there are 
 
102 DESCRIPTION OF TEE SOCIAL ORGANISM. [II. 40. 
 
 hundreds of men who are fit to labor to one who is fit to 
 organize and direct. 
 
 We may illustrate the necessity of an organizer by adducing 
 a familiar and not at all extreme case, that of building a 
 house. When one looks at a house in connection with labor, 
 he is prone to think of it merely as the product of the work 
 of so many bricklayers, hod-carriers, carpenters, plasterers, 
 and glaziers. But if we look closely into the matter we can 
 see how badly these laborers would have got along without 
 a managing head. The bricklayers would not have known 
 where they could have bought the brick and sand suited to the 
 house on the most economical terms. They would probably 
 get all their material at once, and on mixing their mortar find 
 that they had forgotten the necessity of its ripening before the 
 building was commenced. During the week or two required 
 for this purpose they might have to remain idle. On com- 
 mencing work they would have endless trouble in deciding 
 what each man should do and how the money should be 
 divided. They would probably misunderstand the plans, build 
 wrong, and have to begin over again in consequence. When 
 the time came to put in the first window-frame they would 
 find that the carpenters were not ready with the material, and 
 would have to wait for them. The same difficulty would 
 occur in laying the joists, and would repeat itself oftener 
 and oftener at every stage of the process. The final result 
 would be either that the house would never get built at all or 
 would get very badly built, and that only after the men had put 
 into it twice as much labor as they would have done under 
 competent direction. 
 
 To describe the functions of the manager more in detail : 
 He must see that all the necessary raw materials are purchased 
 in the best markets and at the proper time ; that they are of 
 proper quality and are suited to his machinery and labor; that 
 they arrive at the factory at the proper moment ; that the fac- 
 tory is ready to receive them, and that they are so cared for 
 as not to suffer deterioration from any external or internal 
 
II. 41.] OF LABOR. 103 
 
 cause ; that the machinery is kept in good order ; that the 
 various employes know their business ; that the least possible 
 amount of waste occurs while the processes are going on ; that 
 the tilings made are those which other people want, and that 
 they are made in the proper quantities ; that arrangements are 
 made for preserving them until they can be sold ; that the em- 
 ployes are paid at the proper times ; that useful improvements 
 in the machinery are introduced, while no money is wasted in 
 unsuccessful experiments ; that the proper number of opera- 
 tives are at work in every department, and that they are the 
 persons best suited to perform their respective duties. In a 
 word, the manager must see that every one of the countless 
 causes that might lead to the injury of so complicated and deli- 
 cate an organization is carefully guarded against. The ability 
 $o do all this well is so rare that we must look upon the manager 
 as the most important factor in the work of production on a 
 large scale. 
 
 41. The Efficiency of the Laborer. We have spoken of 
 the laboring unit in a way which might imply that one such 
 unit could be considered the equivalent of another. Such, 
 however, is by no means the case. It is impossible to measure 
 the labor of a railway manager and that of the digger of a 
 canal by any common standard. This is obvious enough. But 
 it is also true, though not so obvious, that we cannot assume 
 any equality between laborers of different classes, even when 
 they are engaged in similar kinds of work. The result of the 
 day's work depends upon the man who does it, what he does it 
 with, and what he does it for ; and when any of these three 
 factors are different the result is different. Laborers differ 
 among themselves in hereditary capacity for work, and their 
 efficiency depends upon their food and their abilities. A 
 single beef-fed English laborer is the equivalent of several, 
 we could hardly say how many, under-fed Russian peasants. 
 If we are to compare them, we should consider a group of the 
 latter as representing a single one of the former. 
 
104 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 41. 
 
 Disposition to labor is equally important with physical 
 strength. Certain races of men will not work more than ab- 
 solutely necessary for their subsistence on any account what- 
 ever ; other races would be unhappy without constant employ- 
 ment. 
 
 This explains the fact that those countries where wages are 
 hio-h compete successfully with those where they are low. For 
 example, although nominal wages are fifty per cent higher in 
 America than in England, and twice as high in England as on 
 most of the continent of Europe, yet American manufacturers 
 of cotton can compete with those of England on even terms, 
 while but few European countries can compete with either of 
 them, and feel obliged to protect their home manufacturers by 
 protective tariffs. The docility and know-how of the American 
 enables him to manage machinery so much better than his 
 European competitor that the cost of the labor put into a yard 
 of cotton is actually less here than in any other part of the 
 world. 
 
 Of course the efficiency of the laborer depends also upon 
 his adaptation to his special work. For the work of digging a 
 canal nothing but physical strength is necessary. But if we con- 
 sider any work higher than that of carrying and digging, we 
 shall find that the laborer needs qualifications of a higher order 
 than mere physical strength. If he learns a trade, the time 
 required for this purpose will depend largely upon his natural 
 aptitude. If he does not possess a certain amount of skill he 
 can never be entrusted to manage a machine. Thus his effi- 
 ciency would be greater or less according to his natural or 
 acquired qualities. Finally, it goes without saying that one 
 class of laborers might do one kind of work better, and another 
 class another kind. As an example showing how national habits 
 affect the efficiency of labor, we may cite a drawback under 
 which manufacturers labor in Russia. The religious holidays, 
 which the common people of that country consider it impera- 
 tive to observe, are so numerous and come at such irregular 
 intervals, that great manufacturing establishments requiring 
 
II. 42.] OF LABOR. 105 
 
 regularity for their economical management can scarcely be 
 managed without the aid of foreign labor. When the holiday 
 comes, the Russian laborer must leave his work no matter what 
 the state of affairs, the pressure of steam, or the need of his 
 being present to carry on the operations of the establishment. 
 
 42. Friction of Exchange. The kinds of labor described 
 in the preceding sections are those entirely devoted to the 
 work of production. But if we use the terms labor and laborer 
 in their most general sense, we should include all exertion of 
 the human faculties necessary to keeping the social organism in 
 operation. Among the operations necessary for this purpose, one 
 of the most important is that of exchange ; hence whatever time 
 or work is required in effecting exchanges should be included 
 under the head of labor. We have, therefore, another class of 
 laborers whose function it is merely to buy, to take charge of 
 and to sell commodities, without any changes being made in 
 them in other respects. This class includes bankers, brokers, 
 merchants, shop-keepers, and retail dealers of every kind. 
 
 On a superficial view this labor does, not really appear to be 
 a necessity of the social organism. If the producer of a com- 
 modity sends it at his own expense to the very place where the 
 consumer lives, and the latter is willing to go and get it, why 
 should a third party step in to take a portion of the price ? The 
 answer is that if his services were not valuable, men would cer- 
 tainly not pay for them. Quite possibly, if human nature were 
 a little nearer perfection than it is, and if men knew their 
 wants exactly and adopted the best system for supplying them, 
 we could get along with a good deal less labor in conducting 
 exchanges. There is a certain analogy between the necessity 
 for this labor and friction in machinery. In a perfect machine, 
 as it is conceived in the mind of the mathematician or phy- 
 sicist, there need be no friction. But in all machines actually 
 made by man there is friction, and the mathematician who 
 calculates the forces necessary to run it must take this friction 
 into account as a resistance requiring additional power to be 
 
106 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 42. 
 
 applied. So the cost of getting a barrel of flour from a 
 firm in New York City to a baker in England is not only 
 the cost of freight and of the handling and carrying of the 
 flour, but also certain profits or wages of jobbers, grocers, ship- 
 pers, and others who have to buy the flour from one party and 
 sell it to another. From the analogy of this labor to the power 
 required to overcome friction in a machine we shall call what 
 it overcomes friction of exchange. 
 
 In the wholesale markets, where goods are bought and sold on 
 a large scale, the friction of exchange is very small. It attains 
 its minimum in the sale of stocks at the great money centres. 
 The commission of the broker is here only about one eighth of 
 one per cent. It is larger where goods of any sort are traded in, 
 because the man who buys the goods must always run some risk 
 of their deteriorating on his hands ; but in wholesale transac- 
 tions it is still too small to be a very important factor in the ulti- 
 mate price to the consumer. The friction attains its maximum 
 in the sale at retail of those commodities which are most likely 
 to deteriorate or become worthless in the hands of the dealer. 
 It is also great in the case of those goods sold in quantities so 
 small that the time spent by the dealer in showing them to his 
 customers, or wrapping them up, has a value equal to an impor- 
 tant fraction of the value of the goods. For reasons which the 
 reader can readily work out for himself, books, fancy goods, 
 including haberdashery, and fresh vegetables, are among the 
 things for which the friction of exchange is greatest. 
 
 With the labor necessary to overcome the friction of exchange 
 • must be included that of merely inducing people to buy things 
 which they would not buy if left to themselves. Yery often a 
 man who does this successfully may get one third, one half, or 
 even two thirds of the price. The labor of travelling book- 
 agents is an example. In country districts, where there are no 
 stores within convenient reach, the services of peddlers may be 
 really necessary, but in cities we must consider their principal 
 function to be that of persuading people to buy their wares. 
 
II. 44.] TEE INCREASE OF POPULATION. 107 
 
 CHAPTEE VII. 
 
 THE INCREASE OE POPULATION. 
 
 43. If the population of the world were immortal, the gen- 
 eral conditions of production, exchange and consumption 
 would not differ materially from those that actually exist. 
 Hence in the general review which we have thus far taken, it 
 has not been necessary to consider the economic effect of the 
 continual death of men, and of the constant stream of new births 
 by which the ranks of humanity are kept full. But when we 
 apply economics to social questions, it often becomes necessary 
 to take the effect of human mortality and growth into account. 
 The introduction of this additional cause affecting wealth nec- 
 essarily modifies our economic conclusions, and requires new 
 and different statements. The general rule is that every man 
 not only has to live, but to support his family also. The princi- 
 pal question which arises in this connection is that of the eco- 
 nomic effects of the more or less rapid increase of population. 
 These effects were discussed in all their relations, and elaborated 
 into a complete system, by Malthus, in "the early part of the 
 present century, and, in consequence, the conclusions to which 
 he was led are commonly known as the Malthusian theory of 
 population. This theory has been accepted as sound by a large 
 majority of economists ; and those who have contested it have H 
 probably done so from a misunderstanding of its true import. 
 "Without attempting to follow Malthus in detail, we shall pre- 
 sent the theory of population in as clear a form as possible. 
 
 44. Let us suppose that every married pair has four chil- 
 dren who grow to maturity, marry, and have four more chil- 
 dren, and so on indefinitely. It is evident and certain that 
 in such a case the population would double with every genera- 
 
108 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 44. 
 
 tion. If the average duration of the generation was one third 
 of a century, then in 33£ years the population would be mul- 
 tiplied by 2, in 66f years by 4, in 100 years by 8, and so on. 
 
 Continuing the process, we see that the population would be 
 multiplied by 8 during the period of every century. That 
 is, it would increase in a geometrical ratio, or in geometrical 
 progression. 
 
 The ratio of this progression would of course depend upon 
 the average number of children in each family who grew to 
 maturity and married. If this number were only three instead 
 of four, then the population would only increase by 50 per 
 cent in each generation, and a little more than 3£ times in 
 each century. That is, the rate of increase will depend on 
 the fertility of the population. It is, however, evident that if 
 all the conditions remained the same, generation after genera- 
 tion ; if each generation had precisely the same degree of health, 
 and the same appetites and means of support as its predecessors ; 
 if the difficulty of supporting a family did not in any manner 
 change, then the rate of increase would always be in the same 
 ratio ; that is, the numbers of the population at any equidistant 
 periods of time would form a geometrical progression. This 
 fact was expressed by Malthus in the statement that population 
 tends to increase in this progression — a statement which his 
 opponents frequently misstated by assuming it to mean that 
 population does actually thus increase under all times and cir- 
 cumstances. 
 
 There is nothing in what we have said which presupposes 
 any definite rate of increase. If, instead of four or three, only 
 two children of each family should grow to maturity and 
 marry, there would be no increase at all. If only one, the 
 population would be reduced to one half in each generation. 
 But the law would still be that of geometrical progression, the 
 only difference being that in the one case the common ratio of 
 the progression would be unity, and in the other it would be 
 less than unity. 
 
 The general rule is, however, that as men are actually con- 
 
II. 45.] THE INCREASE OF POPULATION. 109 
 
 stituted the ratio will be considerably greater than unit}*, unless 
 the increase of population is kept down by external causes. 
 Yet apart from these causes different races and classes of men 
 show very different degrees in the tendency to increase. 
 
 45. It will conduce to clearness if we begin by considering 
 the causes which tend to check the increase. They belong to 
 two classes. 
 
 Firstly, moral causes acting upon the individual and leading 
 him to postpone or avoid marriage. 
 
 Secondly, physical causes resulting in the death of offspring. 
 
 The first of these causes is probably a product of civilization. 
 Savage and barbarous tribes propagate almost entirely by vir- 
 tue of an animal impulse, and without consideration of what 
 shall become of the creatures who owe their origin to that im- 
 pulse. This is true not only in the lowest states of society, 
 but frequently among the lower orders of some civilized socie- 
 ties. The lower order of the colored population in the United 
 States may be taken as a case in point. The wants of this 
 class of people are so simple, and, in our country, so easily sup- 
 plied, that the problem of supporting a family is one to which 
 little consideration is given in contracting the marriage rela- 
 tion. This, of course, is due also to the improvident character 
 of the race. Statistics show that the problem of supporting 
 a family exerts a much more serious restraint upon the lower 
 classes in European countries, who before they marry take 
 into consideration the necessity of supporting children. 
 
 As we ascend the social scale we find the restraining influ- 
 ence to increase, and to reach its maximum with those classes 
 who have a social position to sustain and but limited means to 
 sustain it. The wealthy classes in all countries, being above 
 the fear of want, are subject to no moral restraints from this 
 source. 
 
 Secondly, when moral restraint proves an insufficient induce- 
 ment to the keeping down of increase* then want and disease 
 step in and do the work by carrying off those children who are 
 
HO DESCRIPTION OF THE SOCIAL ORGANISM. [II. 46. 
 
 least fitted to cope with the world. Infant mortality attains 
 its maximum among the lower orders of men and the crowded 
 poor of great cities, and is at its minimum among the classes 
 who are able to supply their children with everything neces- 
 sary to their continued existence. 
 
 It must be specially remarked that these two causes operate 
 very differently among different classes of people. The first 
 principally affects the middle intellectual and professional 
 classes, and has little influence upon either the wealthy or the 
 most degraded ones. The second cause operates principally 
 among the poor, and among them naturally varies inversely as 
 the first cause; in other words, the less moral restraint the 
 poor impose upon themselves the greater the mortality among 
 their children. 
 
 Eliminating the two causes just described, we shall have the 
 measure of the unrestrained tendency to increase. This, as 
 already remarked, is very different among different people. In 
 France it is so small that, notwithstanding the small amount 
 of emigration, the increase of population is very slow. The 
 same is true of native Americans. Although our population 
 has very generally increased by nearly 30 per cent in every 
 decade, it would seem from the Census reports that the largest 
 portion of that increase comes from immigration or from for- 
 eign-born parents. The state of things thus indicated is one 
 most worthy the attention of the student of social science. 
 
 46. This conclusion that different classes of men tend to 
 increase at different rates gives rise to one of the most impor- 
 tant questions affecting the future of our race. Enlightened 
 men now recognize the fact that the qualities of the children 
 born into the world are determined by natural causes. In 
 individual cases the causes entirely elude our scrutiny; but 
 when we consider general averages among large collections of 
 men, we have open to us a very fruitful field of investigation. 
 The maxim "Like produces like" is found to be an approxima- 
 tion to the truth in the general average case. For example, 
 
II. 46.] THE INCREASE OF POPULATION. HI 
 
 statistics show that vigorous and healthy parents have a larger 
 proportion of vigorous and healthy children than weak and 
 sickly parents do. Talented parents have a larger proportion 
 of talented children than dull parents do. Qualities very fre- 
 quent in certain races are almost unknown among others. The 
 laboring classes in European countries rarely, if ever, give birth 
 to children capable of rising above the station in which they 
 are born. Certain races of men are incapable of understand- 
 ing the methods of scientific investigation. The student of 
 ethnology finds differences among men who to the ordinary ob- 
 server are quite alike in all their qualities. The success of 
 the English people is very largely due to a common-sense turn 
 of mind, leading them to look upon things as they actually are, 
 and to govern themselves accordingly, instead of being carried 
 away by the search after " el Dorados " and Utopias which has 
 been the curse of the world. 
 
 When the laws of descent are more fully investigated, it will 
 probably be found that the characters of children depend not 
 only upon the characters of the parents, but upon their sur- 
 roundings. It may possibly be found that when a race is 
 thrown into a new situation, by emigration or otherwise, and 
 its members thus stimulated to new activities and brought into 
 new relations to the world, a higher average of talented off- 
 spring is the result. The establishment of such laws is, how- 
 ever, still a work of the future, and until they are established 
 a satisfactory theory of population is out of the question. 
 
 The economic application of the preceding principles arises 
 in this way : The kind of labor in which a man is fitted to 
 engage depends very largely upon the qualities with which he 
 is born. We may trace a regular gradation in the orders of 
 labor, from the work of the day-laborer, which is at the bottom 
 of the scale, up to the functions of the great administrator, 
 ruler, and philosopher, which are at the top. The higher up 
 we go, the rarer the combination of natural qualities which the 
 work requires, and, by a law of value hereafter to be laid down, 
 the more important are we to regard the work. The good of 
 
112 DESCRIPTION OF THE SOCIAL ORGANISM. [11.47. 
 
 society requires that the number of people who are born ca- 
 pable of performing each separate kind of labor should be 
 approximately proportional to the number required for its 
 performance. Measured by this standard, there has been up 
 to the present time a comparative scarcity of men of the 
 higher orders, and a comparative redundancy of men of the 
 lower orders. The question whether this inequality is to in- 
 crease or diminish in the future is involved in the law of 
 descent. So far as our imperfect knowledge of the subject 
 enables us to see into it, the balance of evidence seems to 
 threaten a continued scarcity of the higher orders of men. It 
 .would seem that the race, in this country at least, is less pro- 
 lific the higher we ascend in the intellectual and social scale. 
 There would therefore be an absolute diminution in the pro- 
 portion of men capable of performing the higher functions of 
 society, were it not that such men are born to a greater or less 
 extent among all classes of society. This continual replenish- 
 ing of the higher ranks from births among the lower ranks 
 encourages us to believe that the former will, at least for some 
 time to come, keep their relative numbers ; but whether these 
 numbers will increase in the proportion that philanthropists 
 would like to see them increase is still an open one. 
 
 47. The Malthusian theory of population is so frequently 
 misapprehended that it has almost become a by-word among 
 some economic thinkers. It is proper, therefore, that we 
 should see clearly in what it consists. It applies to the ques- 
 tion of an increase of population the same method which is to 
 be applied in all scientific investigation ; that is, it considers the 
 causes one at a time, commencing with the most general ones. 
 In economics the most general causes are the qualities of 
 human nature, because these are found among all men, while 
 other causes depend upon the situation in which men are 
 placed. Now, considering only the tendency of the race to 
 propagate, and making abstraction of all changes in its condi- 
 tion, it is unquestionably true, as already shown, that the popu- 
 
II. 47.] THE INCREASE OF POPULATION. H3 
 
 lation will increase in a geometrical progression, the common 
 ratio of which will depend upon the disposition to propagate. 
 This common ratio is greater than unity among almost all races. 
 We might almost say that it is necessarily greater than unity, 
 because if less than unity the race will die out by virtue of its 
 own inherent tendencies. Now it is certain that the number 
 of individuals who could gain a subsistence upon the surface of 
 the earth is limited. It is therefore perfectly certain that if the 
 tendency to propagate should act without any restraining influ- 
 ence whatever, the ultimate result would be a larger popula- 
 tion than the earth could support. 
 
 So much has been proved by Mai thus. Those who misap- 
 prehend the theory interpret it as meaning that the increasing 
 numbers will be kept down by positive starvation. But this 
 does not follow at all. We have already shown that a moral 
 restraining influence is always at work, at least among the in- 
 telligent classes. To say that a time may come when the whole 
 race cannot find adequate subsistence is the same thing as say- 
 ing that certain classes of men will not be able to support large 
 families. Now the question whether a man will or will not be 
 able to support a family is one which he can himself decide in 
 advance. Intelligent people reaching a decision on this point 
 will govern themselves according!} 7 . It is only the unintelli- 
 gent and reckless classes who will give no consideration to the 
 subject. The only question, then, which can remain is whether 
 we shall always have a reckless class of this kind in such num- 
 bers as to exceed the limits imposed by the conditions of sub- 
 sistence. This question is one which the future alone can 
 answer. All the economists of the presenftime can do is to 
 gain a clear conception of the various causes at play, and then 
 to proceed intelligently in the investigation of the laws of 
 descent. 
 
114 DESCRIPTION OF TUE SOCIAL ORGANISM. [II. 48. 
 
 CHAPTER VIII. 
 
 OF FLUCTUATIONS IN ECONOMIC PROCESSES. 
 
 48. If the population of the country were nearly invaria- 
 ble ; if each individual of that population ate the same quanti- 
 ty of each kind of food year after year ; if he wore the same 
 kind and number of clothes; if there were no change of 
 fashions in life ; if no improvements were made in the mode of 
 supplying wants, then there would be no great fluctuations in 
 business. Every producer would know beforehand how much 
 of his product would be demanded by the community, and at 
 what price ; he could make his calculations and employ his la- 
 borers accordingly, and those embarrassments which so trouble 
 the whole business community would be nearly unknown. As, 
 a matter of fact, however, modern improvements in organizing 
 the productive capacities of society have introduced fluctua- 
 tions in nearly every department of trade. What was fashion- 
 able last year in ladies' wear is not fashionable this year ; and 
 what is now fashionable may not be wanted hereafter. Thus 
 manufacturers and dealers are in a state of uncertainty as to 
 what product they should make in order to meet the future 
 demand, and have to run the risk of losing money by making 
 what they cannot sell, or of failing to gain a profit by not 
 making what is wanted. If every producer could make one 
 thing as easily as* another, and if the machinery constructed 
 for one purpose could be applied to another, the drawbacks 
 arising from this cause would not be serious. But neither the 
 machinery nor the operatives of a great factory can suddenly 
 change their work without loss. The greater part of the ma- 
 chinery of almost any great factory would be nearly worthless 
 for any other purpose. Yet, since the demand does change 
 from time to time, it is essential that, so far as possible, many 
 
II. 49.] FLUCTUATIONS IN ECONOMIC PROCESSES. US- 
 
 agencies employed in production shall admit of being adapted 
 to a new employment. We have to consider how this adapta- 
 tion is effected, and at what disadvantages. We begin with 
 changes in the pursuits of men. 
 
 49. Changes in the Direction of Labor. It is sometimes 
 assumed that there is no power of adaptation among men, and 
 that they are as incapable of turning to new employments as 
 the machinery in the factory is of being turned to new uses. 
 Of course this is a subject on which we can lay down no uni- 
 versal propositions, because the case differs with different men 
 and with different employments. The inhabitants of some 
 countries have much more versatility than those of others. 
 Americans are supposed to possess this quality ■ in a high de- 
 gree, and are, among all people, those who are best able to 
 change their occupation in obedience to a change of demand. 
 The watchmakers of Switzerland and the spinners of Man- 
 chester approach the other extreme, in being able to do little 
 but what they have been taught to do. Again, adaptability 
 varies with the nature of the employment. As a general rule 
 education increases this quality, while a lifetime of training in 
 a specialty diminishes it. A professor of one science can com- 
 monly teach another, and a merchant who is successful in one 
 kind of trade can generally change to another. On the other 
 hand, the cases in which mechanics can change their occupa- 
 tion without disadvantage, though not rare, are exceptional, 
 and more exceptional as the occupation is specialized. 
 
 We have now to show that although men may not be able 
 to change indifferently from one occupation to another, yet, 
 indirectly, industry may be diverted from one occupation to 
 another without serious disadvantage. We may place the ques- 
 tion in the following shape : From the fact that a shoemaker 
 cannot make clothes does it follow that, in case fewer shoes and 
 more clothes should be required, the producers of shoes and 
 clothes cannot adapt their production to the new state of 
 things? The answer is, it does not so follow. Productive 
 
116 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 49. 
 
 industry may be changed from one channel to another without 
 individual men changing their occupation directly from one to 
 the other. The change may be effected in two ways, which 
 we shall illustrate by showing how a certain amount of industry 
 could be changed from the occupation of making shoes to that 
 of making clothes. 
 
 It must first be remembered that, from various causes, men 
 are continually leaving each occupation and new ones are tak- 
 ing their places. They are leaving in consequence of death, 
 of old age, of inability from various causes, as well as from 
 change of occupation. If no new hands should engage in the 
 work of making shoes during the next ten years, it is highly 
 probable that the number of persons engaged in the occupation 
 would be reduced to one half through the causes just cited. 
 This may even be an under-estimate ; it is not unlikely that from 
 ten to twenty per cent leave the occupation every year. Now, 
 there are few if any commodities the want of which by the 
 community can fall off permanently in a more rapid ratio than 
 this. Hence diminished demand for any one commodity may 
 be completely responded to by no new producer undertaking 
 the work of producing that commodity. 
 
 Conversely, it is readily seen that an increase in the produc- 
 tion of clothes can be brought about by a corresponding increase 
 in the number of young men and women who learn to make 
 clothes. Thus we have industry changed from shoemaking to 
 clothes-making, not by individuals passing from one occupation 
 to the other, but simply by having those young men who would 
 have joined the ranks of shoemakers change their purpose and 
 join the ranks of tailors. 
 
 The other method of making the transfer is also an indirect 
 one. Let there be an increased demand for clothes and a 
 diminished demand for shoes. It will be found that a certain 
 number of persons now engaged in miscellaneous occupa- 
 tions can forsake those occupations and become tailors. Per- 
 haps they were once tailors. Let the occupations they leave 
 be A, B, and C. Then we shall have occupations A, B, and 
 
II. 50.] FLUCTUATIONS IN ECONOMIC PROCESSES. 117 
 
 C requiring additional laborers to fill the vacancies thus 
 arising. Some of these vacant places may be filled by the 
 shoemakers. If the shoemakers themselves cannot fill them, 
 other people can do so whose places the shoemakers can take. 
 There may be a chain of any length, occupation Z being sup- 
 plied from occupation T, occupation Y from occupation X, 
 and so on, until we find one which is supplied by the unem- 
 ployed shoemakers. Now since in all these operations the 
 number of people engaged in these intermediate occupations 
 has remained unchanged, while there has been an increase of 
 tailors and a diminution of shoemakers, the result is the same 
 as if a certain number of shoemakers had changed their occu- 
 pation to that of making clothes. "We may therefore assume 
 that it is possible for industry to change from one occupation to 
 another in response to the fluctuations of demand, and that this 
 will result in the same way as if every producer could change 
 from one occupation to another at pleasure. 
 
 50. Competing and Non-competing Groups. Are we to 
 assume that there is no limit to the changes which may thus be 
 made in the industry of a country? Can every occupation be 
 indirectly recruited from the ranks of those engaged in any and 
 every other occupation? It is evident that we cannot answer 
 this question absolutely in the affirmative. It is certain that an 
 increased demand for college professors and railway directors 
 cannot, even indirectly, be immediately responded to from the 
 ranks of day-laborers. On the other hand, it is equally difficult 
 to lay down an absolute line and say that no person from below 
 this line can step above it. We must admit that an increased 
 demand for college professors could be partly met by promot- 
 ing teachers of high-schools ; the places of the latter could be 
 filled by teachers now of a lower order, and these places again 
 might be filled by men in various ranks of life who possess the 
 art of teaching ; their places by men of a lower order, and so 
 on ; so that it is difficult to say just where the limit would be 
 found. 
 
118 DESCRIPTION OF TEE SOCIAL ORGANISM. [II. 50. 
 
 If, however, we go in the opposite direction, we shall find 
 limits which, though not absolute, cannot be far overstepped. 
 As a general rule it will be impossible for the class of un- 
 skilled laborers to engage in any occupation requiring skill, 
 how great soever may be the demand. The very fact that 
 they are unskilled laborers shows that they do not possess the 
 qualities necessary to fill higher places. The latter command 
 higher wages ; and the fact that they are unable to command 
 these wages shows that the defect is inherent in their constitu- 
 tion, and cannot be overcome, how great soever the induce- 
 ment offered. They can change from one unskilled occupa- 
 tion to another : ploughing, tending horses and cattle, digging 
 streets, planting, driving carts, and carrying hods are all open 
 to them. In fact, it might be considered that the range of 
 their possible occupations is wider than in the case of any other 
 class, since there is no limit to the number of little things 
 which a community would like to have done to promote its 
 pleasure. Every owner of an acre lot would like to see it cul- 
 tivated and planted with flowers ; improved streets are needed 
 in every city ; with every increase of population more labor 
 must be devoted to cultivating the ground. The result is that 
 the demand for unskilled labor, although in one sense not large, 
 yet in another sense is unlimited ; and it is not an exaggeration 
 to say that the unskilled laborer has more employments open 
 to him in his grade than any other member of the community. 
 
 Skilled labor may be defined as that which requires a longer 
 or shorter course of training in the use of the eye and the 
 hand, but which does not require any training of the intellect. 
 Since intellectual labor is generally more agreeable and better 
 paid than skilled manual labor, it may be generally assumed 
 that those who engage in the latter are incapable of the former. 
 Yet the line is not at all impassable. The most we can say is 
 that only a small minority can pass it. Moreover, skilled labor- 
 ers are those who find it most difficult to pass from one occu- 
 pation within their plane to another. The case of vacancies in 
 the ranks of tailors beino- filled from the class of shoemakers is 
 
H. 50.] FLUCTUATIONS IN ECONOMIC PROCESSES. \\Q 
 
 an extreme one. It is much easier for either the day-laborer 
 or an educated man to pass from one occupation to another 
 than it is for a skilled laborer to do so. 
 
 The class of intellectual laborers, or those engaged in occu- 
 pations requiring a high degree of education, can generally 
 change their occupation upon their own plane without difficul- 
 ty. But even here all occupations are not open to all edu- 
 cated men. An increased demand for eminent lawyers, skilful 
 surgeons, and eloquent preachers cannot be responded to by 
 any great increase in the number of those who can perform 
 such functions. The response comes in the shape of increased 
 prices for their services. 
 
 There is a grade which may be economically considered as 
 yet higher, with which no competition from the lower grades is 
 possible. It is that of the great organizers and administrators 
 who manage the business affairs of the country. An increased 
 demand for railway presidents can with difficulty be met. The 
 number of people who can successfully carry on the operations 
 of a great factory is very small. Correct judgment of demand 
 or supply in the market cannot be bought for money. No 
 amount of training can make a great novelist without natural 
 qualities to begin with. 
 
 The idea of dividing the industrial population into non- 
 competing groups was first worked out by Mr. Cairnes. He 
 supposed a division into four groups instead of three as is sup- 
 posed above. " First, at the bottom of the scale there would 
 be the large group of unskilled or nearly unskilled laborers, 
 comprising agricultural laborers, laborers engaged in miscella- 
 neous occupations in towns, or acting in attendance on skilled 
 labor. Secondly, there would be the artisan group, comprising 
 skilled laborers of the secondary order — carpenters, joiners, 
 smiths, masons, shoemakers, tailors, hatters, etc., with whom 
 might be included the very large class of small retail dealers 
 whose means and position place them within the reach of the 
 same industrial opportunities as the class of artisans. The third 
 layer would, contain producers and dealers of a higher order, 
 
120 DESCRIPTION OF TEE SOCIAL ORGANISM. [II. 50. 
 
 whose work would demand qualifications only obtainable by 
 persons of substantial means and fair educational opportunities 
 — for example, civil and mechanical engineers, chemists, opti- 
 cians, watchmakers, and others of the same industrial grade, in 
 which might also find a place the superior class of retail trades- 
 men; while above these there would be a fourth, comprising 
 persons still more favorably circumstanced, whose ample means 
 would give them a still wider choice. This last group would 
 contain members of the learned professions, as well as persons 
 engaged in the various careers of science and art, and in the 
 higher branches of mercantile business." 
 
 It is not possible, however, to assign any definite number to 
 these groups; indeed the term group is used to facilitate the 
 thought rather than to express the fact. The difference be- 
 tween men is one of degree and not of kind, the main fact being 
 that each employment is open only to a limited class, and that 
 the higher the employment the more limited is the class which 
 can engage in it. 
 
 The conclusions hereafter to be drawn from this grouping 
 of men are of the utmost importance in estimating the 
 effect of changes in production upon the welfare of the 
 different classes of society. All such changes are produc- 
 tive of increased demand for some kinds of services and 
 diminished demand for other kinds. If these variations 
 of demand can be met by corresponding changes of occu- 
 pation, either directly or indirectly, in the ways pointed 
 out, the equilibrium will be kept up. If they cannot be so 
 met, there will be a disturbance of the equilibrium, to be re- 
 stored only by a different scale of relative wages ; one class 
 commanding more, and another less, after the change. To 
 foresee the effect of these changes we must refer principally 
 to the past to see what their effect actually has been. In 
 special cases, however, the principles above laid down will 
 generally enable us to reach a fairly definite conclusion. 
 
11.51.] FLUCTUATIONS IN ECONOMIC PROCESSES. 121 
 
 51. Transformability of Capital. Capital admits of be- 
 ing changed from one form to another, as labor admits of be- 
 ing employed in one direction or another. The transforma- 
 tion cannot be made so speedily as the transfer of labor ; but, 
 if we take time enough, there is no limit to its extent, as 
 there is in the case of labor. A cotton factory can be changed 
 into an iron ship with more economy than a hod-carrier can 
 be turned into a lawyer. It is true that the transformation of 
 capital necessarily involves a change in the direction of labor, 
 but this change is mostly from one employment to another of 
 the same order, and can be effected in the way just pointed 
 out. 
 
 When we speak of such a transformation as that of a fac- 
 tory into a ship, we of course use the word in a different 
 sense from that employed when we speak of transforming 
 wool into cloth. To effect the transformation it is not neces- 
 sary that any portion of the factory should be used in the ship ; 
 the result is brought about through changing the direction of 
 labor from the work of keeping up the factory to the work of 
 building the ship. The possibility of this being done without 
 a total loss of all the value invested in the factory arises from 
 the fact that the latter is continually wearing out, or, as already- 
 shown (§ 14), capita], like every other kind of wealth, is un- 
 dergoing a constant process of consumption. The consump- 
 tion of wealth which is capital differs from that of wealth 
 which is not capital, or unproductive consumption, in this : 
 that the value consumed is, in, the case of productive consump- 
 tion, reproduced under a new form and in increased amount, 
 while in unproductive consumption we have nothing to show 
 for the thing consumed except the benefits rendered to the 
 consumer. Since the value remains unconsumed however the 
 capital may be transformed, it has the permanence of an in- 
 vested fund. Thus, a man who has saved a sum of money may 
 have it to-day in the form of wool, to-morrow in the form of 
 cloth, and the day after, through selling the cloth and buying 
 boots, he may have it in the form of boots. His fund will 
 
122 DESCRIPTION OF TEE SOCIAL ORGANISM. [II. 51. 
 
 have remained unaltered, notwithstanding the variety of forms 
 which the wealth represented by it has undergone. 
 
 Fixed capital is being consumed, as well as circulating capi- 
 tal. The rates of consumption are, however, very different in 
 different cases. Great public buildings may last for centuries. 
 A canal, if kept in repair, will last as long as the geological 
 conditions of the country through which it passes remain un- 
 altered. The buildings of a factory will probably be nearly 
 worn out in the course of one generation, and its machinery in 
 a few years. Thus, in order to keep up the fixed value of all 
 the cotton factories of a state, it is necessary to continually 
 spend labor in repairing all of them, and in rebuilding those 
 which get worn out. 
 
 Suppose, now, that the business of manufacturing cotton be- 
 comes nnrernunerative, while that of trade with foreign coun- 
 tries becomes remunerative. Since trading requires ships, the 
 prosecution of this remunerative business will require the 
 building of ships. Let us imagine that ten manufacturers 
 have each been devoting $5000 per annum to repairing and 
 keeping up the machinery and buildings of their factories, and 
 that without such repairs the machinery would be worn out 
 in ten years. They may then say : " It is no longer profitable 
 to spend money in keeping up our machinery and our build- 
 ings : we had better devote the sum which we have been 
 spending in this way to the building of ships." If ships cost- 
 ing $50,000 each were the most profitable, the manufacturers 
 could, with the money thus withdrawn, build one ship a year. 
 This would require a diversion of labor from the work of re- 
 pairing factories and machinery to that of ship-building. These 
 two kinds of labor being of the same order, the change could 
 be effected without any great economic disadvantage. The 
 result would be that at the end of ten years the value of the 
 factories would all have disappeared, and in its place would 
 have appeared ten ships. During the whole process of change 
 we conceive that the capital of the manufacturers remains un- 
 altered, the diminution of one kind keeping pace with the in- 
 
11.52.] FLUCTUATIONS IN ECONOMIC PROCESSES. 123 
 
 crease of the other kind, but the practical result would be that 
 their factories would have been transformed into ships. 
 
 This particular example of transformation is perhaps the 
 most difficult and troublesome, and we have selected it as an 
 extreme case. The proposition we wish to enforce is that cap- 
 ital may change its form to correspond to any change in the 
 direction of industry, provided due time be given to effect the 
 transformation. In ordinary cases the transformation can be 
 effected simply by no new capital being invested in the less 
 profitable enterprises. In a growing country new factories are 
 constantly being built and new enterprises undertaken. If any 
 manufacture, that of cotton, for example, becomes unprofit- 
 able, it is certain that by erecting no new buildings or ma- 
 chinery for this manufacture, the proportionate amount of 
 capital invested in it will diminish through the new invest- 
 ments of capital being diverted to other enterprises. 
 
 52. Inequalities in Economic Processes. The inequali- 
 ties described in the preceding section are those which arise 
 from changes in the demand for products, some being in de- 
 mand at one time, and others at another time. But there are 
 also fluctuations which do not arise from this cause alone, but 
 which are unavoidable under almost any circumstances. To 
 understand them, let us begin by imagining all the opera- 
 tions of production, exchange, and consumption to be going 
 on with perfect regularity. We have first to show that under 
 fixed conditions, that is to say, on condition that the quantity 
 of every commodity produced and consumed remains un- 
 changed, the transaction of a certain fixed amount of business 
 is then necessary. If we trace the processes of manufacture, 
 we shall find that the number of exchanges which have to be 
 made are dependent upon the circumstances of the case ; that 
 to increase them will cause unnecessary waste, and that they 
 cannot be diminished without the efficiency of the processes 
 being impaired. 
 
 Take for example our old case of the coat. The farmer who 
 
124 DESCRIPTION- OF TEE SOCIAL ORGANISM. [II. 52. 
 
 shears his sheep has very little knowledge of the location of 
 the various factories for making wool into cloth. He cannot, 
 therefore, sell directly to the manufacturers without running 
 the risk of failure in finding the best market. Quite possibly 
 he does not even know how or where he ought to send his 
 wool. He therefore sells to some jobber whose business it is 
 to know where wool is demanded and at what price. This is 
 the first necessary exchange. If this jobber is himself ac- 
 quainted with the wants of all the factories, or if the managers 
 of the latter know w T here to find him, he will sell to them, 
 making another exchange. It may, however, happen that a 
 second exchange or even a third is necessary. There may be 
 one dealer between the jobbers in the great central markets 
 and the farmer, and there may be another between the jobbers 
 and the manufacturer. Whether there shall or shall not be 
 such "middlemen" is a matter depending upon the knowledge 
 of the course of trade possessed by the various parties con- 
 cerned, especially by the manufacturer and the farmer. This 
 knowledge is one of the conditions which we suppose to remain 
 unaltered, and thus the number of exchanges necessary for the 
 most advantageous transfer of the wool from the farmer to th-e 
 manufacturer are fixed. 
 
 When the manufacturer makes the wool into cloth he finds 
 it more convenient to sell to cloth dealers than to the tailors 
 who make it into cloth. One reason of this is that each tailor 
 wants a great many kinds of cloth, coming from numerous 
 manufacturers, while the products of each factory have to be 
 divided among innumerable tailors. If then every tailor had 
 to get each kind of cloth directly from the factory where it 
 w T as produced, there would be a very troublesome number of 
 transactions. So wholesale jobbing houses are established to 
 purchase various kinds of cloth and sell it to tailors and other 
 manufacturers of clothing. Quite possibly great manufacturers 
 of clothing may find it to their interest to buy directly from 
 the factory. Whether this be so depends upon their knowl- 
 edge and upon the conveniences of business, and not upon the 
 state of trade. 
 
11.52.] FLUCTUATIONS IN ECONOMIC PROCESSES. 125 
 
 What is true of the making of wool into a coat is true of 
 everything we wear or use about our houses. So as long as 
 our means and our wants remain unchanged the population at 
 large requires annually a certain definite number of suits of 
 clothes, a certain number of houses, a certain number of loaves 
 of bread, a certain quantity of beef and pork, and a certain 
 supply of furniture. If every one supplied himself with these 
 commodities at a uniform rate, or even if the rate were uniform 
 for the general average of the community, then there would be 
 no disturbance in the course of trade. The quantity of goods 
 of every kind which every dealer could sell would be nearly 
 the same month after month and year after year. Demand 
 would change only with new sources of supply or new uses for 
 commodities. 
 
 But the more rapidly society progresses the less is any 
 such uniformity possible. The disturbances come from both 
 ends of the line: from the consumer and from the producer. 
 Some cause may lead a large body of the community to econo- 
 mize in the use of clothing. Then there will be a stagnation 
 in all the operations of making and selling clothing, or of 
 doing anything which is necessary for that purpose. When 
 the occasion for such economy arises it is generally practised 
 upon all articles of current consumption. When this is the 
 case business generally is said to be dull. If some cheap sub- 
 stitute for a commodity be found by producers, then all busi- 
 ness which consists in exchanging that commodity will be dull. 
 Competitors capable of producing cheaper goods engage in 
 production and lead to the old producers being no longer able 
 to find a market without lowering their prices. They are per- 
 haps driven out of business, and thus another perturbation 
 occurs through trade having to find new persons for its mana- 
 gers. The conception which has now to be formed is this : 
 
 Firstly, we are to imagine a regular stream of commodities 
 going through the various processes of production and con- 
 sumption. The stream of wool passes from the prairies over 
 certain railways, through certain warehouses and factories, and 
 
126 DESCRIPTION OT THE SOCIAL ORGANISM. [II. 52. 
 
 terminates in the form of clothing. The stream of logs is 
 flowing from our northern forest down the Mississippi and 
 other rivers, through saw-mills, over railways, and into our 
 houses. A stream of cotton is passing from various points in 
 the Southern States, flowing into ships and there dividing, one 
 portion crossing the Atlantic and another portion finding its 
 way to New England factories. A stream of wheat has its 
 origin at various points in a large extent of country, flows 
 over certain railways and into certain cities, passing into flour- 
 ing-mills, flows from them over other railways into bakers' 
 shops and into our houses, where it ends in bread. Streams of 
 pork are going over nearly the same routes. A stream of hides 
 is flowing out of Texas towards our Northern States. 
 
 Secondly, we can imagine a regular and normal state of 
 things so that all the streams would flow out at a constant and 
 uniform rate. Then the exchanges which they imply would 
 be definite in number, and would be invariable except as popu- 
 lation, production, and consumption increased at their regular 
 rate. 
 
 Thirdly, as a matter of fact they do not flow at a regular rate, 
 but rather in a series of waves. Of course an annual wave 
 in most original productions of the soil is unavoidable, since 
 we have a wheat-crop and a wool-crop but once a year, and 
 each at a particular season. But these annual waves are soon 
 smoothed off. Other waves rise from changes in the foreign 
 demand. All these fluctuations are a necessary incident of 
 economic operations, and do not imply anything abnormal in 
 the conduct of society. 
 
II. 53.] THE COMMUNISTIC POINT OF VIEW. 127 
 
 CHAPTER IX. 
 
 PRODUCTION AND CONSUMPTION FKOM A COMMUNISTIC POINT OF 
 
 VIEW. 
 
 53. By a communistic view of economic processes we mean 
 a view which includes only the processes themselves in their 
 relations to the community at large, considered as a co-opera- 
 tive, body, and leaves out of consideration those associated 
 features which do not constitute essential parts of the process. 
 The reason for this view is that the associated features alluded 
 to confuse our thought, and stand in the way of our seeing the 
 essential conditions of the problem. 
 
 Let us see what are the conditions essential to the enjoyment 
 of a coat. They are the labor devoted to the production and 
 transportation of the various materials of which the coat was 
 made, their combination into a coat, the transportation of the 
 coat to some point within easy reach of the wearer, and the act 
 of the latter in going to that point and getting the coat. I say 
 these operations are the essential ones. For it is certain that that 
 coat could not have been enjoyed by the wearer without these 
 processes. And it is equally certain that if these processes are 
 all performed, he will have the coat. Now, that without which 
 a result will certainly not be, and with which it certainly will 
 be, is, in the highest degree, the essential condition of the result. 
 
 Besides these essential operations by which the coat was pro- 
 duced and placed in possession of the wearer, there have been 
 certain acts of another kind. These acts have consisted in a 
 certain number of persons in succession each calling the wool 
 " my property " and receiving money from the following per- 
 son in exchange for the right on his part to call the wool his 
 property, and so with the various materials, and with the 
 finished coat, which the wearer had to pay money for. Now, 
 
128 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 54. 
 
 these acts of exchanging the right of ownership, however nec- 
 essary they may be (and they are absolutely necessary as society 
 and human nature are constituted), are not parts of those opera- 
 tions of production and transformation which we have shown 
 to be essential. The fact that we cannot get along without 
 ownership and exchange in no manner modifies the fact that if 
 the thousands of producers unite in performing all the opera- 
 tions necessary to making the coat and putting it into your 
 possession, you will have it, and if they do not you wall not 
 have it. Now, our object in the present chapter is to leave out 
 of consideration the processes of exchange and the rights of 
 ownership, in order to show what necessary relations exist 
 between the producing operations and the enjoyment of com- 
 modities. We call this view communistic, because the word 
 communism is used to designate a system in which the private 
 ownership of property is not recognized. We view economic 
 conditions from this standpoint because it affords us the basis 
 of solving a number of economic problems in an easy and sim- 
 ple manner which otherwise would be very complex. 
 
 54. We suppose it evident to the reader that the popula- 
 tion of the country comprises some fifteen millions of laboring 
 units, heads or members of families, who are producing com- 
 modities for the benefit of others. Farmers are producing 
 wheat and corn ; millers are producing flour ; carpenters and 
 bricklayers are producing houses ; actors are producing amuse- 
 ment; tailors are producing clothing. If we add up all the 
 bread, all the clothing, all the amusements, all the houses, we 
 shall have in each case a certain sum total representing the en- 
 tire production of each separate commodity by the whole com- 
 munity. 
 
 In return for his contributions to this sum total, each pro- 
 ducer is getting a larger or smaller share of other sums total for 
 his own use. By the process of exchange he gets small quanti- 
 ties of a large number of commodities in exchange for a con- 
 siderable quantity of some one commodity which he himself 
 
II. 54.] TEE COMMUNISTIC POINT OF VIEW. 129 
 
 lias produced. His welfare depends on how much of these 
 separate commodities his labor will enable him to command. 
 The more he puts in the better for the others, and the more 
 they put in the better the chance for him to be supplied. 
 
 To fix the ideas, let us suppose that all these things produced 
 are brought together into one central reservoir. "We employ 
 this conception merely to enable us to think of them as wholes 
 rather than as scattered masses of parts. Then, every com- 
 modity which is brought into the reservoir will be brought 
 in by some person or body of persons, everything will be 
 taken out by somebody, and every commodity which is taken 
 out will be consumed by some person or family. It is cer- 
 tain that nothing can be taken out except what has been 
 put in. 
 
 An apparent difficulty may arise in making this conception 
 correspond to the actual case. If we add up all the quantities 
 of everything actually produced, we find that the greater part 
 are taken out, not for the consumption of the individual who 
 takes them, but for the purpose of being worked up by him 
 and brought back to the reservoir in an improved form. For 
 example, the wool which the drover throws into the reservoir 
 is taken by the manufacturer, not to be consumed by himself, 
 but to be made up into cloth. The tailors take the cloth out 
 of the reservoir in order to throw it back again in the shape of 
 clothing. But this process need not cause any difficulty. The 
 ultimate object of the wool is clothing, and the ultimate object 
 of everything is to satisfy the wants of individuals. The only 
 consumption with which we are concerned at present is that 
 of the commodities withdrawn by the individuals, not to be re- 
 turned by them, but to be applied to their own uses. We 
 therefore leave the wool and cloth out of consideration, and 
 conceive the coat to be brought in, not as the sole contribution 
 of the tailor, but as the joint contribution of wool-growers, 
 shearers, railway managers, spinners, weavers, merchants, and 
 tailors. We may, if we please, imagine a separate central reser- 
 voir into which nothing enters but finished houses, furniture, 
 9 
 
130 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 54. 
 
 bread, pictures, clothing, and other articles to be used for the 
 support of those who withdraw them. 
 
 The economic welfare of each individual depends upon 
 what share of these finished products he has the privilege of 
 withdrawing, and upon nothing else. Now, as a first step to- 
 wards understanding what causes affect the power of the indi- 
 vidual to withdraw commodities from the reservoir, we shall 
 have to make a distinction between causes which affect only 
 the general welfare and those which affect individuals, or spe- 
 cial classes. Everything which increases either the sum total or 
 the quality of any commodity brought into the reservoir tends 
 to increase the general welfare, because then there is either 
 more of that commodity, or a better article, for everybody who 
 wants it. If this commodity is one of which there is already an 
 ample supply, then the increase to the general welfare will be un- 
 important. If it is something of which people stand in great 
 need, and of which the supply is small, the increase forms an 
 important addition to the general welfare. Moreover, in any 
 case, the addition of any commodity will directly benefit only 
 those who use that commodity. Now, economics and govern- 
 ment policy can concern themselves only with the welfare of 
 whole classes of individuals ; and since one class has as good a 
 right to their consideration as another, the general welfare is 
 that with which they are principally concerned. Hence our first 
 conclusion as to whether an economic cause is beneficial or inju- 
 rious in its action must depend on whether it tends to increase 
 or diminish the general supply of commodities brought into 
 the great central reservoir. But as a matter of scientific inter- 
 est, it is perfectly allowable and proper to consider how special 
 classes and subdivisions of men are affected by economic causes. 
 
 Now, it does not follow, because an increased supply of 
 some one commodity is brought into the reservoir, that of 
 course everybody who wants that commodity can get more of 
 it. It may happen that through the indirect action of the same 
 cause a few unfortunate persons may be able to command only 
 a smaller supply. We also must recognize the action of eco- 
 
II. 55.] THE COMMUNISTIC POINT OF VIEW. 131 
 
 noinic causes which, without altering the total quantity brought 
 into the reservoir, would result in that quantity being divided 
 very differently among separate classes of men. If then we find 
 it satisfactorily established that any economic cause will result in 
 some class of men (carpenters, for example) being able to get 
 a larger supply of commodities, we must see in which of two 
 ways this cause acts. If it acts through a larger production 
 of those commodities, then it is a public benefit of which 
 the carpenters are simply getting a share. But if it is a cause 
 which merely enables the carpenters to get something which 
 otherwise some one else would have got, then it is merely trans- 
 ferring the benefit from one class to another, and is not to be 
 regarded as an economic good, unless it can be shown that 
 the commodities do more good when consumed by carpenters 
 than when consumed by others. 
 
 This classification will enable us to make an important gen- 
 eralization. Those industrial and business efforts in which 
 every man competes with his fellows by trying to supply a 
 better article to his customers than his competitors can supply 
 tend to increase the sum total of commodities produced and 
 so promote the general good. Those efforts which consist in 
 placing restrictions on competition by limiting in any way the 
 freedom of everybody to produce as much as he is able can 
 only benefit one class at the expense of others. 
 
 55. Let us now see what regulations would have to be es- 
 tablished for the public good in the distribution of the sum 
 total of products. The reason why regulations are necessary 
 is that every one wants to get a share of a great many things, 
 and especially of the useful and scarcer things. His welfare 
 depends on what he can get, and as a general rule he is a safe 
 judge of what he wants. But it is different with the things he 
 brings in. These are for other people, and it is necessary for 
 the public good that he bring in, not what he likes to produce, 
 but what other people want to consume. How shall he be in- 
 duced to do this ? 
 
132 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 55. 
 
 In considering this question we shall assume that there is 
 a central authority which can make and enforce what regula- 
 tions it pleases. Let us see what would be possible to such an 
 authority, and what, from the very nature of things, impossible. 
 
 I. The first regulation which we see to be necessary is that 
 no one shall be allowed to draw things out of the reservoir un- 
 less he puts in an equivalent of something that somebody wants. 
 But what kind of equivalent ? If nothing more than an equiv- 
 alent in labor, then everybody would put in what he found it 
 easiest to make, and would neglect what he found it difficult 
 to make. The result would be that there would be a great 
 collection of those things easy to make, and a great scarcity of 
 everything else. Since many useful things are hard to make, 
 we must require something else than an equivalent in labor of 
 production. "We may, at this juncture, be guided by the prin- 
 ciple that the quantity of each commodity brought in must, so 
 far as possible, be so regulated as to be just equal to the quantity 
 wanted to be taken out. But even under the most favorable 
 regulations an accumulation of some things and a scarcity of 
 others would be unavoidable. 
 
 II. The central authority would then have to remedy this 
 inequality. It would perhaps say to the combined farmer and 
 miller, " You are bringing in more flour than we possibly can eat, 
 while the people cannot find enough good paper to write their 
 letters on. Cannot some of you leave off making flour and 
 begin the making of paper ? " The answer would naturally be, 
 " It is very easy to make flour and very hard to learn how to 
 make paper. You must therefore offer us some inducement 
 to change." The question would now arise on the part of the 
 central authority whether some privilege or advantage must 
 be held out to induce the makers of flour to learn how to make 
 paper. If the principle is introduced that labor is the only 
 measure of value, and that one person must gain no more than 
 another, it would be impossible to make the change. Evidently 
 the easiest way would be to offer some inducement for making 
 paper rather than flour. Thus would arise that inequality in the 
 
II. 55.] THE COMMUNISTIC POINT OF VIEW. 133 
 
 rights of different contributors to the reservoir which human 
 experience in all states of society has shown to be unavoidable. 
 
 III. Having thus established the principle that inducements 
 must be held out to secure the manufacture of the scarcer arti- 
 cles, the question would arise just how strong the inducement 
 would have to be. The public at large would have an interest 
 in getting the paper with the smallest possible inducement, 
 and the latter ought to be so regulated that there should be an 
 exact balance between the benefit from the increased supply 
 of paper and the evil of offering a premium to paper-makers. 
 This would require some measure of benefit and evil, so that 
 the benefit of getting a little more paper, and the corresponding 
 evil of paying for its production, would be set off against each 
 other. This consideration would lead to the still further devel- 
 opment of the plan. 
 
 TV. Every producer who made an addition to the supply of 
 plentiful articles would do only a little good, while if he added 
 to the supply of the scarcer ones he would do the more good 
 the scarcer the article. The person who took away a supply 
 of the plentiful articles would do very little evil to his fellows, 
 while he who took a supply of the scarcer ones would do more 
 and more evil in proportion to their scarcity. Thus would 
 arise the idea of a measure of good or evil ; that is, of value. 
 The central authority might begin by establishing this measure 
 in the case of each commodity. It might say: " Every man 
 who brings in a barrel of good flour shall be held to do a good 
 of $5 ; and every man who takes away a barrel to do an evil of 
 $5. Every man who brings in a ream of paper shall be held 
 to do a good of $2 ; and he who takes it out an evil of $2." 
 Having established such a scale for every commodity in the 
 market, the authority would await the result. The most equi- 
 table result would evidently be that every one should be allowed 
 to take out a value equal, on the established scale, to that which 
 he brought in, and that he should also be allowed to bring in 
 what he pleased. If inequalities were still found, some things 
 being plenty and others scarce, it would be necessary to con- 
 
134 DESCBIPTION OF THE SOCIAL ORGANISM. [II. 56. 
 
 tinue adjusting the scale of values ; and the final result should 
 be such adjustment of the scale that the quantity of every- 
 thing taken out should be just equal to that brought in. 
 When . this was done the operations of the imaginary society 
 would correspond exactly with those which have grown up 
 among us. 
 
 To what in this picture corresponds the case of non-employ- 
 ment of laborers ? In our picture every man is at liberty to 
 bring in as much or as little as he pleases, but laborers out of 
 employment can bring in nothing, and so can acquire no right 
 in the store. But what is meant when we say that laborers can 
 find no employment? Everybody can find employment on 
 some terms. What is generally meant is that they cannot find 
 employment at satisfactory wages. Wages being what they 
 can buy from the common stock with the proceeds of their la- 
 bor, this is simply saying that what they are allowed to take 
 out of the reservoir is not, in their opinion, the proper equiva- 
 lent of that which they are willing to put in. For this we may 
 say that there is no possible remedy so long as every one is at 
 liberty to work or stay idle. He must be his own judge of the 
 value of his services, and if he values them too highly nobody 
 can help it. 
 
 56. The Conditions of General Prosperity. The careful 
 thinker will note the general tendency of the preceding con- 
 siderations towards one conclusion, namely, that general pros- 
 perity is but slightly affected by those measures in which the 
 public take the greatest interest, that it can practically vary 
 little from year to year, and that it can change but slowly from 
 generation to generation. An illustration has already been ad- 
 duced showing how illusory the popular estimates of economic 
 well-being are apt to be. So accustomed are we to measure 
 this well-being by entirely insufficient standards, that it may 
 be well to review the subject once more from the standpoint 
 of common-sense. 
 
 When is a community, a class, or an individual prosperous ? 
 
II. 56.] THE COMMUNISTIC POINT OF VIEW. 135 
 
 When they have plenty of money ? No, for the money is of 
 no use to them. It may enable them to buy, but it cannot 
 do this unless the things they want to buy are first produced. 
 Is a man prosperous when his goods and services are in de- 
 mand ? Not unless tin's demand will enable him to buy. "When 
 lie sells he gives what is valuable, and does not receive a return 
 until he buys something. The true answer is that he is eco- 
 nomically prosperous when he is able to supply his natural and 
 artificial wants without more labor than is conducive to his 
 physical health. A class is prosperous when all its members 
 enjoy this condition of prosperity ; and when all classes in the 
 community enjoy it, then certainly is the community jDrosper- 
 ous, no matter how weak and badly off it may be when we 
 measure it by the popular standard. Two opposing factors 
 therefore come in — the supply or mass of commodities, and 
 the labor by which that supply is obtained. 
 
 We have already shown, what indeed ought scarcely to need 
 showing to a reasonable being, that, so far as the community 
 at large is concerned, a necessary prerequisite to the supply of 
 these wants is that all the agencies necessary to that end shall 
 be produced. If all the people of the country are comfortably 
 housed and supplied with all the food, clothing, furniture, 
 books, and other wealth necessary to supply their wants, then 
 that country is prosperous. They cannot enjoy this wealth 
 unless it is produced: the houses must be built, the grain 
 raised, the furniture manufactured, and the clothing made. 
 Moreover, if the community is increasing, not only must the 
 existing houses be kept in repair, but there must be a continual 
 addition to their number. Conversely, if all these things ex- 
 ist, that is, if there are enough of houses, furniture, food, 
 clothing, for everybody, we may be satisfied that no one will 
 be compelled to go without these necessaries. It is indeed 
 conceivable that they might all be owned by a few persons, 
 and that those few might refuse to let the majority have any 
 share of them. Practically, however, this is out of the ques- 
 tion. No matter how rich and fortunate he may be, a man 
 
136 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 56. 
 
 can eat only a certain small quantity of bread, and lie lias 
 not the slightest occasion for taking more than that quantity 
 from the common store. Therefore he can have no motive 
 for keeping anybody else from eating his share of the bread. 
 He can only live in one house, and if he has more houses 
 than that one he will be practically forced to let other people 
 occupy them on such terms as they choose to make. He 
 may own a ship, but if this ship could bring nothing but what 
 he wanted for his own personal use he would burn her up. 
 He bought or built her in order that she might bring things 
 for other people. We may therefore lay it down as a practical 
 rule, taking human nature as it is, that when a community as 
 a whole is amply supplied, no industrious and well-behaved 
 member of that community is likely to be in serious permanent 
 want. Thus we are led to our second factor, the conditions of 
 production. 
 
 It is equally evident that producing power is the necessary 
 and sufficient condition that the wealth just shown to be re- 
 quired for prosperity shall exist. So long as the community 
 possesses the necessary land and minerals, so long as it has fac- 
 tories, mills, and mines all in good working order, so long as 
 its railways continue to run, and its laborers and merchants 
 maintain their skill and good morals, so long will the neces- 
 saries of life be produced. The producing power can be im- 
 paired only by moral or physical causes acting upon the com- 
 munity at large. Of course, every cause which impairs con- 
 fidence between man and man, or which leads one to doubt 
 whether he will be compensated for his services ; every cause 
 which prevents producers from working, and every cause 
 which cuts off the supply of material for them to work with, 
 tends to diminish production. Hence the question of national 
 prosperity resolves itself almost entirely into that of the 
 stimulus to production. 
 
 This chapter is, more than any other one, the starting-point 
 in the system of economic investigation which will be em- 
 ployed in subsequent parts of the present work. 
 
11.57.] CHANGES WITH THE ADVANCE OF SOCIETY. 137 
 
 CHAPTER X. 
 
 CHANGES IN THE SOCIAL OKGANISM WITH THE ADVANCE OF 
 
 SOCIETY. 
 
 5*7. We may readily imagine the arts of production to re- 
 main stationary for long periods of time. Economics would 
 then be reduced to a system in which it would not be necessary 
 to consider progressive changes of any kind. Such, however, 
 is not the case with our generation. We recognize two great 
 forms of change : the one common to the whole civilized world, 
 the other confined to particular countries. In the first class we 
 comprise all those improvements in capital and in knowledge 
 which lead to a constant increase or improvement in the pro- 
 ducts of labor. Tlo a very great extent, increase of capital and 
 increase of knowledge go hand in hand. The reason of this is 
 that when we learn some new and better way of producing a 
 given article, it is generally necessary to produce a new form 
 of capital in order to utilize the discovery. To take a familiar 
 example, when the compound engine was invented, the owners 
 of Atlantic steamers, in order to utilize it, had to remove their 
 old engines and put in new ones of the improved pattern. 
 
 Our knowledge of the best way of producing things is con- 
 stantly increasing so rapidly that there is no immediate prospect 
 of its reaching a stationary condition. Yet it would seem that 
 it must ultimately approach such a condition, though it is diffi- 
 cult to say how many generations or how many centuries may 
 be required. If we look closely into the matter, we see that 
 the causes of progress form a very widely extended class. They 
 include not merely improvements made and applied within any 
 one country, but knowledge of the wants and capacities of 
 foreign countries, and the results of that experience which is 
 gradually teaching us the best way of doing many things. 
 Such results tend gradually to embody . themselves in fixed 
 
138 DESCRIPTION OF TEE SOCIAL ORGANISM. [II. 57. 
 
 habits. We readily perceive that the system by which the 
 body of farmers on the prairies of the West exchange goods 
 with various countries in Europe, Asia, and South America is 
 exceedingly intricate in its details. Its successful operation 
 depends upon the proper co-ordination of the efforts of manu- 
 facturers, merchants, ship-owners, and managers of railways. 
 There being little real concert of action among these widely 
 separated individuals, the co-ordination of their work is a mat- 
 ter of slowly growing habit. 
 
 Thus we may see that the commercial supremacy of New 
 York is entirely a result of habit and of convenience. Men 
 from all parts of the country send there to buy their goods, 
 because they know that they can make a better selection and be 
 more likely to find exactly what they want there than they can 
 anywhere else. The very fact that so many kinds of people are 
 thus led to going thither makes it pay the merchants of that 
 place to supply themselves with every possible kind of goods 
 to meet the demand. It does not pay the merchants of Boston 
 to keep on hand so large a supply of everything the people 
 want as is found in New York, because the people of the in- 
 terior would not find it out, and are not in the habit of going 
 in such great numbers to Boston to buy. The result is a 
 tendency in the great movements of commerce of all countries 
 to concentrate themselves along certain lines and in certain 
 cities. The only limit to this concentration is the physical im- 
 possibility of handling more than a limited amount of goods 
 within the limited space occupied by any one city. 
 
 In the same class of causes we must include the opening up 
 of new sources of supply in distant and uncivilized countries. 
 The great Asiatic countries, especially China and Japan, are 
 gradually coming into communication with the rest of the world, 
 and the resources of Africa are rapidly being discovered and 
 opened out. Thus there is a gradual tendency towards a state 
 of things in which every part of the world will supply every 
 other part with the goods which it can make to the greatest 
 advantage. 
 
n. 58.] CHANGES WITH THE ADVANCE OF SOCIETY. 139 
 
 58. In the United States, besides this improvement in capi- 
 tal and methods of production, we have had a change due to 
 the increase of population. This increase is productive both 
 of advantages and disadvantages to the organism as a whole. 
 The disadvantage is the continual diminution in the supply of 
 the natural agents of production which can be commanded by 
 each individual. The larger the population the less land each 
 individual must draw his subsistence from. Of course until 
 population reaches a certain density this diminution is not felt. 
 No one needs more land than, with the least amount of labor, 
 will yield him the food, cotton, tobacco, cattle, and timber nec- 
 essary for his use. So long as the population is not dense enough 
 to encroach upon this minimum, so long no disadvantage is 
 felt. But when the individual has to raise his subsistence from 
 a smaller surface of soil, he is obliged to introduce improved 
 methods of cultivation, and to limit himself in the enjoyment 
 of those products of the soil which require the cultivation of 
 extended areas. Thus the denser the population becomes the 
 more capital and labor it will be necessary to devote to sub- 
 sistence, and the more liable the poorer members will be to 
 suffer from privation. 
 
 The advantages of a dense population are obvious and numer- 
 ous. The social attractions of great cities are powerful eco- 
 nomic causes tending to bring men together in them. But the 
 great advantage of a dense population in production arises from 
 the increased facility with which closely associated men can 
 co-operate in production. In a widely scattered population the 
 division and organization of labor on a great scale are impos- 
 sible, because these require large bodies of men to work to- 
 gether. The greater the number of such bodies of men the 
 greater the variety of articles which can be made within con- 
 venient reach for the use of the whole community. 
 
 "We must also notice that the result of improvements in pro- 
 duction is not merely that each individual secures a larger 
 supply of the necessaries of life, but that he gets those supplies 
 of better quality and in a larger variety of forms, and therefore 
 
140 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 59. 
 
 can better suit liis taste and peculiarities. The farmer of to-day 
 does not eat any more than his predecessor did a hundred years 
 ago, nor does the rich man of to-day necessarily eat more than 
 the poor man. But the modern farmer has better food than 
 the farmer of a hundred years ago had, and the man of wealth 
 has a greater variety of food than the poor man. We have 
 not many more chairs in our houses now than our forefathers 
 had, but they are a different kind of chair. Our watches and 
 clocks are more numerous, and we have many more books and 
 pictures. Altogether we devote nearly as much labor to pro- 
 duction as they did, but we get far more variety and better 
 results from it. 
 
 59. Looking at the matter more closely, we perceive that 
 these improvements in production involve a change in the rela- 
 tive proportions of men engaged in various classes of employ- 
 ments. The reason of this is that great improvements are 
 confined to certain kinds of production. As one extreme case 
 we may take the building of a brick house. We are scarcely 
 able to do this to any better advantage than our ancestors. 
 We have indeed learned to use machinery in moulding bricks, 
 and in the case of large buildings we employ steam hoisting- 
 apparatus to raise the materials as the walls go up. But, leaving 
 out these comparatively small improvements, the labor of mak- 
 ing the necessary material and erecting the walls is almost the 
 same that it has been for thousands of years. 
 
 Improvements in agriculture may be considered as interme- 
 diate between the two extremes. By the use of sowing and 
 harvesting machinery, and by improvements in methods of 
 cultivation, we are enabled to secure our supply of agricultural 
 products with only a fraction of the labor necessary a few gen- 
 erations ago. But the labor necessary to care for the crop and 
 take it to market cannot be greatly diminished. 
 
 The extreme cases of improvement are those already de- 
 scribed. They consist principally in the making by machinery, 
 on a large scale, of what was formerly done entirely by hand. 
 
11.61.] CHANGES WITH TUB ADVANCE OF SOCIETY. 141 
 
 The spinning and weaving of cotton, the making of watches, 
 the sewing of shirts, and the printing of books and newspapers 
 may be taken as cases in point. 
 
 60. One result of such improvements is a continual increase 
 in the ratio of the urban to the rural population. Since it is 
 absolutely necessary that men shall live on the farms which 
 they cultivate, an agricultural city is an impossibility. Hence 
 we must always have, besides the dwellers in cities, a certain 
 population scattered over the country. But the labor of this 
 population is more and more confined to the management of 
 the rude products of the soil. The grain once harvested, the 
 cotton once gathered, and the cattle once killed, everything 
 that follows can be more advantageously done by large co-oper- 
 ating bodies of men. Such bodies are most easily collected in 
 towns and villages. Hence, as improvements go on, a con- 
 tinually larger proportion of the population is found congre- 
 gated in the cities. "We may see this by studying our Census 
 reports. We find that not only does each individual city in- 
 crease in about the same ratio as the entire population, but new 
 cities are continually arising. 
 
 61. A general characteristic of social progress, the enuncia- 
 tion of which is due to Herbert Spencer, will give us aluminous 
 and comprehensive view of the subject. Progress consists in 
 two continuous and connected processes, the one called differ- 
 entiation or specialization, the other integration. 
 
 The former term expresses the fact that individual men 
 become different from their fellow-men by the acquisition of 
 special powers or faculties. The denser the population, and 
 the more refined the special kinds of skill found among partic- 
 ular men, the more numerous the men who can do some useful 
 thing better than any of their fellows. In a primitive state of 
 society there are very few trades. As society increases men 
 differentiate themselves more and more by following more 
 numerous and specialized occupations. The extremes of differ- 
 
143 DESCRIPTION OF THE SOCIAL ORGANISM. 
 
 entiation are approached when a man devotes himself to mak- 
 ing some one part of a watch, or when, as in Switzerland, a 
 manufacturing firm is devoted to making a particular kind of 
 hands for a watch. 
 
 This process of differentiation necessarily implies that each 
 individual must come into closer and more important relations 
 with a continually increasing number of his fellow-men. The 
 watchmaker of old needed but few customers. But the man 
 who does nothing but make the hands of a watch must have a 
 great number. Thus, as differentiation goes on, every part of 
 the social organism becomes more closely connected with every 
 other part. This increasing adaptation of the parts of the 
 organism is called integration. 
 
 QUESTIONS. 
 
 1. Describe as fully as you can the natural requisites of production nec- 
 essary in the erection of a house. 
 
 2. Can you give any examples additional to those of § 20 showing 
 that knowledge pursued with the object of gain is not generally productive 
 of results useful to mankind at large? 
 
 3. Can you give any reason why the owner of land should have the 
 exclusive use of any water-power which may be obtained from a stream 
 flowing through his premises? 
 
 4. What food is necessarily consumed in the production of a coat? 
 
 5. If a farmer is induced to invest in a steam-plough, what will be the 
 debit and credit side of his account? 
 
 6. In what cases should we regard a carriage as capital, and in what cases 
 as sustenance? 
 
 7. When we speak of a negative capitalist, is it the capital itself or his 
 property in capital which is negative? 
 
 8. To what extent should a theatre be regarded as capital? If you regard 
 it as capital with respect to the owner, but not as capital with respect to the 
 country at large, then who are the negative capitalists and what is the in- 
 terest which they pay on that negative capital? (Note that the essential 
 mark of a negative capitalist is that he is paying interest on some fund 
 which he is not using as capital, but is enjoying as sustenance.) 
 
 9. Show that the negative capitalist must pay interest instead of receiving 
 it. Is every one who pays interest necessarily a negative capitalist to that 
 extent? If so, give as many examples as you can of negative capitalists. 
 
QUESTIONS. 143 
 
 How is it "with a man who borrows money to expend in stocking his farm ? 
 Is his capital positive, negative, or zero? 
 
 10. If we should compare the population of New York and of Switzer- 
 land with respect to the ratio of the laboring units to the total population, 
 would you expect the ratio to be nearly the same in the two countries? In 
 which country would you consider it to be the greater? How would the 
 ratio in this country a century ago compare with the present ratio? 
 
 11. Can a national loan add to the capital of a country? 
 
 12. "If there are human beings capable of work, and food to feed them, 
 they may always be employed in producing something." Can they neces- 
 sarily produce the equivalent of the food they consume? If not necessarily, 
 under what conditions can they? Take, as a starting-point, the state of 
 things if the fixed capital of a country were all destroyed, but the suste- 
 nance all preserved. 
 
 13. Is there any inherent necessity that wealth should be consumed in 
 order to perform the functions of capital — e.g., if a machine could be made 
 which would run forever without wear, would it lack any essential prop- 
 erty of capital? 
 
 14. In 1871 a large part of the city of Chicago was destroyed by fire. 
 Could the people of the city have rebuilt it without outside help? If not, 
 point out the nature of the help rendered from outside. 
 
 15. Point out the influence of steam-transportation upon the ratio of the 
 urban to the rural population. 
 
 16. How does the modern system of production by large organizations 
 operate upon the shiftless class who will never stick to a regular line of 
 work? Show why, when this class really wants to work, it is harder to 
 get it than it would be in a primitive community. 
 
 17. Do fidelity and reliability on the part of the common laborer be- 
 come more or less necessary with the progress of society? 
 
 18. "What reasons can you give for considering that, other conditions 
 being equal, that country is best off in which the ratio of the laboring units 
 to the whole population is the least? Granting the relation, which term is 
 cause and which effect? That is, is the country well off in consequence of 
 the small number of laboring units, or is this number small because of the 
 prosperity? 
 
 19. To what extent is a contractor engaged in building houses a laborer, 
 and to what extend a capitalist? What form does his capital take? Is it 
 necessary that he should have any capital at all, and if so, why? 
 
 20. Enumerate so far as you are able the various classes of men who re- 
 ceive wages in the widest economic sense. If you begin with those highest 
 in rank, who would come first? 
 
144 DESCRIPTION OF THE SOCIAL ORGANISM. 
 
 21. Enumerate, so far as you are able, those classes of persons working 
 for hire whom you would put into Walker's third class, and those whom 
 you would put into the fourth class. 
 
 22. Can you see any difficulties in the way of abolishing all wages by 
 time and paying laborers by the piece? If so, enumerate them. 
 
 23. If the organization of labor described in § 36 were carried to the 
 highest degree, describe the result so far as you are able. 
 
 24. Can you explain why the co operative system, under which the opera- 
 tives dispense with master-workmen and managers to run the factory, and 
 make the shoes themselves, and thus get the whole price, has not been more 
 successful? 
 
 25. Define what portion of the price paid for a coat goes to compensate 
 the friction of exchange. 
 
 26. Explain as well as you can in what manner the checks upon the 
 increase of population will act when the population begins to encroach 
 upon the means of subsistence. 
 
 27. What is the effect of encroachment on the means of subsistence 
 upon the efficiency of labor (§ 41)? 
 
 28. Does the proportion of the population engaged in intellectual pur- 
 suits tend to increase or diminish with the increase of wealth? 
 
 29. How do you reconcile the rapid growth of population in civilized 
 countries during the present century with the Malthusian theory? 
 
 30. Is there any method of calculation by which we can approximate to 
 the total population which the earth can sustain? If so, state the method, 
 and show what data are necessary to apply it. 
 
 31. Has cheap transportation of passengers and goods across the ocean 
 tended to retard or to stimulate emigration? 
 
II. 62.] OF MONET. 145 
 
 Division C— The Mechanism of Exchange. 
 
 CHAPTER XI. 
 
 OF MONEY. 
 
 62. The necessity of exchange arises from the division of 
 labor. If there were no such division, then every man would 
 make all things necessary for human wants, and hence might 
 supply all his own wants. He would then not need to exchange 
 with other persons. But, in the actual state of society, each 
 producer generally makes a large quantity of some one com- 
 modity, and in order to supply his wants he must exchange this 
 commodity for a great number of other commodities. 
 
 We have already defined two possible systems on which this 
 exchange might be effected, the one barter, the other sale. By 
 the method of barter the exchange of one quantity for another 
 would be made by a mutual transfer of the ownership of the 
 commodities exchanged. We have shown how impossible such 
 a system would be in civilized society, and how by the intro- 
 duction of a common medium of exchange, called money, the 
 difficulties in the way of barter are avoided. 
 
 But. to understand correctly the theory of exchange it must 
 be remembered that its ultimate result is, after all, barter, in 
 that commodities are ultimately exchanged for commodities. 
 To show this, let us suppose the owner of a pair of shoes to sell 
 them, and with the money to buy a barrel of flour. In doing 
 this he has made two exchanges, selling the shoes for the money 
 and buying the flour with the money. But so far as he is con- 
 cerned, all he has done and all he wanted to do is to exchange 
 his shoes for the flour. The money was only an intermediate 
 
 10 
 
146 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 62. 
 
 ao-ent which enabled him to effect this exchange. This is why 
 money is called the medium of exchange. 
 
 The function of money in leading to what is equivalent to 
 barter, and the nature of the exchanges which are actually 
 made in the social organism, can be most clearly apprehended 
 by referring to the communistic view of the operations of the 
 organism which has been set forth in Chapter IX. 
 
 We there introduced the conception of each producer bring- 
 in <r Lis product to a central point, and depositing it in a com- 
 mon stock for the benefit of other men. In return for this he 
 is permitted to take from the common stock such equivalent 
 of the products of other men as he desires. We have shown 
 how difficult and complex would be the problem of deciding 
 how much of any commodity he should be allowed to take from 
 the common stock in exchange for what he brought into it. 
 By the use of money this requirement is fulfilled in a wonder- 
 ful manner, and the most complex problem which could be 
 presented to the central authority is solved at once without 
 serious trouble to anybody. The benefit conferred by bringing 
 wealth in and the evil caused by withdrawing it are measured 
 by the money received and paid. For example, considering 
 a shoemaker in his relations to society at large, that is, to 
 all other individuals of the community, we see that when he 
 sells a pair of shoes he puts them into the common stock for 
 the benefit of other people. The measure of this benefit was 
 the money that he received for them, and the possession of 
 this money was his certificate that he had rendered the benefit. 
 When he bought flour with the money he surrendered this 
 certificate and took a barrel of flour from the common stock. 
 His right to draw from the common stock on account of his 
 shoes then terminated. In consideration of giving other people 
 a pair of shoes other people gave him a barrel of flour. 
 
 Our next questions will be what commodities can be used 
 as money; and what requirements these commodities must ful- 
 fil in order to perform the functions of money in the most ad- 
 vantageous manner. 
 
II. 63.] OF MONET. 147 
 
 63. Requirements of the Medium of Exchange. From 
 what lias already been said we see that all civilized communi- 
 ties are in need of some common commodity called money for 
 which all other commodities shall be exchanged. We also call 
 to mind that exchange consists in a mutual transfer of owner- 
 ship, the ownership of the goods passing from the seller to the 
 buyer, and that of the money in the reverse direction. We have 
 now to examine what requirements money should fulfil. 
 
 First Requirement. It must have value. To see the rea- 
 son for this requirement, let us take the case of a man who 
 agrees to work one month for the sum of $30. If his employer 
 could agree beforehand that this $30 should purchase for him 
 a certain amount of clothing, flour, and other necessaries, it 
 would make little difference to him whether it had or had not 
 value. But no such guarantee is possible. The employe can 
 buy with his money only as much as it has the power to com- 
 mand from the dealer, the shoemaker, the grocer, and the other 
 persons who are to supply his needs. Moreover, the commodi- 
 ties he can thus buy measure what his money is really worth 
 to him. Let us suppose that he wants to have a pair of shoes 
 made. It is very clear that if the shoemaker can get money 
 without going to the trouble of making shoes, he is not going 
 to make shoes for the laborer for the sake of the money. The 
 same is true of every one who supplies the laborer's wants. 
 Hence it is clear, if the latter is not to be deceived, that the 
 money which he receives must be something which the grocer, 
 the shoemaker, and the tailor cannot get except by working 
 for it as he himself does. It must also be desired by them, 
 because of course they will not work for what they do not 
 desire. 
 
 Thus three necessary qualities of money are (1) that it must 
 be desirable, (2) limited in supply, and (3) incapable of being 
 commanded except by labor. These elements, as we shall 
 hereafter see, determine value. The somewhat vague yet ex- 
 cellent term purchasing power is applied to the power pos- 
 sessed by money to command commodities. We may then say 
 
148 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 64. 
 
 that the purchasing power of money is the measure of its value 
 to the person who possesses it. 
 
 Secondly. The value of money must he definite and per- 
 manent. If the commodity used as money is something of 
 which either the desirability or the quantity at hand fluctuates 
 widely from week to week, then the seller, laborer, or other 
 receiver of money can never know beforehand what quantity 
 of the necessaries of life the money which he is getting will 
 purchase for him. It may possibly be weeks, months, or years 
 before he will want to expend the money for the necessaries of 
 life ; but he wants a reasonable assurance that when he does 
 expend it it will buy as much as it would when he gets it. This 
 constancy of purchasing power implies constancy of value, and 
 therefore a general constancy in the conditions of supply. 
 
 Thirdly. Money must possess durability. If it is liable 
 to wear out or deteriorate as it passes from hand to hand, it 
 speedily disappears and no person could with safety keep it for 
 a long time. To avoid this difficulty it must be something 
 which is as durable as possible. 
 
 Fourthly. It must admit of convenient subdivision. Of 
 the vast multitude of commodities or services necessary to sup- 
 ply human wants, some have to be bought in small and others 
 in large quantities. Thus payments of various amounts have 
 to be made, which cannot be done unless the money by which 
 they are made can be divided up to any extent. 
 
 Fifthly. It must he something which can readily he trans- 
 ported from place to place, and thus he at convenient command 
 of the owner. This needs neither illustration nor proof. 
 
 64. The commodities which most nearly fulfil all the pre- 
 ceding conditions are the precious metals, gold and silver. 
 These metals have therefore long formed the universal medium 
 of exchange among civilized nations, with some exceptions 
 which will be considered from time to time. Yet it cannot be 
 claimed that they absolutely fulfil any of the above require- 
 ments. All we can say is that they come nearer to the fulfil- 
 
II. 65.] OF MONEY. 149 
 
 merit than any other commodities with which we are ac- 
 quainted. 
 
 Other commodities have been temporarily used by people 
 who could not readily command the precious metals. Among 
 tribes engaged principally in the chase, furs and skins have 
 been employed as money. These formed the medium of ex- 
 change between the Hudson Bay Company and the Indians. 
 Among pastoral tribes sheep and cattle have frequently been 
 used. In the early history of the American colonists wampum 
 was the medium of exchange with the Indian tribes. When 
 the metals have come into use, it is not always gold or silver 
 that is first employed. Platinum coins were once in use in 
 Eussia. The smallest coins of Europe are made of copper, 
 although it is gradually giving way to the alloys of nickel, out 
 of which our small coins are made. We might not inappro- 
 priately include in this class an irregular kind of money, the 
 paper notes sometimes issued by governments in dire distress. 
 But although these notes are intended for use as money, they 
 generally purport to be promises to pay money, and not the 
 money itself. It will hereafter be shown how and under what 
 conditions such promises can take the place and fulfil the func- 
 tions of money. 
 
 65. Methods in which the Precious Metals are utilized 
 as Money. When one sells a commodity, it is essential that 
 he shall know how much money he is getting in exchange; 
 hence arises the necessity of measuring money. In the early 
 stages of society the money is measured by its weight', men 
 sell for so many pounds or ounces of gold or silver. This seems 
 to have been the case in ancient times. We read of the pieces 
 of silver with which Abraham bought land. So, after the gold 
 discoveries in California, payments were made in mining com- 
 munities by weighing gold-dust. But the weighing of all 
 money paid is too troublesome in ordinary transactions, to say 
 nothing of the difficulty of insuring the fineness or purity of 
 the metal. Hence, from an early age of the world's history, 
 
150 DESCRIPTION OF THE SOCIAL ORG AUTISM. [11.66. 
 
 governments have adopted the policy of coining the precious 
 metals into pieces of definite weight. Such pieces of metal 
 are now universally used in domestic transactions. Thus we 
 have certain weights of gold in England, France, and America 
 known respectively as pounds, francs, and dollars. 
 
 The way in which money gets into circulation is ordinarily 
 this : When any possessor of gold or silver desires to use it in 
 purchasing commodities he sends it to a mint. The mint is a 
 kind of factory established by the government for purifying 
 the precious metals and making them into coins. At the mint 
 the government makes the gold and silver bullion brought to 
 it into coins, and returns it to the owner in the form of money. 
 Some governments coin all the bullion brought to them free 
 of charge, while others demand a small percentage for the ex- 
 pense of the operation. As a general rule, however, the charge 
 is so small as not to be a very important item in the value of 
 the money. 
 
 66. The reason for governments undertaking the coinage 
 of money is that, if the coinage is honestly executed, it affords 
 the best assurance that the coin is what it professes to be. If 
 individuals or corporations were allowed to issue money, the 
 question would be constantly arising whether any particular 
 coin did or did not contain the requisite amount of metal. But 
 when a government coins, the weight and quality of the metal 
 in the coin is fixed by law. Each nation determines for itself 
 what amount of metal shall be contained in a given coin. If 
 we compare the moneys of England, France, and America, we 
 find the fundamental units to be entirely different. The Eng- 
 lish pound contains nearly as much gold as five American 
 dollars, and one American dollar contains more than five 
 francs. But it is essential that whatever coin is issued under 
 a given name shall be as invariable as possible from generation 
 to generation. Otherwise we have changes in the meaning of 
 the word " pound," " dollar," or " franc," which would be in- 
 tolerable. 
 
II. 67.] OF MONET. 151 
 
 When a government undertakes to coin money, its first step is 
 to prescribe how much gold or silver shall be put into a coin, and 
 to give that coin a name. The name should then indicate the 
 quantity of the metal of which the coin consists. Some econo- 
 mists have objected to giving special names to the coins, be- 
 cause these names impress the ignorant public with the idea 
 that some element of value resides in the name itself. For ex- 
 ample, all ignorant people who do not possess unusually good 
 sense think that a dollar has some peculiar element of value 
 which does not reside in twenty-six grains of ordinary gold. 
 Hence it might have been better to designate coins simply 
 by their weight, as so many grains or grams of gold or silver. 
 But it is questionable whether the superstition would have 
 been done away with by any system of naming. The English 
 pound was not originally the name of the coin, but meant a 
 pound of silver. But this did not prevent more than one king 
 from making a coin which contained less than a pound of sil- 
 ver and calling it a pound. At the present time no one ever 
 thinks of any relation between the pound sterling and the 
 pound weight. 
 
 67. Legal-tender Quality of Money. As a general rule 
 the great body of the coined money of each nation is a legal 
 tender for all payments made under its laws. It is very essen- 
 tial to clearly understand how the necessity of making money 
 legal tender arises. It arises because men must have some 
 common understanding as to what shall be meant when one 
 person agrees to pay another a specified sum of money. We 
 can readily imagine that if there were no such understanding, 
 disputes might arise as to what sort of dollars or cents or cur- 
 rency a party had agreed to pay. Such disputes would be 
 especially liable to arise when, as is always the case, substitutes 
 for the precious metals are used as money. They are avoided 
 by a legal provision that when a person agrees to pay a sum of 
 money within the jurisdiction of any country, the agreement 
 shall be construed to refer to the coin issued from the estab- 
 
152 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 67. 
 
 lislied mints of that country. Money with which this right is 
 associated is called a legal tender. 
 
 The legal tender of a given kind of coin may be limited or 
 unlimited. It is limited when the legal understanding is 
 that payments can be made by it only to a certain amount ; 
 unlimited when there is no such legal understanding. Some 
 of our small silver coins, for example, are a legal tender to the 
 amount of $1, and others to the amount of $5 or $10. The 
 largest and most important coins are a legal tender to any 
 amount. The effect of the limit is this: No creditor is com- 
 pelled to accept payment and give the debtor a release if the 
 coin is not a legal tender to the amount of the debt, but may 
 require payment in coin which is a tender to the full amount. 
 
 The power of making particular kinds of money a legal 
 tender is so easily abused that its nature and effect should be 
 well understood. "When properly used it has no other effect 
 than that of establishing the meaning of words. As it is nec- 
 essary that there should be a common understanding as to what 
 shall be meant by " one foot," "one acre," or "one gallon," so 
 a similar understanding is necessary as to the meaning of "one 
 dollar." As the law prescribes that "one pound" shall mean 
 a particular weight, so it prescribes that the word " one dollar " 
 shall mean a certain coin issued from some United States mint. 
 During the Civil War, however, Congress went farther and 
 enacted that certain paper notes issued by the government 
 should be a legal tender. This was changing the meaning of 
 words, because the word dollar, which before meant a piece of 
 gold, now meant a piece of paper. Had this change applied 
 only to agreements made after the law was enacted, it would 
 not have been morally wrong. But some courts decided that 
 it should apply to all previous contracts, in one case even to an 
 expressed contract for the payment of gold coin. This decision 
 was as wrong as if Congress had changed the size of the bushel 
 measure and the courts had decided that old contracts for the 
 delivery of wheat must be made in the new measure, and not 
 in that understood by the parties when they made the contract. 
 
II. 68.] OF MONET. 153 
 
 68. The Monometallic and Bimetallic Systems. In some 
 cases only one of the precious metals is made into coins of un- 
 limited tender. Thus in England and Germany all large pay- 
 ments can be required by the creditor to be made in gold coin. 
 Among oriental nations, especially India, China, and Japan, 
 silver has very generally been the only unlimited legal money. 
 
 The system of making but one of the precious metals an 
 unlimited tender is called monometallism. 
 
 The system of making both gold and silver coins an unlim- 
 ited tender under the same jurisdiction is called bimetallism. 
 
 Under the bimetallic system the debtor has the right to make 
 his payment at choice in either of the two precious metals, no 
 matter how great the amount may be. This system prevails 
 with some modification among most European nations except 
 England and Germany, but with certain limitations which will 
 hereafter be discussed. In the United States sometimes one 
 and sometimes the other system has prevailed. At the present 
 time we have a modified form of bimetallism, which will be 
 described subsequently. 
 
 The system of pure, or unlimited, bimetallism is as follows : 
 The government first assumes that the values of equal weights 
 of the two precious metals have a certain fixed ratio to each 
 other. During the first seventy years of the present century 
 the value of an ounce of gold in the markets of the world was 
 generally nearly equal to that of 15^ ounces of silver. Only 
 on rare occasions did it fall below 15 or rise above 16. Hence 
 France chose 15£ as her ratio. Since 1834 the ratio adopted 
 by the United States has been 16. The number thus estab- 
 lished is called the monetary ratio. 
 
 It must be understood that this does not mean the actual 
 ratio in the markets of the world, but is an arbitrary number, 
 chosen by the legislative authorities so as to be as near as pos- 
 sible to what they supposed would be the market ratio. 
 
 Having fixed the ratio, and prescribed the weight of pure 
 metal in each coin in accordance with it, the mint coins all the 
 bullion of either metal brought to it into coins of unlimited 
 
154 DESCRIPTION OF TEE SOCIAL ORGANISM. [II. 69. 
 
 legal tender. At the present time tlie United States gold dol- 
 lar contains 23.22 grains of pure gold, while the silver one con- 
 tains 371.25 grains of pure silver. The coins, however, also 
 contain ten per cent of alloy, so that the actual weights are : 
 
 The gold dollar 25.8 grains. 
 
 The silver dollar 412.5 grains. 
 
 The three essential features of unlimited bimetallism are : 
 
 I. That the law recognizes no difference between the values 
 of its gold and silver coins. 
 
 II. The mint must coin into dollars all of each kind of 
 metal which is brought to it. 
 
 III. Each metal being an unlimited tender, a debtor may 
 pay his debt in the one he chooses. 
 
 Difficulties have been found in making a scheme involving 
 all these features work satisfactorily. Hence they have been 
 modified in various ways. 
 
 69. Limited J3imetattis?n. Between the years 1873 and 
 1878 the ratio of the market value of gold to that of silver took 
 an extraordinary rise, and has for several years past not differed 
 much on the average from 18. The result has been to throw 
 the monetary systems of those nations practising bimetallism 
 into confusion. The system temporarily adopted by these 
 nations is that of restricting the coinage of silver, while plac- 
 ing no limit upon that of gold. This restriction applies only 
 to the quantity coined, and not to the legal-tender quality of 
 the silver coins. That is, a debtor can pay a debt of any 
 amount in silver coins if he can find them, but the mint will 
 not coin them for him. At present the mints of the United 
 States are required to coin not less than two millions nor more 
 than four millions of silver dollars monthly. But, for reasons 
 which cannot be well understood at present, the government 
 does not coin these dollars for the owners of the bullion, but 
 buys the bullion, coins it on its own account, and pays these 
 coins out to the public creditors. 
 
II. 70.] OF MONEY. 155 
 
 At the time of sending this book to press the whole ques- 
 tion of coinage throughout the world is in an uncertain and 
 confused state, owing principally to the extraordinary change 
 in the relative market values of gold and silver which has 
 just been described, and owing also to the increasing amount 
 of money needed to transact the great volume of business 
 to which modern production has given rise. The desirable- 
 ness of an international system of coinage is widely recog- 
 nized, but the people of no one nation are fully agreed as to 
 what is the best system even for themselves, and of course an 
 international arrangement involves yet greater difficulties. 
 
 70. Subsidiary Coinage. The system of monometallism 
 does not imply that gold coin alone shall be used, but only that 
 no other coin shall be an unlimited tender. Small payments 
 must always be made in coins of other substances, because gold 
 coins of small value would be so minute as to be liable to loss. 
 Hence all governments issue coins of small value, which are 
 made a limited legal tender, and are called subsidiary coins. 
 The metals most used in these subsidiary coins are silver, 
 nickel, and copper. To prevent them from being melted 
 down as bullion, they contain less than their nominal value of 
 metal. Thus our silver quarter dollar weighs only 96 grains 
 instead of 103 grains, which last would be one fourth the 
 weight of the silver dollar. 
 
 If the coinage of this subsidiary money were free, like that 
 of gold, every one who got his silver coined into quarter dol- 
 lars would receive in coined money a greater nominal value 
 than that of the bullion from which the coin was made. 
 Hence the practice is similar to that adopted in the case of our 
 silver dollar: the government buys the silver bullion for its 
 small coins, makes them into coins of the prescribed denomi- 
 nations, and offers these coins in exchange for those of unlim- 
 ited legal tender, at their face values. The result is that the 
 public take what are wanted for small payments, and no more. 
 
156 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 71. 
 
 71. Volume of the Currency. By currency is ordinarily 
 meant money or some substitute for money in actual circula- 
 tion from hand to hand. One of the most important mathe- 
 matical conceptions which enter into economics is that of the 
 total volume of the currency. We may reach it in various 
 ways which are nearly equivalent to each other. Assuming, as 
 we may, that the quantity of coin more than fifty years old 
 actually in circulation is insignificant in amount, we may add 
 up the value of all the coins issued from the United States mint 
 during the last half-century. We shall thus have a sum total 
 from which all the coined money now in circulation must have 
 come. If we subtract from this sum total all the coin that has 
 been melted down, all that is now in foreign countries, and all 
 that is lying idle in the vaults of the banks or of the Treasury, 
 we shall have a balance showing the coin in circulation. This 
 balance is the volume of the currency so far as coin is conr 
 cerned. 
 
 But we may commence at the other end of the line by con- 
 sidering the money which is in every man's pocket. If we 
 could at midnight on any day demand and obtain from every 
 individual and corporation in the country a statement of the 
 amount of coin money in actual possession of such person, we 
 should have a definite sum total. It is evident that this sum 
 total would change very slowly from day to day, and even 
 from year to year. The only effect of payments would be that 
 one man would have a great deal more and another man a 
 great deal less on different days. Only when money was 
 melted down, sent out of the country, or stored away in vaults, 
 or as new coin was issued, would there be changes in the sum 
 total. 
 
II. 72.] BANES AND CREDIT-MONEY. 157 
 
 CHAPTER XII. 
 
 BANKS AND CKEDIT-HONEY. 
 
 72. We suppose the reader to have clearly iri mind what 
 has been said in §§ 4-6 on the relation of wealth to its owner. 
 When we study the operations of business we see that although 
 in most cases the wealth one possesses is a definite existing 
 object, such as a house, a table, or a field of wheat, yet in 
 other cases the wealth is not definite. For example, I agree 
 with a cabinet-maker that he shall make me a table and de- 
 liver it next week. I may then consider myself in a certain 
 sense the owner of that table, although it has no existence and 
 may possibly never come into existence. Again, in the sale 
 of commodities in the market, it rarely happens that pay- 
 ment is made at the time of the sale. In this case what the 
 seller receives for his commodity is not money, but the right 
 to demand money at some future time. But he considers him- 
 self the owner of that much money as completely as if he had 
 it in his safe, and, for economic purposes, we may consider this 
 imaginary money, which he is to get at some future time, as a 
 part of his wealth. Legally, however, the creditor is con- 
 sidered, not as the owner of wealth, but as the possessor of a 
 right, namely, the right to demand from his debtor the pay- 
 ment of the money, and to enforce this payment by legal 
 measures. This right to require the payment of money from 
 another person is called credit. 
 
 To prevent confusion we must carefully distinguish this 
 meaning of the word credit from the analogous and common 
 meaning of good business standing. When we say, " That 
 man's credit is good," we use the word in a different sense 
 from the economic one. In the latter sense a man's credits are 
 
158 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 73. 
 
 simply the sum total of the moneys which others owe to him, 
 and have nothing to do with his character or standing. 
 
 Transfer of Credit. A creditor may transfer his rights to 
 other legal persons on the same principles by which he trans- 
 fers the ownership of wealth. The transferee then- takes his 
 place as the possessor of the right in the way pointed out in 
 II. 9. The methods and forms of transfer vary witli the nat- 
 ure of the credit. Commonly, any piece of writing clearly 
 indicating the transfer of the right, and duly signed by the 
 party transferring, is sufficient. 
 
 73. Sow Banks Arise. In a primitive state of society 
 every payment of money is made by the payer actually deliv- 
 ering the money into the hands of the payee. In modern 
 mercantile operations this transaction would involve a heavy 
 tax upon the resources of the community Large sums in pos- 
 session of the owner would be in danger of being lost, stolen, 
 or burnt. Serious danger of loss and theft would be incurred 
 in the transportation of money from the office of the payer to 
 that of the payee. Doubts and disputes about the amount 
 actually paid, or the amounts in the possession of individuals, 
 would frequently arise. 
 
 A little consideration will show us that in most payments 
 the delivery of the money is not necessary. Since only the 
 ownership of the money is changed by the payment, and 
 since, as a general rule, the payee only wants the ownership 
 in order that he may transfer it to some other person, it fol- 
 lows that all the requirements of exchange will be fulfilled if 
 the money is stored where he can get possession of it in case he 
 wants it, provided a systejm of transferring the ownership can 
 be devised. Thus, all the inhabitants in a town may keep 
 their money deposited in some one place, and make payments 
 by transfers of ownership in such form as might be mutually 
 agreed upon. Such is the basis of the banking system now 
 prevalent in all civilized communities. 
 
 A bank may be defined as primarily a place in which 
 
II. 74.] BANKS AND CREDIT-MONET. 159 
 
 money is deposited for safe-keeping. It has, indeed, more com- 
 plicated functions, but they will be best understood by start- 
 ing from this first and most simple function of all. Let us 
 then begin by considering the case of a town the inhabitants 
 of which deposit all their money for safe-keeping in a single 
 bank, and make all payments among themselves by transferring 
 the ownership of the money. Such an institution is called a 
 bank of deposit, and the moneys in it are called deposits. It 
 is obvious that the total amount of deposits at any time 
 would be the sum total of all the moneys owned by each in- 
 dividual of the community at that time. It would therefore 
 represent the volume of the currency so far as the town was 
 concerned (§ VI). 
 
 14:. Bank Deposits and Cheques. From what has been 
 said of the dual character of financial transactions and obliga- 
 tions, it will be seen that the deposits appear to the managers 
 of the bank under two aspects. 
 
 I. As liabilities or obligations of the bank. By this is 
 meant the obligation of the bank to pay to each or any de- 
 positor the amount of his deposit whenever required. Of 
 course the sum total of liabilities is in this case equal to the 
 sum total of the deposits. 
 
 II. As resources of the bank. The resources would in this 
 case be the coin in possession of the bank, and would con- 
 stitute the fund which enables the bank to satisfy its liabili- 
 ties. So long as the bank engaged in no other transactions than 
 those which we have described, the resources and liabilities 
 would remain equal. Of course there is no physical necessity 
 for this equality, since the coin might be stolen without less- 
 ening the liability of the bank. But the balance can always 
 be produced by suitably accounting for any deficiency, so long 
 as the accounts of the bank are kept in order. 
 
 A statement of the condition of the bank at the close of 
 business on any one day would then be in a form like the fol- 
 lowing : 
 
160 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 76. 
 
 Resources. Liabilities. 
 
 Cash in vaults (coin) $25,000 John B. Smith, Creditor $500 
 
 William Jones 1,250 
 
 Samuel Rhett 850 
 
 Etc., etc., etc. 
 
 Total liabilities (deposits). .$25,000 
 
 75. Cheques. The ownership of money in a bank is trans- 
 ferred by an instrument in writing called a cheque. The 
 drawer of the cheque is an owner of money deposited who 
 wishes to transfer that ownership to another person. The 
 drawee is the person to whom the transfer is made. The 
 usual form of a cheque is the following : 
 
 New York, June 30, 1685. 
 Exchange National Bank, 
 Pay to Samuel Rhett [drawee] or order 
 ($910) Nine hundred and ten dollars. 
 
 William Jones [drawer]. 
 
 By this instrument $910 of the right of "William Jones to 
 his deposit in the bank is transferred to Samuel Rhett, whose 
 right is increased by the same amount. When Rhett presents 
 the cheque at the bank his credit is increased, and Jones's is 
 diminished by this amount. Thus the cheque appears in its 
 dual aspect as an increase of one man's credit and a diminution 
 of another's, which cancel each other, leaving the sum total at 
 $25,000 as before. 
 
 *76. Transfer of Cheques. By long-established mercantile 
 usage the drawee may transfer the right given him by the 
 cheque to any other person, this person to another, and so on 
 indefinitely, by suitable indorsements on the back of the 
 cheque. This right is expressed by the words " or order," which 
 mean his order or that of any party whom he may designate. 
 Thus the ownership may pass from hand to hand like that of 
 money 
 
II. 78.] BANKS AND CREDIT- MO NET. 161 
 
 77. Individual Accounts. If to the total deposits of any 
 customer last night be added all the cheques in his favor which 
 he has deposited to-day, and from the sum be subtracted the 
 cheques he has drawn to-day, the remainder will be his deposit 
 to-night ; that is, it will express his share of the money held 
 by the bank. In mercantile usage the subtractive quantity is 
 transferred to the other side of the equation, which thus be- 
 comes credit yesterday plus cheques since deposited equals 
 cheques drawn plus credit to-night. Thus the amount may be 
 balanced every day. 
 
 Variations of Sum Total of Deposits. In the case so 
 far supposed, so long as no party in town made payments 
 to parties outside, or received payments from parties outside, 
 the total amount of the deposits would remain unchanged. 
 The only varying quantities would be the individual amounts 
 owned by each depositor ; and the additions would in all cases 
 balance the diminutions. But when a depositor had to make a 
 payment abroad, he would have to withdraw his money for that 
 purpose. Thus the sum total would be diminished by all pay- 
 ments made by the townspeople to persons outside. When 
 a depositor receives money from parties outside he deposits it in 
 the bank, and the sum total is then increased by the amount so 
 received. Thus the sum total would fluctuate according as the 
 payments in one direction or the other were in excess, and the 
 state of the bank from day to day would be the index of the 
 balance of trade of the town with the world outside. 
 
 78. Capital of the Bank. That perfect solvency which 
 has just been described would depend on the bank's meeting 
 with no losses. Since all mercantile transactions are now 
 and then liable to loss, it is necessary that the bank, in 
 order perfectly to secure the depositors whose money is loaned, 
 should have a guarantee capital. This capital is a fund sub- 
 scribed or paid in by the stockholders of the bank, who thus 
 become the owners of its rights. The capital thus paid in ap- 
 pears again on both sides of the statements of the bank. 
 
 ii 
 
162 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 79. 
 
 As a liability it expresses the sum which, in case the bank 
 stopped business, it would have to return to its individual 
 stockholders. As a resource it is expressed by this additional 
 amount of cash in the vaults of the bank. If a capital of 
 $15,000 were paid in to our supposed bank, its statement would 
 then appear in the following form : 
 
 Resources. Liabilities. 
 
 Cash in vault $40,000 Due depositors $25,000 
 
 Capital stock 15,000 
 
 $40,000 
 
 This statement means simply that out of $40,000 cash in 
 the vaults, $25,000 belongs to depositors, and $15,000 to the 
 stockholders. 
 
 79. Discount Functions of the Bank. The cost of man- 
 aging such a bank as we have described would have to be paid 
 by its customers, since we have assigned it no business by 
 which it could make a profit. Having in its possession all 
 the coin owned by the town, the bank would find a certain 
 sum lying idle in its vaults from year to year and from gener- 
 ation to generation. For although, as we have just shown, 
 the sum of the deposits would fluctuate according to the state 
 of trade with the outside community, yet in practice these 
 fluctuations would be slight. Although the individual may and 
 often does pay out all the money he has got, the community 
 at large never does. If the average amounts of deposits were, 
 as we have supposed, $25,000, it might be found that they oc- 
 casionally went as high as $30,000, and might perhaps from 
 time to time fall as low as $20,000. Of course no numerical 
 rule for the limits can be set in practice. But the actual fluc- 
 tuations are found to be of this order of magnitude. Thus the 
 sum idle forever in the vaults of the bank might be fixed at 
 $20,000 plus the capital, making $35,000 in all. Now the bank 
 could loan this money out at interest without any danger of its 
 being unable to fulfil its engagements ; and this for two reasons : 
 
II. 79.] BANES AND CREDIT-MONET. 163 
 
 in the first place, as business goes, it would not be called upon 
 by the depositors of the money loaned to pay it ; and in the 
 second place, if it ever should be called upon, it could get the 
 money by demanding payment from the borrowers. Hence 
 so long as the loans were well secured the solvency of the bank 
 would be unimpaired. 
 
 The result of this policy would be, that instead of the insti- 
 tution being a custodian of money, it would become a horrower, 
 bound to repay the money on demand, but at liberty to loan it 
 out as long as the depositor does not demand it. The deposit 
 then becomes a credit simply, and the depositor, instead of 
 being the owner of money ', is the possessor of a right, namely, 
 the right to require money from the bank and enforce its 
 payment. 
 
 Now, b}' the Irypothesis just made, suppose that there is in 
 the vaults of the bank a cash sum of $20,000, which lies there 
 unused year after year and generation after generation, and an 
 additional sum of $15,000 paid in by the stockholders. This 
 makes a sum of $35,000 which the bank can loan out at inter- 
 est without any danger of being unable to meet its obliga- 
 tions on demand. Then all residents of the town who want to 
 borrow money can go to the bank and secure loans until the 
 whole $35,000 is thus borrowed. For each sum borrowed the 
 borrower gives his promissory note, which in banking practice 
 is usually payable in one, two, or three months. 
 
 The very same reason which originally prompted the de- 
 positors to place their money in the bank will now prompt the 
 borrowers to deposit their loans, and to make such transfers as 
 they desire by cheques upon the bank. When these loans are 
 all effected, and the deposits made, the state of the bank is as 
 follows : 
 
 The amount of cash in the vaults remains the same as before, 
 $40,000, since all borrowed has been re-deposited. 
 
 The amount due depositors is increased by $40,000, which 
 they have borrowed and immediately deposited. 
 
164 DESCRIPTION OF TEE SOCIAL ORGANISM. [II. 80. 
 
 This amount is balanced by $40,000 in promissory notes 
 from the borrowers, payable in one, two, or three months. 
 
 The promissory notes represent moneys collectible by the 
 bank and applicable to the liquidation of its liabilities. Hence 
 the statement of the bank will now be as follows : 
 
 Resources. Liabilities. 
 
 Cash in vaults $40,000 Capital stock $15,000 
 
 Prom, notes (discounts) 35,000 Due depositors 60,000 
 
 Total resources $75,000 Total liabilities $75,000 
 
 This means that of the cash on hand and debts due, amount- 
 ing in all to $75,000, $15,000 belongs to the stockholders and 
 ),000 is due depositors. 
 
 80. We now have a state of things which may almost seem 
 paradoxical, and which is a frequent source of confusion to those 
 not familiar with business. The inhabitants of the town con- 
 sider that they have altogether $60,000 in money in bank, and 
 yet there exists only $40,000 in money all told. They are 
 therefore, in a certain sense, the possessors of money which has 
 no real existence. There is, however, nothing more confusing 
 in this than that a man should be the owner of a table which 
 is not yet made, but which the maker has agreed to finish and 
 deliver next week, or that he should be the owner of a house 
 which a contractor has agreed to build. In fact he is not the 
 owner of money, but the possessor of credit, which, as already 
 explained, is merely a debt from the bank. But this credit 
 serves all the purposes of money, and may be used in making 
 exchanges, exactly as if it were gold and silver. 
 
 Since each depositor counts himself the possessor of so much 
 money in the bank, it follows that the total volume of the cur- 
 rency is now $60,000. We therefore reach the conclusion that 
 the volume of currency in circulation may include not only 
 material money, but credit, expressed by nothing more than 
 figures written in the books of a bank. In other words, when a 
 customer goes to a bank, gives his promissory note for $1000, 
 
II. 81.] BANKS AND CREDIT-MONET. 165 
 
 and has the figures $1000 written on the credit side of his ac- 
 count, thereby giving him the right to draw cheques for that 
 amount, an addition of $1000 is made to the total volume of 
 the effective currency. By effective currency we mean that 
 which can be used in payment. 
 
 Since all the money borrowed has been deposited, there still 
 remains the same amount in cash in the vaults of the bank. 
 But this amount will fluctuate yet more than before, owing to 
 the number of persons who may make or receive payments to 
 or from the rest of the world. Still it would probably be 
 found that the amount would never fall below $30,000. This 
 sum could again be loaned out to customers, and if they de- 
 posited it, it could be loaned again, and so on indefinitely. Thus 
 we cannot set any mathematical limit to the volume of the credit 
 currency which the bank may have in circulation through the 
 cash in its vaults. But with every increase in this volume 
 there would be an increase in the fluctuations arising from trade, 
 so that a limit of safety would be soon reached. The national 
 banking law of the United States sets the limit at 25 per cent 
 of the current liabilities, but of course the bank must seek to 
 keep its cash a little above that limit. In the case supposed, 
 when the bank had approached the safe limit to the amount of 
 its loans, its statement would be in this form : 
 
 Resources. Liabilities. 
 
 Cash in vaults $40,000 Capital stock $15,000 
 
 Prom, notes (discounts) 120,000 Due depositors 145,000 
 
 Total resources $160,000 Total liabilities $160,000 
 
 81. Bank Circulation. It often happens that the deposi- 
 tor or borrower desires to make payment without the formality 
 of drawing and signing a cheque. The bank may then, in 
 making him a loan, issue its own promissory note, payable on 
 demand. Thus arises the familiar hank-note. This transac- 
 tion will consist in the simple exchange of credit between the 
 individual and the bank. The individual gives the bank his 
 
166 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 82. 
 
 promissory note, payable with interest at some future time, and 
 in return receives from the bank its own promissory note, pay- 
 able on demand without interest. If now we suppose our 
 bank to issue notes in this way to the sum of $10,000, its 
 statement will be as follows : 
 
 Kesoukces. Liabilities. 
 
 Cash in vaults $40,000 Capital stock $15,000 
 
 Prom, notes (discounts) 130,000 Due depositors 145,000 
 
 Circulation 10,000 
 
 Total resources $170,000 Total liabilities $170,000 
 
 At this point we may notice. one of those singular mistakes 
 which frequently influence the views and actions of masses 
 of men, although in direct conflict with facts which would 
 be well known would men only attend to them. This error 
 is the belief that the main function of a bank is to issue cir- 
 culating notes. It may be questioned whether this function 
 should be considered a legitimate one of any bank, and as a 
 matter of fact the large majority of the banking firms of the 
 world do not issue such notes. Public or incorporated banks 
 generally, but not universally, issue them. We shall hereafter 
 see reason to believe that if no such thing as a bank-note for 
 general circulation had ever been thought of, the world would 
 not have been any worse off. 
 
 82. Ulterior Development of the Bank. The transactions 
 which we have described complete those which necessarily per- 
 tain to the business of conducting the bank. In practice, how- 
 ever, there is yet further development in various ways. In 
 the first place, instead of all the business men of the town 
 keeping their money in one bank, there are frequently a great 
 number of banks. The result is that when a payment is made 
 by cheque it will happen in a large majority of cases that the 
 payee does not himself keep an account in the bank on which 
 the cheque is drawn, but in some other bank. Then, instead 
 of sending himself to the bank to get his cheque cashed, he 
 
II. 82.] BANKS AND CREDIT-MONEY. 167 
 
 hand's it to his own bank, authorizing the latter to collect it by 
 indorsing his name on the back. The result is that in the 
 course of the day the various banks of the city will have a col- 
 lection of cheques drawn against each other. 
 
 Now if we take the sum total of all the cash in the banks 
 of the city, it will remain true (leaving out the exceptional 
 cases where parties withdraw cash to make payments) that the 
 sum total will vary only in consequence of payments to par- 
 ties outside the city. But when the cheques drawn upon each 
 other are presented, each bank is obliged to pay in cash all 
 drawn upon itself, and has the right to collect in cash all held 
 for payment by other banks. The cash in the vaults of any one 
 bank will then increase or diminish according as the cheques 
 deposited with it are in excess of or below those drawn upon 
 it. Still, as business ordinarily goes, it will frequently happen 
 that these amounts closely balance each other. 
 
 As business goes on, the accounts of the resources and liabil- 
 ities of the bank become more complex. The statement can 
 be balanced at any time by calculating the conditions if the 
 bank should at that moment wind up all its business and dis- 
 solve. Its resources would then consist of all the property 
 which it possessed and all the debts due to it, in whatever 
 shapes they might be. Ideally we conceive that this whole 
 sum is put into cash. The liabilities would then consist essen- 
 tially of the statement what would be done with this cash. 
 In the first place, the depositors and holders of notes would all 
 have to be paid off. Then other creditors would have to be 
 paid, the capital stock would have to be made good, and the 
 balance would be divisible pro rata among the stockholders as 
 accrued profits. It must also be remembered that, in the state- 
 ments published by the banks, the cash on hand and debts due 
 are divided up under a number of separate heads, instead of 
 being combined into one sum total. These little details are, 
 however, of slight economic importance, and all that is essen- 
 tial for the student is to understand the nature of the large 
 amounts which pertain to the conduct of the business. 
 
168 DESCRIPTION OF TIIE SOCIAL ORGANISM. [II. 83. 
 
 CHAPTER XIII. 
 
 ORGANIZATION OF BANKS IN DETAIL. 
 
 83. The system of banking, as described in the preceding 
 chapter, is subject to a weakness dealing with which is the 
 most intricate problem connected with the subject. The 
 source of weakness is this : the bank, in order to make any 
 profit, must always have upon its books credits payable on 
 demand (that is, deposits and circulating notes) to an amount 
 greater than it has the cash on hand to pay with. The result 
 is that if everybody having money in the bank should de- 
 mand immediate payment, the bank could not fulfil its obliga- 
 tions, and would be obliged to postpone payment and suspend 
 business. But this suspension would not imply any lack of 
 ability to make good its obligations in the course of time. 
 Excluding such abnormal cases as those arising from defalca- 
 tion, robbery, bad debts, etc., every bank has on hand not only 
 cash, but the promissory notes of its customers ; and these two 
 items, as already shown, must, in the normal case, equal or ex- 
 ceed the deposits and capital combined. A well-conducted 
 bank has generally a large reserve fund in addition to what 
 would make good its capital and deposits. 
 
 Let us see the consequences of a continued demand upon a 
 bank for the payment of its debts, called in common language 
 a " run." Suppose the run to be upon the bank whose condi- 
 tion is described in § 81. It has on deposit or in circulation 
 the sum of $155,000 ; that is to say, it has credit to this amount 
 circulating as money through the medium of cheques and 
 notes, and forming this amount of the currency of the com- 
 munity. Suppose now that the owners of this whole $155,000 
 come day after day to demand payment, while no others de- 
 posit money in their places. The bank having cash to the 
 
II. 83.] ORGANIZATION OF BANKS IN DETAIL. 169 
 
 amount of $40,000 can redeem this amount of its indebtedness. 
 But there will still be $115,000 outstanding. In order to meet 
 this indebtedness it must refuse to discount any more notes, and 
 must require the payment of all those which it holds, as fast as 
 they become due. As the payments come in they can be ap- 
 plied to the redemption of the indebtedness until the whole 
 $115,000 remaining is paid. This will still leave $15,000 out 
 of the $130,000 of notes discounted, and this money will be- 
 long to the stockholders as capital. The final result of the run 
 will be as follows : 
 
 I. A diminution of $115,000 in the volume of the currency 
 circulating in the community. Instead of $145,000 in bank 
 credits and $10,000 in bank-notes, there is now circulating 
 $40,000 in coin, just as if the bank had never been organized. 
 
 II. The bank will during a period of several months have 
 been obliged to refuse to loan any money to its customers, and 
 thus many of the latter, failing of their expected loans, will be 
 unable to pay their debts. 
 
 These two evils will tend to aggravate each other, since, 
 owing to the diminution in the volume of the currency, not 
 only the ability of the merchants to borrow from the banks, 
 bnt to borrow from other people, will be diminished. So long 
 as a man has a considerable deposit in the bank he is in a much 
 better position to loan money than when he has only a small 
 quantity of coin on hand. The general result will be what is 
 called a "commercial panic," or a general inability on the part 
 of large numbers of the community to pay their debts. 
 
 But this, be it remembered, results, not from any inherent 
 necessity of the case, but because the customers of tiie bank, 
 either from loss of confidence or from any other reason what- 
 ever, have determined to withdraw their balances. So long as 
 general confidence is felt in the bank there is no danger of a 
 run upon it. The state of mind of the ordinary depositor has 
 been facetiously expressed in the form : " If you can pay me 
 my money, I do not want it ; but if you cannot pay me, then I 
 must have it." The reason why a general run upon banks is 
 
170 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 84. 
 
 never to be feared under ordinary conditions is that there can 
 be no occasion for it. The depositor can generally make his 
 ordinary payments in his own community by cheque as easily 
 as by money ; and even if he must withdraw his money to 
 make the payment, the chances are that the payee will re- 
 deposit it in the same bank or in some other bank. The ex- 
 ■ ceptional cases arise when he is to make a payment in some 
 other place, or when he wants the gold or silver coin to use for 
 some other purpose than paying it out. 
 
 The reader must, however, be on his guard against the popu- 
 lar illusion that these exceptional cases can never arise except 
 from distrust of the bank. Such would indeed be the case if 
 no one ever wanted money except to pay out within the sphere 
 of operations of the bank. But experience shows that if banks 
 act on this supposition by increasing their credits, their deposi- 
 tors will come demanding coin for foreign export, or to melt 
 down for manufacturing purposes. We shall hereafter see that 
 the facility with which coin can be exported operates like a 
 safety-valve to stop an undue expansion of bank credit. The 
 banks themselves keep each other in check by requiring the 
 prompt payment of all cheques which they hold against each 
 other. 
 
 84. On the other hand, there always exists a greater or less 
 tendency towards an increase of the discounts and deposits of 
 a bank. Men of business continually want to borrow money, 
 provided the rate of interest is not too high ; they therefore go 
 to the banks for loans. But instead of taking the loans out as 
 cash, they commonly leave them on deposit, and make their 
 payment by cheques. In such cases there is a simple exchange 
 of indebtedness, the bank acknowledging the indebtedness to 
 the customer on demand, while the latter gives his note for 
 the same sum payable with interest at a future time. When 
 business is brisk and merchants see good opportunities for 
 profit by enlarging their operations, they naturally go to their 
 banks for discounts, thus creating a demand for money, or, to 
 
II. 85.] ORGANIZATION OF BANKS IN DETAIL. 171 
 
 speak more accurately, for bank credits. In order to avoid too 
 great an extension of this credit, the bank raises its rate of in- 
 terest, thus discouraging the applications of those borrowers 
 who do not expect to make a profit to justify the increased 
 rate. "When business is dull the opposite effects take place : the 
 merchants pay off their notes instead of letting them continue 
 at interest, and the bank must lower its rate of interest in order 
 to attract borrowers. 
 
 85. Since all the profits which banks can pay their stock- 
 holders are derived from the interest on the moneys loaned, 
 and since all the coin in the vaults is so much dead capital 
 drawing no interest, there is a certain tendency on the part of 
 banks to make the largest loans on the smallest available cash 
 reserve. How far this temptation will be yielded to depends 
 upon the good management and soundness of the bank, the 
 general financial state of the community, and the laws which 
 govern banks. In new countries, where the rate of interest is 
 high and the demand for loans great, the temptation is much 
 stronger than elsewhere. Thus arose the " wild-cat banking" 
 which was so prevalent in our new States during their early 
 history. "When a "wild-cat" bank was established, its practice 
 was to loan its own notes on interest. The banker knew that 
 there was little immediate danger of these notes coming back 
 in great numbers, because the community was too much in 
 want of them as money. He was therefore tempted to loan 
 them on insufficient security, especially as good security was 
 difficult to obtain under the circumstances. If he could in- 
 duce his customer to carry the notes to a great distance, the 
 danger of their being returned for payment became still less. 
 So long as people would take his notes, he was thus enabled to 
 draw a high rate of interest on a very small capital. When 
 his notes finally returned for payment, he was frequently 
 obliged to refuse them. To make him pay would cause em- 
 barrassment to the business community, and thus his creditors 
 were disposed to deal very gently with him. The result was 
 
172 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 86. 
 
 throughout our whole western country a great mass of depre- 
 ciated paper money, issued by banks which those who handled 
 the money really knew nothing about — money which frequently 
 proved worthless, thus causing great loss to the last holders. 
 
 86. Suspension of Specie Payments. We have described 
 the distress resulting to a community in the case of a general 
 run' upon banks, causing a shrinkage of the circulation and an 
 inability of the bank to make loans to those requiring them. 
 To avoid this evil it used to be very common in America for 
 banks to suspend specie payment under such circumstances. 
 Then, when the depositor came for his money, they refused to 
 pay him in cash, but tendered him only a circulating note of 
 their own or some other bank. If he asked the payment of this 
 note, he was told that he must wait. By thus dishonoring its 
 own obligations, the bank was enabled to continue making 
 loans to its customers. In order to do so, it only had to write 
 the appropriate credits on the books of the bank in exchange 
 for the customer's promissory notes. What it loaned him, how- 
 ever, was not money, but rather the hope of money. There 
 was little danger, within moderate limits, of the bank having to 
 pay out large amounts of these notes, because no one had an 
 object in demanding notes which would serve him no better 
 purpose than the credits in his bank-book. The bank in its 
 relation to its depositors was in the position of a debtor who 
 was not obliged to pay out anything but promises to pay, and 
 who could therefore afford to accumulate debts while awaiting, 
 the return of better times. 
 
 To these defects of the old bank currency we may add the 
 evils arising from counterfeiting. Counterfeit bank-notes were 
 so numerous that the " Bank-note Detector " was almost a ne- 
 cessity in every place where considerable sums of money were 
 paid and received. This Detector was a periodical publication, 
 giving the names of all the incorporated banks in the different 
 States, with descriptions of the genuine notes of each denomi- 
 nation, and of the counterfeits which had got into circulation. 
 
II. 88.] ORGANIZATION OF BANKS IN DETAIL. 173 
 
 87. National Banking System of 'the United States. The 
 evil tli us arising led during the Civil War to the establishment 
 by Congress of the national banking system of the United 
 States. Our account of this system will be confined to its lead- 
 ing economic features. Every such system requires for its 
 operation many legal enactments which do not concern the 
 economist. The latter is principally concerned with the provi- 
 sions which regulate the credits of the bank, and the funds 
 which it holds to make good such credits. We call to mind 
 that an important part of the circulating medium does not con- 
 sist of coined money, but of debts payable on demand by the 
 bank, the right to receive which is transferred from hand to 
 hand as if it were money. In order that these debts may be 
 of equal value with coin, the bank is obliged to pay them on 
 demand. They are of two kinds, bank-notes and bank credits. 
 The latter are transferred by simple delivery, as in the case 
 of money. The former are transferred by written cheques as 
 already described. To pay this indebtedness on demand, the 
 bank has two kinds of resources. The one consists of promis- 
 sory notes of business men, payable with interest at future 
 times, and of other forms of property and of credit. The 
 other resource is coined money. Since, as already shown, the 
 volume of coined money is less than the amount of credit pay- 
 able on demand, and since the greater the volume of the latter 
 the higher the profit of the bank, it follows that there must 
 be some restrictions upon the power of the bank to increase its 
 credit money and pay out its stock of coin. These restrictions 
 we shall now proceed to consider. 
 
 88. Private banks — that is, men or firms who become 
 bankers simply as a matter of private business — are not ordi- 
 narily subject to any legal limitations. It may be assumed that 
 no one does business with such a banker unless he is satisfied 
 of his good financial standing and of his business ability and 
 prudence. The interest which the banker feels in his own 
 reputation is a strong incentive to caution, and, in the view of 
 
174 DESCRIPTION OF TEE SOCIAL ORGANISM. \U. 89. 
 
 some, offers better security than any law directing him how to 
 regulate his business can offer. 
 
 Private bankers may establish book credits in favor of their 
 customers to any extent, thus performing all the functions of 
 banks of deposit, but they are not allowed to issue circulating 
 notes. Now, although a book credit transferable by cheque is 
 economically of the same nature as the indebtedness expressed 
 by a bank-note, yet the two stand on a very different footing 
 in their relations to the community. Cheques are generally 
 drawn for considerable sums, and are employed for payments 
 only between well-known and responsible men of business. 
 Since every person who draws or indorses a check thereby 
 guarantees its validity, any person receiving it can not only re- 
 quire payment of the bank, but in case the bank does not pay 
 lie has the right to require payment of the drawer or of any 
 previous indorser. Hence he has a greater security than that 
 afforded by the solvency of any one individual taken singly. 
 
 But in the case of bank-notes this additional security is 
 wanting. "When they once get into circulation they will be 
 offered in the course of trade to persons who know nothing 
 about the bank and have no means of assuring themselves that 
 the note is genuine. It therefore seems more necessary that 
 the law shall protect the individual against the danger of being 
 compelled to take a worthless bank-note than that it shall pro- 
 tect him against the' danger of a worthless cheque. In the one 
 ca.se he can protect himself, and in the other he cannot. 
 
 89. The principle of protection adopted in the national 
 banking system is taken from one previously in force in the 
 State of New York. To see what the principle is, let us once 
 more recur to the relation between the amount of notes which 
 a bank has in circulation and the funds it retains in its vaults 
 to pay those notes whenever required. The bank could be re- 
 quired to keep in its vaults a supply of coin equal to the whole 
 volume of its notes, and to use this coin for no other purpose 
 than the payment of the notes as presented. But it has already 
 
n. 90.] ORGANIZATION OF BANKS IN DETAIL. 175 
 
 been sliown that, were this policy adopted, the bank would 
 have nothing to compensate it for the expense and labor of 
 issuing the notes. It's only source of compensation is the inter- 
 est gained by loaning the money held in reserve. The problem 
 then is to allow this reserve to be invested in such a way as to 
 yield interest, and at the same time to be available for no other 
 purpose than the payment of the notes in case of necessity. 
 
 Our national banking system requires that before issuing 
 notes a bank shall have deposited with the Treasurer of the 
 United States interest-bearing bonds of the United States to an 
 amount not less than $30,000 and not less than one third of its 
 capital stock. Thereupon the bank is authorized to issue cir- 
 culating notes to an amount not exceeding 90 per cent of the 
 par value or the market value of the bonds so deposited. To 
 guard against an excess of notes above the legal limit, the bank 
 is not allowed to issue any except such as it receives in blank 
 from the Comptroller of the Currency in Washington. The 
 bonds held by the Treasurer can be applied to no purpose ex- 
 cept the redemption of the notes in case the bank fails to 
 redeem them itself. The bank, however, regularly receives the 
 interest on its bonds. The result of this arrangement is that 
 although a bank may fail to pay a note on demand, the holder 
 of the note is secured against ultimate loss. Consequently no 
 person in taking a national-bank note has any occasion to con- 
 cern himself with the standing of the bank which has issued it. 
 Probably in not one case out of a hundred does the person who 
 receives a note look to see what bank issued it. Counterfeits 
 are of course possible. But the public has to trust the vigi- 
 lance of the government to guard it against them. 
 
 90. It is of course always necessary that a well-ordered 
 bank shall keep on hand a reserve in coin or legal-tender money 
 available to pay its notes and credits as they are from time to 
 time presented. The question how large this reserve must be 
 is one of the most difficult in banking. In the case of private 
 banks it is, as already said, left to the discretion of the bankers 
 
176 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 90. 
 
 themselves. In the case of national banks in any of the prin- 
 cipal cities of the Union the reserve is required to be at least 25 
 per cent of the outstanding circulating notes and deposits of 
 the bank. In the case of banks situated in the smaller towns 
 the required reserve is 15 per cent. 
 
 Of course it cannot be required absolutely that the reserve 
 shall never fall below this limit, because the very object of the 
 reserve is to pay the indebtedness on demand, and if payment 
 is demanded faster than money is received the reserve may fall 
 to zero. The law therefore simply requires that when the re- 
 serve falls below the required limit the bank shall not increase 
 its liabilities payable on demand ; in other words, it shall stop 
 loaning money. 
 
 Thus the law does the best it can to insure that the business 
 of the national banks shall be conducted on sound principles. 
 But experience shows that no legal provisions can afford secu- 
 rity against bad management. Examinations are made from 
 time to time to see that every bank has on hand the securities 
 and other property which the state of its business requires. But 
 when a bank is authorized to loan money to individuals, no ex- 
 amination can make it certain that the borrowers are all solvent. 
 Bad debts are incurred from time to time, and stocks and bonds 
 may depreciate or become worthless. The holders of circulat- 
 ing notes have still a security which is almost certain, in the 
 bonds deposited with the Treasurer of the United States, but 
 creditors of all other kinds are liable to suffer loss. Yet, if we 
 should compare the loss actually suffered with the business 
 transacted, the amount of risk would be found surprisingly 
 small. The daily transfers made by bank notes and credits 
 amount in the city of "New York alone to many millions of 
 dollars. The total loss in the whole country to depositors 
 probably never amounted to a million of dollars in any one 
 year, except in cases of some great swindle. The danger of 
 loss incurred by money in one's pocket or drawer is many 
 times that which it incurs when deposited in any bank man- 
 aged with common honesty and prudence. 
 
II. 91.] ORGANIZATION OF BANKS IN DETAIL. 177 
 
 91. Tlie Bank of England Plan. The problem of estab- 
 lishing a proper relation between the credit currency issued 
 by a bank and its reserve fund is met differently in different 
 countries. In this respect the Bank of England is governed 
 by the celebrated Charter Act of 1844, a measure due to Sir 
 Robert Peel. The business of the bank is divided into two 
 separate departments, the one the " banking department," the 
 other the "issue department." The banking department re- 
 ceives deposits transferable by cheque in the way described in 
 the preceding chapter, but it does not issue notes. The issue 
 department emits bank-notes for circulation, and keeps its sepa- 
 rate reserve fund to insure payment of the notes. 
 
 The basis of the regulations governing the issue department 
 is this : it was found that the volume of notes in actual circula- 
 tion generally ranged between sixteen and twenty millions of 
 pounds, seldom or never falling below the former limit. It 
 was therefore assumed that a certain minimum volume of bank- 
 notes would perpetually remain in circulation, and so never 
 be presented for actual payment at the counter of the bank. 
 This assumed minimum was originally fixed at fourteen mil- 
 lions, but has since been increased to fifteen millions. This 
 amount may be issued by the bank without keeping any coin for 
 their payment, though of course, as already shown, an equal 
 amount of promissory notes from individuals, or of govern- 
 ment securities, must always be held by the bank. But for 
 every note issued above this minimum an equal amount in coin 
 or bullion must be held by the issue department of the bank. 
 
 The result of this arrangement is that if the volume of the 
 coin-reserve diminishes, so as to be but little above the excess 
 of notes in circulation over fifteen millions, no more notes can 
 be issued. Now, for reasons the statement of which belongs 
 to a more advanced part of our subject, this state of things is 
 likely to occur at the very time when the public are most in 
 need of notes, credit, or other forms of currency. The power 
 of the bank to perform one of its functions is thus paralyzed at 
 the very moment when this function is most essential to the 
 
 12 
 
178 DESCRIPTION OF TEE SOCIAL ORGANISM. [II. 91. 
 
 business interests of the community. This difficulty has been 
 met by an expedient known as a "suspension of the Charter 
 Act " by an " order in council " of the government.* 
 
 Three such suspensions have been authorized, in the years 
 1847, 1857, and 1866 respectively. The suspension authorizes 
 the bank directors to count the reserve of the issue depart- 
 ment as a part of the reserve fund of the banking department, 
 so that the latter could still discount the notes of merchants, 
 although its reserve fell below the proper limit. 
 
 The necessity of this suspension has subjected the act in ques- 
 tion to criticism, on the ground that a law which has to be sus- 
 pended from time to time proves itself to be defective by its 
 own operation. If the object of human laws is to establish 
 regulations which shall forever govern the relations of men, 
 without any modifications whatever, then this criticism is un- 
 doubtedly sound. But taking a different point of view, we 
 may regard the arrangement as one of the finest examples of 
 the practical adaptation of laws to the varying circumstances 
 of mankind that ever was invented. A law is devised which 
 works with entire success except in rare emergencies. The 
 provision that it shall cease its operations temporarily under 
 these emergencies may be regarded from a practical point of 
 view as an excellent one, the law being enforced so long as it 
 is beneficial, and no longer. 
 
 * The term "suspension" applied to these orders is sometimes mis- 
 construed by people in this country not conversant with financial affairs, 
 through the same word having been applied here to the cessation of specie 
 payments by our banks. The assumption that a " suspension " of the bank 
 act meant a suspension of specie payments by the bank, though utterly 
 false, was frequently urged by popular orators as an excuse for the issue of 
 paper money. As a matter of fact, the Bank of England has not for a 
 moment suspended specie payment, or thought of doing so, since its re- 
 sumption in 1819. 
 
H. 92.] TEE CLEARING-HOUSE SYSTEM. 179 
 
 CHAPTER XIV. 
 
 THE CLEARING-HOUSE AND FOREIGN EXCHANGE. 
 
 92. In the great financial centres the banks have a system 
 of balancing their accounts, the study of which is instructive to 
 the student of economics, because it shows an ideal system by 
 which we might imagine the accounts of every individual with 
 the community to be balanced in the actual commerce of the 
 world. To understand it let us commence by considering 
 what the banks are to do with the cheques which they hold 
 upon other banks. Let us suppose that there are ten banks 
 of deposit in a town. Then, under the system explained in 
 Chapter XIII., each bank will have deposited with it each day 
 a greater or less number of cheques drawn upon each of the 
 other nine banks. It therefore has the right to send these 
 cheques around to the banks on which they are drawn and 
 receive the money for them. Were this process actually gone 
 through with, the amount of coin to be transported back and 
 forth would be very great, almost equal in fact to the sum 
 total of all the mercantile transactions of the town during the 
 day. But it is evident that since bank A holds cheques drawn 
 on bank B, and bank B holds cheques on bank A, only the dif- 
 ference of the sums total of these two classes of cheques will 
 have to be paid in money. Thus a certain amount of trans- 
 portation of coin may be saved by each bank, through a repre- 
 sentative, meeting each of the others in advance of payment, 
 exchanging cheques, and having each debtor bank pay the bal- 
 ance due to the creditor bank. 
 
 But a little consideration will show that a still greater saving 
 is ideally possible. Let each bank at the end of the day add 
 up the sum total of the cheques which it holds against all the 
 other banks. Let the sum total of these credits be called C. 
 
180 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 92. 
 
 Then take the sum total of all the cheques against it held by 
 other banks, which it must pay. If we call this sum total of 
 its debts D, it is clear that, after all payments are made, the 
 amount of money in its vault will be algebraically increased by 
 C minus D. In other words, it will have received C dollars 
 and will have paid out D dollars. "When D is greater than C, 
 its stock of coin will be diminished by the difference of the 
 two quantities ; when less, it will have been increased by this 
 difference. Hence all the money which it is really necessary 
 for the bank to handle is this difference. Moreover, since 
 every cheque appears as a credit in favor of one bank, and an 
 equal debit against the other bank, it is evident that the sum 
 total of the C's for all the banks will be exactly equal to the 
 sums total of the D's. If, therefore, we call each bank whose 
 C is greater than its D a creditor bank, and each bank whose 
 D is greater than its C a debtor bank, the sum total of the 
 credits held by the creditor banks will be exactly equal to the 
 sum total of the debts due by the debtor banks. Hence : If 
 any agency collects all the amounts due from the debtor banks, 
 the agency can with the money thus collected jpay all that is 
 due to the creditor banks. 
 
 Such an agency is called a clearing-house. All the 
 cheques drawn on any day are brought to the clearing-house on 
 the following morning. The sum total of the cheques held by 
 each bank is added up, thus showing the amount C of each 
 bank's gross credits. The grand total of all these credits is the 
 sum of all the cheques. 
 
 The cheques are then re-classified with reference to the 
 banks on which they are drawn. The sum total drawn against 
 each bank is its D. The grand total is again formed, which is 
 of course equal to the grand total of the C's. The table on the 
 opposite page shows how the operation may be performed. 
 
 Under each bank whose name is found at the top of a col- 
 umn is written the amount of the cheques which it holds against 
 the several other banks whose names appear on the side. Thus 
 the Exchange Bank is supposed to hold cheques to the amount 
 
II. 92.] 
 
 THE CLEARING-HOUSE SYSTEM. 
 
 181 
 
 of 284 units (which we may consider to be dollars, hundreds 
 or thousands of dollars as we please) against the Planter's 
 Bank ; 276 against the Merchant's Bank ; 420 against the Gro- 
 cer's Bank, etc. Adding up its column, we find the sum total 
 
 Name of Bank. 
 
 Plan- 
 ter's. 
 
 Mer- 
 chant's 
 
 Gro- 
 cer's. 
 
 Ex- 
 change. 
 
 State. 
 
 City. 
 
 North. 
 
 Total. 
 
 Merchant's 
 
 $735 
 150 
 262 
 819 
 522 
 415 
 
 $532 
 
 724 
 
 163 
 
 875 
 808 
 194 
 
 $216 
 432 
 
 183 
 896 
 404 
 325 
 
 $284 
 276 
 420 
 
 208 
 525 
 179 
 
 $725 
 818 
 324 
 790 
 
 4i5' 
 
 529 
 
 $802 
 901 
 293 
 416 
 184 
 
 279 
 
 $219 
 364 
 892 
 246 
 325 
 214 
 
 $2,778 
 3,526 
 2,803 
 2,060 
 3,307 
 2,888 
 1,921 
 
 Exchange 
 
 State 
 
 City 
 
 North 
 
 
 
 Total 
 
 $2,903 
 
 $3,296 
 
 $2,456 
 
 $1,892 
 
 $3,601 
 
 $2,875 
 
 $2,260 
 
 $19,283 
 
 
 
 of all the cheques which it holds against all the other banks is 
 $1892. In the same way the Planter's Bank holds cheques 
 against the other banks to the total amount of $2903, and so 
 on. Thus we have the sums total given at the bottom of each 
 column as the total credit, C, of each bank. 
 
 Now consider the horizontal lines. The Planter's Bank has 
 against it $532 held by the Merchant's Bank, $216 by the Gro- 
 cer's Bank, etc. The sum total is found in the right-hand col- 
 umn to be $2778. 
 
 Now take the banks individually with reference to their total 
 debts and credits. The Planter's Bank has a total credit of 
 $2903, and the total debt is found in the right-hand column to 
 be $2778. Balancing this account, it is a net creditor to the 
 amount of $125. Taking the other banks in the same way, 
 we find the folio wins: results : 
 
 Debtor Banks. 
 
 Merchant's $230 
 
 Grocer's 347 
 
 Exchange 168 
 
 City 13 
 
 Total $758 
 
 Creditor Banks. 
 
 Planter's $125 
 
 State 294 
 
 North 339 
 
 Total. 
 
 The debts are now balanced in the following way : The 
 Merchant's Bank pays into the clearing-house $230, the Gro- 
 
182 DESCRIPTION OF TEE SOCIAL ORGANISM. [II. 93. 
 
 cer's $347, the Exchange $168, and the City $13, making a 
 total of $75S. The clearing-house pays $125 of this sum to 
 the Planter's Bank, $294 to the State Bank, and $339 to the 
 North Bank, which at the same time exhausts the fund and 
 settles all the accounts. By these small payments transactions 
 amounting in all to $19,283 are settled with exactly the same 
 result to each bank as if each account had been settled sepa- 
 rately. A mass of indebtedness which amounts to a vast sum 
 total is thus balanced by comparatively small payments. 
 
 93. In practice this clearing-house system can only be ap- 
 plied to banking institutions. But if all mankind were per- 
 fectly reliable and honest, it could be carried into all the ac- 
 counts of society, and the use of money would then be con- 
 fined to the payment of balances at stated periods. Every 
 man who produces and sells anything, or who renders to his 
 neighbor or the public at large any services for which he re- 
 ceives money in payment, is, by the act of supplying such 
 commodity or service, a creditor ; and this credit or service is 
 balanced by the money he receives. For whatever lie pur- 
 chases or gains from others he is a debtor ; and he pays his 
 debt in money (cf. § 55). "We might then imagine an account 
 kept between each person and society at large, the latter being 
 the clearing-house. The value of every commodity or service 
 which he rendered to others would be recorded, this value 
 being exactly what would have been paid for it had it been 
 done for money. On the other side of the account everything 
 he gained or received from others would be charged against 
 him. Then at stated intervals, once a year for instance, we 
 might suppose his accounts balanced by his paying to some 
 central person the excess of his debits, and receiving the excess 
 of his credits. The final result of this system would be the 
 same to which the actual system of exchange by means of 
 money leads. But owing to the imperfections of human 
 nature, and the impossibility of keeping such an account in a 
 way which every one would agree upon as perfect and free 
 
II. 94] FOREIGN EXCHANGE. 183 
 
 from error, the balance has to be preserved in each individual 
 case by the actual transfer of money back and forth. 
 
 94. Of Foreign Exchange. If we consider once more the 
 subject of credit, we shall see that to give a credit entire pre- 
 cision two agencies and two provisions come into play. 
 
 The first agency is a debtor, who may be any legal person 
 whatever, but in the case that we are now considering is gen- 
 erally a banking or mercantile firm. 
 
 The second agency is a creditor, or person to whom the 
 payment is due, who also may be any legal person whatever. 
 
 One provision is a designated place of payment. 
 
 Another is a designated time of payment. 
 
 The necessity of having a designated place of payment will 
 appear on reflecting that without it the debtor might not know 
 where to find the creditor. Hence in mercantile credits the 
 bank or other point where the parties or their agents must 
 meet in order to make and receive payment has to be speci- 
 fied. Again, if no time of payment were understood, but if 
 the act could be postponed indefinitely at the option of the 
 creditor, the debt would be worthless. Hence in mercantile 
 credits the time when payment is to be made is always speci- 
 fied, and when not specified the debt is payable on demand. 
 For our present purpose we need not take account of any post- 
 ponement of the time of payment, but may consider the debt 
 as payable upon demand. 
 
 Kow the creditor and debtor need not live in the same 
 place nor in the same country. The place of payment may be 
 yet a third country, though it is more commonly the country 
 in which the debtor resides. Hence a person may be the 
 owner of the right to receive money in a foreign country. 
 
 Credit payable in a country foreign to the creditor is called 
 foreign exchange, or simply exchange. Exchange is said to be 
 on the country or city where the payment is to be made. 
 Thus, exchange on London means the right, which may be 
 
184 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 94. 
 
 possessed by a person in any part of the world, of requiring 
 a money payment in London. 
 
 In order that foreign exchange may have any value it is 
 evident that there must be intercommunication between the 
 residence of the creditor and the country where the debt is 
 payable. A debt payable in the moon would have no value, 
 even if by looking through our telescopes we could see the 
 gold piled up and only waiting for the creditor to get it. But 
 an American may buy goods in London, and he must then 
 make payment in London. A credit payable in London will 
 be of greater utility to him for this purpose than one payable 
 at home, because it will save him the expense of transporting 
 money to London. 
 
 The ownership of foreign exchange is transferred by an in- 
 strument in writing called a hill of exchange, of the same gen- 
 eral character as a bank cheque, but usually more elaborate. 
 Like a cheque, it consists of a formal order from the creditor, 
 or drawer, to the debtor, or drawee, directing him to pay a 
 specified sum of money to the order of a third person, called 
 the payee. When this bill is transferred from the drawer to 
 the payee, the latter becomes the owner of the foreign ex- 
 change, with all the rights which pertain to that ownership.* 
 
 The payee may reside in any part of the world without in 
 any way impairing his ownership. But in order that the bill 
 may become payable it has of course to be transferred to some 
 
 * Owing to the danger of loss and delay in the transmission of bills when 
 the only communication between countries was by sailing-ships or stage- 
 coaches, it was customary to deliver bills of exchange in the form of three 
 separate orders, called first, second, and third of exchange. This custom is 
 still continued. The form of a bill of exchange is commonly as follows : 
 
 Sixty days after sight of this my first of exchange {second and third of same 
 tenor and date unpaid) pay to the order of, James Smith five hundred pounds 
 sterling, value received, and charge the same as advised. 
 
 Rhett & Co. 
 
 To Messrs. Smith & Co., London. 
 
 In the three orders the words first, second, and third are permuted, so 
 that each is an order to pay provided the other two remain unpaid. 
 
II. 95.] FOREIGN EXCHANGE. 185 
 
 person in the place of payment, which we may suppose to be 
 London. This person presents it to the payee, who acknowl- 
 edges the obligation of paying it by writing upon it an accept- 
 ance. 
 
 Foreign exchange may be transferred like any other credit. 
 Exchange on London is bought and sold as if it were a com- 
 modity in all parts of the world. To see its origin, suppose 
 that an American merchant ships a cargo of goods to a London 
 correspondent for sale. When the goods are sold, the corre- 
 spondent becomes indebted to the shipper in the amount agreed 
 upon. Thus the shipper in New York becomes the creditor 
 of the firm in London. He can then draw a bill of exchange 
 on his London correspondent, take it to a banker, and sell it 
 for whatever sum it commands from the banker. The latter 
 transfers it to his London banker by the usual indorsement, 
 and the London banker collects the money from the payee. 
 Thus the New York banker becomes the owner of the credit 
 in a London bank. 
 
 Now suppose that another American merchant desires to 
 purchase goods in London. In order to pay for them he goes 
 to the banker and asks him for a bill of exchange on London. 
 A bill for the required amount is sold to him at any price that 
 may be agreed upon, and is by him transferred to his London 
 correspondent. The correspondent takes it to the London 
 banker and receives payment. 
 
 95. The advantage of this system is that much of the 
 trouble and expense of transporting money backward and for- 
 ward is saved. If every merchant in New York who bought 
 goods in London had to send money over to pay for them, and 
 every one who sold goods there had to bring his money home, 
 the expense of transporting the money back and forth would 
 be considerable. With bills of exchange it is only necessary 
 to transport the excess of the sum total of debits over the 
 sum total of credits. So long as the payments- to men in Lon- 
 don balance the payment due from them, there will be a con- 
 
186 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 95. 
 
 tirmal supply of bills of exchange in the hands of New York 
 bankers, and an equal sale of them to merchants. But it some- 
 times happens that the goods purchased abroad exceed those 
 sold there. New York bankers then find that the quantity of 
 bills of exchange which they sell exceed those which they buy. 
 Consequently their credits in the hands of London bankers 
 diminish and will soon be exhausted. To make them good 
 they have to ship gold from New York to London to an 
 amount sufficient to balance the account. But if the value of 
 the American goods sold in London exceeds the value of those 
 bought, the opposite effect will take place. New York bankers 
 will find the amount of foreign exchange sold them to exceed 
 that purchased from them, and their idle credits in the London 
 banks will increase. Gold must therefore be transported from 
 London to New York to pay the balance due the latter city. 
 
 Of course the converse of what we have said holds true of 
 New York in its relations to London. The merchants of the 
 latter city buy and sell goods in New York, and may then 
 have to make payment in New York. .Thus exchange on 
 New York is bought and sold in London. 
 
11.96.] TEE VOLUME OF THE CURRENCY. 187 
 
 CHAPTER XV. 
 
 CONCLUSIONS RESPECTING THE VOLUME OF THE CURRENCY. 
 
 96. A question of fundamental importance which now 
 arises is, What should we regard as the sum total of the cur- 
 rency of the country? We must begin by discussing a dis- 
 puted question respecting the definition of the word " money " 
 which arises from the want of an exact nomenclature. If we 
 so far accept mercantile usage as to call by the general name of 
 currency everything which men pass from one to the other in 
 payment, we see that it comprises the following classes of 
 things : 
 
 I. Coined gold or silver. We have seen that, on the mone- 
 tary system which has always prevailed, coined gold or silver 
 must be the ultimate basis of everything that is used as money. 
 Whatever form credit-money may take, it must, to be valid, 
 consist in a right to receive or claim from some party a definite 
 quantity of coin. A right to receive merely ideal money, or 
 a representative of coin, amounts commercially to little more 
 than the right of a hungry man to an ideal loaf of bread. This 
 right may, however, as already shown, be more or less remote 
 in time or place without destroying its value. 
 
 II. Legal-tender notes. In the United States gold and sil- 
 ver are to a certain extent replaced by promissory notes issued 
 by the government, familiarly known as " greenbacks." At 
 present these notes give the bearer the right to claim from the 
 United States the amount of gold or silver coin named on their 
 face. They have therefore the qualities of bank-notes, but 
 differ from them in being a legal tender. This is the same 
 thing as saying that every person paying them out may throw 
 upon his creditor the expense and onus of having them paid. 
 From 1862, the time when these notes were first issued, to 
 
188 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 96. 
 
 1879, they were not payable in coin. In consequence their 
 value was sometimes greatly below their nominal equivalent in 
 coin. Since the resumption of specie payment by the govern- 
 ment in 1879 they have been at par with coin. 
 
 III. Bank-notes. The third kind of currency consists of 
 bank-notes. These notes are now issued by all the national 
 banks of the United States under certain limitations and re- 
 strictions prescribed by law. They differ from greenbacks in 
 that they are not a legal tender between individuals. The 
 only parties responsible for their payment are the banks which 
 issue them, though the government has taken very efficient 
 measures to secure their payment. 
 
 IV. Bank credits ; that is, the right to receive money from 
 a bank, expressed by figures being written to the credit of the 
 individual depositor in the books of the bank. 
 
 Now, it is a disputed question whether anything but coin 
 should be called money. This is a question of definition which 
 does not admit of being absolutely settled, because anything 
 may be called by any name which all agree upon. It is, how- 
 ever, certain that the coined money which is the necessary 
 basis of all currency should have a distinctive name. But 
 instead of laying down a rule on this subject which might not 
 be accepted by others, we shall simply try so to use words that 
 in each case it shall be clear what is meant. We shall speak 
 of "coin" or "coined money" whenever reference is made to 
 this kind of money alone. 
 
 Currency is something qui.te different, and may include all 
 credits and money actually used in payments. At the same 
 time, its actual meaning in commerce is very vague. Com- 
 monly it means only material money, coin and notes in actual 
 circulation. Sometimes it means paper money, in contradis- 
 tinction to coin. We shall use it in a sense wider than either 
 of these to designate everything, material or immaterial, which 
 passes from hand to hand as money. 
 
 The question now is, How shall we determine the total 
 volume of the currency in dollars ? We have shown that the 
 
11.97.] THE VOLUME OF THE CURRENCY. 189 
 
 volume of coined money in circulation is a definite quantity. 
 We now want to know what this quantity becomes in the 
 case of credits. First consider what the phrase " volume of 
 the currency " means. The amount of currency possessed by 
 any one man at any moment comprises the disposable funds 
 which he has received in payment for services rendered, and 
 which he can immediately pay out at his pleasure. It is 
 that which he thinks of as " cash on hand " or " cash on hand 
 and in bank." He may have it in three places — in his pocket 
 in his safe, or in his bank. In his pocket or his safe it is 
 simply so many dollars in coin and bank-notes. In bank it is 
 simply so much credit ; he does indeed think of it as so much 
 money in bank, but, as just shown, this is not so : it is not 
 money, but credit. But this fact does not prevent its being 
 counted by him and by every one else as so many dollars, nor 
 abridge its power of performing all the functions of money. 
 
 In the case of merchants who do business abroad on a large 
 scale we may add that yet another form of currency is that 
 of money or credit in the hands of correspondents. When a 
 shipper sends a cargo of goods abroad and sells them, he may 
 have the right to draw upon the consignee for payment. In 
 this case he conceives himself to have so much money or credit 
 in the hands of the consignee ; but since lie cannot pay this 
 credit out to others with the same freedom that he can transfer 
 a bank credit or a bank-note, it is not considered as a part of 
 the currency. 
 
 97. We have now to consider whether the sum total of the 
 coin and bank-notes actually existing in the country should be 
 considered as in circulation. The principles on which this 
 question is to be settled belong to a more advanced stage of our 
 subject, but the result can be stated here. Currency is to be 
 considered in circulation only when it can be paid out by the 
 owner at his own pleasure, and when he is keeping it for the 
 purpose of payment. If he is gaining interest on it, and is 
 keeping it with that object alone, it is not in circulation. What 
 
190 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 98. 
 
 we assume as a condition of being in circulation is that, since 
 the owner is gaining no interest, he will invest or expend it as 
 soon as he can find an opportunity. This is the case with the 
 o-reat volume of money which every one has on hand or in 
 bank. 
 
 One circumstance now comes in to make the question at this 
 point a little indefinite. Banks and bankers, especially in 
 Europe, often pay a small interest on their deposits, which our 
 national banks are not allowed to do. When the depositor is 
 receiving interest, this may induce him to leave his money in 
 the bank instead of paying it out. But as the interest received 
 is below the current rate at which money can be borrowed, we 
 may consider this inducement as not sufficient to keep a large 
 sum of money permanently out of circulation. 
 
 We may now see that the coin held by a bank in reserve to 
 make good its outstanding credits is not in circulation. It does 
 indeed add to the circulation three or four times its volume by 
 enabling the bank to give credit, but this credit we have already 
 counted. Now, since the bank cannot and does not pay the 
 coin reserve out at its own pleasure, this reserve does not belong 
 to the class described. 
 
 Nearly the same considerations apply to the funds accumu- 
 lated in the public treasury. A volume amounting to several 
 hundred millions of dollars is commonly kept in reserve in the 
 vaults of the treasury. It can be paid out only in pursuance of 
 law, and until so paid is not in circulation. 
 
 The same rule might apply to the treasuries of the several 
 States of our Union. The amounts held by them are not, how- 
 ever, so great as to specially require their consideration. 
 
 98. We therefore conclude that the total volume of the cur- 
 rency may be obtained in this way : Add up all the coin in 
 the hands of persons, all the legal-tender and bank notes in 
 circulation, and all the bank deposits. The sum is the total 
 volume of the currency. We do not include the coin held by 
 the banks or the treasury as a reserve, because this is not in 
 
11.99.] THE VOLUME OF THE CURRENCY. 191 
 
 circulation. If we know the total amount of coin in the 
 country, we may find the amount in the hands of individuals 
 by subtracting the bank and treasury reserves from the sum 
 total. We may therefore find the volume by adding up the 
 total amount of coin, bank-notes, and deposits, and subtracting 
 the reserves held by the banks. 
 
 Including bank credits as a part of the volume of the cur- 
 rency is a precaution which is, unfortunately, seldom taken. 
 Financiers generally include only coin and bank-notes in their 
 official publications. But bankers know very well that the to- 
 tal volume of the deposits is the most important factor of all, 
 and the correctness of the student's ideas on the subject may 
 be gauged by the clearness with which he sees that bank credits 
 should be included as well as bank-notes. 
 
 An illustration of this is afforded by a well-known feature of 
 business in France. Statistics show that the amount of coin 
 and bank-notes circulating in that country is larger in propor- 
 tion to its population than in most others. The explanation 
 of this is that the habit of keeping bank accounts and making 
 transfers by cheque is less practised in France than elsewhere. 
 Where an American business man would keep all his money in 
 bank, and draw cheques for all payments, the Frenchman keeps 
 bank-notes in his safe and pays them out to his customers. 
 
 At the same time it should not be lost sight of that bank 
 credits and bank-notes perform for the most part quite dis- 
 tinct functions. The former are used principally in large 
 transactions and in the great wholesale operations of com- 
 merce. The latter are used in retail trade. 
 
 99. The question has sometimes been raised whether bank 
 cheques should not be considered as a part of the volume of the 
 currency, since they pass from hand to hand in payment. The 
 answer to this is that if we include them we must leave out 
 the bank deposits which they represent. We must be careful 
 always to count every credit once, but never to count it twice. 
 Let us look at the matter more closely. John Smith has a 
 
192 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 99. 
 
 credit of $1000 on the books of the bank. He hands his 
 neighbor a cheque for $500 of this amount. This does not in 
 the slightest degree increase the bank credit ; it merely divides 
 the ownership of it : one half now belongs to Smith, and one 
 half to the drawee of the cheque. "When the latter transfers 
 the cheque to a third party, this third party is the owner of the 
 half of the credit, and so on indefinitely until the cheque is 
 paid. 
 
 But suppose an owner to deposit the cheque in some other 
 bank. Then there is an apparent increase of $500 in the total 
 credit, because the $1000 appears undiminished on the books of 
 the original bank. So far as this original bank is informed, 
 John Smith is still the owner of the whole $1000, while the 
 other bank has $500 to the credit of an entirely different party, 
 thus making a sum total of $1500. In reality, however, there 
 is still no greater sum total of credit. Smith knows that he 
 has only $500 and, being an honest man (else the bank would 
 have nothing to do with him), acts accordingly. The remain- 
 ing $500 is to the credit of another party in another bank. 
 When the cheques are exchanged in the clearing-house the 
 state of the case will be patent, and Smith's credit will be re- 
 duced to $500. Since the sum total of credit remains un- 
 changed by the drawing and transfer of the cheque, it would 
 be a mistake to consider the cheque as an addition to the cur- 
 rency. It is neither credit nor currency in itself, being only 
 the instrument for transferring a portion of existing credit un- 
 changed to another party. 
 
EXERCISES. 193 
 
 EXERCISES. 
 
 1. The bank described in § 81 engages successively in the following busi- 
 ness transactions. "Write the statement of its resources and liabilities at 
 the close of each transaction. 
 
 A. It cashes a cheque for $3000 on another bank, paying coin for it. 
 
 B. It then cashes a cheque upon itself for $4000 in coin. 
 
 C. A customer then deposits a cheque for $2000 on another bank, and 
 is credited with it. 
 
 D. Another customer then deposits $1000 in coin. 
 
 E. Its own notes to the amount of $2000 are then presented for redemp- 
 tion. 
 
 F. A mercantile firm then borrows $7000, and leaves it on deposit. 
 
 G. Another firm then borrows $5000, and takes it in the bank's own 
 circulating notes. 
 
 H. A debtor to the amount of $2000 then pays Ms note in coin. 
 
 Iu making these various entries, note that each separate transaction 
 changes two, and only two, of the five items: Cash in vaults; Promissory 
 notes on hand; Cheques on other banks; Deposits; Circulation. At the 
 end of the last transaction the statement should be found as follows : 
 
 Resources. Liabilities. 
 
 Cash in vaults $34,000 Capital stock $15,000 
 
 Promissory notes (discounts) 140,000 Due depositors 151,000 
 
 Cheques on other banks. .. 5,000 Circulation 13,000 
 
 $179,000 $179,000 
 
 2. Show that the preceding transactions will have added $15,000 to the 
 volume of the currency. 
 
 3. If, after the last transaction, the bank should go into liquidation and 
 wind up its business, show that the volume of the currency would thus be 
 contracted by $130,000. 
 
 4. Can you give any reasons for the following provisions of law regulat- 
 ing the business of the national banks? 
 
 That a national bank shall not hold real 'estate unless rendered necessary 
 for the protection of its interests; 
 
 That it shall not make any loan or discount on the security of the shares 
 of its own capital stock, nor purchase its own stock; 
 
 That it shall not pledge or hypothecate any of its notes or circulation for 
 the purpose of procuring money to be paid in on its capital stock or to be 
 used in its banking operations. 
 
 5. Why do banks and bankers loan money only for short periods! 
 
 13 
 
194 DESCBIPTION OF TEE SOCIAL ORGANISM. 
 
 6. National banks were taxed a small percentage annually upon the aver- 
 age amount of their deposits as determined each day. The Treasurer of 
 the United States discovered that it made a great difference in the amount 
 of the taxes whether the deposits were determined each day at the close of 
 business, or whether the banks waited until the accounts were settled in 
 the clearing-house the next morning before determining their deposits. 
 Explain the source of the difference, and state which estimate was the just 
 basis for the tax. 
 
 7. It was once found that certain speculators in New York would go 
 to a bank and borrow a large part of the legal-tender notes it had on hand, 
 and, having effected the loan, leave the borrowed notes with the bank as col- 
 lateral security for the payment of the loan. What effect had this proceed- 
 ing upon the power of the bank to make loans to their customers, and at 
 what expense to the speculators? 
 
 8. If one should object that it is not consistent to include bank-notes in 
 the volume of the currency, and exclude bank cheques, taking the ground 
 that both perform the same functions, how would you explain the diffi- 
 culty? 
 
 9. F. A. Walker discusses at considerable length the question what should 
 be considered money, and reaches the conclusion that coin and bank-notes 
 are money, and that bank cheques are not money. He says nothing about 
 bank credits in this connection. Show that there is no necessary connec- 
 tion between a definition of money from his point of view and the question 
 of volume of the currency discussed in Chapter XVI., because this volume 
 does not involve his definition of money. (See his Money, Trade, and In- 
 dustry, Chapter I. ; Capital and Money, Chapter XVIII.) 
 
 10. If bank-notes or other forms of paper credit were used for all pay- 
 ments from ten cents upward, in accordance with the principles of banking, 
 in what respect would the requirements of the medium of exchange pointed 
 out in § 63 be altered, it being assumed that the medium there described is 
 the money lying in the bank to secure the payment of the notes? Are there 
 any of the requirements which would then become unimportant? 
 
 11. Consider the influence of the wear and tear of bank-notes upon the 
 profit gained by their circulation. Does it favor the issue of large or small 
 notes? , 
 
 12. "In a period of depression there is just as much currency in the 
 country as ever, but large sums lie in banks, and the rate of discount on call 
 loans is exceedingly low." What kinds of currency are here spoken of? 
 How does such a state of things affect the volume of credit-currency? 
 
 13. "All the notes which represent the gold actually possessed by a bank 
 are no addition to the capital of a country; but all the notes in circulation 
 in excess of that, and which produce industry or which people in general 
 
EXERCISES. 195 
 
 are willing to receive in return for their commodities or services, are a 
 genuine addition to the capital of a nation." Criticise this use of the word 
 capital. 
 
 14. Is there most temptation to "wild-cat" banking where the rate of 
 interest is high or where it is low ? 
 
 15. If the current rate of interest should fall to one per cent per annum, 
 what would he the effect upon the business of banking? Would it tend to 
 increase or diminish the volume of credit-money? 
 
 16. Are people most likely to melt down subsidiary coins, or coins of 
 unlimited tender, when they want to use them as metal ? 
 
 17. Show how, by suspending specie payments, the power of a bank to 
 loan money was increased. 
 
 18. When our imports from England exceed our exports, will the bankers 
 of New York find the amount of foreign exchange offered them or that 
 demanded from them in excess? 
 
 19. "Of the money daily used a very small percentage is bank-notes. 
 The great bulk is cheques, drafts, and telegrams. The telegraph transmits 
 millions upon millions of bank credits from Boston to New York, Chicago, 
 London, etc., etc., and the reverse, where the telegram is the only money 
 used." Criticise. If instead of telegraphing a man should telephone, would 
 liia words be money? — Professor Sumner. 
 
 20. A banker " may be only just able to pay what he owes to others and 
 yet be, so long as his credit lasts, a wealthy man. Suppose that he owes 
 $1,000,000 (without interest) [deposits, etc.], and has debts of merchants, 
 railway companies, and the government which together could be sold for 
 $1,000,000. If there were a run on the bank and he had to suspend pay- 
 ment, his wealth would be found equivalent to zero; but meanwhile he ob- 
 tains the interest on $1,000,000, which will leave him a handsome surplus 
 after paying the expenses of tbe bank. And since there is no reason why 
 he shall not continue to enjoy this surplus for an indefinite period, his 
 business might obviously be sold for a considerable price, even though its 
 assets did not balance its liabilities, provided that the sale were a secret 
 one, so that its credit could be maintained." Could a banker do business 
 on such a basis? Would he add to the wealth of the country? 
 
BOOK III. 
 
 THE LA.WS OF SUPPLY AND 
 
 DEMAND. 
 
BOOK III.— TEE LAWS OF SUPPLY AND 
 DEMAND. 
 
 CHAPTER I. 
 
 THE CONCEPTION OE VALUE. 
 
 1. Value lias already been denned, and the method of 
 measuring it described. We have now to consider value as 
 expressing a certain relation between men and their wants as 
 the one term, and wealth and its capacity for gratifying those 
 wants as the other term. 
 
 The Conception of Value. The conception of value as a 
 quality admitting of measurement offers peculiar difficulties 
 to the student, owing to its intangible character. No one has 
 any difficulty in conceiving of length, area, weight, tempera- 
 ture, and other physical qualities, because these qualities may 
 all be made evident to the senses. But in the case of value 
 we have nothing that is evident to the senses. One may be 
 given a barrel of flour, and furnished with the most perfect 
 means of measuring all its physical properties, without being 
 able to form any estimate of its value. The latter will in fact 
 depend on where the flour is, and how much people have to 
 eat either where it is now or where it is to be taken to. 
 
 It follows that value is not a quality inherent in the com-i 
 modify, but depends upon the relation of the latter to the 
 persons desiring it. Things have no value unless they are in 
 such a position that those who desire them can command them. 
 If a barrel of flour were buried a hundred feet under the earth, 
 it would, under present conditions, have no value, though not 
 a single one of its physical properties might have suffered. 
 
 Many definitions of value have been given ; it is called 
 
200 TEE LAWS OF SUPPLY AND DEMAND. . [III. 2. 
 
 "Cost of production," "Cost of reproduction," "Estimate of 
 resistance to be overcome in order to command the commod- 
 ity," etc. These and many other definitions are useful in 
 suggesting a simple idea which hardly admits of an entirely 
 satisfactory formal definition. We may regard value either 
 as intensity of desire or as utility. When a man pays $5 
 for a barrel of flour, we may assume that his desire for 
 that barrel of flour is a little greater than his desire for $5, 
 and that the desire of the grocer is a little less. Taking an 
 average, the general desire is equal to that for the money. If 
 the value of a commodity A is $2, that of B $7, and that of C 
 $100, we may imagine that people in general desire these 
 three commodities with intensities proportional to 2:7: 100. 
 
 We may also say that the value of a commodity in the mar- 
 ket is its utility to those who purchase it. This definition 
 agrees with the other, because utility, in economics, means 
 capacity for satisfying desire ; and, when we suitably restrict 
 the meaning of our terms, we may say with logical correctness 
 that intensity of desire on the part of the person, and capacity 
 of satisfying that desire on the side of the commodity, are 
 equal. But the word utility has another application which we 
 must distinguish from the present one. 
 
 2, The Economic Conceptions of Utility and Value. Econ- 
 omists have claimed that, although utility is necessary to value, 
 it alone does not suffice to give value ; for example, that the 
 utility of iron far exceeds that of gold, although gold has a 
 higher market value. Again, air is far more useful than either, 
 since we should die without it ; yet it has no value whatever. The 
 rule was therefore laid down that value depended not only on 
 utility, but on difficulty of acquirement ; that which could be 
 acquired without labor having no value, how great soever its 
 utility. Thus arose the conception of two kinds of value — 
 value in use, or utility, and value in exchange, or market value. 
 
 The two Categories of Things in which Utility inheres. We 
 shall now show that " value in use" and " value in exchange" 
 
III. 2.] THE CONCEPTION OF VALUE. 201 
 
 are not in reality two distinct kinds of value, but rather the 
 same kind of value inherent in two distinct categories of things. 
 The one category is that of things in general, as gold in general, 
 iron in general, and air in general. The other category is that 
 of particular things — the cargo of iron which has just arrived 
 in port ; a particular ingot of gold ; the air which one is at 
 the moment breathing. 
 
 Utility in the two Categories. When we say that iron is 
 more useful than gold, we do not mean that a single bar of 
 iron really possesses higher utility than a similar bar of gold 
 would. "What we mean is that iron in general, or all the iron 
 in the world, is more useful than gold in general, or all the 
 gold in the world. But a single bar of iron is, under the actual 
 conditions in which men are placed, less useful than a bar of 
 gold, for the simple reason that if the bar of iron were lost or 
 annihilated there are plenty of other bars to take its place ; 
 whereas there are not plenty of bars of gold. 
 
 It might be said, in reply to this, that the fact of there being 
 plenty of other bars of iron does not really lessen the value or 
 importance of the service rendered by any particular bar, and 
 that it is this service considered in itself which determines the 
 utility of the bar. But a little consideration will show that we 
 cannot make this kind of utility, that is, the utility of things or 
 services in themselves, the subject of any precise thought or 
 estimate. If we tried to do so, we should conclude that the 
 utility of everything which supports life is infinite. For ex- 
 ample, in travelling by rail, we might say that the utility of 
 every separate rail over which we pass is infinite, because it 
 keeps the train in which we ride from destruction. It is clear 
 that such a conception of utility cannot be exactly measured. 
 
 The more reasonable definition is this : The utility of an ob- 
 ject is measured by the disadvantage which we should have suf- 
 fered if the object had never existed. Adopting this definition, 
 the utility depends not merely on what the object does for us, 
 but on what would have happened if the object had not existed. 
 Now, if the bar of iron were non-existent, we should merely 
 
202 TEE LAWS OF SUPPLY AND DEMAND. [III. 3. 
 
 have been put to the labor and expense of making another bar 
 to take its place. So it is this labor and expense which measure 
 its utility, as well as its market value. And every one knows 
 that this labor and expense would be far greater in the case 
 of a bar of gold than in that of a bar of iron. 
 
 Value in the two Categories. On the other hand, if we 
 attempt to assign a market value to air, or iron in general, 
 we shall find it to correspond to the utility. If the inhabitants 
 of the planet Mars should offer to purchase our atmosphere, 
 they would find that the market value we set upon it would be 
 infinite, because to part with it would be instant death to the 
 inhabitants of this planet ; hence the " value in exchange" of 
 air in general is not zero, but is rather infinitely great. Again, 
 if the inhabitants of Mars should offer to purchase all the iron 
 on our planet with an equal weight of gold, we should not ac- 
 cept the offer. That is, iron as a sum total has a higher market 
 value as well as a greater utility than gold as a sum total. 
 There is therefore no objection to defining the value of com- 
 modities as equivalent to their utility, provided that we always 
 attach the correct idea to the word utility. But utility will 
 then be identical with value. 
 
 3. This principle is closely related to an improved theory of 
 value formulated by Professor Jevons. Consider a man in a 
 situation where the command of food is difficult or uncertain. 
 A daily supply of a pound of bread will be of the greatest 
 value to him ; to secure it he would give all his time if neces- 
 sary. It would be of equal utility, because it would keep him 
 from starving. The addition of a second pound per day would 
 be of less utility, and would also have less value. If he were 
 offered a third pound per day, the value and the utility would 
 both be still smaller. If the loaves offered went on increasing, 
 a point would soon be reached when he would prefer some- 
 thing else than food, say clothing. The utilities of successive 
 supplies of clothing would go on diminishing in the same way. 
 If the supply were houses of increasing size, their utilities 
 
III. 4.] THE CONCEPTION OF VALUE. 203 
 
 would go on diminishing. A point would thus arise in the 
 case of each and every commodity at which the utility of an 
 additional portion would he so small that it would be indiffer- 
 ent whether a person did or did not undergo the labor or 
 privation necessary to command it. This Mr. Jevons calls 
 final utility. Thus final utility is synonymous with value 
 which is measured by price. 
 
 Now, what is ordinarily bought and sold in the market are 
 not sums total comprising the whole of any commodity which 
 exists, but little portions each of which is insignificant along- 
 side of the whole. It is therefore with final utilities alone 
 that the operations of commerce and the laws of economics are 
 commonly concerned. 
 
 4. It is sometimes said that economics has nothing to do 
 with anything but this market value, and knows no other meas- 
 ure of value. Although this is true in the generality of cases, 
 it is a grave mistake to regard it as universal. In any case 
 where the question is one respecting the effect of a material 
 increase or diminution in the supply of an article, the benefit 
 or injury cannot be expressed by the market value of small 
 portions. For example, the injury and suffering which would 
 be inflicted on mankind by a general failure of the crops is 
 not to be measured by the market value lost. In fact it would 
 be found that the value of a short crop would exceed that of 
 an abundant one. So with capital. The utility to non-capital- 
 ists of all the capital accumulated by others is incomparably 
 greater than the interest they pay upon it. This principle is 
 of special importance in all cases where the question at issue is 
 that of a general policy which will tend to change quantities 
 total of any product. If all the laborers of the country should 
 combine together to materially change the conditions of pro- 
 duction, the corresponding change of value would afford no 
 criterion of the benefit or injury to society. This limitation 
 upon the doctrine of value will have important applications. 
 
204 THE LAWS OF SUPPLY AND DEMAND. [III. 5. 
 
 5. Value has a relation to human needs which, although 
 commonly simple enough, is sometimes seriously misunderstood. 
 Its origin depends on two factors, which must be kept separate 
 in thought. These factors are (1) need on the part of man, 
 and (2) capacity to gratify that need on the part of the wealth 
 valued. To a man who is as happy as he can be and wants 
 nothing, no wealth can have any value. It is only when he 
 needs to better his condition that value arises. The result of 
 this is that increase of value may imply not only an increase of 
 power to gratify our needs, but also an increase of those needs. 
 By making a man very thirsty and cutting oil his water-supply 
 we give value to water. By threatening to inundate him with 
 the Mississippi River we give value to the dikes which keep 
 that river from overflowing his fields. By clearing away the 
 forest we give greater value to the limited quantity of wood 
 that remains. By adding more people to the number who must 
 be fed from one farm we increase the value of the farm and 
 everything upon it. A cold climate increases the value of 
 houses, shelter, and clothing. 
 
 The result of all this is that although value is the measure 
 of wealth, it is very dangerous to take it, as is often done, as 
 the measure of human welfare. It may equally be the measure 
 of the increase of human necessities, and it is very difficult to 
 draw an exact line between the two cases. It is only when we 
 compare two different values in cases where men are similarly 
 situated that we can say whether the difference between the 
 values corresponds to the difference of general welfare. If we 
 should find by comparing the two States of Ohio and Indiana 
 that the wealth of one far exceeds that of the other in pro- 
 portion to its population, we might fairly conclude that the 
 inhabitants of the wealthier State were on the whole better 
 off. But we could not make a similar comparison of the 
 people of Switzerland with those of Minnesota, because the 
 necessities of the former lead them to assign a higher value to 
 roads and fields than these objects possess in Minnesota. 
 
III. 6.] THE ABSOLUTE STANDARD OF VALUE. 205 
 
 CHAPTER II. 
 
 THE MEASURE OF VALUE BY AN ABSOLUTE STANDARD. 
 
 6. "We have to introduce certain mathematical conceptions 
 into this subject. One of the most common of these is that of 
 one quantity varying directly or inversely as another quantity. 
 A simple example is that of total cost varying directly as price 
 per unit. If I have to buy a box of tea, then the higher the 
 price per pound the more I must pay for the box. , This rela- 
 tion is expressed algebraically by saying that the money I must 
 pay for the tea is equal to the product of the price into some 
 fixed quantity. 
 
 Let M = the total amount of money I must pay ; 
 P = the price per pound. 
 Then the law of relation is expressed by the equation 
 
 M=PXC. (a) 
 
 C being the constant quantity. When we say that C is a con- 
 stant quantity, we mean only this, that it does not necessarily 
 vary when P varies, or that we suppose it constant in order to 
 get a relation between P and M. In the present example we 
 can readily see what C is. It is the number of pounds of tea 
 in the box. If this is 120, then we have for the cost of the tea 
 M = Pxl20. 
 
 To take another example, let us inquire what sum total of 
 values can be exchanged by a piece of money in a year. Let 
 us put 
 
 E, the total amount of exchanges required ; 
 
 D, the number of dollars in the coin ; 
 
 ~N, the number of times that the coin changes hands in the 
 course of the year. 
 
 It is evident that the higher the value of the coin — that is, 
 
206 THE LAWS OF SUPPLY AND DEMAND. [III. 7. 
 
 the greater the value of D — the greater the value of the ex- 
 changes it will effect, other conditions being equal. Hence 
 
 we may write 
 
 E = DxC. 
 
 A very little consideration will show that the constant C is 
 equal to ~N, the number of times the coin changes hands in a 
 year. The relation between the three quantities is therefore 
 expressed by the equation 
 
 E = DxK (&) 
 
 We may therefore also say that the quantity of business 
 which a coin will transact in the course of a year is proportional 
 to the number of times it changes hands. 
 
 7. Inverse variation comes into play when one quantity in- 
 creases as another diminishes. If I have a fixed sum of 
 money, it is evident that the higher the price per pound of an 
 article the less of that article my money can buy. This rela- 
 tion is expressed by saying that the amount I can buy is equal 
 to some quantity divided by the price per pound. Using the 
 same notation as in the first example (a), and putting Q for 
 the quantity I can buy, we shall have in this case 
 
 Here it is evident that C represents the fixed sum of money 
 which I have to buy with, the same as M in the first example. 
 From equation (b) we derive, by an algebraic operation, 
 
 *=£■ 
 
 This equation expresses the fact that if a certain definite 
 amount of business is to be transacted by a coin, then the 
 smaller the value D of the coin the greater the number of 
 times it must change hands.* 
 
 * It may appear to the student that we are here explaining a simple matter 
 in a complex way, since the results are plainer than the reasoning. This is 
 true. The ohject is to illustrate a principle which we shall have to apply in 
 
III. 8.] TEE ABSOLUTE STANDARD OF VALUE. 207 
 
 8. In all the above cases it is obvious what the constant 
 quantities mean. But sometimes, although we may form a defi- 
 nite idea of these quantities as constants, their meaning depends 
 upon a great many conceptions. One of these conceptions, 
 which we must have at command, is that of a scale of prices. 
 Suppose that the price of everything next year should be dou- 
 ble its price this year. Then, other conditions being equal, 
 double the amount of money would be required to buy and sell 
 the same goods, since the amount of money required for each 
 purchase necessarily varies as the price. By a scale of prices 
 is meant a general average of prices of all goods bought and 
 sold. If this average of prices increases, we say that the scale 
 of prices increases, and vice versa. Let us call the scale S, and 
 let us put M for the amount of money required to make all the 
 exchanges. Then, since the higher the scale the greater the 
 amount of money required, we may write the equation 
 
 M = S X C, (c) 
 
 being some Constant. 
 
 What this constant is depends upon a great many causes ; 
 one of which is the total amount of commodities to be bought 
 and sold. It also depends upon what standard of comparison 
 we take for S ; that is, for what scale of prices we regard S as 
 equal to unity. But in this case all that is necessary is to ad- 
 here to a scale when once adopted. For example, the scale of 
 prices was about twice as high in 1864 as it was in 1861. 
 Hence it required twice as much money to transact a given 
 amount of business in 1861 that it did in 1861. If we call the 
 scale of 1861 unity, that of 1861 will be 2. If we call that of 
 1861 unity, we had in 1861 S = £. 
 
 It is evident that the constant quantity in equation (c) de- 
 pends upon and varies with the total amount of business to be 
 transacted. Therefore if we put 
 
 the future, namely: Whenever one quantity varies as another, the one may be 
 considered as equal to the product of the other into some third quantity. Con- 
 versely, if one quantity varies inversely as another, it is equal to the quotient of 
 some third quantity divided by the other. 
 
208 THE LAWS OF SUPPLY AND DEMAND. [in. 9. 
 
 B = the total amount of business, 
 
 we may write 
 
 C = BxK, 
 
 K being some other constant quantity. 
 
 If we substitute in equation (<?), the latter will become 
 M = SxBxK, 
 which means that the quantity of money required will vary 
 both as the scale of prices and the amount of business to be 
 transacted. 
 
 In all cases of this sort we may consider the algebraic sym- 
 bols as the measures of certain economic causes. The effects 
 of these causes will then be studied by supposing some one 
 cause to vary while all the others remain constant. Thus we 
 shall get the effect of the variation in that particular case. By 
 considering each of the causes in succession to vary, we get the 
 effects due to the variation of all the causes. The last equa- 
 tion is an example of introducing two varying causes, scale of 
 prices and quantity of business. 
 
 9. Suppose the price of everything to be twice as high 
 this year as last, while the quantity produced remains the 
 same. In ordinary language, it would be said that all values 
 had doubled. But it is clear that really nothing would have 
 been any more valuable or useful than before. The measure- 
 ment of values by prices is therefore not entirely satisfactory. 
 To illustrate the exact nature of the defect, let us suppose an 
 analogous case in measuring length. On getting up some morn- 
 ing, a father measures the heights of his children with what 
 purports to be a foot-rule. He finds that the boy who yester- 
 day only measured four feet now measures eight. Marking 
 his own height, he finds it to be eleven feet. He might claim 
 that his entire family was twice as tall as yesterday, and that 
 he was himself a giant. But the more reasonable explanation 
 would be that his supposed foot-rule was only one half its 
 proper length, and that the actual size of everything else re- 
 mained unchanged. 
 
III. 10.] THE ABSOLUTE STANDARD OF VALUE. 209 
 
 Now the measure of values by money is, in principle, simi- 
 lar to the measure of lengths with a rule. When we say a man 
 is six feet high, we mean that his height is equal to six of a 
 certain length which we call a foot. So when we say that a 
 barrel of flour is worth $5, we mean that its value is equal 
 to five pieces of money each of which we call a dollar. In 
 order therefore that we may never be deceived in actual values, 
 both the foot and the dollar with which our comparisons are 
 made must remain unchanged. There is no difficulty about 
 the foot, because it is a material substance, and we can readily 
 find matter which does not vary in its magnitude from year to 
 year. But since value is only a mental conception, and depen- 
 dent upon human desire, there can be no absolute dollar to 
 compare with. The current dollar may be variable in value, 
 as well as a barrel of flour, and we must always remember that 
 calling a thing, whether metal or paper, one dollar, or one pound, 
 or one franc, no more gives it a fixed value than calling a stick 
 one foot makes it a foot long. 
 
 10. Is there then any way by which we can approximate to 
 a real standard of value ? To show how we may reach such an 
 approximation, let us again return to the case of the foot-rule. 
 It is very evident that in the case we have supposed, that of a 
 man finding himself twice as tall as he was before, common- 
 sense would tell him that the rule with which he measured was 
 only half as long as before. In other words, the logical pro- 
 cess would be to measure the rule by the heights of himself and 
 children instead of measuring them by the rule. If he found 
 that yesterday the combined measures of himself and of his 
 children were 16 feet, while to-day they all together measured 20 
 feet, he would conclude that the rule to-day was shorter than it 
 was yesterday in the ratio 20 : 16, or that it had shrunk 20 per 
 cent. This result would indeed rest on the assumption that 
 there was no actual change in the heights of the family, and 
 whatever error this assumption might be subject to, the same 
 error would his result be subject to. It is evident that in the 
 H 
 
210 THE LAWS OF SUPPLY AND DEMAND. [III. 11. 
 
 case supposed the errors arising from this assumption would be 
 much less than that arising from the supposition that the length 
 of the measure was invariable. 
 
 In the same way, in devising an absolute standard of valne 
 the most logical process is to suppose that the general or aver- 
 age values of commodities remain unchanged from year to year, 
 and that a general rise or fall in prices is caused by a diminu- 
 tion or increase in the value of the dollars in which the price 
 is expressed. Now, if the changes thus indicated were the 
 same with all commodities, that is, if all prices rose or fell ex- 
 actly in the same proportion, there would be no difficulty. But 
 as a matter of fact we never find this to be the case. We must 
 therefore seek for some general average which shall be as near 
 as possible to what we want. One possible hypothesis would 
 be this : We might assume that the absolute value of every- 
 thing produced by the population of the country remains un- 
 changed except that as population increases the total value 
 produced increases in the same ratio. In other words, we 
 may suppose the average productiveness of each individual to 
 remain the same from year to year. 
 
 If then we could determine the total money value of all that 
 is produced by all the inhabitants of the country, and divide 
 the result by 60,000,000, or such other number as might ex- 
 press the total population, we should have for the quotient a 
 certain number of dollars which would be the average produc- 
 tiveness of each individual, measured in current money. If we 
 found this average to fluctuate from year to year, we should 
 conclude that it was due to changes in the value of the dollar 
 with which the value produced was measured. 
 
 11. The Tabular Standard of Value. As a matter of 
 fact it is impossible to determine the total productiveness as 
 just defined with any approach to accuracy. We cannot learn 
 what every man is doing or making by any system of inquiry. 
 The next best course is to take as our standard of comparison 
 the value of a certain number of the great staples of life. 
 
III. 11.] THE ABSOLUTE STANDARD OF VALUE.. 
 
 211 
 
 Flour is one of these. In the city of New York a barrel of 
 flour which sold for $5 in the year 1S83 would only bring 
 $4 in 1885. If we regard tho value of the dollar as in- 
 variable, we should say that the value of the flour was 20 per 
 cent less in the latter year than in the former. But if we 
 regard the value of the flour as invariable, then we should say 
 that the value of the dollar was 25 per cent greater in 1885 
 than in 1883. 
 
 Instead of depending on flour alone for a comparison, we 
 should take all commodities which are consumed in appre- 
 ciable quantities. The table below will show the method bet- 
 ter than any amount of description. We have here a list of 
 twenty articles of nearly universal consumption. Of each ar- 
 ticle we take what we may suppose to be a rude approximation 
 to the quantity which a person may consume in a year. To 
 discover the actual average amount consumed by each person 
 
 Table showing the Price op a certain Collection of the Neces- 
 saries of Life, at New York, in the Years 1876, 1880, and 1884. 
 
 
 1876. 
 
 1880. 
 
 1884. 
 
 1 barrel corn-meal 
 
 $3 68 
 
 12 43 
 
 7 72 
 
 7 65 
 5 53 
 2 58 
 
 8 90 
 
 34 
 
 1 34 
 
 5 60 
 
 9 00 
 10 60 
 
 7 20 
 
 2 80 
 
 6 12 
 2 84 
 36 
 
 10 70 
 
 2 98 
 
 3 30 
 
 $3 80 
 
 11 76 
 
 7 78 
 
 7 40 
 
 3 47 
 2 30 
 
 7 52 
 
 30 
 2 06 
 
 4 68 
 
 8 80 
 
 6 20 
 
 5 10 
 
 1 60 
 
 7 50 
 
 2 92 
 30 
 
 9 00 
 
 2 98 
 
 3 80 
 
 $3 24 
 
 2 barrels flour 
 
 11 18 
 
 1000 bricks 
 
 7 59 
 
 500 feet lumber 
 
 8 53 
 
 
 4 70 
 
 20 lbs. cotton 
 
 2 10 
 
 
 9 16 
 
 2 cwt. ice 
 
 23 
 
 1 cwt. pig-iron 
 
 1 28 
 
 100 lbs. beef 
 
 4 80 
 9 90 
 
 100 lbs. pork 
 
 7 90 
 
 30 lbs. butter 
 
 5 40 
 
 
 2 10 
 
 
 6 75 
 
 
 2 40 
 
 
 39 
 
 
 7 10 
 
 
 3 58 
 3 00 
 
 
 
 Total 
 
 $111 66 
 
 $98 27 
 
 $101 33 
 
 
 
212 THE LAWS OF SUPPLY AND DEMAND. [III. 11. 
 
 would be a difficult problem, and the quantities in the table 
 must be considered as only rude guesses, the object being to 
 illustrate the principle and not to give a fact with the utmost 
 exactness. With each article is given the cost of the assumed 
 quantity from the wholesale price in the city of New York at 
 certain periods separated by four years. The numbers given 
 are the averages during the years ending June 30th, of 1876, 
 1880, and 1884. The prices are taken from the reports of the 
 Bureau of Statistics of the Treasury Department. 
 
 Adding up the several columns, we find that the collection 
 of commodities described in the table cost $111.66 in 1876 ; 
 $98.27 in 1880 ; and $101.33 in 1884. 
 
 We now proceed on the supposition that the real value of 
 this collection of articles remains unchanged. But when meas- 
 ured in dollars the value was less by 12 per cent at the second 
 epoch than at the first. From this it would follow that each 
 dollar was worth about 13 per cent more in 1880 than in 1876. 
 From 1880 to 1884 there was a slight increase in the amount 
 of money necessary to purchase the collection. We therefore 
 conclude that during that period there was a slight deprecia- 
 tion in the value of the dollar. It is probable that since 1884 
 the value of the dollar has again been slightly increasing, so 
 that less money would purchase the collection now than was 
 reqnired during that year. 
 
 To perfect this table many additions and modifications are 
 necessary. We should include the rate of wages paid to vari- 
 ous classes of laborers whenever it can be exactly determined. 
 But in estimating the rate of wages it would be necessary to 
 take into account the unemployed as well as the employed. 
 Suppose, for example, that out of ten carpenters eight were 
 getting $2 per day, while two were unemployed. Then the 
 average wages of the carpenters would be $1.60 and not $2. 
 The wages of domestic servants, washerwomen, and other 
 classes who render personal services would also have to be 
 taken into account. Manufactured articles, clothing for ex- 
 ample, should be more fully represented. 
 
ni.ll.] THE ABSOLUTE STANDARD OF VALUE. 213 
 
 One source of error in drawing conclusions from such a table 
 can be more easily seen than avoided. The improvements con- 
 stantly being made in manufactures lead to their being really 
 cheaper when measured in terms of human labor, which is our 
 proper ultimate standard. This improvement should be allowed 
 for, if possible, by increasing the quantities in our standard col- 
 lection. 
 
 As a general rule the changes of value to which our current 
 dollar is subject are very little noticed or considered by the 
 public at large. Yet, as we shall hereafter see, nothing is more 
 essential to enable us to' understand the condition of the social 
 organism than this knowledge. The value of the dollar ought 
 to be determined from month to month by some central au- 
 thority and made known to the public. 
 
 It will be remarked that the changes in the amounts of 
 money necessary to purchase the tabular collection of com- 
 modities correspond to the changes in the general scale of 
 prices defined in § 8. The relation between this scale and 
 the absolute value of the dollar may be stated as follows : 
 
 The absolute value of the dollar varies inversely as the 
 scale of prices. 
 
 It should also be remarked that the conception which we 
 have called " absolute value of the dollar" is frequently called 
 " purchasing power." This popular form of expression is well 
 adapted to give a clear notion of the subject, since any one un- 
 derstands how a dollar may purchase more at one time than at 
 another. 
 
 Both the scale of prices and the purchasing power at any 
 time may be represented by numbers, the values of those 
 quantities at any arbitrary epoch being taken as unity. Thus 
 we should have, taking 1880 as unity : 
 
 . 1876. 1880. 1884. 
 
 Scale of prices 1.14 1.00 1.03 
 
 Purchasing power 0.88 1.00 0.97 
 
 A standard of value fixed in this way, by the prices of com- 
 modities, has been called a tabular standard of value. 
 
214 TEE LAWS OF SUPPLY AND DEMAND. [III. 12. 
 
 12, It lias been proposed to adopt a tabular standard of 
 value as that for tbe payment of debts which are due only at 
 the end of long periods of time. The public debts of the prin- 
 cipal nations of the world have gone on for several generations; 
 ground-rents in our great cities have sometimes been continued 
 for a hundred years or more. In these cases the essential condi- 
 tion of the contract is that, in consideration of a service rendered 
 at one time, the party receiving it agrees to pay a sum of 
 money at some distant future time. The objection to this sys- 
 tem is that no one knows what the absolute value of the money 
 will be when the time of payment comes. We know as a mat- 
 ter of history that great changes in the value of the monetary 
 unit have occurred, and can sometimes trace their causes. The 
 great additions to the gold supply of the world made by the 
 discovery of gold in Calif ornia and Australia in 1848 and 1850 
 resulted in a diminution of the value of the dollar. Hence 
 when old debts were paid during the few years preceding 1860, 
 the creditor received a less value than he supposed he would 
 get. During our civil war paper dollars were issued in such 
 quantities that their value fell to one half that of the gold 
 dollar or less. One half of all old debts payable during 1864 
 may be said to have been forfeited. During the years 1865 to 
 1880 there appears to have been a pretty steady appreciation in 
 the dollar. The result was that everybody who during the 
 years 1863 to 1865 contracted debts payable now has to pay 
 double the value on which he based his agreement. 
 
 Now, one object of the tabular standard of value is to ar- 
 range an equitable system for the payment of such debts. This 
 system is in brief that of providing that the payments shall be 
 made, not in so much gold, silver, or other current money, but 
 shall consist of such a quantity of the current money as shall 
 purchase a stipulated collection of commodities. 
 
III. 13.] THE RELATION OF PRICE AND DEMAND. 215 
 
 CHAPTER III. 
 
 THE RELATION OF PKICE AND DEMAND. 
 
 13. The laws which we have to consider in this chapter are 
 so wide-reaching in their operation that they may be justly re- 
 garded as the fundamental ones of economic science. In ac- 
 cordance with a general principle of scientific method, we have 
 to begin the study of these laws by showing how they operate 
 in the simplest cases. What these cases are will be seen by 
 recalling the principal industrial and commercial operations as 
 they have already been described. These operations consist, 
 in brief, in producing goods, taking them to market, and sell- 
 ing them to persons who want to use them. In the case of 
 most products a number of sales are necessary, because nearly 
 every person who makes anything has to buy the materials 
 with which to make it, and after it is made it may pass through 
 several owners before reaching the final consumer. The sim- 
 plest case which will include all the elementary operations is 
 that in which a commodity is made by some producer, brought 
 to market, sold by the producer to a dealer, and by him to the 
 person who is to consume the commodity. In this case there 
 are two exchanges. The difference between the prices at 
 which the two sales are made will represent the profits and ex- 
 penses of the dealer. 
 
 Let us take the purchase and sale of flour as an example. 
 In accordance with what has been said, we have three classes 
 of people to deal with : 
 
 I. Producers of flour. These producers actually comprise 
 farmers, millers, and dealers. But, to make our first considera- 
 tion as simple as possible, we shall combine them all together in 
 the persons of the one class who bring the flour to market and 
 sell it. 
 
216 THE LAWS OF SUPPLY AND DEMAND. [III. 13. 
 
 II. The dealers who purchase the flour from the producers. 
 
 III. The consumers of flour, who purchase it from the deal- 
 ers in order to make it into bread for consumption. 
 
 Still further to fix the ideas, we shall take the city of New 
 York as an example of a market. In and near this city there 
 is a population of some 2,000,000 to be supplied with flour. 
 Then the classes of people above described will be, firstly, 
 those who are bringing flour to New York for sale; secondly, 
 the dealers who purchase it at wholesale ; thirdly, the two 
 millions of people who are buying it from the dealers to eat. 
 
 There are in reality many grades of flour, and the prices of 
 different grades will differ. But, to make our first example as 
 simple as possible, we shall suppose but a single average grade. 
 
 Since the dealers are the owners of all the flour they sell, or 
 act as agents of the owners, we may consider them at liberty 
 to charge what price they please. But the quantity which 
 they can sell depends upon the price they charge. The rela- 
 tion between the price and the sales may be called the law of 
 price and demand, and is such that the higher the price the 
 less the quantity which can be sold. 
 
 The reason of this law is that every rise in price will lead to 
 economy and retrenchment on the part of consumers. The 
 diminution in the amount sold arises in two ways: 
 
 Firstly, by leading consumers to be more economical in the 
 use of flour, eating and wasting less bread. 
 
 Secondly, by leading' them to employ substitutes for flour, 
 such as corn-meal, oat-meal, or potatoes. 
 
 We readily see that the diminution in the consumption aris- 
 ing from an increase of the price will be different with differ- 
 ent classes of consumers. The wealthy do not take any account 
 of the price of flour in determining whether they shall or shall 
 not eat bread. The lower we descend in the scale of wealth 
 the more rigorous the economy which must be practised, and 
 the greater the diminution in consumption which will be caused 
 by a rise in price. 
 
III. 14.] THE RELATION OF PRICE AND DEMAND. 211 
 
 14. We now Lave the following definitions of certain words 
 which will be in almost constant use. 
 
 P By market is meant a place or region where one or more ! 
 (commodities are bought and sold on a large scale. Chicago 
 )and New York are great wheat marketsJ- Many thousands of 
 farmers in the Northwestern States send their wheat to the 
 former city for sale, while American and European dealers pur- 
 chase wheat or flour in New York. The essential feature of a 
 market is that the price of the commodity is publicly known, 
 so that everybody knows very nearly at what price other peo- 
 ple are buying and selling. 
 
 By the supply of a commodity is meant the quantity of 
 that commodity brought to any market for sale. For example, 
 if we find that there are to-day 100,000 bushels of wheat in 
 Chicago awaiting purchasers, we might say that the supply to- 
 day is 100,000 bushels. But it is better to consider the supply 
 as the total quantity brought to market for sale in the course of 
 a year, or other unit of time, rather than as a stock on hand. 
 
 By the demand for a commodity is meant the quantity 
 of that commodity which can be actually sold in any market at 
 any given price during a year or other unit of time. 
 
 We must carefully distinguish between this economic signifi- 
 cation of the term demand and the popular one, which merely 
 implies desire to purchase. No amount of mere desire for a 
 commodity is sufficient, in itself, to constitute a demand. The 
 latter arises only when the person desiring has the means as well 
 as the willingness to purchase. " There is no demand, economi- 
 cally speaking, in the hungry eyes of a penniless boy looking 
 at tarts through a pastry-cook's window. Without pennies an 
 unlimited longing and passion for their consumption would not 
 permit that boy to contribute aught to the demand for tarts." 
 
 Introducing the word demand, the law of price and demand 
 which we have already mentioned may be expressed as follows : 
 
 First Law: Other conditions being equal, demand varies 
 with price in such a manner that as the price increases demand 
 diminishes, and vice versa. 
 
218 THE LAWS OF SUPPLY AND DEMAND. [III. 15. 
 
 Universal Applicability of the Law of Price cmd De- 
 mand. The law of diminished demand with increased price 
 applies not only to goods bought and sold in market, but to 
 every form of service for which people pay money. If hack- 
 men charge too much for the use of their carriages, fewer peo- 
 ple will employ them and more people will walk or take the 
 street-cars. If a theatrical manager puts the price of his 
 tickets too low, more people will apply for them than the thea- 
 tre will hold ; if he sets the price too high, some of the seats 
 will be empty. If bricklayers demand higher wages, fewer 
 people can afford to build houses. By lowering their wages 
 the number of people who can afford to employ them is in- 
 creased. When a Washington newsboy finds the day passing 
 away without his supply of New York papers being disposed 
 of, he lowers the price from five to three or two cents, know- 
 ing that he may thus sell at a low price papers which he would 
 otherwise have to lose entirely. 
 
 15. Sensitive and Insensitive Commodities. Let us next 
 inquire whether we can make any approximate estimate of how 
 much the demand will fall off with a given increase of price. 
 First let us see why it falls off at all. The reason is that the 
 income of people in general is limited. If, therefore, prices 
 rise without any general increase of income, it will be impossi- 
 ble for individuals to purchase the same amount of everything 
 as before. The fundamental question we have been consider- 
 ing is, How will demand vary with price, all other conditions 
 being equal ? Among the other conditions which, by hypothe- 
 sis, remain equal are the incomes of the purchasers. Since, 
 then, each man has an equal amount of money to spend whether 
 the price be high or low, the sum total w T hich he 'can purchase 
 with his money will vary inversely as the price. For instance, 
 if prices should all be doubled, he could purchase on the aver- 
 age only half as much as before. We may now reasonably 
 suppose as an average rule that the result will be the same for 
 each separate commodity that it is for things in general; that is, 
 
III. 15.] TEE RELATION OF PBICE AND DEMAND. 219 
 
 that the quantity sold or demanded will vary inversely as the 
 price. For example, if it is a question of how many peaches a 
 man will purchase for his table, we may suppose that each per- 
 son will be willing in the course of the summer to reserve a. 
 certain definite amount of his income for buying peaches. 
 Then if the price is one half the usual one, he will buy twice 
 as many as before ; and if it is double, he will buy one half as 
 many. 
 
 However sound this rule may be in its application to the 
 general average of all the things exchanged, we cannot suppose 
 it to be true of each commodity considered separately. For 
 both as a matter of fact and by reason we know that the de- 
 mand for some commodities will fall off much more than that 
 for others in consequence of a given increase of price. We 
 need words to express these differences, and therefore shall 
 adopt the following definitions : 
 
 Sensitive commodities are those the demand for which falls 
 off most when the price is raised. 
 
 Insensitive commodities are those the demand for which is 
 but little changed by changes in price. 
 
 "We readily see that those commodities will be insensitive on 
 which consumers have the least ability or the least inducement 
 to economize. A few examples will make this clear. 
 
 Pepper, mustard, and table condiments generally will be 
 insensitive because their cost is insignificant. Tobacco is in- 
 sensitive because a man who becomes addicted to it finds it so 
 difficult to give it up that he would rather economize on some- 
 thing else if the price of tobacco rises. Nearly the same re- 
 mark applies to wines and spirituous liquors, so far as their use 
 as beverages is concerned. 
 
 Food considered as a whole is an insensitive commodity, be- 
 cause it is most difficult for any one to go with much less than 
 • his accustomed quantity. But if the price of only one particu- 
 lar kind of food rises, it might prove to be sensitive, because 
 some other kind would be substituted for it. For example, if 
 the price of potatoes rises, bread can be eaten instead of pota- 
 
220 TEE LAWS OF SUPPLY AND DEMAND. [III. 16. 
 
 toes, and vice versa. So one kind of bread or meal can be 
 used instead of another. But if the prices of all sorts of food 
 should rise in the same proportion, there would be no motive 
 to substitute one for the other, and people would have to 
 economize on something else. 
 
 On the other hand, clothing, especially fine clothing, is proba- 
 bly a sensitive commodity. Most people could make their old 
 clothes last a good deal longer than they do ; there is there- 
 fore a strong inducement to buy fewer fine clothes, or no fine 
 clothes at all, when the price rises. The same is true of those 
 luxuries which people indulge in only as their means increase. 
 
 As we ascend in the scale of luxury we find that the demand 
 for commodities depends more and more on the cost of things 
 below them in that scale, and therefore proportionally less on 
 their own cost. Hence we cannot strictly classify them as 
 being, in themselves, sensitive or insensitive. 
 
 Investments and other forms of capital are a case in point. 
 Many people save up a part of their annual income to be in- 
 vested in bonds, stocks, and other interest-bearing securities. 
 If then the price of anything which they deem necessary rises, 
 they may stop saving and spend their surplus income in paying 
 the increased price for the necessary articles of current con- 
 sumption. This will tend to make the necessaries and small 
 luxuries of life less sensitive than the average, because by 
 economizing in investments and costly luxuries consumers will 
 have more money to spend on other things. 
 
 16. Reaction of Demand on Price. In what precedes 
 we have compared the effect of different scales of prices for a 
 commodity when the general conditions which exist in the 
 market remain unaltered. Our conclusion has been a law 
 according to which a cause which changes the price of a com- 
 modity, without at the same time changing anything else, will 
 change the demand. This limitation is expressed by the con- 
 dition " other things being equal." Although other conditions 
 are always equal for the time, yet as a matter of fact they do 
 
III. 17.] THE RELATION OF PRICE AND DEMAND. 221 
 
 not remain equal from one time to another. That is to say, 
 although it is certain that to-day, or any other day, more flour 
 can be sold at $5 per barrel than at $5.10, yet it is possible 
 that more can be sold at $5.10 to-morrow than can be sold at 
 $5 to-day. Some new use may be found for flour, or it may 
 suddenly be wanted to make up a failure of the crops in Eu- 
 rope. Then there will be an increase of demand, even if the 
 price should remain unaltered or should be raised. Since in 
 this case a greater quantity can be sold at the old price, dealers 
 will be able to increase the price, while at the same time sell- 
 ing a greater quantity than before. Self-interest will prompt 
 them to do this. Hence we have a second general law : 
 
 Other conditions being equal, an increased demand for any 
 commodity increases its market jprice. 
 
 Combining this law with the other, we see the nature of the 
 mutual interaction between price and demand. Weak reason- 
 ers sometimes find it hard to see that increase of price causes 
 diminished demand, and that diminished demand diminishes 
 price. In reality this mutual interaction is necessary to equili- 
 brium. If increase of price acted on demand so as to increase 
 it also, we should have an increasing price causing an increased 
 demand; this increased demand would again increase the price, 
 and so the two would go on increasing without stopping. Evi- 
 dently this can never be the case. But since the actual rule is, 
 increasing price diminishes demand, this diminished demand 
 tends to diminish the price ; a state of equilibrium is reached 
 between the opposing forces ; a rise of price is checked by the 
 fallling off of demand, and falling price is stopped by stimulat- 
 ing demand, which keeps it from falling without limit. 
 
 17. Onr next inquiry is how the two preceding laws con- 
 necting price and demand are to be modified so as to apply to 
 the actual way in which business is done. The case to which 
 the laws apply without modification is that when the demand 
 which we consider comes from the people who actually con- 
 sume the products, and when the price which we consider is 
 
222 TEE LAWS OF SUPPLY AND DEMAND. [III. 18. 
 
 what those people have to pay. Of course this price is gener- 
 ally the retail price. Now, will the same law apply in the 
 wholesale markets, and in those cases in which large purchases 
 of goods are made, not for purposes of consumption by the 
 producer, but for re-manufacture into other things ? 
 
 Granting that consumption and retail prices are connected 
 by the laws already laid down, we remark that the retail and 
 wholesale prices necessarily vary together, so that the con- 
 sumption must indirectly depend upon the wholesale price. 
 Now, although it is not always true that the retail price varies 
 immediately with every change in the wholesale price, yet 
 these two prices must in the long-run correspond to each other, 
 at least in the case of the great staples of life. Suppose a 
 grocer to purchase flour at $4 and to sell it at $4.25. It is cer- 
 tain that if the wholesale price is increased 25 cents, he cannot 
 continue to sell at the same price as before. If the wholesale 
 price falls, he will have to lower his price in a corresponding 
 decree, or other dealers will undersell him and he will lose his 
 customers. Thus, as a general rule, the profit in selling at re- 
 tail will be the lowest which will permit the retail dealers to 
 meet all the expenses of their business and compensate them- 
 selves for their labor and skill. The modifications to which 
 this general rule is subject will be considered in future chap- 
 ters. We therefore conclude that, as a general rule, the de- 
 mand will increase as the wholesale price diminishes, and vice 
 versa, because the wholesale and retail prices vary together. 
 
 18. Equilibrium of Supply and Demand. In a normal 
 state of things the price will be so adjusted as to preserve an 
 equilibrium between the supply and demand. To return to 
 our illustration, suppose that, the price of flour being $5 per 
 barrel, the dealers- of New York find that the quantity which 
 comes into their market is sold nearly as fast as it arrives ; there 
 will then be no occasion for a change in either the supply, the 
 demand, or the price. Suppose then that there is an unusually 
 good crop, or that from any cause whatever an increased supply 
 
•in. 19. J THE RELATION OF PRICE AND DEMAND. 223 
 
 is brought to market, the conditions of the market otherwise re- 
 maining the same. The result will be that so long as the price 
 remains at $5 the increased supply will accumulate on their 
 hands. In order to get rid of it they will be obliged to lower the 
 price. This will cause an increased demand both at home and 
 abroad, according to the first law. The normal equilibrium 
 will be reached when the price is so fixed that the increased 
 demand thus caused exactly balances the increased supply. 
 
 Suppose, secondly, that instead of an increased supply there 
 is a diminution in the supply. Then the people who go to 
 market offering $5 per barrel cannot all be supplied. To de- 
 cide who shall be supplied, the dealers raise the price. This 
 action will, by the first law, diminish the demand. The nor- 
 mal price will be that which brings the demand down to the 
 supply. 
 
 To illustrate the second law, let us consider that the supply 
 remains constant, but that the change occurs in the demand. 
 Suppose that owing to a failure of the European crop there is 
 an increased demand. The immediate result will be exactly 
 the same as in the case of a diminished supply. The demand 
 cannot be entirely satisfied and the price must be raised. The 
 rise in price will have the double effect of increasing the sup- 
 ply and diminishing the demand. When they are equalized 
 equilibrium will be restored. 
 
 19. Discounting the Market. The sale of goods at retail 
 for consumption generally goes on at a very regular rate. But 
 in the wholesale market the changes may be sudden to any ex- 
 tent, the exchanges being determined not merely by the present 
 price, but by the judgment of men as to what the price or the 
 supply is going to be in the future. If, in the opinion of a 
 wholesale dealer, the price of wheat is going to rise five per 
 cent within the next three months, he will at once proceed to 
 purchase a large stock. If it is going to fall, he will make no 
 more purchases than are necessary for his present business, but 
 will rather make contracts to sell wheat three months hence 
 
224 THE LAWS OF SUPPLY AND DEMAND. [III. 19. 
 
 which he has not yet bought, but which lie intends to buy at 
 the lower price. Since all the wholesale dealers proceed on 
 the same system, it follows that the prospect of a future rise 
 in price will cause a present rise. If reports show the proba- 
 bility of a short crop, then, although a year may elapse before 
 the scarcity will be felt, an immediate rise of price will result. 
 This will be true even if the short crop is that of some foreign 
 country, because then that country will demand more wheat 
 from us. The act of purchasing according to an expected 
 price is called discounting the market. The effect of this 
 cause is to make prices more steady than they would be if no 
 account were taken of the future supply and demand. The 
 wholesale dealers in the great markets adjust their price, not to 
 the supply and demand of to-day, but to the probable supply 
 and demand of the future. They make the adjustment so that 
 in the long-run the consumption shall as nearly as possible bal- 
 ance the production. 
 
 /Speculative Transactions. In the regular course of trade all 
 commodities may be considered as passing from hand to hand 
 only in one direction. If A sells wheat to B, it ought to be 
 because A is in nearer communication with the producer than 
 B is, while B is in nearer communication with the consumer. 
 If A sold to B and B sold back to A again, there would 
 have been two sales with no net result. So, also, if the wheat 
 passed from A to C through the hands of B, when C could 
 just as well have purchased from A, B's labor would be 
 wasted. Hence when all transactions are conducted in the 
 most economical manner there will be no more exchanges than 
 are necessary to the proper care of the wheat while it is passing 
 from the farm to the mill. 
 
 But there is one occasional exception to the rule. A and B 
 may have different opinions on the subject of the future price 
 of. wheat, the one thinking that it is going to fall, the other 
 that it is going to rise. Then B may purchase the wheat, not 
 to send to some other market, but to keep in order to re-sell it 
 in the future at a higher price. Perhaps he will sell it back 
 
III. 20.] THE RELATION OF PRICE AND DEMAND. 225 
 
 to the very man from whom he bought it, in which case the 
 latter will suffer for his want of judgment. This operation of 
 selling merely to take advantage of a prospective rise in price 
 is called speculation. Its economic effects are greatly exagger- 
 ated in the popular mind. It amounts to little more than 
 betting on the future price of the article speculated in. 
 
 Prices in Different Markets. It is obvious that there can- 
 not be two prices for the same commodity in the same market 
 at the same time. Thus the price of wheat in Chicago is tele- 
 graphed over the country from day to day with as much exact- 
 ness as we know the height of the barometer. The same is true 
 of the great cotton markets in Charleston and Liverpool, and 
 of t he silver market in London. 
 
 It is also evident that in two different markets the price/ 
 cannot differ by more than the cost of transportation from one 
 market to another. If it costs fifteen cents to transport a\ 
 bushel of wheat from Chicago to New York, it is certain that 
 the price in JSTew York cannot differ by more than fifteen 
 _cents from that in Chica go. / For, if there were a greater dif- 
 ference, dealers would purchase in the other market and trans- 
 port it, thus saving money. If the demand in New York is 
 such that it is necessary to transport wheat from Chicago to 
 meet it, then the price in New York must be higher than that 
 in Chicago by the cost of transportation. 
 
 20. Is the rise of price consequent on increase of demand 
 temporary or permanent f It does not follow that because 
 increased demand raises the price the rise will be permanent. 
 The first effect of such a change will be that the wholesale 
 dealers will try to purchase more of the commodity and pay 
 higher prices to the producers. If there is any prospect that 
 the increased demand will be permanent, production will be 
 stimulated ; manufacturers will enlarge their facilities and em- 
 ploy more men, and new factories will be started. As the ul- 
 timate result of this, one or the other of two opposite effects 
 may follow. We have shown in Book II. that commodities 
 15 
 
226 THE LAWS OF SUPPLY AND DEMAND. [III. 21. 
 
 can frequently be made more cheaply on a large scale. If 
 then the increased demand is such as to lead to more economi- 
 cal production, the ultimate result will be to lower the price. 
 For example, the price at which axes and hatchets are sold is 
 very much below what they would cost if very few people 
 wanted them. 
 
 On the other hand, it may happen that an article cannot be 
 produced on a large scale with advantage owing to the limited 
 supply of something necessary to its production. A rise of 
 price due to increased demand may then be permanent, as will 
 be shown in the next chapter. 
 
 21. The Law of Value applied to Money. When money 
 and goods are exchanged for each other we may consider the 
 act of exchange to consist in the buying of the money with 
 the goods, and the latter will then be the price paid for the 
 money. In this case increasing the supply of money has the same 
 effect as increasing the supply of a commodity; that is, the 
 value of the money relative to the goods it exchanges for falls. 
 This is the same as saying that a larger amount of money will 
 be required to purchase a given commodity ; that is ? there will 
 be a rise of prices. The law under which this occurs will be 
 fully explained hereafter. At present we need only state the 
 result, which is : If the volume of currency be increased, all 
 other things being equal, money will be cheaper relatively to 
 goods, and thus the scale of prices will be increased in the 
 same proportion. 
 
EXERCISES. 227 
 
 ILLUSTRATIONS AND EXERCISES, 
 
 1. Mill says there can be no such thing as a general rise in values. Ex- 
 plain this generally, and especially in the case of a general rise of prices, 
 and show under what limitations it is true. 
 
 2. Can we make any exact comparison of the value of a barrel of flour 
 among the Puritans two centuries ago with its value at the present time? 
 
 3. Show the different results when the value of an article rises in conse- 
 quence of its scarcity, and when in consequence of some new use being 
 found for it. 
 
 4. During the Civil War the prices of nearly all commodities were twice 
 as high as before. During the ten years following the close of the war 
 there was a gradual diminution of all prices, so that the owner of a farm in 
 1875 might find it worth only half as many dollars as in 1864. Do you con- 
 ceive that the rise of values in the one case and the diminution in the other 
 indicated any actual change in the national wealth? What did these varia- 
 tions indicate? 
 
 5. If we regard value as purchasing power, explain how it is to be meas- 
 ured. Does any error arise from this view of value? 
 
 6. If we lived in a country where all the food and clothing we wanted 
 could be had without labor and without price, — where all kinds of food 
 ready to eat grew from the ground, and clothing of the latest fashion grew 
 upon trees, — would values be greater or less than they are now? 
 
 7. It is sometimes said that exchange increases wealth ; that is, that things 
 are more valuable after they have exchanged ownership than they were 
 before. Under what limitations is this true, and how does the friction of 
 exchange enable us to define the increase? Compare the value of a pound 
 of sugar in the barrel at a grocer's store with the same value after the sugar 
 has been sold to the customer. 
 
 8. Can you apply the theory of value so as to lay down any rule to govern 
 the education and training of youth ? If there is one kind of knowledge and 
 understanding which a man can readily acquire whenever he wants it, and 
 will acquire by his daily experience, and another kind which he can acquire 
 only when under the discipline of the school, show how the theory of value 
 will apply to the question what the school should teach. 
 
 9. Some writers have claimed that prices are regulated by competition. 
 If we grant that this is true, does it give us a satisfactory scientific theory 
 of the subject? 
 
 10. In our markets the price of flour and corn-meal are generally in the 
 ratio 3 : 2. Explain how this ratio arises. 
 
228 THE LAWS OF SUPPLY AND DEMAND. 
 
 11. " The price of mutton on an average exceeds that of beef in the ratio 
 of 9 to 8: we must conclude that people generally esteem mutton more than 
 beef in this proportion, otherwise they would not buy the dearer meat." 
 Can you make any improvement on this statement? Do the respective 
 quantities of mutton and beef which are eaten come into the question? 
 
 12. In London, on April 15, 1865, copies of the London Times containing 
 the news of President Lincoln's assassination sold at the price of sixty 
 cents or upward. Mr. Shadwell says he knows of no cause which deter- 
 mined the price to be exactly sixty cents. What can correctly be said on 
 the subject? Is there any reason to believe that the price of sixty cents was 
 at any moment uniform all through the city, or that it continued through a 
 period of several hours? What do you suppose was the actual state of the 
 case? 
 
 13. Arrange the following articles of common consumption according to 
 what you suppose to be their respective degrees of sensitiveness, putting 
 the most sensitive at the top of the list and the least sensitive at the bot- 
 tom: corn-meal; coarse rye flour; pork; beef; sugar; molasses; coarse 
 clothing for laborers; fine clothing; tobacco; imported wines; writing- 
 paper; ink; pepper; magazines; paintings; government bonds. 
 
 Each product may be considered sensitive or insensitive according to 
 the criterion laid down in § 15. If the rise in price causes more than the 
 corresponding economy of consumption, so that people in general spend less 
 money for it when the price is high, the commodity is sensitive. In the 
 opposite case it should be classed as insensitive. If the consumption 
 varies inversely as the price, so that the money expended for a commodity 
 may be considered to remain constant, the commodity should be classified 
 as sensitive in an average degree. 
 
 14. Show that the degree of sensitiveness of a whole class of commod- 
 ities, one of which may be substituted for another, will be very different 
 from that of each of the commodities considered separately. Consider, 
 for example, the various kinds of meat — beef, mutton, veal, etc. If we 
 suppose the price of one of these to rise while the price of all the others 
 remains constant, we should find for each one taken separately a certain 
 degree of sensitiveness. But suppose the price of all should rise in the 
 same proportion ; show that they would then be less sensitive. If food of 
 every kind should rise in the same proportion, to what extent would it 
 prove sensitive? 
 
 15. If statistics show that in the city of Cincinnati the sales of flour 
 had increased 22 per cent from one year to the next, while the price was 
 10 per cent higher, would you conclude that" the change of price was due 
 to a change in the demand or vice versa ? What would you reply to an 
 objector who should tell you that this fact was contrary to the law of price 
 and demand laid down in § 14, and so disproved that law? 
 
EXERCISES. 229 
 
 State the criterion for determining in such a case whether it is the price 
 which changes the demand or the demand which changes the price. 
 
 16. It is said that the Dutch possessors of certain islands in the East 
 Indies, where the whole supply of certain spices was raised, were in the 
 habit of ascertaining every year the total crop. If they found it to exceed 
 the amount they could sell, every one was required to burn his share of the 
 excess in order that the price might not be lowered by too much being 
 thrown in the market. Were they the gainers by this operation? On what 
 principle would the gains depend? 
 
 17. If the price of food of every kind should rise 25 per cent, what effect 
 would that rise have upon the consumption of other commodities, and what 
 effect upon their price? 
 
 18. Sugar is much more necessary to table enjoyment than pepper. Yet, 
 should the price of both rise threefold, people would economize much more 
 on the sugar than on the pepper. Explain this. Apply the explanation to 
 the classification of commodities in the order of necessity on the following 
 definition: Assume a man's income to diminish progressively. Then things 
 are necessary in the order in which he dispenses with them. 
 
 19. Show that insensitive commodities are those whose price will rise 
 most in case of scarcity. 
 
 20. If all commodities should become cheaper in the same proportion, 
 of which class, the necessaries or the luxuries of life, would the consump- 
 tion be the more augmented? 
 
 21. What effect would a general failure of the crops all over the world 
 have upon the price of fine clothing? 
 
 22. If such a failure of the crops were foreseen by the wholesale deal- 
 ers in grain six months before it occurred, but remained unknown to the 
 general public, in what way would the public be led to economize in the 
 consumption of their existing supply of grain? 
 
 23. When our government issued a large volume of greenbacks in 1862, 
 gold began to be at a premium in New. York. Many people attributed 
 this state of things to the gold - dealers of Wall Street. Have you any 
 opinion on the subject? What effect had the issue and the war together 
 upon the prices of commodities in general? Could the changes in the 
 prices of commodities affect the premium on gold, and if so, how? 
 
 24. If railways were abolished, what would be the effect upon manu- 
 factures in Iowa, and upon agriculture in New England? 
 
230 THE LAWS OF SUPPLY AND DEMAND. [III. 22. 
 
 CHAPTER IV. 
 
 MONOPOLIZED REQUISITES OF PRODUCTION. 
 
 22. In tlie preceding chapter we were mainly concerned 
 with the mutual relations of price and demand. The next 
 subject in logical order is the effect of a change in the demand 
 for a commodity, or its price, upon the supply. From the 
 popular point of view, which was to a certain extent the view 
 of the earlier economists, the law is very simple. When the 
 price of a commodity rises, more people will engage in its pro- 
 duction, until by their mutual competition the price is brought 
 to the lowest paying point. If skill is required in the work, 
 then the producer of that skill must be paid for the labor which 
 he spent in acquiring it. If the compensation is more than suffi- 
 cient to pay for the labor, it will stimulate men to acquire the 
 skill. Thus the gains of a physician form the compensation 
 not only for his current work, but for the time and money 
 which he spent in learning his profession. It is thus conceived 
 that the price of a commodity can be ultimately expressed in 
 terms of human labor, provided we include not only the labor 
 spent directly in production, but in collecting all the requisites 
 of production, whether capital, skill, or knowledge. 
 
 There was one obvious exception to this. The production 
 of breadstuffs and other means of subsistence required land, 
 and it was clear that the price of land did not admit of being 
 measured by human labor, since it was not the product of labor. 
 Thus rent became an important factor in the price. Rent was 
 defined by Adam Smith as the income received by the owner 
 for the original indestructible powers of the soil. 
 
 It was next seen that production could not be increased 
 indefinitely by the mere increase of human labor, but that in 
 many cases every additional unit of quantity produced required 
 
III. 23.] MONOPOLIZED REQUISITES OF PRODUCTION. 231 
 
 more labor than the preceding unit. For example, suppose that 
 from a given farm 1000 bushels of wheat can be produced at a 
 certain cost in labor, fertilizers, management, etc. It is possi- 
 ble that by doubling the cost, that is, the labor and material 
 devoted to the farm, 2000 bushels could be raised. If with 
 every addition of this amount of labor 1000 additional bushels 
 of wheat could be raised from the farm, it is evident that there 
 would be no limitation upon the amount. But as a matter of 
 fact we know very well that this is not the case, and that after 
 a certain point every additional bushel will cost more and more 
 labor, and that practically no amount of additional expense will 
 increase the product beyond a certain maximum. 
 
 We must now recognize the fact that at the present time all 
 the requisites of production are not equally at the command of 
 every one, but that in a great number of cases their possession 
 is limited to such an extent that no sufficient approximation 
 to the truth can be gained by assuming that production can 
 be measured in labor alone. We need a word to express 
 the possession of requisites for production which are not at the 
 command of men in general, and the word which best expresses 
 this is monopoly. The use of this word is indeed subject to 
 the great objection that it is used in ordinary language as a 
 term of reproach. Were this' idea necessarily associated with 
 it, economists should find another. But it should be a part of 
 the training of the scientific student to eliminate all ideas 
 of praise and blame from the terms which he uses, and to re- 
 member that science deals only with things and facts as they 
 are. Hence when we use the word " monopoly " we attach no 
 reproach to the idea conveyed, but simply use the word to 
 designate a certain state of things. 
 
 23. How the Monopoly Element comes into the Question. 
 Suppose a great increase in the demand for a commodity C. 
 We may suppose, to fix the ideas, that while a year or two ago 
 a quantity of C represented by 1000 units could be sold annually 
 at a price of $1 per unit, the same amount can now be sold at 
 
232 TEE LAWS OF SUPPLY AND DEMAND. [III. 24. 
 
 $3 per unit, or that 3000 can be sold at $1 per unit. It is then 
 clear that the result must lie somewhere between two extremes. 
 
 The first extreme case is that in which all the elements nec- 
 essary for the production of C are at the command of everybody, 
 or at least of as many people as are necessary to supply the in- 
 creased demand of 3000 units. The result of this will be that 
 a slight increase in the price of C will stimulate those already 
 engaged in producing it to enlarge their facilities, and will 
 draw other people into the work. This increase of production 
 will continue until the amount produced is trebled. As pro- 
 duction has kept pace with demand, the selling price will be the 
 same as before, or at least not materially higher. 
 
 But suppose, as the other extreme case, that some element 
 necessary to the production of C cannot be commanded by the 
 world at large. Perhaps there is a man X who alone possesses 
 the knowledge and skill to make C at a less cost than $3 per 
 unit, or who has a patent on something which is a necessary 
 component of O, or there is a company Y which owns a mine 
 out of which the raw material for making C can alone be got. 
 It is then clear that there will not necessarily be any increase of 
 production, but that, instead of 3000 units of C being sold at 
 $1 per unit, there may be only 1000 as before, with the sell- 
 ing price raised from $1 to $3 in consequence of the increase 
 of demand. 
 
 The word which expresses this exclusive command by X or 
 Y may now be defined as follows : 
 
 A monopoly is the ownership or command, by one or a 
 limited number of persons, of some requisite of production 
 which is not solely a product of human labor. 
 
 24. A little consideration will make known to us three 
 classes of monopolies. 
 
 Firstly, the exclusive command of every man over the facul- 
 ulties with which the Creator has endowed him constitutes a 
 monopoly. If a man is born with an unusual share of admin- 
 istrative or business ability which enables him to organize and 
 
III. 24.] MONOPOLIZED REQUISITES OF PRODUCTION. 233 
 
 direct the productive labor of thousands of other men in the 
 most effective and economical way ; if he is born with any 
 special talent, or with unusual skill in any branch of produc- 
 tion, then lie has the monopoly of a valuable requisite of pro- 
 duction which his fellow-men cannot take from him. This 
 monopoly is not only a rightful one, but the principle on 
 which it rests is at the basis of all our ideas of human rights. 
 
 The second great class of monopolies consists in the private 
 ownership of natural requisites of production. As already 
 shown, the laws of all civilized nations recognize, establish, and 
 protect this ownership. Such natural requisites are land, and 
 the coal, iron, and other minerals which are beneath it. Although 
 the value of land depends largely on human labor, yet the land 
 itself, the acres on the surface of the earth, are entirely the gift 
 of nature. The iron, copper, silver, tin, and other ores be- 
 neath the surface of the earth are also entirely the gift of 
 nature. Although labor is required to give them value, yet 
 every one is not at liberty to apply this labor ; the right to do 
 this being absolutely confined to the owners. The question of 
 the rightfulness and expediency of this class of monopolies 
 may be regarded in some of its points as an open one, but its 
 discussion does not belong to the purery scientific treatment of 
 the subject. 
 
 The third class of monopolies consists of those which are 
 granted by governments, such as the exclusive right to build 
 a railway or dig a canal over particular regions, to make a pat- 
 ented article, or to publish a copyrighted book. Patents and 
 copyrights are in a certain degree a mere extension of the first 
 class of monopolies, since their object is to guarantee to inven- 
 tors and authors the benefit of any superior skill with which 
 nature may have endowed them. 
 
 It may seem that patents and copyrights do not strictly come 
 within our definitions of monopolies, since what is monopolized 
 cannot be called a requisite of production limited in supply. 
 It is perfectly true that they are not material requisites of pro- 
 duction. But we have shown that knowledge, which is imma- 
 
234 TEE LAWS OF SUPPLY AND DEMAND. [III. 25. 
 
 terial, is a very important requisite, and what is granted to the 
 patentee or author is the benefit of a certain knowledge which 
 he has himself acquired. The man who can write a very in- 
 teresting and popular novel has been endowed by nature with 
 a peculiar skill which he can use to increase the pleasure of his 
 fellow-men. It is perfectly right that he should gain whatever 
 compensation he can by the use of this special skill. But when 
 he writes his story everybody can copy it and spread it, unless 
 forbidden to do so. Thus in order to secure the author's right 
 to the product of his skill and labor it is necessary that gov- 
 ernment shall prohibit the multiplication by printing of copy- 
 right stories, except with the author's consent. In form the. 
 monopoly is that of printing certain combinations of words in 
 a book, and we may consider the monopoly to consist in the 
 exclusive right to use these printed words. From this point 
 of view the object in which the wealth inheres would not be the 
 work of nature. But the author's faculties are originally the 
 work of nature, and it is this which we should regard as really 
 protected by the copyright laws. These same remarks apply 
 to patented machines with so few modifications that the reader 
 can make them for himself. 
 
 25. Limitations upon the Definition of the Word Monop- 
 oly. The essential feature of the monopoly element in produc- 
 tion, which gives it its economic importance, consists in this, that 
 the possessors of monopolies may have to a greater or less extent 
 an advantage over their less favored fellows in the price which 
 they can command for the use of the special agencies monopo- 
 lized. This advantage must be not merely a temporary one, 
 but such as to entirely prevent competition on equal terms be- 
 tween the less and the more favored classes in the use of the 
 monopolized agency. In order that the definition may include 
 nothing but what is essential to this advantage, certain limita- 
 tions have to be placed upon it. 
 
 First Limitation. A monopoly is of no value or account 
 unless the number of persons who possess it is so small com- 
 
III. 25.J MONOPOLIZED REQUISITES OF PRODUCTION. 235 
 
 pared with the quantity of the monopolized article which the 
 public demand that these persons can command a higher price 
 for the article than if there were no monopoly. For example, 
 in the widest sense, we may say that John Smith has the com- 
 plete and exclusive monopoly of his own hands. But if his 
 hands are no better than those of other people, this monopoly 
 gives him no advantage over them, because they can do what- 
 ever lie can. Again, the shoemaker has the monopoly of his 
 own skill; and it may be that not one man out of fifty in the 
 community has the natural aptitude which would enable him 
 to become a good shoemaker. But if this fraction of the pop- 
 ulation has the aptitude, and can make all the shoes the com- 
 munity demands, the monopoly is of no value. We must there- 
 fore distinguish between effective monopolies, which give their 
 possessors an advantage in production, and ineffective monop- 
 olies, which give no such advantage, either because there is not 
 sufficient demand for the monopolized requisite, or because 
 too many people share the monopoly. Hereafter whenever we 
 use the word monopoly we shall be understood to mean an 
 effective monopoly. 
 
 Second limitation. It must be understood that the applica- 
 tion of the word monopoly is limited to such requisites of 
 production as are not the sole products of the labor of the 
 person owning them. Now, a number of elements enter into 
 every production. "When, therefore, we inquire how far a 
 requisite of production is monopolized, we must analyze it into 
 its original elements until we find where the natural agency 
 comes in. For example, the skill of the shoemaker may be 
 entirely a product of time and labor spent in acquiring it. But 
 in order to effectively expend that time and labor he must have 
 possessed in the beginning the industry and perseverance to 
 enable him to learn his trade. This industry and perseverance 
 may be in part acquired qualities, and therefore not monopo- 
 lies ; but in so far as the man did not acquire them they are 
 monopolies. In order to acquire them he must have had some 
 good qualities born in him, and his parents must have taken 
 
236 THE LAWS OF SUPPLY AND DEMAND. [III. 25. 
 
 some pains in promoting these qualities. Now, since the man 
 did not make himself nor guide his parents in his early educa- 
 tion, it is to these native and early acquired habits that we are 
 to look for the monopolized elements in his nature. 
 
 So also with regard to any finished product. "We cannot 
 generally say of the product as a whole that it is or is not mo- 
 nopolized. What we must do is to trace its production back 
 to its beginning, and see what monopolized elements in the 
 shape of patent-rights, land, ores, or other natural products 
 were necessary elements in its existence. 
 
 Third Limitation. Monopolies are not in general abso- 
 lute, but the advantages which they give vary in degree. As 
 a general rule a monopolized requisite is not one which the 
 owners of the monopoly alone can supply on any terms what- 
 ever, but it is one which the} 7 can supply with less labor to 
 themselves than other people can. To return to our former 
 example : even if one or a few men, owing to their superior 
 skill, should monopolize all the shoemaking of a community, 
 it may nevertheless be the case that other people could, on a 
 pinch, make shoes. Again, the ownership of land is very valua- 
 ble near a city, and continually diminishes as we go away from 
 population. If the owners near the city charge too high for 
 their products, people can fall back on the more distant land. 
 Some deposits of iron ore may be so rich in metal and so near 
 the surface that iron can be made from them at six dollars per 
 ton ; from other deposits it might cost twelve dollars a ton, and 
 from yet others twenty, fifty, or a hundred. The values of these 
 monopolies therefore differ in degree, and no one of them be- 
 comes effective until it will pay to utilize the ore. 
 
 Since, in these cases, a monopoly only means facilities supe- 
 rior to those enjoyed by other men, there is implied in it a term 
 of comparison comprising men in general. Then when we 
 say that this man X possesses talents, skill, or a natural agent 
 superior to those enjoyed by men in general, the question may 
 arise what we are to understand by this last term. There are 
 so many gradations among men that we can set up no exact 
 
III. 26.] MONOPOLIZED REQUISITES OF PRODUCTION. 237 
 
 standard as that of men in general. The question cannot be 
 answered in a way which shall be mathematically exact. "We 
 can only say that the proper term of comparison is the class of 
 men having the same general talents, education, possessions, or 
 powers of production in the community at large. Since this 
 implies a series of gradually increasing monopolies, we may 
 call them relative or graduated monopolies. 
 
 An absolute monopoly will then mean one possessed only 
 by one or a limited number of persons. 
 
 26. Temporary Monopolies. If an individual or a company 
 has a great capital invested in a manufacturing establishment, 
 although there may be no actual monopoly, yet for the time 
 being the situation will be the same in its relation to varying 
 demand as if the skill and capital invested in the establish- 
 ment were monopolized. An increasing demand, especially if it 
 is believed to be temporary, cannot be at once met by other 
 men founding similar factories, because this requires time, 
 while the product is wanted now. But if demand falls off, 
 the establishment cannot advantageously devote its capital and 
 its organization to any other industry than that in which it is 
 engaged. Cotton-making machinery can make nothing but 
 cotton, and the operatives of the factory are not readily availa- 
 ble for other employments. The result is that the owners of 
 the factory may be obliged to go for a considerable period 
 without gaining either profits on their investments or compen- 
 sations for their peculiar skill. 
 
 In this connection we must always remember that the econo- 
 mic effect of a monopoly does not arise merely from its prevent- 
 ing competition on equal terms, but that it also implies that the 
 owner of the monopolized product cannot change his occupation 
 without a relative disadvantage. For example, a lawyer who 
 has rare natural gifts for his profession cannot advantageously 
 change that profession merely because he finds the demand for 
 his services falling off. The chances are that in any other pro- 
 fession he can do no better than the common run of mankind. 
 
238 THE LAWS OF SUPPLY AND DEMAND. [III. 28. 
 
 Thus the conclusion that the supply of a monopolized element 
 cannot be readily increased to meet an increasing demand im- 
 plies that it cannot readily be diminished to meet a diminish- 
 ing demand. This is as true of a temporary monopoly as of 
 any other one. 
 
 27. Recapitulation. The preceding definitions may be 
 summed up as follows : 
 
 I. When one or a limited number of persons command the 
 supply of any natural requisite of production their power is 
 called a monopoly. 
 
 II. Monopolies inhere, not in manufactured products, but in 
 the original elements or requisites which are necessary to the 
 existence of the product. 
 
 III. A monopoly is ineffective if the number of holders is 
 so great and the demand for the requisite so small that the 
 holders can command no higher price for the requisite monopo- 
 lized than will pay them for the labor and capital which they 
 expend in supplying it. It is effective when the demand be- 
 comes so great or the supply so small that the monopolized 
 requisite commands a higher price than this. 
 
 IY. A monopoly is complete or absolute if no others than 
 one or a limited number of possessors can supply the requisite. 
 It is relative or graduated when it comprises only superior 
 facilities for supplying the requisite, so that the latter can be 
 obtained from an unlimited number of sources by increasing 
 the labor and capital devoted to obtaining it. 
 
 V. A temporary monopoly may inhere in a manufactured 
 product through a sudden increase of demand, or through all 
 the manufacturers combining to limit production and keep up 
 price. 
 
 28. Effect of Monopolies upon the Relation between Price 
 and Supply. We have seen that when the demand for a com- 
 modity increases in such wise that more of it is wanted and, in 
 consequence, people are willing to give a higher price for it, 
 
III. 29.] MONOPOLIZED REQUISITES OF PRODUCTION. 239 
 
 one of two things will occur. Its producers must either make 
 a greater quantity of the commodity in order to supply the 
 increased demand, or they can and will charge a higher price 
 without increasing the quantity. Thus the supply and demand 
 can be equalized in either of two ways by a proper adjustment 
 of the price. Both adjustments will commonly come into play; 
 that is, a larger quantity will be produced, but not a quantity 
 so much larger that it will all lie demanded at the old price. 
 The production will be increased and the price raised at the 
 same time. 
 
 Let us return to the illustration of § 22. "We there supposed 
 that 1000 units of a product C were sold annually in a certain 
 condition of demand at the price of $1 per unit. When the 
 demand is increased threefold the extreme results would be : 
 1000 units produced as before, but sold at $3 per unit. 
 3000 units produced and sold at the old price of $1. 
 
 If, as a result of the increased demand, 3000 units were 
 produced, corresponding to the increase, it would show that 
 there was no effective monopoly. If only 1000 units were pro- 
 duced, it would show that the monopoly was absolute. The 
 average result might be that 2000 units would be produced, 
 and would be sold at perhaps $1.50 per unit, or at least at some 
 price exceeding $1. 
 
 The state of equilibrium is reached when the price is so ad- 
 justed that the quantity produced and brought to market is all 
 that can be sold at that price, and all that the producers are 
 willing to make at that price. 
 
 29. The important distinguishing effect of a monopoly is 
 that it prevents the supply of the commodity in which it in- 
 heres from varying in response to variations in the demand. 
 The question what kind of monopolies enter into a manufac- 
 tured product, and to what extent they enter, can be best 
 answered by investigating the effect of an increased demand 
 for that product. 
 
 If the conditions of production are such that any increase of 
 
240 THE LAW OF SUPPLY AND DEMAND. [III. 29. 
 
 demand will be met by a corresponding increase of production 
 without raising the price, then there is no monopoly. If, owing 
 to the necessity of requiring skill or capital, a considerable 
 period, say a year or more, is required to increase the produc- 
 tion, then there may be a temporary monopoly. If, however, 
 the price comes down to its former limit when a reasonable 
 time has been given for increasing production, the monopoly 
 is only temporary. If it will never come down, then the mo- 
 nopoly is permanent and real. 
 
 If the same party or parties must supply the market, no 
 matter how much the demand may be increased, the monopoly 
 is absolute. If the increased demand and higher prices result 
 in a limited competition, the monopoly is relative. 
 
 Moreover, in every case, to find in what particular requisite 
 the monopoly inheres, we must seek out those requisites the 
 supply of which cannot be indefinitely increased without in- 
 creasing the cost. These will be the monopolized requisites. 
 
 EXERCISES. 
 
 1. Consider the various requisites for the production of a pair of shoes, 
 and describe to what extent they are each monopolized, whether the monop- 
 oly is effective, and, if so, what effect it has on the variations of price arising 
 from variations in demand. 
 
 2. Show that a requisite of production which requires longyears of study 
 for its perfection will have to a certain extent tlie character of a temporary 
 monopoly, although it may he within the reach of every one who devotes 
 the necessary time to the study. 
 
 3. Would it be correct to say that society is any worse off on account of 
 natural monopolies of any kind ? For example, is it bad for society that 
 there are a few physicians or surgeons of such extraordinary skill that they 
 can command fees to the amount of a hundred dollars in a day ? 
 
 4. Enumerate the principal monopolies of the first class described in 
 § 24, and show under what circumstances and to what extent they are 
 effective. 
 
 5. Under what circumstances will the owner of a waterfall be in posses- 
 sion of an effective monopoly ? 
 
 6. Show to what extent and in what way the ownership of iron ore in 
 various parts of the country constitutes graduated monopolies ; that is, 
 under what circumstances these monopolies are of the highest value to their 
 owners, and under what circumstances they are of no value at all. 
 
III. 30.] THE BENT OF LAND. 241 
 
 CHAPTER Y. 
 
 THE KENT OP LAND. 
 
 30. The ownership of land comes within the definition of a 
 monopoly, as given in the preceding chapter. For land, that 
 is, the acres on the earth's surface, is a product of nature and 
 not of human skill. It is also a product limited in supply; or, 
 at least, that portion from which any given collection of peo- 
 ple can conveniently draw their subsistence is limited. This 
 will be made clear by reflecting that no person can go out and 
 fertilize and cultivate land at pleasure, because he will find 
 that all the land within reach is already occupied by somebody 
 else, and is owned by that other person as private property. 
 But it does not follow from this that the monopoly is either 
 an unlimited or an effective one, as we have defined these 
 terms. We must therefore look more closely into the matter 
 with a view of seeing how far the usefulness of the soil is to 
 be regarded as the product of human labor, and how far as 
 the gift of nature. There are economists who have claimed 
 that land has no other value than that which has been derived 
 from labor expended upon it by its owners, and is therefore 
 not a monopoly at all. The general opinion of economists 
 is, however, on the other side. The theory generally in vogue, 
 and which we are about to develop, is commonly associated 
 with the name of Ricardo, who first brought it to public 
 attention in a clear and forcible way. In explaining it we 
 shall closely follow F. A. "Walker, who has developed it with 
 great clearness and fulness.* 
 
 We begin by stating a fact which favors the view of the 
 dissentients. We all know that land depends very largely for 
 
 * In his little book, Land and its Rent (Boston, 1883). 
 16 
 
242 TEE LAWS OF SUPPLY AND DEMAND. [III. 81. 
 
 its fertility upon human labor. Before a crop can be raised 
 the trees must be cleared away, the stumps pulled out and 
 burned, and the ground cleared of the roots. Even in the 
 case of the great prairies, where there are no trees to clear 
 away, it is generally necessary to dig drains and to clear off 
 the grass before the land can be cultivated. Then labor is to 
 be applied to plough the land and sow the seed. Now suppose 
 that one man working in this way upon a little farm of twenty 
 acres could raise two hundred bushels of wheat. It will be 
 found in many, perhaps most countries, that if two men work 
 and put in twice as much material in the shape of fertilizers, 
 plough twice as well, and so on, fully twice the crop can be 
 raised off the farm. Possibly they might raise four hundred 
 and fifty bushels by their combined efforts, and thus have 
 twenty-five bushels each more than if they had worked alone 
 on two separate farms of the same size. Perhaps if three men 
 put their labor and fertilizers into the same farm, they would 
 raise three times as much as one man. Now if this scale went 
 on indefinitely — that is, if by increased labor and expense in 
 fertilizing land, a proportional increase of crop could always 
 be obtained — there could be no effective monopoly in land. 
 Every man who wanted wheat could get as much by joining 
 hands with his neighbor and helping him to cultivate his farm 
 as he could by getting a farm of his own. 
 
 But such is not the case. A point is soon reached in which 
 an addition to the amount of labor and material expended on 
 the farm will not give a corresponding addition to the crop. 
 This point is called the point of diminishing returns. We 
 may consider it as reached in every community and on every 
 farm after a short period of cultivation. That is, the more 
 wheat we want from a given farm, the greater the labor and 
 capital required per bushel. 
 
 31. Let us now suppose that, within convenient reach of a 
 city or any other market, there are four tracts of land having 
 four different degrees of fertility. The first tract, with a given 
 
III. 81.] THE RENT OF LAND. 243 
 
 amount of labor and capital, will yield twenty-four bushels of 
 wheat to the acre, the second twenty-two bushels, the third 
 twenty bushels, the fourth eighteen bushels. Let us begin 
 with the case in which the city is so small, or the market one 
 where there is so little demand for wheat, that it will only pay 
 to cultivate part of the twenty-four-bushel tract. Then it is 
 evident that the other tracts can command no rent. 
 
 Suppose a new man to come into the country seeking for 
 land to cultivate. Since, by hypothesis, a portion of the 
 twenty-four-bushel tract is still uncultivated, it will pay the 
 owners of that tract better to let the new-comer have a farm 
 upon it at a rental of one bushel per acre per annum than 
 to leave it wholly uncultivated. He can pay this rent and still 
 have twenty-three bushels per annum as his portion of the 
 crop. This course will pay him better than it would to culti- 
 vate the next poorer tract free of rent, because then he would 
 only get twenty-two bushels, and he will of course choose it. 
 If the point of diminishing returns has not been reached, it 
 might even pay all concerned still better to employ the new 
 man, with his capital, as an assistant in improving the cultiva- 
 tion of the already-cultivated farms than to rent him a new 
 one. Hence all the twenty-four-bushel farms will not be 
 under cultivation until the point of diminishing returns has 
 been reached. 
 
 Suppose that all the farms of the twenty-four-bushel class 
 are at length under cultivation, and that, owing to increased 
 population or increasing demand, there is now more wheat 
 wanted than can be raised from these farms under the existing 
 system of farming. Supposing that no wheat is imported, this 
 demand must be supplied by commencing the cultivation of 
 the next lower grades of land, namely, those in the twenty-two- 
 bushel tract. Now, by hypothesis, the same amount of labor 
 and capital necessary to produce twenty-two bushels from this 
 second tract will produce twenty-four bushels from an acre of 
 the first tract. It will therefore pay a tenant as well to rent a 
 farm from the first tract at two bushels per acre per annum as 
 
244 TEE LAWS OF SUPPLY AND DEMAND. [III. 32. 
 
 to have land in the second tract for nothing. Hence, at this 
 point, the land of the first tract will yield a rental of at least 
 two bushels per acre. 
 
 Suppose that by the still increasing demand the lands of 
 the twenty-bushel and eighteen-bushel tract come into cultiva- 
 tion. Then, reasoning in the same way, the twenty-bushel 
 tract will yield a rental of two bushels, the twenty-two-bushel 
 tract a rental of four bushels, and the twenty-four-bushel a 
 rental of six bushels. For, the cultivator who rents land from 
 the first tract at six bushels, or from the second at four, will 
 be on the same level with the one who gets land on the third 
 tract at two, or on the fourth for nothing. The general law 
 is now evident : As population increases, lands of lower and 
 low T er degrees of fertility come into cultivation, and the better 
 lands command rent. If there is every grade of land within 
 convenient reach, then the rental will be equaltto the excess of 
 fertility of the best soil over that of the poorest soil which it 
 will pay to cultivate. 
 
 32. In the preceding exposition we have, for simplicity, com- 
 pared lands as if the rental depended solely upon their fertility. 
 But other causes come into play which can be brought into 
 the same class by an extension of the word " fertility." We 
 have supposed that with a certain amount of labor and capital 
 land would yield eighteen, twenty, twenty-two, and twenty-four 
 bushels to the acre. The general question is not, however, that 
 of the number of bushels to the acre, but that of the number 
 of bushels to a given amount of labor. When we use acres 
 to illustrate the case we tacitly suppose that the labor of culti- 
 vation is proportional to the acres. If from any cause what- 
 ever it should cost twice as much labor to cultivate an acre of 
 one farm as of another, the fertility of the first per acre would 
 have to be twice as great in order to command the same fraction 
 of the produce as rent. "We must therefore interpret the word 
 fertility as meaning the yield for a given amount of labor, and 
 not the yield per acre. 
 
III. 33.] THE BENT OF LAND. 245 
 
 In the next place, we have supposed that the crops from 
 the different farms compared were all equally accessible to the 
 market. If this is not so, then the land farthest from the mar- 
 ket will be at a relative disadvantage. But this again will be 
 brought into the rule by including in the cost of cultivation 
 that of taking the crop to market. The rule will then be that 
 those lands from which crops can be gathered and brought to 
 market with the least total expenditure of labor will command 
 a higher rent. 
 
 33. Relation of Rent to Price of Breadstuff s. In the 
 case we have been supposing the tenants of the best farms will 
 be paying to the land-owners a rent of six bushels of wheat 
 per acre per annum. In order that they may be able to com- 
 pensate themselves, they must get such a price for the remain- 
 ing twenty bushels of their wheat as to return to them all they 
 have expended in labor and material. That is, the price of wheat 
 must be high enough to pay for all the labor and capital ex- 
 pended in cultivation, and to make good the rent. This fact 
 has given rise to the impression that the price of wheat is in- 
 creased by the rent of land. 
 
 A close examination will, however, show that this view re- 
 verses the relation of cause and effect. It is the high price of 
 wheat which causes rent, and not rent which causes the high 
 price. That is, rent is an effect, not a cause, of the high price. 
 The simplest way to show this is to refer to the two first laws 
 of supply and demand (Chapter III.). These laws being true 
 for each separate market, must be true at any one moment for 
 the world at large. According to the first law, when the price 
 of wheat is fixed at any given figure there will be a certain 
 definite quantity which can be sold at that price. If only 
 a certain number of bushels are brought to each market, 
 then it will command in that market a price which will be 
 higher the fewer the number of bushels brought. The buyer 
 need not ask or care why the supply is plentiful or scarce. All 
 that concerns him is to get his wheat at the lowest possible 
 
246 TEE LAWS OF SUPPLY AND DEMAND. [III. 33. 
 
 price. And if other people are ready to buy all that comes at 
 a certain price, he also has got to pay that price or go without 
 the wheat. Hence the price depends upon the quantity of 
 wheat brought to market. 
 
 Now, it is quite true that if all the land-owners from whom 
 it was possible to obtain a supply of wheat could by combin- 
 ing among themselves prevent more than a certain number 
 of bushels per annum from being produced, or, what amounts 
 to the same thing, if they would not allow any one to have their 
 farms except at a higher rental than the natural one just laid 
 down, then they would raise the price. But this would only 
 be because some of the tenants would refuse to cultivate the 
 farms on such terms, so that less wheat would be raised. 
 Such a combination is practically out of the question. Even 
 if it were practised, it would not be a case of high rents 
 causing high prices, but only a case of artificial scarcity caused 
 by a combination on the part of the landlords to raise the 
 price of wheat and thus to enable them to charge more rent. 
 
 To sum up : Wheat is high because only a certain limited 
 quantity is brought to market. 
 
 ~No more is brought to market because more cannot be 
 raised without having recourse to less fertile lands, which it 
 will not pay to cultivate until the price is yet higher. 
 
 The cost to the farmer of raising any particular portion of 
 wheat brought to market has nothing to do with the price at 
 which it can be sold. 
 
 To dispose yet more clearly of this view, let us trace the 
 chain of causes in the opposite direction. Suppose one or all 
 the owners of the best class of farms actuated by the philan- 
 thropic desire to make the cost of bread to the public as low as 
 possible. They therefore offer the lands to their tenants free 
 of rent. "Will the price of wheat fall in consequence ? Not 
 at all. This remission of rent would not increase the quantity 
 of wheat which the farms would yield. The tenants would 
 take the same amount to market as before. The same amount 
 being brought to' market, it would command the same price. 
 
RENT. 247 
 
 The only effect would therefore be that the tenants would 
 themselves pocket the rent which they had formerly paid to 
 the landlords. 
 
 EXERCISES. 
 
 1. Is it necessary to rent that there should he a regular gradation of fer- 
 tility down to no-rent lauds? For example, if in the case supposed in § 31 
 the first two tracts should be of equal fertility, and all the rest of the region 
 utterly barren, would the fertile tracts command rent? 
 
 2. If one should claim that no land commanded any other rent than 
 interest on the capital invested in it, how would you test the truth of his 
 claim? 
 
 3. Show how the theory of rent applies in a country where the farmer 
 owns the land instead of hiring it. What element then takes the place of 
 annual rent? 
 
 4. Why is land more highly cultivated in England than in America? 
 
 o. Why is the rent of land so low in a state so densely populated as 
 Massachusetts? 
 
 6. When wheat is brought to market for sale, does the question what it 
 cost the farmer to raise it have anything to do with the price he can com- 
 mand for it? If yes, how do the buyers know what it cost in any particu- 
 lar case, and how can the cost affect the bargaining? If no, show in what 
 way cost of production does affect price. 
 
 7. If land-owners were forbidden by law to charge rent, what would be 
 the effect upon the supply and the price of breadstuff s? 
 
 8. Would it be correct to say that it is of the very nature of a monopo- 
 lized requisite that its supply cannot be increased indefinitely, even if the 
 owner wanted to do it ? 
 
 9. On what terms would the owner of an absolute monopoly find it 
 profitable to increase the supply of his monopolized requisite ? Take as an 
 example the case of the spices in the East Indies already mentioned. 
 
 10. What has been the effect of steam-transportation upon the price of 
 agricultural land in the neighborhood of great cities ? If we had no railways 
 from the city of New York, what would be the result upon the price of 
 land in the neighborhood of New York and on the Hudson River? Show 
 according to what law the rent of land would vary in such a case, supposing 
 the whole region to be of equal fertility. 
 
248 TEE LAWS OF SUPPLY AND DEMAND. [III. 34 
 
 CHAPTER YI. 
 
 ON COMPETITION AS DETERMINING COST. 
 
 34. It is a current opinion that prices are necessarily kept 
 down to nearly their lowest limit wherever free competition is 
 permitted. The reason is briefly this : If the dealers in a 
 commodity do not sell it at the lowest paying price, others 
 will step in and offer the same commodity at a lower price, and 
 thus draw away all the custom from those whose charges are 
 too high. 
 
 This proposition is sufficiently near the truth in the whole- 
 sale trade of the country, and with respect to those necessaries 
 of life which are produced and sold independently by great 
 numbers of persons. In this case business success depends 
 entirely upon the producer and jobber being able to sell at the 
 lowest possible price. It is less true in the retail markets, and 
 may fail entirely in special cases. We shall now analyze the 
 principal cases in which it fails. Take first the general prin- 
 ciple as we may conceive it exemplified by an example. A 
 city dealer sells cloth at one dollar per yard which has cost 
 him eighty cents per yard. We may suppose this cost to in- 
 clude all the expenses of business and loss upon waste material, 
 thus making the net profit twenty cents a yard. It occurs to 
 the dealer to inquire whether by lowering his price to ninety- 
 five cents a yard he will get custom enough to make good 
 the diminution in the rate of profit. To effect this result his 
 sales must increase by at least one third, otherwise the dimi- 
 nution of profit on each yard from twenty to fifteen cents 
 would not be compensated. Now if, when he thus lowers his 
 price, he could make everybody know that fact, and could sat- 
 isfy the public that it was a real diminution in price and not 
 merely the substitution of a poorer article, he would succeed, 
 
III. 34.] ON COMPETITION AS DETERMINING COST. 249 
 
 But in the majority of cases the cloth will be purchased only 
 occasionally, and in such small quantities that it will not be 
 worth while for the man's customers to make a special inves- 
 tigation in order to learn about the diminution of price. Con- 
 sequently it may well happen that his sales would not be in- 
 creased by one third, and he would then lose by his attempt 
 to sell at a lower price. 
 
 The less important the commodity, that is, the smaller the 
 amount of money any one expends for it annually, the less 
 likely it is to be sold at the lowest possible price. It is not 
 worth any one's while to change his grocer because some other 
 grocer sells pepper or mustard ten per cent cheaper. Even 
 in the case of such staples as tea and coffee, it is so difficult to 
 ascertain the quality before trial that the customer finds it a 
 very difficult problem to determine who it is that really sells 
 at the lowest price, taking quality into account. 
 
 In such cases, however, there is a tendency analogous to 
 competition which does tend to lower prices by giving an ad- 
 vantage in the long-run to him who sells the cheapest. Sup- 
 pose two persons appear in business, one of whom goes on 
 the principle of exacting the highest price from his customers 
 that he can profitably command, while another sells as low as 
 he can, perhaps from mere conscientious motives. The first 
 may make the largest profits in one year and for several years, 
 but the fact that the second is a more economical dealer to 
 purchase from will gradually become known to a larger and 
 larger section of the community, so that he may ultimately 
 have the most profitable business. Moreover, the very state of 
 things which makes this access of custom so slow will make it 
 permanent. A large body of customers having become per- 
 manently satisfied with his dealings will not take the trouble 
 to investigate whether some one else may not serve them a 
 trifle cheaper, and thus he may be on the sure road to fortune. 
 The general fact thus illustrated is this : If the question which 
 suggests itself to the retailer's mind is, What are the most profit- 
 able prices for me to charge these individual customers for this 
 
250 THE LAW8 OF SUPPLY A1SD DEMAND. [III. 35. 
 
 article ? the answer may be very different from what it will be 
 if he asks himself what price will in the long-run best serve 
 to give him a permanent and enduring trade. 
 
 35. Cases of Prices not determined by Competition. We 
 have in the three preceding chapters laid down and illustrated 
 the law that if the price is above the normal one at which 
 supply and demand are balanced, the supply will exceed the 
 demand, and there will be in the case of a commodity a con- 
 tinually increasing accumulation which cannot be disposed of. 
 There are, however, large classes of services in which the equi- 
 librium .will be brought about in a somewhat different way. 
 A price may be fixed either by law or custom for certain 
 personal services. If this price is below the normal one, a suf- 
 ficient number of people cannot be found to render the services, 
 and there will be an unsupplied demand. If the fixed price is 
 above the normal one, and if there is no monopoly, the supply 
 will exceed the demand. 
 
 Carriage-fares afford one case in point. It is so difficult to 
 satisfactorily fix the price of a drive in a carriage by bargaining 
 between the passenger and the driver, that in nearly all civil- 
 ized cities a tariff of prices is fixed by the municipal authori- 
 ties. In cities where this tariff is low, passengers will frequently 
 find it difficult to secure carriages, because it will not pay the 
 owners to keep more carriages than there is constant employ- 
 ment for. When it is above the normal price the number of 
 carriages to be had will exceed those which are necessary to 
 carry all the passengers demanding them at the fixed rate. 
 The result will be that a certain proportion of the carriages 
 will stand idle a large part of the time. In this case the com- 
 petition is not a competition as regards price, but a competition 
 to secure a passenger at a fixed price. It is a fact continually 
 lost sight of that this competition is just as effective in bring- 
 ing the compensation of each individual driver to the lowest 
 limit as would be a competition in the matter of prices. ]STo 
 permanent gain can accrue to individual drivers by having the 
 
III. 36.] ON COMPETITION AS DETERMINING COST. 251 
 
 tariff raised, unless they can at the same time keep out compe- 
 tition. If free competition is allowed, additional carriages will 
 be bought, more men will go into the business, the profits 
 will be divided among a larger number, and this process will 
 continue until the individual profits of each driver are reduced 
 to the lowest point at which he is willing to remain in the 
 business. 
 
 Another case is afforded by the sale of newspapers. As a 
 general rule the price at which any newspaper is sold remains 
 unchanged through all the vicissitudes of supply and demand 
 for long periods of time. The equilibrium is then kept up 
 by publishers accommodating their supply to the demand, in- 
 creasing or diminishing it according as there is more or less 
 matter of public interest in the paper sold. 
 
 If the prices of all journals were fixed by law, custom, or 
 mutual agreement, the competition would be entirely in respect 
 to quality. That paper would get the largest circulation which 
 most pleased its subscribers. The result would be that more 
 and more labor and expense would be devoted to its produc- 
 tion, and by this competition the profits would again be brought 
 to their lowest limit. 
 
 36. Cases where Competition is Difficult. In the preced- 
 ing cases we have supposed the service to be such that it can 
 be easily rendered, and that great numbers of people can en- 
 gage independently in rendering it. But in recent times a 
 large and important class of services have sprung up, in which 
 the amount of wealth and organizing ability required to render 
 them is so great that a temporary monopoly may be established, 
 though none is legalized. Then this monopoly may be ren- 
 dered permanent, or at least may be continued through many 
 years, by skilful management. Such a case is seen in the tele- 
 graph system of the United States. "When a single company 
 possesses the only line between two cities, or over a certain 
 region of country, it can fix its own price for messages. It 
 may find it profitable to keep this price far above the nor- 
 
252 TEE LAWS OF SUPPLY AND DEMAND. [in. 37. 
 
 mal rate, rather than to enlarge its facilities, so that a great 
 number of messages can be sent at a low rate. If a competing 
 company is proposed, its promoters may foresee that, at the low 
 prices to which competition would lead, it would be unable to 
 make a profit. It may therefore stay out of the competition 
 long after the business would be sufficient to give it a paying 
 profit, were they secure against a fall in prices. During all this 
 period of doubt and uncertainty the first company has the field 
 to itself. Suppose at last a competing company to build a new 
 line, and to take messages at a low rate ; if this low rate is not 
 as profitable as a higher one would be, the two companies may 
 combine in some way, or the more wealthy may buy out the 
 poorer one, so that the monopoly shall still be kept up. The 
 whole history of telegraph companies in the United States has 
 been of this character. It is supposed that great numbers of small 
 companies have been established for the sole purpose of being 
 bought out by more powerful rivals, in order that the latter 
 might continue their temporary monopoly. 
 
 It will be seen that the only cases in which individual pro- 
 fits can be kept permanently above their normal minimum is 
 that in which some monopoly is owned by the producer. This 
 monopoly may be one of individual skill, knowledge of busi- 
 ness, or the possession of some natural agent. 
 
 37. Competition among Business Managers. We have 
 seen, in treating of labor, what an almost infinite variety there 
 is in the employments which men engage in for pay. The nat- 
 ural endowments of men by which they are qualified for one 
 or another employment also differ in an important degree. 
 Considered in their effects, these differences in capacities are 
 enormously greater than they appear when considered in them- 
 selves. To illustrate what we mean, consider the difference 
 between the captain of a great steamship and one of the sailors. 
 They differ very slightly in bodily structure, and the sailor has 
 the same general mental qualities as the captain. He speaks 
 the same language, and there are a great many things which he 
 
III. 37.] ON COMPETITION AS DETERMINING PRICE. 253 
 
 knows how to do better than the captain does. The superi- 
 ority of the captain consists in this, that he knows how to 
 navigate and direct the ship, while the sailor does not. This 
 is a very small difference in itself. But, small as it is, it makes 
 all the difference between conveying the ship safely to port 
 and losing a million of dollars and a thousand lives by wreck- 
 ing her. 
 
 We have now to show how the law of supply and demand oper- 
 ates in consequence of these great diversities in natural and ac- 
 quired cajDacities. The question is, what cause determines the 
 rate of compensation in any particular employment, or the in- 
 come which a man can gain in any business. To avoid wander- 
 ing through a wilderness of different occupations, let us take as 
 examples the various operations necessary to the production of 
 shirts. We shall then suppose a person to have his choice be- 
 tween becoming a field-hand, a planter engaged in raising cot- 
 ton, a cotton-broker, an operative, a manager of a cotton-mill, a 
 dealer in cotton cloth, a manufacturer of shirts, or a shirt-dealer. 
 
 If these different occupations could be equally well pursued 
 by all men, it is evident that the most agreeable would be pre- 
 ferred. The occupations of planter, manager, and broker are 
 more agreeable than that of the operative, and the latter is 
 more agreeable than that of the field-hand. Hence there would 
 be more competition in the first three occupations than in the 
 two last, and the field-hand would gain the highest income 
 among all engaged in producing shirts. But we know that 
 this is not the case. The reason is obvious. The number of 
 people who are qualified to become brokers, managers, and 
 merchants is very small, while the large majority of men are 
 born capable of being trained for the position of field-hand. 
 Were it not for this great diversity in natural capacities, we 
 should have the singular result that the occupations we now 
 consider the lowest would be best paid. 
 
 To fix the ideas, let us suppose the number of people who 
 are required to supply shirts to the population of New York 
 City to be as follows : 
 
254 THE LAWS OF SUPPLY AND DEMAND. [III. 37. 
 
 1,000 field-hands, 
 
 50 planters, 
 
 10 cotton-brokers, 
 
 2,000 operatives, 
 
 5 managers of factories, 
 
 100 shirt-dealers. 
 
 Suppose, however, that instead of the number of persons 
 
 qualified to perform these functions in the best manner being 
 
 in the same proportion, thej are in some such proportion as 
 
 this : 
 
 10,000 field-hands, 
 
 40 planters, 
 
 5 brokers, 
 10,000 operatives, 
 
 3 managers of factories, 
 1,000 shirt-dealers. 
 We see that there is a comparative scarcity in the number of 
 persons qualified as planters, brokers, and managers. To under- 
 stand exactly what this signifies, we must remember that, when 
 we speak of the number being thus limited, we do not mean 
 that only this number could by hook or by crook follow these 
 occupations. "What we mean is that the number who can fill 
 them in the most advantageous manner is thus limited, and 
 that, in consequence of this, they can in a certain sense defy 
 competition. 
 
 To show what the result of this is, let us compare two 
 cotton-brokers who at first sight may seem to be about equal 
 in ability. But one is not a good judge of cotton, does not 
 know what farmers are most to be relied on, does not know 
 exactly what kind of cotton will bring the highest price, cannot 
 well judge what the state of the market will be next year, and 
 does not know the cheapest way of getting his cotton to the 
 manufacturer. The other broker knows all these things. The 
 skilful broker then outbids the other with the most honest 
 farmers, birys the best kind of cotton, especially that kind of 
 cotton which in a few months is going to rise in price, has his 
 
III. 38.] ON COMPETITION AS DETERMINING PRICE. 255 
 
 stock well housed, and gets it to the manufacturer at a cheap 
 route, and by a line of railway which is reliable in its manage- 
 ment. The poorer broker outbids his keener neighbor with 
 another class of farmers, buys cotton which is going to fall in 
 price, finds that it is not of the quality which he expected, 
 learns when too late that somebody has cheated him by putting 
 stones inside the bales, has a lot of cotton damaged by getting 
 wet, pays more for transportation to the manufacturer, and 
 finds he has to sell it at a lower price because the market is 
 glutted with that particular kind of cotton. At the end of the 
 year he may find that he has made just $5 as the result of the 
 year's business, while his more skilful neighbor may find that 
 he has made $50,000. 
 
 The same principle holds true in the management of the fac- 
 tory. The poor manager buys the wrong kind of cotton at the 
 wrong time, does not know how to mix it properly, gets it 
 wasted, finds his machinery getting out of order, cannot make 
 his operatives work together in the most advantageous manner, 
 and does not know the right time to sell. If there were no 
 other manager who could do better than he, he would still be 
 able to live. But there may be a single competitor who will 
 know how to arrange these matters by avoiding all waste and 
 having all the operations conducted in the most advantageous 
 manner. He will sell his goods at so low a rate as to drive 
 his competitors out of business, and at the same time make 
 a fortune for himself. Whether the breadstuffs and other 
 products which are every year brought from the far West to 
 the Atlantic seaboard shall cost $100,000,000 or only 
 $80,000,000 for transportation depends entirely upon the skill 
 of a few dozen railway managers. The managers who can 
 bring them for $80,000,000 will drive the others out of busi- 
 ness and make $20,000,000 profit for their companies. 
 
 38. All these cases of special skill in business management 
 are examples of a graduated monopoly of the same kind as 
 that in the ownership of the soil. Let us imagine ourselves 
 
256 TEE LAWS OF SUPPLY AND DEMAND. [III. 39. 
 
 able to measure and record the business ability of every man 
 in the country. The result would be of this general nature : 
 that a dozen men might be ranked in the highest class, a score 
 or two in a class a shade below, a hundred in a third class, 
 several hundred in a fourth class, and so on. Since there is more 
 business than can be transacted by the half-dozen highest classes 
 on this scale, it follows that the latter will be able to command 
 or gain by their services an income proportionate to their su- 
 periority over the lowest class that can make a living. These 
 incomes will be gained by such wise management that the in- 
 evitable waste of material and labor shall be reduced to a mini- 
 mum, and that the product shall be what consumers most want. 
 
 39. The principle involved can be seen in another case. 
 Let us imagine that among a tribe of savages one man has 
 learned to make first-class fire-arms and excellent gunpow- 
 der. His fellows see how he does it, and they find that they can 
 also make a kind of gunpowder and of fire-arms. But, through 
 want of knowledge, what they make is so poor in quality that 
 they can seldom get near enough to an animal to shoot it. 
 The skilful man understands the chemistry of the subject so 
 well that with his gunpowder and arms a buffalo can be shot 
 before the animal sees the huntsman. Then the skilful man 
 could, without injuring his fellows, charge for his services the 
 whole advantage which he gave them. He could, perhaps, if 
 the tribe was a thousand strong, charge for his powder and 
 guns one half of all the game killed with them, and the rest 
 of the tribe would find it more advantageous to pay this price 
 than to use the best weapons they could themselves make. 
 Morever, this bargain would not be to their disadvantage, since 
 the skilful man could never command more from them than 
 the value of the advantage he afforded. 
 
III. 40.] OF PROFITS AND COST OF PRODUCTION. 257 
 
 CHAPTER VII. 
 
 OF PROFITS AND COST OF PRODUCTION. 
 
 40. At a first glance the term " cost of production " may 
 seem perfectly definite and precise in meaning. When, in ac- 
 cordance with universal practice, it is measured by money, it 
 signifies the value of the labor and money which the producer 
 must expend in order that an article may be produced. If for 
 each yard of a certain kind of cotton the owner of a factory is 
 obliged to pay out a certain sum of money for labor, materials, 
 repairs, interest, etc., then the cost of production is said to be 
 that sum per yard. When the cotton is sold, the excess of 
 money received after paying all expenses connected with the 
 sale is called profits, and is supposed to be the share received 
 by the owners of the factory as the result of the skill, enter- 
 prise, and capital which they have invested in the work. If we 
 trace out what the factory pays, we find it to be divisible into 
 wages and cost of material. But the materials which 
 are purchased cost labor, and this labor has to receive its wages 
 from the proceeds of the sale. Following the process backward 
 step by step, it was found that everything paid for the manu- 
 factured product might be divided into three parts, namely : 
 
 I. Rent which was received by the owners of the soil from 
 which the original materials were obtained. 
 
 II. Wages paid for labor expended in production. 
 When the manufacturer sells the product he must get both 
 
 these items back again with a surplus, else he cannot continue 
 business. The surplus is his share of the money received, and is 
 called his profit. Thus we have a third element in the price 
 of the product, namely — 
 
 III. Profits, or the share of the gross amounts realized 
 which constitute the gains of the manufacturer or employer 
 of labor. 
 
 17 
 
258 THE LAWS OF SUPPLY AND DEMAND. [III. 41. 
 
 This was the theory of the leading economists a generation 
 or two ago. But it fails to satisfy the requirements of the 
 present time. It is now seen that rent and payment for any 
 monopolized elements of production should be included in 
 the same class. Hence if we are to consider rent as part of 
 such cost, we should also include everything that the owners 
 of mines, the organizers of labor, and the possessors of material 
 limited in supply can command over and above the ordinary 
 wages of labor. Again, the profits of the manufacturer are 
 really his compensation for the skill and capital which he in- 
 vests in his enterprise. In so far as they are' gains made- by 
 the use of his organizing powers they are products of his labor, 
 and therefore may be considered as wages when that term is 
 used in its most extended sense (II. 34). That portion which 
 represents profit upon the capital invested should be considered 
 as interest on capital. Thus profits are divisible into the two 
 parts wages, or gains by labor, and interest on capital. 
 
 41. It is unnecessary to develop the subject from this point 
 of view, because without greater precision the classification can 
 serve no useful purpose. To show the difficulties in the way 
 of a rule for estimating cost of production which shall suit 
 everv case, let us suppose the possessor of a valuable bed of 
 iron ore who has in his employ a chemist and an engineer, each 
 possessing extraordinary skill in conducting the processes nec> 
 essary to the smelting and casting of the iron which comes from 
 his bed. Now, the way he would estimate the cost of produc- 
 ing iron is this : " This bed of iron is of great value ; I should 
 have to pay two hundred thousand dollars for it" (perhaps he 
 did pay two hundred thousand to get it). " The annual inter- 
 est on this money is ten thousand dollars. I have to pay sala- 
 ries of ten thousand dollars each to two scientific experts ; an 
 equal salary to a business assistant, whose services are of great 
 value. I also have to pay great sums for the use of certain 
 patents in the manufacture of steel. Moreover, my own or- 
 ganizing ability and knowledge of the business are of great 
 
III. 42. J OF PROFITS AND COST OF PRODUCTION. 259 
 
 value. Since they will on the average enable me to gain a 
 large sum per annum, forty thousand dollars or more, I there- 
 fore estimate them at that figure." Adding up all these items, 
 he will obtain the cost of production per ton of the various 
 kinds of iron which he turns out. 
 
 A little consideration will show us that this cost of produc- 
 tion will, in practice and in the long-run, mean very nearly 
 the same thing as the price he can get for his iron. For if, 
 during a long series of years, he can command a price very 
 much above the ordinary cost of production, it must be because 
 he possesses a monopoly of some kind, either in the quality of 
 his ore, the skill of his assistants, or his own knowledge and 
 organizing abilities. "Whatever this monopoly consists in, it 
 will be valuable in proportion to the gains it enables him to 
 secure, and its use will therefore be charged to cost of pro- 
 duction. Nor can we stop him from doing this. He may sell 
 out to another man all his monopolies except his own knowl- 
 edge and skill, and may sell him the product of that knowl- 
 edge and skill in so far as they are embodied in the organiza- 
 tion of the work, for a sum proportioned to the gains of the 
 establishment. Then, since the buyer has had to pay so great a 
 sum of money, it is quite reasonable that he shall include all 
 these items for which he has had to pay in the cost of produc- 
 tion. 
 
 42. There is, however, another sense in which we should 
 make an entirely different estimate. It might be claimed that it 
 cost a man nothing to use his own faculties or to manage his own 
 capital. If his machinery would wear out as fast in standing 
 idle as when running, we might say that it cost him nothing to 
 run his machinery. So it costs the land-holder nothing to rent 
 his land. The iron ore still under ground, though it may 
 have been sold for millions of dollars, has never cost anybody 
 anything except the trouble of finding it. The original discov- 
 erer got a grant of it from the government ; he sold his rights 
 to some one else ; the buyer sold them again, and thus they 
 
260 TEE LAWS OF SUPPLY AND DEMAND. [III. 42. 
 
 passed from hand to hand, increasing in value as the richness of 
 the ore became known. But this increase of value cost nobody 
 anything more than the labor of learning the value of the ore. 
 
 We may thus form a new conception of cost of production 
 by not counting as such cost anything except the labor which 
 has been actually devoted by men to the production, and valu- 
 ing this labor by the same standard that we value other kinds 
 of labor. In making this new estimate we leave out of consid- 
 eration everything that is paid for monopolies of any kind. 
 We therefore take from the cost the rent of land, the money 
 paid for the bounties of nature, the high salaries of skilled em- 
 ployes, and the gains which the owners make by their special 
 skill. To distinguish this diminished cost of production from 
 the one already described, we shall call it net cost. 
 
 It is now necessary to have some criterion for determining 
 what we shall consider the net cost. Snch a criterion is af- 
 forded by economic science, and may be arrived at as follows : 
 Let us suppose the price of a commodity to gradually and con- 
 tinually fall from month to month and from year to year, with 
 no hope of its ever again rising. A first approximation to the 
 net cost of production to any individual producer, whether a 
 person or a company, would then be the price at which the 
 producer would abandon business entirely. 
 
 A little reflection will show that this is a legitimate defini- 
 tion from the second point of view just outlined. For no per- 
 son or company can or will go on producing indefinitely at a 
 loss. He may do so temporarily, hoping for prices to be higher 
 in the future. But if they are never to be any higher, which 
 is the case we have supposed, then the producer will immediately 
 stop when he ceases to gain. 
 
 It is evident that this stopping-point may be far below what 
 is estimated as cost of production by the first method. In the 
 first place, the millions of dollars which the unfortunate owner 
 paid for the mine do not count at all. His mine is worth to 
 him just what he can make out of it ; and it makes no differ- 
 ence, so far as his interests at the present time are concerned, 
 
III. 42.] OF PROFITS AND COST OF PRODUCTION. 261 
 
 whether he got it for nothing or paid a million dollars for it. 
 If he can make any money out of it he will, and if he cannot 
 he will give it up. In the next place, as he finds his profits 
 diminishing, he will have to inform his skilled assistants and 
 manager that they must either submit to a reduction of their 
 wages or allow the establisment to go out of business. The 
 result will be the reduction of all wages to the lowest point 
 which will suffice to retain the services of the different grades 
 of employes. If these employes are able to use their special 
 skill in other pursuits with equal advantage, they will soon seek 
 for such pursuits. But it is one of the marks of monopolized 
 skill that it cannot generally be employed advantageously in 
 many directions. The skilled employes of all grades would 
 therefore have to submit to a greater or less reduction. Final- 
 ly, if the owner or company themselves cannot advantageously 
 change their capital, which, as a matter of fact, they may find 
 to be the case, they will have to be satisfied as long as they are 
 making a fair living. 
 
 Let the reader not forget the object of this criterion for de- 
 termining net cost of production. We are not showing that 
 under any probable or conceivable circumstances would the pos- 
 sessors of skill and capital be thus reduced to what would seem 
 to them penury. We are supposing an ideal state of things : 
 one in which the possessors of monopolies would be unable to 
 command more than if they did not possess them. We are try- 
 ing to divide what is commonly called cost of production into 
 two parts : the value of special monopolies, and what is really 
 paid for non-monopolized labor and services. We eliminate 
 the monopolized elements by supposing the price to diminish 
 until those elements cease to be of special value to their owner, 
 at least in the particular direction in which they are used. 
 Then we have the net cost of production as it would be were 
 the most skilful business managers and other possessors of 
 monopolized elements brought down to the general level of 
 their fellow-men of the same class. 
 
262 THE LAWS OF SUPPLY AND DEMAND. [III. 43. 
 
 43. The elements which enter into net cost of production 
 as thus defined are : 
 
 I. Wages, measured on the lowest scale for which any of 
 the persons concerned would be willing to continue work. 
 
 II. Interest on capital invested in the work. 
 
 III. Taxes, insurance, and other miscellaneous items inci- 
 dental to production. 
 
 Whatever the producer receives for his products above the 
 net cost of production thus defined may properly be considered 
 as his profit. It includes the gains of himself and his imme- 
 diate employes arising from their special skill, the interest on 
 whatever money he may have sunk in the enterprise and be 
 unable to command again, by sale or otherwise, as well as the 
 gains from monopolies of every kind. No one knows, and no 
 one can estimate with precision, what the profits are in any 
 special case. We know by experience that there are certain 
 products the prices of which are subject to great fluctuations 
 from year to year. We also know that there are certain estab- 
 lishments which continue in operation through a period of 
 years at the lowest price, without any positive hope that prices 
 will be higher in the immediate future. If prices do finally 
 rise, it cannot be supposed that the net cost of production rises 
 in anything like the same proportion. We may therefore fairly 
 suppose that when prices are high the producers are gaining a 
 profit not necessarily equal to the whole increase of price, but 
 certainly equal to an important fraction of it. 
 
III. 44.] EQ UILIBMUM OF S UPPL T AND DEMAND. 263 
 
 CHAPTER VIII. 
 
 PRESERVATION OF EQUILIBRIUM BETWEEN SUPPLY AND DEMAND. 
 
 44. Let us begin by supposing method of doing business 
 quite different from that considered in the preceding chapters. 
 If we visit a port in the East Indies, a trader will come on 
 board with silks, cashmeres, and other products of the country 
 for sale. The ship is then his market, and the passengers the 
 buyers. But his price will not be fixed by any such consider- 
 ations of the state of this market as enter into the calculations 
 of the wholesale dealer ; his only object is to get the highest 
 possible price from each individual passenger. If one pas- 
 senger would be willing to give $100 for a shawl rather than 
 go without it, another $60, and a third only $40, the trader 
 would endeavor to get these separate sums for the same kind 
 of a shawl from the three separate parties. In such a case, 
 in the absence of any communication among the different 
 passengers, the price would be merely the result of mutual 
 guessing ; the trader trying to guess how much the passenger 
 would give, and the passenger to guess how little the trader 
 would take. There would therefore be no definable law to 
 regulate the price. 
 
 So far as the willingness and state of mind of buyer and 
 seller are concerned, the same thing may be considered as 
 holding true in all cases. There are in the community a cer- 
 tain number of people who would give $20, $30, or $40 a 
 barrel for flour rather than go without it. If their flour-dealer 
 could keep them ignorant of the market price, he might exact 
 this extreme limit of price for his flour. But the state of 
 things which exists in the wholesale markets of every civilized 
 country prevents any such operation. The general rule is that 
 goods must be sold at the same price to all comers. A trader 
 
264 THE LAWS OF SUPPLY AND DEMAND. [III. 45. 
 
 who should exact a higher price because his customer chanced 
 to be for the moment ignorant of the market price would soon 
 lose his business standing. It is only in the case of retail and 
 short-sighted shop-keepers that the attempt is now practised. 
 The result is that if any commodity is offered at a certain price 
 P, the buyers will comprise all those persons who are willing 
 to pay either P or any higher price. 
 
 We now see from another point of view how it is that as 
 price is lowered the demand increases. All the purchasers 
 willing to give the higher price are retained at the lower price, 
 and a certain number of additional ones are brought in. 
 
 45. Graduated Cost of Production. It has been shown 
 that if the net cost of producing a commodity exceeds the price 
 it will command in the market, its production must cease. 
 Hence the price asked must be above the cost of production 
 by an amount sufficient to make good all the expenses con- 
 nected with the sale in the market. Since whenever the price 
 sufficiently exceeds the cost of production to make the latter 
 pay well, the production will be increased, it might seem to 
 follow that the selling price could never exceed the cost of pro- 
 duction and sale. But this conclusion does not follow as a 
 matter of course, because it rests on the supposition that the 
 cost of production is a fixed quantity, and that the amount pro- 
 duced can be increased indefinitely without increasing the cost 
 per unit of the commodity. Were there no limit upon the 
 quantity which could be produced at the lowest net cost, this 
 would be true. But we have shown that monopolized elements 
 enter, to a greater or less extent, into nearly every commodity. 
 Since, by hypothesis, these elements are limited in supply, and 
 are not at the command of every one, the effect of the monop- 
 oly will be with every addition to the quantity to increase the 
 cost of each unit added. 
 
 In the case of monopolies of the raw materials of production 
 which we have described in the last chapter, the general rule 
 is this : A certain limited amount of the raw material can be 
 
III. 46.] EQUILIBRIUM OF SUPPLY AND DEMAND. 265 
 
 obtained at a comparatively low net cost from some especially 
 favored sources. If this quantity does not suffice for the 
 supply, then it is to be sought for from less and less favored 
 sources, and thus each unit will cost more. This is the mark 
 of a graduated monopoly (§§ 25, 27), which is the most common 
 kind of monopoly. In such a case, the quantity made to sell at 
 a price P is all that can be made at a net cost not exceeding P, 
 just as the quantity sold has been shown to be all that could be 
 sold at a price not below P. To illustrate this, let us see how 
 it may be with the production of iron. 
 
 46. There may be in certain favored spots deposits of iron 
 ore so rich in metal and so near the surface that pig-iron can 
 be made from them at a net cost of $7 per ton. Prom other 
 deposits or other portions of the same deposit the cost may be 
 $8 per ton ; in the next class in order $9 ; and so on until we 
 reach a cost above any limit we choose to set. 
 
 Suppose now the market price to be $9 per ton. It is evi- 
 dent that all those mines from which the iron can be made at 
 a net cost less than $9 will pay for working them. If the price 
 rises to $10 or $12, the less, favorable mines will be sought out 
 and opened. If it falls to $8 or $7, the less favorable fur- 
 naces will have to close, temporarily or permanently. The 
 result then would be : 
 
 I. The higher the price which can be got for the commodity 
 the greater the quantity which will be produced. 
 
 II. The price will be equal to the cost of production from 
 the least favored mines. 
 
 We shall hereafter see that the second rule is not the most 
 general one. But we need not consider the exceptions to it at 
 present. The final result of both the law of demand and the 
 law of supply is that the price will be so fixed that supply and 
 demand shall be equal. To show how the point of equilibrium 
 is reached, we have supposed a state of things set forth in the 
 table on the next page. 
 
 In the table of demand the first column is a series of prices 
 
266 
 
 THE LAWS OF SUPPLY AND DEMAND. [III. 46. 
 
 per ton which are chosen quite at pleasure, and from which we 
 may suppose the wholesale dealers, or the manufacturers, to 
 select at pleasure in order to try the effects of each separate 
 price upon sales and production. 
 
 The second column gives the corresponding demand, that is, 
 the number of thousand tons which it would be possible to sell 
 at that price in a given state of the market during a given 
 period. In order to avoid the use of large numbers we shall 
 call 1000 tons the unit of quantity. We may suppose, to fix 
 the ideas, that the market includes the whole United States, and 
 that the period of time is one year. The first two columns 
 then indicate that 50,000 tons can be sold in a year at $7 per 
 ton, 48,000 at $8, and so on. 
 
 In the table of supply the first column gives a series of the 
 various costs of production per ton. 
 
 Table of Demand. 
 
 Table of Supply. 
 
 Selling Price. 
 
 Demand 
 
 in Thousands of 
 
 Tons. 
 
 Cost of 
 
 Production per 
 
 Ton. 
 
 Quantity which 
 
 can be produced 
 
 at that Cost. 
 
 Total at Cost 
 or Lower. 
 
 $7 
 8 
 9 
 10 
 11 
 12 
 13 
 14 
 
 50 
 48 
 46 
 43 
 40 
 36 
 83 
 29 
 
 $7 
 8 
 9 
 
 10 
 11 
 12 
 13 
 14 
 
 10 
 10 
 12 
 13 
 
 15 
 20 
 20 
 20 
 
 10 
 20 
 32 
 45 
 60 
 80 
 100 
 120 
 
 The second column gives the quantity which we may sup- 
 pose can be produced at each particular cost. That is, we 
 suppose that 10,000 tons can be produced annually from those 
 few favored mines which yield the product at $7 per ton ; 
 10,000 from the next class, at $8 per ton ; and so on. 
 
 The third column shows the total quantity produced at each 
 cost or at less. It is formed by adding all the prices beside 
 and above it in the preceding column. For example, $7 being 
 the lowest price of all, it shows all that can be produced at that 
 
III. 47.] EQUILIBRIUM OF SUPPLY AND DEMAND. 267 
 
 cost. Opposite $8 we have the 10 units which can be pro- 
 duced at the cost of $8, and also the 10 which can be produced 
 at $7, making a sum total of 20,000 tons at $8 or less. 12,000 
 tons can be produced at the cost of $9, which added to the 
 preceding makes 32,000 tons which can be produced at the rate 
 of $9 or less ; and so to the end of the table. 
 
 Note particularly that these tables show, not what actually is 
 done, but what can be done under certain assumed conditions, 
 and by fixing certain arbitrary prices for iron. To see what 
 actually would be done, suppose the selling price were fixed 
 at $9 per ton. The dealers would then be able to dispose of 
 their stock at the rate of 46,000 tons per annum. But since 
 they could not afford to pay the full price at which they sold, 
 but perhaps 10 cents less, the producers would supply them 
 only with the 20 units which could be produced at a cost less 
 than $9 per ton. Buying only 20 units and selling 46, the 
 stock on hand would diminish at the rate of 26 units per an- 
 num, and the dealers would of course raise the price. At $10 
 per ton they would sell at the rate of 43 units per annum. 
 But this rise of $1 would only add to the supply the 12 units 
 which can be produced at $9 per ton, so that the supply would 
 now be 32 units per annum and the equilibrium would not yet 
 be restored. At $11 per ton the sales would be reduced to the 
 rate of 40 units per annum, while the supply would be 45, the 
 13 units which can be produced at $10 per ton being now 
 added. The supply would then slightly exceed the demand, so 
 that the price under the conditions shown by the tables would 
 be between $10 and $11 per ton. 
 
 47. Modifications. This is an example of the law of equi- 
 librium in its simplest form. By comparing it with the actual 
 case the student will readily see what modifications are to be 
 made in it to correspond to what actually takes place. The fol- 
 lowing are the principal modifications : 
 
 I. Neither of the two tables is to be considered as invari- 
 able from year to year. The demand at a given price will be 
 
268 TEE LAWS OF SUPPLY AND DEMAND. [III. 47. 
 
 greater in some seasons than in others, owing to the greater or 
 less want of iron for railways or manufacturing purposes. In 
 one year 46 units might be salable at $8 per ton, as supposed 
 in the table, while in another year the sales at that price might 
 be 50 units. But in any case we could make a table of the 
 same kind as that given above which would hold good until 
 there was a change in the demand. Every three months or 
 every year we should need a new table. 
 
 II. The cost of production from each mine may vary in 
 the same way with variations in the price of labor and the cost 
 of machinery. Moreover, the quantity which can be produced 
 at any one price is not fixed as we have supposed it, because 
 the managers of the furnaces can to a certain extent increase 
 or diminish their production at pleasure. If the price of iron 
 were only $7.50 per ton, the most favored producer would have 
 no great stimulus to manufacture for so small a profit, and 
 therefore might make less than ten units per annum, But 
 when the price went up to $12 per ton the large profit would 
 stimulate him to enlarge his works and employ more labor, so 
 that he would produce at the rate of more than ten units per 
 annum. 
 
 On the other hand, this tendency is checked by the fact 
 that any sudden change in the quantity produced is disadvan- 
 tageous. A manager would rather run at a loss for a short 
 time than discharge his workmen, and when the prices went 
 up he might be unable to make any material increase of pro- 
 duction without investing additional capital, and might not deem 
 it worth while to make this additional investment. However 
 these two opposing causes might operate against each other, 
 the result would be in any case a relation of the same general 
 character as that shown in the table. We therefore need a 
 new table of supply as well as of demand every few months or 
 every year. But in every state of the market there is always 
 a possible table of the kind shown which expresses that state. 
 
 III. Effect of Discounting the Market. The price is fixed 
 by the dealers and producers, not merely according to the 
 
III. 47.] EQUILIBRIUM OF SUPPLY AND DEMAND. 269 
 
 present state of the market, but its probable future state from 
 the best information they can get or the best judgment they 
 can form. If they foresee that next year a great number of 
 railways will be built, they will be less anxious to sell now and 
 will allow stock to accumulate on their hands for the sake of 
 the prospective profit. But the general average result for a 
 whole year or a series of years will not be altered (cf. § 19). 
 
 IY. In many cases there may be no dealers at all, the produ- 
 cers of the pig-iron selling direct to the manufacturers who use 
 it. But this does not change the relation of things shown 
 in the table. The functions of the dealers are then performed 
 by the producers themselves, and since the prices are publicly 
 known, the laws governing them are the same as when dealers 
 fix them. 
 
 Y. The modifications in the tables in case of no monopoly 
 can readily be made. Suppose, for example, we could make a 
 ton of pig-iron at a cost of $9 in labor, capital, and supervision ; 
 that none could be produced at a less cost, and that any required 
 quantity could be produced at that cost. The selling price 
 would then be between $9 and $10 no matter what the de- 
 mand. The only exception to this would be that in case of a 
 sudden increase in the demand, the price would be temporarily 
 raised, owing to the difficulty of suddenly increasing the supply 
 to correspond to the new state of the market, while the reverse 
 would be true when the demand diminished. 
 
 Suppose next that the quantity were an insensitive one for 
 which the demand varied very little from 43 units per 
 annum, regardless of the price. The result would be that the 
 first four orders of mines shown in the tables would be worked 
 continually. The total amount produced would then be 
 45 units per annum ; the selling price would be between $9 
 and $10 per ton, because if we place it at $9 or less the fourth 
 class of producers would drop out, and the demand could no 
 longer be supplied. On the other hand, if the price exceeded 
 $10 per ton, the fifth order of producers would enter in and 
 the total production would be 60 units per annum, or IT 
 
270 TUE LAWS OF SUPPLY AND DEMAND. [III. 47. 
 
 units more than could be sold. Since it would be impos- 
 sible to sell the entire product, some one would have to stop, 
 and of course it would be the unwise man of the fifth class. 
 
 Combinations. In the case last supposed a combination 
 might be made between the five classes of producers to 
 charge $11.50 per ton and thus make it pay for the fifth man 
 to continue the manufacture. But unless this combination in- 
 cluded an agreement to diminish the total product pro rata, 
 so as to reduce the whole amount produced to the 43 units 
 demanded, there would be a continual accumulation on the 
 hands of the producers. The first four orders of men would 
 soon find it pay better to " freeze out " number five by lower- 
 ing the price than to continue the combination. 
 
 QUESTIONS. 
 
 1. If, in the state of things set forth in the table of § 46, the product 
 should be sold at $10 per ton net, what would be the profits made by the 
 four orders who would supply the demand? 
 
 [$30,000, $20,000, $12,000, zero.] 
 
 2. The same state of things being supposed, if all the producers should 
 combine, set the price at $12 per ton, and agree that the five orders of pro- 
 ducers should each supply the same quantity of iron, what profits would 
 they respectively make? [$36,000, $28,800, etc.] 
 
 3. The same table of supply holding good, let the demand for iron so in- 
 crease that double the quantity could be sold at the same price; that is, 100 
 units at $7, 96 units at $8, etc. What would be the price and supply to 
 produce equilibrium? [$12; 72,000 tons.] 
 
 4. From the amount of advertising done by the makers of quack medi- 
 cines, can you form any idea of the relation between the net cost of produc- 
 tion and the selling price of their nostrums? 
 
 5. Supposing the persons who use quack medicines always purchase the 
 medicine recommended by the druggist who sells it, what effect would this 
 habit have upon the druggist's rate of profit, upon the remuneration of his 
 trade, and upon the number of persons who would become druggists? 
 
 6. There is free competition in the production of a commodity C, but 
 the producers have no facilities for selling to the public, and so have to 
 sell to a particular dealer, who can charge the public what he pleases. How 
 will the profits be divided between the producers and this dealer? 
 
III. 49.] EQUILIBRIUM OF SUPPLY AND DEMAND. 271 
 
 CHAPTER IX. 
 
 EQUILIBRIUM BETWEEN SUPPLY AND DEMAND IN THE CASE OF 
 ABSOLUTE MONOPOLIES. 
 
 48. Let us briefly review our mode of reasoning in the 
 cases heretofore considered. We have regarded price as the 
 determining cause fixing the amount both of the supply and 
 the demand, and so fixing them that they shall be equalized. 
 The general rule is that an increase of price not only dimin- 
 ishes demand, but, as shown in the last chapter, stimulates sup- 
 ply, so that the equilibrium can always be established by prop- 
 erly adjusting the price. In showing how price stimulates 
 supply, we have hitherto considered two cases : 
 
 1. That of free and unlimited competition on equal terms, in 
 which the supply can always be increased to meet any demand 
 that may arise, without any increase in the net cost of produc- 
 ing each unit of the commodity. In this case the price is fixed 
 by the net cost of production. 
 
 2. That of a graduated monopoly, in which there is a large 
 competition, but not on equal terms, the favored producers 
 having a superior command of some form of skill or natural 
 agents. This case has been considered in the last chapter. 
 
 "We have now to consider as a third case that of an absolute 
 monopoly, held by one or a limited number of persons. 
 
 49. Let us first suppose that a single individual or company 
 has the exclusive command of some natural requisite of produc- 
 tion, a mine of nickel or the right to make a patented machine. 
 Then, having the sole command of the market, such a person can 
 fix the price at his own pleasure. The law of averages will not 
 be applicable, nor can we by scientific method lay down an abso- 
 lute law as to what he will do. He may say he wants to keep the 
 
272 THE LAWS OF SUPPLY AND DEMAND. [III. 49. 
 
 mine for his children, or to bequeath to them the patent-right. 
 But although we cannot lay down a law of his action, we may 
 assume that he will do what is most for his own interests ; that 
 is, that he will fix such a price as will in the long-run yield him 
 the largest profit. In determining what will be the largest 
 profit various cases arise. If the quantity of the monopolized 
 requisite is absolutely limited, the case will be different from 
 that of a patented machine, in which there is no limit to the 
 number of machines that the patentee may make. It is certain 
 that the quantity of nickel contained in the earth is limited, so 
 that by no efforts can more than a certain number of tons ever 
 be produced. This fact must be kept in view by the owner, 
 who may thus be led to confine his production to a certain defi- 
 nite quantity per annum, no matter how high the price may rise. 
 On the other hand, the owner of the patented machine has a 
 motive for making as many machines as he can, subject to the 
 condition of not bringing the price so low as to lessen his 
 profit. 
 
 Next imagine that instead of a single person there are two. 
 These two persons may combine with each other by an agree- 
 ment not to sell below a certain fixed price. In this case the 
 result will be the same as if they were a single person, because 
 the two are acting in fact as a single economic agent. If they 
 compete, that course will tend to lower the price. Whether it 
 will reduce the price to such a point that the monopoly in itself 
 shall become valueless depends upon the quantity demanded, the 
 price which the consumers are willing to give, and the net cost 
 of supplying it. Suppose, in the case of the nickel mine, that 
 each miner is producing regularly at the rate of one thousand 
 kilograms per annum, and making a regular profit of x dol- 
 lars. If he reduces the price, the demand upon him will be 
 increased in two ways. The total amount purchased will be 
 increased according to the first law of demand and price, and 
 he will also attract customers from his rival. Suppose then 
 that his rival does the same thing, and that a competition is 
 thus established as to who sells the cheapest. Will the result 
 
III. 50.] EQUILIBRIUM OF SUPPLY AND DEMAND. 273 
 
 be to bring the price to the lowest paying limit ? Not at all. 
 Every increase in the supply will require additional laborers 
 and capital, and when the competing parties find that the in- 
 crease of their facilities is neutralized by the lowering of the 
 price, neither of them will depress the price any further. 
 Thus the two, like the one, may be expected in the long-run 
 to fix the price at the figure which yields the largest profit. 
 
 With only two competitors we may be sure that no competi- 
 tion will ever last long, and that they will, either tacitly or by 
 common agreement, fix a scale of prices, and thus act as if they 
 were a single person. The greater the number of competitors, 
 the more difficult it will be to have any such understanding as 
 to price. As a matter of fact, however, it is well understood 
 that among the great metal manufacturers of the country, and 
 indeed among nearly all those who produce commodities on a 
 large scale, attempts are made from time to time to establish 
 agreements either about price or quantities produced. It is, 
 however, difficult to make any general and precise statement 
 on this subject, because the state of the case is constantly chang- 
 ing. Agreements may be formal or informal, and each party 
 sometimes adheres to them and sometimes breaks them. New 
 competitors come in from time to time, and thus change the 
 basis on which agreements were made. One thing can, how- 
 ever, be said with certainty. The great staples of life which 
 are really necessary to human advancement and welfare are 
 not monopolized. For the monopolized articles the public can- 
 not be compelled to give more than they are willing to give, 
 and every rise of prices leads to less of the article being sold. 
 Fortunately for the interests of mankind, absolute monopolies 
 of insensitive products are quite exceptional. 
 
 50. The most common case of an absolute monopoly is that 
 of patented machines. As a general rule these machines are 
 things that people can readily go without, or find substitutes 
 for. They are therefore to be regarded as sensitive commodities. 
 To illustrate this, let us suppose that it is possible to sell in a cer- 
 18 
 
274 
 
 TEE LAWS OF SUPPLY AND DEMAND. pil. 50. 
 
 tain city 100 sewing-machines of a certain patent at the price 
 of $40 each, and that, for every dollar above $40 added to the 
 price, there is a falling off of five machines per annum in the 
 sales. Then at the price of $45 the sales would fall off to 75, 
 and finally at the price of $60 nobody would buy the machines. 
 The number salable at each price is shown in the first two 
 columns of the following; table : 
 
 Price. 
 
 Demand. 
 
 Total Amount 
 received. 
 
 Cost. 
 
 Profit. 
 
 $40 
 
 100 
 
 $4000 
 
 $3000 
 
 $1000 
 
 45 
 
 75 
 
 3375 
 
 2250 
 
 1125 
 
 50 
 
 50 
 
 2500 
 
 1500 
 
 1000 
 
 55 
 
 25 
 
 1375 
 
 750 
 
 625 
 
 60 
 
 
 
 
 
 
 
 The patentees can fix the price at pleasure. But, in accord- 
 ance with the fundamental law of human nature on which 
 economic science is founded, we suppose them so to fix it that 
 they shall receive the largest income. To show how the in- 
 come derived from different quantities of manufacture may be 
 arrived at, let us suppose the cost of the machines, exclusive of 
 interest upon the permanent original capital invested, to be $30 
 each. Then if the selling price is fixed at $40, the cost of the 
 100 machines which can be sold will be $3000, as shown in the 
 fourth column of the table, and the profits will be $1000, as 
 shown in the last column. If the price is raised to $45, they 
 can sell only 75 machines ; the cost of these 75 machines being 
 $2250, the profits will be $1125. If they put the selling price 
 at $50, they can dispose of but 50 machines annually. The 
 cost of these machines will be $1500, and the profits will be 
 $1000. If they put the price at $55, they will sell but 25 
 machines annually, which will cost them $750, and their profits 
 will be reduced to $625. At a price of $60 they will sell no 
 machines at all, and therefore can do no business. 
 
 To correspond to the actual case in business we should of 
 course make allowance for the cost of selling, which in such 
 
III. 51.] EQUILIBRIUM OF SUPPLY AND DEMAND. 275 
 
 cases is considerable. If this cost is a constant premium on 
 every machine sold, we have to add it to the price of the ma- 
 chine. If it is a percentage of what the machine sells for, we 
 may deduct this percentage from what the machine sells for in 
 the first column. In any case it is a simple matter to make 
 the necessary changes in the calculation, and we need not de- 
 scribe the process, because our object is to show the principle 
 involved, which will best be seen by putting the case in the 
 simplest form as shown in the table. 
 
 Since in each case the selling price must depend upon the 
 will of the manufacturer, we cannot lay down an absolute and 
 necessary law about it. But, for reasons already dwelt upon, 
 the price concluded by the political economist will be that 
 which secures to the manufacturer the largest profit ; that is, 
 in the case supposed, it would be $45. 
 
 5 1 . Case in which the Supply is absolutely limited. Not 
 only may the whole supply of a commodity or facility be in the 
 hands of one or a few persons or companies, but it may be 
 incapable of increase beyond a certain definite limit. One ex- 
 ample of this case is that of an ocean telegraph cable without 
 other cables to compete with it. Only a certain number of 
 words can be sent over the cable daily, and the cost will not be 
 materially diminished by any diminution in the number sent. 
 In this case we can establish a normal price which tends most 
 to the public benefit, but which may not be the price most 
 profitable to the owners of the cable. Since the lower the 
 price the greater the number of messages, a price may be estab- 
 lished at which messages enough will be demanded to keep 
 the cable constantly employed. This may be called the normal 
 price. Let us suppose first that the demand for sending mes- 
 sages is comparatively insensitive, as shown in the table on the 
 next page. 
 
 The first column shows the price per word taken at pleasure. 
 Opposite each price is given the supposed number of words 
 which senders will demand to be sent at that price per day ; 
 the last column shows the total receipts. 
 
276 THE LAWS OF SUPPLY AND DEMAND. [III. 51. 
 
 Price per 
 
 Number of Words 
 
 Total Daily- 
 
 Word. 
 
 demanded per Day. 
 
 Receipts. 
 
 $2 40 
 
 5,000 
 
 $12,000 
 
 2 20 
 
 5,500 
 
 12,100 
 
 2 00 
 
 6,000 
 
 12,000 
 
 1 80 
 
 6,500 
 
 11,700 
 
 1 60 
 
 7,000 
 
 11,200 
 
 1 40 
 
 7,500 
 
 10,500 
 
 1 20 
 
 8,000 
 
 9,600 
 
 1 00 
 
 8,500 
 
 8,500 
 
 If the cable can send words without limit, the most profit- 
 able price per word would be about $2.20, at which price about 
 5500 words would be demanded, and the daily receipts would be 
 $12,100. But suppose that not more than 5000 words can 
 possibly be sent. Then it would be most profitable to send this 
 maximum number and keep the cable constantly employed. 
 The price leading to this result would be $2.40. Suppose, 
 however, that if the company pleased it could send 8000 words 
 per day and no more. Then it would be most for the public 
 benefit to fix the price at $1.20 per word, at which price the 
 cable would be constantly employed. But the daily receipts 
 would be only $9600. 
 
 The price actually charged might range anywhere between 
 the extremes $1.20, the normal price, and $2.30, the price most 
 remunerative to the company. If the company is chartered by 
 the government and receives favors from it, the normal price 
 is that which should be fixed, provided the company is willing 
 to lay the cable on that condition. 
 
 The question may be asked : Suppose the company can make 
 a profit by sending the messages" at $1, or even 80 cents, per 
 word ; would it not be better for the public to fix the rate at this 
 lower price ? The answer of the economist is, No. By hypo- 
 thesis, the company can only send 8000 words per day. If the 
 price is fixed at 80 cents, people will be coming in with 9000 
 words per day, so that there will be 1000 which cannot possibly 
 be sent. In this case a selection must be made. On what prin- 
 ciple shall we select the 8000 which are to be sent from the 
 
III. 51.] EQUILIBRIUM OF SUPPLY AND DEMAND. 211 
 
 9000 demanded ? Clearly the answer is that we should select 
 the 8000 which are the most important. But how shall we 
 determine which are the most important % Sentimentality aside, 
 there is but one possible way. The most important messages 
 are those for which the senders are willing to pay the most. 
 Hence the only course would be to find the senders of those 
 8000 words who are willing to pay the price of $1.20 per word. 
 The only way of doing this is to charge $1.20 and to let the 
 senders of the 1000 words who are not willing to pay this price 
 give way to the others. No injustice is thus done, because no 
 one need pay money unless the service is worth it, and it is 
 perfectly right that those persons to whom the service is worth 
 less than $1.20 per word should give way to those to whom it 
 is worth more. 
 
 Another case of limited supply is that of the seats at theatres 
 and other places of public amusement. There are, of course, 
 only a certain definite number of seats at such places. The 
 price of tickets may be so low that more people will demand 
 them than can be supplied with seats, and they may be so high 
 that many seats will be left empty. The normal price is that 
 at which the demand will be just equal to the number of seats, 
 and the general good is best subserved by this price. But this 
 normal price will vary from time to time according to circum- 
 stances, rising higher when a celebrated actor is to appear, and 
 falling when nothing of especial interest is presented. If the 
 price be put much below the normal price, the tickets will be 
 purchased by speculators with a reasonable probability of selling 
 them again at a profitable advance. 
 
 The professional services of the lawyer or physician come 
 under the same category. The physician can properly attend 
 only a limited number of cases. If his fees are below a certain 
 amount, which depends upon his reputation, the demand for 
 his services will be greater than he can supply. If his charges 
 are too high, he will remain a greater or less portion of the day 
 idle. The normal price is that at which the demand will be 
 equal to his power of attending patients. 
 
278 THE LAWS OF SUPPLY AND DEMAND. [HI. 53 
 
 CHAPTER X. 
 
 INTERNATIONAL SUPPLY AND DEMAND. 
 
 53. The operations of international supply and demand 
 are governed by the same general principles with those which 
 govern home supply and demand. The differences between 
 the productive capacities of different countries are of the same 
 general nature as between different iron or coal mines. There 
 are, however, certain modifications in the application of these 
 principles of which the following is the one chiefly to be con- 
 sidered. In domestic trade and manufacture laborers can pass 
 from one establishment to another, and capital can pass from 
 one employment to another, with comparative freedom. The 
 various machine-shops and railways compete with each other 
 in the price they offer for goods and the wages they offer to 
 their employes. We may thus imagine a certain level or 
 equilibrium between the different employments in a country. 
 Any disturbance of this equilibrium will very soon be cor- 
 rected. Thus each country, considered separately, will enjoy 
 this equilibrium within its own limits. 
 
 But it does not follow that the equilibrium will hold between 
 different countries. There is no competition between a farm- 
 hand in China and one in the United States, and therefore no 
 tendency to an equality of wages between them. 
 
 53. Let us now suppose a number of countries in each of 
 which an industrial organization of its own lias grown up, but 
 which have never had any communication with each other. 
 To make this supposed case merge as nearly as possible into 
 the real one, we shall suppose that these different countries all 
 use the same kind of money ; which money, for simplicity, we 
 may call gold. Then there will be in each country a certain 
 scale of prices for all the commodities it produces ; and this 
 
III. 53.] INTERNATIONAL SUPPLY AND DEMAND. 279 
 
 scale will be determined in each case by the laws of equilibrium 
 between supply and demand which have already been laid 
 down. Suppose now that some two of these countries discover 
 each other, and that free communication is opened up between 
 them. Of course absolutely free communication is not practi- 
 cable, because labor is required to transport goods across the 
 ocean or other intervening region. For the sake of sim- 
 plicity, however, we may first suppose transportation to cost 
 nothing. To begin with an extreme case, let it be found that 
 the prices in gold of all commodities in one country are higher 
 than in the other. The country of higher prices will then 
 begin by making all its purchases from the cheaper country, 
 paying for them in gold. The result will be a scarcity of gold 
 in the one country and a plenty in the other. This will result 
 in a fall of prices in the one and a rise in the other, until the 
 two scales are brought into approximation (§ 21). 
 
 Of course the general inequality of prices which we have 
 just supposed is something which never exists under our present 
 arrangements ; because, as a matter of fact, communication be- 
 tween countries has always been more or less free, and thus 
 no general inequality between the scale of prices in different 
 countries has ever had a chance to exist. In other words, the 
 equilibrium to which, in the state of things which we have sup- 
 posed, the prices would ultimately attain is that to which they 
 really do approximate, so far at least as concerns those goods 
 which pass between the two countries. 
 
 The question now is where the excess of purchases by the 
 dearer country would stop. We suppose that everybody in 
 each country buys where he can get his goods the cheapest. 
 So long as this mode of buying results in a greater value of 
 goods being conveyed from A to B than is conveyed in the 
 reverse direction, so long will gold to pay for them continue to 
 flow out of B into A, and so long will prices continue to fall in 
 B and to rise in A. This rise and fall will stop as soon as 
 equal values are transported in each direction between the two 
 countries. 
 
280 THE LAWS OF SUPPLY AND DEMAND. [III. 54. 
 
 54. Relative Advantages of Different Countries in Pro- 
 duction. If, when an equilibrium is reached, the price of each 
 individual commodity is the same in the two countries, all trade 
 between them will cease, because there will be no inducement 
 to transport goods from one to the other. The prices will be 
 equal unless one country has a relative advantage over the other 
 in the production of special commodities. An example of what 
 is meant by relative advantage is this : If in each country the 
 cost of producing ten yards of cotton is the same as that of 
 producing one bushel of wheat, then, no matter what that 
 cost is, neither country will have any advantage in the relative 
 production of wheat and cotton. It may cost twice as much 
 to produce both the wheat and the cotton in one country that 
 it does in the other, but in this case the advantage is an abso- 
 lute and not a relative one. If it costs just twice as much 
 labor to produce each separate commodity in one country that it 
 did in the other, there would be no relative advantage between 
 any two commodities, and therefore, in the case supposed, 
 no trade between the countries. Wages of all kinds would be 
 twice as high in the more favored country, but this would not 
 lead to any trade or competition. There would be, indeed, an 
 inducement to emigrate from the less favored country to the 
 other, which tendency would, however, execute itself with com- 
 parative slowness, owing to the indisposition on the part of 
 men to change their country. We have therefore, in our 
 present discussion, nothing to do with the general advantage of 
 one country over another in production, but only with its rela. 
 tive advantage in producing one commodity rather than another. 
 
 From what has been said we see that this relative advantage 
 would, in the case of free trade between the two countries, be 
 indicated not only by the relative prices of different commodi- 
 ties, but by their actual prices. If wheat is cheaper in America 
 than in England, it shows that we have a relative advantage in 
 producing wheat over producing the common run of commodi- 
 ties which are transported between the two countries ; while if 
 iron is cheaper in England, it shows that England has a relative 
 
III. 55.] INTERNATIONAL SUPPLY AND DEMAND. 281 
 
 advantage in the production of iron. Bnt this fact gives us no 
 clue to the rate of wages in the two countries, which may differ 
 to any extent without impairing the equilibrium of prices. The 
 exchanges between the two countries show that America has a 
 relative advantage over England in the production of bread- 
 stuffs, pork, cattle, cotton, leather, tobacco, and some dairy pro- 
 ducts. England has a relative advantage in the production of 
 spool-thread, woollen goods, and a great variety of manufac- 
 tures of small articles in common household and family use. 
 The result is a continual flow of the former in one direction 
 over the ocean, and of the latter in the other direction. 
 
 55. Balance of Trade by Foreign Exchange. In a former 
 chapter it was shown how international trade is balanced by the 
 use of foreign exchange on the part of bankers (II. 95). If the 
 value of our imports from England exceeds that of our exports 
 to that country, there will be, as already shown, a demand in 
 the New York market for exchange on London in excess of 
 the supply. In accordance with the common law of supply 
 and demand, the New York bankers will then raise the price 
 of exchange on London. The question now arises to what limit 
 the price may rise. The answer is that the limit is determined 
 by the fact that the New York debtor lias always the privilege 
 of making payment by sending coin across the Atlantic. If 
 then the premium charged by the bank is in excess of the cost 
 of freight and insurance, coin or bullion will be exported. The 
 ratio between the amounts of metal in the English pound and 
 the American gold dollar are such that the bullion value of the 
 former is $4.86 65. It is found by experience that when the 
 New York bankers charge a higher price than $4.90 for ex- 
 change on London our merchants begin to export bullion. Per- 
 haps at a rate one cent above this, all payments would be made 
 in bullion and no foreign exchange would be bought. The gold 
 will flow out in payment until the fall in prices consequent 
 upon the outflow stimulates the exportation of other commod- 
 ities than gold, and then the balance will be restored. 
 
282 TEE LAWS OF SUPPLY AND DEMAND. [III. 55. 
 
 Suppose, on the other hand, that our exports are in excess of 
 our imports. Then the merchants in New York who possess 
 credits in London will exceed those who owe debts there. 
 Thus the supply of foreign exchange by the former will exceed 
 the demands of the latter, and the bankers will find exchange 
 on London accumulating on their hands. In accordance with 
 the law of supply and demand, they will lower the price in 
 order to stimulate demand and discourage the supply. The 
 limit will, however, be reached on the same principle as in the 
 opposite case. Whenever the price offered by the banker falls 
 so low that it will pay the New York creditor better to ask his 
 London debtor to send coin across the Atlantic than it will to 
 sell the debt, then coin will begin to come. This limit of price 
 ranges from $4.83 to $4.84. If the excess of imports contin- 
 ues, the inflow of coin will result in an increased volume of 
 currency on this side of the Atlantic, which will lead to a rise 
 in prices and thus stimulate importations from abroad. 
 
 Of course the flow of gold from England will tend to make 
 prices low there and thus stimulate exports to America. 
 Thus the foreign exchanges both of gold and commodities 
 always tend towards an equilibrium which, however, is con- 
 tinually being disturbed through the action of changing eco- 
 nomic causes in each country. For a few weeks or months 
 there will be an excess of imports, followed by a corresponding 
 demand for foreign exchange or for gold to send abroad, while 
 at other times the state of things is the opposite. 
 
 The one condition which is always to be fulfilled to pro- 
 duce equilibrium is that equal values shall pass in the two 
 directions. It does not follow either that equal weights or 
 equal numbers of different kinds of commodities shall pass. 
 One country may have a great advantage in the production of 
 a single commoclity and no more. If wheat is the commodity 
 which we can produce to the greatest relative advantage, and 
 if the quantity which we can produce is sufficient to buy our 
 whole supply of those foreign commodities in the production 
 of which other nations have a relative advantage, then we 
 
III. 56.] INTERNATIONAL SUPPLY AND DEMAND. 283 
 
 should export nothing but wheat. The people of Switzerland, 
 by a system of training extending through many generations, 
 have acquired a great advantage in the manufacture of watches. 
 The result is that little except watches is exported from that 
 country in exchange for many kinds of products imported. 
 
 56. Tax and Cost of Transportation. In the preceding 
 discussion we have supposed transportation to cost nothing, and 
 trade to be perfectly free. We have now to inquire how our 
 conclusions must be modified when we allow for the cost of 
 transportation and for the duties which have to be paid on im- 
 ports. As a result of this cause the relative prices of commodi- 
 ties will always be higher in the country to which they are 
 exported, and as a consequence equal values according to the 
 scale of prices in each country cannot pass. If, for example, 
 the imports into New York should equal the exports in value, 
 then it is certain that those imports are worth less when they 
 leave England than when they are landed in New York. And 
 because the exports are worth more when they reach England, 
 it follows that, as measured in England, the value of the im- 
 ports would be in excess. How then is the equilibrium to be 
 defined ? 
 
 To answer this question, let us suppose that both exports 
 and imports are carried in foreign ships to and from the port 
 of New York. Then in order that the accounts of the New 
 York merchants with other foreign correspondents may be ac- 
 curately balanced, it is necessary that the value of the goods 
 as received from the ship shall equal the value of those ex- 
 ported, at the price paid in New York by the London purchaser 
 of the exports. Let us call this equal quantity P. Then when 
 this value P of exports reaches London it will be valued at a 
 higher price, the addition being represented by all the cost of 
 transportation, insurance, and interest on capital. If this cost 
 be D, the value delivered in London will be P -j- D. If the 
 cost of sending the goods back from London in payment be 
 H, then it is only necessary to send the value P — H from 
 
284 THE LAWS OF SUPPLY AND DEMAND. [III. 57. 
 
 London in order to make the value P in New York. Thus as 
 measured in London the value of the imports will exceed that 
 of the exports by D -f- H. This quantity D -f- H will represent 
 the total cost to the English shipper of carrying the goods in 
 both directions, including all profits upon the transaction. If 
 the cost of transportation were entirely incurred by the New 
 York dealers, the result would be that to balance the account 
 the exports and imports should be equal as valued in England, 
 while the imports would be in excess as valued in New York. 
 It is therefore practically impossible to strike a mathematically 
 exact balance in the case. In theory, however, the balance is 
 obtained by subtracting from the price of the imports the sums 
 paid by the importer for the cost of transportation, and adding 
 to the cost of exports whatever he pays towards transporting 
 them. Modifying the sides of the account in this way, the 
 exports and imports should balance on both sides, provided no 
 gold is to be transported in either direction. 
 
 57. We thus reach a very simple theorem concerning the 
 balance of foreign trade. Since the excess of imports into 
 each country must be paid for in coin, it follows that if we 
 include the value of the coin or bullion paid with that of the 
 exports, and if we include coin and bullion among the imports, 
 then the sum total of imports and exports must in the long-run 
 balance each other. This qualification "in the long-run" is im- 
 portant, because there is no necessity that the balance should 
 be struck every day or every month, or even every year. A 
 nation may go on for some time increasing its debts abroad 
 simply by the home merchants deferring payment. Thus there 
 is always a fluctuating mass of indebtedness from the merchants 
 of one country to those of another which may sometimes go 
 on increasing for years. As a general rule, however, this in- 
 debtedness does not increase indefinitely, but is being paid off 
 from time to time. If it has grown in one year, it probably 
 will diminish in the year following. 
 
 Of course the supply and demand for foreign exchange cor- 
 
in. 58.] INTERNATIONAL SUPPLY AND DEMAND. 285 
 
 responds to the payment of indebtedness on the two sides, and 
 not to its being incurred. That is to say, a New York im- 
 porter does not demand foreign exchange when lie becomes in- 
 debted to his London correspondent, but when he has to pay 
 that indebtedness. 
 
 58, Although the preceding theory is exact when we make 
 all due modifications in its application, yet the student must 
 be warned against supposing that any official statement of the 
 total values of imports and exports will accurately represent 
 the theory. The precise value of goods is always indefinite, 
 and becomes necessarily greater with every step the goods take 
 towards their destination. A bale of cotton is worth more on 
 board a ship in Charleston harbor than it was on the wharf. 
 And a bale of broadcloth, when brought to New York, is 
 worth more after being landed on the wharf than while it was 
 in the ship. The prices of goods also fluctuate from day to 
 day, and it would be impossible to formulate any system which 
 would be exact from an economical point of view, without an 
 examination of every merchant's ledger to find what all his im- 
 ports actually cost him in every way. For this reason statisti- 
 cal tables of the values of imports and exports are not to be 
 regarded as mathematically exact, but only as rude approxi- 
 mations to the actual values. 
 
 In the case of gold and silver bullion, however, the num- 
 bers may be regarded as sufficiently exact for all practical pur- 
 poses, and they afford the best test of the actual balance of 
 trade. If during a series of years we find that more gold is 
 exported from any country than is imported, we may conclude 
 that there is a corresponding excess to the home value of im- 
 ports of other goods, and vice versa. But even in this case the 
 completeness of the tables is always open to challenge. Coin 
 and bullion may be imported by passengers arriving from 
 abroad without being reported to the authorities, and the prin- 
 ciples of economics may settle the question of the balance of 
 trade better than statistics. 
 
286 THE LAWS OF SUPPLY AND DEMAND. [III. 60. 
 
 59. Total Balance of Trade with all Countries. Hitherto 
 we have considered interchange between two countries only. 
 But it does not at all follow that the value of our imports from 
 any one country must equal that of the goods which we re- 
 turn to it. During the year 1883-4, for example, our imports 
 from Brazil were 50 millions of dollars, while our exports to 
 Brazil were only 9 millions. Our trade with France, Austria, 
 and the East Indies and many other countries shows an excess 
 of the same kind. On the other hand, our imports from Great 
 Britain were 163 millions, and our exports to that country were 
 386 millions. This, however, forms no exception to the rule 
 when we extend the latter to include sums total. Our total 
 imports from all countries were valued at 668 millions, and our 
 total exports at 740 millions. This difference is partly to be at- 
 tributed to the defects of the official system of valuation, partly 
 to the indebtedness incurred by foreigners to our merchants, 
 and partly to the profits gained by the latter through the ex- 
 change. The inequalities in the relations of the different coun- 
 tries are accounted for by England paying Brazil and France 
 for what they export from those countries, and charging it 
 against the value of what she receives from us. The case is 
 exactly the same as between individuals. If A purchases from 
 B, B from C, and C from A, and the values are equal, the 
 commodities are paid for by simply cancelling the accounts 
 without any money passing between the parties. The opera- 
 tion is, in principle, identical with the balancing of bank in- 
 debtedness at a clearing-house (II. 92). 
 
 60. Theories and Nomenclature of the Balance of Trade. 
 When it is found that the total value of the goods imported 
 into a country exceeds the total value of those which it ex- 
 ports in exchange, the balance of trade is said to be against that 
 country. This form of expression may surprise the young 
 economist, since it implies that a nation is more favorably 
 situated the greater the value of the goods which it sends 
 abroad and the less the value which it receives in payment. 
 
III. 60.] INTERNATIONAL SUPPLY AND DEMAND. 287 
 
 It is a relic of the old " mercantile system" of two centuries 
 ago, and is based on two principles then in vogue. 
 
 The first of these principles was that a nation was rich in 
 proportion to the amount of gold and silver which it possessed. 
 Accordingly, the policy of the leading mercantile countries was 
 shaped by a constant effort to get as much of these metals as 
 possible into the country, and to prevent them from leaving it. 
 Since, as jnst shown, the metals would be received in payment 
 for any excess of exports over imports, it was considered that 
 an excess of exports encouraged the importation of money, 
 while the opposite state of things implied its exportation. 
 
 The second principle was that a nation was impoverished in 
 proportion to the amount of labor expended on any imported 
 product by the foreign producer. For example, when it was 
 found that a product which only cost an English manufacturer 
 one day's labor could be sold in Portugal for two or three days' 
 labor of a Portuguese, it was held that the exchange was dis- 
 advantageous to England. This principle combined its force 
 with the other in leading governments to look unfavorably on 
 an excess in the value of their imports. 
 
 At the present time the expression " favorable balance of 
 trade" implies to those who use it an increasing indebtedness 
 from foreign countries. It is not a good thing to be in debt, 
 but it is supposed to be a good thing to have others indebted 
 to us. Statesmen like to see our exports exceed our imports, 
 because that seems to imply either that our indebtedness is 
 being paid off, or that foreigners are running in debt to us. 
 Since, however, this indebtedness is not public, but private, the 
 parties can be safely left to take care of it for themselves. 
 
 In the long-run the relation of the export to the import of 
 the precious metals to and from any country must depend on 
 whether that country is a large producer of them. A consid- 
 erable part of the annual gold-supply of the world comes from 
 California and Australia. These countries may therefore in 
 the long-run be supposed to export more gold than they im- 
 port, because the supply tends to diffuse itself over the world 
 in proportion to the needs of different countries. 
 
288 THE LAWS OF SUPPLY AND DEMAND. [III. 61. 
 
 61. Advantages of International Trade. The advantages 
 of international trade are that the people of each country have 
 a larger field from which to supply their wants than they would 
 have were they to depend entirely upon their own resources. 
 If all countries were alike in their productive capacities, no in- 
 ternational trade would arise. The inequalities which give 
 rise to trade are both natural and artificial. In trade, countries 
 share these advantages with each other. For example, it is 
 found that there are certain kinds of foreign wool which when 
 mixed with American wool will make a far better cloth than 
 the latter will make alone. By importing this wool we make 
 our own more valuable. It is also found in metallurgy that 
 there are certain foreign ores the addition of which to our own 
 greatly facilitates the process of manufacture. Our metal- 
 lurgists therefore seek for these foreign commodities. Nearly 
 all the platinum of the world is found in or around the Ural 
 Mountains. If it could not be exported, no other nation than 
 Russia would have the use of it. 
 
 The principle is the same in the case of artificial powers or 
 products. Our inventors have by peculiar skill and applica- 
 tion brought the sewing-machine to great perfection. With- 
 out foreign trade the advantage of the skill that they have ac- 
 quired in making these instruments would be enjoyed only by 
 ourselves. But by exporting these machines other nations 
 share these benefits with us. Our cotton helps to clothe the 
 whole world, and our breadstuffs to feed large portions of it. 
 In return for this we get the benefit of any peculiar skill that 
 may be acquired by the inhabitants of any other countries. 
 The products of Chinese and Japanese art are found in many of 
 our houses. The skill acquired by the English manufacturer 
 of cloth is available to clothe us. The mere fact that a country 
 is less rich in natural wealth than another may make its services 
 available. ~No civilized country is so poor that it cannot in 
 some way assist us in supplying our wants. As the poorest 
 classes among us can perform menial services for us more ad- 
 vantageously than we can perform them for ourselves, so the 
 
in. 61.] INTERNATIONAL SUPPLY AND DEMAND. 289 
 
 inhabitants of countries less fortunately situated than our own 
 are ready to supply us with many commodities more cheaply 
 than we can afford to make them for ourselves. As some 
 people are so wealthy as to command nearly everything they 
 want without irksome labor, so we might imagine a country 
 so rich in natural wealth as to have most of its wants requiring 
 disagreeable labor supplied by its neighbors. In a word, the 
 social organism does not comprise the people of one country 
 alone, but of the whole civilized world, who are all engaged in 
 supplying each other's wants. 
 
 ILLUSTRATIONS AND EXERCISES. 
 
 1. Investigate the effect of the following causes upon the price of ex- 
 change on London in the city of New York, showing in each case whether 
 the effect will be to make exchange dear or cheap for the time: 
 
 1. During a period of one year American merchants import more goods 
 from England than they export, but run in debt for the excess. 
 
 II. During the year following they pay off this indebtedness. 
 
 III. Owing to the rate of interest being higher than in Europe, London 
 capitalists invest in American securities. 
 
 IV. Owing to the rate of interest being higher in London, American in- 
 vestors purchase British securities. 
 
 V. A war in Europe leads the contending parties to purchase large sup- 
 plies of food, military accoutrements, and weapons from the United States. 
 
 IV. In consequence of goods being dearer in Europe than in America the 
 exports from America largely exceed the imports. 
 
 VII. The quantity of gold mined in America is in excess of our own 
 wants, and is therefore regularly exported to London. 
 
 VIII. The mining of gold and silver diminishes so that we have to im- 
 port bullion from London. 
 
 2. Consider the great difference between the natural advantages of differ- 
 ent countries for the production of the great staples of life. Name several 
 such staples which can be produced advantageously only in certain coun- 
 tries. Also name, so far as you can, those commodities which can be pro- 
 duced as well in one place as in another. Then show in what countries 
 will people most devote themselves to the production of this last class of 
 commodities, and illustrate your theory by such instances as you are ac- 
 quainted with. Can you thus explain the fact that there are many com- 
 modities which will not be made at all in the United States, unless their 
 importation from abroad is impeded by a protective tariff ? 
 
 19 
 
290 THE LAWS OF SUPPLY AND DEMAND. [III. 63. 
 
 CHAPTER XL 
 
 EFFECT OF TAXES ON PRODUCTION UPON SUPPLY, DEMAND, AND 
 INTERNATIONAL TRADE. 
 
 62. The general policy of different forms of taxation, 
 that is, the consideration of the effect of taxes upon the in- 
 terests of society, belongs to the application rather than to the 
 theory of economics. At the same time, a tax levied by gov- 
 ernment is an economical cause, the effects of which are to be 
 investigated by the same methods that we employ in the inves- 
 tigation of other causes. The consideration of taxes is there- 
 fore a legitimate branch of pure economics, which we shall 
 now enter upon so far as necessary for the purpose of round- 
 ing out the subject. 
 
 The only taxes which we need consider for the present pur- 
 pose are those levied upon production; that is, the taxes which 
 a producer may be obliged to pay as a consequence of having 
 added to wealth. Since transportation is an act of produc- 
 tion, it follows that import duties are to be included in our 
 list. As a matter of fact, import duties are the only taxes 
 upon production which are at all popular. But most govern- 
 ments are obliged also to levy taxes upon particular home 
 products, especially alcoholic liquors and tobacco. All such 
 taxes produce their effect through the laws of supply and 
 demand, and the method of investigation is the same in all. 
 
 63. To begin with a simple case, let us suppose that a 
 country has, up to a certain point, had no occasion to levy a 
 tax upon tobacco. A necessity for increasing the revenue 
 arises, and the government determines to levy a tax on all to- 
 bacco produced. Let this tax be fixed by a percentage of the 
 value of the tobacco, and, for convenience, let us suppose it to 
 be payable when the tobacco is produced. 
 
III. 64.] EFFECT OF TAXES ON PRODUCTION. 291 
 
 Now, the first conclusion we draw is that the immediate 
 economic effect of the tax is the same as that of an increase 
 in the cost of producing tobacco. For, so far as the producer 
 of tobacco is concerned, it makes no difference to him whether 
 the money which he pays goes as tax to the government, or to 
 some land-owner or laborer who helps him in his work. In 
 both cases it is a sum which he has to pay out as a condition 
 of producing, and is therefore regarded by him as an addition 
 to the cost of production. The question now is, What change 
 will this tax produce in the supply and the demand ? The first 
 factor in the case will be the producer, with whom therefore 
 we commence to trace out the effect. 
 
 It is certain that the first thing that the producer will at- 
 tempt will be to add the tax to the price at which he sells his 
 tobacco. This addition must be made by all through whose 
 hands the article passes, and thus the consumer of tobacco will 
 find an attempt to charge him a higher price for it. JSTow 
 two cases may occur, depending on whether tobacco is or is 
 not an insensitive commodity. 
 
 If tobacco is an insensitive commodity (§ 15), that is to say, 
 if the consumer will buy as much at the higher price as he 
 formerly bought at the lower price, then no further change 
 will occur in the conditions. The manufacturer and seller of 
 the tobacco, finding this same demand under the increased price 
 as they did before the tax was levied, will go on manufacturing 
 the same quantity as before, and will make the same net profits. 
 We may therefore lay down the law : 
 
 A tax upon an entirely insensitive product is wholly paid 
 l>y the consumer, no matter what the conditions of production. 
 
 64. But the case of an absolutely insensitive product is an 
 extreme one, which we can hardly consider to have an actual 
 occurrence. It is certain that some people will economize in 
 the use of tobacco or any other product when the price is high. 
 Then when the seller finds the amount demanded to fall off 
 in consequence of the increased price, we have a cause which 
 
292 THE LAWS OF SUPPLY AND DEMAND. [III. 65. 
 
 we must trace back to the producer. The consumer buying 
 less, the producer finds that he cannot sell the same amount as 
 before. He must therefore do one of two things : (1) di- 
 minish his production, or (2) lower his price, thus taking a part 
 of the tax upon himself. Which course he will take depends 
 upon the conditions under which he produces, and especially 
 upon whether monopolized elements enter into the production. 
 
 If there is no monopoly, then it is to be assumed that, before 
 the taxes were levied, the competition of producers had resulted 
 in the tobacco being sold at the lowest price which would 
 induce any person to engage in its production. This being 
 the case, the producers could not all afford to go on producing 
 as before, and still pay a part of the tax. There must there- 
 fore be a diminution, those least able to bear the additional 
 burden going out of business, and the others diminishing their 
 production. This diminution must, in the case supposed, go 
 on until the rise in prices caused by the increased scarcity be- 
 comes nearly equal to the tax. We have therefore as a second 
 law: 
 
 The tax levied upon a commodity into which no monopolized 
 elements enter is entirely paid by the consumer. 
 
 65. Suppose next that a monopolized element does enter ; 
 for example, that certain soils are much better adapted to rais- 
 ing tobacco than to any other purpose, and would command a 
 much higher rental than they would if the production of to- 
 bacco were stopped. If the cultivators of such soils leave off 
 raising tobacco, they will be subject to a greater or less loss of 
 income. Therefore rather than do so they will lower the price ; 
 that is, they will pay a portion of the tax themselves. To cor- 
 respond to the actual case we must suppose a graduated monop- 
 oly, some soils having no special advantage in raising tobacco, 
 and others having a great advantage. The former will now be 
 devoted to the cultivation of some other product when the tax 
 is levied, while the owners of the latter will pay a portion of 
 the tax. We therefore reach the conclusion : 
 
III. 67. J . EFFECT OF TAXES ON PRODUCTION. 293 
 
 A tax upon a sensitive commodity into which monopolised 
 elements enter is divided between the producer and the con- 
 sumer. 
 
 66. A fourth case may be considered possible, namely, that 
 in which a consumer will not pay any increase of price whatever. 
 Let us then suppose that, from any cause, when the seller of 
 tobacco raises the price, he finds that his customers will not 
 bivy any at all, and that he must either continue to sell at the 
 old price or go out of business. The knowledge of this fact 
 will go back through the channels of trade to the producer, 
 who must then take his chance of selling at the same price 
 as before or giving up production. If he can better afford to 
 pay the whole tax than to go into some other business, he will 
 do so. If he cannot, he must stop producing tobacco entirely. 
 Hence we have a fourth law : 
 
 If a commodity cannot be sold at all above a certain price, 
 a tax upon it must be paid entirely by the producer. 
 
 This case can hardly arise unless a commodity is very sensi- 
 tive in consequence of some substitute for it being readily ob- 
 tainable. Then if this substitute is untaxed, the effect of the 
 tax may be to stop the production of the taxed commodity 
 entirely. 
 
 6*7. Taxes on International Trade. If an import duty be 
 levied, the home and foreign production of the article imported 
 will be changed in accordance with laws founded on those 
 first principles which have just been enunciated. A much 
 greater complexity of circumstances ma} r , however, enter, de- 
 pending upon the variety of sources from which both the 
 foreign and domestic supply of the commodity may be ob- 
 tained. In domestic taxation we had to consider only a single 
 class of producers, or at most a single graduation of the monop- 
 oly. But most largely imported products may be obtained from 
 several countries, where they are produced under very different 
 conditions ; we must therefore see how the preceding principles 
 
294 TEE LAWS OF SUPPLY AND DEMAND. [III. 68. 
 
 will apply to these various conditions which may be found to 
 exist. If there were a commodity C which could be produced 
 only in England, and which none but Americans consumed, 
 then an import duty levied by America upon C would either 
 be paid wholly by American consumers, or divided between the 
 American consumer and the British producer in exact accord- 
 ance with the laws already laid down. That is, the tax on an 
 insensitive product, or on a product of which no producer in 
 England had any monopoly, would be paid entirely by the 
 American consumers. As the product, on the one hand, became 
 sensitive, or, on the other hand, as the production was monopo- 
 lized, the British producer would have to lower his price in 
 order to induce the Americans to continue their importation. 
 This simple case is, however, an extreme one. As a matter 
 of fact almost every commodity can be and is, to a greater or 
 less extent, produced by ourselves. This fact brings in a case 
 which cannot arise in domestic taxation, namely, that of an 
 untaxed home product competing with the taxed foreign 
 product. Hence the laws governing the case will be more 
 complex than in the case of domestic taxation. 
 
 68. A yet further difference in the two cases arises from 
 the fact that the British producer has other nations to whom 
 he can sell, and who perhaps do not levy the same tariff that 
 the United States does. To show how these two differences 
 modify the result, let us take the case of writing-paper. Sup- 
 pose that under free trade a certain amount Q of writing-paper 
 would be annually imported from abroad and a certain other 
 quantity H produced at home. Let a duty then be levied upon 
 the foreign paper. We may suppose that the foreign manufac- 
 turer would at first endeavor to throw the payment of the 
 entire duty upon the American consumer. The latter would 
 then be charged a higher price for his paper. The result would 
 be an attempt on his part to economize in the use of paper and 
 to prefer the domestic product. The immediate result would 
 therefore be an increased demand upon the American manu- 
 
III. 68.] EFFECT OF TAXES ON PRODUCTION. 295 
 
 facturer for paper. This would lead to a rise in the price of 
 the home product. The effect of this upon home production 
 would depend upon the extent to which monopolized elements 
 enter into the manufacture of paper, the effect being determined 
 by the laws already laid down in treating of monopolies. 
 
 If no monopoly either in skill or material existed, so that large 
 numbers of men could make paper as advantageously as the 
 most experienced makers, then this higher price would stimu- 
 late the manufacture of paper. The rise in the price would be 
 checked, and the American consumer, getting his supplies at 
 home, would greatly diminish his demand for the foreign pro- 
 duct. 
 
 We must now trace the reaction of this diminished demand 
 upon the foreign producer. If no monopolized elements enter 
 into the foreign product, then the foreign producer, making no 
 more than the regular profit, could not afford to lower his price 
 in order to stimulate the declining demand. If he had no 
 demand except what came from America, those who were least 
 able would have to go out of business, as in the case of home 
 taxation. Just here, however, the difference arises. The Eng- 
 lish manufacturer has not only America, but his own country 
 and the rest of the world, as possible buyers of his product. 
 Hence by lowering the price in a degree very slight compared 
 with the duty, he may recover from other sources of demand 
 what he has lost id the American demand. He will not there- 
 fore be obliged to bear any considerable portion of the tax 
 levied by America. This conclusion may be generalized as 
 follows : 
 
 If the greater part of the supply of some special commodity 
 produced in one country is consumed in another country, then 
 a duty levied by the consuming country may have to he partly 
 borne by the producer. But in the more common case in which 
 there are many home and foreign consumers of the commodity, 
 then either a duty levied must be paid entirely by the con- 
 sumers of the country which levies the duty, or the importa- 
 tion of the commodity must cease. 
 
296 THE LAWS OF SUPPLY AND DEMAND. [III. 69. 
 
 69. The effect just described upon the foreign producers 
 was deduced on the supposition of a non-monopolized home 
 production. If, however, the home production is monopolized, 
 then the increased home demand consequent upon the duty- 
 will not be entirely met by increased home production, but by 
 increased home price. The owners of the monopolized ele- 
 ments will be able to command a higher price for their services. 
 The consumer will therefore have to pay a higher price whether 
 he purchase the home or foreign product. For a yet stronger 
 reason than before, the foreign producer will have no motive 
 for materially diminishing his price. One result will be a 
 diminution in the consumption of paper ; another will be an in- 
 crease in the ability of the home producer to command a price 
 for his monopoly. 
 
 We thus see that an import duty upon products into which 
 monopolized elements enter gives an immediate value to those 
 elements which they would not otherwise have. Suppose, for 
 example, that in consequence of inherent capacity and natural 
 aptitude I have acquired a peculiar skill in making a very ele- 
 gant style of paper at a very small cost to nn-self. So long as 
 I am subject to the competition of equally gifted foreigners I 
 may be unable to command more than a moderate price for my 
 paper. If, however, I can induce the government to levy an im- 
 port duty on this particular kind of paper which I alone in this 
 country can make to the best advantage, then I can raise the 
 price either to the highest limit which people are willing to pay, 
 or to the cost of production by less favored persons. That is, 
 by the aid of the tariff I shall be able to command for my 
 skill a higher price from my fellow-citizens who want the paper, 
 while my government may not be able to collect any increased 
 revenue from foreign importations, because the diminution of 
 imports may compensate for the increase of duty. 
 
 If, on the other hand, there are an unlimited number of my 
 countrymen who are as well qualified to make this peculiar 
 paper as I am, then a tariff will not benefit me, since, in any 
 case, I am then subject to unlimited competition. 
 
III. 70.] EFFECT OF TAXES ON INTERNATIONAL TRADE. 297 
 
 lO. Effect of Import Duties on the ^Balance of Trade. 
 From the considerations in the last chapter it follows that in- 
 ternational trade is determined by production and relative prices 
 in the two countries, combined with cost of transportation, 
 customs duties, and other expenses incident to the exchange. 
 The final conclusion to which we are led will be most clearly 
 seen by taking the prices in some one country as a standard of 
 comparison. Let us then consider a unit of any commodity 
 produced in the United States to mean one dollar's worth, as 
 determined by the wholesale price in New York. Suppose, to 
 fix the ideas, that in Liverpool these unit quantities of different 
 commodities have the values shown in the following table. 
 The numbers in the table are supposed to be the quotient of the 
 price in Liverpool divided by the price in New York. 
 
 Cotton $1.25 
 
 Wheat 1.20 
 
 Leather 1.15 
 
 Petroleum 1.10 
 
 Beef 1.00 
 
 Cloth 0.95 
 
 Linen '. 0.90 
 
 Iron 0.85 
 
 Silk 0.80 
 
 Tin 0.80 
 
 Wool 0.75 
 
 Suppose that in this state of things transportation cost noth- 
 ing and trade were free. Then it is evident that cotton, wheat, 
 leather, and petroleum would be exported from New York to 
 Liverpool, while cloth and all the articles below it on the list 
 would be imported. If the values of these exports balanced 
 that of the imports, trade would continue on this basis, though 
 prices might be brought more nearly to a level. But suppose 
 that our exported articles exceeded in value those imported. 
 The result would be an influx of coin to pay for them, and a 
 consequent rise of prices in this country. There would then 
 be less cotton, less wheat, less leather, etc., in a dollar's worth, 
 so that the home prices of these articles would be brought more 
 
298 THE LAWS OF SUPPLY AND DEMAND. [III. 70. 
 
 nearly to an equality with those abroad. The result would be 
 a diminution in the exports of those articles, and an increased 
 importation of articles which it did not before pay to import. 
 The equilibrium would be reached when a sufficient. supply of 
 articles imported from the bottom of the list was taken to bal- 
 ance those exported from the top of the list. 
 
 Suppose, secondly, that we consider the cost of transportation. 
 This will depend, not upon the value of the product, but upon 
 its weight and bulk. It will prevent trade in those commodi- 
 ties the prices of which in the two countries do not differ 
 by enougli to pay the cost of transportation. 
 
 Let us suppose, next, that an import duty of 50 per cent ad 
 valorem, upon all foreign products is levied by each country. 
 If the above scale of prices continued to hold, all trade would 
 be stopped by this duty. 
 
 Suppose, however, that the duty was levied only by one 
 country, say America. If the scale of prices were unchanged, 
 there could be no imports to pay for the exports, because the 
 duty would raise the price of all foreign products, even that 
 of wool, above the home price. Since, however, our cotton, 
 wheat, and other commodities are, by hypothesis, admitted free 
 in Liverpool, the exports of those commodities would continue, 
 and would for the time be paid for in gold. The result of this 
 influx of gold would be a general rise of prices in this country 
 (§ 21). Let us now trace the effects of this rise. 
 
 When it reached 10 per cent the export of petroleum would 
 cease ; at 15 per cent, that of leather ; at 20 per cent, that of 
 wheat; at 25 per cent, should it reach that limit, that of cot- 
 ton. For we can export nothing unless the foreign exceeds 
 the home price, and each of these percentages is the excess of 
 the foreign price before the inflow of gold began. 
 
 To see whether this prohibitory limit would be reached, let 
 us consider the articles at the bottom of the scale. The for- 
 eign price of iron being 85 cents, the duty of 50 per cent would 
 raise its cost to us, when imported, to $1.2T|. We should 
 therefore import none, even after the rise in prices. The 
 
III. 71.] EFFECT OF TAXES ON INTERNATIONAL TRADE. 299 
 
 price of foreign silk, with duty added, would be $1.20. Hence, 
 when the home scale of prices rose to more than 20 per cent, 
 we should begin to import silk, tin, and wool, but should ex- 
 port nothing but cotton. The reduced annual imports and 
 exports would then balance each other at a rise of between 
 20 and 25 per cent in the scale of prices. 
 
 Studying the preceding case, we see that the reason trade 
 would continue is that the foreign relative price of the three 
 articles at the bottom of the list increased by 50 per cent, the 
 amount of the duty, is still less than the relative foreign price 
 of cotton at the top of the list. Had the duty been 60 per 
 cent, nothing but wool could, have been imported, and TO per 
 cent would have stopped all trade. Our conclusions are : 
 
 I. The first and immediate effect of a newly levied ad 
 valorem import duty is to raise the scale of prices in the coun- 
 try which levies it. 
 
 II. The ultimate effect, after equilibrium is reached, is to 
 stop all foreign trade except in those commodities whose rela- 
 tive cost of production in the two countries differs by a greater 
 percentage than t that of the duty. 
 
 III. The import duty cannot permanently impair the 
 equality of values imported and exported, and must there- 
 fore diminish the one as much as the other. 
 
 71. The question may arise whether by increasing the duty 
 on the articles at the bottom of the list a state of things could 
 not be brought about in which the home supply would all be 
 made in this country and nothing would be imported. To an- 
 swer this question, let us suppose the attempt successful. We 
 should then have a continual export of wheat, cotton, and other 
 commodities which would have to be paid for. If the duties are 
 so high that the exports are not paid for in goods, they would 
 have to be paid for in money. Thus would arise a continual in- 
 crease in the volume of the currency, accompanied by an increase 
 in the price. This increase could never stop until the influx of 
 gold was stopped by our exports being paid for in goods. 
 
300 TEE LA WS OF S UPPL Y AND DEMAND. 
 
 It must be remembered that this increase of price would not 
 be confined to imported articles, but would affect the wheat and 
 cotton exported. When the price of these articles became as 
 high as they were abroad, then their export would necessarily 
 cease, and thus we should have an end of all trade. We there- 
 fore reach the conclusion, 
 
 By no device of levying duties can we permanently prevent 
 the imports and exports from balancing each other. 
 
 EXERCISES. 
 
 1. If a personal tax should be levied on all persons having red hair, could 
 those persons charge a higher price for their services in consequence? 
 What would be the effect of such a tax ? 
 
 2. In a community where grocers have to purchase a license to carry on 
 their business, can they charge a higher price for their goods in consequence ? 
 In what manner is the equilibrium restored if disturbed by such a tax ? 
 
 If a tax is levied upon an income derived from patents, can the person 
 taxed collect it from others by charging a higher price ? 
 
 3. Show the error of the following reasoning: The monopolist is the very 
 person who can best afford to be taxed. For, since lie has a monopoly, 
 he can charge what price he pleases for his monopolized products, and can 
 therefore collect the entire tax from his customers by raising the price of 
 those products. (Cf. § 65.) 
 
 4. Show more explicitly than is done in § 54 that there can be no trade 
 between two countries, how great soever the difference of their general pro- 
 ducing capacities, if the relative producing capacities are the same for all 
 commodities. Put the hypothesis in this shape: Of the various necessaries 
 of life- 
 Country A produces the quantities M, N, P, Q, etc., per man. 
 Country B produces the quantities £ M, \ N, i P, i Q. etc., per man. 
 
 o. Apply the proposition that a tax on production has the same effect 
 as an increase of the cost of production to the case of international trade. 
 Is there any difference between the economic effects of an import duty 
 and an increase in the cost of ocean transportation arising from an increase 
 in the price of coal ? 
 
 6. What would be the economic effect of a tax of ten per cent of the 
 gate-money at all horse-races ? 
 
 * 7. If so heavy a tax should be levied on the home manufacture of 
 
 * The student will be better able to grapple with the questions marked 
 by an asterisk after he has been through the next book, and he should then 
 return to them. 
 
EXERCISES. 301 
 
 paper as to entirely stop its production, while the foreign article was 
 admitted free, would there arise any increased demand for other home 
 products to compensate for the loss of the paper? 
 
 8. Show under what conditions the following may be true: "We may 
 often, by trading with foreigners, obtain their commodities at a smaller 
 expense of labor and capital than they cost to the foreigners themselves." 
 If you have any difficulty, consider how much of the labor of a hod-carrier 
 an eminent lawyer can command by an hour's work. 
 
 9. If the farmers of the United States could raise cotton in unlimited 
 quantities at a cost of two cents a pound, what effect would this have 
 upon the industry and foreign exchanges of the country? "What would be 
 the benefit to the world at large? 
 
 *10. If English operatives should lose their skill, and their capitalists 
 cease to manufacture, in what way would our interests be affected? 
 
 11. Are there any American manufactures whose production requires 
 monopolized elements, and which under the influence of an import duty 
 will be sold abroad cheaper than at home? Show under what conditions 
 such a result is possible. Take as an extreme example the following case: 
 A farmer discovers a mine of copper on his farm from which he can 
 obtain the metal in unlimited quantities at one third the current cost. 
 Our import duty is 45 per cent ad valorem. How are the most advan- 
 tageous selling prices for the farmer at home and abroad respectively 
 determined? 
 
 12. Should it be regarded as a sign of want of skill, or as a sign of 
 prosperity, that the imports of a couutry are very large in proportion 
 to its population? 
 
 *13. "Within two or three years of the close of the Franco-German "War 
 the French paid an indemnity of 5,000,000,000 francs to the Germans, 
 having raised the money by loans. Is it to be supposed that there was 
 any actual transport of this amount of coin from France to Germany? 
 "Whether there was or not, explain what the economic result of the pay- 
 ment finally was. 
 
 *14. If five thousand Americans go to Europe for the summer and spend 
 abroad, on an average, $1000 each, what is the ultimate effect of this ex- 
 penditure? 
 
 15. If "our government could adopt such a policy that we could export as 
 small or as great a value as we pleased in payment for a given volume of 
 imports, ought it to make the exports large or small in amount? 
 
302 THE LAWS OF SUPPLY AND DEMAND. [III. 72. 
 
 CHAPTER XII. 
 
 THE CAUSES WHICH DETERMINE THE KATE OF INTEREST. 
 
 72. The question of usury lias been one of the stumbling- 
 blocks of mankind in all ages. Except in the most intelligent 
 society, and in recent times, the taker of "usury" has been 
 generally looked upon as one who unjustly made a profit with- 
 out rendering any service in return. The view of the natural 
 man may be illustrated as follows : I loan a man $1000. Dur- 
 ing the year it remains in his hands I, the owner of the money, 
 have nothing to do with it and have no agency in its operations, 
 yet at the end of the year I demand and receive back from him 
 not only the $1000, but $50 or perhaps $100 or more in the 
 way of compensation. Compensation for what? Apparently 
 not for anything I have done or been doing. Not for my labor 
 in gaining the $1000, because I was compensated for that when 
 I got the money ; not for anything I did afterwards, because I 
 did nothing afterwards. Thus it looks as if I got my interest 
 without rendering any service whatever. The case seems 
 strengthened when traced to its every-day consequences. If, 
 by my own earnings or by inheritance, I am fortunate enough 
 to be the owner of $100,000 or more, I can spend my life 
 without performing any labor whatever, and live in comfort, 
 and perhaps in affluence, on what society pays me as interest 
 without expending any of my original fortune. 
 
 Yet if we look at concrete cases we shall see that this 
 difficulty must be surmountable. If the usurer were a person 
 who forcibly compelled people to take his money and pay him 
 interest for it, then the preceding general conclusion would be 
 evidently correct. But, as a matter of fact, he never loans 
 money unless some one comes to him for it, and is willing to 
 pay the interest demanded. Now, evidently no one will do this 
 
III. 72.] CAUSES AFFECTING THE RATE OF INTEREST. 303 
 
 unless he expects, by means of the money, to receive not only 
 the benefit of the money itself, but of the interest which he ex- 
 pects to pay. Of course it is here presumed that the borrower 
 knows what he wants and what he is likely to do, and that he 
 is not systematically the victim of a delusion which prompts 
 him to seek that which is going to do him an injury. As a 
 matter of fact, if we look into the case, we shall find that as a 
 rule the borrower of money does gain by the bargain. Take 
 for example the owner of a fertile pasture-field in California. 
 The field is of no use to him unless he can stock it with sheep. 
 Unless he can find somebody to supply him with sheep, he 
 may have to sell half his field in order to get sheep for 
 the other half. Instead of doing this he goes to a capitalist, 
 borrows money, perhaps at twelve per cent interest, and buys 
 the necessary sheep. At the end of the year he sells his wool 
 and receives for it more than he lias expended for pasturage 
 and services, and still has his sheep. He pays the capitalist his 
 interest, and is still richer than he was when he started. He 
 could sell the sheep, and with the proceeds pay off the principal 
 and have a profit left. 
 
 "What has gained this profit ? Only his own labor and ex- 
 ertions, says the objector. But this is clearly an error, for it is 
 certain that if nothing but his own labor and exertions were 
 necessary he would not have gone to the capitalist at all. His 
 labor would have been worthless without the sheep, and he could 
 not get the sheep without money. But granting this, the ob- 
 jector asks, What right had the capitalist to charge him interest ? 
 The answer is that in the course of the year the man has been 
 enabled to make twice as much profit with the capitalist's 
 money that he could have made without. Nothing, therefore, 
 can be more equitable and just than that the capitalist should 
 have his share of what his money helped to produce. Between 
 rational people there can be no lending and borrowing unless 
 it is expected that the money is going to enable the borrower 
 to gain more than its interest, through the advantage it gives 
 him. Without this it would be unwise for him to borrow. 
 
304 TEE LAWS OF SUPPLY AND DEMAND. [III. 73. 
 
 Indeed without this it will be unwise for the capitalist to 
 lend, because he may not get his money back again unless 
 the borrower has been so successful in the use of it as to be 
 able to repay it with interest. Thus the difficulty which we 
 have cited is simply a wrong way of looking at things, and 
 arises from neglecting or overlooking the principle that every 
 agency necessary to production is to be counted as a factor in 
 production. The mistake is of the same nature as when we 
 look upon a brick house as simply a product of the labor of 
 brickmakers, bricklayers, and carpenters, and leave out of ac- 
 count the knowledge and skill which were necessary to organize 
 and direct their work. 
 
 13. Since there are people always ready to borrow money 
 and others ready to supply it, it follows that we may speak of 
 supply and demand in borrowing and lending money as we do 
 in exchange. Moreover, we can easily see that the rate of in- 
 terest is determined, at least for the time being, by the relation 
 between demand and supply, just as the price of goods is so de- 
 termined. Every increase in the rate of interest tends to dis- 
 courage borrowers and thus to diminish demand, for the same 
 reason that a rise in prices diminishes the demand for goods. 
 It also increases the supply by offering stronger inducements to 
 owners of money to save and lend it instead of spending it 
 themselves. Thus in each state of the market there will be a 
 certain rate of interest at which the supply and demand for 
 money to lend and borrow will be equal. When the demand 
 exceeds the supply the rate of interest will rise, thus checking 
 the demand and stimulating the supply. When demand falls 
 off, the rate of interest falls also, thus discouraging the supply 
 and encouraging the demand. 
 
 Fluctuations of this sort are seen from week to week and 
 month to month in the great money-centres of the world. The 
 Bank of England fixes its rate of discount from time to time 
 according to the state of the market, to which it therefore 
 serves as an index. Ordinarily the rate is three or four per 
 
III. 74.1 CAUSES AFFECTING TEE RATE OF INTEREST. 305 
 
 cent per annum. But occasionally satisfactory borrowers can- 
 not be found without going even below three per cent. Occa- 
 sionally the rate rises to six, eight, or ten per cent. In America 
 the prevalence of usury laws nominally prevents these fluctua- 
 tions ; but the result of this is that when the demand for 
 money is so great that the rate of interest necessary to equalize 
 demand and supply is above the legal rate, the banks select 
 the customers to whom they will lend. The principles upon 
 which this is done will be discussed later ; all we have at pres- 
 ent to understand is that in each state of the market there is a 
 certain definite rate of interest which will equalize demand and 
 supply. 
 
 '74. All this does not, however, tell us why in the long-run 
 money should have a definite rate of interest. "Why is it, for 
 example, that in a certain state of the market the borrowers 
 and lenders should be in such proportion that four per cent 
 per annum would equalize the two rather than one per cent or 
 fifty per cent ? 
 
 To answer this question we have to examine the causes upon 
 which the demand and the supply respectively depend, and see 
 by what conditions they are equalized. In order that any person 
 may be willing to borrow money at a definite rate of interest, 
 he must consider that he has at least an average chance of gain- 
 ing more than that rate by means of the money. At this point 
 a source of confusion is to be noted and avoided. "What the 
 borrower really pays interest for is capital, not money. The 
 borrower can gain nothing by keeping the money ; all he bor- 
 rows it for is to purchase some kind of capital. True, it is 
 morally and physically possible that he might expend the money 
 in his own support. But a man who would do this would 
 never be able to borrow at all. As a matter of fact, it is always 
 necessary that the lender should have full assurance that the 
 borrower will be able to pay, and he therefore requires that the 
 borrower shall place a full equivalent of capital, with a margin 
 to guard against loss, in possession of the lender or of some 
 
 20 
 
306 THE LAWS OF SUPPLY AND DEMAND. [III. 74. 
 
 trustee. Such a legal conveyance of tlie ownership of capital to 
 guard a lender against loss is a mortgage. 
 
 We see then that what is called the rate of interest on money 
 is not a property of the money itself, but depends upon the ad- 
 vantage which capital gives its owner in production. We have 
 then to see in what this advantage consists. In the first place, it 
 has been pointed out that capital is a labor-saving agent (II. 29). 
 Its fundamental property is that, with the aid of labor, it returns 
 its user at some future time a value greater than that of the capi- 
 tal and labor combined. For example, if by expending $100 in 
 any kind of capital to-day, the manufacturer finds that he can 
 add $10 per year to the net value of his product, after paying 
 for the additional labor, and deducting all the cost of keeping up 
 his capital to its original value of $100, then that capital yields 
 him a profit of ten per cent per annum. If the increase of pro- 
 duction does not exceed the cost of keeping up the capital, then 
 he would make no greater profit with the capital than without 
 it, and so there would be no use in his acquiring capital at all. 
 
 It has already been shown that nature may be said to keep a 
 number of standing offers of interest upon capital open to the 
 world (II. 29). These offers take the form of opportunities for 
 digging canals, building railways and tunnelling mountains, and, 
 in general, of developing the resources of the country. The 
 rate of profit offered depends upon how far the country 
 is already developed. In an absolutely new country, such as 
 America was three centuries ago, we can hardly set any limit 
 to the rate of interest offered by nature. This is the same 
 thing as saying that capital was very much needed, or that 
 there was great room for improvement in the facilities for pro- 
 duction. At the present time it is not always possible to know 
 with certainty in advance what rate of interest nature does 
 offer for building a particular railway or factory. But men 
 engaged in the management of capital make the best estimate 
 they can of the profit to be gained in each case, and select their 
 field of investment accordingly. 
 
 Next consider the case of circulating capital. A manufacturer 
 
III. 75.] CAUSES AFFECTING TEE BATE OF INTEREST. 307 
 
 finds that with the machinery he already possesses and the la- 
 borers he already employs he can make more goods than he does. 
 But to do this he must increase his stock of raw materials. If 
 he has not the means of doing this, he must borrow money 
 in order to purchase the necessary materials. In order that he 
 may gain a profit exceeding the interest which he pays, he 
 must be able to sell his increased product at an advance over 
 the increased cost of material and labor. "Were the state of 
 things such that neither he nor any other manufacturer could 
 do this, there would be no profit in increasing the quantity of 
 goods manufactured, and the work would remain stationary. 
 Hence, although circulating capital is not a labor-saving agent, 
 it is yet a requisite of production whose accumulation requires 
 abstinence from its immediate enjoyment on the part of the 
 owner. 
 
 75. Next let us see in what way this demand acts upon 
 the supply. The first question is, Why is the supply of money 
 to lend limited at all ? The reason is that the amount of every 
 man's income which he is able and willing to save from current 
 expenditures is limited, and this is all he can have to lend. A 
 large fraction, probably a large majority, of the population do 
 not expect permanently to save anything for use as capital. It 
 is to the few whose incomes are so large or whose personal 
 wants are so few that they are willing to save that borrowers 
 must look for capital. Now, unless some interest is to be 
 gained as the result of saving, there is no strong motive for any- 
 body to save more than is necessary for the support of himself 
 and his family, and for insurance against want in his old age. 
 
 To see this by an example, suppose that you have gained one 
 hundred dollars. Yon have your choice to expend it in some- 
 thing for present enjoyment, or to postpone the expenditure to 
 some future time, say the end of the year. Perhaps you intend 
 to buy a cyclopaedia, and the question is whether you shall buy 
 it now or at the end of the year. Other conditions being equal, 
 the advantage is in favor of buying it now, because then you 
 
308 THE LAWS OF SUPPLY AND DEMAND. [III. 76. 
 
 will have the enjoyment of it during the year, while if you 
 postpone the purchase, you not only lose this enjoyment, but 
 you may die in the mean time and thus lose all opportunity of 
 any enjoyment of your money. If then a manufacturer comes 
 to you and wants to borrow the money, it is evident that you 
 and he cannot both have the benefit of what the money may 
 purchase during the year coming. You will therefore refuse 
 him unless he pays you what you consider a sufficient compen- 
 sation for going one year without the use of the cyclopaedia. 
 
 Yiewing the same case from a different standpoint, let 
 us suppose that you do not under any circumstances want the 
 cyclopaedia until the end of the year, — perhaps indeed it is not 
 to be published until after that interval, — and that you have not 
 yet earned the money to buy it. The question then takes the 
 form, Shall you earn the money necessary to purchase it now, or 
 shall you wait until you want it? Unless you are so fortunate 
 that you can earn a hundred dollars without any disagreeable 
 labor, your wisest course is to wait. It will at worst cost you 
 no more to earn the money a year hence than it will now, and, 
 since the future is always uncertain, it is best not to expend 
 labor for what after all may fail to yield fruition. And so for 
 this reason also you have no sound motive for earning the 
 money in advance, unless you are to make a future profit by 
 doing so. Thus, as a general rule, there will be no money to 
 loan unless interest is to be gained. 
 
 76. The minimum below which the rate of interest can 
 never fall is that which just suffices to induce the savers of 
 income to earn an income in advance of their enjoyment of 
 it. What rate this is is a fact of human nature which can be 
 learned, not by reasoning, but only by observation. Human 
 nature differs so widely with different men that not even the 
 law of averages can be satisfactorily applied, except in a single 
 place and at a given time. Some men are in receipt of great 
 incomes without any more exertion than is really necessary to 
 their en joyment of life. To such men it is all the same whether 
 
III. 76.] CAUSES AFFECTING THE RATE OF INTEREST. 309 
 
 they earn money now or next year, and they might be willing 
 to part with it without receiving any interest at all. In the 
 case of other men a certain instinct of what is right leads them 
 to live frugally and thus to expend less than their income. 
 Such men will be willing to loan at a very low rate of inter- 
 est. These cases are, however, exceptional, and the rule is that 
 men save only in consequence of the interest they are to gain. 
 The numerical value of the minimum rate of interest is a 
 result of certain qualities of human nature which we cannot 
 measure with certainty. It is, however, a curious fact that up 
 to the present stage of human history the rate of interest has 
 rarely fallen below that which would yield a young man, in 
 the course of his average life, a profit equal to the principal in- 
 vested. The expectation of life for a man at twenty may be 
 put at forty years. If he has gained a certain capital it will, 
 without any investment, last him his average life, if he con- 
 sumes two and a half per cent of it per annum. Hence, so far 
 as he is individually concerned, he has no motive for saving 
 unless he can gain this rate of interest. Now this is about 
 the minimum rate yet known. Of course no perfectly exact 
 numerical statement can be made in such a case, because the rate 
 is always fluctuating ; but this is a sufficient approximation for 
 our purpose. Since, then, as human nature is constituted, the 
 supply of capital tends to diminish as the rate of interest falls, it 
 follows that all persons who want capital must pay interest. 
 Nature is competing with them, and they must at least pay her 
 price. But the rate they have to pay may be very small. As 
 a country increases in wealth, the rate of interest tends to fall, 
 both from diminished demand and increased supply. Nature 
 continually offers less and less, as the resources of a country are 
 developed, and the accumulation of raw material and the de- 
 velopment of factories constantly approach the limit at which 
 no further profit can be made by the further increase of capi- 
 tal. Again, as wealth increases men are more and more able 
 to save, and thus the supply increases. 
 
310 TEE LAWS OF SUPPLY AND DEMAND. [III. 77. 
 
 YT 1 . Risk as affecting the Hate of Interest. In the pre- 
 ceding discussion we have taken no account of the risk which 
 a lender incurs of wholly or partially losing the money he lias 
 loaned, in consequence of inability on the part of the borrower 
 to repay him. For this risk he must be compensated ; and of 
 course the amount of the compensation will be greater the 
 greater the risk. Since he is himself the sole judge of the 
 risk and the compensation, no sure mathematical law can be 
 laid down to govern the case. The mathematical theory of 
 probabilities, however, embodies a principle which is applicable 
 to a certain class of cases, if the lender reaches his conclusions 
 in the most reasonable manner. This principle is that the com- 
 pensation for a risk is equal to the amount in jeopardy mul- 
 tiplied by the probability of loss. Suppose, for example, that 
 from the best judgment which a lender can form there is one 
 chance out of twenty that the borrower with whom he is deal- 
 ing will fail within a year. We then say that the probability 
 of failure within the year is one twentieth, and the proper com- 
 pensation for the risk would be five per cent per annum. If 
 the minimum rate of interest were also five per cent, then the 
 lender should receive ten per cent per annum for his money. 
 
 We ought perhaps to say that this is the minimum which he 
 as a prudent man ought to accept. If his situation is such 
 that the loss of the money would reduce him to distress, he 
 ought to demand a higher compensation on account of the risk. 
 The wealthier he is the nearer this reasonable compensation 
 will approach the mathematical limit. It can never fall below 
 that limit. 
 
 78. The Nature of Capital and Cause of Interest. The 
 reader who has carefully mastered the subject of capital and 
 interest will see that they depend fundamentally upon the fact 
 that time, and perhaps a long time, must elapse between the 
 performance of labor and the enjoyment of its products if 
 we would get the maximum of ultimate enjoyment from our 
 labor. For example : 
 
 If I sow a crop, I must wait a year for its final enjoyment. 
 
III. 78.] CAUSES AFFECTING TEE RATE OF INTEREST. 311 
 
 If I raise a liorse, lie will not be of any use for three or 
 four years, and I may not get all the use of him for ten or 
 fifteen years. 
 
 If I build a railway, I may not be fully compensated for 
 my labor until after the lapse of twenty or thirty years. 
 
 Now, as I am situated in civilized society, I have my choice 
 either to enjoy all my labor shortly after the time of perform- 
 ing it, or to postpone my enjoyment for one or many years. 
 
 The longer I am willing to postpone my enjoyment the more 
 thorough and effective I can make the agencies by which my 
 future wealth is to be produced, and hence the greater the 
 amount of ultimate enjoyment which I or my posterity can 
 command from my labor. 
 
 But my wants are immediate. I cannot live now on next 
 year's crop, nor haul my crop to market with a new-born colt. 
 I must be fed, clad, and housed while working for my future 
 self. 
 
 He who loans me money is one who enables me to devote 
 my labor to my future good by feeding, clothing, and housing 
 me now, and hence enables me to produce more wealth in the 
 long-run. If he does not require repayment of the money 
 until I have begun to gain the increased means of enjoyment, 
 it is just that I share the increase with him when I do pay it. 
 Interest is the excess which I pay him on account of his per- 
 mitting me to anticipate the future results of my labor by en- 
 joying now what otherwise I would only have enjoyed in the 
 future, or perhaps would never have enjoyed. 
 
 When I devote myself to labor intended to yield sustenance 
 only in the distant future, I' do not engage in the direct pro- 
 duct of the sustenance, but in the production of some inter- 
 mediate form of wealth intended to increase the productiveness 
 of my future labor. This intermediate form of wealth we call 
 capital. 
 
312 THE LAWS OF SUPPLY AND DEMAND. [III. 78. 
 
 EXERCISES. 
 
 1. Bastiat illustrates interest b} r supposing one carpenter, James, with 
 ten days' labor, to make a plane which he loans to William. The latter 
 uses it for 290 of the 300 working days of the year, when it is worn 
 out. He spends the remaining 10 days of the year in making a new plane 
 to return to James, but, in addition, he gives him a plank as interest. 
 Mr. Henry George says William lost the value of this plank by his bargain, 
 because he could have spent the first 10 days of the year in making him- 
 self a plane, instead of the last 10 days, and would then have saved his 
 plank. Show the fallacy. 
 
 2. Explain why the rate of interest is highest in newly-settled countries. 
 Especially what causes affected the rate of interest in California immediately 
 after the gold discoveries ? 
 
 3. Show the effects of discovering improved methods of production 
 upon the rate of interest, and explain how the effect depends upon the cost- 
 liness of the machinery needed to put the improvements into operation. 
 
 4. What effect has a low current rate of interest upon the price of gov- 
 ernment bonds bearing interest at a fixed rate ? 
 
 5. Explain how it is that usury laws do not generally make the rate of 
 interest lower, but rather tend to prevent men from lending their money. 
 Take the following example of their spirit: A man in pecuniary difficulties 
 goes to a capitalist saying, "Could I only borrow a thousand dollars for a 
 year, I could come out with a handsome profit. But if I cannot get this 
 loan, I shall be ruined and my family will be destitute. If the capitalist 
 saves the man by loaning him the money at 12 per cent interest and com- 
 pensation for risk, the usury laws punish him by perhaps forfeiting the 
 entire sum loaned. If he replies to the man, "No, I will not help you on 
 any terms whatever, and if your family starves it is none of my concern," 
 the law does not censure him. 
 
 6. Explain the relation of interest to the increased productivity of labor 
 due to the use of capital. 
 
 7. How does carelessnsss on the part of a community respecting its future 
 needs affect the rate of interest? 
 
BOOK IV. 
 
 THE 
 SOCIETARY CIRCULATION. 
 
IV. 1.] TEE MONETARY FLOW. 315 
 
 BOOK IV.— THE SOCIETARY CIRCULATION. 
 
 CHAPTER I. 
 
 THE MONETAKY FLOW. 
 
 1. "We have now to present the reader with a method of 
 representing the exchanges within a social organism considered 
 in their totality. The object of the method is to facilitate the 
 study of the action of economic causes upon production and 
 exchange. 
 
 There is no act of exchange the effects of which terminate 
 with the act itself. "When the ownership of any commodity 
 passes from A to B, that passage may only pave the way for 
 another transfer from B to C, and so on until the commodity 
 reaches the person who is finally to consume it. A piece of 
 money changes hands without end, since every person who 
 receives it expects, unless in exceptional cases, to pay it out 
 again to some one else. 
 
 We call to mind that under our present system every ex- 
 change is a double transfer of ownership — money passing in 
 one direction, and the ownership or enjoyment of wealth in 
 the other direction. We thus have two separate processes of 
 transfer, one of money and the other of wealth or its enjoy- 
 ment. We shall consider these two systems separately, and 
 afterwards show the relation between them. The transfer of 
 money is the most simple in its conception, and we shall there- 
 fore begin with it. 
 
316 THE SOCIETARY CIRCULATION. [IV. 3. 
 
 2. The Dual Conception of Economic Quantities. We 
 now have to draw a distinction between two measures or 
 conceptions of economic quantities the neglect of which has 
 been a potent cause of dispute between schools, and inexact- 
 ness of thought. This distinction is that between a fund, 
 or accumulated quantity, and a flow. Applied to a material 
 substance like water, this would be expressed as the distinc- 
 tion between a reservoir of water and a flow of water. We 
 have a conception of a certain number of gallons of water 
 stored up in a mill-pond. We also have a conception of a 
 rate of flow into the pond, or out of it, of so many gallons per 
 hour. Now, there is no fixed relation between these two con- 
 ceptions. A very large mill-pond may have a very small flow 
 of water from it, and a small pond may have a much larger 
 flow. If we were told that one pond had a much larger sup- 
 ply of water than another, this statement would be ambigu- 
 ous, and we could make no use of it until we knew whether 
 " larger supply" meant a larger sum total of water or a larger 
 flow per hour. To avoid ambiguity we define fund and flow 
 as follows : 
 
 A fund is quantity or value pure and simple : so many 
 dollars, for example. 
 
 A flow is so many dollars per hour, day, or year. 
 
 3. To form a conception of the total exchanges of a coun- 
 try or other social organism, we must first conceive of all the 
 individuals who can make exchanges. This class includes 
 all legal persons who can be owners of property. A firm 
 or company of any kind must be considered as a person dis- 
 tinct from the men who form it. For example, if Brown and 
 Smith are in partnership, there will be three persons among 
 them, the firm and its two partners. But unless the combi- 
 nation forms a separate legal person, having dealings with all 
 its members individually, it is not to be considered as a person. 
 On the other hand, we are not to count as separate persons 
 those who do not do business on their own account. As a 
 
IV. 4.] THE MONETARY FLOW. 317 
 
 general rule, husband, wife and minor children will all together 
 constitute but a single person. In fact, any body of people 
 whose separate interests do not concern society may be consid- 
 ered as a single economic person whenever we want to con- 
 sider their relations to the rest of society. 
 
 In the following chapters we shall graphically represent eco- 
 nomic persons by small circles. 
 
 4. Flow of the Currency. In this chapter we use the 
 word, "money" in its widest sense, so as to include every- 
 thing of which the ownership is transferred from hand to 
 hand in payment for goods or services. Let us consider all 
 the money paid by any one person. To do this we record 
 every payment that he makes, and write down its amount in 
 a column of an account-book. At the end of some unit 
 of time, say a year, we add up all these payments. "We 
 shall then have a definite sum, expressing all the payments 
 of that particular person during the year. Let us imagine 
 this sum calculated in the same way for every one of the thou- 
 sands or millions of persons who make up the social organism. 
 The sum total will express the amount of the entire payments 
 within the organism during the year. This sum we call the 
 flow of the currency. 
 
 Instead of considering payments, we might have taken the 
 receipts of money. Under every person's name we should 
 then write down all the sums of money paid to him. The 
 sum at the end of the year would express the total annual 
 payments to him, and this sum for the whole community 
 would give another value for the flow of the currency. If we 
 determined the flow by both methods, then, since every pay- 
 ment made by any one person must be made to some other 
 person, we should register every payment twice, once under the 
 payer and once under the payee. Hence we should get the 
 same sum total of the flow in either case. 
 
 This, however, presupposes that we include no payments 
 made to or from foreign persons, or persons outside the or- 
 
318 
 
 THE SOVIET ART CIRCULATION. 
 
 [IV. 4. 
 
 ganism under consideration. Such payments form a very im- 
 portant economic factor ; but in this preliminary discussion we 
 have to omit them, and consider only internal payments. We 
 may, if we choose, consider all the persons in the world as 
 forming a single social organism, and the two measures of the 
 now will then always balance. 
 
 Fig. 1. 
 
 The conception of the flow of the currency is represented 
 graphically in the following way : We draw a little circle for 
 each person legally capable of being an owner of wealth. 
 Whenever a payment of money is made we suppose it to pass 
 from the circle representing the payer to that representing the 
 payee through a little vein. This vein we represent by a line 
 from one circle to the other, with an arrow-head showing the 
 
IV. 4.] TEE MONETARY FLOW. 319 
 
 direction of the payment. These veins form a network through 
 which we suppose the money to be flowing from person to 
 person. This continual flow of money from owner to owner 
 is called the monetary circulation. 
 
 It will readily be seen that when we speak of a flow we 
 introduce a conception which does not strictly conform to the 
 actual case, because at no time is money really flowing like a 
 fluid from person to person. Excepting such cases as that of 
 transmission by mail, money is always in possession of some 
 one person, and it passes from one person to another in -a 
 moment by the act of payment. It would therefore be more 
 exact to consider the circles as representing reservoirs of 
 money, and the motion along the arrows to take place by sud- 
 den transfers from one reservoir to another. But the trans- 
 fers have the same result as a flow, and a certain advantage 
 is gained by conceiving of the money as regularly flowing 
 from one reservoir to the other, as shown by the arrows. In 
 fact, the familiar words " currency" and " circulation" in Eng- 
 lish, and the yet more expressive phrase "argent liquide" 
 applied by the French to ready cash, or money all ready to 
 flow, show how natural the conception of a flow of money is. 
 
 We may imagine that on each connecting vein we write 
 down the amount of all the money which has passed along 
 that vein in the course of the year. The sum total of all the 
 amounts passing from any one person will be his total payments, 
 and the sum of all the amounts passing to him will be his total 
 receipts. The sum of all the numbers written down upon the 
 veins will be the total flow of the currency. The amount of 
 this flow in dollars we represent by the symbol F. 
 
 The general rule will be that as much money flows from 
 every person as flows to him. It is true that there is no law 
 against a man collecting as much money as he chooses, just as 
 he would collect books or pictures. Practically, however, he 
 has no motive to collect any considerable sum of money, be- 
 cause he loses interest on it as long as he keeps it. Hence, 
 as a matter of fact, nearly all the money received by persons 
 
320 THE SOCIETART CIRCULATION. [IV. 5. 
 
 is very soon paid out again for some purpose. To this rule, 
 however, there are two important exceptions, that of banks 
 and that of the government. We have shown that banks 
 can create money in the form of credit. The stream of money 
 may therefore flow from them for a considerable period with- 
 out any stream flowing back. When the credits are paid off by 
 their debtors, they are in receipt of money which they are under 
 no legal obligation to pay out again. Still we shall generally 
 find that in the long-run the receipts and payments will near- 
 ly balance in the case of banks as in other cases. In the case 
 of a government, payments can be made only in accordance 
 with certain legal forms, and there can be no assurance that 
 they shall exactly balance the revenue. Hence large sums of 
 money may be collected in the public treasury at one time, to 
 be paid out at another time. But if, instead of taking a single 
 year, we take a generation, the account of receipts and pay- 
 ments will still be nearly balanced. 
 
 We are therefore to conceive that the inflow to every person is 
 equal to the outflow from him. But it does not follow that 
 the number of streams to and from him must be equal. If his 
 sole source of income is a salary, there will be but one flow of 
 money to him, namely, that coming from his employer. But 
 from him there will be currents to his grocer, his baker, his 
 landlord, his tailor, and dozens of others from whom he buys. 
 A retail tradesman may have streams flowing to him from hun- 
 dreds or even thousands of customers, while the streams from 
 him may be no more numerous than in the case of his salaried 
 clerk. 
 
 5. Distinction and Relation between the Volume and the 
 Flow of the Currency. We have to make in currency the dis- 
 tinction between a fund and a flow, the logical nature of which 
 has been already pointed out. The volume of the currency is a 
 fund. On our diagram the volume is the total number of dol- 
 lars flowing through the network at any moment. If we in- 
 troduce the more accurate conception of each person as a reser- 
 
IV. 5.] TEE MONETARY FLOW. 321 
 
 voir, then, since the reservoirs contain all the money at any 
 one moment, we should say that the volume of the currency 
 was the sum total contained in all the reservoirs at any epoch, 
 say on midnight of a particular day. 
 
 The method of determining this volume has already been 
 laid down (II. 96-98). For our present purpose we may con- 
 sider it as made up of two parts, material money and immate- 
 rial money. The material portion consists of coin, bank-notes, 
 and other forms of credit which pass from hand to hand without 
 change or subdivision. The immaterial portion of the currency 
 consists of bank credits, the ownership of which is transferred by 
 cheques. The relations between the volume and the flow of 
 these two kinds of currency have to be considered separately. 
 
 Let us on January 1st fix our attention on a dollar bill. We 
 shall perhaps see this bill pass from a young man to a confec- 
 tioner in exchange for ice-cream ; from the confectioner it passes 
 to the grocer, from the grocer to his drayman, and so on. "We 
 may imagine it passing from hand to hand until December 
 31st. If we count up the number of times the bill has changed 
 hands, we shall have the contribution to the flow of the cur- 
 rency made by that particular bill. Adding up the contribu- 
 tions for all the dollar bills in circulation, we shall have the sum 
 total of their contributions to the flow F. In the case of the five- 
 dollar bills we proceed in the same way, but multiply the num- 
 ber of transfers by 5. The product will be their contribution 
 to F. Doing the same thing for the ten-, twenty-, and fifty- 
 dollars bills, and for all the gold and silver pieces in circulation, 
 we shall have that portion of F due to the circulation of ma- 
 terial money. Let us call this sum total F'. If we divide ~F' 
 by the sum total of all the bills and pieces of coin in circula- 
 tion, we shall have the average number of times which mate- 
 rial money changes hands in the course of the year. Divid- 
 ing the 365 days of the year by this number, we shall have 
 the average number of days which money remains in one man's 
 hands. 
 
 It follows that if nothing but a fixed number of pieces of 
 
 21 
 
322 THE SOCIETART CIRCULATION. [IV. 5. 
 
 material money were in circulation in a community, we could 
 obtain the annual flow of the currency in a third way, as follows : 
 
 Multiply the denomination of every piece of money by the 
 number of times it changes hands in a year. We shall then 
 have as many products as . there are pieces of money. The 
 sum of all these products will be the flow of the currency. 
 
 Let us see now how this conception is to be modified in the 
 case of bank credits. As already shown, these credits are not 
 material money, but consist simply in rights to money, which 
 are represented by writing certain figures in the books of the 
 bank. Yet they form a part of the volume of the currency. 
 But we cannot separate them into individual dollars so clearly 
 as we can the bank-notes. The results, however, do not offer 
 any immediate difficulty. Every bank cheque drawn by A in 
 favor of B is a contribution to the flow F ; if B passes this 
 cheque to C in payment of a debt, the cheque is again added to 
 the flow. Moreover, it is only so far as the bank credit is thus 
 transferred by means of cheques that it has anything to do with 
 the flow. If then we call the sum total of payments by cheque 
 F", we shall have 
 
 Total flow of the currency = F = F' -f F". 
 
 If we call the average volume of bank credits or deposits 
 D, then dividing F" by D, we shall have the average number of 
 times which a dollar of bank credit changes hands in the course 
 of the year, and hence we can determine the average length of 
 time which it remains in any one person's hands. 
 
 "We have now two quantitative conceptions before us : a sum 
 total of payments, F, and the total volume of currency, which 
 we shall call Y, by which these payments are made. It may 
 perhaps give precision to these conceptions if we compare them 
 with that of the circulation of blood in the body. The body of 
 an adult man contains a certain number of pints of blood. If 
 we keep an account of all the blood which flows into any one 
 organ or part of the body, the forefinger for example, in the 
 course of one day, we shall have the circulation of that finger. 
 Since the same blood may flow in over and over again, and must 
 
IV. 5.] TUB MONETARY FLOW. 323 
 
 be counted every time, the circulation, even for the forefinger, 
 may be expressed by a greater sum total than the entire volume 
 of blood in the body. Moreover, this circulation C will be 
 greater the greater the time we take, being sixty times as great 
 for one hour as for one minute, and twenty-four times as great 
 for a day as for an hour. If we add up C for every organ in 
 the body, we shall have the total flow of blood for one day. 
 Dividing this total flow by the entire volume of the blood, we 
 shall have the average number of times which the blood circu- 
 lates in the course of the day. 
 
 This analogy must not, however, be carried too far. Blood 
 circulates by being always carried back to one central point, 
 whereas money is not so carried, but may only pass from hand 
 to hand without end. If we wish the analogy to correspond 
 more exactly, we must suppose that to the circulation of a single 
 molecule of blood from the heart to any organ and back again 
 corresponds the passage of a unit of money from one person to 
 another. 
 
 Let us now state the algebraic relation between the volume 
 of currency Y and the flow F. This relation is expressed by 
 saying that F is equal to Y multiplied by the average number 
 of times which each unit of money changes hands in the course 
 of a year. We may use the algebraic notation : 
 
 B/, the average number of times a material dollar changes 
 hands in a year ; 
 
 B/', the average number of times for a bank credit ; 
 
 R, the same average for the whole volume of currency. If 
 this number E,, which we call rapidity of circulation, is fixed 
 — that is, if money always circulates with the same average 
 rapidity — then the relation between F and Y is fixed and defi- 
 nite, and one cannot be increased without increasing the other 
 also. We therefore have between the volume, flow, and rapid- 
 ity of circulation the equation 
 
 F = YXE, 
 
 which is the fundamental equation required. 
 
324 THE 80CIETABY CIRCULATION. [IV. 6. 
 
 6. We now have to consider whether there is any law which 
 fixes the number of times R that each dollar can change hands 
 in a year, or, what amounts to the same thing, whether there 
 is any law which determines how long a dollar shall remain 
 on the average in any one man's hands. A little consideration 
 will show us that although this last period is not fixed by any 
 precise law, being subject to changes through the action of 
 various causes, yet it can only change between very narrow 
 limits. 
 
 If every man could pay out his money the instant he got it, 
 the time between two payments would be very short. But 
 as a matter of fact he must in general keep more or less of 
 his money a certain period before he can advantageously spend 
 it. If he receives a salary payable at the end of every month, 
 he probably pays a moderate grocery bill at once, and keeps 
 the rest of his money to spend from time to time uniformly 
 throughout the month. If he owes one half, but pays out the 
 other half at a uniform rate, then the average time which his 
 money stays in his hands is a quarter of the month. In a com- 
 munity of such men, such pieces of money would change 
 hands forty-eight times in the course of a year. The change 
 of hands is made with greater rapidity the higher we go in 
 the financial scale. As a general rule every man feels that 
 he is losing possible interest on his money by keeping it, and 
 therefore tries to pay it out for something as soon as he ad- 
 vantageously can. The larger and wider the transactions in 
 which he is engaged the better he can manage this, and there- 
 ' fore the quicker he can pass his money. It would probably 
 be found that among the brokers on Wall Street every dollar 
 changes hands at least once, and possibly a number of times, in 
 the course of a day. 
 
 It might seem at first sight that the causes which determine 
 how long a single dollar will remain in one man's hands must 
 be so exceedingly transitory and variable that no average time 
 can be fixed. This conclusion would be correct if we were re- 
 quired to consider the time sought as an absolutely fixed math- 
 
IV. 6.] TEE MONETARY FLOW. 325 
 
 ematical quantity. But although the quantity cannot be thus 
 absolutely fixed, the conditions of society are such that the law 
 of averages prevails with a near approach to rigor. The aver- 
 age length of time which a dollar remains in one man's hands 
 is fairly definite when we take the average of millions of peo- 
 ple, each using hundreds of dollars. At the same time it is 
 liable to change by the action of any cause, however slight, 
 which affects the transactions of the whole community in the 
 same way. There are, as we shall presently show, certain 
 causes which accelerate the passage of money from hand to 
 hand, and there are certain conditions under which this passage 
 is retarded and money is kept longer in people's hands. 
 
 ILLUSTRATION AND QUESTION. 
 
 1. An example of confusion between the ideas of a fund and a flow is 
 found in the discussion of one of the most celebrated economical theories of 
 modern times, that of the " wage- fund." This theory asserted that the sum 
 total of money in a country available for the payment of wages was limited 
 and definite in amount, a statement in itself quite correct. Hence it was 
 concluded that wages could be increased only by increasing this amount. 
 I,t was thus supposed that there was a certain relation by virtue of which the 
 amount of wages depended upon the amount of the wage-fund. But a very 
 little consideration will show us that no such relation could exist, any more 
 than the flow of water over a dam could be determined by the amount of 
 water in the mill-pond. No matter how vast the fund, it would in time be all 
 absorbed in the payment of wages ; then, were the fund never replenished, 
 no more wages could be paid, and society would come to an end. The fund 
 must therefore be continually replenished. Now, this being so, the pay- 
 ment of the wages depends, not upon the magnitude of the fund, but upon 
 the rate at which it is replenished. This rate is not a fund at all, but a 
 flow. It bears the same relation to a fund that a flow of so many gallons 
 per hour does to a reservoir holding so many gallons of water. 
 
 2. Adding up all the bank cheques drawn in a community during a 
 month, it is found that they amount to twenty millions of dollars. If each 
 cheque were paid by the drawee to a third person, who collected it, what 
 would be the total contribution made by these cheques to the monetary 
 flow? If the bank deposits averaged five millions of dollars, what would 
 be the annual rapidity of circulation for the bank credits? Note that we 
 do not count the deposit of money in a bank as part of the monetary flow. 
 
326 THE SOCIETABY CIRCULATION. [IV. 7. 
 
 CHAPTEE II. 
 
 THE EQUATION' OF SOCIETAKY CIRCULATION. 
 
 7. In the preceding chapter we considered the total pay- 
 ments of money from person to person in a social organism. 
 Now, considering only the cases which come under economic 
 principles, each of these payments was made in exchange for 
 something transferred from the payee to the payer. This 
 something may be either material wealth already in the posses- 
 sion of the payee, or it may be a service involving labor on the 
 part of the payee. "When one hires a laborer to work for him, 
 he receives in return a service consisting of the results of the 
 man's labor. If he buys a pound of tea at his grocer's, he re- 
 ceives the tea in exchange for his money. Hence, as already 
 remarked, to every flow of currency from one person to 
 another corresponds a reverse flow of wealth or services from 
 the second person to the first. The total circulation consists, 
 therefore, of two combined circulations equal and opposite 
 to each other, the one of some form of current money, the 
 other of some object of desire, the product of human labor. 
 To distinguish these two we shall call the latter the industrial 
 circulation. 
 
 The same diagram which represents the monetary circulation 
 may also be considered to represent the industrial circulation, 
 the latter flowing in the opposite direction from that of the 
 arrows, but along the same veins. 
 
 We shall use the term societary circulation to designate 
 these two opposite circulations. 
 
 We have shown that it is the industrial circulation alone 
 which really supplies the wants of the community. Were it 
 possible to keep up the industrial circulation without the use 
 of money, men's wants would be supplied just as they are 
 (II. 53). 
 
IV. 8. J THE EQUATION OF SOCIETARY CIRCULATION. 327 
 
 Since we cannot possibly keep up the industrial circulation 
 without the other, it might seem idle to point out this fact, but 
 the understanding of the fact is conducive to sound thinking 
 on the subject. The public are prone to assume that the sup- 
 ply of their wants depends altogether on keeping up the mone- 
 tary circulation, regardless of the industrial circulation, and 
 bad policies are therefore urged upon governments. The 
 lesson to be drawn from the fact is this : The influence of 
 changes in the monetary circulation tipon the well-heing of 
 the community is to he determined by their effects upon the 
 industrial circulation. 
 
 8. Our first proposition concerning the industrial circula- 
 tion defines its amount. If we include in this circulation every 
 transfer of commodities or services for which money is paid, 
 or to be paid, and no others, then its value will necessarily be 
 equal to the flow of the currency, this flow having been defined 
 as the sum total of money payments. But to preserve the 
 equality we must exclude from the monetary flow all such 
 transfers as loaning money, or depositing it in a bank, because 
 these are not balanced by reverse transfers of wealth or ser- 
 vices. Then, keeping the two flows in correspondence with 
 each other, the flow of the currency must, in the long run, 
 remain equal to the total value of the industrial circulation as 
 measured in money. 
 
 Of course this measure is subject to the general laws of 
 measurement already developed, according to which the numeri- 
 cal value of any fixed quantity varies inversely as the measur- 
 ing unit. Hence, with every change in the absolute value, or 
 " purchasing power," of the dollar, there will, all other condi- 
 tions being equal, be an- inverse change in the money measure 
 of a fixed industrial circulation. This measure will therefore 
 vary directly as the scale of prices. Hence, in accordance 
 with the mathematical principle already illustrated, the money 
 value of a fixed industrial circulation will be equal to some 
 quantity multiplied into the scale of prices. The quantity 
 
328 THE SOCIETARY CIRCULATION. [IV. 9. 
 
 to be multiplied is simply the value of the industrial circula- 
 tion as it would be on the scale of prices which we assume as 
 the unit of comparison. Thus in III. 11 we assumed the scale 
 of prices in the year 1880 as the unit, and found certain other 
 scales for other years. If then we put K for the industrial 
 circulation on the scale of prices which we take as unity, and 
 if we put P for the actual scale as found from the table of 
 prices, then the money value of the total industrial circulation 
 will be K X P. 
 
 Prom what has already been said, this product is the same as 
 the flow of the currency ; hence, using the notation already 
 given, in which that flow is Y X R, we have the equation 
 
 Y X R = K X P, 
 which may be called the equation of societary circulation. 
 
 This equation may be regarded as the fundamental one in 
 the theory of exchanges. To the non-mathematical reader a 
 further explanation of its significance may be needful. The 
 first member, TxE, assumes the very obvious fact that the 
 total money value of the exchanges which will be effected in 
 a year by a number Y of dollars is equal to Y multiplied by 
 the average number of times which a dollar changes hands 
 during the year. The other member of the equation, K X P, 
 implies that the total money value of the wealth and services 
 which these payments balance increases with the scale of 
 prices, and with the quantities of wealth exchanged ; so that 
 when either of these factors increases, Y XE must increase 
 in the same proportion. 
 
 9. The next proposition is that the quantity K, which rep- 
 resents the industrial circulation as measured by the unit scale 
 of prices, also represents, with some slight modifications, the 
 sum total of the necessary operations of the social organism, so 
 far as these operations consist in the transfer of goods and the 
 rendering of services. To show how this is, and what it means, 
 let us take some continuous series of those operations. Our old 
 history of the coat will serve for this purpose. We wish to 
 
IV. 9.] THE EQUATION OF SOCIETARY CIRCULATION. 329 
 
 learn what flow of the currency was caused by the various pro- 
 cesses of transportation and manufacture to which it was sub- 
 ject. Commencing with the sheep on the prairie, the first 
 industrial operation was that of tending and shearing the sheep. 
 The measure of this industrial operation was the money paid 
 by the owner of the sheep to his employes for their work, 
 which money payment counts as a part of the flow of the cur- 
 rency. The next industrial operation we may conceive to have 
 been the transportation of the wool to Chicago by rail. This 
 was balanced by a flow of the currency from the sheep-owner 
 to the railway company. Arriving in Chicago, the ownership 
 of the wool passed to the wool-merchant, and was balanced by 
 a flow of the currency from the wool-merchant to the owner. 
 By a succession of such operations the wool reached a factory, 
 and each operation was balanced by a flow of currency. In 
 the factory operatives rendered service in manufacturing the 
 wool into cloth, which service was balanced by a flow from the 
 owners of the factory to the operatives. As the ownership of 
 the cloth passed successively to the wholesale dealer, to the 
 tailor, and the owner of the coat, every transfer was balanced 
 by a flow of currency between the same parties in the opposite 
 direction. The same thing is evidently true of all industrial 
 operations. For every such operation there is a corresponding 
 flow of the currency. 
 
 We are mainly concerned with the converse proposition 
 that, omitting exceptional cases to be considered presently, 
 every money payment is made to facilitate the progress of 
 goods or services from those who own or render them to those 
 who want them. This follows from the general principle that 
 no one pays out his money unless he receives an equivalent, 
 and that he always pays it in such a manner as to get the great- 
 est equivalent he can command. Hence, as a general rule, 
 payments of money are made only for the services which they 
 can most advantageously command, and every money payment 
 is balanced by a corresponding transfer of services of some 
 kind. 
 
330 TUE SOCIETABY CIRCULATION. [IV. 10. 
 
 10. A third principle touching the industrial circulation is 
 that there is a certain amount of that circulation which is most 
 conducive to human well-being. To show what this maximum 
 is, let us commence with a simple example. Here is a shoemaker 
 who has a wife and two children to support. He can work a 
 certain number of hours in the day, six or eight perhaps, with 
 positive pleasure to himself. Work beyond these hours grad- 
 ually becomes more and more irksome. The first additional 
 hour he will think little of, the second he will have more aver- 
 sion to, the third yet more, and so on. A point will at length 
 be reached when he cannot work longer unless at the expense 
 of his health. 
 
 Now, under the laws of demand and supply, he can obtain a 
 certain amount of sustenance with his eight hours of agreeable 
 labor. If this sustenance is all his family want, the problem of 
 his existence will be a very simple one. But we may be sure it 
 is not all they want. If it suffices to give them cotton curtains 
 to their windows, they will want lace ; they will want the choice 
 cuts of beef rather than the coarser ones ; and the wife will 
 want to hire a seamstress instead of mending the clothes her- 
 self. The man will therefore certainly work a little more than 
 the number of hours agreeable to him. The limit of advanta- 
 geous working is reached when the additional sustenance which 
 he' can obtain by additional work will not compensate for the 
 irksomeness of the labor. At this point he will stop working 
 of his own accord. For the number of hours up to this limit 
 he can command a certain amount of money yearly. This 
 amount will be, so far as he is concerned, the most advanta 
 geous flow of the currency from his customers to him. If he 
 works longer, the irksomeness of the labor will more than bal- 
 ance the benefit derived through the additional monetary flow. 
 
 What is true of this shoemaker is true of everybody. 
 There is a certain maximum amount of labor which, whether 
 applied to production or exchange, cannot be exceeded with- 
 out disadvantage to the individual. Every man must be 
 his own judge of this maximum, because it depends upon his 
 
IV. 10.] THE EQUATION OF SOOIETAET CIRCULATION. 331 
 
 health, habits, the wants of his family, and his own desire for 
 wealth. We may therefore regard the flow of the currency 
 as measuring, in the normal state of society, that particular 
 amount of industrial circulation which on the whole is most 
 conducive to the enjoyment and well-being of the community. 
 
 It is true that this proposition runs counter to current no- 
 tions. The popular opinion is that almost every man in the 
 community wants more employment than he can get. Mer- 
 chants are sorry when business is dull, and glad when it is so 
 brisk that they have hard work to keep up with it. Laborers 
 are often out of employment entirely, although they profess 
 their willingness to work for even lower wages than the pro- 
 ducts of their work ought to entitle them to command. But a 
 fallacy underlies these conclusions. The fact is that the aver- 
 age man does not want to do any more work than he does. 
 Many laborers desire laws to prevent them working more than 
 eight hours a day. What everybody wants is, not to render 
 more service, but to get more pay for that which he does ren- 
 der, which is a very different thing. That is to say, he does 
 not wish to increase his part of the industrial circulation, but 
 he does want to increase the flow of currency to him which 
 should balance his contribution to the industrial circulation. 
 In other words, he wants to establish a higher scale of prices 
 for his services. The greater the demand the higher the price 
 he can charge. Hence his desire for increased demand. 
 
 The wish for high prices being entertained by all men, there 
 is a force akin to pressure tending to make the scale of prices 
 as high as possible. Now, the very fact of this pressure re- 
 acts upon the circulation itself. Bearing in mind the proposi- 
 tion already reached, that every transfer must be balanced by 
 a corresponding payment, it follows that there cannot be any 
 greater industrial circulation than that measured by the flow 
 of the currency. But the higher the scale of prices the less 
 industrial circulation a given flow will measure. In other 
 words, in our equation, if we suppose Y X R to be fixed, 
 then KxP must be fixed ; so that the larger we make P the 
 
332 THE SOCIETARY CIRCULATION. [IV. 11. 
 
 smaller must be K. Hence the combined efforts of every 
 man to command as high a price as he can for his services 
 may result in himself or some one else not being able to con- 
 tribute his normal amount to the industrial operations of the 
 social organism. 
 
 11. Exceptions to the Equation of Societary Circulation. 
 With every such general proposition of economics as this, we 
 are to consider to what limitations and modifications it is sub- 
 ject. The first and most obvious limitation is that the act of 
 incurring debts prevents it from being necessarily fulfilled at 
 all times. When a debt is incurred, a transfer forming a part 
 of the industrial circulation is made without any corresponding 
 transfer of money in the other direction. If the debt is not 
 paid during the year, we shall find in the sum total of the in- 
 dustrial circulation certain transfers which are not balanced by 
 the societary circulation. But since, as a rule, the debt is paid 
 at some time, it follows that in the long-run the balance will be 
 made good. Moreover, taking each year by itself, the chances 
 are that the excess of industrial circulation arising in this way 
 towards the end of the year will be balanced by the payment 
 of debts incurred during the year before. 
 
 It may be truly said that in cases of bankruptcy the payment 
 is never made. If, then, we are to be quite strict, we should add 
 to that side of the equation which represents the societary cir- 
 culation a certain quantity indicating the loss from bankruptcy. 
 The reader can do this, if he chooses, by writing the equation in 
 the form 
 
 K X P = V XE + B; 
 
 B representing the loss by bankruptcy. 
 
 This modification would not materially affect the conclusions 
 drawn from the equation, and therefore need not be further 
 considered. 
 
 It may also happen that two persons, A and B, have made 
 a direct exchange of goods and services, and that the only 
 money that passes between them is a balance due from one 
 
IV. 11.] TEE EQUATION OF SOCIETABY CIRCULATION. 333 
 
 to the other. Then there would be a portion of the industrial 
 circulation not balanced by a flow of currency. As a general 
 rule, however, money passes between any two parties only in 
 one direction at any one time. That is, if A buys from B, 
 and B from A, it will commonly happen that A pays B and 
 B pays A separately. Practically the cases are too few to be 
 of any importance, the flows of money between any two per- 
 sons being generally in one way only, and of commodities the 
 other way. To include this exceptional case we have only to 
 draw two veins between the circles representing the persons. 
 
 The opposite result occurs in great speculative transactions. 
 In the Chicago markets the ownership of large quantities 
 of wheat may at various times pass back and forth between 
 parties, either with or without corresponding direct payments. 
 So also, in New York, speculative sales of railway and other 
 shares are made on a large scale. For reasons which will be 
 presently shown, such sales, and the payment made for them, 
 should be excluded from our sums total. 
 
 Yet another disturbance of the equation arises when A pur- 
 chases from B, and B from C, and A pays C directly, and thus 
 cancels both debts with one payment. To represent all the 
 transactions, such a payment should be counted as made from A 
 to B and again from B to C, and the veins should be drawn 
 accordingly. 
 
 Yet another partial exception to the equation occurs in the 
 collection of government revenues. When government col- 
 lects a tax from the people, there might appear to be no in- 
 dustrial flow back to the taxpayers to balance the monetary 
 flow embodied in the tax. "We may, however, consider the 
 general benefit rendered by the government as such an indus- 
 trial flow, and then the balance will hold good. But if govern- 
 ment borrows money, there is no flow of services from the 
 government to the borrower. "When, year after year, the gov- 
 ernment slowly pays off the debt, there is no industrial flow 
 from the bond-holder to the government. These cases consti- 
 tute another general exception to the equation. The same ex- 
 
334 TEE SOCIETABY CIRCULATION. [IV. 12. 
 
 ception arises whenever a flow of currency consists in bor- 
 rowing money to be subsequently repaid. 
 
 For the most part these exceptional cases do not need to be 
 treated in connection with the main principles of the subject. 
 Onr proper course is first to consider the action of cause and 
 effect as it would be were the balance of the two flows always 
 perfect, and afterwards to consider, so far as may be necessary, 
 what disturbance or change is produced in the exceptional cases. 
 
 12. Illustrations of the Societary Circulation. In the 
 graphic representation of the monetary flow already given, 
 each separate person was separately represented. But in 
 considering the action of economic causes upon classes of 
 men, we cannot consider each individual separately, but have 
 to treat whole classes together. For example, we may con- 
 sider all the shoemakers in a city, in the country, or in the 
 world, represent them by a circle, and then suppose a flow 
 of money to them and another from them. The flow to them 
 will consist of all the payments made for the purchase of shoes ; 
 the flow from them will consist of their payments for leather 
 and other capital, and for their own sustenance. We may 
 also consider our class to include the whole body of men en- 
 gaged in producing anything to be made into shoes — shoe- 
 dealers, leather-makers, and even the raisers of the cattle 
 whose hides went into the leather. If, however, we wish to 
 consider the separate relations of these classes, we may sub- 
 divide them to any extent, and have different classes for the 
 shoemakers, the shoe-dealers, the tanners, and so forth. 
 
 On this system let us represent graphically the operation of 
 levying a tax in order to pay off a debt due the public creditors. 
 We draw one circle to represent the public treasury ; another 
 circle, which we call society, represents the totality of the 
 taxpayers, bond-holders excepted ; a third circle represents 
 the bond-holders or public creditors. We draw a vein from 
 society to the public treasury, showing the flow of money 
 from the people to the government, in payment of the tax. 
 
IV. 12.] THE EQUATION OF SOCIETARY CIRCULATION. 335 
 
 We draw a second vein from the public treasury to the bond- 
 holder, showing the payment to them to extinguish the debt. 
 But the operation is not complete 
 until the money gets back into the 
 possession of society at large. If 
 the bond-holders spent the money 
 for miscellaneous purposes, it would 
 go directly to society at large, and 
 we should draw a third vein, when 
 the circuit would be complete. This 
 is shown in Fig. 2. 
 
 But suppose the bond-holders spend the money in building 
 a railway. Since railways are built only by certain special 
 classes of people, we may consider their functions as separate 
 from those of society in general. The circulation will then be 
 as in Fig. 3. Here the stream subdivides. One branch goes 
 directly or indirectly to the laborers who excavate the road. 
 
 Fig. 2. 
 
 Another portion goes to steel- makers who furnish the rails. 
 A third goes to lumbermen who supply the ties. The fourth 
 we may consider as going to unenumerated classes of people, a 
 part of society at large. Thus we have four flows, a, h, c, d, 
 going from the bond-holders which are together equal to the 
 one flow from the public treasury. As represented in the dia- 
 
336 
 
 THE SOCIETABT CIRCULATION. 
 
 [IV. 12. 
 
 gram, two flows go from the steel-makers, one to society at 
 large, and one to the owners of iron ore. 
 
 All the other flows we draw to society. Thus, taking the 
 classification we have given, the single flow of money which 
 went into the public treasury returns in five different streams. 
 Of course, by subdividing the streams still further, we might 
 have had a thousand or ten thousand return flows ; but in any 
 case their sum total would have been equal to the outflow of 
 taxes, or, to speak more exactly, equal to the flow from society 
 into the treasury of that portion of the tax used in paying off 
 the bond-holders. 
 
 As another illustration, let us draw a diagram representing 
 the flow of the rents paid to a landlord by his tenants, in 
 
 case the landlord spends one portion of his rents for his own 
 support and the remainder in building new houses. The 
 tenants derive their income by rendering services to soci- 
 ety at large, no matter what particular persons. The flow of 
 those particular moneys paid for rents is represented by the 
 vein from society to the tenants. That portion of the land- 
 lord's income which he spends for his own sustenance is repre- 
 sented by the vein c drawn from him to society at large. But in 
 building houses he employs bricklayers, carpenters, painters, 
 lumbermen, and so forth. If we include the lumbermen with 
 
IV. 12.] THE EQUATION OF SOOIETARY CIRCULATION. 337 
 
 the carpenters, the brickmakers "with the bricklayers, etc., which 
 we do merely to simplify the diagram, we may consider three 
 classes of men to whom go the three flows d, e,f. These three 
 flows, together with the fourth one, c, going directly to society, 
 are equal to the flow b to the landlord. All the classes of 
 men who build the house draw their sustenance from society, 
 so that we have the outflow from society to the tenants com- 
 pensated by four inflows, thus completing the circuit. 
 
 As in the former case, we might have subdivided the flow 
 among many hundreds or thousands of different classes, includ- 
 ing the iron-founders, owners of iron ore, managers of saw- 
 mills, land-owners, etc. The reader can do this to any extent 
 he desires, when he finds it necessary to consider the effect of 
 the operation upon any particular class of men. But this fur- 
 ther subdivision does not change the total amount of the flow, 
 but only splits it up among a greater number of classes. 
 
 ILLUSTRATIONS AND EXERCISES. 
 
 1. Our government is employing a portion of its taxes in buildiDg up a 
 navy, principally of iron. Draw a diagram showing the principal classes 
 of people through whom the money thus levied goes back into the pockets 
 of the taxpayers, and the lines of flow. 
 
 2. Draw a diagram showing the changes in the flow if, in lieu of build- 
 ing the navy, our government expended its taxes in erecting fortifications 
 and supplying them with heavy guns. 
 
 3. A government being about to engage in war, a man of great wealth 
 employs a portion of his income from houses and lands in equipping a regi- 
 ment of cavalry. Draw a diagram representing the flow thus arising. 
 
 4. Draw a diagram showing the various classes of people among whom 
 the money paid for a coat may be considered as divided. 
 
 5. Do the same thing with the money which the inhabitants of a city 
 pay for bread. [In the last three questions there is not necessarily any 
 return flow to be drawn.] 
 
 22 
 
338 TEE SOCIETARY CIRCULATION. [IV. 14. 
 
 CHAPTER III. 
 
 VARIATIONS LN THE EQUATION OF SOCIETAEY CIRCULATION. 
 
 13. It is necessary at the outset that we have clearly in 
 mind the results reached in the last two chapters. They may 
 be summed up as follows : 
 
 I. There is a certain definite mass of money, notes, and credit 
 in circulation, the amount of which, in dollars, we call the vol- 
 ume of currency, and represent by the symbol Y. 
 
 II. Each dollar of this mass circulates with greater or less 
 rapidity. The average rapidity we represent by the symbol R. 
 We conceive R to represent the average number of times which 
 each dollar changes hands in the course of the year. 
 
 III. It is necessary to the well-being of a community that a 
 certain sum total of transfers of wealth and services should be 
 made between its members. The total of these transfers during 
 the unit of time, measured in dollars of absolute money, — that 
 is, on the unit scale of prices, — is represented by the symbol K. 
 
 IY. Representing by F the ratio of the actual scale of 
 prices to the unit scale, the value of the absolute dollar meas- 
 ured on that scale will be equal to P. The amount of busi- 
 ness expressed in the current scale of prices will then be K X P. 
 
 Y. This being the case so long as all the processes of buying, 
 selling, incurring debts and paying them go on at a regular 
 and uniform rate, we have the equation 
 
 Y X R = K X P. 
 
 14. All four of the quantities Y, R, P, and K are subject to 
 change. Let us first consider the changes to which Y, or the 
 total volume of the currency, is subject. Were no money or 
 credit ever introduced into or withdrawn from the circulation, 
 no change could occur in its total volume. But in the actual 
 
IV. 14.] THE EQUATION OF SOCIETABY CIRCULATION. 339 
 
 case a circulating dollar may go out of the regular course of 
 circulation in any of the following ways : 
 
 I. If it is a coin dollar, it may be withdrawn through being 
 melted into bullion or exported to a foreign country. Since we 
 are considering only the operations within a certain community, 
 we regard money as outside the field of our circulation when it 
 passes outside the community. If, as we might well do, we 
 suppose our community to include the whole world, then there 
 would be no diminution of the total volume of the currency by 
 the export of coin. But there would still be a diminution when- 
 ever coin was melted down. 
 
 II. Credit-money is withdrawn by the payment of debts 
 to banks. If a merchant who has a note in bank pays it 
 in coin, that coin goes into the vaults, and is out of circulation 
 until it is loaned to somebody else. If he pays it in bank-notes, 
 the same thing is true. If he pays it by a bank cheque, he 
 transfers to the bank a certain credit either on itself or on 
 some other bank. In either case this credit is cancelled until 
 a new loan is made, and thus the volume of credit-currency is 
 diminished by the amount of the payment. 
 
 Of course the volume of currency is increased by the reverse 
 operations. Every dollar of bullion which is coined adds one 
 dollar to the money in circulation. Whenever a loan is made 
 at a bank, the amount of the loan is added to the circulation, 
 as already shown in the chapter on banks. 
 
 It may be remarked that neither the payment of ordinary 
 commercial debts nor the deposit of money in a bank changes 
 the volume of the currency. In the first case we have only a 
 transfer of money, which the receiver takes for the purpose of 
 transferring it again as soon as he has occasion. The transfer is 
 therefore simply an ordinary money payment. If the money 
 is deposited in a bank, it is true that that particular money 
 does for the time being pass out of circulation. But an addi- 
 tion equal to the deposit is made to the credit-currency by the 
 depositor having the right to draw cheques on the bank, so 
 that the total volume is the same as before. 
 
340 THE SOCIETART CIRCULATION. [IV. 15. 
 
 Hence when the banks discount new notes in greater quan- 
 tity than the old ones are being paid off, they increase the vol- 
 ume of the currency. The banks are then said to expand the 
 circulation. When they demand payment of maturing notes 
 to a greater extent than they discount new ones, they contract 
 the circulation. 
 
 15. Changes in Rapidity of Circulation. Every cause 
 which leads a man to hesitate before spending his money tends 
 to diminish the rapidity of circulation. Every cause which 
 tends to make him pass it off quickly tends to increase it. We 
 now have to inquire whether there are any causes which may 
 be from time to time operative upon a whole community, so as 
 to make all or the general body of its members desirous of ex- 
 changing their money more or less rapidly than usual. Busi- 
 ness men almost universally believe in such changes. " Dis- 
 turbance" and " stagnation" of business imply a diminution in 
 R. " Briskness" implies that, so far as those who find busi- 
 ness to be brisk are concerned, the circulation is rapid. Con- 
 clusions drawn from the experience of men of business in this 
 particular case are, however, rather unreliable, and we must 
 look at the matter more closely. 
 
 Money circulates with a normal rapidity, which we may re- 
 gard as a healthy maximum, when every man who earns money 
 can immediately pay it out with a result satisfactory to him- 
 self. Every cause which leads him to doubt what is the most 
 satisfactory disposition to make of his money interferes with 
 his expenditure, and leads him to keep his money longer than 
 he otherwise would. The general rule will be that before he 
 receives his money he forms more or less definite conclusions 
 as to what he will do with it. If anything happens to disap- 
 point the expectations on which those conclusions are based, 
 he is likely to keep his money longer than he otherwise would. 
 Let us see what examples of this we can find. 
 
 If in a manufacturing establishment an unexpected dis- 
 agreement occurs between the employers and the operatives, 
 
IV. 16.] TEE EQUATION OF SOCIETABT CIRCULATION. 341 
 
 the money which the former received in the course of business 
 no longer goes to the payment of the latter, and remains for a 
 longer period on their hands than it would otherwise have done. 
 Thus every strike on the part of laborers tends to diminish the 
 rapidity of circulation. If prices unexpectedly rise in conse- 
 quence of the strike, purchasers will delay buying, and a still 
 further block in the circulation may arise. In periods of un- 
 certainty, investors of money, that is, purchasers of capital, be- 
 come apprehensive, and their money lies on their hands longer 
 than it would otherwise have done. 
 
 On the other hand, mere " hard times" does not necessarily 
 imply any diminution in the circulation, though they may 
 arise from that cause. When business of some one kind is 
 very dull it may happen that the people who ordinarily spend 
 their money in that particular business are spending it in 
 some other way. It is therefore impossible to conclude with 
 entire certainty whether the circulation is more or less rapid 
 than usual ; but we may suppose it true that, as a general 
 rule, when business is dull in all its branches the circulation is 
 less rapid than when it is brisk. 
 
 A very potent cause of increase in the rapidity of circulation 
 is the issue of irredeemable money. Such an issue leads, as will 
 hereafter be shown, to a rise in prices. The prospect that 
 prices will rise makes a large number of people anxious to 
 purchase as soon as possible, and thus to obtain all the money 
 they can get. It therefore causes business to be very brisk for 
 the time being. Conversely, the prospect that there will be a 
 fall in prices leads people to postpone buying as long as possi- 
 ble, and thus tends to diminish the rapidity of circulation. 
 
 16. Next let us consider the changes in the product 
 K X P. Remembering that this product signifies the entire 
 exchange transactions of the community, measured in current 
 dollars, we perceive that it may change from two causes : 
 
 I. The actual increase or diminution in the quantity of goods 
 which change hands, represented by K. 
 
342 THE SOCIETABY CIRCULATION. [IV. 17. 
 
 II. A change in the general scale of prices at which the 
 goods are sold. This scale is P. 
 
 For example, if exactly the same transactions should take 
 place this year as last, but at double the price, then, although 
 there would be no change in the actual transactions, yet, since 
 every sale was made for twice as many dollars, the numerical 
 measure of K X P would be double that of last year. "We 
 must therefore carefully distinguish between these two causes 
 as affecting the measure of the industrial circulation. As a 
 general rule the actual exchanges will not vary rapidly so long 
 as things go on in their regular way. It is of course to be ex- 
 pected that in a growing country they will increase from year 
 to year as population increases and production improves. As 
 already shown, there is a certain amount of these transactions 
 which is most advantageous, and in which everything goes on 
 as nearly as possible to every one's satisfaction. So long as this 
 happens it makes no difference, except indirectly, what the 
 scale of prices is. All our current wants would be as well sat- 
 isfied on a scale of half-dollars as on one of two dollars, always 
 provided that the change is carried through so as to include all 
 services rendered. Practically, however, it is impossible to 
 carry such a change uniformly through, and therefore it is to 
 the best interest of society to have as little change as possible 
 from month to month and from year to year. 
 
 17. Effect of Changes in the Volume of the Currency. 
 In the social organism demand is exercised only through the 
 instrumentality of the currency. Whoever purchases anything 
 in market must have the money to pay for it, either in hand 
 or in prospect. Since, then, his power of demanding is limited 
 by his power of commanding money, we may consider money 
 as in some sort the instrument of demand. We have now to 
 consider the effect upon demand, price, and supply produced 
 by changes in the amount of money in circulation, or the vol- 
 ume of the currency. 
 
 To make the state of the case as clear and simple as possible, 
 
IV. 17.] THE EQUATION OF SOCIETART CIRCULATION. 343 
 
 suppose that a beneficent government or any other power should 
 distribute live dollars in paper money or coin to every person 
 within its sway: what would be the consequence ? Firstly, since 
 a very great majority of the recipients would feel the want of 
 something which the money could buy, they would proceed to 
 purchase the necessaries of life from the dealers. The latter 
 would therefore find their stores unusually crowded, and would 
 speedily have to send to their wholesale dealers for an increased 
 stock. The latter, again, would call upon the producers for an 
 additional supply of goods. The result of this increase of de- 
 mand would, as shown in III. 17, 21, be a rise in price. 
 
 We might also expect an increase in the production, and 
 therefore in the supply. This expectation, however, would 
 probably be disappointed, because, by hypothesis, each and 
 every producer has his five dollars and, for the time being, 
 would be more anxious to buy something with it than to keep 
 up his business. So long as everybody crowded to the stores to 
 buy, everybody would have to leave off work, for a while at 
 least ; and although the prospect of an increased price would 
 be an inducement to produce more, yet, on the other hand, the 
 feeling of increased wealth would lessen the stimulus to hard 
 work, and would therefore counteract the action of that cause. 
 "We should therefore have two effects from this influx of money : 
 firstly, a general selling off of the store of products through 
 the channels of business ; secondly, a general rise of prices. 
 
 This rise of prices would affect different classes differently 
 according to their position. The man who promptly spent his 
 money would be the richer ; the man who did not spend it until 
 after prices had risen would not be so well off. Nearly every 
 one engaged in trade would profit by the increased prices, and 
 be encouraged by the increase of his business. "Workers for 
 wages and men on salaries would find the week following that, 
 owing to the rise in prices, they were unable to purchase as 
 much as before. Possibly in one or two weeks they would 
 find their whole gift absorbed in the increased prices they would 
 have to pay, so that they would be worse off than before. They 
 
344 THE SOCIETABY CIRCULATION. [IV. 18. 
 
 would therefore be compelled to demand an increase of wages 
 which they might ultimately get after more or less suffering. 
 The general selling off of goods would result in the scarcity 
 of a great many things that people who did not buy them at 
 the time would want, and this would have to be made up by 
 increased work in some directions. 
 
 The final result would be that all prices and all current 
 wages would rise in nearly the same proportion. Each in- 
 dividual would therefore be able to command.no more of the 
 necessaries and comforts of life than before he had received 
 his five dollars. So far as current operations are concerned, 
 neither harm nor good would on the whole be done. Some 
 would gain and some would suffer. 
 
 The case is different when we consider future debts and 
 payments. Every person who had loaned money would, when 
 he received it, find that he could purchase less of the neces- 
 saries of life than before. He would therefore be a positive 
 loser ; the debtor would be able to command the money with 
 less labor, and would therefore be a gainer. 
 
 The reverse effect would result if the volume of the cur- 
 rency were diminished by taking money from the community. 
 There would be a falling off in the sales of all dealers, and 
 hence a depression in trade generally. The falling off in de- 
 mand would lead to a fall of prices, and wages would have to 
 be lower or production would be temporarily stopped. Debt- 
 ors would lose by having to work more, or sell more goods to 
 command the money which they had agreed to pay; and cred- 
 itors would gain by being able to purchase more with the pro- 
 ceeds of their debt. 
 
 18. Effect of Varying Indebtedness. In establishing the 
 equation of the societary circulation, it was assumed that the 
 payment of debts throughout the organism kept pace with 
 their incurrence, so that the two balanced each other. Now 
 this is not always the case. The history of commerce shows 
 periods of great buoyancy of feeling and tendency to specula- 
 
IV. 18.] TEE EQUATION OF SOCIETART CIRCULATION. 345 
 
 tion, when men of business incur debts on a larger scale than 
 usual. Since every debt is incurred on account of some trans- 
 fer of goods or services, for which no money payment is made 
 at the time, it follows that the whole mass of indebtedness 
 represents that portion of the industrial circulation which has 
 not yet been balanced by the monetary circulation. At the 
 same time, as already remarked, if this mass of indebtedness is 
 not increasing, the two circulations must still balance each 
 other, because the unbalanced portion of the industrial circu- 
 lation, for which indebtedness is being incurred, is then bal- 
 anced by the equal payment of former debts. 
 
 But if the mass of indebtedness is increasing, there is then a 
 portion of the industrial circulation which is not balanced by 
 the monetary flow at all, and thus the equation is disturbed. 
 How important the consequence of this is will be seen by re- 
 flecting that if people stopped paying off their old debts, and 
 bought everything on credit, the monetary flow would for the 
 moment entirely cease. This is of course an extreme case. 
 But let us suppose as a possible case that one fourth the volume 
 of current business is done on credit, while the old debts are 
 left standing. The result will be that the industrial flow will 
 be to the monetary flow in the ratio of 4 : 3. If before this 
 state of things commenced the two flows balanced, then when 
 the speculation begins there will be an apparent redundancy of 
 the monetary flow, because the volume of currency suffices 
 for the flow 4, while only the flow 3 is required. The result 
 will be the same as in the case of an increase of the volume of 
 the currency ; that is, a universal demand for commodities of 
 all kinds, with a tendency towards a rise of price. 
 
 When the indebtedness is to be paid off the reverse effect 
 occurs. If the volume 4 of regular business is to continue, and 
 a volume 1 of indebtedness is to be discharged, there will be a 
 call for a monetary flow represented by the number 5. But, 
 on the scale of prices established by the speculation, the actual 
 volume of currency only suffices for the volume 3 of exchanges. 
 Thus arises a state of things to be subsequently discussed. 
 
346 TEE SOCIETART CIRCULATION. [IV. 19. 
 
 19. Fundamental Law of Value of the Total Volume of 
 Currency. The law which would determine the amount of va- 
 riation in wages and prices in every case, after things had been 
 readjusted on the new basis, can be got at by considering that 
 in the industrial circulation nothing would really be changed 
 except the scale of prices. The quantities purchased being 
 the same as before, K remains unchanged. In the equation 
 K X P = TX R, R also would be unchanged ; whence it 
 follows that the rise in the price P would be proportional to 
 the increase in the total volume Y of the currency. For 
 example, if in the beginning the total volume of the currency 
 had averaged $10 per capita, then a gift of $5 to eVery person 
 would add 50 per cent to the volume of currency. To re- 
 store the equilibrium, the scale of prices, represented by P, 
 would have to be increased 50 per cent also. If, instead of 
 adding 50 per cent to the currency, it had been doubled, prices 
 would double. After the equilibrium was restored every two 
 dollars would do the same work which one dollar had done 
 before. Leaving out the case of debtors and creditors, and 
 the temporary disturbance before equilibrium was restored, 
 everything would be readjusted on this basis of double prices. 
 
 Since the volume of currency and the prices would be in- 
 creased in the same proportion, it follows that the quantity of 
 goods whose value would equal the total volume of the cur- 
 rency would remain unchanged. We may express this result 
 in the following form : 
 
 When the volume of the currency fluctuates, other condi- 
 tions being equal, the purchasing power of each unit of 
 money varies inversely as the whole number of units, so that 
 the total absolute value of the whole volume of currency re- 
 mains unaltered by changes in that volume. 
 
 The question now arises, What fixes this absolute value of 
 the total volume of currency? To answer this let us return to 
 the equation of societary circulation, Y X E = K X P. Here 
 R represents the number of times that a dollar changes hands 
 in a year. If we divide the year by R, we shall have the 
 
IV. 19.] TEE EQUATION OF S0C1ETART CIRCULATION. 347 
 
 average length of time that a dollar remains in one man's 
 hands. If we take this period instead of one year as our unit 
 of time, we shall have K = 1. K will then be the total value 
 of the exchanges during this period, measured on the unit 
 scale for which P = 1. Thus the equation will become V = K. 
 We conclude : 
 
 The absolute value of the total volume of currency circulat- 
 ing in a social organism is equal to that of the total indus- 
 trial circulation of the organism, during the average time that 
 apiece of money remains in one mail's hands. 
 
 EXERCISES. 
 
 1. If the rapidity of circulation should be doubled, what change would be 
 made in the volume of the currency in order that the same business should 
 be transacted on the same scale of prices ? (Deduce the result from the 
 equation of societary circulation.) 
 
 2. Show how the answer to the above question follows from the second 
 theorem of § 19. 
 
 3. When the volume of the currency increases, the equation 
 
 K XP = VXR 
 can be kept up by increasing K as well as by increasing P; that is, by in- 
 creasing the volume of business transacted as well as by raising the price. 
 Show why it is that it is P rather than K which responds to the stimulus 
 of an increase of V. 
 
 4. Do you interpret the first theorem of § 19 as meaning that the absolute 
 value of the whole volume of currency remains unaltered even when popu- 
 lation and business increase ? If not, how will this absolute value change 
 in this case? Apply your answer to the second theorem. 
 
 5. If a continually increasing volume of business has to be transacted 
 with an unvarying volume of currency, what will be the effect on prices? 
 
 6. If producers, laborers, and dealers of every class should combine to 
 raise prices ten per cent, and refuse business on any other terms, what effect 
 would this action have on the amount of business transacted? 
 
 7. If everybody believed that prices were going to fall, what effect would 
 this belief have on the rapidity of circulation? 
 
 8. If a large portion of the material currency in circulation consisted of 
 interest-bearing bank-notes, what would be the effect on R and P? 
 
348 TEE SOCIETABY CIRCULATION. [IV. 20. 
 
 CHAPTER IV. 
 
 THE MEASURE OF DEMAND BY ABSOLUTE VALUE. 
 
 20. Most of the economic causes which we have heretofore 
 considered produce their effect by or through their influence 
 upon demand. Although the theory of this influence may be 
 regarded as entirely contained in the separate results of the 
 preceding chapters, yet, in order to give entire precision to our 
 conclusions, it is necessary to bring our separate results together, 
 and show how they coalesce into a single theory of demand as 
 a mathematical quantity. Let us begin by repeating our defi- 
 nitions and conclusions respecting demand given in the oj)ening 
 chapter on that subject. 
 
 The demand for a specific commodity, considered as a 
 mathematical quantity, means how much of that commodity 
 can be sold — 
 
 In a definite market, say New York, Chicago, or the entire 
 country, 
 
 During a fixed period of time, say one year, 
 
 In a certain condition of society or state of the market, 
 
 And at a certain price. 
 
 Regarding the principal places or combination of places 
 which we take as our market, and the period of time, as fixed 
 quantities whose changes we have no need to consider, we see 
 that the amount of the demand will depend upon and vary 
 with the third and fourth conditions, namely, (1) the price 
 charged, and (2) the condition or wants of the public in rela- 
 tion to that commodity. These innumerable varying conditions 
 may be summarized under the single comprehensive and there- 
 fore somewhat ill-defined term state of the market. 
 
 "With regard to the first cause we have found the law to be 
 a very simple one, namely, the higher the price the less the 
 
IV. 20.] MEASURE OF DEMAND BY ABSOLUTE VALUE. 349 
 
 quantity demanded. We may assume the action of this cause 
 to be thoroughly understood, and to need no further elucida- 
 tion. It is the second group of causes, comprehended in the 
 term " state of the market," with which we are concerned. In 
 accordance with a general principle of scientific inquiry, we 
 have to investigate the action of this cause on the supposition 
 that all other conditions are equal. We must therefore sup- 
 pose that in our market, and during the period which we con- 
 sider, a fixed and invariable price is put upon the commodity. 
 The quantity sold will then vary only with the state of the 
 market. If more people are buying flour at five dollars per 
 barrel this month than last month, it will show that there has 
 been some change : perhaps a foreign demand ; v perhaps some 
 new use for flour ; perhaps greater ability on the part of the 
 public to buy ; perhaps any other of an innumerable series of 
 causes. We" thus get an idea of a demand which does not mean 
 quantity really sold, but the quantity which would ^ oe sold 
 supposing the price to he fixed and invariable. This is the or- 
 dinary mercantile meaning of demand as a quantity, and must 
 not be confounded with " the definition formerly given. An 
 example will make the distinction clear. 
 
 The producers of nickel may be able and willing to turn out 
 the same number of pounds of that commodity annually, year 
 after year. Then if, from any cause whatever, the state of the 
 market so changes that there is an increased demand, the pro- 
 ducers will raise the price until the demand is brought down, 
 as before, to the supply, which we suppose to remain invaria- 
 ble. We should then have the demand and price rising and 
 falling together, in accordance with the second law as laid down 
 in IIL 16. The difference between the two definitions of de- 
 mand will then be seen in this form : Since, by our hypothesis, 
 the quantity really sold is the same in the two cases, the actual 
 demand, as above defined, has remained the same. But, in mer- 
 cantile language, there has been a change in the state of the 
 market, such that more nickel would have been demanded at 
 a fixed price than before, and thus, by the second method of 
 
350 THE SOCIETARY CIRCULATION. [IV. 21. 
 
 measurement, demand has increased. We see, then, that there 
 are two distinct ways of measuring demand between which we 
 must carefully distinguish. Both are perfectly legitimate, and 
 may be useful if we do not confound them. A clear concep- 
 tion of each is all that is necessary to avoid confusion. These 
 conceptions may be assisted by calling the one the actual de- 
 mand, or the quantity sold, and the other the market de- 
 mand, which expresses the wants of the public. The market 
 demand will then be a hypothetical quantity, expressing the 
 apparent want of the public for a commodity, and the actual 
 demand will be the quantity really sold. 
 
 21. The relation of these two measures of demand can be 
 made quite clear by the use of algebraic symbols. It has been 
 pointed out (III. 15) that the general average relation between 
 demand and price may be approximately expressed by saying 
 that demand varies inversely as price. The fact that two quan- 
 tities vary inversely is expressed algebraically by saying that 
 one is equal to some constant quantity divided by the other 
 (III. 7). Hence if we put 
 
 P, the price at which a commodity is offered, 
 D, the quantity which will be bought at that price, 
 then the relation between D and P will be expressed by such 
 an equation as 
 
 D=4 (1) 
 
 where we put M for some constant quantity. So long as M 
 remains unchanged, D will increase as P diminishes, and di- 
 minish when P increases. 
 
 In order to learn how much of the commodity can be sold at 
 a given price, say $3 per pound, we must know M as well as P. 
 Our equation will be, in this case, 
 
 ^ 3 
 
 The quantity M is what we have called the market demand, 
 or the public want for the commodity. If we suppose P to 
 
IV. 22.] MEASURE OF DEMAND BY ABSOLUTE VALUE. 351 
 
 stand fixed at $3, then D will increase when M increases, and 
 vice versa. The greater the number of people, the more they 
 want the commodity, and the better able they are to buy, the 
 larger M will be. It therefore depends on all the circumstances 
 which induce people to buy, except the price charged for the 
 commodity. 
 
 22. We have already seen that in the long-run, and omit- 
 ting certain exceptional cases, the quantity of each commodity 
 sold is necessarily equal to the quantity produced. Hence when 
 we speak of the actual demand we cannot correctly talk about 
 variations in that demand without corresponding variations in 
 the supply, because that demand is equal to the supply. We 
 cannot correctly say that any cause will increase the demand 
 unless it increases the quantity of a commodity brought to 
 market and sold. Since, in the discussion alluded to in the be- 
 ginning of this chapter, what is called demand is the desire of 
 the public for certain services or commodities which are sup- 
 posed not to depend upon the quantity of those commodities 
 produced, but upon the state of the market, it follows that it 
 is the market demand which is there considered. We shall there- 
 fore in the present chapter use the term demand to signify the 
 market demand, and so shall suppose it to express a certain con- 
 dition of the market, having no reference to the real market 
 price, but expressing how much of the commodity can be sold 
 in a fixed period of time at a fixed price. 
 
 Accepting this definition, we have pointed out a cause which 
 immediately affects demand. With every addition to the flow 
 of the currency there is an increased demand for all commodi- 
 ties, no matter whether the augmentation of the flow arises 
 from an increase in Y or in ~R. Hence we may say the market 
 demand for things in general is proportional to the flow of the 
 currency, as already defined. 
 
 We have called the market demand hypothetical. The rea- 
 son is clear. The quantity actually sold cannot exceed the sup- 
 ply. Therefore if we suppose a constant and rapid increase of 
 
352 TEE SOCIETARY CIRCULATION. [IV. 22. 
 
 the currency constantly going on, without any increase of sup- 
 ply, while the price is fixed, the whole supply of goods on hand 
 might be speedily sold out and. the operation of buying would 
 have to stop. In actual trade the price always rises under such 
 circumstances. Hence the case of a fixed price is necessarily 
 hypothetical. But though hypothetical, it affords us a method 
 of measuring a certain quantity, namely, the ability and willing- 
 ness of the public to buy, which is measured by the quantity they 
 would buy at a fixed price. 
 
 The question now arises, Is this measure of ability and will 
 a true one ? are the public really any more able and willing 
 to buy when the flow of the currency is increased than they 
 were before ? The answer is that this depends on how we are 
 to measure this ability and willingness. In a certain sense they 
 are more so ; and in another, and perhaps more exact sense, they 
 are not more so. We have here our former case of measures 
 by a varying foot-rule. If we agree to measure by a foot-rule 
 which increases and diminishes in length from day to day in 
 spite of all we can do, it is certain that any object that we 
 measure will contain more feet one day than another. But if 
 we consider length measured by an absolute standard, we may 
 regard objects in general as being invariable in length. It may 
 then be perfectly true that a piece of timber would measure 
 more feet one day than another, although its real length should 
 remain unchanged. 
 
 So in the present case. If we measure the ability of the 
 public to buy by the quantity of a commodity which they will 
 purchase in a year at a price fixed in dollars, then the measure 
 of that ability will undoubtedly increase with the flow of the 
 currency. With every increase in the flow they will be able 
 to buy more, because they have more dollars to buy with ; with 
 every diminution in the flow they will be able to buy less; 
 just as when we measure a piece of timber, the shorter the foot 
 the greater the measure. 
 
 But if we adopt an absolute standard, if we consider the 
 quantity which can be bought, not at a price fixed in dollars, 
 
IV. 23.] MEASURE OF DEMAND BY ABSOLUTE VALUE. 353 
 
 but at a price fixed by a tabular standard of value, as described 
 in Chapter II., then there can be no change in the general ability 
 of the public to buy produced by changes in the flow of the 
 currency, because the money price will then keep pace with 
 the flow. 
 
 These same statements apply to our measures of market de- 
 mand. Let us recall the definition of this term. When the 
 quantity of goods which can be sold at a fixed price increases, 
 we say that the market demand increases ; when this quantity 
 diminishes, we say that the market demand diminishes. Now 
 if by the words "fixed price" we mean a fixed number of dol. 
 lars, without reference to the absolute value of those dollars, 
 then evidently our measure of the market demand becomes de- 
 ceptive. Suppose, for example, that the volume of the currency 
 is doubled, and that in consequence all measures of value in 
 currency have doubled. Then every seller would meet a great 
 rush of people to buy his goods. He might therefore say, " The 
 market demand for my goods has doubled." But in reality he 
 would be offering his goods at half the old price, and he could 
 at any time cause the same rush of buyers by reducing his prices 
 to one half. Hence in order to compare two states of the mar- 
 ket at different times with respect to any commodity we must 
 reduce the two prices of the commodity to the same tabular 
 standard of value. When we find that a certain cause stimu- 
 lates demand we must ascertain whether it does this merely by 
 increasing the flow of the currency or by bringing other causes 
 into play. 
 
 23. We now recognize two measures of market demand : 
 the current measure, expressed by money, and varying with 
 everything that affects either the volume or rapidity of circu- 
 lation ; and the absolute measure, which is expressed, not in 
 money, but by the general average prices of commodities and 
 services. It is necessary to have this distinction clearly in mind 
 in all our discussions of the effect of economic causes upon de- 
 mand. Causes which act through the general circulation by 
 23 
 
354 TEE SOCIETART CIRCULATION. [IV. 23. 
 
 adding to its volume or stimulating its rapidity affect the cur- 
 rent demand, but not the absolute demand. Causes which act 
 through supply, or by changing the wants of the community, 
 by opening up new markets or by finding new uses for things, 
 change the absolute demand. 
 
 This distinction may be made clear by returning to the alge- 
 braic equation and again considering the market demand M. 
 The fact that this quantity varies directly as the flow of the 
 currency is expressed by saying that it is equal to some constant 
 quantity multiplied by that flow (II. 6). If we put 
 
 1ST, this constant quantity, 
 
 F, the flow of the currency, 
 we shall therefore have, in equation (1), 
 
 M = KXF (a) 
 
 and 
 
 p 
 
 Thus if we call P' the quotient -, we shall have 
 
 _r 
 
 D = p- ( c ) 
 
 Now let us notice the relation of these quantities. Equation 
 
 (a) expresses the fact that if the flow F of currency increases, 
 
 the market demand M will also increase. But this presupposes 
 
 that we measure this market demand by the amount we can sell 
 
 at a fixed price in current dollars. When the flow of the currency 
 
 increases, these dollars become less valuable ; so that the price 
 
 p 
 in absolute measure is — , or P'. Hence the equation (c) ex- 
 
 presses the actual demand when the price is reduced to absolute 
 measure by allowing for changes in the absolute value of the 
 dollar, and this demand is independent of the flow of the cur- 
 rency. 
 
 The conceptions of the three measures of demand just de- 
 scribed are of such fundamental significance that we shall re- 
 capitulate and condense them. 
 
IV. 24.] MEASURE OF DEMAND BY ABSOLUTE VALUE. 355 
 
 The current market demand for a commodity is the quantity 
 of that commodity which a community would purchase in a 
 year at a price fixed in dollars. 
 
 The absolute market demand is the quantity the community 
 would purchase at a price varying to keep pace with the abso- 
 lute value of the dollar. 
 
 The actual demand is the quantity which, as a matter of 
 history, the community really does purchase. 
 
 24. The great importance of the above principles arises from 
 the fact that the public look upon increased demand as an eco- 
 nomic good, and upon diminished demand as an economic evil, 
 and are thus prone to consider demand as a measure of prosper- 
 ity. "When the merchant finds more people coming to his store 
 for his goods, and the laborer finds more people to pay him what 
 he considers fair wages, there is a feeling on the part of both 
 that they are benefited. Of course there is no corresponding 
 feeling on the part of the buyers and the employers that they 
 are injured, because if they had such a feeling they would not 
 come forward with their demands. The fact that they do come 
 forward demanding goods or labor shows that they expect to 
 reap an advantage thereby. 
 
 The reverse is true when the employer ceases to come for- 
 ward, and the customer, having spent his money, stays away 
 from the store. The merchant and laborer then feel that their 
 prosperity is diminishing. 
 
 Thus arises a feeling on the part of the community at large 
 that those economic causes which stimulate demand should in 
 some way be promoted, as being beneficial, and that those which 
 diminish it should be avoided, as productive of evil. Since, then, 
 with every increase in the volume or rapidity of the currency 
 there is an increased market demand when measured in the 
 usual way, and in fact in the only way in which we can practi- 
 cally measure it for the time being, it follows that, by a nat- 
 ural process, there is in society a certain tendency to favor every 
 measure which will increase the volume or rapidity of the cir- 
 culation. 
 
356 THE SOGIETAET CIRCULATION. [IV. 25. 
 
 Both of these cases indicate changes in the current market 
 demand, but we cannot tell whether they indicate changes 
 in the absolute market demand until we know the causes at 
 play. 
 
 We have just spoken of measuring demand in currency as 
 the only practical way of doing it for the time being. This is 
 necessarily the case. We have no way of measuring demand 
 at the moment in absolute measure, because it requires an elab- 
 orate statistical investigation of the prices of commodities, 
 which there is no authority to undertake. We are in the po- 
 sition of a community which has no other than the varying 
 foot-rule with which to measure its piece of timber, and which 
 is therefore obliged to accept those measures for the time 
 being, and to conclude upon absolute lengths, not directly from 
 the measures, but from long-continued observation of their va- 
 riations. So in economics, although we are obliged, to measure 
 the current intensity of demand in terms of the circulation, 
 yet we know that we are thus liable to be deceived, and that we 
 must refer it to absolute measure whenever we are to get cor- 
 rect results. 
 
 25. We have now to show that changes in demand arising 
 from changes in the flow of the currency neither lessen any 
 avoidable evils nor lead to any attainable benefits. We say 
 " avoidable evils " and " attainable benefits," because with these 
 alone are we concerned in economics. If we look closely, we 
 shall see that the current aspirations on the subject are directed 
 towards a Utopia. People have in mind a certain ideal state 
 of things, in which every laborer is constantly employed, every 
 merchant has as many customers as he can wait upon, and 
 every railway as much freight as it can carry. I say this idea is 
 purely Utopian, for changes in the demand and supply of various 
 commodities are absolutely unavoidable. The people want 
 more of one thing to-day and more of another thing to-morrow ; 
 next year they will leave off wearing something that they wore 
 this year and take to something new. One month they will lay in 
 
IV. 25.] MEASURE OF DEMAND BY ABSOLUTE VALUE. 357 
 
 a three months' supply of goods, and perhaps save their money 
 for the two months following. Thus, as already shown, the 
 processes of production do not go on in a continuous stream, 
 but by a series of waves. Necessarily the employment of la- 
 borers who are carrying on the processes vary in the same way. 
 Now this class finds itself with nothing to do, and now that 
 class. There is therefore but one possible way of insuring that 
 every laborer shall be constantly employed. It is to require 
 that he shall work every day for any wages that he can get, 
 whether it is ten cents or ten dollars, and shall be put at work 
 by the authorities if he is any morning found idle after the 
 hour for commencing work. Thus the idea of remedying this 
 evil is purely Utopian. No practical benefit can arise from dis- 
 cussing any measures looking to finding employment for every- 
 body all the time. 
 
 What we are to remember in this connection is that the dif- 
 ference between the two measures of demand for labor corre- 
 sponds to a difference in the measure of the wages of labor. 
 That is, we may measure the wages of the laborer either by 
 
 The amount of money which he can receive for a week's 
 work, or 
 
 The quantity of commodities which he can buy with a week's 
 wages. 
 
 The first is the popular method of measuring. When we 
 say that wages are higher in America than in England, we 
 mean that the laborer can get more money for a week's work 
 in America than in England. But it needs no argument to 
 show that this is not the true measure of his prosperity, and 
 that the real question is, How much sustenance can he com- 
 mand in the respective countries ? It is also evident that 
 any cause which enables him to command more money for a 
 day's work, but which at the same time increases the amount 
 which he must pay for his week's food and clothing, does not 
 really do him any good. He may indeed, through his igno- 
 rance of economics, be deceived into thinking that he is bene- 
 fited by the higher wages ; but this is a kind of deception 
 
358 THE SOCIETARY CIRCULATION. [IV. 25. 
 
 which he will not long submit to. Now a very little exami- 
 nation will show us that an increase of the flow of the cur- 
 rency can at best only raise the laborer's wages in money, and 
 cannot increase the amount of subsistence which he is able to 
 command with his day's work. That this must be so will be 
 seen by looking at the subject from the communistic point of 
 view (II. 54). The community at large, of which laborers of 
 some kind form the largest portion, can be fed only with the 
 food actually raised, and clothed only with the cloth actually 
 made. But these actual quantities are dependent upon and 
 limited by physical circumstances and cannot be altered by 
 changes in the currency. 
 
 To show how the same result follows from the point of view 
 we have been taking in the present chapter, suppose an increase 
 in the flow of the currency to take place just as an unemployed 
 laborer has made up his mind how many dollars he considers 
 an equivalent for his week's work. If he gets employment 
 under the stimuli!* of. the increase and goes to work, then, be- 
 fore he can spend his week's wages prices have risen a little. 
 They rise still more before he can spend his second week's 
 wages, and thus he continuously finds himself able 1 to buy less 
 and less. He is therefore no better off than if he had gone to 
 work in the beginning on unsatisfactory terms, and is obliged 
 to demand an increase of wages, and probably be thrown out 
 of employment, just as he was before in his efforts to get the 
 present rate. He is therefore in no manner benefited by the 
 increase of wages. 
 
 So also with the general prosperity. An increase in the 
 flow of the currency will cause a temjDorary wave in the 
 flow of goods from the manufactories to the consumers. But 
 this wave will inevitably be followed by a depression, and 
 is therefore solely temporary in its effects. The only causes 
 which permanently advance national prosperity are the slightly 
 increasing improvements in production, new railways, new 
 farms, new warehouses, improved machinery, improved orga- 
 nization, of labor. 
 
IV. 27.] OF INDIVIDUAL INCOME AND EXPENDITURE. 359 
 
 CHAPTER V. 
 
 OF INDIVIDUAL INCOME AND EXPENDITURE. 
 
 26. By the annual income of a person is meant the net 
 sum of his wages, gains and profits during a year, whether 
 derived from his own labor, his business management, or the 
 interest upon his capital. To find its amount we must sub- 
 tract from the sum total of moneys received by him in pay- 
 ment the amount which he has had to expend in order to 
 transact his business and keep up his capital. It is therefore 
 the sum total of the monetary flow to him, diminished by the 
 flow from him for the purposes last mentioned. The amount 
 to be subtracted on account of business expenses and capital 
 from the individual monetary flow is very different among differ- 
 ent classes of persons. One whose sole occupation is to work 
 for wages or a salary has no payment to subtract. His income 
 is the same as the monetary flow to him. The other extreme is 
 found in the case of men who transact business on a very large 
 scale. They are continually buying and selling, and their 
 income may be only a very small fraction of their transactions — 
 so small a fraction, in fact, that it may be completely swallowed 
 up by an unexpected rise or fall of prices. 
 
 27. The question what payments are to be considered as 
 necessary to the continued transaction of business and the pres- 
 ervation of capital may be a difficult one in special cases ; but 
 the guiding principles may be made quite clear. In estimating 
 net income it might be claimed that we should subtract from 
 the total receipts of the individual the amount necessary for his 
 own sustenance. But this would be wrong in principle, because 
 the very object of determining income is to learn how much 
 the person can afford to expend on his own sustenance without 
 
360 THE SOCIETABT CIRCULATION. [IV. 27. 
 
 encroaching upon his reserve of capital or diminishing his 
 power to carry on business. Hence we must leave unsubtracted 
 all that he expends in improving his capital or increasing his 
 business. 
 
 As one example let us take the case of a merchant. At the 
 end of a year he finds that he has sold goods to a certain 
 amount. The principal items which he has to subtract from 
 this amount in order to obtain his income are these : 
 ' T. The prime cost of the goods he has sold. 
 
 II. Rent of storehouse, insurance, and other expenses at- 
 tendant upon the simple preservation of his stock in proper 
 condition for sale. 
 
 III. Wages to clerks and others engaged in selling goods or 
 transacting his business. 
 
 IV. Stationery, postage, losses from bad debts, and other 
 miscellaneous items incident to the transaction of business. 
 
 After subtracting these and any other items necessary to the 
 conduct of his business from the sum total of his sales, the 
 remainder will represent his net income. 
 
 In the case of a manufacturer the same items will occur with 
 some modifications and additions. Instead of the item " prime 
 cost of goods sold " he will have the prime cost of all the raw 
 material manufactured and sold. He will also have the very 
 important item " wear and tear of machinery and other forms 
 of fixed capital." This item is necessarily somewhat indefinite. 
 If his machinery has been going during the whole year with- 
 out any repairs, it must have deteriorated, and the amount of 
 deterioration must be estimated as best he can. If he has 
 made large improvements in his factory, and paid for them out 
 of his profits, such payment should not be subtracted, but 
 should be considered as an investment of his surplus income. 
 
 In the case of great changes in price the question will some- 
 times arise, "What is to be considered as the measure of the capi- 
 tal kept up ? Suppose a merchant to find at the end of the 
 year that although the actual stock of goods on hand is nearly 
 the same as at the beginning, yet their prime cost is greater, 
 
IV. 27.] OF INDIVIDUAL INCOME AND EXPENDITURE. 361 
 
 and their cost if purchased now would be double. Is lie to 
 consider this increase of value as a profit earned and applied 
 so as to double his capital? We reply, Not if the rise in 
 prices is the result of a general increase in the scale of prices 
 arising from a diminution in the absolute value of the dollar. 
 In this case there would be no increase of his actual capital, 
 but only an apparent increase arising from his measuring his 
 capital by a depreciated standard. If, however, the rise of 
 prices is confined to the particular stock of goods he deals in, 
 and grows out of some scarcity in the supply, the greater value 
 would represent an actual increase of his capital, and might be 
 counted as a profit, and therefore as an addition to his income. 
 
 In other cases we have to consider whether an expenditure 
 was incident to the transaction of business, or was applied 
 to the sustenance of the person or his family. For example, if 
 a physician who receives annually $3000 in fees has to pay out 
 $500 of this amount on account of a horse and buggy in which 
 to visit his patients, his net income is only $2500. But if he 
 should visit his patients on foot and employ the horse and 
 buggy to give his wife and family a daily airing, we should re- 
 gard that expenditure as coming out of his income, and say that 
 his net income was $3000. The difference in the two cases is 
 that in the one the horse and buggy are supposed to be used for 
 business purposes and not for enjoyment, whereas in the other 
 they are used for enjoyment. 
 
 Corporate Income. Another difficult case arises when we 
 consider the income of companies. The preceding rules 
 apply to any legal person. A railway or manufacturing com- 
 pany may have its own independent income. Such income, 
 in the regular course of business, is supposed to be divided at 
 stated times among the shareholders as dividends, and thus to 
 become a part of their regular incomes. But very often the 
 profits gained by the company, instead of being so divided, are 
 employed in increasing the capital or enlarging the business of 
 the company. In such a case are the stockholders to be regard- 
 ed as in receipt of an income from their shares ? If so, how is 
 
362 TEE SOCIETARY CIRCULATION. [IV. 28. 
 
 the amount to be determined ? Since they get nothing at all 
 from the company, it might seem that the profits of the latter 
 should not be reckoned as income to them. On the other hand, 
 if they have a right to their prospective share of these profits, 
 and this prospective right has a market value, they should be 
 considered as in receipt of an income equal to the increase in 
 the market value of their shares arising from the increase of 
 the capital owned by their company. 
 
 28. Expenditure of Income. The income determined in the 
 preceding section is a certain amount of money which the in- 
 dividual can expend at his own pleasure without diminishing 
 his productive power. There are two distinct ways in which 
 he can spend it : 
 
 I. In sustenance for himself, his family and friends. 
 
 II. In increasing the amount of capital which he possesses. 
 
 We have found his net income by subtracting from the to- 
 tal monetary flow to him the total payments necessary to the 
 transaction of his business and the preservation of his capital. 
 The remainder is expended in the two ways just mentioned. 
 We have then three great classes of payments made by him, 
 namely : 
 
 Payments on account of business and capital ; 
 
 Payments for sustenance ; 
 
 Payments in increase of capital. 
 
 These together make up the total monetary flow from him, 
 which is equal to the flow to him, as has already been shown. 
 These flows are illustrated in the diagram opposite. From 
 society to the merchant goes a flow of currency for the pur- 
 chase of goods. From the merchant goes one flow to the 
 jobbers who supply his goods, another to his clerks, and an- 
 other to capitalists who perhaps own his warehouse or have 
 loaned him money. These flows represent what he pays out 
 on account of business. The dotted line to producers of 
 capital represents that portion of his flow which he expends in 
 increasing his capital. He may merely increase his stock of 
 goods, and then, so far as he is concerned, the producers of his 
 
IV. 29.] OF INDIVIDUAL INCOME AND EXPENDITURE. 363 
 
 capital are the jobbers themselves. If he builds a new store 
 with his profits, these producers will be bricklayers, carpenters, 
 and mechanics. The heavy dotted line represents his pay- 
 
 Fig. 5. 
 
 ments for the sustenance of himself and family. The sum 
 total of the five flows from him makes up the single flow from 
 society to him. 
 
 29. There are two laws of income which are fundamental in 
 economics. In applying the term " law " to these propositions, 
 it must not be understood that they are absolutely true, irre- 
 spective of the interpretation which may be put upon them. 
 They are rather to be regarded as approximations to general 
 truths which require, however, to be interpreted in each partic- 
 ular case. The first law which we shall consider may be ex- 
 pressed in the following form : 
 
 As a general rule the income which an individual gains is 
 equal to the value which he adds to the sum total of produc- 
 tion through the use of his own faculties and capital. 
 
 There is perhaps no proposition in political economy which 
 runs counter to common ideas more than this. It is a familiar 
 
364 THE SOCIETARY CIRCULATION. [IV. 29. 
 
 fact that the largest incomes are gained by men whose function 
 in production appears to the superficial observer quite insig- 
 nificant. From the point of view of the average man the labor 
 is the sole measure of the product, and the man who without 
 labor gets a portion of the product gets it without rendering 
 an equivalent service. 
 
 Since the first impulse of the student ought to be to point 
 out certain obvious limitations to this law, we may begin by 
 considering them. The first question will be what contribution 
 to production is made by a man who makes a fortune merely 
 through operations in the stock market. The answer is that so 
 far as this man's interests are concerned, the case is truly an 
 exception. If the operations were merely speculative — that is, 
 if there has been no real change in the value of the stock — the 
 people with whom he has been dealing have lost an equal 
 amount. Therefore the algebraic sum total of the gains of all 
 the classes engaged in these speculations will be zero. Now, 
 as already pointed out, we are in political economy principally 
 concerned with sums total and not merely with the interests of 
 this or that individual. Hence this error will not affect the 
 sum total. 
 
 Let us suppose, in the second place, that our operator has pur- 
 chased a stock supposed to be worthless and, having held it a 
 year or two, it has without any effort on his part become of great 
 value. This means that it has become useful to mankind while 
 he was the owner. In order, therefore, that the law may be 
 correctly applied we must include in production all increase of 
 value produced by any circumstance whatever, and must credit 
 this increase to the owner of the object whose usefulness was 
 enhanced. This remark applies to all cases of the ownership 
 of land, real estate, machinery, ores, etc., the value of which 
 may change without the application of labor, merely through 
 the movement of population and the action of supply and de- 
 mand. The law must therefore, in order to be correct, be un- 
 derstood in some such form as this : The total income of the 
 community comprises all the values produced by its labor jplus 
 
IV. 30.] OF INDIVIDUAL INCOME AND EXPENDITURE. 365 
 
 all the increase in the value of fixed property brought forth 
 without labor minus all the decay in value which has occurred. 
 Leaving out speculative operations, gambling, etc., which mere- 
 ly change the ownership of property, every man's income is then 
 the measure of what he adds to the total production. 
 
 The most simple consideration by which the law can be 
 illustrated is this : no person can gain income except by selling 
 to some other person something which this other person for 
 the time being considers to be an equivalent. Take for in- 
 stance the case of a railroad manager who is worth many mil- 
 lions of dollars. If he has not gained this fortune by knock- 
 ing people down and picking their pockets, or by burglary, 
 which of course we assume, then he must have gained every 
 dollar through some person paying a dollar for his services. 
 All his millions have been gained from the millions of people 
 who travel on his road and the thousands who purchased its 
 stock, and every one of these millions and thousands paid his 
 dollars because he thought it advantageous to himself so to 
 do. He was either gaining an advantage or saving himself 
 from a disadvantage. He either reached his place of business 
 betimes in the morning, or he was saved the expense of having 
 to stay in the city overnight, or of hiring a carriage to take 
 him home. 
 
 30. Second Law of Income. The entire amount paid by 
 the purchaser for any commodity may be considered to be 
 divided as income among the persons who have been instru- 
 mental in the production of that commodity, each man's 
 share being his compensation for the labor expended and 
 capital employed in such production. 
 
 We may show this most easily by a diagram of the flow 
 pertaining to an expenditure of $100 in the purchase of boots. 
 Let us suppose that the raw material, principally leather, which 
 the shoemaker consumed in making the boots cost $40 ; and 
 that he had to pay $20 to an assistant and $.5 to the owner of 
 
366 
 
 THE SOGIETART CIRCULATION. 
 
 [IV. 30. 
 
 his shop as rent. This would leave $35 as his own income 
 from the hoots. 
 
 The payment made to his assistant and shop-owner may, for 
 simplicity, be considered as made solely on account of their 
 
 services. In the case of the 
 owner the services did not 
 merely consist of labor, but 
 principally of the interest on 
 the capital he had invested 
 in the shop. We may, if we 
 choose, consider the income 
 from capital as a separate 
 item, but there is no need of 
 our doing it now. 
 
 We have left the $40 
 which the shoemaker paid to 
 the leather-dealers for raw 
 material. This is divided in 
 the same way between the 
 owner of a shop, the dealer's 
 clerks, the tanner from whom 
 he purchased his leather, and 
 himself. The division which 
 we assume is shown on the 
 diagram as $3 going to one 
 party, $7 to another, and $20 
 to the third, while $10 is 
 kept as his own income. 
 
 The $20 which he pays the 
 tanner is divided according 
 to the same system. In each 
 class of persons represented 
 by the circles is given their portion of the money. Follow- 
 ing the flow to the bottom, we see that the division of the 
 $100 contributes incomes as follows : 
 
 Fig. 6. 
 
IV. 30.] OF INDIVIDUAL INCOME AND EXPENDITURE. 367 
 
 To the shoemaker $35 
 
 To the journeyman shoemaker 20 
 
 To the owners of shops 8 
 
 To the leather-dealer 10 
 
 To the leather-dealer's clerks 7 
 
 To the tanner 5 
 
 To the producers of bark 5 
 
 To the tanner's assistant 5 
 
 To the dealer in hides, his clerks, the railway owners, the drovers, and 
 
 the cowboys, each $1, making 5 
 
 Total $100 
 
 An important question may arise at this point. The money 
 paid to the purchaser did not divide itself in this way in a con- 
 tinuous stream, because the chances are that the shoemaker 
 paid the wages and rent, and purchased his leather, before he 
 sold his boots. The same thing may be true all the way down 
 the diagram, so that we are apparently tracing the process in a 
 reverse order. If the boots had all burned up before they 
 were purchased, the greater part of the persons represented 
 would have received their income. 
 
 But this does not contravene the law laid down. It still 
 remains true that the income of the shoemaker is found by 
 subtracting the $65 which he had previously paid out from 
 the $100 which he received. The same is true all the way 
 down, so that the numbers still correctly represent incomes. 
 
 On the other hand, when we consider the future we shall see 
 that the money paid by the purchaser of the boots is a very 
 necessary part of the future income of all concerned in pro- 
 ducing them. The shoemaker cannot keep up his purchase 
 of leather or his payments to others unless he can sell his pro- 
 ducts. Moreover, as a general rule, so long as he continues 
 Ills sales he will continue his purchases. Thus the interdepen- 
 dence of the various incomes is a necessary result of the case. 
 
 The following important corollary may be deduced from the 
 preceding law : When the price of goods rises, it is certain 
 that some one concerned in their production is receiving an in- 
 creased income for his services, and vice versa. 
 
368 TEE SOCIETARY CIRCULATION. [IV. 30. 
 
 The division of this increase of income among the different 
 parties concerned is partly a question of interpretation. If, 
 next month, the shoemaker gets $120 for the same boots 
 which he sold for $100 the present month, we may consider 
 that increase of income as confined to himself, because he got 
 his leather and employed his help at old prices. But the 
 general fact will be that he could not command this increased 
 price unless leather became dearer. Therefore in the future 
 lie must pay the higher prices, and thus the increased income 
 will be divided among most or all of the producers. 
 
 The results of the above two laws may be combined in the 
 following conclusions : 
 
 I. Every mass of finished or unfinished products may he 
 regarded as the joint work of the various persons whose ser- 
 vices were necessary to the production. 
 
 II. The value of all such products in the country may he 
 divided among the producers into shares, each share being 
 a part of the income of the person who contributes that share 
 to the product. 
 
 III. Conversely, we may consider every mail's income to 
 represent his contribution to the sum total of the product, and 
 to measure his right to take an equal value of the products of 
 others from that sum total. 
 
IV. 31.] DEMAND AS THE DIRECTOR OF INDUSTRY. 369 
 
 CHAPTER VI. 
 
 DEMAND AS THE DIEECTOR OF INDUSTRY. 
 
 31. The members of the community generally believe that 
 the public interests are deeply affected by the way in which 
 people spend their money. This belief arises from the suppo- 
 sition that the spender confers a marked benefit on the person 
 from whom he buys. It is supposed that if he spends his 
 .money in clothing, tailors are benefited ; if he spends it in 
 shoes, shoemakers are benefited ; if he carries it abroad, the 
 whole community lose the benefit he might have conferred 
 upon it ; if he employs Chinese cheap labor, the Anglo-Saxon 
 race are the losers; and if he invests it, nobody but himself gets 
 any benefit from it. In what respects these current popular 
 doctrines are erroneous will appear subsequently. "We begin 
 by considering the question of the effects of different kinds of 
 expenditure from an economic point of view, without reference 
 to preconceived opinions. The investigation is one of the most 
 intricate in economics, and requires for its prosecution that we 
 have clearly in mind a number of conclusions already drawn in 
 previous chapters. These conclusions we shall now re-state for 
 the sake of clearness. 
 
 I. The necessary conditions of general prosperity are that a 
 sufficiency of the necessaries of life to support the whole com- 
 munity should be produced, and that each member should be 
 able to command such portion as he is entitled to under the laws 
 which govern the social organism. A sufficiency of a commod- 
 ity is all that is required. There is no need of piling up more 
 food than the whole communit}' can eat, nor of making more 
 clothes than they can wear out. Therefore increasing prosper- 
 ity is marked, not by an unlimited increase of the more com- 
 mon necessaries of life, but by gradual improvements in the 
 24 
 
370 THE 80CIETARY CIRCULATION. [IV. 31. 
 
 quality of these necessaries, and in the quantity of those arti- 
 cles which are commonly considered luxuries. It will of course 
 be understood that no line can be drawn between necessaries 
 and luxuries. These do not form two classes of things, but the 
 quality of being a luxury must be regarded as one which dif- 
 ferent objects possess in different degrees. When a man makes 
 the first step upward in the social scale, it is not by sleeping 
 in two straw beds after having formerly slept in one, but by 
 sleeping in a better kind of bed. lie substitutes finer for 
 coarser clothing, and a family carriage for a cart. As he ad- 
 vances, a silver watch comes into his possession, which, in time, 
 is replaced by a gold one. He may have no more chairs than 
 he had before, but they are of better quality, and books and 
 pictures are added to the embellishments of his house. Lace cur- 
 tains take the place of the cotton ones on his windows, and his 
 books at last go into a walnut case. The prosperity of any one 
 man is improved when he can add comforts possessing in a 
 higher degree the quality of luxuries; and any class of men is 
 prosperous when all of its members are prosperous. Since, by 
 the natural laws of supply and demand, those things are made 
 which people most want and can best afford to buy, it follows 
 that general prosperity is marked by a general increase in the 
 effectiveness of industry, and that we must expect this increase 
 of industry to show itself in the production of articles which 
 to the lowest grade of men would appear luxuries. 
 
 So much for production in so far as it concerns the ability of 
 each man to get command of his share of the product. "We 
 have already shown that in the state of things which now exists 
 in this country it is scarcely possible for any industrious man 
 to suffer for the necessaries of life. The only persons who can 
 so suffer are those so weak, miserable, and worthless that they 
 cannot or will not do anything which anybody else wants to 
 have done, or who set so high a price on their services that 
 they can get nobody to employ them. 
 
 II. We call to mind that the primary form of capital may be 
 considered as sustenance for laborers ; that is, food for them to 
 
IV. 31.] DEMAND AS THE DIBECTOR OF INDUSTRY. 371 
 
 eat, clothing for them to wear, and houses for them to live in. 
 In an economic sense the class laborer includes every person 
 who gains a living by his own exertions, and does not live off 
 the interest of his money, or the profits on his investments. 
 Clergymen and teachers are therefore included in the class, as 
 well as mechanics and hod-carriers. 
 
 "We also call to mind that when the laborer receives money 
 in exchange for work done, this money may be regarded as an 
 order on owners of sustenance to supply the laborer with a cor- 
 responding quantity of that sustenance. This order is ad- 
 dressed to the house-owner, who receives it as rent ; to the 
 owner of flour, who gives flour in exchange for it ; and to the 
 clothier, who gives clothes for it. 
 
 In order that the work of the laborer may be profitable, the 
 value of his product, whatever it may be, must exceed the 
 value of all the sustenance which he and his family consume. 
 The measure of the laborer's prosperity is the quality of the 
 sustenance which he is able to command. 
 
 III. The demand for various kinds of commodities fluctuates 
 from month to month and from year to } 7 ear. There is there- 
 fore a corresponding fluctuation in the industry which pro- 
 duces those commodities. It has been shown that these fluctua- 
 tions in industry may be represented by supposing laborers who 
 are engaged in producing one class of goods to change their oc- 
 cupation and produce the other class. This change can be ef- 
 fected either directly, by laborers changing their occupation, or 
 indirectly, by employing more new labor in the new occupation. 
 The result is the same in the two cases (as shown in II. 49). 
 The restrictions to which this change of industry is subject have 
 also been pointed out, and it has been shown that the only case 
 in which any difficulty is met with in effecting the change of 
 employment arises when a higher order of skill is demanded.- 
 
 IV. It is also necessary that the reader should have clearly 
 in mind the monetary circulation as described in the last two 
 chapters, and the distinction between the current measure of de- 
 mand and the absolute measure. The main proposition to be 
 
372 THE SOCIETARY CIRCULATION. [IV. 32. 
 
 had in mind in this connection is that demand depends upon 
 the ratio between the flow of the circulation and the price 
 asked ; that when the flow diminishes, either through a dimi- 
 nution of the volume of currency, or, what amounts to the 
 same thing, through a diminution of its rapidity of circulation, 
 a general falling off in the demand for commodities in general 
 is a necessary result ; also that this falling off has its natural 
 remedy in a corresponding diminution in the general scale of 
 prices,, which will immediately restore the demand without any 
 general change in the ability of different classes of men to com- 
 mand the means of subsistence. 
 
 32. If in the monetary circulation we consider a payment 
 from one person A to another person B, we may inquire what B 
 does with the identical money he thus receives, and may, in im- 
 agination, trace it through the different streams passing from B 
 to other members of the community. From each member the 
 stream will subdivide itself amongst other members, and so on 
 indefinitely, but its total magnitude will remain unchanged-. 
 For example, we may imagine that a sum of five dollars being 
 paid to B, he pays one dollar of it to each of five persons. If 
 each of these persons divides it among four other persons, there 
 will be twenty in all who will each receive twenty-five cents 
 of that money. If each of these twenty persons divide the 
 money among five others, we shall have one hundred persons 
 each receiving five cents. In every case the total volume of 
 all the little streams which we consider amounts constantly 
 to five dollars. Of course in practice the division would be 
 unequal, but this would not affect the result when we add up 
 all the payments. 
 
 It may be asked, How shall we distinguish this particular five 
 dollars from all the other money flowing from B ? The latter 
 was perhaps in receipt of hundreds of dollars from other par- 
 ties ; he puts the five dollars he receives from A into his gen- 
 eral fund, and thus mixes it up in such a way that we cannot 
 distinguish between this particular sum and the other money. 
 
IV. 32.] DEMAND AS THE DIRECTOR OF INDUSTRY. 373 
 
 The answer to this is that we learn what B does with that par- 
 ticular five dollars by inquiring in what streams the deficiency 
 would have been found had he not received that five dollars 
 from A. It is mathematically certain that if he had not re- 
 ceived it be would have had that much the less to pay out to 
 others ; so that, taking all his payees together, it is certain that 
 five dollars more are received than would have been received 
 by them had A not made this payment. What is true of these 
 payees is true of their payees ; there is a deficiency in the 
 stream amounting to this sum, how far soever we trace it. 
 
 Having thus considered tbe effects of cutting off this stream, 
 so far as it concerns those to whom it would have flowed had 
 it not been cut off, let us consider the consequence in another 
 direction. If A bad not made that payment to B he would 
 have had five dollars more either to keep or to spend for some 
 other purpose. Let us first consider the case in which he 
 spends it in some other way. Then his flow to some third 
 person, C for example, would have been increased by the same 
 amount that his flow to B is diminished. He pays either to B 
 or to C, but not to both. We may in imagination trace the pay- 
 ment from A through C and then see it subdivided amongst 
 different classes of persons in the same way that we did when 
 it went through B. 
 
 The conception that we must now form is this : We imagine 
 A holding his five dollars and deliberating whether he shall 
 issue it to B or to C. Whichever of the two he decides shall 
 receive it, we may trace it from the receiver as it subdivides 
 itself among other members of the community. We may sup- 
 pose it, after two or three payments, to be subdivided among 
 the same persons, whether paid to B or to C. After it reaches 
 those same persons the effects will be the same. Any economic 
 difference that may result from the two directions will take 
 place while the streams are divided, and before they join by 
 reaching the same parties. This conception of the stream ulti- 
 mately reaching the same persons in whichever way paid is 
 introduced for simplicity. As a matter of fact and reason, 
 
374 THE SOCIETARY CIRCULATION. [IV. 33. 
 
 when divided among so many men that each one's share is in- 
 considerable, we may consider it as having reached the same 
 persons. 
 
 33. Purchase of Commodities and Demand for Labor. 
 In all that precedes we have made no classification of pay- 
 ments according to their object. A distinction is, however, 
 made by economists between payments to laborers for their 
 services and payments for commodities already produced. 
 The ground of this distinction is this : the capital with which 
 commodities are produced is not the money received for sell- 
 ing them, but the sustenance which the laborers consumed 
 while making them. Hence the payments which support 
 labor are not those made to the seller of goods, but those 
 made to laborers to enable them to purchase sustenance. If, 
 then, we consider only the latter class of payments, we must 
 follow the stream of currency through the parties who sell 
 goods until we find it to reach laborers who receive it as wages 
 and who purchase sustenance with it. 
 
 This is what we have done in the preceding chapter, where 
 we have shown that every payment for goods purchased may 
 be considered as divided as wages and interest among those 
 instrumental in their production. 
 
 Let us now return to the question how we may suppose a 
 payment from A to B to be divided by the latter amongst his 
 employes with a view of finding what laborer it reaches. It 
 is an obvious rule of business that if a manufacturer finds he 
 cannot sell a particular class of goods, he stops making those 
 goods. If he finds goods sell well, he spends the money which 
 he receives for them in helping his operatives to replace the 
 stock which is sold out. Since manufacturers will not allow 
 unsold goods to accumulate without limit, and indeed will 
 make none except what they can sell, we may consider every 
 person who purchases goods of any particular class as placing in 
 the manufacturer's hands the power and inducement to replace 
 these goods by employing men to make a fresh supply of them. 
 
IV. 31] DEMAND AS TEE DIRECTOR OF INDUSTRY. 375 
 
 34. We now reach the following fundamental law of em- 
 ployment : A change of demand from one commodity to 
 another may always be met by a corresponding change of labor 
 from the production of the one commodity to that of the other 
 i?i so far as this change is possible. 
 
 The way in which the change is brought about, and the condi- 
 tions to which it is subject, have been set forth in II. 49, 50. 
 Let A be an agent who has money to spend, M a shoemaker, 
 and T a tailor. Also let S be the collection of the individuals 
 from whom the tailors and shoemakers may purchase their sup- 
 plies. Then if the agent purchases from the tailors, the latter 
 will spend the money so received for food, clothing, and other 
 necessaries, as well as for the means of continuing their busi- 
 ness. This expenditure is repeated by a continuation of the 
 stream from M to S. S representing the community in general. 
 But suppose the spender, instead of purchasing clothes, pur- 
 chases .shoes. Then his money, instead of going to the tailor T, 
 will go to the shoemaker M. If now the equilibrium of supply 
 and demand was exact when the purchase was made from the 
 tailor, then the result of buying from the shoemaker will be 
 that a certain amount of tailoring industry is left out of em- 
 ployment, while there is a demand for an additional supply of 
 the labor of shoemakers. To fix the idea, let us suppose that A 
 represents a number of persons such that the demand in ques- 
 tion will be represented by the services of a single person. If 
 then a single tailor can change his business to that of making 
 shoes, he Avill receive the same money as before, and will spend 
 most of it among the same people as before. The supply and 
 demand will then be perfectly equalized, and the monetary 
 circulation among all the people of the community will be the 
 same as before. What A has done has been to change the in- 
 dustry of one man from that of shoemaking to that of making 
 clothes. 
 
 We have already shown how and under what conditions this 
 change can be brought about. We call to mind that there is 
 no necessity that any individual tailor should change his occu- 
 
376 
 
 TIIE SOCIETARY CIRCULATION: 
 
 [IV. 34. 
 
 pation for that of a shoemaker. Some third person may have 
 adopted the trade of shoemaker, and the tailor may take his 
 place, or there may be a series of changes, as already explained 
 in treating of changes of occupation. Finally, some tailor may 
 die and the person who otherwise would have filled his place 
 may learn to make shoes. But in whatever way the change 
 comes about, the final result will be the same as if some one 
 tailor had changed his occupation to that of a shoemaker. 
 The effect of this change of expenditure is shown in the dia- 
 gram, which now includes not merely 
 a single flow, as our former diagrams 
 have, but two alternate flows. On 
 the right hand the accented letters 
 represent the .flows which formerly 
 went through the tailors. From the 
 agent A went the flow a' to the tail- 
 ors, among whom of course we in- 
 clude the merchants who sold the 
 clothes. This flow subdivides itself 
 into two, V and c\ the former being 
 the payment for the subsistence of 
 the tailors, and the latter that portion 
 of the payment which went to the 
 parties who supplied the cloth and 
 the wool. These parties got the wool 
 from certain sheep-raisers, and the 
 flow d' represents the payment to 
 them. 
 
 Now when A ceases to buy these particular clothes, the 
 latter flows all stop. In lieu of a' we have an equal flow a 
 going to the shoemakers. We therefore suppose a passage of 
 certain men from the ranks of the tailors to those of the shoe- 
 makers. To show that this passage may be indirect, we draw 
 a blank circle between them, which may be considered as rep- 
 resenting the community at large, or that portion of the com- 
 munity which is looking for something to do. The unemployed 
 
 Fig. 
 
IV. 35.] DEMAND AS THE DIRECTOR OF INDUSTRY. 377 
 
 tailors pass into that class, and the shoemakers pass out of it, so. 
 that it remains unchanged in number. 
 
 , Since shoemakers consume the same subsistence as tailors, the 
 flow b for that subsistence is the same as the flow b', so that the 
 interests of society at large are unaffected. In lieu of the flow 
 c to the cloth and wool-dealers, we have a flow c to the leather- 
 makers. Therefore there must be a change from the business 
 of dealing in wool to that of making or dealing in leather. 
 
 In lieu of the flow df to the sheep-raisers, we have the flow 
 d to the cattle-raisers. It is as easy to raise cattle as sheep, and 
 the balance is made good by a sufficient number of cattle being 
 substituted for sheep. > 
 
 The point mainly to be kept in mind is that the totality of; 
 demand is unchanged by the change of expenditure. There is' 
 a greater demand for those classes of services or commodities 
 on the left side of the diagram, and a less demand for those on 
 the right side. The compensation is effected by the passage of 
 a limited number of men from those on the right to those on 
 the left, and the interests of society at large remain unchanged. 
 
 35. Case of Non-competing Groups. The question may 
 arise, What would be the effect if , the change of expenditure 
 by A, instead of being directed to commodities made by the 
 same classes of men as before, should be directed to those 
 made by a non-competing group whose ranks tailors could 
 not join? Suppose, for example, that in lieu of shoemakers 
 the parties employed were professors of Sanscrit and Hebrew. 
 Not only could the tailors never learn to teach Sanscrit or He- 
 brew, but it is not likely that there could be any relation by 
 which the tailor should take any place occupied by such a 
 teacher in the blank circle. The result would be a general 
 falling off in the demand for the work of tailors, and an in- 
 crease in the demand for professors of Sanscrit. 
 
 It may appear that since the professors of Sanscrit must be 
 clothed, there will be a flow from them to the tailors to com- 
 pensate for the loss of the flow from A. But examination will 
 
378 THE SOCIETABT CIRCULATION. [IV. 36. 
 
 show us that such is not the case. The professors of Sanscrit 
 must have been clad before, and will need few or no more 
 clothes after their change of employment than they did before. 
 Moreover, their entire income is, by hypothesis, taken out of 
 the flow which formerly went to the tailors, and under any 
 circumstances they spend but a small fraction of that income 
 for clothes. There is therefore an actual increase in the de- 
 mand for the labor of teaching Sanscrit, and a diminished 
 demand for that of making clothes, which, so far as this par- 
 ticular operation is concerned, cannot be compensated. 
 
 To learn the complete effect of the change upon society we 
 ought to know what the professors were doing before A 
 employed them. They probably left some other employer, E, 
 and thus the flow to them from E was stopped, to be replaced 
 by the flow from A. If, after the change, this flow from 
 E should pass to tailors, shoemakers, etc., the compensation 
 would be complete, the only change being that the professors 
 of Sanscrit would now be paid out of a new flow. But this 
 would be really no change at all, so far as the interests . of 
 classes are concerned, but only an interchange of two flows. 
 What we are considering, however, is not a change of this 
 sort, but an actual change by A from demanding clothes to 
 demanding the teaching of Sanscrit, uncompensated by any 
 reverse change by other people. The undoubted result is that 
 already set forth. So far as immediate income is concerned, 
 one class is better and another worse off. There are indeed 
 ulterior effects, but these are to be considered in subsequent 
 chapters. 
 
 36. Other Forms of Expenditure. We have been compar- 
 ing the effects of different modes of expenditure, and we have 
 shown that the sum total of the demand for labor is the same 
 whether one spends his money for one kind of labor or suste- 
 nance or another kind. But there are still two cases to be con- 
 sidered. What will the effect be — 
 
 1. When A, instead of spending his money by demanding 
 
IV. 36.] DEM AS D AS TEE DIRECTOR OF INDUSTRY. 379 
 
 services from the social organism to which he belongs, sends it 
 abroad, or melts it into jewelry ; that is, when he simply stops 
 the flow a from himself, and so employs nobody in place of 
 the tailors ? 
 
 2. When, instead of spending, he invests it in some form of 
 capital ? 
 
 The modifications in our conclusions when the act of demand 
 is thus modified will form the subject of the next three chap- 
 ters. 
 
 EXERCISES. 
 
 1. Draw diagrams showing the effects of the following changes of ex- 
 penditure, and the corresponding changes of labor. Show also, in each 
 case, whether the change can be made without disadvantage. 
 
 1. A man who has been collecting a library stops buying books and 
 spends the same income in building houses. 
 
 II. The inhabitants of a city who have been getting their streets graded 
 and paved stop that expenditure and spend the same income upon the 
 erection of a city hall. 
 
 III. A body of men who have been clothing themselves expensively 
 stop buying new clothes and expend the money thus saved in giving din- 
 ners to their friends. 
 
 IV. A body of men in New York stop building railways and invest the 
 income thus saved in building iron ships. 
 
 V. A man who has been spending his income in keeping an expensive 
 house bequeaths his property to a college. 
 
 2. After the burning of Chicago what classes of men probably left the 
 city, and what classes went thither to find profitable employment? 
 
 3. If the government of New York State had never undertaken the 
 building of the new capitol at Albany, in what way would the demand 
 for labor have been different from what it is? 
 
 4. When a government borrows money from a body of capitalists who 
 have been building railways, and expends it in war, what change in the 
 occupation of men does it bring about? 
 
 5. When the State of Virginia borrowed money from citizens of New 
 York, and spent it in internal improvements, what change in occupation 
 and what movement of population was brought about? 
 
380 TEE SOCIETARY CIRCULATION. [IV. 37. 
 
 CHAPTEK VII. 
 
 EFFECT OF A DIMINUTION IN THE FLOW OF THE CURRENCY. 
 
 37. Our answer to the question what will happen in case of 
 a withdrawal of currency from the regular now, and a conse- 
 quent diminution of that flow, depends upon principles which 
 have already been developed in the preceding chapters. But 
 it will conduce to clearness to combine these principles in a new 
 form and apply the result to this special question. The imme- 
 diate effect is very obvious, and is correctly apprehended by 
 the business public. The ulterior effect is not so obvious, but 
 is capable of being made clear to any mind capable of grasping 
 the problem. 
 
 The immediate effect of the withdrawal must be a diminu- 
 tion of the industrial as well as of the monetary flow. Let us 
 once more revert to the hypothesis of Fig. 7. The consumers 
 A were there supposed to have been spending their money for 
 clothes, thus causing an industrial flow along the lines d\ c', V, 
 and a' from sheep-raisers and wool-dealers, etc., through tailors 
 terminating in the men A. It was shown in the last chapter 
 how the change of A's expenditure from clothes to shoes now 
 causes the industrial flow to pass along the veins d, c, b, a, but 
 without causing any diminution in the demand for employ- 
 ment. !Now it is very evident that if A does not spend his 
 money in either of these directions, nor in any third direction 
 which will cause a demand for the products of the community, 
 that particular branch of the industrial flow shown on the dia- 
 gram will entirely stop. This will be the case if he sends 
 his money abroad, melts it into jewelry, or deposits it in a 
 bank which does not loan it out to its customers. Hence the 
 tailors, shoemakers, and producers of subsistence in general 
 
IV. 37.] DIMINUTION IN THE FLOW OF TEE CURRENCY. 381 
 
 naturally oppose this policy on the part of A, and desire that 
 he shall not only spend his money, but spend it at home. 
 
 Now if the money prices of all commodities or services were 
 fixed by any law whatever, whether a legislative enactment or 
 a provision of nature, then this diminution of the industrial 
 flow would be not only the immediate but the permanent re- 
 sult of every diminution in the flow of the currency. But such 
 is not the case. The ulterior effect is that the industrial flow 
 is restored as soon as prices can accommodate themselves to the 
 new state of things. To see this we must first remark that 
 there is no law which prescribes how great a monetary flow is 
 required to measure or equal the industrial flow. This depends 
 altogether upon the scale of prices. When in the equation of 
 the industrial flow, 
 
 K X P = V X R, 
 
 we have a diminution in Y, it may at any time be compensated 
 by a corresponding diminution in P, without changing the 
 actual industrial flow K. Moreover, this operation of dimin- 
 ishing P, so as to keep up the equation, is nothing more than 
 that of accommodating prices to demand, as we have already 
 shown. 
 
 If then we suppose that the change of expenditure by A 
 was equivalent to one per centum of the total expenditure of 
 the entire community, it would follow that one per centum of 
 the industrial population would be thrown out of employment 
 so long as the scale of prices remained the same as before. If 
 this one per centum were composed wholly of tailors, that class 
 alone would be immediately affected. Finding this diminution 
 ill the demand for their labor, some of them would have to sub- 
 mit to a reduction of one per cent in their wages, while others 
 would seek for other employments. This competition for work 
 would cause a fall in prices, and the reduction in price would 
 cause an increase of demand. Thus, as soon as the equilibrium 
 was restored, everything would go on as before, except in the 
 following points : 
 
382 THE SOCIETART CIRCULATION. [IV. 38. 
 
 1. There would be fewer tailors in proportion to the rest of 
 the community. 
 
 2. Wages would be one per cent lower. 
 
 3. Goods would be one per cent cheaper. 
 
 Thus everything would go on in its regular normal way, only 
 on a scale of prices one per cent lower. No one except A would 
 in reality be either better or worse off. We may assume that 
 A would be a little better off, because he bought, instead of 
 clothing, something which he must have wanted more than he 
 did clothes. 
 
 In tracing this effect of the withdrawal of the circulation we 
 have supposed the withdrawal to be permanent. But in most 
 cases the circulation will be restored through the action of 
 causes brought into play by the very act of withdrawal. For 
 example, if a portion of the volume of currency is sent abroad, 
 that very act, if it diminishes home and raises foreign prices, 
 will lead to a demand for our goods from abroad, and thus re- 
 sult in sending back the money. The more money the owner 
 deposits in a bank the more the bank will have to loan. Hence 
 the general rule will be that the volume of currency cannot be 
 so diminished by bank deposits as to cause a great rise of prices. 
 When prices begin to fall, that very fact will cause men to seek 
 for money in order to buy, and thus will arise a tendency on 
 the part of the owners of bullion to get it coined into money, 
 and on the part of business men to borrow from their banks. 
 
 38. The question may arise whether, after all, we are not 
 here dealing with a general and serious evil in that we are sup- 
 posing a change of occupation on the part of men and a change 
 in prices of goods, neither of which can take place without loss 
 and friction. This would be true if there were any system on 
 which we could accurately adjust prices and demand, so that 
 everybody should know exactly what occupation to engage in, 
 and pursue that occupation all his life, and if the change con- 
 sisted in a disturbance of this adjustment. But such is not the 
 case. As a matter of fact, changes of the kind we have sup- 
 
IV. 39.] DIMINUTION IN TEE FLOW OF TEE CURRENCY. 383 
 
 posed are going on all the time as an inevitable result of the con- 
 tinual change in population and tastes, of old men dying off and 
 new ones coming on the stage, of new modes of production be- 
 in£ discovered and new wants arising. Laborers of all classes 
 are continually making changes by demanding higher wages or 
 better terms of labor from their employers, and every change 
 of this sort is necessarily accompanied by change of demand. 
 Prices of every sort are therefore always varying so as to ac- 
 commodate themselves to these changing circumstances. It is 
 perfectly conceivable that the change made by A in his mode 
 of expenditure would be compensated by a change in the oppo- 
 site direction by some one else, or by tailors getting dissatisfied 
 and going into other employments of their own accord before 
 A changed his demand. In this case A's change, instead of 
 resulting in the necessity of a new adjustment of prices and 
 wages, might obviate the necessity of an adjustment due to 
 some other cause. 
 
 Moreover, we have supposed A's cessation of demand to be 
 for clothing alone, and thus thrown the whole burden of the 
 change on the tailors. But this is an extreme case. The chances 
 are that the demand falls off equally from nearly all classes of 
 products, and that the compensation is effected without any 
 material change of occupation. • 
 
 39. The above conclusion is subject to one important tem- 
 porary exception. Although the wholesale prices of commodi- 
 ties rapidly adjust themselves to variations in the monetary flow, 
 there are certain classes of services in which the adjustment 
 takes place Yevy slowly and is impeded by various causes. The 
 salaries of government officers can be changed only by legisla- 
 tion, and therefore do not respond to changes of demand. The 
 salaries of employes generally are to a certain extent subject 
 to the same rule. They are fixed by agreement or custom, and 
 can be changed only after the pressure has become so serious as 
 to derange the business of employers. The same thing is true 
 of most retail prices. It has been shown in a preceding chapter 
 
384 THE SOCIET ART CIRCULATION. [IV. 39. 
 
 why they do not respond rapidly to changes in the market. 
 No one expects the prices of dishes on Delmonico's table to 
 rise and fall with the market prices of cattle and flour. Al- 
 though it is undoubtedly true that in the long-run a permanent 
 change would produce its effect, even at Delmonico's, unless 
 some other cause intervened to prevent it, yet this would not be 
 true immediately. 
 
 This resistance to change modifies in an important degree 
 the effect which we have described, and renders it much more 
 injurious to certain classes. What we have conclusively shown 
 is, firstly, that in the case of a diminution in the monetary flow 
 this diminution tends to divide itself in equal proportions in 
 ail the channels of flow; secondly, that there is also a ten- 
 dency to cause a uniform fall of prices ; and thirdly, that 
 when these tendencies have full play, no one except debtors 
 and creditors are either worse or better off. 
 
 But suppose that there are certain channels in which the 
 sellers of services or commodities are able to demand the same 
 price as before ; that is, to keep up the same monetary flow as 
 before through the channels which lead to themselves. The 
 inevitable result will be that the flow into other channels will 
 be diminished in an undue proportion, and that other persons 
 must in consequence suffer. To fix the ideas, let us suppose 
 that the persons who can thus command a constant flow to 
 themselves form one half of the community, and that there is a 
 diminution in the total flow%of 10 per cent. Let us call A the 
 half of the community who possess this ability to keep up the 
 flow, and B the other half. The result will be that class 
 A will command the same prices for all their goods and ser- 
 vices as before, while class B will find a diminution of 20 
 per cent in the flow to them. Then class A will actually gain, 
 by being able to purchase more cheaply all the goods which 
 class B have to furnish, while class B will lose to the same 
 extent. In the present state of human nature, class B are 
 not going to submit immediately to this discrimination against 
 them ; they therefore determine that they will remain idle 
 
IY. 39.] DIMINUTION IN THE FLOW OF TEE CURRENCY. 385 
 
 rather than submit to selling their goods or services at so low a 
 rate. The result will be that their prices as well as those of 
 class A will be kept up, and thus there will be a diminished 
 industrial flow from them corresponding to the diminished 
 monetary flow to them. In short, to take the case just sup- 
 posed, 20 per cent of them will be idle, or perhaps all of them 
 will be idle 20 per cent of their time. Supposing the former 
 case to occur, as it commonly will, the result will be that the 
 80 per cent of class B who remain at work will be in the same 
 position as class A. Thus we shall have 90 per cent of the 
 population at work on the old scale of prices, and 10 per cent 
 idle, and looking for a living as best they can get it. 
 
 Such is the familiar case presented to us in what are com- 
 monly known as " hard times." The real trouble in such cases 
 is that wages and prices are higher than they should be to cor- 
 respond to the monetary flow. Were there any power which 
 could by its own fiat diminish all prices ten per cent, that act 
 would operate exactly like taking the load off a wheel when 
 the driving force became insufficient to turn it. The wheel 
 would immediately commence turning again. 
 
 In order that such a fiat should be effective it would have to 
 include not only a scaling down of prices and wages, but of 
 debts. The payment of a debt is an integral portion of the 
 monetary flow ; but it is a portion which cannot be diminished 
 in response to a general diminution in the flow, except through 
 the disaster of bankruptcy on the part of the debtor. The re- 
 sult is that when the general flow of currency diminishes, the 
 intensity of its effect is exaggerated, not only because there are 
 such large classes of men who cannot command the same prices 
 as before, but because in every mercantile community large 
 payments of debts are always due. This is why a commercial 
 panic is first felt at the monetary centres, where business is 
 conducted and debts are incurred on a large scale, and why in 
 case of such a panic the obstruction to current business is pro- 
 portionally greater than the diminution of the total monetary 
 
 flow. 
 
 25 
 
386 THE SOCIETARY CIRCULATION. [IV. 40. 
 
 4:0. Since there is no power which can possibly issue or en- 
 force such a fiat, or make any regulations respecting prices, it 
 follows that the only available way of avoiding the evils just 
 described would be to make the monetary flow correspond to 
 the variations of price. Were this practicable, the method of 
 doing it would belong to a separate portion of the present work, 
 since it would be a practical application of economical princi- 
 ples, and not a branch of the science. But we may dispose of 
 the subject by showing what kind of difficulties surround it. 
 What we want is an accordance between the two quantities, 
 scale of prices and flow of currency. Now suppose that the 
 government or banks of the country could, by the issue of 
 credits or paper money, make the flow of currency what it 
 pleased. If prices were fixed by law, there would then be no 
 difficulty in keeping up the equation. But, as a matter of fact, 
 every man is at liberty to set what price he pleases on his 
 goods and services. It would therefore be impossible for the 
 government to keep up the equality. The result of an at- 
 tempt to do so would be a continuous increase in the volume 
 of the currency to correspond to the continually increasing 
 prices which everybody would be putting upon their contribu- 
 tions to the industrial flow. 
 
 In this connection it must be remarked that we have in 
 all the preceding discussions supposed the disturbance to begin 
 with a diminution of the monetary flow. But the student 
 of the subject should never forget that the real evil is not 
 merely this diminution of the flow, but the lack of corre- 
 spondence between the flow and the scale of prices which thus 
 arises. The very same trouble will arise if prices are made 
 higher while the flow remains unaltered. Now, efforts to in- 
 crease prices or wages are constantly being made on every 
 hand, and no power can prevent them. Let us suppose all the 
 operations of industry to be going on in the normal way already 
 described, everybody being employed on terms which are satis- 
 factory for the time being. As human nature is, we may be 
 sure that this satisfaction will not continue. Some class of men, 
 
IV. 40.] DIMINUTION IN THE FLOW OF TEE CURRENCY. 387 
 
 the builders of houses for example, will be sure to demand 
 higher wages. Let us suppose that they command them ; the 
 result will be an increase in the flow of the currency to the 
 builders of houses which must come out of the pockets of their 
 employers. Hence there will be a less flow from these em- 
 ployers to other people. The success of the house-builders 
 will encourage other classes of laborers to demand higher 
 wages. This demand will come at the very moment when, in 
 consequence of the success of the house-builders, there will be 
 an inability on the part of the public to pay even the same 
 wages as before. The probable result will be a more or less 
 prolonged strike, which, even if it succeeds, will lead to some 
 classes being left out of employment. That is, we shall have 
 the very same effects as would have resulted from a with- 
 drawal of currency. 
 
388 THE SOCIETART CIRCULATION. [IV. 41. 
 
 CHAPTER VIII. 
 
 EFFECT OF LABOR-SAVING IMPROVEMENTS IN PRODUCTION. 
 
 41. Every person familiar with industrial operations is 
 aware of the contests which so often arise between artisans and 
 the introducers of labor-saving processes. These contests are 
 being continually waged in one shape or another. The general 
 rule is that whenever o, machine is introduced for making w T hat 
 was before made by hand, the workman opposes its introduction 
 by every means in his power. The opposition is based on the 
 very obvious ground that if the introduction of the machine is 
 permitted, it will deprive a part or the whole of the workmen 
 of their employment. For example, the number of boots and 
 shoes which the people of a country wear will not be greatly 
 increased by a reduction in their price. Consequently, if a 
 machine is introduced which, under the guidance of one man, 
 will do the work of twenty shoemakers, a falling off in the de- 
 mand for the labor of shoemakers is inevitable. 
 
 The history of this subject shows one feature which does not 
 receive the attention it deserves. In this contest between the 
 artisan and the machine, the latter has been continually victo- 
 rious for a hundred years. Class after class of men have seen 
 a large part of their emploj^ment taken from them by ma- 
 chinery, so that at the present time there is scarcely any de- 
 mand for the labor which millions of men had to perform a 
 century ago. And yet, in spite of this, the laborer gets higher 
 wages than he did a century ago, and is as fully employed as he 
 ever was. His victor, instead of crushing him, has benefited 
 him. In the whole history of the contest we do not find a case 
 of a general and permanent fall of wages from the introduc- 
 tion of machinery. 
 
IV. 41.] EFFECT OF LABOR-SAVING IMPROVEMENTS. 389 
 
 The principles laid down in the preceding chapters enable 
 us readily to account for this. Let us take for example the 
 hypothetical case of a shoe-machine. Suppose a machine to be 
 so perfect that it really makes shoes of every kind and quality 
 for almost nothing, so that after its introduction there is abso- 
 lutely no demand for the labor of the shoemaker. To fix the 
 ideas, let us suppose that the average flow from the rest of the 
 community to the shoemakers is $5 from each person. Let us 
 also suppose, to make the case as extreme as possible, that the 
 cost of the machine-work is practically nothing, so that every 
 man's shoes on the average cost him $5 less per year. What 
 is the consequence ? An obvious consequence is that there is 
 no longer any demand for the labor of shoemakers. A conse- 
 quence less obvious is that every man has $5 more to expend 
 in some other direction. As already shown, he can only expend 
 this $5 by directly or indirectly demanding that amount of 
 labor or its products. Hence arises an increase in the demand 
 for other kinds of labor exactly equal to the diminution in the 
 demand for shoemakers. The equilibrium is completely re- 
 stored by the class of men who are engaged in making shoes 
 employing themselves in the kind of labor for which there is 
 an increased demand. "When this change is completed every 
 one will be as fully employed as before, and every one will 
 enjoy the advantage of cheaper shoes. 
 
 We may readily apply the principle here illustrated to the 
 actual historical facts. The introduction of machinery during 
 the last hundred years has to a certain extent changed the di- 
 rection of men's occupations. Instead of making things with 
 their own hands, as they formerly had to do, they are now 
 manao-ino; machines or assistina; in various ways in working them. 
 The pin-makers are no longer at work ; a few of them are feed- 
 ing a pin-making machine, but the majority have learned other 
 employments. A large class of carpenters no longer push the 
 plane ; a portion of them feed the planing-machine, and the 
 remainder are fully occupied in executing work with that in- 
 creased refinement which increased demand has encouraged. 
 
390 THE SOCIETART CIRCULATION. [IV. 42. 
 
 The same change may be traced all through the channels of 
 industry. The general rule which we may lay down is this : 
 
 JVb operation of cheapening production can cause a dimi- 
 nution in the sum total of the demand for labor. Every dimi- 
 nution which it may cause in one direction is compensated by 
 an increased demand in some other direction. 
 
 4l2. Effect of Improvements in Production %ipon Different 
 Classes. In the preceding discussion we have been principally 
 concerned with sums total as affecting the prosperity of men 
 in general, but we have not considered the effects of improve- 
 ments in production upon special classes. Our general conclu- 
 sion has been that, taking society at large, there has been a 
 general improvement in the ability of men to command the 
 necessaries and luxuries of life with a given amount of labor. 
 We have also shown that the demand for labor in general can- 
 not be said to vary from generation to generation, because it 
 adapts itself to the varying conditions which come into play 
 from time to time. When the flow of currency increases, the 
 demand for labor increases. Higher wages then can and will 
 be commanded ; but with these higher wages come higher 
 prices, so that if the conditions of production are unchanged, 
 the power on the part of the laborer to command the necessa- 
 ries of life is unchanged. When we measure demand, not by 
 money, but by commodities, then improvements in production 
 give rise to increased demand, which is met by wages becoming 
 higher when measured by the necessaries of life, though they 
 may not be higher in money. 
 
 Thus each class of men is affected by changes in production 
 in two ways — (1) by changes in its money wages, and (2) by 
 changes in the price of the sustenance which it consumes. 
 
 The question which now arises is this : From the fact that 
 the demand by the community at large for labor in general re- 
 mains unaltered through all variations in production, does it 
 follow that the benefit of these improvements extends to all 
 classes? Does it follow that the shoemakers just spoken of 
 
IV. 43.] EFFECT OF LABOR-SAVING IMPROVEMENTS. 391 
 
 can do what the savers of money want done? We reply that it 
 does not so follow by virtue of any general or necessary princi- 
 ple. To get the advantage of improvements in production the 
 laborer may have to accommodate himself to new conditions, 
 and if he cannot do this he may be as badly off as before, if 
 not worse. The question whether he can so accommodate him- 
 self is one of mere fact to be settled, not by deductive reason- 
 ing, but by an appeal to the history of economic phenomena, 
 and by an examination of the ways in which the laborer must 
 accommodate himself to the new conditions. What we can say 
 with certainty is that, the total demand for labor being unal- 
 tered, it follows that if there is a less demand for one kind of 
 labor, there will be a greater demand for some other kind, and 
 vice versa. Hence, if the laborers of any one class do not reap 
 any benefit, there is so much the greater benefit to be reaped 
 by those of some other class. This brings us to the main ques- 
 tion ; that is, the power of laborers to pass from one kind of 
 work to another. To consider this question intelligently the 
 reader must have clearly in mind the conditions of this trans- 
 fer of labor between competing and non-competing groups, as 
 already developed (II. 50). 
 
 43. Let us begin with the case of shoemakers. Suppose that 
 by means of machinery the amount of labor necessary to the 
 production of a pair of boots or shoes is suddenly reduced to 
 one half. If the community wear no more shoes than before, 
 then one half of the shoemakers must find some new employ- 
 ment. We have already shown that in such a case people who 
 wear boots and shoes will have the amount of money saved by 
 the improvement to spend for other commodities ; and if the 
 shoemakers who are thrown out of employment can make 
 these commodities, then they will command the same wages as 
 before, and will, in common with the rest of the communit}^, 
 reap the advantage of having cheaper shoes. But if they can 
 do absolutely nothing but make shoes, they would be com- 
 pelled to suffer distress. 
 
392 THE SOCIETART CIRCULATION. [IV. 43. 
 
 To see whether any such state of things is probable, we re- 
 call that the supposition we have made, namely, a sudden 
 reduction of one half in the cost of making shoes, is an extreme 
 one. As a general rule the improvement is gradual, and the 
 transfer of labor from shoemakin^ to other branches is brought 
 about, not by men changing their employment under compul- 
 sion, but by people who under the old system would have 
 learned to make shoes learning to do something else on the 
 new system. The distress therefore could arise in the way we 
 have pointed out only by a class of men being born who could 
 never learn to do anything but make shoes. As a matter of 
 fact no such men are ever born. There are a large number of 
 mechanical trades requiring the same order of natural skill as 
 making shoes, which men who would otherwise become shoe- 
 makers can readily learn. 
 
 The question then takes the form whether the members of 
 the community would spend the money saved in their shoes in 
 the demand for products requiring the same skill as shoemak- 
 ing. Let us for clearness suppose the community divided into 
 three classes, unskilled laborers, skilled laborers, and intellectual 
 laborers. Let us also suppose that every man who is born can 
 find a place in one of these classes, and in only one. We also 
 suppose that in each class he can learn to follow any pursuit 
 which he may select. Then if the community spends the 
 money saved on shoes in demanding products of unskilled la- 
 bor, the class of unskilled laborers will be the people most 
 benefited, because they will have higher wages and cheaper 
 shoes at the same time. The class of skilled laborers would 
 gain by having cheaper shoes, but lose by having lower wages. 
 We cannot say whether the advantage or disdvantage would be 
 the greater in this case. The demand for intellectual labor would 
 not be altered ; but the educated class also would gain by having 
 cheaper shoes. The general result would be that unskilled labor 
 would gain doubly ; intellectual labor would gain singly ; skilled 
 labor might either gain or lose. The average result to the com- 
 munity at large would be a gain equal to the saving on shoes. 
 
IV. 44.] EFFECT OF LABOR-SAVING IMPROVEMENTS. 393 
 
 If the money saved on shoes was expended in the products 
 of other skilled labor of the same order as shoemaking, then 
 the balance would be completely preserved, and all classes 
 would command the same wages as before, but would gain by 
 having cheaper shoes. Finally, if the increased demand was in 
 the direction of intellectual labor, the result would be of the 
 same general nature as when the demand was for unskilled la- 
 bor. Intellectual laborers would gain doubly by having higher 
 wages and getting cheaper shoes; unskilled laborers would 
 gain singly by having cheaper shoes with the same wages; 
 while the class of skilled laborers would gain in one direction 
 and lose in another. 
 
 44. The question whether all classes are equally benefited 
 therefore turns upon whether, when machinery, knowledge, 
 and methods of production are improved, the general order 
 of skill required in production is increased or diminished. 
 This, I say, is the form which the historical question takes. It 
 is one to be answered by a comprehensive examination of the 
 requirements of modern machinery and labor. The result 
 would probably be that a lower order of some qualities and a 
 higher order of others is required. It is probable that less 
 natural skill of a rare kind is required when goods are made 
 by machinery. So far as this is true, the introduction of 
 machinery is doubly beneficial to the day-laborer by securing 
 him a higher order of employment and cheaper necessaries of 
 life at the same time. It is also true that the management of 
 the machine may require moral characteristics — industry, sobri- 
 ety, steadiness, honesty, and reliability — of a higher degree than 
 ordinary irresponsible labor. If so, the laborer who does not 
 possess these qualities would again be at a relative disadvantage 
 in consequence of improvements in production. That is to 
 say, he would lose by lower wages and gain by cheaper pro- 
 ducts, and the loss might exceed the gain. We may lay it 
 down as a general rule that the idle, dissipated, and unreliable 
 classes will be in about the same low state, no matter how 
 
394 THE SOCIETARY CIRCULATION, [IV. 45. 
 
 far society advances. Even philanthropists could do nothing 
 for them, unless it could do away with them in the future by 
 preventing them from being born ; and perhaps there is no 
 effective way of doing this unless by extermination. 
 
 45. There is yet another way of looking at the subject 
 which will lead us to similar general conclusions. The way in 
 which improvements really benefit society is by increasing the 
 quantity and quality of the commodities necessary to existence, 
 health, comfort, and happiness. But when we consider the 
 relations of special classes of men we find that different classes 
 consume different commodities. Improvement in the produc- 
 tion of silk dresses, linen shirts, white neckties, gold watches, 
 and fine houses are of no benefit to the class of unskilled 
 laborers, who cannot command or do not want any of these 
 commodities, even when they are cheapest. What is neces- 
 sary to the amelioration of this class is improvement in 
 the production of corn, pork, coarse cloth, flannel, and cheap 
 houses. "We may then inquire whether the production of this 
 last class of commodities has improved as much as that of the 
 other and higher classes. If so, then all classes will be bene- 
 fited in -the same proportion. If the improvement in produc- 
 ing the necessaries of life exceeds that in producing the luxu- 
 ries, the laboring classes will have been the greatest gainers. 
 In the contrary case the higher classes will have been the gain- 
 ers. This, again, leads us to considerations of fact which the 
 reader can advantageously enter upon for himself. 
 
 There is, however, one defect in his conclusions to be guard- 
 eda gainst. If we inquire into the effect of improvements 
 in production upon human progress, we should make a great 
 mistake if we did nothing more than compare class with class 
 in the way we have followed in the preceding examples. One 
 of the great fallacies which pervade popular economic reason- 
 ing arises from failing to distinguish between small classes and 
 large ones. We hold up for public sympathy a few individual 
 sufferers whom we suppose to have suffered in consequence 
 
IV. 45.] EFFECT OF LABOR-SAVING IMPROVEMENTS. 395 
 
 of the advance of society, and we ask society at large to stop 
 its progress for the benefit of the unfortunate class supposed 
 to be represented by these sufferers, without calculating the 
 number of this class. "We must admit that, as men are consti- 
 tuted, they will be moved more strongly to action by individ- 
 ual cases which chance to be presented to them than by 
 considerations of the good of a large class which they do 
 not see. They forget, or will not comprehend, that the inter- 
 ests of millions are more important than the interests of thou- 
 sands represented by some particular petitioner or sufferer 
 whose case has excited their sympathies. This leads us to see 
 that in considering the subject from a philanthropic point of 
 view, the beneficent effect of improvements in production con- 
 sists in this, that whole classes of men are enabled to enjoy 
 more of the luxuries of life. Fifty years ago the majority 
 of the inhabitants of this country slept on straw beds ; now 
 every inhabitant who wants to can command as good a bed as 
 the richest man in the country, so far asrits substantial qualities 
 are concerned. We now see in the cottages of every class of 
 laborers little comforts which fifty years ago could be com- 
 manded only by the wealthy. In a word, the number of those 
 who can enjoy the substantial comforts of life is continually 
 increasing through improvements in production, no matter 
 what doubt may be entertained as to the status of the low- 
 est classes of humanity. 
 
 It appears that the general effect of the improvements in 
 question is to leave the two extreme classes, the wealthy and 
 the worthless, comparatively unchanged. The former can com- 
 mand all they want whether improvements go on or not. They 
 do indeed gain by the discovery of new means of enjoyment, 
 but this is not a merely economic effect, being due to improve- 
 ments in knowledge, taste, and morals. The worthless class will 
 always be what it is now, no matter what society tries to do for 
 it. But all classes between these extremes are constantly ad- 
 vancing, and the luxuries of life are becoming accessible to a 
 continually increasing proportion of the population. 
 
396 THE SOCIETABY CIRCULATION. [IV. 46. 
 
 CHAPTER IX. 
 
 THE FUNCTIONS OF THE CAPITALIST. 
 
 46. Theee remains to be considered the effect of investing 
 money in the increase of capital. In the popular mind, one 
 who invests his money is supposed not to expend it. Hence it 
 might be supposed that the effect of the investment of money 
 would be that described in Chapter TIL, through the money 
 being withdrawn from circulation. But we now know this 
 opinion to be erroneous. Investing money consists in transfer- 
 ring its ownership to some other person, and receiving in return 
 a right of property in capital of some kind. This will be already 
 clear to the student who has carefully studied the chapter on 
 capital in the second book. The person investing is simply a 
 purchaser of bonds, stocks, or material capital ; and if he buys 
 bonds or stocks, he becomes the owner of certain rights in some 
 form of material capital. 
 
 Although there may be many transfers of the money thus 
 invested before it finally reaches the hands of laborers, yet it 
 will as a rule ultimately reach them. Suppose, for example, 
 that a person A loans a sum of money x to a friend. Then the 
 friend has x dollars more and A has x dollars less than before, 
 so that the sum total of their power to employ labor remains 
 unchanged. Let the friend purchase bonds from a banker 
 with the money. Then the power of employing x dollars' 
 worth of labor passes to the banker. The money serves the 
 banker no useful purpose until he passes it to some one else, 
 perhaps a customer. Every one into whose hands it falls must 
 be paying or losing interest on it while he keeps it, and he can- 
 not gain the interest until he purchases an ownership in some 
 form of actual capital. 
 
 As a general rule it will not pass through many hands until 
 
IV. 47.] THE FUNCTIONS OF TIIE CAPITALIST. 397 
 
 it is employed in hiring laborers to build a Louse or factory, 
 or to do some other kind of work necessary to the increase of 
 capital. Hence, so far as the employment of labor is concerned, 
 expenditure by investment gives the same kind of employ- 
 ment as any other kind of expenditure, and thus forms no 
 exception to the rule laid down. But if we consider the 
 ulterior effects of this mode of expenditure as compared with 
 that of purchasing commodities for one's own consumption, we 
 shall find that, although the immediate effect is the same, the 
 ultimate effect upon the prosperity of society is very different. 
 The effects may in fact be divided into primary and secondary. 
 The primary effect is that already pointed out in showing that 
 the expenditure does not increase or diminish the sum total of 
 the demand for labor, but only determines into which one of a 
 great number of possible directions the labor shall be directed. 
 The secondary effect is to increase and cheapen the production 
 of sustenance, and thus to diminish its cost to the community 
 and to laborers in general. This secondary effect is produced 
 in go indirect a manner that we must view the process through 
 which it arises from different points of view. 
 
 47. We begin with an example of a special case which will 
 illustrate the theory. Let us suppose that a person, by living in 
 the most economical manner possible, could save $3000 per an- 
 num out of his income. He then has his choice of two modes of 
 proceeding : 
 
 Firstly, not desiring to live so frugally, lie spends his whole 
 income in sustenance for himself. That is instead of living 
 frugally, he demands fine furniture and carpets for his house, 
 books for his library, pictures, jewelry, extra fine clothing, 
 horses and carriages for himself, to the total amount of $3000 
 per annum. 
 
 Secondly, he may abstain from the enjoyment of these lux- 
 uries and expend the income thus saved in building houses for 
 rent. 
 
 In changing from the former mode of expenditure to the 
 
398 THE SOCIETARY CIRCULATION. [IV. 47. 
 
 latter he will, as already shown, be diverting a certain amount 
 of the producing power of the country from the work of 
 producing furniture, books, clothing, horses and carriages for 
 him to the work of building houses for him. So far the 
 account is balanced, and the change is neither better nor worse 
 for society at large. It is the same if, after each house is built, 
 he occupies it with his own family, or uses it in any way for 
 his own exclusive benefit. The only change is that society is 
 supplying him with houses for his own use instead of supplying 
 him with the luxuries already described. 
 
 But suppose that after each house is built he regards it as an 
 investment of capital and offers it for rent. Then the condi- 
 tions are altered. Society at large, or the particular class of 
 society which can afford to live in the kind of a house he lias 
 built, will have a larger supply of houses at its disposal. The 
 tenants will each be in the enjoyment of a house wkich they 
 could not afford to build. Leaving out of account the rent they 
 pay, the state of things is the same as if the saver had vol- 
 untarily abstained from luxuries in order that these tenants 
 might have houses. 
 
 Since, however, the tenants pay rent at the highest market 
 rate, the question may arise whether this rent is not in every 
 way an equivalent for the benefit rendered by the house, so 
 that after all society at large is no better off on account of the 
 second mode of expenditure. The reply should be in the 
 negative. Society is better off because of the additional supply 
 of houses and the consequent lowering of rents. Although the 
 market value of the services rendered and received balance each 
 other, yet the total utilities do not balance. Each tenant enjoys 
 a complete house without having had to save anything to' build 
 it. Could they have had no house until they had built them 
 themselves, they would have been obliged to go for several 
 years almost without shelter. 
 
 Suppose that the man, being of a penurious disposition, 
 expends all the rent he receives from his house in building 
 still more houses. It is clear that so long as that process con- 
 
IV. 48.] THE FUNCTIONS OF THE CAPITALIST. 399 
 
 tinues the advantage to the tenants continually increases. 
 They all have to pay rent, but that rent is expended in build- 
 ing new houses for more tenants ; and so long as the owner 
 himself abstains from any enjoyment of the income, so long do 
 tenants get the entire benefit both of the houses and of the 
 rents. 
 
 Let us inquire more closely into the exact nature of the 
 benefit which this investor in houses has conferred. It is 
 plain that, whatever the number of houses he has built by his 
 saving, that additional number have the tenants of the country 
 to live in. The supply being thus enlarged, it is to be ex- 
 pected that the rents will be lower in about the same propor- 
 tion, so that the entire body of tenants get more houses for 
 the same sum total of rent. That is, the competition of land- 
 lords lowers rents just as an increased supply of a commodity 
 lowers its price. 
 
 But there is one essential difference between this com- 
 petition and that in the manufacture and sale of commodities. 
 In the latter case there is a certain net cost of production 
 below which no amount of competition can permanently de- 
 press the price. But what the tenant pays rent for is only the 
 use of the house, not its ownership, and the owner makes this 
 use available to him through abstinence, which does not cost 
 money at all. Now, there is no necessary limit to the possible 
 practice of abstinence, and so no necessary limit to a possible 
 fall of house-rents through the competition of capitalists. 
 
 48. To consider the subject in a more general way, let us 
 suppose that nobody saved any money for investment, but that 
 every person in the community expended his entire income in 
 providing for the immediate wants of himself and his family. 
 Then there could be no increase in the capital of the coun- 
 try. For example, no railway can be built unless certain per- 
 sons feed the laborers who are engaged in building it ; and in 
 order to do this it is absolutely necessary that some one should 
 have saved up money or sustenance which he does not want 
 
400 THE SOCIETABT CIRCULATION. [IV. 48. 
 
 himself. This would not cause any positive loss in a commu- 
 nity which did not increase in population, and which was con- 
 tent to remain stationary in its consumption of commodities. 
 That is to say, if all the railways, farms, factories, fences, and 
 other forms of capital, and the whole supply of raw material 
 employed in production, are kept up to their present standard, 
 while population remains the same, the wants of the stationary 
 population will continue to be supplied as well as ever, but no 
 better. 
 
 If, however, the owner of a railway should allow the rails to 
 rust out without having saved the funds to replace them, and if 
 the same thing should happen to the other fixed capital of the 
 country, there would be a positive diminution of capital with- 
 out, apparently, any one ceasing to live on his income. But this 
 would amount to the same thing as expending not only one's 
 current income, but also the capital he had before accumulated. 
 In order to keep up his capital the owner must save enough 
 from his income to make good its wear and tear. If he does 
 this and nothing more, he will still be expending his entire 
 income. 
 
 Suppose that under these circumstances population increases. 
 Without any new railways, factories, fences, and farms there 
 can be no increase in the production of commodities ; or, at 
 least, the increase will not be proportional to that of the labor 
 which would now be available. The result would be a general 
 scarcity and higher prices. Men would be compelled to seek 
 out new farms; but since, by hypothesis, no one has any 
 money to loan them, they must supply their own wants as best 
 they can while cultivating the farms. Since no new railways 
 are built, the farther they go from the railways the farther 
 they will have to haul their produce to market. Since no more 
 clothing can be made, every one would have to go with a con- 
 tinually diminishing amount of clothes. The result would be 
 scarcity, distress, and perhaps famine, continually increasing 
 from year to year. 
 
 Of course the same result would happen yet more rapidly if 
 
IV. 49.] THE FUNCTIONS OF THE CAPITALIST. 401 
 
 the owners of capital not only failed to add to their savings, 
 but suffered the capital which they already possessed to go to 
 decay. After the rails are rusted out no more freight can be 
 drawn over the road ; after the machinery is worn out no more 
 goods can be made until it is replaced. 
 
 Now, the fact is that a large majority of persons in every 
 community do act in precisely this way. They do not save 
 any part of their income to be invested in capital. In fact, our 
 typical idea of a laborer is that of one who has never saved 
 anything from his earnings, while by a capitalist we mean a 
 man who has saved money from his income and employed it in 
 hiring laborers to improve the capital of the country. A large 
 majority of laborers, even if they were placed in possession of 
 capital, would probably employ it in satisfying their current 
 wants. Hence if there were no capitalists there would be a 
 continual increase of misery, want, and starvation which would 
 go on unceasingly with the increase of population. 
 
 49. The same thing may be seen in another light from the 
 communistic point of view (Part II., Chapter IX.). Referring 
 to the conception of a national reservoir of wealth, it is evi- 
 dent that the less sustenance any one draws from this reservoir 
 the more will be left for others. Now, a non-capitalist is a per- 
 son who withdraws from the reservoir in the form of suste- 
 nance everything to which his services entitle him ; that is, his 
 whole income. The capitalist is one who does not withdraw 
 all this sustenance. He leaves in the reservoir that portion of 
 his share to which his investment would entitle him, and, in- 
 stead of taking the sustenance, becomes the owner of capital 
 designed to increase the production of sustenance. Let us call 
 A that part of his income which the capitalist expends for 
 sustenance, and B that part which he invests in capital, say 
 railway stock and machinery. 
 
 If he consumed this railway and machinery to supply his 
 own wants, then, so far as the interests of society are con- 
 cerned, he might as well have taken the portion B in suste- 
 26 
 
402 THE SOCIETABY CIRCULATION. [IV. 49. 
 
 nance at once. But lie cannot consume any considerable part 
 of his railways, machinery, or other form of capital in the sup- 
 ply of his own needs. The palace-car in which a railway pres- 
 ident sometimes travels is indeed a product of the capital of 
 the railway consumed as sustenance. But it is a very small 
 fraction of the earnings of the road. The great function of 
 the road is to produce sustenance and bring it to the reservoir 
 for use by the public. 
 
 But the reader must guard against a misunderstanding. We 
 have apparently shown that the capitalist not only leaves his 
 share of sustenance for others to consume, but also the whole 
 product of his capital. But this would be a misinterpretation. 
 It is true that if we suppose the sustenance which he declines 
 to take to have been previously brought into the reservoir, this 
 would be true so far as that particular fund of sustenance is 
 concerned. But he cannot get his capital without employing 
 labor to produce it. So he says to the laborer, " Instead of 
 producing sustenance for me to consume, produce capital for 
 me to use in further production." Hence, in the very act of 
 refusing his sustenance, he withdraws a corresponding amount 
 of labor from the production of sustenance and devotes it to the 
 production of railways, mills, or other forms of capital. Less 
 sustenance and more capital is produced. But do not forget 
 that this diminution of sustenance does not come out of the 
 share of others, but is only the capitalist's own share which he 
 has refused to order. 
 
 As already shown, he cannot get any use of his capital except 
 by making sustenance with it. Moreover, if his investment is 
 a profitable one, the amount of sustenance thus made must be 
 greater than that which he refused to consume. Since capital 
 is really a labor-saving contrivance, we must expect that this 
 will always be the case except when bad investments are made. 
 
 The question may now be asked, Since all this extra suste- 
 nance which he receives as profit belongs to him, in what way 
 is society benefited ? The reply is this : By hypothesis, it is 
 sustenance which, although he owns, he does not himself want 
 
IV. 50.] THE FUNCTIONS OF TEE CAPITALIST. 403 
 
 to consume. If lie had wanted to consume it, lie would have 
 consumed it in the first place and never purchased his capital at 
 all. Since, then, he necessarily offers this increased supply of 
 sustenance in the public markets for sale, the result is a fall in 
 the price of sustenance generally, arising from a more plenti- 
 ful supply at the command of the community. Thus we reach 
 the very same result that we did by the former reasoning in 
 the case of houses, the enjoyment of houses being equivalent 
 to the consumption of sustenance. 
 
 Let us observe, in illustration of all this, the actual process as 
 we see it going on. A barrel of flour can now be transported 
 from Chicago to New York for about fifty cents. Thus at an 
 insignificant cost the whole population of ISTew York can draw 
 their food from the Western prairies. This would have been 
 impossible unless railways had been built. The railways would 
 never have been built if the Yanderbilts and other wealthy 
 men had not saved up their income and employed it in build- 
 ing railways. 
 
 50. A clear understanding of this intricate subject is so 
 important to one desiring a complete command of it that we 
 shall go over it in yet another way. From what has been said 
 in the preceding chapters it will be seen that the monetary 
 flow to a person whom we call an agent is divisible into two 
 portions, the one income, over the expenditure of which he 
 has complete command, and the other business expenses, over 
 which although formally he may have equal command, yet, 
 practically, which he is obliged to expend in the ways deter- 
 mined by the condition of his business. With this latter 
 portion we have at present nothing to do, being concerned 
 only with his expenditure of income. 
 
 In relation to his income we may regard him either as pro- 
 ducer or consumer. As a producer his income is the money 
 value of his contributions to the wants of others. These contri- 
 butions may be in the form either of capital or of sustenance, 
 but they are determined immediately by the demands of 
 
404 THE SOCIETART CIRCULATION. [IV. 50. 
 
 others for his products, coupled, of course, with his own 
 talents. In other words, if he made shoes rather than clothes, 
 it was not because he thought shoes a better thing to make 
 than clothes, but because he found, or thought he would find, 
 people wanting shoes rather than clothes. In whatever branch 
 of business activity he engaged, we may assume that he 
 chose it on account of the wishes of others rather than of him- 
 self. Hence he is not to be considered responsible for the 
 direction of his producing activities. 
 
 But when we consider him as a consumer of commodities 
 or expender of income the case is reversed. He holds in his 
 hands the power of directing an amount of industry represented 
 by his income. He thus becomes a power determining what 
 he shall demand from society ; and the question which arises 
 is whether society has any more interest in his demanding 
 one thing than another (cf. Chapter VI.). 
 
 From what has been said it will be seen that there are two 
 ways of making this demand. The agent may either purchase 
 something already made, or he may hire laborers to make it. 
 But it has already been shown that these two methods lead 
 substantially to the same result. It is true that in the first case 
 he does not immediately direct any industry at all, since all 
 he does is to purchase from some seller, X, a commodity, C, 
 already made. But in the very act of paying for C he places 
 in X's hands both the power and the disposition to reproduce 
 C in the future by re-employing labor if necessary. Hence, 
 whether he purchases or employs a laborer to make C, he 
 directs a certain amount of labor to that production in the very* 
 act of expending his income. 
 
 The only question which we have left is whether the com- 
 modity C which the agent demands is sustenance for himself 
 or capital. The capital may be sustenance for sale to some 
 one else. If he demands sustenance for himself, then his ac- 
 count with society is balanced ; he simply consumes the equiv- 
 alent of his income, that is, of his contributions to the suste- 
 nance or capital of others. But if he demands any form of 
 
IV. 51.] THE FUNCTIONS OF TEE CAPITALIST. 405 
 
 fixed capital, then, until that capital produces something for 
 some one else to enjoy, society at large is in exactly the same 
 condition as if he had demanded sustenance for himself. The 
 changed condition of things arises when that capital begins to 
 produce sustenance which is offered for sale. If we suppose 
 the agent's demand for capital to have included everything 
 necessary to make the capital effective, which of course we 
 must do, then it would have comprised not only fixed capital, 
 but raw material to be manufactured, and sustenance for the 
 laborers employed in the manufacture. To make the matter 
 clear, we may divide his investment into three parts : 
 
 F, that part expended in fixed capital ; 
 
 C, that part expended in raw material for manufacture ; 
 
 W, that part expended in the payment of wages. 
 
 Each of these items represents a fund of labor which he 
 could have required to be devoted to sustenance for him- 
 self. 
 
 The portion "W represents that portion of the fund of suste- 
 nance which he owns and commands, but the right to which 
 he delivers over to the laborers in exchange for other work. 
 Thus the laborers enjoy a certain amount "W of sustenance 
 which would otherwise have been consumed by the agent. 
 
 The machinery now goes to work ; the raw material is manu- 
 factured into some finished product, sustenance or capital, 
 and the result is that an increased product is for sale to society, 
 thus resulting in competition and a reduction of prices. 
 
 51. Let us now consider whether the laborer, that is, the 
 non-capitalist, really has, through the saving of the capitalist, 
 an opportunity to consume a greater value than he produces. 
 Taking the case just as it stands, our answer must be in the 
 negative. Suppose the capitalist to have allowed the tenant 
 to live in his house for a whole year free of rent, except such 
 amount as might be necessary to keep the house in its original 
 condition. Then when the tenant restored the house to the 
 owner at the end of the year, it would be in the same condi- 
 
406 THE SOCIETARY CIRCULATION. [IV. 51. 
 
 tion as when he took it. He would therefore have consumed 
 nothing more than he reproduced by keeping up the repairs. 
 Hence whatever portion of the rent he pays as interest on the 
 capital invested is over and above his actual consumption of 
 the house. It might therefore seem that he gets no equiva- 
 lent for that portion of the rent which he pays for interest on 
 capital. 
 
 This is the same stumbling-block that we have already de- 
 scribed in the chapter on the rate of interest (Book II., § 72). 
 It is very evident that the capitalist has given him during the 
 whole year the use and shelter of a house which would never 
 have existed but for the capitalist's savings. Now, it is this 
 use which measures the benefit conferred, and not the consump- 
 tion of the house. Perhaps in thirty years the tenant could 
 have saved money enough to build the house himself, but he 
 must have the house now ; and the benefit rendered consists 
 in the capitalist letting him have now what, by his own ex- 
 ertions, he would not have had for thirty years. But it still fol- 
 lows that he must, at the end of his tenancy, return the house 
 in as good order as when he got it, besides paying interest on 
 the capital invested in it. 
 
 Beturning, then, to our original question, we find it to be 
 really true that the capitalist does not allow the laborer to con- 
 sume more than he produces. But we must remember that 
 he produces more than he would have produced without 
 capital. Capital, skill, and organization are the great labor- 
 saving agents. The more they improve the more productive 
 labor becomes. Now, the laws of supply and demand permit* 
 the laborer to command his full share of this improvement 
 although it was effected by the mental powers of a much 
 higher class of men. 
 
EXERCISES. 407 
 
 EXERCISES. 
 
 1. When Mr. George Peabody made his great gift for the benefit of the 
 London poor, he directed that it should be expended in building houses for 
 them and renting these houses to them at a moderate rental. The income 
 thus gained was to be continually expended in building additional houses 
 for other poor. 
 
 1. By this arrangement did the benefactor confer as great a benefit upon 
 the poor as if he had directed that the houses should be occupied free of 
 rent? 
 
 II. In what respect did his action differ in its effect from that of a mi- 
 serly capitalist who invested his whole surplus income? 
 
 2. Explain the function of capital and the reason for interest from the 
 point of view taken in III. 78, and show that great numbers of people are 
 now in the enjoyment of the past labor of other people. 
 
 3. From the same point of view, show by examples drawn from indus- 
 trial works that the man who would make improvements in future pro- 
 duction on a large scale is obliged to help others in order that he may 
 attain that end. 
 
 4. Of two young men, the one spent all his income in expensive clothing 
 and in giving entertainments to his friends, in order to encourage trade, 
 while the other invested his income in railway bonds. Compare the eco- 
 nomic effects. 
 
 5. Give examples additional to those in the text of the effect upon 
 society of a general decay of the desire to accumulate wealth on the part 
 of capitalists. If none of , the next generation of men should try to get 
 more than one hundred dollars ahead of their current expenditure, what 
 would be the result? 
 
 6. Is it better for the typical laborer who is never going to save any- 
 thing that the capital of the country should be mostly concentrated in the 
 hands of a few persons, each possessing an immense fortune, or that it 
 should be divided with an approach to equality among a great number 
 of small capitalists? Consider especially the case of the New York Cen- 
 tral and other great railways of the country. [We here suppose society 
 divided into two classes, a laboring class L, and a capitalist class C, own- 
 ing a definite quantity P of capital. We want to know whether it is better 
 for L that the capital P should be distributed equally among C or concen- 
 trated in a few hands.] 
 
408 THE SOCIETART CIRCULATION. [IV. 53. 
 
 CHAPTER X. 
 
 THE RELATION OF CAPITAL TO LABOE. 
 
 52. As society is constituted, employment can be given to 
 labor only by and through the instrumentality of capital. That 
 is to say, no person can employ labor unless he has money saved 
 up which he does not want for his own immediate use, with 
 which to pay the laborers their wages. These wages would be 
 of no use to the laborer unless there were sustenance in the 
 market for him to buy with his wages. This sustenance must 
 be such as the owner does not want for his own immediate sup- 
 port, else he could not afford to sell it. It is sustenance, as 
 already shown several times, which constitutes the only real 
 wages, and in paying the laborer money the employer only sup- 
 plies him with the means of obtaining the sustenance. We 
 might therefore simplify the problem by considering the em- 
 ployer as the owner of the sustenance which he gives the la- 
 borer in exchange for his work, were it not for a liability to be 
 misunderstood. 
 
 The laborer must also have tools and machinery to work with. 
 Tools and machinery are forms of capital, and must be supplied 
 by a capitalist. If, as may well happen, the laborer owns his 
 own tools, he is himself to that extent a capitalist. 
 
 A third form of the capital necessary to the employment of 
 labor is the raw material on which the laborer must perform 
 the act of production. In agriculture the raw material com- 
 prises manure and seed. In the cotton-mill it is cotton ; in a 
 clothing-factory it is cloth. 
 
 Fixed capital in the form of tools and machinery, circulating 
 capital in the form of sustenance, and circulating capital in the 
 form of raw material may therefore be regarded as immediate 
 necessities to the employment of labor. But it does not at all 
 
IV. 53.] THE RELATION OF CAPITAL TO LABOR. 409 
 
 follow from this that there is any mathematical relation between 
 the value of the capital and the amount of employment it gives 
 to labor. In digging up a street, all the fixed capital necessary 
 to the employment of a digger may be a pick and spade, each 
 worth fifty cents. In a great cotton-factory capital to the value 
 of hundreds of dollars may be necessary for each operative. We 
 must therefore seek for some other mathematical measure of 
 capital than the value of the accumulated fund, if we are to 
 discover a mathematical relation between capital and the labor 
 it can employ. To do this we must refer to the distinction 
 already pointed out between capital as a fund and the flow of 
 capital. 
 
 53. Let us inquire what constitutes the funded capital of a 
 cotton-factory. We readily see that the owners of the factory, 
 in establishing it and putting it into successful operation, had to 
 invest their capital in the following way : 
 
 Firstly, they had to erect the necessary buildings and place in 
 them the necessary machinery. Secondly, they had to supply 
 themselves with a sufficient quantity of raw material to keep 
 the operatives employed until they begin to receive returns 
 from the sale of the goods. In order that they may incur no 
 danger of the factory having to stop for the want of material, 
 it is necessary always to have a considerable supply on hand. 
 Thirdly, it was necessary to have a sufficient accumulation of 
 money to pay the wages of the operatives until the owners be- 
 gin to be reimbursed from the sales of the product. 
 
 If we take an inventory of the invested capital at any state 
 of its progress, we shall find that, in addition to the forms enu- 
 merated, there is a greater or less supply of the finished products 
 on hand waiting to be sold, and a certain amount of debts due 
 from parties to whom sales have been made. It often happens 
 that payment is not expected for three or six months after the 
 delivery of the goods. When this is the case the owners of the 
 factory must have a supply of raw material and finished goods 
 sufficient to keep the factory going during the whole period 
 
410 THE SOGIETARY CIRCULATION. [IV. 53. 
 
 that any particular portion of the material is undergoing the 
 process of manufacture, and for three or six months longer. 
 Thus at any time we shall find the capital to consist of build- 
 ings, machinery, stores of raw material, material undergoing 
 the process of manufacture, stores of finished products waiting 
 the market, money in bank to pay operatives, and debts due 
 the company. Subtracting from these the debts due from the 
 company, we shall have the value of the fund of capital. 
 
 In the average normal case this accumulated fund varies very 
 slowly, although the principal items which make it up may 
 vary greatly, one diminishing while the other increases. The 
 sum total will represent the abstinence of the owners which has 
 given rise to the factory. It is the fund on which they expect 
 to gain a profit to compensate for this abstinence. 
 
 But we cannot, merely from the knowledge of how many 
 dollars are thus invested, conclude what number of laborers 
 the factory can give employment to. This depends upon the 
 rate at which the capital is being transformed. We are to con- 
 sider the capital as in a constant state of flow, material flow- 
 ing in at one end, passing along through the factory, and flow- 
 ing out at the other end. A smaller but much slower flow is 
 going on in the fixed capital, the machinery being worn out 
 and constantly needing labor to replace it. As a part of the 
 same process we must consider the flow of wages to the oper- 
 atives. As already pointed out, this flow may be considered as 
 coming from the owners of the capital. Thus we may count 
 up in all three flows of capital to the factory: the raw material 
 to be transformed, the sustenance for the operatives and man- 
 agers to consume, and the labor applied to the continual reno- 
 vation of the buildings and machinery. From the factory we 
 have the one flow of finished products which goes to society at 
 large. The return flow of money, received in exchange for the 
 finished products, branches off in the three directions through 
 which labor and material come to the factory ; that is, one flow 
 of the money goes to the operatives, another to the suppliers 
 and repairers of buildings and machinery, and a third to the 
 
IV. 54.] THE RELATION OF CAPITAL TO LABOR. 4H 
 
 producers of raw material. Besides these we have a fourth flow 
 to the owners of the factory. Considering these owners purely 
 as capitalists, this last flow is their compensation for abstaining 
 from the enjoyment of the capital invested in the factory. In 
 so far as they are managers it is their compensation for the skill 
 and labor which they have expended in the management. 
 
 54. We now see that the efficiency of the factory as a means 
 of employing labor depends, not upon the amount of the accu- 
 mulation, but upon that of the flow, especially of the flow to the 
 operatives. In other words, the efficiency depends upon the 
 value per annum which the factory can add to the flow of the 
 raw material passing through it. This, again, is little more than 
 the very obvious and childish-looking proposition that the fac- 
 tory can employ just as many laborers as it can profitably keep 
 at work. 
 
 We have now to inquire what is the test that the laborers 
 are profitably at work. The answer is that the value of the 
 product turned out from the factory, considered as sustenance, 
 must exceed the value of the material and labor devoted to the 
 work of production. To take the simplest conceivable case : 
 if a laborer, requiring no capital whatever, consumes one dol- 
 lar's worth of food per day, and only turns out a product worth 
 fifty cents a day, his labor is unprofitable. Such labor can- 
 not be kept up permanently. If he uses one dollar's worth of 
 raw material daily, then, in order that his work may be profit- 
 able when he consumes at the same rate, the product of his 
 day's labor must be worth more than the two dollars expended 
 in production. 
 
 Taking the largest view of the case, the profitableness of 
 the factory is measured by its capability of paying dividends 
 to its owners. If no profit is made, then the value of what 
 the factory consumes must be equal to or greater than that 
 of the product turned out, and the establishment must be 
 unprofitable not only to its owners, but to society at large. 
 
412 THE SOCIETARY CIRCULATION. [IV. 55. 
 
 55. There are two possible ways of measuring the benefit 
 of such capital as a factory to laborers, namely : 
 
 Fallaciously, by the employment it gives to laborers. 
 
 Correctly, by the sustenance it produces for laborers. 
 
 Measured in the first way, the laborers are considered as con- 
 sumers, and the sustenance which they consume is supposed to 
 be due to the capital invested in the factory. But it must never 
 be forgotten that this sustenance would never have been avail- 
 able if some one else than the laborers had not saved it, and 
 that it was this saving, and not the existence of the factory, 
 which made it available. We must therefore regard this 
 popular measure of the benefit of the factory as entirely falla- 
 cious. We should rather regard it as the measure of what 
 the factory costs society at large, because labor is the produc- 
 ing power of society, and is limited in supply, and the work 
 of the factory may be said to consume a portion of this supply. 
 
 The true measure of the value of the factory is not the 
 consuming power of the laborers, but the producing power of 
 their work, or rather, as just shown, the excess of the sus- 
 tenance produced over that consumed. 
 
 The important question now arises : Let the factory produce 
 a form of sustenance which the lower orders of laborers do 
 not want, gold watches for example. Then, since the sus- 
 tenance consumed is the food and clothing of the operatives, 
 the work of the factory results in a positive diminution of food 
 and clothing. Is its effect, then, not positively injurious to 
 the poorer classes? 
 
 We reply, Yes, if we make abstraction of every agency ex- 
 cept this particular factory. But, as already shown, the work 
 of all the factories of a country is divided up in proportion to 
 the demand for their several products. We may be sure, 
 therefore, that for every watch-factory at work for the wealthy 
 there will be a corresponding number of other factories pro- 
 ducing coarse or fine food and clothing in proportion to the 
 sustenance demanded by the various classes of society. 
 
IV. 56.] LAWS OF A HETEROGENEOUS CURRENCY. 413 
 
 CHAPTER XL 
 
 LAWS OF A HETEROGENEOUS CUEEENCY. 
 
 56. In our consideration of monetary operations we have 
 hitherto not taken account of any distinction between the effects 
 of the various kinds of currency which may be in circulation. 
 We have supposed that every dollar which a man received was 
 paid out by him as soon as he could satisfactorily spend it, and 
 that lie spent it in the same way whether it was a gold, silver, 
 paper, or credit dollar. But there are certain cases in which 
 these different kinds of dollars will not always be used in the 
 same way, and will therefore not have the same economic 
 effect. 
 
 Let us suppose that, in a country using gold only as money, 
 the currency is expanded by the addition of irredeemable paper 
 money. The first effect of this addition to the currency will 
 be a general increase in the demand for goods. This demand 
 will produce an increased activity in trade, to be followed by a 
 general rise in prices. Since this rise of price is confined to 
 the country in question, its citizens will be led to purchase 
 goods abroad, and thus to export gold. It will also lead them 
 to invest more money in watches, jewelry, picture-frames, and 
 other things made of gold. The result will be a diminution in 
 the quantity of gold in circulation. The equilibrium will be 
 reached when the gold eliminated from the circulation is equal 
 to the paper money which has been added. The scale of prices 
 will then be the same as before, and the only effect of the change 
 will be that paper has displaced a certain quantity of gold in 
 the circulation, in the same way that a stone placed in a vase 
 full of water will displace a volume of water equal to its own 
 bulk. 
 
 Another similar addition to the currency will be followed 
 
414 THE SOCIETART CIRCULATION. [IV. 57. 
 
 in the same way by a disappearance of another portion of gold ; 
 and if the increase be continued, the final result will be that 
 all the gold will disappear from circulation. Besides being ex- 
 ported and melted into jewelry, it will be hoarded up by indi- 
 viduals and banks according to a law now to be developed. 
 
 57. Gresham's Law. This law is : A cheaper or depre- 
 ciated currency always tends to displace a more valuable one. 
 
 At first sight this statement may seem to contravene one of 
 the admitted principles of economics by implying that the 
 worse article is preferred to the better one. But it is really in 
 strict accord with fundamental principles. For the special pur- 
 pose of making an exchange bad money may answer as well as 
 good money. Now, we always prefer for any purpose the 
 cheapest article which will answer that purpose, unless some 
 evil to the person using it attends its use. For example, we 
 do not make our axes out of gold or silver, but prefer the 
 cheapest metal, namely, steel, which will answer the purpose. 
 If there were a community which had to make silver axes be- 
 cause it had no steel, we should find that when that community 
 began to trade with the rest of the world, the silver axes would 
 entirely disappear and be replaced by iron or steel ones. The 
 case is exactly the same when gold is replaced by paper. As 
 silver can be put to other uses than making axes, so gold has 
 other uses than that of serving as money. 
 
 For a similar reason a slightly depreciated paper currency 
 also tends to displace any other paper currency which is at par 
 with gold, always provided that the depreciated paper is ac- 
 cepted in trade. The rule is that it will be so accepted within 
 certain limits. If a bank-note in New York is worth 98 cents 
 on the dollar, a retail dealer would rather accept it and pocket 
 the loss than lose his bargain or run the risk of offending; his 
 customer. Then, since the latter can only get 98 cents for it 
 at a bank, he will pay it out in preference to a good bill. The 
 very same motive will prompt the dealer who receives the bill 
 to pay it out in preference to other bills, and thus the depre- 
 
IV. 57.] LAWS OF A HETEROGENEOUS CURRENCY. 415 
 
 ciated money circulates with greater rapidity than any other. 
 No more powerful stimulus can be given to trade than the feel- 
 ing of everybody that it is for his interest to get rid of money 
 as soon as he receives it. Moreover, if the depreciated cur- 
 rency is circulated in such quantities that everybody expects to 
 receive it, then, instead of refusing it, the more gracious course 
 on the part of the dealer is to raise the price of his goods. 
 Thus, when the bulk of the currency will only bring 90 cents 
 on the dollar, it is more to the interest of the trader to raise the 
 price of his goods 10 per cent than it is to dispute with his 
 customers about the money they offer him. 
 
 The most striking example of the operation of this law is seen 
 when, owing to the depreciation of the currency, the metal in 
 the minor coins becomes more valuable than the money in which 
 larger payments are made. When, in the year 1862, our 
 government began to issue paper money and, in consequence, 
 a gold dollar became more valuable than a paper dollar, all the 
 small silver coins disappeared from the circulation. The rea- 
 son was that every man who paid four silver 25-cent pieces in 
 change for a paper dollar gave more than the dollar was worth. 
 Every man who paid out the 25-cent piece paid what was worth 
 more than that amount. It might indeed seem scarcely credible 
 that the whole community would put itself to great inconven- 
 ience for so insignificant a reason. But the result is neverthe- 
 less an historical fact of universal experience. It is probably 
 to be explained, not by supposing that everybody hoards his 
 small change in the case supposed, but that people here and 
 there do so. If only one man out of ten, or even one out of fifty, 
 keeps all the small change he receives, a scarcity very soon re- 
 sults. 
 
 Let us now return to the case of the infiltration of paper 
 currency into a gold circulation. If it be continued, the gold 
 will all be displaced. There will also be a slight, though not 
 necessarily great or permanent, rise in the scale of prices. If, 
 however, the addition of paper currency be continued, then, as 
 already shown, prices will rise ; or, in other words, the curren- 
 
416 THE SOCIETABY CIRCULATION. [IV. 58. 
 
 cy will depreciate. There is no limit to the possible amount of 
 this depreciation. If the paper money is accepted, which it 
 must be if made a legal tender, every one will expect to be 
 paid in paper, and will charge accordingly. The gold dollar 
 having the same value as before, gold will be at a premium, 
 the banks will refuse to part with it, and private individuals 
 will hoard it. It will be bought and sold in the public mar- 
 kets like any other commodity, to be exported to foreign coun- 
 tries in payment of goods, or to be made into articles of utility. 
 
 58. The reader can now form in his mind a symbolic pic- 
 ture of the operation we have described. To make this picture 
 correspond as nearly as possible to the actual case in our own 
 country, let us. supjDOse that our material currency is of three 
 kinds, gold, silver, and paper. The gold in the gold dollar is 
 more valuable than the silver in the silver dollar, while the 
 paper in the paper dollar is worth much less than either. The 
 order of absolute value is then jpaper, silver, gold. By Gresh- 
 am's law, the silver tends to displace the gold, and the paper 
 to displace both. 
 
 The question may now arise how, on the law in question, 
 it is possible for the gold or silver to circulate at all, if the 
 paper money is preferred to make payments with. But the 
 law does not say that the two heterogeneous currencies cannot 
 circulate together, but only that one tends to displace the 
 other. The solution of the difficulty is found in the law al- 
 ready laid down that, under given conditions of trade and in- 
 dustry, a certain volume of currency is absolutely necessary to 
 carry on the trade of the country on a certain scale of prices. 
 Our experience seems to show that if our material currency 
 were exclusively of gold, we should need about fifteen dollars for 
 each inhabitant, exclusive of the credit currency of the banks. 
 If then we have a population of sixty millions of people, they 
 will need nine hundred millions of dollars in gold to transact 
 their business on a scale of gold prices. Since this amount is 
 absolutely necessary to make the payments, it follows that if 
 
IV. 58.] LAWS OF A HETEROGENEOUS CURRENCY. 417 
 
 there is less than nine hundred millions in paper money, it is 
 absolutely necessary to make use of silver or gold. If the silver 
 and paper together are less than this amount, some gold must 
 still be used ; otherwise prices would fall so low that a gold 
 dollar would be worth less than a currency dollar, and this 
 would lead to the importation of gold and thus remove all 
 temptation to hoard it. 
 
 This condition that nine hundred millions is necessary may 
 be represented to the mind by the contents of a vase which 
 holds just nine hundred millions of any kind of dollars. The 
 paper, silver, and gold currencies combined are then just suffi- 
 cient to fill this vase when the scale of prices is on a gold basis. 
 The fact that if we now infiltrate more paper into the currency 
 gold will begin to pass out, is represented by supposing that 
 if we now add more paper to the vase an equal quantity of 
 gold will overflow. To make the comparison complete, we 
 must suppose that the gold, though the heavier metal, tends to 
 float to the top of the vase, the silver to float under it, and the 
 paper to be at the bottom. Then if we continue to pour in 
 paper money, the gold will soon have floated out in equal quan- 
 tity. When the gold is all gone, the silver is at the top and be- 
 gins to flow out. If so much paper is added as to fill the vase 
 and displace all the silver, what will then happen ? If there is 
 any place to which the paper can flow, then it will begin to 
 flow out. For example, if the paper is redeemable in silver or 
 gold, then, when its volume exceeds nine hundred millions, 
 people will take it to the banks or Treasury for redemption. 
 Thus it will be impossible to get more than the nine hundred 
 millions in circulation. 
 
 If, however, it cannot be redeemed, this is the same thing as 
 saying that the vase is so closed that the paper cannot flow out 
 of it. Then prices will rise, so that not only will more than 
 nine hundred millions of money be in circulation, but more will 
 be necessary to the business operations of the country. We 
 may represent this state of things by imagining our vase to be 
 27 
 
418 THE SOCIETABT CIRCULATION. [IV. 58. 
 
 of some flexible material which will expand to any extent when 
 we force paper money into it. 
 
 By thus forming a mental picture of the vase containing, 
 from the bottom downwards, gold, silver, and paper money, 
 and by imagining that as one or the other kind of money is 
 added it displaces other money in the way described, or ex- 
 pands the vase when there is no other money to displace, we 
 shall have an exact conception of the way in which different 
 kinds of currency affect each other. 
 
 The law of expansion of price when the currency becomes 
 too redundant explains a fact which frequently perplexes fin- 
 anciers who have experimented with paper money. It is that 
 an issue of such money does not result in a lowering of the 
 rate of interest, or indeed in any accumulation of money at the 
 great centres of trade. The supply of money is apparently as 
 scarce as ever or scarcer. The reason is that, on the higher 
 scale of prices caused by the money, more dollars are required 
 to carry on the exchanges of the community. 
 
 ILLUSTRATION OF GRESHAM'S LAW IN THE HISTORY OF THE 
 COINAGE AND CURRENCY OF THE UNITED STATES. 
 
 From the establishment of the "United States mint to the year 1834 
 our gold dollar weighed 27 grains 916£ fine, and the monetary ratio for our 
 coinage was 15 : 1. But the market ratio of value of the two metals was 
 generally greater (cf. II. 68). The result was that very little gold was 
 coined, and that little did not get into common circulation. 
 
 By the acts of June 28, 1834, and January 18, 1837, the weight and fine- 
 ness of the gold dollar were changed to those stated in II. 68, making the 
 ratio 16 : 1. The result was that gold came into circulation, and, after the 
 gold discoveries of 1849, silver disappeared from circulation except as 
 subsidiary coin. In 1853 the subsidiary coins also began to disappear, 
 and, in order to keep them in circulation, Congress had to reduce their 
 weight by seven per cent. This device worked until 1862. Then, when 
 large volumes of notes irredeemable in coin were issued, gold soon disap- 
 peared from circulation, and began to command a premium. The sub- 
 sidiary silver coin remained until the premium on gold began to approach 
 ten per cent, and then it disappeared also, much of it going to Canada. It 
 was replaced by postal notes. In 1873 occurred the great fall in the mar- 
 ket-price of silver, which restored the small silver coins before the premium 
 on gold fell to ten per cent. 
 
IV. 59.] OF ECONOMIC FALLACIES. 419 
 
 CHAPTER XII. 
 
 OF ECONOMIC FALLACIES. 
 
 59. In a former chapter certain fallacies in economic method 
 were described. These consist in a generally incorrect way of 
 viewing the subject in its logical bearings, and do not there- 
 fore necessarily lead to erroneous practical conclusions. We 
 have now to consider fallacies which lead men into incorrect 
 views of public policy, and opinions of governmental action. 
 Although these fallacies are unlimited in the number and 
 variety of their forms, we shall find on analyzing them that 
 most of them proceed from one central root, from which they 
 divide like the branches of a tree. The root of the whole sys- 
 tem consists in mistaking the means of industry for its end. 
 
 Let us first see how natural is the process of thought which 
 leads us to concentrate attention on means rather than on ends. 
 We have before us a mechanic who is, for the time being, out 
 of work. In consequence he sees before him the danger that 
 his family will suffer for the necessaries of life. He wants a 
 supply of food and clothing to protect them against hunger and 
 cold. But he does not say to his fellow-men, " Give me food 
 and clothing," because he knows they cannot or will not do it 
 when asked in this way. He knows that he must have money 
 to buy the commodities he wants. He knows, however, that 
 it would be equally useless to say, " Give me money." He 
 knows that to get money he must work for it. So what he 
 really says to the public is, " Give me work to do," although 
 what he really wants is, not the work, but the necessaries which 
 the work will yield him. The work is the means, and the only 
 means, of commanding the necessaries, but not at all the end of 
 his exertions. Yet it is by an evidently reasonable process that 
 he is led to asking, not for what he wants, but for the means to 
 
420 THE SOCIETABT CIRCULATION. [IV. 60. 
 
 get it. So far, therefore, no fallacy actually shows itself, but 
 only an open door through which an unending line of fallacies 
 may come in. 
 
 60. The first fallacy of the line comes along in the charac- 
 ter of what might pass muster as an obvious truth, and so is 
 harbored by all classes. 
 
 The laborer thinks and says, The greater the means the more 
 perfectly the end will be attained ; the more work I can get the 
 more food and clothing I can buy for my family, and the more 
 perfectly they will be fed and clothed. 
 
 The employer thinks and says, The greater the demand for 
 my commodities the more employment I can give to my la- 
 borers and assistants, and the better off they and I will be. 
 
 The man of business thinks, The more buying and selling 
 we can do the better off we will be, and the more perfectly our 
 customers and patrons will be supplied. 
 
 The shipper thinks, The greater the quantity of goods I im- 
 port and export the more pleased the country in general and 
 my firm in particular will be. 
 
 The statesman says, The greater the amount of rolling and 
 hammering of metal the more perfectly the country will be sup- 
 plied with those requirements of wealth which are made of 
 metal. 
 
 Is not all this obvious and true ? I answer, ~Ro. The propo- 
 sitions are not true as general ones ; they are true under some 
 conditions and not under others. Their truth or falsity de- 
 pends on the manner in which the increase of labor and of 
 activity in business is brought about. Among all classes of 
 society we find men who are desirous of increasing the activi- 
 ties just described by increasing the necessity for them. The 
 mechanic finds that he is out of employment because some 
 large manufacturer has been introducing machinery to do the 
 work which he, the mechanic, formerly did, so that his labor is 
 no longer necessary. He therefore denounces the machine and 
 tries to stop its products from reaching the public. If success- 
 
IV. 61.] OF ECONOMIC FALLACIES. 421 
 
 fill, lie will create a greater necessity on the part of the public 
 for employing him. The carpenter knows that if the house 
 which he has just built should burn down the owner would 
 be obliged to build another. He therefore looks upon the fire 
 feeling that, although a loss is inflicted on some one else, it is 
 a gain to him by increasing the demand for his labor. The la- 
 borer feels that if a dam is washed away by a freshet, a benefit 
 is done him by creating a demand for his labor. The states- 
 man says that if we can keep people from getting iron from 
 abroad, there will be more made at home, and thus all the 
 makers will be benefited. All these we may call labor falla- 
 cies. 
 
 61. From this same root comes out another branch, which 
 may be called the money -fallacy. Since money is what the 
 laborer wants to buy with, and since it seems evident that the 
 more money the government puts into circulation the more 
 easily he can command it, he wants the government to issue all 
 the money it can. The dealer in fancy goods wishes that eco- 
 nomical man who is saving up his money to spend it more free- 
 ly, because he can thereby give more employment to labor, or 
 help somebody to do so. When a great body of summer tour- 
 ists who had intended to go abroad are kept at home by the 
 cholera, merchants congratulate themselves that the million of 
 dollars which they would have carried away with them are to 
 be spent at home and thus to benefit the country. 
 
 A curious feature of these fallacies is that they are the pro- 
 duct of civilized training, and that a savage would see their 
 logical character a great deal more clearly and quickly than the 
 civilized man does. If we could give a savage a bird's-eye view 
 of the country, and explain to him that from any cause what- 
 ever the people had made more clothing than could possibly be 
 worn by the whole community, and had piled up greater quan- 
 tities of food than they could possibly eat, and that a large 
 body of industrious foreigners had thrust upon them more 
 manufactures of iron and brass than they knew what to do with, 
 
422 THE SOGIETART CIRCULATION. [TV. 62. 
 
 and that in consequence there was a great dearth of something 
 to do, his first notion would be that this was a very happy state 
 of things for the people of the country. It would require long 
 years of training to make him conceive how it could be an un- 
 happy state of things, and possibly the attempt might utterly 
 fail. Now, in reality, and from the point of view of common- 
 sense, the savage would be right. Looking at the subject from 
 the savage's standpoint, we see the utter absurdity of supposing 
 that it can be bad for a country to have more of the commodi- 
 ties of life within its borders than its people know what to do 
 with. 
 
 62. The essential character and plausibility of the labor- 
 fallacy may be shown by the following illustration. A farmer 
 is carrying hay to market. The county authorities prepare 
 for him a very fine smooth road. It is obvious to him 
 that the better his horse pulls the more hay he will get to 
 market. A stranger meets him on the road and finds him 
 applying this principle by lubricating his wheels with sand in- 
 stead of oil. Inquiring the motive of this ingenious device, the 
 stranger is asked whether he can deny that the better the horse 
 pulls the more hay he will get to market. 
 
 The stranger is not prepared to deny this principle. 
 
 " The more sand I put on my wheels the better I find my 
 horse to pull." The stranger cannot deny this either. 
 
 " Therefore it is an undeniable conclusion that the more 
 sand I put upon my wheels the more hay I will get taken to 
 market." 
 
 The student can have no more instructive exercise than that 
 of framing a series of ingenious devices by which the farmer 
 could baffle every argument of the stranger to prove that this 
 position was unsound. He could show that his neighbor, who 
 put oil on his wheels, had a very poor miserable horse, while he 
 himself had a strong and sound one, and all the result of the 
 exercise he was thus enabled to get by the sanding policy. He 
 could taunt the stranger with being the agent of some oil-mer- 
 
IV. 62.] OF ECONOMIC FALLACIES. 423 
 
 chant who wanted him to buy oil in lieu of the lubricant which 
 he could have for nothing on the wayside. He could demand 
 if the stranger ever knew a case in which a horse that pulled 
 well got less hay to market than one that did not pull at all. 
 He could cite the case of a fellow-farmer who had been using 
 oil and whose horse got so frisky and pulled so light a load that 
 he ran away and destroyed the hay-cart and broke the farmer's 
 leg. 
 
 The corresponding reasoning in the case of the laborer is 
 simply this : 
 
 The more my labor is in demand the more perfectly my 
 family will be supplied with the necessaries of life. 
 
 But the greater the need I create for my labor the more it 
 will be in demand. 
 
 Therefore I advocate a policy which will make people need 
 my labor. 
 
 So the dealer tries to make clothes as scarce and dear as pos- 
 sible in order that everybody else, mechanic, laborer, hod-car- 
 rier, merchant, and man of business, may be in greater need of 
 clothes. The carpenter, bricklayer, and plasterer want houses 
 to wear out as fast as possible, that the public need for houses 
 may lead to their employment. The manufacturers of copper 
 and iron want to cut off the foreign , supply of their product, 
 that the public may be in greater need of it. The cooper wants 
 barrels made scarce, that the public may be in greater need to 
 employ him. Thus the individual efforts of every man to col- 
 lect the largest supply of the necessaries of life is accompanied 
 by a general feeling throughout all society that other people 
 ought to continue in need of these necessaries. 
 
 It goes almost without saying that no man ever applied the 
 principle in his own individual case. We never heard of a man 
 who, through some miscalculation, had bought more clothes 
 than he could wear, throwing them away or burning them in 
 order that he might have an inducement to buy more. 
 
 We have mentioned examples of these fallacies in a few of 
 the many forms in which we daily see them in the newspapers, 
 
424 THE SOCIETABY CIRCULATION. [IV. 63. 
 
 in the speeches of Congressmen, the resolutions of labor and 
 socialistic meetings, and tacitly and by implication in the re- 
 strictive rules of trades-unions. In some of these examples the 
 fallacy will be obvious enough to the reader. In others he may 
 find it to need illustration. We may take as a typical average 
 case that of a house which is burned down. By this accident 
 the owner is undoubtedly injured ; but are not carpenters, 
 bricklayers, and plasterers thereby benefited, either to a degree 
 equivalent to the loss of the house, or at least to an apprecia- 
 ble fraction of it ? We answer, No. It is true that these indi- 
 vidual mechanics who may be employed to build the house may 
 be benefited in a slight degree, but, as has already been shown, 
 the demand for labor is not increased by the destruction of the 
 house. The sum which the owner is now to spend in the em- 
 ployment of bricklayers, carpenters, and plasterers would, had 
 the house remained, have been expended by him, or by those 
 from whom he is to borrow the money, in the employment of 
 labor in other forms. The demand for labor which is thus 
 gained in one direction is lost in another direction, and one 
 class gains at the expense of another. On the other hand, the 
 owner of the house has lost its whole value, and, on the whole, 
 the total loss to the community is measured by that of the 
 house. • 
 
 63. Special Consideration of the Money Fallacy. The 
 fallacy which we have now to consider in detail, although from 
 the same root as the labor fallacy, has little in common with it, 
 and has an entirely different history. The labor fallacy may 
 be described as affecting the great mass of the community in a 
 mild form, and as not varying much from year to year or from 
 generation to generation. The money fallacy, on the other 
 hand, is periodic, overwhelming us, not at regular intervals, but 
 from time to time, owing to the influence of changing events. 
 The Americans more than any other people have been its vic- 
 tims. It was at its height during the ten years following the 
 outbreak of the Civil War. During the decade following it 
 
IV. 63.] OF ECONOMIC FALLACIES. 425 
 
 greatl y subsided ; and at the present time, although shared by a 
 large party, is not doing serious damage. Yet it is constantly 
 latent in human nature, and therefore liable to break out at any 
 time after the disastrous effects of the policy it gives rise to on 
 one generation have been forgotten by the succeeding one. It 
 is therefore one which the student of economics should thor- 
 oughly understand. It consists in considering the monetary 
 unit which we call one dollar as an absolute measure of value, 
 deriving its existence and its value from law. 
 
 During the years 1862 and 1863 our government issued 
 hundreds of millions of legal-tender notes to circulate as money. 
 The result was a gradual but continual rise in prices, until the 
 great body of things which people had to buy cost twice as 
 much as before. Wise men said the dollar was depreciated to 
 one half, but the public said the paper dollars were as good as 
 any other dollars because they performed all the functions of 
 dollars. No one had any difficulty in passing off all the money 
 that he received, and having it accepted as that number of 
 dollars which it pretended to be. Money, it was reasoned, was 
 only the medium of exchange. A man gets it by selling only 
 that he may buy with it ; and if he can do this, what more 
 is wanted ? 
 
 The reply is : One very important thing more is wanted! He 
 must not only be able to buy with it, but he must be able to buy 
 a dollar's worth. The other replies, But he does get a dollar's 
 worth. A dollar's worth is exactly what a dollar will bring, 
 and he certainly gets that. You cannot enforce any law pre- 
 scribing how much a dollar shall bring. 
 
 The economist admits all this, but yet claims that something 
 is wanting. Although the man who takes a dollar cannot have 
 any authoritative and legal understanding as to how much he 
 can buy with that dollar next week or next year, yet he does 
 want to feel a reasonable assurance that he can buy as much 
 with it then as he can now. If he builds a house, neither the 
 builder nor the law itself can guarantee him against the house 
 being demolished by an earthquake, unroofed, burned by a fire, 
 
426 THE SOCIETARY CIRCULATION. [IV. 63. 
 
 or worn out by the action of the weather. But because he 
 cannot have such a guarantee, it does not therefore follow that 
 he should not care how combustible the materials are and how 
 poorly the house is built. Notwithstanding the impossibility 
 of the guarantee, he wants a house that will probably be as good 
 next year as it is this, and which will endure for the use of his 
 children and grandchildren. 
 
 .Now, it is the same with a dollar. If he foresees a reasona- 
 able probability that a year hence his dollar will only buy him 
 the tenth part of a dinner, then it can no more fulfil the func- 
 tions of a dollar with him than the house which is sure to 
 decay in a year can fulfil the functions of a house. He wants 
 a dollar which will buy as good a dinner next year as it will 
 now, and which, if he invests it, will buy as good a dinner for 
 his grandchildren as it will for him. If Congress is to furnish 
 him the dollar, the impossibility of an absolute guarantee of 
 this sort does not justify the issue of a dollar which it is cer- 
 tain will not fulfil the required conditions. 
 
 The fallacy on which all this difficulty rests is that of looking 
 upon the dollar as an absolute standard of value. During the 
 period above referred to a gold dollar was worth two or more 
 dollars in paper. This was a state of things which many in- 
 telligent people had a difficulty in understanding, and which 
 they attributed to the machinations of speculators. They rea- 
 soned that both the gold and silver dollars derived their value 
 from laws of Congress, and were declared of equal value by 
 this authority. Therefore the value must really be the same, 
 although in "Wall Street and at the banks they were considered 
 different. The answer to this is that a dollar is not a stand- 
 ard of value in any other sense than a foot is. If Congress 
 should legalize two different lengths and declare each of them 
 a foot, that would not make them equal. If it should direct 
 the foot measure to be made of a kind of material which would 
 shrink in a few days to one half its length, yet although this 
 measure might be called a foot, it would not be of the same 
 length. In declaring anything one dollar Congress only gives 
 
IV. 63.] OF ECONOMIC FALLACIES. 427 
 
 it a name, but does not give a value. The principle involved 
 may be expressed as follows : Calling an object one dollar, and 
 declaring it a legal tender for that amount, no more gives it a 
 definite value than declaring apiece of metal to he a foot gives 
 it a definite length. 
 
 We qualify the word value here by the word definite, be- 
 cause, as we shall hereafter see, this proposition is subject to an 
 important limitation. Thus the difficulty which men experi- 
 ence in understanding how there can be two values to the dollar 
 is as absurd as a difficulty in seeing how two different lengths 
 could each be one foot. The reason why a difficulty is felt in 
 the one case which is not felt in the other is that length is 
 something which can be made evident to the eye, while value 
 is not. The inequality of two foot measures is made evident 
 by merely putting them together and seeing how they look. 
 The inequality of two dollars can be shown only by going into 
 the public market with them and seeing how much they will 
 respectively buy. Even then the inequality is manifest only to 
 the eye of reason and not to the eye of sense. 
 
 Connected with this notion is the belief that the dollar de- 
 rives its value from the government stamp upon it. This 
 belief admits of a test so simple that it is wonderful how it can 
 acquire the currency it does. Were it correct, a coin might be 
 vastly more valuable than the bullion out of which it was made, 
 and the excess of value would depend on the greatness and 
 power of the nation by which it was stamped. But, as a mat- 
 ter of fact, leaving out the expense of minting, and the excep- 
 tional cases of fractional currency, the value of any coin is 
 exactly that of the bullion from which it is stamped. The 
 dollars of the poorest South American states, the sovereigns of 
 England, and the uncoined gold bars fresh from the mines, all 
 exchange in the markets of the world according to the amount 
 of gold or silver in them. 
 
428 THE SOCIETARY CIRCULATION. 
 
 ILLUSTRATIONS. 
 
 1. Illustration of the Labor Fallacy. ' ' Have you ever witnessed the anger 
 of the good shopkeeper Jacques Bonhomme when his careless son happened 
 to break a square of glass? If you have been present at such a scene you 
 will most assuredly bear witness to the fact that every one of the spectators, 
 were there even thirty of them, by common consent, apparently, offered 
 the unfortunate owner this invariable consolation : ' It is an ill wind that 
 blows nobody good. Everybody must live, and what would become of the 
 glaziers if panes of glass were never broken? ' Now, this form of condolence 
 contains an entire theory which it will be well to show up in this simple 
 case. . . . Suppose it cost six francs to repair the damage ; we say that the 
 accident brings six francs to the glazier's trade — that it encourages that trade 
 to the amount of six francs. I grant it. I have not a word to say against it. 
 You reason justly. The glazier comes; performs his task; receives his six 
 francs; rubs his hands; and, in his heart, blesses the careless child. All 
 this is that which is seen. But if, on the other hand, you came to the con- 
 clusion that it is a good thing to break windows, that it causes money to 
 circulate, and that the encouragement of industry in general will be the 
 result of it, you will oblige me to call out, ' Stop there; your theory is con- 
 fined to that which is seen. It takes no account of that which is not seen.' 
 
 " It is not seen that as our shopkeeper has spent six francs upon one thing 
 he cannot spend them upon another. It is not seen that if he had not had 
 a window to replace he would perhaps have replaced his old shoes, or added 
 another book to his library; in short, he would have employed his six francs 
 in some way which this accident has prevented. 
 
 " Let us take a view of industry in general as affected by this circum- 
 stance. The window being broken, the glazier's trade is encouraged to the 
 amount of six francs; this is that which is seen. 
 
 "And if that which is not seen is taken into consideration, it will be un- 
 derstood that neither industry in general nor the sum total of national 
 labor is affected, whether windows are broken or not. 
 
 "If the window had not been broken, the shoemaker's trade (or some 
 other) would have been encouraged to the amount of six francs: this is that 
 which is not seen. 
 
 "Now let us consider Jacques Bonhomme himself. In the former sup- 
 position, that of the window being broken, he spends six francs, and has 
 neither more nor less than he had before, the enjoyment of a window. 
 
 " In the second, where we supposed the window not to have been broken, 
 he would have spent six francs in shoes, and would have had at the same 
 time the enjoyment of a pair of shoes and of a window. 
 
 "Now, as Jacques Bonhomme forms a part of society, we must come to 
 the conclusion that, taking it all together, and making an estimate of its en- 
 joyments and its labors, it has lost the value of the broken window." — 
 F. Bastiat, translated by Mrs. Faiccett. 
 
ILL TJSTRA TIONS. 429 
 
 2. Illustration of the Money Fallacy. The following was written before 
 the resumption of specie payments, at a time when the country had not re- 
 covered from the financial notions produced by the Civil War : 
 
 In the world of business "credit" includes the ability and the obligation 
 to pay all demands in cash as they become due. A man or a firm that can- 
 not do this has no credit, however excellent it may be in other respects. 
 Suppose you should be travelling in a distant city and, going to the cashier 
 of your hotel for change, he hands you a ten-dollar bill on the banking firm 
 of Spread Brothers & Company. 
 
 "Are you sure this bill is good ?" you inquire. "Good as gold, sir. 
 The firm of Spread Brothers & Co. is the greatest in this State, possessed of 
 unbounded wealth, and its operations extend over the whole globe." 
 
 "Then," you reply, "I suppose if I take this bill to their counter, they 
 will pay it? " 
 
 "Pay it? Why, no, sir. You would be hooted by the small boys in the 
 street and laughed at by Spreads' clerks. The credit of the firm is so ex- 
 cellent and all its debts so well secured by real estate and bonds worth 
 millions of dollars that both the firm and the community concluded ten 
 or twelve years ago that there was not the slightest need of their redeeming 
 their bills, and they are never going to do it." 
 
 " I don't understand that kind of credit. In my State, credit paper is 
 something which the party issuing is bound to pay when required; and if 
 he does not pay, he has no credit, no matter how rich he is." 
 
 "Of course twopenny firms must pay. But we claim that a firm so 
 great, so powerful, and so wealthy as that of the Spreads need not pay." 
 
 "Well, sir," you would reply, " I don't see what difference it makes to 
 me how wealthy Spreads' firm is, or how well their paper is secured, if I 
 cannot get any of their wealth in exchange for my bill. I always thought 
 the advantage of having the paper of a wealthy firm was that it was sure to 
 be paid; but if the richer the firm the less the need of paying, I would 
 rather have the bill of some smaller house." 
 
 "Ah, you know nothing about finance, I see, and I will get you some 
 foreign money rather than argue further with you." 
 
 If a hotel cashier should talk in this way to you, you would be a little 
 puzzled to say whether he was joking or in earnest: and yet great statesmen 
 do argue in just that way about our greenbacks. There are bills to the 
 amount of four hundred millions of dollars afloat, reading, "The United 
 States will pay the bearer — dollars." Yet if you should take one of 
 these bills to the government's counter asking that this promise be redeemed, 
 the clerks would laugh at you. A year or two since some one did this very 
 thing, and the newspapers speculated on the man's sanity, while a Treasury 
 official thought he was only trying to make himself notorious. If a politi- 
 cian tries to justify permanent non-payment, he will talk about the credit 
 and wealth of the nation exactly as the hotel clerk talked about Spread 
 Brothers & Co. — The A B C of Finance, by S. Newcomb. 
 
430 THE SOCIETARY CIRCULATION. 
 
 3. An apt analogue of the money fallacy may be constructed by supposing 
 that the people of St. Louis deemed it greatly to their interest that the 
 flow of the Mississippi should be increased. Let us suppose that in order 
 to bring this about they erect powerful machinery which is to turn im- 
 mense paddle-wheels whose blades dip below the water and project it 
 down the river. As each wheel turns it causes a great rush of v/ater 
 from it, and thus an apparent increase in the flow. If we could imagine 
 a person with as little idea of the flow of the river as a mathematical 
 quantity as the ordinary man has of the industrial flow, as such, we may 
 see how strong the impression such a person would have that the flow of 
 the river is really increased by the machinery. His eyes show him the 
 rush and foaming of the water wherever the machine operates, while the 
 tide goes on, apparently the same as before, wherever it does not operate. 
 The way in which we should show this man the error of his views is also 
 analogous to that which we have employed in showing the monetary fallacy. 
 We should say to him: 
 
 "The flow of the river past your city is necessarily equal to the sum 
 total of the water which comes to it from the mountains. Your machinery 
 cannot possibly change the streams from the mountaius, and therefore it 
 cannot change the flow of the river. True, there is, as you say, a greater 
 flow where your wheels act; but this is necessarily accompanied by a 
 diminution of the flow in the great masses of water below, which you do 
 not see." 
 
 The reason why a mistake such as this is so common in the case of 
 economics and not possible in the case of the river is that in the latter the 
 mind can form a conception of the real state of things without special 
 training, while in the former it cannot. If we imagine a person spending 
 his life in managing the supposed paddle-wheel and seeing the rush of 
 water from it, without ever forming any conception either of the magni- 
 tude of the river or of the source of its waters, we see how naturally he 
 might be gradually led to believe that the flow of the river depended on 
 his machinery. But this person would be in the same state of mind as 
 the average man in relation to the course of trade and industry. In show- 
 ing the latter the true relations of things we do for him what we should 
 do for the supposed man in showing him the source and magnitude of 
 the river. 
 
 EXERCISES. 
 
 1. Consider the following ways in which a man may gain wealth, and in- 
 vestigate in each case whether his gains are to be regarded as additions 
 made by himself to the total wealth of the country without being detri- 
 mental to the rest of the community, how far they are made at the expense 
 of particular individuals with whom he may have had dealings, and how 
 far as made at the expense of the community in general : 
 
EXERCISES. 
 
 431 
 
 I He bets with a broker about the future price of stocks, and wins. 
 
 II He invests in stocks and bonds, which rise in price in consequence of 
 increased prosperity of the railways and manufacturing companies which 
 
 ^m H^'invents a new method of boot-making, and employs a great body 
 of artisans in making boots by this method at a profit to himself. 
 
 IV He bo rrows money and builds a railway, the dividends of winch pay 
 all the interest on his debt and yield him a large additional income. 
 
 V He patents a new sewing-machine, which turns out to be a great 
 
 mioccss 
 
 VI He discovers and buys a valuable mine. 
 
 VII He sets up a large grocery-store, and manages to sell so cheaply as to 
 attract all the customers from a great number of other stores, and compel 
 flip latter to retire from business. 
 
 VIH He discovers an excellent silk-maker in the interior of France, buys 
 his products, and sells them at a profit in New York. 
 
 2 Consider also whether, in any of the preceding cases, the community 
 attge necessarily gains, as well as the man who makes the money, and 
 in what their gains consist. [Apply the principles of Chaptei V.] 
 
 3 Show that it is impossible for a nation to adopt such a policy that 
 ther"e shah be anv great continuous and unceasing increase in its stock of 
 
 he PV cious metais "and that the general world's stock of those metals tends 
 lo distribute itself among all nations in proportion to their need for using 
 them as money. 
 
 4 Explain how it is that in a very poor community the volume of the 
 cutely Hn a yet smaller proportion than the volume of business trans- 
 acteT [This involves the conclusion that the rapidity of circulation is 
 greater in such a community. Cf. Chap. II.] 
 
 * Tn a new country, where the rate of interest is high, people are most 
 , nttoblrrowmoey Suppose wealthy foreigners to loan them all 
 £"Td nd slvl they wanted P but with the enforced stipulation that 
 n"ne S of it snou!d be exported: what would bethe economic effect upon 
 the community? Would it be materially beneficial? 
 
 ft Suooose the loan made without stipulation: what would the com- 
 mumfydo' with the money ? What would determine the benefit they would 
 derive from it ? 
 
 7 From your answers to the two preceding questions explain what is 
 
 reallvdTewhen foreigners invest capital in a country where the rate of 
 
 ntresUs high. Does'the act of investment commonly -con.* » ^ndmg 
 
 money thither? If so, what becomes of the money? If not, what is sent. 
 
 Note In all such questions as these it will assist the student to begin 
 with Tsimple concrete case. For example, suppose that in the new country, 
 
432 TEE SOCIETARY CIRCULATION. 
 
 Colorado for example, a great profit can be made by working a mine and 
 building a railway to it. So a Colorado banker offers ten per cent per an- 
 num interest on all money borrowed. One London capitalist loans him 
 $10,000, which he ships as gold, and another sends him a cheque on his 
 London banker for £2000. Trace out what the Colorado people will do 
 with the gold and the cheque, drawing a diagram of the monetary and in- 
 dustrial operations to which the loans give rise. 
 
 8. Suppose that during the Civil War our government had adopted the 
 policy of preventing the Southern States from importing anything but gold 
 and silver, but had allowed them to export anything they pleased: what 
 would have been the effect upon the price of commodities within their 
 limits, and upon the power of the Confederate Government to prosecute the 
 war? 
 
 This presupposes the blockade modified to this extent : that no ship 
 would be allowed to enter the Southern ports if she carried anything except 
 gold and silver, but she might carry in as much of these metals as she chose. 
 
 On leaving the port no restriction is supposed to be placed upon what she 
 carried out. 
 
 If one should answer the foregoing question in this way : Gold and silver 
 are the sinews of war, and hence the free introduction of these articles 
 would have increased the power of the Confederate Government to carry 
 on the war; — would he be correct? 
 
 If one should answer it by saying this policy would have been demoraliz- 
 ing to the Confederate Government by acting as a bribe to the people to 
 expend all their energies in raising cotton for export, instead of employing 
 them in war, would he be correct? Could the importation of anything 
 which could not produce either sustenance or munitions of war help a 
 people so situated ? 
 
 It is essential to a complete discussion and conclusion on this subject that 
 the student should consider to what extent the Confederate Government 
 could have got possession of the gold imported. This action would have 
 depended upon their power to get possession of the cotton or other goods 
 exported; this, again, would have depended principally upon the willingness 
 of the planters to raise cotton, not for their own benefit, but for that of the 
 government. 
 
 9. The inhabitants of a city conclude that hack-drivers are an exception- 
 ally meritorious class of citizens, and so resolve to expend all their surplus 
 income in hack-hire. Are hackmen going to be permanently benefited? 
 What will be the economic effect? (Cf. III. 35 and Bk. IV., Chap. VI.) 
 
 10. Are we to regard the consumption of commodities as productive of 
 any benefit to the producers, or is that benefit confined to the consumers? 
 For example, are we to regard an increased consumption of tea as benefi- 
 
EXERCISES. 433 
 
 cial to grocers? As beneficial to the inhabitants of China? Explain why 
 the answer is not the same in all cases. 
 
 11. Trace the economic effect of the frugal New England population put- 
 ting their money into savings banks. "What do such savings really consist 
 in? 
 
 12. Show the relative advantages to a spendthrift of living in a frugal 
 and of living in a free-spending community. Define the difference between 
 two such communities. 
 
 28 
 
434 THE SOCIETARY CIRCULATION. 
 
 APPENDIX TO BOOK IV.— THE RELATION OF DEMAND FOR 
 COMMODITIES TO DEMAND FOR LABOR. 
 
 It is the plan of the present work to present to the reader in the first four 
 books only such a body of doctrine as is generail} r accepted by all economic 
 reasoners who have completely mastered the subject, and thus to avoid 
 breaking the current of thought by arguments and discussions on contro- 
 verted points. But the theory of the employment of labor which has been 
 presented in the preceding chapters may form an exception to this rule. 
 This theory is, in one point, in apparent discord with certain views held 
 by the best economic reasoners of the time. This discord can be settled 
 only by a very careful analytic comparison of the hypotheses and conclu- 
 sions of the two theories. 
 
 The gist of the view which has been laid down iu the present work is this: 
 That, so far as the current rate of wages and the immediate interests of 
 society at large are concerned, it makes little or no difference whether the 
 owner of money expends it in one direction or another; and that the real 
 point on which the remote interests turn is whether the spender employs 
 his money for an object terminating in his own gratifi6atiou, or in an ob- 
 ject involving an increase in the wealth which can be commanded by society 
 at large. As special examples : 
 
 I. If the manufacturer of cloth buys wool and other materials with a view 
 of enlarging his production; if a farmer buys manure to increase the fer- 
 tility of his field, or a plough and team of horses to cultivate a new field, 
 then he will ultimately benefit society by placing at its disposal a larger or 
 better supply of cloth and wheat. 
 
 II. If I employ men as outriders for my carriage, or servants to wait upon 
 me, I render no benefit to society, but leave the account even. But if I em- 
 ploy these men in making cloth or raising wheat, then I benefit the rest of 
 society by placing at its disposal larger or better supplies of food or clothing. 
 
 III. If I have been in the habit of spending a thousand dollars of my in- 
 come annually in clothing myself in fine velvet, and I change my mode of 
 expenditure by giving up the velvet and spending the money in paying a 
 man to sing and dance for me, I merely change the direction of a certain 
 portion of the industry of the country from the work of making velvet to 
 the work of dancing for me, and the interests of society at large remain un- 
 affected by the change. 
 
 The other theory, which is not necessarily in opposition to the above 
 views, but which is often supposed to be, is very fully developed by Mr. 
 John Stuart Mill, in his Political Economy, Book I., Chapter V., §9, and 
 also by Mr. J. L. Laughlin, in his abridged edition of Mill, pp. 87-92. It 
 is embodied in the maxim that "a demand for commodities is not a de- 
 mand for labor." "We must understand the meaning and application of 
 this maxim before we can make any comparative analysis of it. Taken 
 
DEMAND FOB COMMODITIES, ETC. 435 
 
 literally it is undoubtedly correct, as has in fact already been shown. 
 Buying things does not make them. When the ownership of a great 
 factory is transferred from one company to another, the conditions of pro- 
 duction are in no wise altered. The producing ability of society at large is 
 the same after a bale of goods has been sold as it was before. All that 
 mere buying and selling consists in is the transfer of rights, powers, and 
 duties from one person to another, and not the production of such rights, 
 powers, or duties. 
 
 Has this fact any necessary antagonism to the theory which has been 
 hud down? I think not. It is rather certain corollaries drawn from it that 
 are in antagonism to it, and it is with these corollaries and not with the 
 maxim itself that we shall be concerned. 
 
 If we regard the theory as a complete one, which some economists do, 
 then the question whether one does or does not benefit labor by his expen- 
 diture turns entirely upon whether he purchases goods or employs labor, 
 and does not depend upon the kind of goods he purchases or the work 
 which he employs the laborers to do. Now, this conclusion admits of a very 
 easy reductio ad absurdum. The farmers of the country employ a great body 
 of laborers every winter, spring, and summer in sowing, cultivating, and 
 harvesting crops. If we conclude that the main question is not, "What 
 shall we employ our laborers in doing ? " let us suppose that the farmers 
 employ them as liveried servants to drive their carriages and wait on table, 
 leaving all the crops unharvested. It is perfectly clear that society at 
 large will suffer by such a policy. It must be therefore that some other 
 question than that of "demand for labor versus demand for commodities " 
 comes into play. 
 
 This reductio ad absurdum proves that the theorem is not complete, but 
 does not disprove it in all its applications. The direct issue between the 
 two applications may be seen in the following propositions. The doctrine 
 of the present work is : 
 
 If in lieu of clothing myself with fine -velvet, I expend the same income in 
 paying a man to dance for me the year round, I merely change a certain 
 amount of the industry of the country from the work of making velvet to the 
 work of dancing, and the interests of society at large are unaffected by the 
 change. 
 
 The opposing reply of Mr. Mill is: No, you do more than this : you trans- 
 fer a certain portion of your consuming power from yourself to the dancer; 
 and you direct a certain portion of the industry of tlie country from the work 
 of supplying yourself with velvet to that of supplyiny your dancer with food. 
 You thus confer a positive benefit upon society at large by increasing the manu- 
 facture of food in compensation for which you have given up wearing velvet. 
 
 The comparison of these opposing views requires us to enter upon some 
 minute and somewhat intricate considerations. There is a certain advan- 
 tage in the direct employment of the dancer, inasmuch as he gets the entire 
 benefit of my expenditure, whereas, when I buy the velvet, the great armies 
 
436 THE SOCIETARY CIRCULATION. 
 
 of men who were directly or indirectly engaged in producing that velvet do 
 not get all the benefit of my money, because a certain portion of it is absorbed 
 in the cost of making the numerous exchanges ■which have come into play. 
 Therefore, could we do away with the labor of exchange, we might employ 
 the men now engaged in buying and selling in the sole labor of producing, 
 and thus society at large would be a gainer. Thus, in so far as labor of 
 exchange is saved, Mr. Mill's view has a certain amount of correctness. 
 
 But practically can we make any alterations in the ratio of the number 
 of men engaged in actual production to those engaged in exchange? Prac- 
 tically no such saving in exchange appears to be possible. The proportion 
 of the community which has to be engaged in the work of exchange is fixed 
 by the conditions of the country and of trade, and cannot be altered on 
 any considerable scale. 
 
 Returning now to the main question, we have to begin by recalling sev- 
 eral preliminary propositions, which must be accepted by all who really 
 understand the case, and which we shall therefore not stop to establish. 
 
 I. The typical laborer is one who has not accumulated any considerable 
 amount of wealth for himself, and must therefore depend for his support 
 upon the capital of others who pay him for his services. 
 
 II. The wages which he receives may all be expressed in terms of food, 
 clothing, and shelter, for which we may use the general term sustenance. If 
 he is paid in money, we may regard this money as an order on society to 
 supply the laborer from its storehouse with the equivalent of the money in 
 sustenance. Thus the laborer is to be regarded as an agent producing sus- 
 tenance and at the same time consuming it. 
 
 III. The benefit of his labor to society at large, and especially to other 
 laborers, depends upon his producing for other laborers an amount of sus- 
 tenance equal or superior in quantity or quality to that which he himself 
 consumes. That is, as he eats his daily bread and wears out his clothes, 
 and as the house in which he lives is going to decay, he must by his 
 labor produce more than an equivalent in some form of clothing, food, or 
 houses for his fellow-laborers. 
 
 IV. We can therefore measure the benefits rendered to laborers at large 
 by any economic cause by determining whether that cause results in a 
 greater production of sustenance for laborers. 
 
 The counter-proposition of Mr. Mill is now tested by considering the 
 relative situations and activities of the spender of money, and the maker 
 of velvet or body of makers, and a dancer or body of dancers, in the follow- 
 ing Avay: 
 
 We have a first agent A (Fig. 8), comprising a body of men who receive 
 the stream a frOm society and have been spending it upon fine velvet bought 
 from the velvet-maker V with the equal stream b. The velvet-maker V has 
 a capital, and a body of operatives to whom he pays the stream of wages c. 
 The stream d purchases subsistence for the operatives. 
 
 A time now comes when A gives notice to V that after his present orders 
 
DEMAND FOB COMMODITIES, ETC. 
 
 437 
 
 are filled he will want no more velvet, and in- lieu of spending his money on 
 velvet he will spend it on men to dance for him. To make the cases in every 
 respect equal, we may assume that he will want a theatre equal in value 
 to V's fixed capital, and that V can transform his capital into the required 
 theatre. Such are the fundamental hypotheses common to the two theories. 
 Now, according to the view laid down in this book, the Tesult of this action 
 on A's part will be that V will say to his men : " The demand for velvet will 
 cease; I can therefore no longer employ you in making velvet. But A, my 
 customers, will want dancers; I am going to build them a theatre, and you 
 can dance for them at the same wages I have been paying you." The result 
 will be that shown in Fig. 9. A receives the same monetary flow a from 
 
 Dancers] Q 
 
 Fig. 8. 
 
 Ftg.9. 
 
 society. He pays one flow to V, the former velvet-maker (now a manager 
 of his theatre), and another to a body of dancers who were formerly opera- 
 tives. Thus the sole change is that V and all his operatives have gone out 
 of the business of making velvet into that of dancing. Society at large is 
 unaltered by the change, whichever way it occurs, because all it knows of 
 the matter is that it supplied food to the total number of operatives em- 
 ployed by V, and when they take to dancing, the supply and the money 
 they pay for it remains just the same as before. 
 
 According to Mill's view, the change in A's expenditure will work in this 
 way: When A advises V that he is going to stop wearing velvet, V will say 
 to his operatives: "I can no longer employ you in making velvet, because 
 the men A who have been buying my velvet are going to stop wearing it. 
 But these men are going to employ dancers to dance for them, and those 
 dancers will want sustenance. Therefore, instead of employing you in 
 making velvet for A, I am now going to employ ycm in making sustenance 
 for A's dancers." In other words, the velvet-makers, instead of responding 
 to A's demand, "We want dancers," will respond to the demand of his 
 dancers, " We want sustenance." 
 
438 THE S0C1ETABY CIRCULATIONS , ^ 
 
 This supposed state of things is represented in Fig. 10. The stream a i 
 instead of passing from A through V and O to society, as in Fig. 8, now 
 passes from A to D in payment for dancing. Thence it passes from D to 
 O in payment for the sustenance which V and O are now making, and from 
 this point we have the same draft on society as before. 
 
 Mr. Mill's conclusion is that a certain portion of the industry of the 
 country performed by V and O has been changed from the work of making 
 velvet to the work of making sustenance for D. Thus the production of sus- 
 tenance is increased, and thus, in accordance with the principles laid down, 
 laborers are benefited. Thus we have two apparently contradictory results 
 well made out, of which only one can be really true. Which is true? Are 
 we to regard Fig. 8 as changed into Fig. 9 or into Fig. 10? 
 
 A very little consideration will show us 
 one essential difference. In Fig. 9 we are 
 dealing with absolutely the same body of 
 persons as in Fig. 8, namely, a spender or 
 body of spenders A, a body of velvet-mak- 
 ers V and O, and society. 
 
 Thus the comparison is made with the 
 same persons. 
 
 Now, supposing Fig. 8 to change into 
 Fig. 10, we bring into consideration a new 
 body of men, D. Now, A did not make 
 ^ [sustenance) these men on the spot to dance for him; 
 
 and even if he could do so, society would 
 FigTio not ^e benefited, because the streams to 
 
 and from society are precisely the same in 
 Fig. 10 as in Fig. 8. Very clearly, before we can decide whether Fig. 10 is 
 more favorable to society at large than Fig. 9, we must know what these men 
 D were doing in Fig. 8. It is at this point that the writer takes exception to 
 Mill's theory. It withdraws from society and brings upon the scene a new 
 body of men, D, and at the same time brings in an increase of subsistence 
 for the support of these men. It therefore proves nothing. We can con- 
 clude nothing until we know what the men D were doing in Fig. 8, where 
 they form a part of society. Now, we may make two hypotheses — that 
 they were employed in Fig. 8, or that they were for the time being unem- 
 ployed. If we take the most popular hypothesis, we shall undoubtedly 
 suppose thern to be unemployed. 
 
 There are constantly in the whole country a body of unemployed men, 
 ranging from a few thousand to perhaps half a million, or, we may say, one, 
 two, or three per cent of the whole population. The popular economy 
 holds these men up to view and informs us that if we will, by increasing the 
 volume of the currency or taking some other measures, find employment 
 for them, all will be well ; and it tacitly assumes that thereafter nobody will 
 be out of employment. As a matter of fact we have shown that this body 
 
DEMAND FOB COMMODITIES, ETC. 439 
 
 of unemployed men is of the same general magnitude, and subject to the 
 same kind of fluctuations, no matter what system we adopt, and that it is 
 inseparable from the ordinary fluctuations in production and consumption. 
 We cannot therefore look upon D as representing a permanently unem- 
 ployed class to whom we have given permanent employment. All we have 
 done is to take out of society, in imagination, a body of men D, and thus 
 to deprive society both of their producing and consuming powers. Their 
 consumption, which formerly came from society, now comes from V; that 
 is, the increased amount of food produced by V is the economic equivalent 
 of the sustenance which D produced when a part of society as in Fig. 8. We 
 have simply changed the occupation of D from that of production in general 
 to dancing, and the occupation of V and O from that of producing velvet 
 to that of producing sustenance. Thus the interests of society at large re- 
 main unaltered. 
 
 It therefore appears that the logical conclusions are the same even when 
 we adopt Mr. Mill's theory of the change. It is therefore unnecessary to 
 decide whether the outcome of the change is represented by Fig. 9 or 
 Fig. 10. 
 
 The case of Fig. 10 illustrates the way in which Mr. Mill and his dis- 
 ciples prove their theory. They bring upon the stage a body of unem- 
 ployed men and show that though these men should be surrounded by a 
 crowd of customers crying, "We want velvet," " We demand such food as 
 you know how to make," and offering them money for the velvet and the 
 food, yet this demand would not be of the slightest use to the men, who 
 could be employed only by some one offering them wages to go to work, 
 and finding the necessary capital for that purpose. 
 
 If this is true and obvious, as of course it is, why devote so much atten- 
 tion to refuting the deductions from it? I reply, because the fact is falla- 
 ciously used to set aside one of the most fundamental principles of eco- 
 nomics. A single example will suffice. It was shown in Chapter VIII., 
 preceding, that labor-saving machinery cannot diminish the sum total of 
 demand for labor, because all the money saved goes into the market to 
 purchase other products of labor. Mr. Mill says of this theory: 
 
 "This is plausible, but involves a fallacy; a demand for commodities 
 being a totally different thing from demand for labor. It is true, the con- 
 sumers have now additional means of buying other things; but this will not 
 create the other things, unless there is capital to produce them, and the im- 
 provement has not set at liberty any capital, even if it has not absorbed 
 some from other employments. The supposed increase of production and 
 of employment for labor in other departments therefore will not take 
 place; and the increased demand for commodities by some consumers will 
 be balanced by a cessation of demand on the part of others, namely, the 
 laborers who were superseded by the improvement, and who will now be 
 maintained, if at all, by sharing, either in the way of competition or of 
 charity, in what was previously consumed by other people." 
 
440 TEE SOCIETARY CIRCULATION. 
 
 Any one who has mastered the theory of the demand for labor set forth 
 in Chapter VI., ante, should be able to grapple with what seems to the 
 writer a totally groundless conclusion. It is true that the act of buying 
 commodities with the money saved by the machinery does not, in itself, 
 employ labor. But it transfers the employing power to the seller of the 
 commodities, and, even if the latter transfers it to another, it must after a 
 very few transfers reach laborers as wages, and then the result is the same 
 as if the saver had employed labor with it in the first place. 
 
 Mr. Mill's reasoning in fact seems to involve the conclusion that if the 
 crowd of men whom we have pictured as surrounding the unemployed 
 laborers and crying for velvet which they could not furnish should go to all 
 the velvet manufacturers within reach, and buy out for cash all their stock 
 on hand, as well as give them orders at double prices for all they could 
 make during the next year, that course would not give employment to one 
 of the unemployed men. No matter how fabulous the sums offered and 
 paid by the men hungry for velvet, their demand is only for a commodity, 
 and therefore does not set free any new capital for the use of the velvet- 
 makers, and so the latter cannot employ any new men. 
 
BOOK V. 
 APPLICATIONS 
 
 OF 
 
 ECONOMIC SCIENCE 
 
BOOK ¥.— APPLICATIONS OF ECONOMIC 
 SCIENCE TO QUESTIONS OF POLICY. 
 
 CHAPTER I. 
 
 THE LET-ALONE PRINCIPLE. 
 
 1. Most questions of governmental policy cluster around 
 one central maxim, founded on what is sometimes called the let- 
 alone principle. This maxim was enunciated by the Physio- 
 crates, a school of French economists and philosophers which 
 arose early in the last century. Its familiar form was, Laissez- 
 aller, laissez-faire ; which may be freely paraphrased, " Let 
 things take their own course." It was directed against the sys- 
 tem, which was then almost universal, of governmental inter- 
 ference with the freedom of intercourse between nations 
 and individuals. It opened up a new line of thought, founded 
 on the consideration that the individual man was a being better 
 able to take care of himself, in bargaining with his fellow-men, 
 than any government was to take care of him. We have to 
 consider what the maxim means, on what grounds it rests, to 
 what limitations it is subjected, and what are its relations to 
 the progress of society. 
 
 Since the maxim is directed against interference of govern- 
 ment with the individual, we must begin by considering the 
 relations of these two parties. We may consider government 
 in this case as the instrument for the combined action of society 
 at large. Thus the relation of the individual to government 
 means his relation to society ; that is, to all his fellow-men. In 
 this connection we must remember that society can be nothing 
 
444 APPLICATIONS OF ECONOMIC SCIENCE. [V. 2. 
 
 more than an aggregate of individuals, and can have no inter- 
 ests separate from the interests of individuals. It would be a 
 contradiction in terras to talk about a society which was wealthy 
 and prosperous while its individual members were poor and 
 starving. 
 
 We may consider the maxim as expressing either a policy 
 or a principle. Considered as a policy it claims that govern- 
 ment should not interfere with the rights of individuals, or bodies 
 of individuals, to direct their industry into sucli channels as they 
 may deem best, and to make such contracts with their fellow- 
 men as they may deem mutually advantageous. The principle 
 or law embodied in the policy is that non-interference on the 
 part of the government is best for the progress of society, so 
 far at least as the operations of its wealth-producing powers are 
 concerned. These two views of the maxim are practically 
 equivalent, because it is only on grounds of general good that 
 government can be required to abstain from interfering, and 
 thus the principle and the policy necessarily go together. 
 
 2. Economic Significance of Laissez-faire. Like all other 
 very general principles in social science, the let-alone principle 
 may have a very wide range of meanings and applications. In 
 order to treat it definitely it is necessary to distinguish between 
 these applications, and to find in what its economic significance 
 consists. Taken in its widest possible range, it is sometimes 
 interpreted as meaning that every man should always be at 
 liberty to do as he pleases. But it is evidently impossible that 
 he should enjoy this liberty. He might want to fly, but he 
 cannot do it. His liberty is necessarily limited by the condi- 
 tions which surround him. 
 
 The first class of limitations are those imposed by the physi- 
 cal necessities of the case. Two men cannot exist in the same 
 place at the same time. They cannot eat the same loaf of 
 bread. Practically a man cannot wholly rid himself of the 
 society of his fellows. 
 
 Tet further limitations are imposed by the mutual and equal 
 
 fr' 
 
 tU^ Jj^-^Ji *-*■ 
 
V. 2.] THE LET-ALONE PRINCIPLE. 445 
 
 rights of men. One man cannot be allowed to assault another, 
 however much he might like to do it. The sufferer from a 
 contagious disease will be quarantined or isolated by his fellow- 
 men. One man is not going to allow his neighbor to erect an 
 inflammable house adjoining his own, or to suffer nitro-glyce- 
 rine to be stored in his cellar. 
 
 Again, there are certain generally recognized necessities of 
 society which lead governments to demand certian duties from 
 their citizens. Of these the most important is the payment of 
 the taxes necessary to the public support. In most countries 
 this includes a contribution to the education of the rising gen- 
 eration. In case of war every male citizen may be required 
 to bear arms against the enemies of his country. 
 
 The above three limitations upon the let-alone principle have 
 little relation to economic questions. The burning question 
 of the day, in applying economic principles to governmental 
 polic3 r , is whether any economic advantage can be gained by 
 government interference with the liberty of the individual. If 
 we strictly limit our question in this wa}>-, we shall exclude some 
 questions which the economist often discusses. One of these 
 is that of limiting the employment of children in factories. 
 Legislation to effect this object has been opposed by economists. 
 If the purpose of the legislation had been the increase of wealth, 
 the ground taken by the economist might have been sound. 
 As a matter of fact, however, the purpose was the general good 
 of society in the future, which is not a purely economic ques- 
 tion, and therefore cannot be treated from a purely economic 
 point of view. Owing to the confusion which often arises 
 from not keeping in sight the distinction here indicated, we 
 shall define it precisely : 
 
 An economic question is one whose issue concerns only 
 wealth and its enjoyment, including the power of each individ- 
 ual to gain the maximum amount of gratification from his labor. 
 When other subjects are involved in the question, it ceases to 
 be a purely economic one, and therefore an answer founded 
 solely on economic considerations may not be conclusive. 
 
446 APPLICATIONS OF ECONOMIC SCIENCE. \Y. 3. 
 
 3. We may continue our examination of the principle by 
 correcting a misapprehension concerning it. It is very com- 
 monly considered as a policy invented by the economists, and 
 of doubtful applicability; sometimes, indeed, as a mere ab- 
 straction to which it is impossible to give a definite shape. 
 
 On the contrary, the maxim merely expresses a fundamental 
 law on which civilized society is organized, and one which, un- 
 der certain limitations to be hereafter considered, is obeyed in 
 most of the internal relations of all civilized communities. In 
 practice every civilized community allows each of its members 
 to engage in any occupation he chooses, and to make any bar- 
 gains with his fellow-men which he deems just, so long as he 
 does not interfere with their equal rights. It is on this basis 
 of individual freedom that the whole fabric of modern society 
 is erected. All that the economists did was to state and point 
 out the principle, and to claim for it a wider range than had 
 formerly been allowed it. 
 
 The most common argument against this view is this: In 
 early and primitive forms of society, when population is sparse, 
 governments weak, and each man under the necessity of pro- 
 tecting himself, the principle may well apply. But as civiliza- 
 tion develops, and population becomes denser, the relations of 
 the individual to society become so intimate that he has to give 
 up more and more of his natural rights, until he has so few 
 left that it is not worth while to consider them. 
 
 This argument is founded on a complete misapprehension of 
 the facts of the case. The let-alone principle, as a principle, is 
 quite modern ; and as a policy it is almost entirely a growth of 
 modern times. Until within two centuries there was no wide- 
 spread idea of the individual having any rights simply as a hu- 
 man being. He was born a citizen of some country, or a sub- 
 ject of some king, and was allowed such rights at home as law 
 or custom sanctioned. But if he left his country, it was only as 
 civilization advanced that any rights at all were conceded him. 
 
 One illustration will make this plain. To-day a person with 
 money enough to pay his way can travel around the world, 
 
V. 4.] TEE LET-ALONE PRINCIPLE. 447 
 
 coming into contact with thousands of men without meeting 
 any one to challenge him, or to demand whence he comes, 
 whither he goes, or why he is not attending to his affairs at 
 home. Two or three thousand years ago he could not have 
 travelled through Europe without being threatened at every 
 step with robbery, imprisonment, slavery, or death. 
 
 The fact is that although, with the progress of society, gov- 
 ernment has within its sphere grown more powerful and effi- 
 cient, this sphere has not been greatly enlarged. But the 
 sphere of individual activity has greatly enlarged, and with 
 the spread of knowledge the individual has become better able 
 to maintain his rights against society, and governments are be- 
 coming less and less able to manage him. Let us look, for ex- 
 ample, at such great public works of antiquity as the pyramids 
 of Egypt, and think how large a proportion of the laboring 
 energies of the nation which erected these structures could be 
 commanded by its ruler. We shall then see that although 
 civilized governments of the present day could undertake works 
 equally great, they could not command the same proportion 
 of the labor-power of the people. The labor-power of the na- 
 tion has increased many-fold, but the proportion of that power 
 which government can command has diminished in a nearly 
 equal degree. 
 
 4. The Grounds of the Let-alone Maxim. These grounds 
 are briefly as follows : 
 
 I. The Ground of Right. In the conscience of every civil- 
 ized man there is a feeling that he has the exclusive right to 
 the use of his own faculties, and that society at large, that is, 
 his fellow-men, should not interfere with his actions so long as 
 he does not interfere with theirs. The recognition of this 
 right in each individual carries with it the right of any two or 
 more individuals to make such bargains as they may deem best 
 for their interests. For example, if a farmer deems it to 
 his advantage to borrow money from a capitalist at twelve 
 per cent interest, and government comes in with a law that 
 
448 APPLICATIONS OF ECONOMIC SCIENCE. [V,4. 
 
 no one shall loan money at a higher rate than six per cent, thus 
 compelling the farmer to go without the money, and the cap- 
 italist to seek some less profitable investment, this is an inter- 
 ference with the natural rights of both parties to make their 
 own bargains. 
 
 It may be objected to this claim of right that after all it 
 amounts to nothing, because it is of no practical use for one to 
 claim a right which he cannot persuade or force others to re- 
 spect. The reply to this is that we may call it a power as well 
 as a right. As a matter of fact the civilized man can and does 
 enforce the right we have described in nearly all the every-day 
 relations of life. As a general rule the adult man can and does 
 use his faculties as he pleases, so long as he refrains from inter- 
 ference with the rights of other men to use their faculties as they 
 please. The only cases in question are therefore exceptional 
 ones, and the maxim then amounts to the assertion that gov- 
 ernment, or society at large, if we choose so to consider it, has 
 no right to exercise and claim a power in cases which are ex- 
 ceptional, and where the exercise of the power is merely vexa- 
 tious. 
 
 II. As a matter of policy, the let-alone principle is support- 
 ed on the ground that the processes of production and distri- 
 bution are conducted in the most advantageous manner when 
 left to the management of individuals, each of whom seeks only 
 his own interest. If a railway is to be built, self-interest will 
 prompt its projectors to make it connect those points and follow 
 that line where it is most wanted, because there people will 
 pay highest for its use. If the public want an article, that fact 
 will stimulate its manufacture. If the makers charge too much 
 for it, other makers will compete and thus lower the price. 
 The prices of any class of goods are highest where the goods 
 are most wanted, and lowest where they are least wanted. Thus 
 the self-interest which prompts traders to buy in the cheapest 
 and sell in the dearest market prompts them to do what is best 
 to satisfy the wants of the public. If an enterprise does not 
 pay its projectors, that fact shows that it does not confer upon 
 
V. 5.] THE LET-ALONE PRINCIPLE. 449 
 
 the public a benefit sufficient to compensate for the capital and 
 labor bestowed upon it. In general, since no man is required 
 to do anything which is not to his advantage, no bargains will 
 be made except such as, in the judgment of the parties, will 
 benefit both. 
 
 5. Criticism and Defence of the Let-alone Policy. If we 
 consider the preceding argument as valid in its widest and 
 most unrestricted application, we shall see that it rests upon 
 two tacit assumptions, namely : 
 
 1. That tilings are to be considered good in proportion to 
 the desire of people to have them. In other words, govern- 
 ment need have no other standard to decide whether an end 
 is good for society than the willingness of men to labor for 
 the attainment of that end. 
 
 2. That individuals are the best judges of what is for their 
 own interests. 
 
 Examination shows that there are, or may be, many excep- 
 tions to each of these premises. 
 
 I. Great numbers of people desire, and are willing to pay 
 for, things which are injurious both to themselves and their 
 posterity ; quack medicines and intoxicating liquors, for exam- 
 ple. In such cases it cannot be concluded by any single prin- 
 ciple that government should not interfere with the liberty of 
 the individual. As another example, children may, with pe- 
 cuniary advantage to their parents, be employed in a way 
 which will injure their health and cripple their mental and 
 physical development. It is clear that we have here a good 
 case for governmental interference. 
 
 To consider the subject in a general way, it is a universally 
 accepted principle that the main duty of government is to re- 
 strain individuals from infringing upon the rights and liberties 
 of their fellow-men. We may extend this principle by say- 
 ing that it may also be the duty of government to restrain the 
 individual from acts injurious to the morals of his fellows or 
 
 to the general good of posterity. 
 29 
 
450 APPLICATIONS OF ECONOMIC SCIENCE. [V. 6. 
 
 II. It is not true that the individual always knows what is 
 best for his own interests. This is markedly the case with the 
 laboring classes, whose opportunities for learning what places 
 offer them the best means of living are very restricted, and 
 whose intellectual inability to judge what public action will 
 promote their happiness leads them to form combinations in- 
 jurious to themselves. They are liable to be led into making 
 disadvantageous contracts with employers who are able to 
 overreach them. Hence several of the best governments, in- 
 cluding that of England, pass laws restricting the freedom of 
 contract between various classes of laborers and their em- 
 ployers. 
 
 6. Limitations on the Preceding Criticisms. The preceding 
 criticisms show that the let-alone principle cannot be regarded 
 as a necessary and universal truth, like a theorem of geometry. 
 But they are insufficient to prove the principle entirely in- 
 valid. Consider first the case in which the government is 
 asked to restrain the individual from doing what would be 
 harmful to himself or his family. To establish a case for 
 remedial legislation, it is not sufficient to show merely that in- 
 dividuals use their liberty to their own injury. Two other 
 propositions must also be established : 
 
 Firstly. That the individual can be really restrained, or the 
 evil he does himself be prevented, by the action of law. 
 
 Secondly. That in executing the proposed law other evils 
 equally great will not follow. 
 
 For example, in considering legislation to prevent the evil 
 of drunkenness, we must first ascertain whether such laws 
 really do prevent the drunkard from getting liquor, or, failing 
 in this, whether they save young men from being led into 
 temptation. Then we must consider the rights of those who 
 have legitimate uses for alcoholic liquors, and compare the 
 wrong done them by prohibitory laws with the benefit done 
 society by preventing drunkenness. 
 
 In answer to the second criticism, the question is not 
 
V. 7.] TEE LET-ALONE PRINCIPLE. 451 
 
 whether each person is a perfect judge of what is best for his 
 own interests, but whether Congress, or society at large, acting 
 in any way, is, practically, a better judge than he is. Now, 
 leaving out exceptional cases, whatever we may say of the im- 
 perfect judgment of the individual, it is certain that no legis- 
 lative power is a better judge of what is for his good than he 
 is himself. No public body can so well judge whether an en- 
 terprise will pay as the men who are to succeed or fail with it. 
 There is a reason stronger than any yet given why men are 
 better judges of their practical affairs than legislative bodies 
 can be, which we have already hinted at in treating of scientific 
 method. It is an observed fact that when a man of good un- 
 derstanding and fair business capacity enters npon any opera- 
 tions or projects in which his own personal interests are 
 involved, he maintains throughout a clear conception of what 
 those interests are, and of the effect upon them of each cause 
 which may come into play. It is equally an observed fact 
 that when such a man studies the public interests, this 
 power of seeing the effect of each cause upon those inter- 
 ests fails him. The reason of the failure is not so much a 
 mistake in estimating the effect of the cause as the want of a 
 clear idea what the public interests really are. The inter- 
 ests of fifty millions of people form an aggregate so com- 
 plex that they cannot be grasped by the mind without a con- 
 siderable power of abstraction ; that is, the power of drop- 
 ping out of consideration all non-essential conditions of the 
 problem, while keeping a firm grasp on all that is essential. 
 Now, this power is not universally possessed by men, and is 
 much rarer among men of action, who control public affairs, 
 than it is among scholars. 
 
 7. Limits of Application of the Let-alone Principle. — The 
 Keep-out Policy. This world in which we are placed is not, so 
 far as we have discovered, constructed upon a system so simple 
 that we can frame any universal laws for the conduct of man- 
 kind. We must therefore expect to find limits to the applica- 
 
452 APPLICATIONS OF ECONOMIC SCIENCE. [V. 7. 
 
 tion of all principles. As we have hitherto defined and 
 discussed the let-alone principle, it means only that govern- 
 ments ought not to interfere with the freedom of each 
 individual to employ his own faculties in his own way, and to 
 en^ao-e in such enterprises as he may choose, so long as he 
 does not interfere with the equal rights of others. It does not 
 deny to governments the same right as the individual to enter 
 into business enterprises, subject to the same restrictions as 
 individuals. But it is often extended so as to include the 
 doctrine that the functions of society should be absolutely 
 confined to the protection of the citizen against wrong, and 
 that government should not engage in any business enterprise 
 whatever, not even in establishing post-offices and carrying the 
 mails. 
 
 It is essential that the student of the subject should clearly 
 understand the difference between this proposition and that 
 of laissez-faire. The one claims that the government should 
 not stop the citizen from acting ; the other that it should not 
 act itself. For the sake of clearness we shall call the latter 
 the Jceep-out principle, because it requires that government 
 should keep out of certain fields of action. 
 
 Illustrations. When government undertakes to carry let- 
 ters,' it violates the keep-out principle. But it does not violate 
 the let-alone principle so long as the business pays for itself 
 and no additional tax is necessary to carry it on. When the 
 law prohibits any one else from carrying letters, then it vio- 
 lates the let-alone principle. 
 
 When a government issues notes to circulate as money, it 
 violates the keep-out principle. When it requires that creditors 
 shall accept these notes as if they were gold and silver, it violates 
 the let-alone principle. 
 
 The establishment and support of public schools is a violation 
 of the keep-out principle. It is also a violation of the other 
 principle to this extent : that the money to support the schools 
 must be raised by taxing every individual, whethei he wants 
 the school or not. 
 
V. 8.] TEE LET-ALONE PRINCIPLE. 453 
 
 Although in the abstract all taxes are a violation of the let- 
 alone principle, yet, if we are to adhere to this principle as 
 closely as we can, taxation should be levied only for the needs 
 of government. Hence when taxes are levied merely to keep 
 people from buying particular things, or to favor one person at 
 the expense of another, the principle is still further violated. 
 
 The same principle is violated when the law refuses to en- 
 force any contracts into which individuals have freely entered 
 for their own mutual benefit, and which works no injury to 
 third parties. The case is the same when the law construes 
 contracts differently from what the parties intended ; for ex- 
 ample, when it admits that a debt which the parties agreed 
 should be paid in gold may be discharged by a payment in 
 silver or paper. But it is no violation to define beforehand 
 what shall be considered a dollar, to say that it shall mean a 
 certain coin or a certain piece of paper, provided always that 
 the definition is applied only to cases in which the parties 
 understood that this was to be the meaning. 
 
 It is no violation of the let-alone principle for government 
 to compete with individuals in any branch of trade or industry, 
 so long as it does so without loss to itself, and hence without 
 increase of taxation. But any such action is of course a direct 
 violation of the keep-out principle. 
 
 8. Relative Applications of the two Principles. The let- 
 alone principle is valuable as an expression of that line of 
 policy which has made modern society what it is. But the 
 keep-out principle does not rest on any such basis. We can- 
 not decide a priori what governments should or should not do. 
 We should rather say that government should undertake any 
 business which it can undertake with advantage to the public 
 and without doing injustice to individuals. It has been more 
 than once questioned whether the post-office department should 
 open the mails to anything but such mediums of information 
 as letters and newspapers. Some maintain that it is no part 
 of the business of that department to act as a general carrier, 
 
454 "APPLICATIONS OF ECONOMIC SCIENCE. [V. 8. 
 
 and that such service should be left to express companies. 
 They would exclude little parcels of every kind from the 
 mails on this abstract ground alone, without even inquiring 
 whether the service could be performed with advantage both 
 to the government and the public. Thus a great convenience 
 to people living in remote regions would have been denied 
 them on a mere abstraction. The correct ground to be taken 
 was this : Government has undertaken to send conveyances with 
 letters and papers to every part of the country, itself assuming 
 the risk of its paying. If the additional cost of carrying mis- 
 cellaneous parcels in the same conveyances is compensated by 
 the additional revenues thus derived, then the work ought to 
 be undertaken ; but not in the opposite case. 
 
 A comprehensive view of the situation will show that there 
 are some services which are not performed in the best manner 
 when left entirely to private enterprise, because some of the 
 conditions which insure good performance are wanting. This 
 is notably the case with bank-notes, railways, and telegraphs. 
 
 Banhnotes. We have described the evils suffered by leav- 
 ing banks free to issue notes at their own pleasure. This state 
 of things was remedied only by governmental interference. 
 Government first issued notes itself, prescribed conditions on 
 which banks should issue notes, and prohibited the issue of any 
 others. 
 
 Railways. On the let-alone and keep-out principles a rail- 
 way will be built to a place by some company whenever the 
 benefit will pay for the outlay. But as a matter of fact the 
 benefit done by the road is always greater than the amount it can 
 collect for its services, because it cannot charge each separate 
 man what it pleases, but must treat all alike. Again, were the 
 principles of universal application, then, if the road did not 
 serve the public as well and as cheaply as it could, other capi- 
 talists would compete with additional roads. This is not always 
 the case. The possible projectors of a second road would see 
 that freights would be lowered and the lessened profits divided 
 between the old and new roads. Hence, although the first road 
 
V. 9.] THE LET-ALONE PRINCIPLE. 455 
 
 might make inordinate profits, it would not follow that a second 
 would pay. If the second is the last built, the two may com- 
 bine to keep up freights, and the public will then find itself 
 paying profits on two roads where only one is necessary. 
 
 Telegraphs. The history of telegraph companies in this 
 country affords an instructive example of how competition 
 may be prevented and an artificial monopoly retained through 
 an entire generation. The leading company long managed to 
 keep the price of messages above the natural limit, by buying 
 up or joining hands with every formidable competing com- 
 pany. The process has been a most wasteful one, because the 
 leader has to use the excess of profits which it derived from 
 the public in these purchases, thus making the public pay for 
 all these companies. In consequence of the liability to this 
 state of things it has become common for governments to take 
 the management of railways and telegraphs into their own 
 hands. This is especially the case with telegraphs, which are 
 managed in. connection with the post-office by all the leading 
 governments of Europe, and that with great advantage to the 
 public. 
 
 9. The strongest objection which has been urged against 
 the Government of the United States undertaking to benefit 
 its people in the same way is the supposed lack of wisdom with 
 which it will manage any such business. It has become the 
 custom for Congress to attend almost exclusively to special 
 "interests" in shaping its policy, thus losing sight of the gen- 
 eral public welfare. That is, if any legislation is proposed on 
 such a subject as the tariff, the encouragement of industries, 
 or the management of the telegraph, Congress does not inves- 
 tigate the subject itself with general reference to the public 
 welfare, but invites all who are interested to present their 
 views. Its policy is then determined by the views thus ob- 
 tained. 
 
 This method is a very bad one, because the only views that 
 can be presented are those of a few interested parties, and the 
 
456 APPLICATIONS OF ECONOMIC SCIENCE. 
 
 more these parties can gain at the expense of the public the 
 better they can afford to urge such a course as shall be to their 
 advantage. 
 
 ILLUSTRATIONS. 
 
 The reader who has carefully weighed the preceding discussion will per- 
 ceive that the main objections to government regulating the activity of the 
 individual are founded on purely practical considerations and not on abstract 
 principles. The reason why wise men are opposed to such regulations is that 
 under present conditions it is scarcely possible to have them wisely directed 
 to the public good, but very easy to have them employed for the public 
 injury. An illustration of each of these possibilities will be pertinent. 
 
 1. If a wise and intelligent man were called upon to devise a single 
 measure of government interference which should be of the greatest bene- 
 fit to the public health and happiness, and which would be at the same time 
 simple and easy, he would probably decide upon the suppression of all 
 quack medicines. The public spend many million dollars annually in pro- 
 prietary pills, bitters, cordials, oils, and other nostrums. Of many of 
 these compositions, spirituous liquors of the worst kind are the principal 
 ingredients. They injure the public health and foster the taste for alcohol, 
 opium, and other injurious products. What is yet more to the point, it 
 cannot be claimed for them, as it can for alcoholic and vinous drinks, that 
 they are sometimes of use and that they gratify an appetite. It cannot be 
 said that quack medicines are useful in any definable case, and their sole 
 basis is a fraudulent pretense that they can cure disease. Yet no one has 
 ever proposed their suppression by law, and we may feel fairly confident 
 that they are one of the last things which a government charged with the 
 task of regulating the activity of the citizen would think of interfering with. 
 
 2. Now take a case of the opposite kind. A few years ago it was dis- 
 covered that a fatty product known as oleomargarine could be manufactured 
 on a large scale at a small cost, and could be used as a substitute for butter. 
 No evidence has ever been adduced that it is not as wholesome and nutri- 
 tious as butter. So far as chemical research has shown, it is the equivalent 
 of butter in all its relations to the human system. Had any State legislature 
 consulted the best chemists within reach, they would have learned that the 
 manufacture of this product was as legitimate as that of another. Yet so 
 strong is the popular prejudice against it, that laws have been enacted the 
 effect of which is to discourage the manufacture; and we can hardly doubt 
 that were our legislators clothed by public opinion with the right to direct 
 the activities of the individual, one of their first acts would be the suppres- 
 sion of this perfectly harmless manufacture. Indeed an attempt to do this 
 was actually made by the legislature of New York, and was frustrated only 
 by a judicial decision that the law was unconstitutional. 
 
ILL U8TRA TIONS. 457 
 
 We may conclude from this review that if legislators really represented 
 the wisdom of the nation on every subject, they might be given much more 
 power over the individual. But so far as we have yet advanced, if we leave 
 out the cases in which the good and evil are so patent to everybody that 
 none can be deceived, we may foresee that the only effect of such power 
 would be to block the wheels of progress, and to make provisions for bene- 
 fiting the powerful few whose views could be heard by the legislature at 
 the expense of the masses whose interests cannot be felt. 
 
 3. To illustrate the difficulty described in § 9, let us suppose a company 
 to find that if Congress can be induced to adopt a certain policy, which we 
 shall call policy A, it can collect an extra profit of one cent per annum out 
 of each inhabitant of the country. Not one person out of a thousand 
 would give a moment's attention to the wrong, or indeed ever find it out. 
 Even if he found it out, it would not pay him to protest against the policy 
 merely to save himself from a loss of one cent a year for each member of 
 his family. He could not send a letter, or print a handbill, or call a 
 meeting of his neighbors without spending more time than the question 
 was worth. 
 
 Very different would it be with the other side. One cent per year out 
 of each inhabitant would make an annual income of $500,000. By expend- 
 ing a fraction of this profit the proposers of policy A could make the 
 country resound with appeals in their favor. At an annual expense of 
 $20,000 two or three new books could be published every year showing 
 the necessity or advantage of policy A, and a copy of each book could be 
 sent to every member of Congress. Another expenditure of the same 
 amount would suffice for the payment of several lecturers on the subject, and 
 the call of many enthusiastic public meetings to send petitions to Congress. 
 A third instalment would provide a body of able lawyers to plead with 
 individual members of Congress. A fourth would secure a long series of 
 editorial articles, in various newspapers, all favoring policy A, and calling 
 upon the people not to vote for any man who opposed it. Thus year after 
 year every man in public life would hear what would seem to be the unani- 
 mous voice of public opinion on the side opposed to the public interests. 
 
 4. Has the practice of the let-alone policy any appreciable influence 
 upon the development of men? That is to say, let there be two countries, 
 similarly situated in all respects, in one of which the government looks 
 carefully after the citizen, prescribing his going out and coming in, and 
 preventing his engaging in any enterprise which the government does not 
 consider beneficial; while in the other the government lets him have his 
 own way and suffer the consequences of any unwise acts he may perform. 
 "What difference in the character of the men would you expect to arise in 
 the course of generations? Is there anything in the policy of England and 
 America and the character of the Anglo-Saxon race by which you can 
 illustrate your conclusions? 
 
458 APPLICATIONS OF ECONOMIC SCIENCE. 
 
 5. Herbert Spencer, in Lis Social Statics, claims that if the coining of 
 money and the carrying of the mails had been left entirely in private 
 hands, the work would have been done as much to the public satisfaction 
 as it now is, if not more so. Discuss the subject from the point of view 
 of American experience with railways, express companies, and telegraph 
 companies. 
 
 6. Mr. Henry C. Carey regarded it an objection to the practice of trade 
 that traders always bought goods where they were cheapest and sold them 
 where they were dearest. Discuss the advantage of this system from a 
 philanthropic point of view. What would be the effect upon the pros- 
 perity of the world if traders should adopt a different policy? 
 
 7. When men are left to themselves they always purchase goods where 
 they can get them the cheapest. By so doing do they command the goods 
 with the minimum of labor to themselves? Can you imagine a state of 
 things such that a man should buy cloth from some other than the cheap- 
 est seller and yet that the cloth should cost him less labor by his adopting 
 that course? If so, state whether these circumstances are such as can 
 ordinarily exist in society. 
 
 8. Is the question of a prohibitory liquor-law an economic one? How 
 is it with the question of a protective tariff? Of laws against demoralizing 
 publications? If, in considering the question proposed in 4, you should 
 conclude that individual liberty favored a vigorous development, would 
 you set any limits to the proposition? For example, do you consider that 
 the liberty on the part of publishers to issue dime-novels for boys to read 
 is of a kind which favors development? 
 
V. 10.] TEE POLICY OF A PROTECTIVE TARIFF. 459 
 
 CHAPTEE II. 
 
 THE POLICY OF A PROTECTIVE TARIFF. 
 
 10. All nations levy taxes to a greater or less extent upon 
 goods imported from foreign countries. Such taxes are com- 
 monly called customs duties, or simply duties. A scale or 
 system of duties is called a tariff. A tariff lias two distinct 
 economic objects : 
 
 Firstly. The raising of revenue. 
 
 Secondly. A real or supposed advantage to the country in 
 "protecting" its producers against outside competition. 
 
 The policy of levying no tax on imported goods, except for 
 revenue, is called free trade. That of levying taxes to "pro- 
 mote home industry" is called protection, or the protective 
 policy. 
 
 One of the great economic questions of the day is whether a 
 protective tariff is, under any circumstances, of real advantage 
 to a country, and hence whether the policy of levying it should 
 or should not be upheld. This question may be considered 
 from two points of view, namely : 
 
 I. That of the let-alone principle in general. 
 
 11. That of the special question of public policy. 
 
 From the point of view of a partisan of the let-alone policy 
 as a general principle of action, there is no occasion for pro- 
 longed discussion. All taxes levied for the purpose of protec- 
 tion interfere with the freedom of the individual to secure his 
 goods on the terms most advantageous to himself, and hence 
 are violations of the let-alone principle. If, therefore, all men 
 admitted this principle, there would be no occasion for discuss- 
 ing the policy of protection. Since they do not all admit it, 
 we shall not consider it at all, but shall consider the policy of 
 protection solely as a practical one touching the public good. 
 
460 APPLICATIONS OF ECONOMIC SCIENCE. [V. 10. 
 
 Moreover, since it is difficult for one country to frame a policy 
 having in view the special benefit of other countries, we shall 
 take account only of the interests of the country which levies 
 the tariff. The question will then be whether we can really 
 promote our own interests by discouraging the importation of 
 foreign goods through the instrumentality of a tariff, and not 
 whether humanity at large is benefited. This is the question 
 on which free-traders and protectionists join issue. 
 
 We have already condemned all universal theories of govern- 
 ment the supporters of which would apply them without regard 
 to circumstances. Now, if by a protectionist we understand 
 one who contends for the highest possible duties on all impor- 
 tations, without regard to the requirements or necessities of the 
 situation, we must admit that the protectionist takes untenable 
 ground. As a matter of fact, all protectionists do not take such 
 sweeping ground as this. The general position taken by them, 
 and the only one worth considering, is that as a general rule 
 we can promote our interests by a protective tariff judiciously 
 adapted to our situation. The corresponding position of the 
 free-trader is that, as a general rule, our interests are promoted 
 by free trade. 
 
 Viewing the subject from this standpoint, we see that if we 
 break away from the let-alone principle, we restrict our dis- 
 cussion too much in confining it to the consideration of high 
 tariffs to protect ourselves against foreign competition. If 
 government is going to use its authority over foreign trade for 
 the purpose of promoting the interests of its citizens, it ought 
 to have full liberty of doing so in the best way, whether by a 
 high tariff or a low one. Thus, placing on the free list an arti- 
 cle from which we might collect a duty, because we think we 
 are thus benefiting manufacturers who use that article in their 
 industry, would be a violation of the let-alone principle. For 
 we must then levy a higher duty on other articles, and give 
 that which is free a special advantage. Again, export as well 
 as import duties might promote the public good, and we might 
 even go so far as to specially encourage the importation of 
 
V. 11.] TEE POLICY OF A PROTECTIVE TARIFF. 461 
 
 certain kinds of goods by bounties, in order to discourage 
 home manufactures, if by so doing our interests would be pro- 
 moted. 
 
 11. Looking at the subject from this broad point of view, 
 and throwing off all our prejudices for or against active efforts 
 on the part of government to promote our general welfare, it 
 must be admitted that many cases may arise in which it would 
 seem possible to promote the interests of ourselves and our 
 posterity by modifying the natural course of trade. The fol- 
 lowing are examples : 
 
 If it is found that the supply of iron, coal, and copper in our 
 mines is getting exhausted at a rate that, if continued, would 
 result in our posterity being entirely without these materials, 
 it would be sound policy to levy a tax upon the extraction of 
 those materials and to admit the foreign product free. Al- 
 though this would be an algebraically negative tariff, it would 
 in the proper sense of the term be protective, if we apply this 
 term to any tariff designed to promote our good. 
 
 If any manufacture is injurious to the public health, selfish- 
 ness would dictate our adopting such a course as would dis- 
 courage its prosecution by our own people. 
 
 If the promotion of some form of industry or labor by a 
 protective tariff is proved to be a valuable means of education 
 to the people, that fact would afford a sound reason in favor 
 of it. 
 
 The policy of permitting the free importation of any product 
 the home supply of which is monopolized by one or more par- 
 ties capable of combining to keep up the price is too obvious 
 to need enforcement. 
 
 But it must never be forgotten that none of these cases can 
 be proved by merely vague and general argument, but that 
 each must rest on its own grounds. Such general statements 
 as, " Home industry may be improved by a protective tariff," 
 " The ultimate cost of a product may be diminished by encour- 
 aging home competition," are entirely inconclusive and value- 
 
462 APPLICATIONS OF ECONOMIC SCIENCE. [V. 12. 
 
 less except as set-offs against the corresponding general argu- 
 ments in favor of free trade. For example, to show that some 
 particular commodity, such as silk, should be protected, it would 
 have to be shown not only that things in general might be got 
 in a cheaper way by encouraging the home product, but that 
 the special product silk would be thus cheapened. 
 
 12. The general argument for free trade is so simple as 
 not to require much elaboration. It is in fact nothing more 
 than an application to the case of foreign trade of the reasons 
 already adduced in favor of the let-alone principle. It is sup- 
 posed that, in ordinary cases and as a general rule, industrial 
 activity takes the most advantageous form when each individ- 
 ual is left free to promote his own interests in his own way, 
 subject to the requirement that he shall not encroach upon the 
 corresponding freedom of his fellow-man. The money paid 
 for goods by the purchaser is a measure of the labor expended 
 by the purchaser in earning the monej', and hence in command- 
 ing the goods. If they cost less when imported from abroad 
 than when bought from his neighbor, that very fact shows 
 that, so far as he is concerned, he gets them with less labor to 
 himself than if they were made at home. The difference be- 
 tween home manufacture and importation is simply this : that 
 in the one case we make the goods we want ourselves, and in 
 the other case we make other things to give foreigners in ex- 
 change for the goods we want. If it is easier and cheaper to 
 us to make the things which we give in exchange than to make 
 the goods, then it is to our economic advantage to import them 
 rather than to make them. 
 
 We have in the beginning mentioned, what is indeed an ob- 
 vious fact, that men, when left to themselves, try to supply 
 their wants with the least possible amount of labor. The free- 
 trader assumes that, in doing this, men are actuated by sound 
 common-sense. But the protectionist takes the ground that 
 there are other and more intricate questions to be considered 
 than the merely economic one of labor. If, in conformity to 
 
V. 13.] THE POLICY OF A PROTECTIVE TARIFF. 463 
 
 this view of the protectionist, we reject the free-trade argu- 
 ment, then we have to consider what reasons can be assigned 
 in favor of a protective tariff. The reasons which one meets 
 are so numerous that they cannot all be considered in detail ; 
 indeed, the course most advantageous to the student will be to 
 examine them for himself and reach his own conclusions. "We 
 shall therefore do little more than state and analyze the prin- 
 cipal reasons in such a way as to guide his thought on the 
 subject. 
 
 13. First Argument for Protection: The Home-indus- 
 try Argument. The following is the form of the argument as 
 usually stated : 
 
 It is important that our commercial and manufacturing in- 
 terests should he protected and industry promoted. By levy- 
 ing a tariff upon the importation of all products that can he 
 made at home we encourage their manufacture at home • by a 
 tariff on iron we cause furnaces for the production of iron to 
 he built, and men to be employed in working them y levying 
 duties on cotton goods causes cotton-mills to he built, and men 
 to he employed in making cotton ; a tariff on glass gives rise 
 to glass-works, and encourages glass-making • and so on indefi- 
 nitely. On the other hand, were free trade permitted, there 
 would be an influx of cheap goods from abroad which would 
 result in a great diminution in the number of our mills, fur- 
 naces, and factories, and would be productive of a great dimi- 
 nution in the amount of industry devoted to the manufacture 
 and sale of iron, clothing, and other products of industry 
 which could be imported from abroad. 
 
 As in all questions of policy, two logical steps come into 
 play in this argument — the one of cause and effect, the other 
 of policy. It concludes, first, that, as a matter of mere cause 
 and effect, the cutting off of the foreign supply of goods pro- 
 motes home industry. Secondly, it assumes that industry is a 
 good thing and therefore ought to be promoted. It is very 
 important that the student should make up his mind on these 
 
464 APPLICATIONS OF ECONOMIC SCIENCE. [V. 13. 
 
 two conclusions separately and not confound them together. 
 The first can be treated by strictly scientific methods in such a 
 way that no doubt can exist in the minds of reasonable men. 
 The second is one of those questions of policy which every 
 person must decide for himself by the aid of his own common- 
 sense. 
 
 Beginning witli the first conclusion, it is too obvious to need 
 proof that levying duties on goods which, were trade free, 
 would be imported must tend not only to increase the home 
 manufacture of those particular goods, but the home produc- 
 tion of everything necessary to make the goods. This is, in- 
 deed, nothing more than saying that when we throw difficulties 
 in the way of a man doing something which he wants done, he 
 will exert himself to overcome the difficulties, or to reach his 
 end by some other means. Cutting off his legs will encourage 
 him to make wooden legs ; depriving him of machinery will 
 lead him to make more and better use of his hands ; and so on 
 indefinitely. The tariff does not make it any easier to manufac- 
 ture our own goods. It only makes it more necessary by com- 
 pelling us either to manufacture them or to go without them. 
 
 But it would be a mistake to suppose that this increase in 
 any particular production necessarily indicates an equal in- 
 crease in the sum total of industry. Whatever capital and 
 labor are thus devoted to one form of industry will, to a greater 
 or less extent, be withdrawn from other employments. In the 
 present case we can see exactly how this withdrawal is effected, 
 and how the compensation is established. No foreigners are 
 going to bring us their goods, or allow us to buy them, unless 
 we give them an equivalent of our productions in exchange. 
 Vice versa, we are not going to make goods for them unless 
 we can get theirs in return. No matter how free trade may 
 be between us and the Esquimaux, we will not ship them any 
 goods. "We cannot under any circumstances import foreign 
 goods without exporting an equivalent of our own products. 
 Hence whenever we diminish importations by a protective 
 tariff, we must at the same time diminish the production of 
 
V. 13.] THE POLICY OF A PROTECTIVE TARIFF. 465 
 
 those goods which, were trade free, we should give in exchange 
 for the goods imported. Thus the compensation is effected by 
 withdrawing labor and capital from the manufacture of goods 
 for export, and devoting it to the production of goods for home 
 use. 
 
 It would, however, be a mistake in the other direction to say 
 that all the industry set in operation by the tariff is withdrawn 
 from other employments, and that there is no increase what- 
 ever. The very fact that, under free trade, goods are im- 
 ported instead of being made at home shows that we find it 
 easier to make the goods which we send abroad than to make 
 those which we receive in exchange for them. Hence when 
 Ave are forced to make them ourselves, there must be an in- 
 crease in the sum total of our industry. Thus the first conclu- 
 sion of the protectionist is shown to be true to a limited extent. 
 
 We have now to consider the second principle, which is that 
 increase of industry is, in itself, a good thing. This principle 
 is really at the basis of the argument, because if industry is not 
 a good thing in itself, why should we take so much trouble to 
 promote it ? 
 
 Few social subjects are of more interest to the philosophical 
 student than the views and practices of men on this point. ~No 
 opinion is deeper-seated in the ordinary mind than that other 
 people should be encouraged to labor, and that when they are 
 hard at work the interests of society are promoted. This 
 opinion gathers tenfold strength when the work is of a kind 
 which strikes the senses. It is hardly possible for any person 
 to visit a great foundry, listen to the clank of the machinery, 
 see the flames light up the evening sky, and watch the forms 
 of a hundred workmen in active motion, without being im- 
 pressed with the belief that he sees before him an activity of 
 great national importance. If he were asked how the labor of 
 five hundred washerwomen in the country compared in impor- 
 tance with that of the foundry employing a hundred men and 
 making a noise which could be heard miles away, it would strike 
 him as very odd that the work of five quiet women should be 
 30 
 
466 APPLICATIONS OF ECONOMIC SCIENCE. [V. 14. 
 
 compared with that of one man working a great steam- 
 hammer. It is perfectly certain that the washerwomen do not 
 receive as much attention at the hands of the public as the 
 iron-founders. "Whether the importance of the two classes to 
 public comfort and happiness is proportional to the attention 
 they receive is an instructive question for the student to think 
 over. 
 
 14. On this question of the desirableness of industry in 
 itself the free-trader and the protectionist come squarely at 
 issue. The former, if he is going to take any tenable ground, 
 must take the ground that industry in itself is a positive evil, 
 or, to speak more accurately, that an increased necessity of em- 
 ploying it in any particular direction is a drawback to human 
 enjoyment. The protectionist, if he is logical, and if he ac- 
 cepts his own argument, must join issue and claim that indus- 
 try in itself is a good. To decide the point it is necessary to 
 make abstraction of everything but the industry, and inquire 
 whether industrial activity is a good in itself. For example, 
 if a man were to do work in a foundry, and all the hammering, 
 melting, burning, and labor went on without any iron being 
 produced, or if these processes were all performed over and over 
 again on the same iron, we should still have all the industry. 
 "Whatever benefits and advantages would then inhere in the 
 foundry must be considered as so much in favor of pure in- 
 dustry. The men would have the benefit of the exercise, and 
 the managers would gain experience in organization. 
 
 In this particular comparison the iron produced must be left 
 out of consideration, because we get that under either system. 
 The claim of the protectionist is, not that we should get no iron 
 under free trade, for we would get rather more than we would 
 make, but that we should get it without any hammering, burn- 
 ing, digging, or other forms of labor. The question whether 
 it is better to get it with or without these operations must de- 
 pend on whether the operations are in themselves a good. If 
 iron plus industry is better than iron without industry, it can 
 
V. 15.] TEE POLICY OF A PROTECTIVE TARIFF. 467 
 
 only be because industry without iron is a good thing. This 
 -ig" r aTp6Tnt on which the student must make up his mind for 
 himself. 
 
 15. Second Argument for Protection. Our labor cannot 
 compete with the low-priced labor of Europe without the wages 
 of our operatives being depressed to nearly the scale tohich 
 prevails abroad. Since there cannot be two prices for the same 
 commodity where free competition is allowed, the rate of 
 wages in countries between which trade is free cannot differ, by 
 more than the cost of exchange and transportation. We may 
 therefore lay it down as a general law that whenever free trade 
 is permitted between two countries in which the scale of wages 
 is decidedly different, the resulting competition will tend to the 
 disadvantage of laborers in the country where the wages are 
 the highest. 
 
 At first sight this argument might seem identical with the 
 former one. The difference is this: in the first argument we 
 are concerned only witli industry and not with the rate of 
 wages. Wages are different from industry in the abstract. 
 Very low wages might promote industry by compelling men to 
 labor more in order to make a living. 
 
 One fallacy of this argument lies in its not taking account of 
 the very different circumstances of different countries. To 
 those who will not accept any proofs except of fact, the fact 
 that in England, which is the typical free-trade country of the 
 world, wages have long been much higher than in the neigh- 
 boring countries of Europe where protective tariffs are in vogue, 
 ought to be a sufficient proof. But the use of this particular 
 method of proof is quite beneath the economist, for the simple 
 reason that it proves nothing except that free competition does 
 not necessarily depress wages in the country where they are 
 highest. There may be great numbers of causes for this dif- 
 ference besides free trade, so that we are not justified in attribut- 
 ing it to the latter. The only satisfactory proof of the fallacy 
 is shown by the reason of the thing. We have shown in Book 
 
468 APPLICATIONS OF ECONOMIC SCIENCE. [V. 15. 
 
 TV., Chapter YIIL, that no cheapening of products can lessen 
 the sum total of the demand for labor in the country, because 
 the money saved on any product goes into the market for the 
 purchase of labor on some other product. Thus the only effect 
 which can be produced by free trade is an increase of wages for 
 one class of laborers, with a corresponding diminution for 
 another class. Should we introduce free trade, and, in conse- 
 quence, should there be an importation of x dollars' worth of 
 goods which we had been making for ourselves, there would 
 be a falling off of x in the demand for labor to make these 
 goods. But there would be an increased demand y for labor 
 to make the goods we should have to give in exchange. If y 
 were less than x, the people who had been paying x dollars 
 would save the difference, and have it to spend for labor of some 
 other kind. The two demands y and x — y would exactly 
 compensate the loss x. The equilibrium is restored by a 
 gradual change in the direction of labor from the prod action of 
 x dollars' worth of goods of one kind to x dollars' worth of 
 some other kind. Such a change, as we have already shown, 
 can nearly always be made faster than any change in the de- 
 mand. 
 
 To the cry, "We cannot compete with the pauper labor of 
 Europe," the answer is, Why do you want to compete? And 
 this brings us to the question, Why are wages higher here than 
 in Europe ? The answer is, Because we have a larger and more 
 profitable field for labor in developing the resources of our 
 country. Erecting houses, building railways, cutting down the 
 forests, digging ore from our mines, and raising wheat from our 
 prairies afford a more remunerative employment for labor than 
 can be obtained in densely populated countries where the rail- 
 ways are already built and the fields of wheat are limited. Our 
 laborer compares with him of Europe in a small degree as the 
 successful lawyer does with the bootblack. The lawyer can- 
 not compete with the bootblack in the art of the latter. Does 
 he therefore desire the price of blacking boots to be raised lest 
 his professional income shall be reduced? Not at all. He 
 
V. 17.] THE POLICY OF A PROTECTIVE TARIFF. 4.QQ 
 
 simply does not compete, but employs himself more profitably 
 in other directions. 
 
 16. To look at the matter from a different point of view, 
 let us consider the case of some great glass-factory. Here we 
 have a great industry employing, we may suppose, a thousand 
 men and a large amount of capital, consisting of buildings, fur- 
 naces, and raw materials. Under free trade this factory would 
 perhaps never have existed, and if free trade were permited it 
 would perhaps have to stop. Now what does all this mean ? 
 It means that one thousand men who, had there been no pro- 
 tective tariff, would have been at work building railways, erect- 
 ing houses, digging in the silver-mines, raising wool, or rearing 
 cattle, have been turned from these employments into building 
 chimneys and making glass. Instead of making things to give 
 foreigners in exchange for glass they are making the glass it- 
 self. Now, the question whether this change is advantageous 
 depends very largely upon whether we are to assign any spe- 
 cial value to the work of making glass rather than to the other 
 work which we have described. By fostering the glass in- 
 dustry we have diversified employment. But is this diversity 
 of any general advantage? Is the country any better off be- 
 cause a thousand men spend their lives in inhaling noxious 
 fumes from furnaces rather than working in the open air? 
 These are questions for every one to consider for himself. 
 
 17. Another consideration which may be adduced is that of 
 the possible amount of foreign competition were all restrictions 
 removed. Mr. Edward Atkinson* estimates the value of the 
 total products of industry in the United States during the year 
 1884 at $10,000,000,000. During the same year the total value 
 of imported merchandise was $668,000,000, or less than seven 
 per cent of our home production. Were the tariff abolished, it 
 is hardly possible that our imports could be doubled ; indeed it 
 
 * The Distribution of Products, p. 31. 
 
470 APPLICATIONS OF ECONOMIC SCIENCE. [V. 18. 
 
 would take a long time to build the ships necessary to bring 
 in the double quantity. It is therefore hardly possible that 7 
 per cent more of our labor would meet with foreign competi- 
 tion. And, if it did, we should have to produce $700,000,000 
 more of goods to export in payment. We should also have to 
 build railways and rolling-stock to transport the goods to the 
 sea-coast, and bring back those received in exchange. Thus, 
 altogether, even the small percentage in which the competition 
 was felt would be balanced by new demands incident to the 
 change. 
 
 18. A Protective Policy Mutual and Reciprocal. To 
 completely understand the workings of a protective tariff it is 
 necessary to see that it is reciprocal in its action; that is to say, 
 if a country A wishes to protect its industries against the com- 
 petition of a country B, that protection can be secured by the 
 action of B as well as by that of A itself. The reason of this 
 is that trade is mutual, and will not go on unless each country 
 receives an equivalent for what it exports. A stream of values 
 is constantly flowing in each direction, and the two streams 
 being equal, an obstruction produces the same effect whether 
 at one point of the stream or another. One example of this is 
 seen in the effect of an export duty. 
 
 Suppose that the English nation should require all cotton 
 goods exported to America to pay a tax of 50 per cent, while 
 no duty was levied by America. It would make no difference 
 either to the exporter of the cotton from Liverpool or its im- 
 porter in New York whether this tax was paid on sailing from 
 Liverpool or on arriving in New York. Hence the price in 
 New York would be affected in the same way, and the stimulus 
 to our own industry would be the same as if the duty of 50 per 
 cent had been levied by America. The only difference would 
 be that it would be the British Government and not our own 
 which would collect the revenue. But this would make no 
 difference to the cotton-manufacturers of our country. 
 
 Again, suppose that all foreign countries should unite in lay- 
 
V. 18.] THE POLIGT OF A PROTECTIVE TARIFF. 471 
 
 ing a heavy duty upon our wheat, cotton, and other exports ; 
 this would diminish all our exports, and would therefore dis- 
 courage the production of wheat and cotton in our own country. 
 It would also prevent our importing so many manufactured 
 goods from abroad, and would thus in two ways cause our in- 
 dustry to forsake the production of wheat and cotton and to 
 engage in the manufacture of those things which, had foreign 
 countries not levied the tariff, would have been imported from 
 abroad. Thus the general effect in stimulating and diversifying 
 industry would be the same whether we or foreigners levied the 
 tariff (cf. III. 70). 
 
 Still there would be important differences in detail, depend- 
 ing upon the magnitude of the tariff : if it were not sufficient 
 to stop all trade, then foreign governments would get the 
 benefit of the revenue and we would get none. Moreover, 
 such a foreign tariff on our exports would not encourage any 
 special industry among us, but only industries in general. That 
 is to say, we could not say that it would encourage the iron in- 
 dustry or the cotton industry separately, but would, so to 
 speak, encourage equally the production of everything which, 
 under free trade, we would import from abroad. On the other 
 hand, a domestic tariff can be so adjusted as to protect any par- 
 ticular industry, the silk-manufacture for example, and to leave 
 any or all others unprotected. Our own tendency is, however, 
 to protect all our manufactures equally ; and this can be effected 
 by the foreigners levying their tariff on our goods as well as by 
 we levying our own tariff on theirs. Moreover, the effects of 
 the two tariffs become identical as they approach the prohibitory 
 limit. If all foreign governments should levy such tariffs as 
 to actually prevent the export of American products, all trade 
 in both directions would be stopped, and the effects would be 
 the same as if we should levy a prohibitory tariff upon all for- 
 eign products whatever. 
 
472 APPLICATIONS OF ECONOMIC SCIENCE. 
 
 ILLUSTBATIONS AND EXERCISES. 
 
 1. Bastiat, a popular French economist, published a burlesque on the 
 arguments for protection by preparing an imaginary petition addressed to 
 the Chamber of Deputies by the manufacturers of everything necessary 
 to the production of light. This petition showed the great benefit which 
 would arise to French industry if a law were enacted requiring that the sun- 
 light should be rigorously excluded from all dwellings. The supposed 
 petitioners traced out the effects of this policy upon industry in some 
 such form as the following: 
 
 I. There would arise a greatly increased demand for all products of in- 
 dustry necessary to the production of light, including tallow, oil, lamps, 
 and chandeliers. As a result of this demand the industry of all persons 
 engaged in the production of these commodities would be stimulated to 
 activity, and the prevailing depression and distress among them would be 
 immediately cured. 
 
 II. This activity would be transmitted to other industries. The demand 
 for tallow would cause an increased demand for oxen and sheep. Thus 
 more of these animals would be reared, and we should have a great increase 
 in the production of artificial meadows, of wool and of hides, so that the 
 whole farming population, including both land-owners and laborers, would 
 find an increased demand for the products of their industry. 
 
 III. The increased demand for oil would result in an expansion of the 
 whale-fisheries; more ships would be demanded, and thus employment 
 would be given to more ship-builders. The latter, in their turn, would be 
 able to buy more food and clothing. 
 
 IV. As a result of the increased demand for lamps and chandeliers, all 
 workers in brass would be immediately benefited by the increased demand 
 for their industry. Their augmented income would enable them also to 
 purchase more food and clothing. The increased demand for food and 
 clothing would benefit all producers of food and all makers of clothing. 
 Thus, step by step, the industry of all classes and of the whole nation would 
 be stimulated to renewed activity, and an era of prosperity such as had 
 never before been known would bless the whole land. 
 
 Now, what is right and what is wrong in the conclusions of this petition ? 
 Were the supposed petitioners right or wrong in claiming that the policy 
 which they advocated would result in a greatly increased demand for labor 
 and in a great increase in the national industry ? Is it or is it not true that 
 the production of tallow, oil, and chandeliers would be stimulated, and that 
 the stimulus would extend to laborers of every class ? If they were right, 
 what reason can you assign why their petition should not be granted? Sup- 
 pose that by a little ingenuity an artificial light could be produced which 
 would be as good and as pleasant to the eyes as dajdight: what reason can 
 
THE POLICY OF A PROTECTIVE TARIFF. 473 
 
 you assign against its employment in lieu of permitting the free introduc- 
 tion of daylight ? 
 
 2. Now view the opposite picture of an apparent evil. Suppose a tree 
 discovered in foreign parts, resembling the cotton-plant, but suddenly 
 brought to such perfection that completely made fashionable garments of 
 any cut the planter might desire could be made to grow on the plant; and 
 this with such ease and in such quantities that one fourth the laborers now 
 engaged in cotton cultivation could produce clothing for the whole country 
 at a merely nominal cost. 
 
 Note the consequences. All the tailors of the country would be imme- 
 diately thrown out of employment. All the stores of cloth and clothing piled 
 up in our warehouses would immediately become almost valueless. The 
 value of all our factories would be as completely destroyed as if a devouring 
 angel had swept over the land. Capital worth thousands of millions would 
 vanish in a night. Nearly all the clothiers in the land would become 
 bankrupts, millions of operatives would be thrown out of employment, and 
 a commercial crisis such as has never yet been known would supervene. 
 
 Would all this on the whole be an evil or a benefit ? From the stand- 
 point of common-sense could it be an evil that everybody should be well 
 clothed without labor and without price ? How would the compensation be 
 effected, and what would be the ultimate effect of the new clothes-bearing 
 plant upon the interests of the country ? As a matter of policy ought 
 Congress to prohibit the introduction and cultivation of such a tree? 
 
 3. Consider the following argument and counter-argument for protec- 
 tion: 
 
 Argument. The principal effect of the protective tariff is to benefit the 
 farmer by securing for him a home market for the products of his farm. 
 The policy in question leads to the establishment of manufactories in his 
 immediate neighborhood, thus bringing the consumer of wheat to his own 
 door as it were. The cost of transporting wheat to a foreign country, and 
 of bringing back the products of that country to the farmer for his own use, 
 is thus saved. The manufacturer and his workman, in consequence of the 
 stimulus to their industry given by the tariff, are better able to purchase the 
 farmer's wheat, while the farmer himself has fewer competitors to engage 
 in the work of raising wheat. Thus the agricultural class is that most 
 benefited. 
 
 Counter-argument. No home market can be created by the tariff for the 
 simple reason that the demand for food depends principally upon the num- 
 ber of people to be fed and the population within reach of the farmers. 
 The demand for food is not increased by the tariff; all classes of laborers 
 can purchase all the food needed for their subsistence at lower rates of 
 wages than they now receive. They will not purchase more than this un- 
 der any circumstances. Hence, so far as mere selling is concerned, the 
 farmer has the same market in either case. But under free trade he can 
 
474 APPLICATIONS OF ECONOMIC SCIENCE. 
 
 purchase everything he wants at a cheaper rate than he can if his foreign 
 sources of supply are cut off by the tariff. 
 
 From the best data you have at hand compare the cost of transporting a 
 cart-load of wheat to a factory ten miles away by horse-power and the cost of 
 transporting the same wheat from Chicago to Liverpool by railway and 
 steamship. Compare also the cost of sending a pair of boots from one end 
 of New York City to the other by a messenger-boy, and the cost of trans- 
 porting the same boots across the Atlantic. From these comparisons frame 
 a definition of the term "distance from market" in an economic sense. 
 Consider also how far it is true that the farmer in Illinois must pay all the 
 transportation both ways if he trades with a foreign country, and how far 
 it would be true to say that the foreigner who eats his wheat and returns 
 the goods must pay the transportation in both directions. Can we throw 
 the cost upon the one more than upon the other? 
 
 4. Why do the English desire free trade with America? Is it that they 
 may find a way of getting their own goods consumed by us, or that they 
 may get the wheat and corn of our prairies to feed their own people with? 
 
 5. Trace out the points of resemblance and difference between the ar- 
 guments for protection and the arguments against labor-saving machinery. 
 So far as our own interests are concerned, is there any essential difference 
 between the effects of our markets being flooded with cheap goods, produced 
 by a foreign pauper working efficiently for almost nothing, and by the pro- 
 ducts of a machine working for nothing but the labor of attention? 
 
 6. We feel very mucli pleased when a foreign market is opened for our 
 goods, but after they are sold we esteem it a favor if we freely admit the 
 goods the foreigners give in exchange. When we find, by statistically 
 summing up our exports and imports, that we have sent abroad goods of 
 far greater value than we have received in exchange, we say that the bal- 
 ance of trade is in our favor. Is this way of looking at the matter in 
 accordance with logic and common-sense? If so, just how far would you 
 carry the principle? If it should be found that we had exported goods to 
 the amount of one hundred million dollars and only received ten millions' 
 worth from abroad, would this show a desirable state of things? Is it any 
 use to open up a new market if we get nothing in exchange? Are we 
 better off the more we get in exchange or the less we get in exchange? If 
 the former, is it logical to try to diminish the amount of imports by protec- 
 tive duties? If the latter, what sort of people should we select to bestow our 
 goods upon? 
 
 7. At the present time hardly any fine white sugar is made in England; 
 the English consumers are supplied almost entirely from France. This is 
 because the French Government gives what virtually amounts to a bounty 
 on all the sugar which goes from France; thus enabling French sugar-refin- 
 ers to undersell their competitors. (Mrs. Fawcett's Political Economy.) 
 
TEE POLICY OF A PROTECTIVE TARIFF. 475 
 
 Is it to the advantage or disadvantage of the British nation that the 
 French give this bounty to their sugar-manufacturers? Which view soever 
 you take, carry it out to its logical consequences on the largest scale. Consider 
 especially a nation which we may call X surrounded by neighbors who 
 are bent on encouraging their own industry to the highest extent at the ex- 
 pense of that of X. "Whatever industry X engages in, some surrounding 
 nation offers to its own producers in that industry such a premium that 
 they can produce and sell the product to the people of X cheaper than 
 these people can make it themselves, and thus the manufacturers of X 
 are kept at a relative disadvantage. Suppose a combined attempt were made 
 by the neighbors to continue this policy to an unlimited extent: would the 
 effect upon the people of X be beneficial or injurious? State how far this 
 policy could be carried, and what its ultimate outcome would be. 
 
 8. Analyze the following arguments for protection, and show whether 
 such a result is probable: 
 
 If free trade were permitted, and if foreign manufacturers found our 
 home manufacturers producing anything which the foreigners could pro- 
 duce with equal advantage, they would first flood our markets with the 
 articles in such quantities us to entirely stop the American production. 
 The Americans having disbanded all their laborers engaged in the manu- 
 factories and suffered the machinery to go into decay, the foreigners would 
 put the price up until it was higher than it ever was before, and would so 
 keep it until the American manufacturers again went to work. Then they 
 would, by lowering the price, again repeat the process of destruction, and 
 so on indefinitely; thus subjecting the price and supply in our country to 
 enormous fluctuations, and causing our manufacturers to waste time and 
 capital in starting enterprises which were to be immediately rendered 
 worthless. 
 
 If we call the home manufacturers A, B, C, etc., and the foreign manu- 
 facturers X, Y, Z, etc., then under a prohibitory tariff competition will be 
 confined to A, B, C, etc., while under free trade X. Y, Z, etc., will compete 
 with each other and with A, B, C, etc., also. Under what circumstances, if 
 any, is it possible, by thus widening the range of competition, to make prices 
 more unsteady? The result will be different according as the home or for- 
 eign product is more or less monopolized. Consider as an extreme case that 
 in which there is but one home manufacturer, A, and but one foreign man- 
 ufacturer, X, each of whom has a complete manufactory. 
 
 Consider also whether the following reversal of the reasoning is as sound 
 as the other: If the foreign manufacturer should try the policy pointed 
 out, the result would be that America would supply itself at a very cheap 
 rate with a large quantity of the goods, while the American manufacturer, 
 though temporarily ceasing his production, would employ his time in get- 
 ting ready to re commence at the first favorable moment. His men would 
 temporarily find other employments. When the foreigner attempted to 
 
476 APPLICATIONS OF ECONOMIC SCIENCE. 
 
 raise the prices, be would find no American buyers until tbe stock be bad 
 formerly sold was nearly used up. Tben tbe American producer, finding 
 tbe market favorable, would start work again, thus compelling tbe for- 
 eigner to again lower bis prices. Tbe result would be tbat tbe foreigner 
 would be compelled to sell to us below cost and there would be no fluctua- 
 tions whatever. 
 
 9. In the New York Tribune Mr. Horace Greeley once illustrated the 
 danger of free trade by picturing an imaginary island the inhabitants of 
 which supplied all their own wants by their own industry. But the island 
 was discovered by a nation of traders, who forthwith sent cargoes of goods 
 to it and offered to the inhabitants everything that they wanted at a cheaper 
 rate than they could produce it themselves. The result was that all indus- 
 try on the island ceased and universal ruin overwhelmed the inhabitants. 
 
 Supposing the inhabitants to be men of sense, were they the happiest or 
 the most miserable of beings? 
 
 10. Under the Constitution of the United States no State can levy duties 
 upon imports. The result is tbat uo State can protect its industry against 
 tbe unrestricted competition of that of other, States, and thus we have a 
 more extended system of absolute free trade on the American continent 
 than in any other similar region of the world. Consider whether this is to 
 the advantage or to the disadvantage of the less developed States. Take 
 up the questions involved in the following order: 
 
 I. In the State of Ohio no great factory for the production of fine cotton 
 goods has arisen or can arise owing to the superior facilities of New Eng- 
 land in that branch of industry. 
 
 11. Is it not, then, to the detriment of the people of Ohio that they cannot 
 protect themselves against this competition? If not, why not? Does the 
 fact that the competition comes from fellow-countrymen change its effect? 
 Can it be a good thing to have tbe manufactures of Ohio crippled by citi- 
 zens of Massachusetts, but a bad thing to have the same thing done by for- 
 eigners? If so, show in what the good consists in the one case, and in 
 what the bad consists in the other case. Suppose the New England States 
 to be separated from the Union: would their competition then become 
 more injurious to tbe other States than it is now? Suppose the Constitu- 
 tion to be so amended tbat each State could protect its industry against the 
 competition of other States of the Union: do you think a protectionist party 
 would arise in each State demanding such protection? Could they or could 
 they not logically apply the arguments for protection to the case? 
 
 In fine, if a free-trader should argue thus: 
 
 That which is an evil when inflicted by one agency cannot become a 
 good merely by being inflicted by some other agency. If, then, it is an evil 
 that the cotton-manufacture of Ohio should be kept down by foreign com- 
 petition, it must also be an evil to allow its suppression by Massachusetts 
 
THE POLICY OF A PROTECTIVE TARIFF. 477 
 
 competition, and the constitutional inhibition in question is injurious to 
 those new States which would build up their manufactures; — 
 How would you answer him? 
 
 11. Can a protective tariff be effective if it does not raise the price of the 
 article protected? That is, if the price remains the same without the duty 
 as with it, will the home manufacture be encouraged? 
 
 12. It is sometimes said that the duty on each commodity should be so 
 adjusted as just to enable the home producer to compete on even terms with 
 his foreign competitor. What reasons can you assign for or against this 
 policy? Consider both its practicability and its application to special cases; 
 as when the conditions of home production are very unfavorable. Suppose 
 the policy adopted, and apply to its discussion the methods of III. 70, 71. 
 
 13. About the close of our civil war, the importers of a particular kind 
 of ore from Sweden petitioned Congress that it might be placed on the free 
 list, but asked for a high duty on the metal extracted from it. One reason, 
 they assigned was that the ore was very bulky in proportion to the metal 
 extracted from it, and that thus employment would be given to American 
 ships engaged in importing the ore. "Was this a sound reason, or the con- 
 trary? 
 
 14. Tin, not being found in important quantities in this country, is ad- 
 mitted free of duty when unmanufactured. If a company should discover 
 a tin-mine, we have every reason to believe that they would immediately 
 succeed in getting a duty of from 30 to 50 per cent levied upon imported 
 tin in order to place them upon the same level with the miners of other 
 metals. How would the price of tin then be fixed, and would the discov- 
 ery of the mine prove a benefit or an evil to the community at large? 
 
 15. When, in the year 1883, we undertook to build a few iron-clad ships 
 of the first class, it was found that there was no rolling or forging machin- 
 ery in the country of sufficient power to roll the steel plates, and we had to 
 import them from abroad. Looking more closely into the matter, we find 
 the following state of things: 
 
 The ores and metals of different countries have different qualities, so 
 that to get the best combination for special purposes it is necessary to com- 
 bine those from different countries, or to use some kinds for one purpose 
 and other kinds for another purpose. 
 
 Now, if an Englishman wants to set up a great rolling-mill and forge, he 
 can import all the machinery he finds necessary into England free of duty; 
 and after his mill is built he can choose his raw materials of all kinds from 
 the whole world without let or hindrance from the collectors of customs. 
 
 If an American wants to erect such an establishment, lie has to pay a 
 heavy duty on all the machinery he finds it necessary to import, and after 
 his works are built he must pay a similar duty, generally ranging from 20 
 
478 APPLICATIONS OF ECONOMIC SCIENCE. 
 
 to 50 per cent of the value, upon nearly everything he imports for the 
 purpose of being manufactured. Can you trace any relation of cause and 
 effect between this policy and the lack of establishments among us which 
 can compete with those of England in the manufacture of guns and steel 
 plates for war-sbips? 
 
 What is the effect of the policy upon the building of iron ships in 
 America? 
 
 16. In March, 1884, a bill was before Congress making a general reduc- 
 tion of 20 per cent in the duties upon imports. The following reasons 
 against the bill were urged by the minority members of the Committee of 
 Ways and Means: 
 
 " The reduction proposed by the bill now under consideration is 20 
 per cent, and it is a noteworthy fact that not a single interest in the United 
 States has asked for it — neither the manufacturer, the miner, the laborer, 
 the farmer, nor the consumer has requested or demanded the proposed re- 
 duction. On the contrary, every interest — manufacturing, laboring, and 
 agricultural — represented before the Committee of Ways and Means has 
 protested most earnestly against the change recommended by a majority of 
 the committee. 
 
 " We have said that no interest has asked for it. We should have ex- 
 cepted the free-trade clubs of New York and Brooklyn, which were repre- 
 sented before the committee by a number of so-called political economists, 
 urging not this reduction alone, but entire abolition of import duties which 
 in any way discriminate in favor of American producers." 
 
 Should these facts have militated for or against the bill? 
 
 17. "The categories all favor free trade, but the facts are all for pro- 
 tection." 
 
 Is this true? Taking the world at large, are the protected or free-trade 
 countries most powerful and prosperous? How do laborers in England 
 compare with those in Austria, Russia, and other countries where the pro- 
 tective policy prevails? 
 
 18. Is it the object and effect of a protective tariff to increase or to di- 
 minish the amount of labor, capital, and industry necessary to command a 
 given supply of commodities? 
 
V. 19.] ON TAXATION. 479 
 
 CHAPTER III. 
 
 ON TAXATION. 
 
 19. General Considerations. It is essential to the exist- 
 ence of civilized society that a certain amount of the labor 
 of the social organism shall be devoted to the performance of 
 the functions of government. The persons who perform these 
 functions are government officers or employes. They have 
 to be paid for their services, and large sums have to be ex- 
 pended by the government in the purchase of commodities 
 for the public uses. It follows that government must be in 
 receipt of an income with which to pay these expenses. This 
 income is called revenue. From the very nature of the case it 
 cannot be to any great extent gained by production, as individ- 
 uals gain their income. It must therefore be obtained by a 
 levy upon the people governed. This levy is called taxation, 
 and the money collected by it is called a tax. The object of 
 the present chapter is to set forth the principal methods of tax- 
 ation, and to trace their effects upon the interests of society. 
 
 In discussing this subject it is very common to consider only 
 the effect of collecting a tax. But the effect does not termi- 
 nate when the citizen has paid his money into the public 
 treasury. All money paid in is to be paid out again by the 
 government, and the disbursement is as important a factor in 
 the result as the collection. 
 
 The reader who has mastered the preceding chapters will see 
 that the inflow and outflow of the public revenues are so con- 
 nected that one cannot be advantageously considered apart 
 from the other. Hence when the economist is ashed what will 
 be the effect if government should levy a tax, and thus largely 
 increase its revenue, he would have to reply : I cannot tell 
 what the effect will be until I know how the increase of revenue 
 
480 APPLICATIONS OF ECONOMIC SCIENCE. [V. 20. 
 
 is to be expended. It may be expended abroad or at home ; 
 in levying war or in constructing a canal ; in paying off a 
 national debt, or in subsidies to various forms of industry. The 
 difference between the effects of these various modes of ex- 
 penditure is much greater than the difference between one 
 method and another of levying a tax. 
 
 20. We shall begin by establishing certain principles com- 
 mon to all methods of taxation. In doing this we suppose the 
 reader to have clearly in mind the nature of the monetary 
 and industrial circulations as developed in the preceding book. 
 The first principle to be understood is this : 
 
 In whatever way a government may collect a tax, the act of 
 collection diminishes the monetary flow from the tax-payers to 
 their fellow-citizens by an amount equal to the tax. This re- 
 suit is so obvious as not to need extended discussion. Every 
 person who pays money to a public collector has so much the 
 less to pa}' to his fellow-men for their goods or services, and 
 thus his monetary flow is diminished. If the taxpayer makes 
 this up by charging a higher price for his goods, then the per- 
 sons who buy his goods, having to pay more for them, will 
 have less money to spend in other directions. Thus the whole 
 amount of taxes collected comes out of the monetary flow of 
 the community. The money demand for labor must therefore 
 fall off by an equal amount (IV. 37) ; and if there were no 
 compensation for this, labor to an amount equal to the tax 
 would be thrown out of employment until prices fell so as to 
 restore the compensation. This effect has been fully developed 
 in Book IY., Chapter VII., and therefore need not be further 
 considered. Our conclusion is that if a flow T is collected as a. 
 tax, a quantity of labor valued at T will be found waiting for 
 the employment of which it has been deprived by its employ- 
 ers being taxed. 
 
 But the compensation is effected when government expends 
 its revenue. This act produces the same effect as individual 
 expenditure. That is to say, all the money expended by the 
 
 
V. 21.] ON TAXATION. 481 
 
 government goes directly or indirectly to those who render it 
 services. Payments to its officers reach them directly; pay- 
 ments for supplies furnished reach the producers of those sup- 
 plies through the regular channels of trade. Thus, in the act 
 of expenditure the monetary flow is restored and a demand for 
 labor is set up equal to the demand lost by the levying of the 
 tax. 
 
 But this labor may not be, and probably is not, of the same 
 kind as that thrown out of employment by the levying of the 
 tax, and there must be a change of employment. "We therefore 
 reach the conclusion : The operation of levying and expend- 
 ing a tax consists in diverting a certain amount of industry 
 from the ordinary channels of husiness into the channels re- 
 quired hy the government.* 
 
 But it must not be inferred that such a change of labor 
 is continually brought about by taxation. When a govern- 
 ment once begins raising and expending its regular annual 
 revenue, the change of industry must be made once for all, and 
 the industry will continue in its new course so long as the tax 
 remains substantially the same. Now all governments from 
 time immemorial have been obliged to levy taxes in some way, 
 and thus society has grown up to the system of having a por- 
 tion of its work devoted to the government service. A real 
 change in the effect occurs only when government makes a 
 change in the amount of its revenue. If the revenue is dimin- 
 ished, the industry in government channels must be diminished, 
 and other industry increased. The ordinary operations of tax- 
 ation and expenditure do not therefore involve any disturbance 
 in the supply of and demand for labor. 
 
 21. In drawing the preceding conclusions we have spoken 
 of the government revenue as raised by taxation. A govern- 
 ment may also supply its wants by borrowing money to be re* 
 paid at a future time. But all that has been said applies equally 
 
 Cf. Book III., Chapter V., and Book IV., Chapter X. 
 31 
 
482 APPLICATIONS OF ECONOMIC SCIENCE. [V. 22. 
 
 to this case. So far as the immediate effects are concerned, they 
 are the same whether government raises money by taxation or 
 by loans. Every dollar borrowed comes out of the monetaiy 
 flow from the person making the loan as completely as if it were 
 obtained by taxation. Every person who loans money to the 
 government loans that which otherwise he would have had to 
 expend in other directions. And when the government ex- 
 pends borrowed money, it creates a demand for labor exactly 
 the same as when it expends a tax. 
 
 In all this we refer only to the immediate economic effect. 
 The ultimate effects are of course different, owing to the re- 
 payment of the loan. When a tax is paid, the transaction 
 between the payer and the government is completed. But 
 when government raises money by a loan, the payer becomes the 
 creditor of the government and thus a national debt is created. 
 The result is that the government must pay the creditor an 
 annual stipend during a period of time which may be stated or 
 may remain undefined. This stipend is to be raised by taxa- 
 tion, which would not have been necessary but for the loan. 
 Thus the ultimate result of borrowing instead of levying is 
 that an increased revenue is to be raised in the future. 
 
 22. The effects of the various modes of government ex- 
 penditure are determined in the same way as the effects of in- 
 dividual expenditure. This may be illustrated by considering 
 the principal objects for which government needs a revenue. 
 
 I. That portion of the revenue which government pays to its 
 officers and employes for their services returns immediately 
 to the circulation, so as to form a part of the. individual income 
 of those persons. 
 
 - II. That portion which is expended in the purchase of sup- 
 plies is divided amongst the producers of the supplies as 
 income, in the way already pointed out (IY. 30). If all the 
 producers are citizens of the government, the money is immedi- 
 ately restored to the circulation from which it was withdrawn, 
 as in the first case. 
 
V. 23.] ON TAXATION. 483 
 
 III. If the money is employed in paying off a debt held by its 
 own citizens, it will soon reach the same general circulation. 
 Each creditor will then be in possession of a sum of money 
 which he otherwise would not have had. As a general rule he 
 will expend the money in increasing his capital, because he has 
 been considering the government bonds which he holds as a 
 part of his capital. But, however he expends it, it must 
 speedily enter into the general circulation, and be expended in 
 the employment of labor. 
 
 IY. If the money is expended in public improvements in- 
 tended to yield a profit, in canals or railways for example, the 
 immediate effect of the expenditure is still the same. But the 
 profit to be ultimately derived from the improvement will be 
 a source of gain which would not have been enjoyed had the 
 expenditure been made for other purposes. 
 
 "V. If the money is spent abroad instead of at home, then 
 it is of necessity withdrawn from the home circulation, and 
 added to the circulation of the country to which it goes. The 
 result will be a tendency to a fall of prices in the one country 
 and a rise in the other. This will ultimately bring the money 
 back again, and thus in the long-run the balance will be restored. 
 Indeed, it is highly probable that the payment will have been 
 made in the first place b} 7 exporting goods and not by export- 
 ing the money. That is to say, when the government has to 
 make the payment abroad, it might purchase foreign exchange 
 from its bankers. The home merchants, finding foreign ex- 
 change scarce in consequence, will be stimulated to export 
 goods in order to keep up the balance. 
 
 23. It follows from all this that the really important ques- 
 tion growing out of taxation is, not how the tax is to be levied, 
 but how it is to be expended. In whatever way it is levied, it 
 will have come out of the pockets of the community, and dif- 
 ferent classes will probably have to pay nearly the same in any 
 case. But when the tax is expended, the government becomes 
 the sole director of the labor which it employs by the expendi- 
 
484 APPLICATIONS OF ECONOMIC SCIENCE. [V. 24. 
 
 ture. Indeed, what is really expended by the country is, not 
 the money paid as tax, but the labor employed with it by the 
 government. The money remains, but the labor is used up in 
 the performance of some public work. Whether it is ex- 
 pended for the public good or not depends entirely on the ob- 
 ject to which it is applied. If expended in war, then the labor 
 of large bodies of men is turned into the channels of destruc- 
 tion instead of those of production, and the result is a loss to 
 humanity of the whole labor thus directed. If directed to the 
 current administration of justice, an advantage is gained ; but the 
 advantage terminates with itself. If devoted to public works 
 which really prove profitable, it is expended with a future 
 profit ; if to unprofitable works, it is wasted. If devoted to 
 the payment of a debt, then on the whole the tendency will be 
 to increase the capital of the country, because the bond-holders 
 who receive the money will in most cases employ it in increas- 
 ing their capital. 
 
 24. Different Kinds of Taxes. Taxes are ordinarily divided 
 into direct and indirect. 
 
 A direct tax is one which it is supposed that the payer cannot 
 collect again from the rest of the community by charging a 
 higher price for his services. 
 
 Indirect taxes are those levied in such a way that the person 
 who pays them can get his money back again by charging the 
 rest of the community a higher price for goods on which the 
 taxes are levied. 
 
 Examples of direct taxes are those on income. An income- 
 tax consists of a certain percentage of the total net income of 
 the person on whom it is levied. Since the payment of such a 
 tax does not increase his power of rendering service to the com- 
 munity, he can charge the latter no more after paying the tax 
 than he could before. Taxes on the sum total of a man's 
 wealth, and upon his houses and lands, are commonly supposed 
 to fall into the same category. 
 
 Examples of indirect taxes are those levied upon the manu- 
 
V. 25.] ON TAXATION. 485 
 
 facture of commodities. In such cases it is supposed that the 
 manufacturer can get his tax back again by charging a higher 
 price for his goods. Thus it is the consumers of the goods, and 
 not the manufacturers, out of whose pockets the tax is sup- 
 posed ultimately to come. If every commodity which is used 
 by the community is thus taxed, it will be the whole commu- 
 nity which will pay, no matter how few the manufacturers. 
 The tax is called indirect because it is paid by the consumers, 
 not to the government directly, but through the men who sell 
 goods at the increased price. 
 
 Economically this classification is imperfect, because it is 
 scarcely possible to determine in all cases whether a tax can or 
 cannot be transferred by the person paying it charging more for 
 his services or commodities. A tax on city real estate, for ex- 
 ample, will lead to its owners charging a higher rental, so that it 
 might be regarded as indirect. But if the owner of a house 
 lives in it, he can scarcely charge to others the tax which he 
 pays on his house. Again, a manufacturer may not be able to 
 collect his tax from others for the simple reason that he cannot 
 sell his goods at all after he raises their prices. He may there- 
 fore be obliged to sustain the loss himself, or go out of business. 
 
 25. The Double Classification of Taxes. The fact is that 
 the methods and systems of taxation are so varied as not to 
 admit of an absolutely exhaustive classification. But the great 
 mass of those which are collected in the United States, and per- 
 haps in other civilized communities, may divide into three 
 classes, as follows : 
 
 I. Taxes levied on individuals. Under this head we in- 
 clude all taxes which any individual is required to pay irre- 
 spective of his wealth or the amount of his income. The fol- 
 lowing are examples : 
 
 A poll-tax is a designated sum of money which every male 
 adult of a community is required to pay annually. One dollar 
 was the common amount of such a tax. Being levied without 
 reference to ability, it was extremely obnoxious and has become 
 
486 APPLICATIONS OF ECONOMIC SCIENCE. [V. 25. 
 
 nearly obsolete. In the few States where it still exists it natu- 
 rally costs more than its value to collect it forcibly from the 
 individual. Its payment is therefore generally made, as in 
 Virginia, a condition of exercising the right of suffrage. 
 
 Licenses to practise particular trades or professions afford 
 another example. In most of our cities, bankers, tradesmen, 
 and managers of nearly every kind of business are required to 
 pay a certain sum annually for the privilege of exercising their 
 avocations. The payments for this license, being fixed without 
 regard to the extent of the business, constitute a purely individ- 
 ual tax. 
 
 II. Taxes on production. The distinguishing feature of a 
 tax on production is that it is a percentage of the value of 
 something which the individual produces. For example, an 
 excise duty on spirituous liquors is a tax of so much per gallon 
 produced. Those who do not produce the articles taxed have 
 no tax to pay directly to the government. Customs duties on 
 foreign imports belong to the same class, because the fact that 
 the production is that of a foreigner does not change the 
 application of the general principle. So far as we are con- 
 cerned, any person who imports goods stands to us in the relation 
 of a producer of the goods. The tax he has to pay is propor- 
 tional to the amount of goods he supplies us with. 
 
 Taxes on production are of two kinds, according to whether 
 they are levied on specially designated articles, or on the total 
 productivity of the individual. Those which we have already 
 mentioned as examples are levied upon special products. The 
 total productivity of the individual is measured by his income, 
 so that a tax on this basis is an income-tax. "When such a tax 
 is levied, the individual is required to make known to the gov- 
 ernment his total profits and earnings for the year, and to pay 
 a designated percentage of them into the treasury. ' 
 
 III. Taxes levied on accumulated wealth. These differ 
 from taxes on production in this very important respect: 
 that the former are paid once for all, while in the case of the 
 latter the same wealth has to pay over and over as long as it is 
 
V. 25.] 
 
 ON TAXATION. 
 
 487 
 
 kept. When a keg of beer has once paid the excise duty it is 
 free ever thereafter. When an income-tax only is levied, an in- 
 dividual who gains a surplus income of $1000 year after year 
 lias only to pay the same annual tax year after year. But if he 
 invests this income in any form of capital, then for every thou- 
 sand dollars he invests and keeps he has to pay an annual tribute. 
 
 A tax on accumulation may be levied on the same two 
 systems as one on production. That is to say, it may be levied 
 only on certain designated kinds of wealth, such as bank- 
 stocks, houses, lands, carriages, watches, etc., or it may be 
 levied on one's whole possessions without regard to their 
 character. 
 
 It follows that there is a double classification of taxes. The 
 one classification turns upon the general condition which de- 
 termines the amount of the tax, whether the latter is purely 
 personal or depends upon production or accumulation. The 
 other division depends upon whether the tax is levied on sums 
 total or is confined to certain designated objects. 
 
 This double classification will be made more clear by pre- 
 senting it in a tabular form. 
 
 Classification. 
 
 Order A. 
 
 Taxes on totals, or 
 
 unlimited taxes. 
 
 Order B. 
 
 Taxes confined to 
 
 designated subjects. 
 
 Class I. 
 Taxes on persons. 
 
 A tax on every one of a 
 certain age or sex. 
 (Poll-tax.) 
 
 Taxes on designated oc- 
 cupations. 
 
 (Licenses.) 
 
 Class II. 
 Taxes on production. 
 
 Tax on total production 
 
 of every individual. 
 
 (Income-tax.) 
 
 Tax on designated pro- 
 ducts only. 
 (Customs, excise duties.) 
 
 Class III. 
 Taxes on accumulation. 
 
 Taxes on one's whole pos- 
 sessions, without regard 
 to their character. 
 
 Taxes on designated kinds 
 of wealth: watches, jew- 
 elry, plate, carriages^ 
 etc. 
 
488 APPLICATIONS OF ECONOMIC SCIENCE. [V. 26. 
 
 26. Results of levying a Tax. Although, as already stated, 
 the economic questions involved in the expenditure of a tax are 
 more important than those involved in its levy, yet the latter 
 are most in need of investigation. There are two reasons for 
 this. In the first place, the objects for which revenue is to 
 be expended are generally determined by circumstances, and 
 not by the arbitrary will of the government or of the citizens. 
 There are certain officials to be employed and paid, certain 
 supplies to be furnished, certain debts to be liquidated, irre- 
 spective of the will of the government for the moment. But 
 the method in which the tax shall be levied is altogether a 
 matter for the decision of the public. 
 
 In the next place, the very fact that taxes paid into the pub- 
 lic treasury come out of the monetary circulation makes the 
 public very critical in inquiring into them, and it is necessary 
 not only to consider what is theoretically the best kind of a 
 tax, but also what method of taxation is least displeasing to the" 
 public. Thus the question of the best method of raising a 
 government revenue becomes a very delicate one, involving 
 not only purely economic considerations, but questions of politi- 
 cal expedienc}' - . The success of a system of taxation depends so 
 largely upon the condition of the people taxed that no system 
 founded solely on a general theory can be relied upon. Still 
 we should have some guiding principles to start with. Tour 
 such principles were laid down by Adam Smith, of which the 
 first was in the following words : 
 
 " The subjects of every state ought to contribute to the sup- 
 port of the government, as nearly as possible in proportion to 
 their respective abilities; that is, in proportion to the revenue 
 which they respectively enjoy under the protection of the 
 state." 
 
 The remaining three principles were : (1) that the tax to 
 bo paid by each individual should be certain and not arbitrary ; 
 (2) that it should be payable at the time and in the way most 
 convenient to the payer ; (3) that the cost of collection should 
 be as small as possible. 
 
V. 87.] ON TAXATION. 489 
 
 27. The tax which most directly accords with the first 
 maxim is one upon gross income. In fact, since Smith defines 
 ability to pay as measured by the revenue which the citizen 
 enjoys under the protection of the state, and as this revenue is 
 neither more nor less than his inc6me, it follows that an income- 
 tax is the very one indicated. Such a tax is levied by deter- 
 mining every man's income from all sources year by year, and 
 requiring him to pay a certain percentage of it into the public 
 treasury. In Great Britain the imposition of such a tax is the 
 most common method of meeting an unusual demand upon the 
 public resources. It was levied by the United States during 
 several years after the termination of the civil war. 
 
 It follows that if an income-tax could be justly levied, it 
 would be the only one which we should impose. But when we 
 come to the question of levying it we meet with a practical 
 difficulty at the very outset. In order to determine how much 
 a man must pay, the government must learn first what his total 
 income is. Now, although the amount of one's income can be 
 defined with all necessary precision, its actual calculation in 
 dollars by government agency involves difficulties which are 
 quite insurmountable. The result of these difficulties is that, 
 in practice, an income-tax is among the most unjust and demor- 
 alizing that the Government of the United States has ever at- 
 tempted to levy. Why this is so will be seen by looking more 
 closely into the conditions. 
 
 In the first place, it is impossible for any government agency 
 to know much of the business of the individual by any investi- 
 gation which that agency can conduct. The government must 
 therefore depend very largely on the man's own statements. If 
 the man can avoid making any statement at all, which he may 
 perhaps do by keeping away from the assessor's office, the latter 
 will have but little material for a conclusion. It is true that in 
 such cases the law requires the assessor to determine the man's 
 income in the best way he can, and then to add a considerable 
 percentage to his estimate, and tax the man accordingly. But 
 it has been decided that this law does not mean that the asses- 
 
490 APPLICATIONS OF ECONOMIC SCIENCE. [V. 27. 
 
 sor may arbitrarily guess anything lie pleases as the man's in- 
 come, but that his estimate must be founded on some sufficient 
 data. The result is that if no data can be found, or if those 
 found do not correctly indicate the income, the conditions re- 
 quired by the law are not fulfilled. What is yet more demor- 
 alizing even if the man is caught and brought to the asses- 
 sor's office, it is to his interest to estimate his income as low as 
 possible. Thus a premium is at oiice offered to dishonesty, 
 an act which every government should do all in its power to 
 avoid. 
 
 But granting that the government has every facility for in- 
 vestigating every man's business, new inequalities arise from 
 the fact that the income proper, as defined in economics, may 
 be very different from income as determined by legal calcula- 
 tions. In the case of persons in receipt of fixed salaries or 
 fees the income is perfectly definite, and if the government 
 can determine it, it affords a correct basis for the tax. The in- 
 equality enters in the case of establishments where several pro- 
 ducers work together in unison, and consume a part of their 
 own products. An extreme case is that of a large farm with 
 a wealthy owner consuming its products. The farmer may, 
 from an economic standpoint, be in the actual enjoyment of a 
 large income. For example, he has a retinue of servants 
 whom he feeds from the produce of his farm. He has his own 
 horses and cattle, ancl feeds them from his farm. He owns 
 his house, barns, stables, etc., and pays no rent for them. His 
 economic income, on which he should be taxed, includes the 
 money value of all these sources of enjoyment. But the as- 
 sessor can only levy upon the products of his farm which he 
 has actually sold, and from these sales the farmer must be al- 
 lowed to subtract all that he has paid for cultivation. 
 
 The result of all this is that in practice the agricultural class 
 are almost exempt from an income-tax, which is levied mainly 
 upon the residents of cities. Among these, salaried and pro- 
 fessional men pay much more than their proper share. 
 
V. 28.] OH TAXATION. 491 
 
 28. We conclude, therefore, that, instead of attempting di- 
 rectly to determine the revenue which each man enjoys under 
 the protection of the State, a tax must be levied on such visible 
 indications of revenue as the agents of the government can find. 
 It lias already been pointed out that whenever a tax is levied 
 upon a manufactured product the manufacturer can, to a 
 greater or less extent, collect the tax from his customers by 
 charging a higher price. It is therefore very generally as- 
 sumed that, however a tax may be levied, it comes ultimately 
 out of the pockets of the community in proportion to their 
 ability to pay. 
 
 On the other hand, all taxes on production are often considered 
 burdens upon industry. By making the product cost more 
 they discourage its consumption, and thus the regular opera- 
 tions of commerce may be greatly interfered with. We have 
 now to consider the relative merits and demerits of different 
 systems of taxation from this point of view. 
 
 The system in vogue in the different States of the Union 
 differs from that generally adopted in Europe in that taxes are 
 mostly of that class and order which are levied on one's whole 
 possessions without regard to their character, while such taxes 
 are little known in Europe. There are two reasons for this. 
 The strongest one is that taxes on production would immedi- 
 ately place the manufacturers of each State levying them at an 
 apparent disadvantage in competing with those of the neigh- 
 boring States, where the same tax might not be levied. The re- 
 sult is that such a tax should be uniform throughout the whole 
 country, and this requires that it should be levied by the gen- 
 eral government. This leaves only the first and third classes 
 open to the States. The personal taxes of the first class are 
 wholly insufficient. Hence States fall back upon those of the 
 third class by taxing accumulation. It is very natural to meas- 
 ure one's ability to pay by his accumulated wealth ; and if we 
 regard only this ability, without reference to the indirect con- 
 sequence to society, or the practical difficulties in the way of 
 determining his wealth, this kind of tax is a very fair one. 
 
492 APPLICATIONS OF ECONOMIC SCIENCE. [V. 28. 
 
 Such a tax is, however, subject to the same kind of objec- 
 tions which have been brought against the income-tax. The 
 system has proved such a failure that it is wonderful how our 
 State legislatures persist in trying to enforce it. The objec- 
 tions are these : 
 
 In the first place, it is impossible to find out what wealth 
 every man possesses. The assessors can see and value his 
 houses and lands, and can guess at the value of his furniture. 
 They may readily find out whether he has horses and car- 
 riages, and can guess at their value. When they attempt to 
 do more than this, difficulties begin to arise. 
 
 It is obviously necessary that every man shall have the right 
 to subtract the debts he owes from the amount of the prop- 
 erty which he possesses, in order to determine his actual owner- 
 ship. This he is sure to do. On the other hand, the amount 
 of the debt should be charged as a part of the property of the 
 creditor. This is something which the creditor may or may not 
 do, and which it is probable that in the majority of cases he 
 does not do. It will cost more to learn the amount due him 
 than the labor is worth. U. S. bonds are not taxable under our 
 laws. It is said that in the city of New York there is an in- 
 creased demand for these bonds at the time when the assessors 
 perform their annual duty, caused by the great number of men 
 who at that time put their wealth into the form of bonds in 
 order to lessen the amount of their taxable property. 
 
 The next objection to this system is that it makes no distinc- 
 tion between property employed in reproduction for the bene- 
 fit of society, and that employed in one's own private consump- 
 tion. Here it is that the system adopted by our States shows 
 at its worst. ~Eo doubt the idea that this is a poor man's coun- 
 try has to a certain extent given color to our system. But if 
 so, the idea has not been intelligently carried out. Since a tax 
 must always be levied on something which the assessor can 
 find, it follows that the most rational system is that which 
 taxes the visible manifestations of wealth. Abroad this prin- 
 ciple is fully recognized. The public exhibition of every- 
 
V. 29.] ON TAXATION. 493 
 
 thing which, indicates rank and position is heavily taxed in 
 England. For domestic servants above a certain class, gold 
 and silver plate, carriages and horses, the privilege of embla- 
 zoning a coat of arms, and other indications of wealth, family, 
 and social position, heavy payments must be made. In the 
 United States no notice is taken of these exhibitions, but, in- 
 stead of doing so, our assessors are engaged in a futile effort to 
 learn the sum total of a man's debts, credits, stocks, and bonds. 
 
 29. We shall close with a few general ideas on our sys- 
 tem of taxation. The great defect of this system is that it is 
 founded only on our natural ideas of what is equitable, and 
 that our legislators totally ignore the results of experience as 
 to what is really practicable. 
 
 The first step in improving our system will be to give up 
 entirely every attempt to tax a man's total possessions, and in- 
 deed to give up every idea of an abstractly equitable system. 
 Our policy should then be : 
 
 I. To tax nothing the possession of which cannot readily be 
 discovered by the assessors. 
 
 II. To tax all visible manifestations of wealth in what the 
 old geometers called a duplicate ratio ; that is, in a ratio yet 
 higher than that of the amount of wealth manifested. 
 
 III. To tax real estate and other forms of wealth which can- 
 not be concealed. 
 
 TV. To tax all products which are designed for the indul- 
 gence of the appetites. 
 
 We need scarcely fear that any tax levied according to a 
 general law will be permanently inequitable. Take for exam- 
 ple the case of real estate. No one is compelled to own it, but 
 as all are compelled to use it, it is probable that the owners 
 can divide the tax equally among the community. The fact is 
 that there is little danger that any reasonable system of taxa- 
 tion will be inequitable in the long-run. 
 
494 APPLICATIONS OF ECONOMIC SCIENCE.. [V. 31. 
 
 CHAPTER IV. 
 
 MONOMETALLISM AND BIMETALLISM. 
 
 30. We assume, in starting, what will be more fully shown 
 hereafter, that at the base of every sound system of currency 
 must lie a right of the holder of bank-notes or other forms of 
 paper currency to demand a definite quantity of something 
 having value in exchange for his notes. "We have seen that 
 practically the precious metals are the only commodities which 
 have hitherto been extensively used for this purpose. We 
 have also seen (Book II., Chapter XII.) that the rival monetary 
 systems of the present day among the leading commercial na- 
 tions are monometallism and bimetallism. 
 
 Monometallism is the system under which a government 
 coins onlv a sino-le metal as unlimited legal tender. Theoreti- 
 cally this metal may be gold or silver, but practically it is 
 only gold among the leading monometallist nations of Europe. 
 The bimetallic system permits the unlimited coinage of 
 either gold or silver. It also permits payment to any amount 
 to be made in either metal at the pleasure of the paying party. 
 
 We have now to consider the relative effects and practica- 
 bility of the adoption of these two systems. Before proceed- 
 ing to this discussion it is essential that the student should 
 have the facts of the case clearly in mind as they have been 
 set forth in the chapter already referred to. He will then 
 understand the following statement of the point at issue 
 between the two parties. We begin with the views of the 
 bimetallist. 
 
 31. The Bimetallist View. The ground taken by the 
 bimetallist is that if the leading nations will only agree to 
 coin silver and gold at any uniform ratio of value previously 
 
V. 31.] MONOMETALLISM AND BIMETALLISM. 495 
 
 agreed upon, the market value of the two metals -will 
 necessarily correspond to this ratio. Suppose, for example, 
 that it is agreed that the silver dollar shall weigh sixteen times 
 as much as the gold dollar ; that is, that government establishes 
 the rule that for monetary purposes the ratio of the value of 
 gold to that of an equal weight of silver shall be 16 : 1. Then, 
 says the bimetallist, if there is a large increase in the silver- 
 supply without any increase in the gold-supply, this increase 
 cannot result in any great fall in the price of silver as com- 
 pared with gold, because people will then coin silver rather 
 than gold, and thus the surplus will all be absorbed in the in- 
 crease of the silver money. If, on the other hand, silver be- 
 comes comparatively scarce as compared with gold, the only 
 result will be that gold rather than silver will be coined ; and 
 since a dollar of either metal will equally answer the purpose, 
 no preference can arise for one over the other. A condensed 
 statement in its extreme form is as follows : 
 
 " The abundant metal is the least demanded. Its tendency 
 is to be depreciated, while the scarcer metal becomes dearer. 
 But it is evident that if to increased production we can con- 
 tinue to oppose increased demand, and to decreased production 
 decreased demand, we shall maintain the equilibrium and 
 things will remain unchanged. This is precisely what we pro- 
 pose to do. For the demand, which, without the adoption of 
 the tariff of 15^, would be directed to the metal which is 
 scarce, would, if the tariff were anywhere in force, be directed 
 to the metal that is abundant. For if the bimetallist law 
 permits each and every one to pay his debts at will in gold or 
 silver, every one must see that the dealers in money will 
 neglect the metal which is hard to find, and will seek for that 
 which is plentiful, to have it coined. Moreover, the scarce 
 metal, if it is not in demand, will not rise in price, and the 
 abundant metal, if active demand springs up, cannot fall." * 
 
 * Cernuschi, as quoted in Wallcer, Money, p. 258, from Bankers,' 1 Maga- 
 zine, N. Y., Nov. 1876. 
 
496 APPLICATIONS OF ECONOMIC SCIENCE. [V. 32. 
 
 The Monometallist View. The ground taken by the mono- 
 metallist is that the permanent use of two metals as money 
 is impracticable. There is in the great markets of the world 
 a certain ratio between the value of a definite weight of gold 
 and the value of an equal weight of silver which fluctuates 
 from year to year with the supply and demand of the two 
 metals. Assume the ratio 16 : 1 to be adopted. If the value 
 of gold becomes greater than that of sixteen times its weight 
 in silver, the latter, being the cheaper metal, will be preferred 
 in payment. Consequently the paying party will not pay in 
 gold at all, but will send silver to the mint for coinage in 
 order that he may make his payments in silver. The result 
 will be that gold will disappear from circulation entirely, and 
 we shall not have bimetallism, but silver monometallism. 
 
 If, on the other hand, gold is worth less than sixteen times 
 its weight of silver; if, for example, the market ratio is 15 : 1, 
 then for the same reason silver will stop circulating as money, 
 and we shall have gold monometallism. The result is that 
 the system of bimetallism really results in a fluctuation be- 
 tween one form of monometallism and another according to 
 the supply and demand of the two precious metals thus caus- 
 ing unlimited confusion in the course of trade. 
 
 32, Criticism of the Arguments. We need not inquire 
 which of these arguments is the stronger, because each of 
 them is insufficient, owing to its being founded on one side of 
 the case and containing no suggestions how the other side is 
 to be taken into account. Each side cites a true cause as the 
 basis of its view, and the only way in which a decision can be 
 reached is by weighing each cause and thus learning which pre- 
 ponderates. This cannot be done with entire precision, be- 
 cause the result depends upon matters of fact about which our 
 knowledge is extremely limited. It is, however, easy to show 
 how the weighing of the two causes should be conducted. 
 
 The arguments of the bimetallist would be perfectly sound 
 if the precious metals had no other use than that of being 
 
V. 32.] MONOMETALLISM AND BIMETALLISM. 497 
 
 coined into money. In such a case, whatever the monetary ratio, 
 one kind of a dollar would serve the purpose as well as 
 another, even though there should be fifty silver dollars in 
 circulation to one of gold. This comparative scarcity of gold 
 would no more increase the value of gold dollars than the 
 scarcity of a particular kind or tint of gold would increase the 
 value of that kind of gold. 
 
 But, as a matter of fact, the precious metals have other uses 
 than this, and the fallacy of the bimetallist consists in ignor- 
 ing that fact, or rather in claiming, without fully proving the 
 claim, that the result of these other uses is insignificant. It 
 is quite possible that not more than half the gold and only a 
 small fraction of the silver which is now in the world is in 
 use as money.* "Wares, jewelry, picture-frames, spoons, the 
 filling of teeth, and plate of all kinds continually absorb it. 
 Hence the weight of gold in a gold dollar may have a higher 
 market value than the weight of silver in a silver dollar, or 
 vice versa, according to the demand for the two metals. In 
 
 * This is a subject on which it is difficult to make any general statement, 
 partly on account of the somewhat indefinite meaning of the term supply, 
 and partly because the state of the case is continually changing. The fact 
 is that an unexplained mysteiy now surrounds the question of the stock 
 of gold in this country. From the statistics of exports, imports, and coin- 
 age during a number of years past, the Director of the Mint estimated the 
 stock of gold coin in the country in 1884 to be 552 millions of dollars. Of 
 this stock there was held 
 
 By the Treasury 89 millions. 
 
 By national banks 98 
 
 Leading, as is supposed, in other hands 365 " 
 
 552 millions. 
 
 Of this stock, only the 187 millions in the Treasury and the banks can be 
 really ascertained to exist; the remaining 365 is supposed to be in circula- 
 tion. But in fact no gold at all is in actual circulation from hand to hand 
 in the Eastern States, and probably very little in any part of the country east 
 of the Rocky Mountains. What has become of all this gold ? Is it hoarded 
 or has it been melted down? If the latter, the state of affairs is most seri- 
 ous, since it would lead to the conclusion that fully the entire annual gold- 
 product of the world is absorbed for other than monetary purposes. 
 32 
 
498 APPLICATIONS OF ECONOMIC SCIENCE. [V. 83. 
 
 such a case, by Gresliam's law, the owners, of gold coin will 
 no longer use it wholly as money, but will begin to use it for 
 other purposes. The converse will hold true if silver becomes 
 more valuable in the market. 
 
 On the other hand, the monometallist is at fault if he 
 claims, without proof, that under the bimetallic system either 
 all the silver or all the gold necessary for the world's circula- 
 tion could be coined without changing the market ratio of the 
 two metals. Let us suppose the two metals to be circulating 
 as money in equal quantities on a universal bimetallic system. 
 Then grant that one of them, say silver, is produced in such 
 excess as to cause a fall in its market price. Before it can 
 entirely take the place of gold in the circulation, enough of 
 the excess must be coined to replace all the gold now in use 
 as money, and an equal value of the latter must be withdrawn 
 from circulation. It is certain that this cannot be done with- 
 out some change in the market value. "Whether the change 
 would be such as to keep the market ratio of the two metals 
 down to the legal ratio would depend upon how great was the 
 excess of silver production compared with the amount which 
 would be absorbed in the coinage. This involves questions of 
 fact, to be settled by learning the actual state of the case. 
 
 33. The whole question turns upon how the influence of 
 the demand for the precious metals for other purposes than 
 that of money compares with the influence of their demand 
 for the purposes of coinage. To consider the question from 
 this point of view we must first point out a great difference 
 between what constitutes the supply of the precious metals 
 and what constitutes the supply of most other commodities. 
 As we have hitherto used the term supply, it has meant 
 the quantity of a commodity brought to market during some 
 definite unit of time, commonly a year. The reason of this is 
 that nearly all commodities reach the hands of the persons 
 who are finally to enjoy them, and are thus out of the market, 
 within a comparatively brief period of their production. Most 
 
V. 34.] MONOMETALLISM AND BIMETALLISM. 499 
 
 of the wheat, clothing, and furniture manufactured is sold, and 
 in the hands of some person who is keeping it for his use, 
 within a year of its final production. In the case of more 
 permanent objects, such as houses and farms, although they 
 may be in the possession of persons owning and using them, 
 they are still to a certain extent in the market for sale or rent, 
 so that the supply is not strictly an annual one. In the case 
 of the precious metals the supply is yet more permanent, be- 
 cause so long as they are used as money they never get into 
 any hands which are going to keep them, but remain con- 
 tinually in the market. 
 
 Hence the supply of gold dollars does not consist of those 
 which have just been coined from the mint and are waiting to 
 be paid out, nor of those coined within a year, but of the 
 entire mass of gold dollars in the country and in the world. 
 Among the gold may be included some that has been passing 
 from hand to hand since the days of the Caesars. Thus the 
 actual supply of the precious metals is vastly greater than the 
 amounts annually produced. Hence it is that their value is 
 less dependent upon current production than in the case of 
 any other commodity. If a hundred millions is extracted 
 from the gold-mines of the world during a year, it is only 
 added to a vastly greater existing amount, and thus produces 
 little difference in the total supply. 
 
 34. Let us return to the definite proposition of the bimet- 
 allists : If the leading nations of the world should agree to 
 coin silver and gold without limit on any assumed ratio, the 
 residt would he to bring the market ratio down to that of the 
 coinage. 
 
 Let us see whether we can test the correctness of this propo- 
 sition. For ten years past the market ratio has very generally 
 been about 18 : 1. What now will be the consequence of offer- 
 ing to every owner of silver the privilege of having it coined 
 into money which shall be relatively more valuable in the ratio 
 cf 18 : 15 ? Evidently there will be an effort on the part of the 
 
500 APPLICATIONS OF ECONOMIC SCIENCE. [V. 34* 
 
 owners of silver to get it coined, while gold coinage will, for 
 the time, cease. The demand thus created will increase the 
 value of silver and diminish that of gold, thus lowering the 
 market ratio. "Will it, as the bimetallist claims, lower it to the 
 ratio 15 ? Clearly not, because if it did there would no longer 
 be any incentive to take it to the mint for coinage. The 
 market ratio will therefore stand somewhere between 15 and 
 18. The exact point at which it would stand would in the first 
 place depend upon the capacity of the mints to coin a con- 
 siderable portion of the existing supply of silver bullion. The 
 amount of this supply we cannot precisely estimate, but it 
 must be several hundred millions of dollars. It is indeed so 
 large that the coinage since 1878 of from thirty to forty mil- 
 lions annually by the United States Government seems to have 
 been without any visible effect upon the silver market. It 
 seems, therefore, safe to assume that were the bimetallic theory 
 tested, all the mints of the world would be employed to their 
 utmost capacity for a period of several years in coining silver. 
 
 Now consider the case of gold. The same reasons which 
 would stimulate the coinage of silver would entirely paralyze 
 that of gold. Thus the annual supply of the latter metal would 
 be thrown upon the market for use in the arts and manufac- 
 tures. To what extent would this lower its value as compared 
 with silver? To some extent, no doubt; but we cannot tell to 
 what extent without more knowledge than we have of the 
 actual amount of gold in the world and the actual demand for 
 other purposes than that of coinage. 
 
 Would the exclusive coinage of silver be continued until that 
 metal alone was the basis for the money of the whole world? 
 This would depend upon whether all the silver in the market, 
 and all that could be produced and taken to the mints during 
 the few years that the coinage was going on, would suffice for 
 the money of the world. We do not know whether it would 
 suffice or not, and thus we do not know exactly what the out- 
 come would be. We could learn by a statistical investigation, 
 but even that might not convince the contending parties. 
 
V. 35.] THE REGULATION OF THE CURRENCY. 501 
 
 CHAPTEK V. 
 
 THE REGULATION OF THE CURRENCY. 
 
 35. The question whether government ought to make any 
 provision whatever for regulating the currency, beyond pro- 
 tecting each individual against fraud or other wrong on the 
 part of those with whom he deals, is an open one. The general 
 principles involved in this question have already been so fully 
 discussed that they need not be further considered at present. 
 In whichever way we decide the question, the fact will remain 
 that governments do sometimes undertake to issue currency, 
 and to enact laws for its regulation. How strongly soever the 
 student may be opposed to any such action on the part of the 
 government, it is very essential that he should be able to trace 
 the effects of the causes which may be brought into play by 
 such action. . Our discussion will not, however, be confined to 
 government action, but will include the effect of such policies 
 as may be adopted by the banks of the country. 
 
 To form a clear conception of the subject, certain principles 
 laid down in the first few chapters of the preceding book are 
 to be borne clearly in mind. It has been shown : 
 
 I. That a regular process of transfer of goods and services, 
 which we have called the industrial circulation, is always going 
 on, and is most necessary to human well-being. 
 
 II. That all such transfers of goods and services have to be 
 balanced by a transfer of current money in the opposite direc- 
 tion, thus constituting a system of exchangee 
 
 III. That the money or credit passing in one direction must 
 measure the value of the goods or services passing in the other 
 direction. At the same time, the number of dollars of money 
 or credit required for this measure depends upon the scale of 
 prices, increasing or diminishing with that scale. 
 
502 APPLICATIONS OF ECONOMIC SCIENCE. [V. 35. 
 
 IY. Since the scale of prices cannot be fixed by any law, but 
 is always a matter of individual bargaining, it follows that we 
 cannot assign any definite quantity of money which shall be 
 necessary or sufficient to effect all the exchanges of a country. 
 If a certain volume of currency is required to transact the 
 business of the country on a certain scale of prices, then if all 
 prices are doubled, the volume of currency must also be 
 doubled, or only half the exchanges can be effected. Conse- 
 quently what is really wanted to keep business going at its 
 normal rate is a fixed relation between the scale of prices and 
 the volume of the currency. 
 
 Y. If from any cause whatever the volume of the currency 
 does not correspond to the scale of prices, that fact is made 
 known to the public through an apparent excess or deficiency 
 in the flow of the currency. A deficiency in the flow is shown 
 by merchants not being able to sell their goods at the regular 
 rate, and by the laborers of the community not being able to 
 find employment at regular wages. All this will result in a 
 diminution of wages and prices. An excess in the flow of the 
 currency is shown by a brisk purchase of goods, and by such a 
 demand for labor that laborers are able to command an increase 
 of money wages. 
 
 YI. The apparent advantages and disadvantages thus arising 
 are, however, in great part illusory, from the fact that what the 
 laborer loses by lower wages he gains by getting his sustenance 
 at lower prices, and vice versa. 
 
 YII. Nevertheless, owing to the difficulty of adjusting prices 
 to variations in the flow of the currency, it is very essential to 
 the public good that the general scale of prices should be kept 
 as nearly uniform as possible from year to year. This requires 
 that the flow of the currency shall always be accommodated to 
 the industrial flow, increasing when the latter increases, and 
 diminishing when it diminishes. At the same time it is a 
 serious question whether the sum total of the industrial flow 
 is subject to much variation from month to month when every- 
 thing goes along at its normal rate. It is sometimes supposed 
 
V.36.] THE REGULATION OF TEE CURRENCY. 503 
 
 by men in business that, at a certain period of eaclx year, the 
 " moving of the crops " causes a great increase in the industrial 
 flow, requiring for its compensation a corresponding increase 
 in the monetary flow. Quite likely this may be true ; and if it 
 is, we have an example of a case in which a certain elasticity of 
 the currency is required. 
 
 It follows from all this that if the regulation of the cur- 
 rency is to be regarded as something for either governments 
 or banks to undertake, the main problem involved is that of 
 adjusting the monetary to the industrial flow. There must 
 be some way by which, when the industrial flow increases, an 
 increased volume of currency shall be drawn into the circula- 
 tion, to be retired again when the occasion for it has passed. 
 To effect this adjustment is supposed to be one of the principal 
 functions of banks. When more currency is wanted, it is sup- 
 posed that merchants will apply to the banks for loans, thus 
 increasing the volume of currency, and hence the monetary 
 flow. "When the occasion for the increase has passed away, the 
 merchants pay off their loans, and thus the volume and flow of 
 the currency are diminished. 
 
 Whether -banks always do perform their functions so as to 
 make this adjustment is a question which economists should in? 
 vestigate more fully than they have hitherto done. It should 
 not be regarded by the student as a settled one, but as one 
 which it should be his business, seriously to examine. Our 
 present object is to assist him by suggesting some ideas and 
 discussing some theories which will come into play in the in- 
 vestigation. 
 
 36. One of the advantages of banks has been supposed to 
 be that of economizing the use of gold and silver. If the lat- 
 ter were alone used as currency, we should have a capital equal 
 to the whole volume of the currency lying idle, and gaining no 
 interest. If one has a twenty-dollar gold piece in his purse, 
 he necessarily loses the interest upon it as long as he keeps 
 it. The same is true of the man to whom he transfers it. 
 
504 APPLICATIONS OF ECONOMIC SCIENCE. \Y. 36. 
 
 The same is true of every piece of coined money issued from 
 the mint. Thus in a certain sense the whole stock of coined gold 
 and silver may be regarded as so much idle capital. The cur- 
 rent theory -is that in so far as this gold and silver is replaced 
 by bank-notes, so far is interest gained on that portion of the 
 capital of the country which is in use as money. Adam Smith 
 compared the necessity of employing this dead capital to that 
 of taking a certain portion of the land of the country for roads, 
 and then likened the substitution of bank-notes for the gold 
 and silver to the construction of a road through the air, which 
 would permit the land previously occupied by roads to be cul- 
 tivated, thus making an actual addition to the productive 
 wealth of the country. 
 
 J3ut this theory is at the best far from satisfactory. Who 
 gains by this substitution \ Every holder of a circulating note 
 loses interest on his investment in that note while it stays in 
 his pocket, unless it bears interest, which bank-notes never do. 
 Therefore the holder of a bank-note loses the interest as Com- 
 pletely as if he had coin instead of the note. What is really 
 saved by the substitution is the wear and tear of the gold and 
 silver coin. In consequence of this wear and tear, all such 
 coin is subject to a slight continuous loss, which the public 
 must bear when the coin becomes too light for circulation. 
 We may consider each man's share of that loss to be equal to 
 the wear and tear of the coin while it is in his pocket. 
 
 Therefore whatever gains result from the substitution of 
 bank-notes for coin must accrue to the benefit of the banks 
 or other issuer of the notes. If they gained more than the 
 regular interest on their invested capital, there would be an 
 actual gain to the public by the issue of notes. It may be 
 questioned, however, whether they do have any such extra 
 gain. The general rule probably is that the expenses incident 
 to the issue of the notes, and the management of the business, 
 absorb all the profits. 
 
 Here a very important point is to be considered. We may 
 readily believe that if all the circulating notes of the country 
 
V. 37.] THE REGULATION OF THE CURRENCY. 505 
 
 were issued from a single central institution, a not inconsider- 
 able profit could be made by that institution out of the busi- 
 ness. For example, there are now circulating in the United 
 States about 600 million dollars in government and bank 
 notes. If we subtract 25 per centum of this as a coin reserve 
 to be held for their payment, there will remain 450 millions, 
 on which the issuing authority could gain interest. Putting 
 this interest at 3^- per cent per annum, the amount gained 
 would be 15 millions per annum. This would no doubt more 
 than pay all the expenses of the issue, were it made by only 
 a single institution. But when made by several hundred banks, 
 each separately responsible for its own share, the expense is so 
 far increased that most of the banks find little or no advan- 
 tage from the issue. The government gains an advantage from 
 its issue of notes by having these notes form a part of the pub- 
 lic debt on which no interest is paid. 
 
 3T. Another consideration is that the continually increas- 
 ing volume of credit used instead of coined money has resulted 
 in the general volume of circulation for the world being sev- 
 eral times larger than it would have been had bank credits not 
 been used as money. Since, as already pointed out, this whole 
 volume of currency is necessary to the transaction of the 
 world's business on the present scale of prices, it follows that 
 our present scale is much higher than it would have been but 
 for the employment of credit-currency. 
 
 The fact is that the world's business, or, as we have called it, 
 the world's industrial circulation, has grown much more rap- 
 idly than its stock of coin. The result of this is that the mon- 
 etary and industrial flows could not have been balanced with- 
 out a continuous fall of prices, but for the use of credit-cur- 
 rency. The use of this currency has resulted in the whole 
 gold-supply not being necessary to the transaction of business. 
 In consequence, a considerable portion of the gold-supply has 
 been available for other purposes than that of money ; watches, 
 jewelry, and picture-frames, for example. "We are therefore to 
 
506 APPLICATIONS OF ECONOMIC SCIENCE. [V. 38. 
 
 regard our ability to command these articles of luxury as beino- 
 due in a great measure to the economy introduced by the credit 
 system. The general benefits to the country rendered by the 
 credit system are therefore that an increased business is trans- 
 acted without an increased scale of prices, and that an impor- 
 tant part of the world's supply of the precious metals has been 
 available for use in manufactures and the arts. 
 
 38. Irredeemable Paper Money. The kind of circulating 
 notes winch we have hitherto considered have been those en- 
 titling the holder to receive a certain amount of coin at the 
 counter of a bank. They are in fact nothing but promissory 
 notes, payable on demand, and deriving their value from the 
 ability of the bank to pay them whenever presented. It has, 
 however, been shown that the transaction of the business of the 
 country requires a certain, volume of currency to be continually 
 in a state approximating to that of flow, being held first by 
 one person and then by another. In other words, it is passing 
 from hand to hand, and is received by one person only to be 
 paid to another. Now, so far as the immediate results are con- 
 cerned, it makes no .difference to the payers and receivers 
 whether the money thus flowing is coin, bank-notes, or credit. 
 Hence a certain amount <of money will always remain in circu- 
 lation, and if it is credit-money, the payment of the credit in 
 coin may never be demanded. 
 
 The result of this state of things is that when a government 
 is in a difficulty, or is financiall}' weak, it may issue a limited 
 volume of its own notes with the reasonable assurance that 
 they will pass for a certain time from hand to hand without 
 the holders demanding payment. By the device of making 
 them a legal tender a forced circulation is given them, quite 
 irrespective of their money value, or of the power of the gov- 
 ernment to redeem them. If the volume issued becomes so 
 great that the notes depreciate, then, in accordance with Gresh- 
 am's law, they will displace all other good notes, or credit re- 
 deemable in coin, and thus may become the basis of the entire 
 
V.39.] TEE REGULATION OF TEE CURRENCY. 507 
 
 circulating medium of the country. Such notes are sometimes 
 called paper money. Such money was the " greenbacks " of 
 the United States issued during the civil war, the redemption 
 of which in coin was not formally undertaken until 1879. 
 
 39. The possibility of a system of irredeemable paper mon- 
 ey being a subject of public discussion, it is necessary that we 
 should have a clear understanding of the laws which regulate 
 its value and adaptability. On this subject two opposite opin- 
 ions are current. One opinion is that such currency would 
 perform all the functions of a circulating medium, if the gov- 
 ernment would only issue it, and call its units by the name of 
 dollars. After the commercial panic of 1873 a political party 
 was formed in many States of the Union, the object of which 
 was to make the circulating notes issued by the government 
 forever irredeemable in coin. The existing notes were prom- 
 ises to pay the bearer the amounts named on their faces ; but 
 by common consent the government was postponing the re- 
 demption of this promise until a more convenient season. Gen- 
 eral B. F. Butler, one of the leaders of the new party, saw the 
 absurdity of having a promise afloat which might never be per- 
 formed, and therefore proposed that the notes, instead of bear- 
 ing such a promise, should be declared money in themselves, 
 and called certificates of value. Then a dollar note would be 
 simply a piece of engraved paper issued by the government 
 and bearing on its face a certificate that it was really one dollar 
 and should be legal tender to that amount for all payments 
 made under the laws of the United States. This view was the 
 strictly logical consequence of the theory already discussed, 
 that money derives its value from the fiat of the government. 
 The reader may be supposed so well able to grapple with this 
 theory that we shall leave him untrammelled in its discussion. 
 
 The opposing theory is that an irredeemable paper money 
 has no value except that which it derives from the hope of be- 
 ing redeemed at some future time. Hence the more remote 
 the process of redemption the less the value. This view might 
 
508 APPLICATIONS OF ECONOMIC SCIENCE. [V. 40. 
 
 appear to be borne out by the facts of history. The general 
 rule has been that such notes are issued only by governments in 
 difficulties, and in such quantities that their redemption be- 
 comes more and more doubtful. Thus the assignats of the 
 French Revolution, the " Continental currency" issued by our 
 own government during the Revolutionary War, and the cir- 
 culating notes of the Southern Confederacy, all became value- 
 less as it became certain that they would not be redeemed. 
 
 40. Although this view is nearer the truth than the other, 
 it is not entirely sound. Under certain conditions an irredeem- 
 able paper currency may have the value and perform the func- 
 tions of money, although it is certain that it will never be re- 
 deemed. What these conditions are may be learned from the 
 principles already developed in treating of the volume and 
 flow of the currency. 
 
 We have seen that it is absolutely necessary to the transac- 
 tion of the business of the country that a certain volume of 
 currency should be in circulation. It is impossible that the 
 exchanges of the United States should be conducted without a 
 volume of currency the value of which, measured by our pres- 
 ent standard, would be about fifteen dollars for each inhabitant. 
 Hence, whatever bills or tokens the people use in making their 
 exchanges, it is certain that so long as the exchanges go on, 
 the total volume of those bills or tokens will have a certain 
 absolute value. It follows that the first essential condition of 
 value of a paper currency is that it shall be generally accepted 
 in trade as money. It must therefore either be a legal tender 
 by law, or received so generally as a matter of custom that it 
 will be refused only in exceptional cases. In times of great 
 popular excitement the force of public opinion alone suffices 
 to give a forced circulation to such money. 
 
 The money being universally accepted, the next condition on 
 which its value depends is its total amount. If strictly limited 
 to an amount not exceeding that required for the transaction 
 of the current business of the community, it will not depreciate. 
 
V.40.] THE REGULATION OF TEE CURRENCY. 509 
 
 Here, however, a question will arise in the mind of the crit- 
 ical student. It has been shown in a preceding chapter that 
 there is no definite volume of currency necessary to transact 
 the business of the country, and that this business can be as 
 well transacted with one volume as with another, always pro- 
 vided that the scale of prices is adjusted to the volume. The 
 expression, " amount of currency required to transact the busi- 
 ness of the country," therefore needs to be precisely defined. 
 
 We start, then, with the proposition that whatever be the 
 volume of irredeemable currency, it will fulfil all the functions 
 of a circulating medium on a certain scale of prices correspond- 
 ing to its volume. If the volume is less than fifteen dollars for 
 each inhabitant, this scale of prices will be below prices in gold. 
 If gold coin were not receivable as money, it would then be at 
 a positive discount as compared with the paper money which 
 we suppose to be so receivable. But being receivable, we 
 should, in the case supposed, have a mixed currency of paper 
 and gold. If we continually add to the volume of the paper 
 Currency, it will at length amount to fifteen dollars for each in- 
 habitant, and will then suffice to transact all the business of the 
 country on the gold scale of prices. If we add still further to 
 the volume, gold will entirely disappear from circulation, and 
 will be at a premium, in accordance with Gresham's law. With 
 every further addition there will be a further depreciation : 
 doubling the volume will simply double all prices as measured 
 by currency. To speak more accurately, the standard of meas- 
 ure, or the dollar, will be reduced to one half its value. The 
 theorem just enunciated may therefore be expressed with 
 greater precision, as follows: So long as the total volume of 
 irredeemable currencies of all kinds does not exceed that neces- 
 sary to transact the business of the country on a coin scale of 
 prices, so long the currencies will not depreciate. 
 
 It follows, therefore, that could a strictly limited volume of 
 irredeemable paper currency be issued, it would perform all 
 the functions of money. Unfortunately, as human nature is 
 constituted, the experiment of such an issue would be a very 
 
510 APPLICATIONS OF ECONOMIC SCIENCE. [V. 41. 
 
 dangerous one. The experiment can at present have no object 
 but that of making money more plentiful, and the more plen- 
 tiful we make it the higher prices will be, and the greater the 
 volume of currency that will be required to transact the busi- 
 ness of the country. Hence the same reason which will 
 prompt one issue will lead to another, and so on until the 
 whole fabric collapses in ruin. 
 
 41. The regulation of the currency through the action of 
 banks is seen at its best in the working of the Bank of Eng- 
 land. The criterion by which the governors of this institu- 
 tion judge of the state of the currency is simply the demand 
 for gold from their vaults. The bank has a variable volume of 
 credit outstanding, payable to its creditors on demand, either 
 in bank-notes or in coin. Since the bank-notes are themselves 
 payable in coin, this whole mass of credit is thus payable. 
 
 The object which the governors keep before them is to allow 
 the mass of credit to be as large as is consistent with entire se- 
 curity against such a withdrawal of coin as might endanger 
 their ability to make good all their obligations on demand. 
 The instrumentality through which they regulate the volume 
 of their credits is the rate of interest. When the demand for 
 coin by their creditors exceeds the deposits of coin, they know 
 that it is being withdrawn for export. They conclude, there- 
 fore, that there is a larger volume of credit in circulation than 
 is necessary for the transaction of the home business on the ex- 
 isting scale of prices. They therefore raise the rate of interest 
 on loans. The result of this is that their customers are dis- 
 couraged from borrowing, and thus a moral force is brought 
 into play which tends to diminish the volume of credit cur- 
 rency. This checks the ability of the public to pay, and so 
 lessens the demand for goods. The system may therefore be 
 considered as acting much like the governor of a steam-engine, 
 which closes the throttle-valve as soon as the engine begins to 
 go too fast, and opens it again when the speed is reduced to 
 the proper limit. 
 
V.42.] THE REGULATION OF THE CURRENCY. 5H 
 
 In the United States the banks were long prevented from 
 performing this function in the same manner through the 
 existence among us of an idea which has come down to us 
 from the dark ages, that the rate of interest should be limited 
 by law. The national banks are prohibited from charging a 
 higher rate than the laws of the State in which they are lo- 
 cated. This limiting rate varies from six to ten per cent. 
 Owing to the great fall in the rate of interest since 1875, 
 this restriction has practically ceased to do any mischief, since 
 the market rate would seldom exceed that fixed by law. Un- 
 der the system of the Bank of England,, and of all banks un- 
 restricted by usury laws, the credit is allowed to the person 
 who will pay the highest rate of interest, regard being had, of 
 course, to the security which he offers. In the case of banks 
 restricted by such laws, if, at the maximum rate allowed by 
 law, the demand for credit exceeds that which the banks#can 
 supply, loans become a matter of favor, and the banks give the 
 preference to those who have been its best customers. The 
 result is that the unfavored part of the community cannot get 
 money at any price whatever. 
 
 42. The effect of the method of regulation which we have 
 described is to keep the general scale of prices somewhere near 
 the average gold prices of the world at large. It is one of the 
 unsettled questions of political economy whether this system 
 of regulation is really of any benefit to the public. It may be 
 held that banks really foster injurious changes in the general 
 scale of prices at the moment when those changes are most se- 
 verely felt, namely, in times of commercial panic and depression. 
 These are the times when the flow of the currency least suf- 
 fices to transact the business of the country, but they are also 
 the times when banks are compelled to be most careful in 
 making loans. "What is wanted is some source of currency 
 which shall be available only when a commercial panic is 
 threatened. Plans for this can be discussed with advantage 
 when the public are more enlightened on general principles. 
 
512 APPLICATIONS OF ECONOMIC SCIENCE. [V. 43. 
 
 CHAPTER VI. 
 
 OF SOCIALISTIC IDEAS. 
 
 43. There are men who hold that the present organization 
 of society is not that best adapted to promote the general wel- 
 fare. These men are so numerous, and so frequently heard, 
 that their views demand the careful attention of the student. 
 To see in what respect it is proposed to change the existing 
 system, we remark that the fundamental principle of the latter 
 is that of individual liberty, or individualism; not indeed un- 
 limited liberty, but liberty within certain limits laid down by 
 law. To put the principle into another shape, every man is re- 
 garded as the master of his own destiny. This is the under- 
 lying idea of the let-alone principle. 
 
 Socialism is a general term applied to a number of systems 
 which propose that society, by orgahized action, shall force the 
 individual to surrender his liberty, or, what amounts to the same 
 thing, his right to the unconditional acquisition and use of 
 property, for the general good. These systems are founded 
 on the belief that the great inequality now seen in the distri- 
 bution of wealth should be lessened, and that an effort should 
 be made to effect this distribution on certain supposed princi- 
 ples of equity. Such views find very strong support in the 
 philanthropic sentiments of mankind. There is a single man 
 in New York whose income would suffice to feed and clothe 
 fifty thousand families. In that same city there are more than 
 that number of families working hard to make both ends meet, 
 and a very considerable number living in squalor and misery. 
 On a superficial view there is no apparent difference between 
 the constitution of this rich man and of his poorer neighbors 
 which would justify such inequality in the wealth they possess. 
 It is therefore natural to suppose that a system which would 
 
V. 44.] OF SOCIALISTIC IDEAS. 513 
 
 distribute his surplus wealth among the poor and unfortunate 
 would tend to the general good. 
 
 In connection with socialism we have to consider the view of 
 the "labor party," the members of which do not call them- 
 selves socialists, and do not propose any radically new system, 
 but are simply engaged in a vigorous effort to secure for 
 the laborer a larger share of the product of labor than he can 
 command under the actual system. Although this class has 
 no system of its own, it has a certain way of thinking which 
 is so nearly identical with the way of thinking of the socialists 
 proper that both may be considered together. The object of 
 the present chapter is to inquire whether any system intended 
 to limit the liberty of any man to acquire all the wealth he can 
 by legal means, and to employ it in the way he chooses, can con- 
 duce to the general good. 
 
 44. "We have in the first place to point out certain wide- 
 spread popular errors which lead to the impression that our 
 present system is not that most conducive to the public good. 
 The mere correction of these errors will go far towards putting 
 us on the right track, and will make it less necessary than it 
 otherwise would be to consider the views of socialists in detail. 
 
 The first error is that of tacitly supposing that the inequality 
 now existing in the ownership of wealth indicates a correspond- 
 ing inequality in its enjoyment. Let us suppose the income of 
 the richest man in New York to be ten millions of dollars, and 
 that of each day-laborer to be five hundred dollars. If their 
 consumption of the products of labor were proportional to 
 their income, Mr. Yanderbilt's family would consume anriually 
 perhaps 100,000 barrels of flour, 10,000 suits of clothes, and 
 so on ; or at least the equivalent in value of these quantities of 
 flour and clothing. J3ut nothing of the sort takes place. The 
 rich consume but little more of the necessaries of life than the 
 poor. All that the wealthiest man gets to live on is his house, 
 with its furniture and decorations, the food he eats, the clothes 
 he wears, and the articles which contribute to his comfort and 
 33 
 
514 APPLICATIONS OF ECONOMIC SCIENCE. [V. 44. 
 
 convenience. As already shown, all his surplus income above 
 this is not consumed by him, but is directly or indirectly ex- 
 pended in employing laborers to build more houses, factories, 
 mills, railways and locomotives, to clear more farms and to dig 
 more mines — in a word, to increase the general supply of all 
 the commodities required by men in general (Book 1Y., 
 Chapter IX.). What society really expends in the support of 
 Mr. Vanderbilt is only the commodities which he takes out of 
 the general storehouse for his own consumption. 
 
 The second error is that of forgetting that under the existing 
 system each individual is engaged as advantageously as circum- 
 stances admit of in the production of the necessaries of life to 
 be consumed by others ; and that no change in that system 
 could result in a more abundant general supply of the neces- 
 saries of life. The utmost that could be done by the change 
 would be to allow some classes to consume more and others 
 fewer commodities. 
 
 A third mistake is that of supposing that the condition of the 
 laboring class has not improved with the advance in the arts of 
 production during the last two or three centuries. This mis- 
 take is about a matter of fact so clear and simple that its mis- 
 apprehension can only be considered as an extraordinary case 
 of mental blindness, suggestive of the danger of intrusting 
 the improvement of society to men who cannot see. Every 
 one who has taken the trouble to inquire into the actual state 
 of society a few centuries ago knows that the condition of the 
 laborer was about this : He lived in a hovel with hardly an}-- 
 thing which we would call a window, with the fire (if he ever 
 had any) in the middle of the building, or perhaps in a chimney- 
 piece at one end. This hovel he occupied in common with the 
 pigs and poultry. His staple article of food was a kind of black 
 bread which a negro of to-day would hardly offer his dog, with 
 a few vegetables from the neighboring garden. The clothing 
 of himself and wife was coarse, scanty, and dirty almost in the 
 same proportion. 
 
 Coming nearer to our own times and our own country, we have 
 
V. 44] OF SOCIALISTIC IDEAS. 515 
 
 a •well-known fact still -within the memory of our older men 
 which shows the improvement in the comfort of the poorer 
 classes in a yet simpler light. In the early part of this cen- 
 tury the clothing for all but well-to-do families had to be 
 made by the female members of each family. They helped to 
 shear the sheep, they spun the wool, wove the cloth, and cut 
 and sewed the clothes. Such clothing was called "home- 
 spun," a term familiar even to the present day. Coming down 
 to the present, it would now be difficult to find within the limits 
 of the United States a family who found such labor necessary. 
 The wife of the poorest day-laborer in our land would rebel at 
 the task of spinning and weaving the material for her hus- 
 band's clothes. What object would there be in undertaking 
 such a task, when with the wages of a week's labor the man 
 can buy himself a ready-made suit of clothes which will 
 last him a year with no other help from the wife than mendino- 
 and sewing on buttons ? 
 
 The improvement in the quantity of food available is not 
 less remarkable than in that of clothing. Three or four days' 
 work of the average laborer will now buy him a barrel of flour 
 and more than a barrel of corn-meal ; that is, a month's supply 
 of bread for an average family. A week's labor will buy 
 him a half-barrel of pork. 
 
 The fourth mistake is that of overlooking the relative im- 
 portance of the different requirements of production, and 
 regarding the functions of the laborer as the only ones to be 
 considered. This is an exceedingly natural mistake. When 
 we trace back the operations through which a coat or any other 
 commodity was produced, we find them all to be ultimately 
 resolved into human labor. But we see in the same connection 
 that conjoined with the merely manual labor, which was the 
 immediate instrument, there were other agencies of equal im- 
 portance which might be called labor, but which are overlooked 
 by the socialist and labor-reformer. These are the functions 
 of the inventor who shows how improvements in production 
 can be made : of the capitalist who saves up his income and 
 
516 APPLICATIONS OF ECONOMIC SCIENCE. [V.45. 
 
 employs it in putting the ideas of the inventor into practice ; 
 of the managers who organize the work of the laborers. "With- 
 out these three classes of men the great class of mere laborers 
 would never have made any advance, but would have been still 
 living in the same miserable style that they lived in one or 
 two hundred years ago. That is, the great improvement in 
 the condition of the laborer which the present generation wit- 
 nesses is not the work of himself, but of men of a higher order. 
 
 45. The fact is that on our present system the enjoyment 
 of the collected wealth of the community is as nearly in accord 
 with the ideal principles of equity as any general system can 
 be. It is a great mistake to suppose that the enormous ine- 
 qualities which we see in wealth imply anything wrong in the 
 system which permits them. When we speak of principles of 
 equity, we mean principles which have their rise in the consti- 
 tution of human nature. At the bottom of all these principles 
 is one which we have already several times alluded to or de- 
 fined : the feeling in the breast of every well-organized man 
 that he is entitled to make the best use of the faculties with 
 which nature has endowed him for his own advancement, and 
 that so long as he gives to others a full equivalent for the 
 benefits that he receives from them, his fellow-men have no 
 other claim upon him. "We have shown that under our present 
 system no one can, as a general rule, command from others 
 more that the equivalent of the good he does them. But we 
 may explain the matter again from a somewhat wider point of 
 view. 
 
 "When we speak of equivalents between services rendered we 
 presuppose some system by which we may measure the values 
 of the respective services. The economic measure of value 
 already defined and investigated is in the direction of equity. 
 True, they result in the value of the service being measured 
 not merely by its character in itself considered, but by its 
 scarcity. But this system of estimation is perfectly equitable. 
 To a man who kindly offers to supply me with several hogs- 
 
Y. 45.] OF SOCIALISTIC IDEAS. 517 
 
 beads of air to breathe, I may say with perfect reason, " I bave 
 all the air I want already, and your services, whatever the cost, 
 are of no use to me. I therefore decline to pay you for the 
 labor you bave spent in bringing me the air." 
 
 To take an extreme case of the contrary kind, suppose I am 
 defendant in a suit at law, the loss of which will reduce me to 
 penury. If a lawyer by his good advice shows me how to gain 
 the suit, it would be inequitable and unreasonable should I say 
 to him, " These services cost you only two or three days' labor 
 all told; I will therefore only pay you the value of two or three 
 days of my labor." It would be inequitable, because what- 
 ever is the maximum amount which I would be willing to pay 
 rather than be deprived of his advice, that maximum repre- 
 sents the extreme value of the services which he renders me. 
 So far as we two are concerned, that amount represents the 
 good which he does me. Therefore, by such amount as that 
 which I actually pay him falls short of this ideal maximum 
 (and the competition of different lawyers for my case may 
 make it fall very far below that amount), by just so much am 
 I the gainer through the legal talent of lawyers in general. 
 I have therefore no right to complain, though I have to pay 
 my lawyer for three days' work what would cost me as many 
 months. And we may see in general that if society stands in 
 great need of, or will derive great advantage from, services 
 which only a very few men can render, it is perfectly equitable 
 that these men should command from society a return com- 
 mensurate with the paucity of their numbers. Any other sys- 
 tem would presuppose obligations on their part towards soci- 
 ety, without corresponding obligations on the part of society 
 towards them. 
 
 The practice of competition continually tends to reduce to 
 a minimum the equivalent which men can charge for their ser- 
 vices. This also is in perfect accord with equity, since, as the 
 number of persons who can render any services increases, the 
 relative importance of each person diminishes. Thus, even 
 
518 APPLICATIONS OF ECONOMIC SCIENCE. [V. 46. 
 
 from an idealistic point of view, nothing can be said against 
 the genera] equity of the existing system of free competition. 
 
 There might indeed be exceptional cases of great hardship, 
 as when one person takes advantage of some temporary but 
 urgent want of another. It would be a great hardship for a 
 bystander to demand from a drowning man his whole fortune 
 as the equivalent of pulling him out of the water. But the 
 customs and tendencies of society do not permit of these ex- 
 ceptional cases being taken advantage of in practice. The 
 men who conduct the business of the world find it to conduce 
 to their prosperity and peace of mind to conduct their affairs 
 on broad general principles, without seeking to take undue 
 advantage of exceptional cases. 
 
 It is also to be remembered that the existing system insures 
 the employment of every man in the way best suited to his 
 talents better than any other system possibly can. This fact 
 follows from almost the whole system of political economy, so 
 that it need not be dwelt upon. The result is that the great 
 mass of producers who make up the working classes of the 
 world will combine in the most advantageous way. 
 
 46. Although the present system seems the best one im- 
 aginable in its general arrangements, it by no means follows 
 that it is best in every detail. "We have shown that there 
 may be exceptional cases. One point where doubt of the uni- 
 versal equity of the existing system may arise is made when 
 we find artificial means adopted to prevent that competition 
 which insures society against being required to pay for indi- 
 vidual services more than they are worth, and to create arti- 
 ficial monopolies. Such a case arises when a telegraph com- 
 pany charges so high for its messages that its lines are idle 
 a considerable portion of the time ; when mechanics combine 
 to abstain from work in order that they may command more 
 from society than the equivalent which would be fixed by free 
 competition, and to limit the number of persons who can 
 learn a trade. But it has not yet been shown that anything 
 
V. 47.] OF SOCIALISTIC IDEAS. 519 
 
 would be gained by attempts to prevent such combinations 
 through legal action. 
 
 In this connection there is an historical fact still existing and 
 not to be lost sight of. As a general rule those improvements 
 in the process of manufacture which have resulted in so large 
 an increase in the production of cotton and woollen goods that 
 the poorest man in the land can now wear a white shirt on 
 Sunday, and warm clothing all winter, have uniformly met 
 with a bitter opposition from the class to which labor- reform- 
 ers belong. Even now nothing is more common than com- 
 binations against cheap methods of production. These com- 
 binations are at war with the good of society in general, and 
 especially with the good of the poorer class of laborers. The 
 greatest want of this class, at least in our large cities, is more 
 house-room. If the organized efforts of philanthropists were 
 directed rationally, this would be the point first aimed at. But 
 instead of the efforts of labor-reformers being aimed in this 
 direction, we find that nearly all the artisans engaged in doing 
 the work necessary to the construction of a house are formed 
 into organizations whose object is to limit in every way the 
 building of houses. They seek to prescribe the number of 
 boys who shall be allowed to learn how to lay bricks, or 
 plaster, or do anything else requiring skill. 
 
 4t. The inquiry now presents itself, What system would 
 socialists substitute for the existing one ? This inquiry it is 
 impossible to answer within the limits of the present chapter, 
 for the reason that the systems which have been proposed are 
 too numerous and too indefinite to be described and discussed 
 in detail. The most celebrated ones are founded on theories 
 of the perfection of human nature which, however beautiful 
 they may be as creations of the fancy, have nothing to cor- 
 respond to them in the world we live in. Time would be 
 wasted in discussing such systems, for the simple reason that 
 it would be vain trying to instruct any man whose common- 
 sense would not suffice to show him their impracticability. 
 
520 APPLICATIONS OF ECONOMIC SCIENCE. [V. 48. 
 
 The danger which now threatens society in this direction does 
 not come from the propounders of new systems, but from 
 popular efforts to make such changes in the details of our 
 present system as it is supposed may remedy the evils which 
 surround us. The way most thoroughly to dispose of the 
 subject is to inquire by what means and to what extent it 
 would be possible for the wisest, most beneficent, and most 
 powerful government, a government which could do anything 
 it pleased, to improve on the present state of things. Let us 
 then suppose such a government to set out to remedy all the 
 evils that we so frequently hear about, and to start mankind 
 on the road to happiness. 
 
 48. The first object aimed at by socialists is that every man 
 shall be enabled to gain a living and to secure his develop- 
 ment. The question would then arise, What shall we consider 
 a living? One of the first classes to be considered would be 
 the poor blacks of the South. But even these are making 
 some sort of a living, and in fact as much of a living as they 
 really want to make. "When the beneficent government sent 
 its representatives among them, they would soon discover that 
 the sole wants of the beneficiaries were a certain annual supply 
 of corn, chickens, and other products to eat, a few old clothes 
 to cover their backs, and some poor shelter from the weather. 
 Just as much work as is necessary to secure these necessaries 
 the typical black man is willing to perform ; more is laborious, 
 and he will not perform it unless forced to do so. Now, what 
 shall the government do with him? Give him more food, 
 better clothes, and a better house than he really needs ? Then 
 food, clothing, and houses must be taken from somebody else 
 for his benefit. Shall he be forced to do more work in order 
 to render an equivalent for the increased supply of necessaries 
 given him ? This would be doing him a great wrong. If he 
 is not to be his own judge of the work he shall do, he is sim- 
 ply a slave. As for development : why should he be de- 
 veloped ? He does not want to be, and it would be doing him 
 
V. 48.] OF SOCIALISTIC IDEAS. 521 
 
 an injury to try to fit liim for a higher sphere. He is happier 
 with his violin than he would be in the Astor Library, and if 
 we wish to fit the race for higher pursuits we had better begin 
 with more promising stock. 
 
 The beneficent government next turns its attention to the 
 tenement-houses of New York City, where several hundred 
 thousand poor are confined in insufficient and unhealthy quar- 
 ters. "What shall be done with them ? Shall they be put 
 into larger houses where they will have more air and room ? 
 Then somebody must build the houses. Bricklayers, carpen- 
 ters, and masons must be induced to go to work, and the 
 beneficent government must make provision for feeding and 
 clothing them while they are building houses for the poor. 
 Just as the houses are started the bricklayers organize a strike. 
 What is the government to do ? Decree that they shall not 
 strike, but be satisfied with such subsistence as the government 
 can give them ? This will be treating them a great deal worse 
 than modern society has ever done. The latter induces them 
 to work if it can, but never forces them to accept conditions 
 against their will. 
 
 Perhaps the beneficent government meets the demand by 
 giving them more flour, meat, and clothing, and thus induces 
 them to continue work. But where are the food and clothing 
 to come from? Perhaps the government will ransack the 
 houses of the wealthy to seize the stores of food and clothing 
 reaped by their wealth. But they would be greatly disappointed, 
 and might find these stores not materially greater here than in 
 any other houses. The next resource would be to tax people 
 in general, and the wealthy in particular, to raise money to 
 purchase flour for the bricklayers. We anticipate no difficulty 
 on the part of the government in collecting the tax to any 
 amount, because we suppose its power unlimited ; but we do 
 not assign it the faculty of making something out of nothing. 
 Therefore if the wealthy are taxed, the money which they can 
 spend in other directions will be diminished by exactly the 
 amount of the tax. The wealthy man of leisure must there- 
 
522 APPLICATIONS OF ECONOMIC SCIENCE. [V. 48. 
 
 fore discharge some of his servants, and thus throw them out 
 of employment. The railway owner must stop building loco- 
 motives and rolling-stock for his railways, giving to the gov- 
 ernment for the bricklayers the money he would have expended 
 in this direction. The result is that the builders of locomotives 
 and cars will find their wages diminished, or perhaps they will 
 be thrown out of employment. Then, when the government 
 took the money and bought flour for the bricklayers, it would 
 come into direct competition with the very occupants of the 
 tenement-house whom it was trying to relieve, and who wanted 
 all the flour they could get. Thus the supply of flour would 
 be diminished, the price would rise, and all the poorly fed, 
 clothed, and housed poor would for the time being be worse 
 ofE than before. The final result would be that the cost of 
 building the tenement-house would come out of servants, build- 
 ers of locomotives, and the occupants of the houses themselves, 
 no matter what arrangements the government might make. 
 
 Our government next tries a third step. It finds that the rail- 
 ways of the country are very largely owned by a few wealthy 
 men who ought not to be allowed the enjoyment of so much 
 wealth, and therefore determines to confiscate their property. 
 It therefore seizes all the railways, and declares that the latter 
 are hereafter to be run exclusively for the public benefit and 
 are to belong to the public. But how much better off would 
 the public be? Shall everybody who wants to ride be carried 
 free? USTo, because then the railway will have no income to 
 pay the men who run it. Shall it charge the same price as be- 
 fore for transportation ? Then nobody will be any better off. 
 Shall it lower the rate ? By whatever amount it lowers the rate, 
 there will be so much less money to pay the employes who 
 manage it and keep it in repair. Making the best possible sup- 
 position, and assuming that the government could manage the 
 road as well as the stockholders, all that could possibly be gained 
 would be the dividends received by the stockholders. This 
 will be so insignificant, when compared with the total transac- 
 tions of the road, that it is not worth considering. But even 
 
y. 4 8 .] OF SOCIALISTIC IDEAS. 523 
 
 if saved, bow would society be better off? The stockholders 
 generally spend their dividends in improving their own or some 
 other roads, or in building bouses or improving farms. If the 
 government stops the dividends, tben these improvements must 
 also stop, and thus the capacity of the country at large must be 
 
 diminished. 
 
 In this argument we have introduced the supposition that 
 the railway could be as well managed by the government as by 
 the stockholders. As governments go, this supposition is al- 
 most absurd. Every man of common-sense knows that the 
 management would be a great deal worse rather than better. 
 
 Finding it impossible to supply the occupants of the tene- 
 ment-houses with better quarters without injuring other classes 
 of laborers, what shall our government try next? Shall the 
 occupants of the tenement-houses be removed to the country 
 where they may have more fresh air? The very fact that they 
 live in the city shows that they prefer city to farm life. In 
 removing them the government would therefore be overruling 
 their ow°n wishes, which, to say nothing of the wrong of it, 
 would produce speedy revolution. 
 
 But could not our government do something by employing 
 the poor of the great cities, thus enabling them to help them- 
 selves? Everywhere we see hundreds and thousands of people 
 out of employment and seeking for something to do. We have 
 shown that there is one way by which these people may get 
 employment, and that is by going to work on the very best 
 terms "they can command. Can the government do anything 
 better for them ? The only measure that any one proposes is 
 that the government shall hire them to do something. But in 
 order to pay them wages government must levy taxes. This 
 tax would be taken right out of the monetary circulation, and 
 would cause a diminution in the ability of the taxpayers to 
 employ labor exactly equal to the increase in the power of the 
 government to do so. Thus, at best, the injury would equal 
 the benefit. 
 
 But the question would arise, In what labor would the gov- 
 
524 APPLICATIONS OF ECONOMIC SCIENCE. \Y. 50. 
 
 ernment employ the men ? In breaking stone, which nobody 
 wants broken ? If so, it would be a waste of labor, and the sole 
 effect of the operation would be to enable the laborers to eat 
 food without producing an equivalent, and thus to diminish 
 the amount of subsistence available for other laborers. Shall 
 they break stone that somebody wants broken ? Then the inter- 
 vention of the government will not be required, because if any- 
 body wants stone broken he will himself hire laborers to do it. 
 
 49. All projects of the class we have been describing can 
 be most clearly analyzed by looking at the whole subject from 
 a communistic standpoint, as in Book II., Chapter IX., and by 
 considering the distribution of the products of labor among the 
 various classes of society from the point of view there taken. 
 The fact is that, under the present arrangements, men are work- 
 ing for each other in the most effective way that it would be 
 possible for them to work under the supervision of the wisest 
 government. We have already a system of socialism marvel- 
 lous in its perfection. The most admirable feature of it is that 
 those propensities of men which we consider most selfish lead 
 them to work for the good of their fellow-men. The men of 
 wealth who employ their money in building houses, managing 
 railways, and sailing ships are great public benefactors, engaged 
 in supplying thousands and even millions of their fellow-men 
 with shelter and with the means to make journeys and to pro- 
 cure sustenance from all parts of the world. Those who would 
 destroy the system may be aptly compared to passengers in a 
 wooden ship who, on finding the weather cold and the supply 
 of fuel insufficient for cooking, are bent upon cutting up the 
 ship for fuel in mid-ocean in order to warm themselves by the 
 fire. 
 
 50. "We have not yet considered some of the most far-reach- 
 ing and yet elementary difficulties in the way of practical so- 
 cialism. One difficulty is that no matter how much society 
 might want to benefit an individual, it could not do it, from the 
 
Y. 50.] OF SOCIALISTIC IDEAS. 525 
 
 mere fact of not knowing what the individual wants. Every 
 man has his own tastes and whims, which may change from 
 day to day, .and which society cannot possibly provide for. It 
 is essential to his happiness that he should be allowed to gratify 
 such transient wants in the best way he can. It would be vexa- 
 tious to have any one but himself decide whether he should take a 
 railway journey when he felt that he needed a change ; whether 
 he should have coffee or milk for breakfast ; whether he should 
 wears his old clothes or be supplied with a new suit. Society 
 lets him look out for himself in all such matters, not because it 
 is selfish and does not care for his good, but because it really 
 cannot help him. He must look out for himself, not because 
 other people are indifferent to his welfare, but because they 
 cannot promote it as well as he can himself. 
 
 A little consideration will show us that no system of social- 
 ism is possible without such an abridgment of individual lib- 
 erty as no class of men would for a moment tolerate. If society 
 is to guarantee an individual a living, it is quite certain that it 
 must prescribe some conditions. To say that every man shall 
 be entitled to a living, and yet retain the right to seek work 
 where he pleases and to prescribe his own condition of labor, 
 would be little short of an absurdity. "What society now does 
 is to offer him the best living it can, on the best conditions he 
 can command, leaving him free to accept or decline them. Bet- 
 ter than this it cannot do. When society prescribed the con- 
 ditions to which he must submit, a rebellion would begin. 
 
526 APPLICATIONS OF ECONOMIC SCIENCE. [V. 52. 
 
 CHAPTER VII. 
 
 OF CHARITABLE EFFORT. 
 
 51. As men advance in civilization the amelioration of the 
 condition of their fellows must become a subject of increasing 
 interest to them. It is not the function of political economy 
 to decide what men ought or ought not to do to promote this 
 end. But it is a legitimate function of the science to point out 
 the effect upon the welfare of the race of any and every char- 
 itable effort into which men may enter. 
 
 We begin with some general remarks upon the impulses of 
 our nature. It is a well-known fact that those appetites which* 
 are essential to the continued existence of mankind are liable 
 to become destructive of his well-being when not controlled by 
 reason. Hence in all civilized communities laws are enacted 
 having for their object the enforcement of certain restraints upon 
 the appetites. The question may now arise whether it is not 
 possible that those benevolent impulses of our nature which 
 move us to relieve distress and suffering may lead to real injury 
 when not guided by reason ; whether, in fact, these impulses 
 may not need to be restrained as well as the appetites. That 
 such a case is at least possible will be evident when we reflect on 
 the complexity of the social organism, on the numerous remote 
 effects which the combined charities of the community may 
 have in the course of generations, and on how little those who 
 give alms consider these effects. It is impossible to maintain 
 any general proposition on this subject which shall cover more 
 than a limited range. "We must therefore reach a conclusion by 
 considering different cases in detail. 
 
 52. Let us first take up the familiar case of a beggar. A 
 gentleman is implored for relief by a repulsive piece of human- 
 
V. 52.] OF CHARITABLE EFFORT. 527 
 
 ity, enshrouded in rags and covered with dirt. Moved by pity, 
 he gives him a dime and passes on. "What is the economical 
 nature of this transaction ? "We reply that the transaction is one 
 of supply and demand, belonging to the same class as the sup- 
 ply of and demand for personal services. The combined will- 
 ingness and ability of a number of persons in the community 
 to give dimes to beggars constitutes a demand for beggary, just 
 as much as if an advertisement, " Beggars wanted, liberal alms 
 guaranteed," were conspicuously inserted in the columns of a 
 newspaper. If there is any difficulty in seeing the truth of this 
 statement, it should disappear when the reader reflects that 
 nothing is necessary to constitute an economic demand except 
 readiness to make payments on certain conditions. Among a 
 crowd of children fond of music, an ability and a willingness 
 to give pennies to organ-grinders constitute a demand for their 
 services. This is evident. Though not so evident, it is equally 
 true that an ability and a willingness on the part of people of 
 delicate musical ears to give organ-grinders pennies for "mov- 
 ing on" are equally a demand for their services, in spite of the 
 fact that the service is the very thing they are paying to get 
 rid of. The fact that the benevolent gentleman may wish that 
 there were no beggars, and may be very sorry to see them, 
 does not change the economic effect of his readiness to give 
 them money. From an economic point of view the gentleman 
 pays the beggar for being poor, miserable, idle, dirty, and worth- 
 less. 
 
 Such being the case, the supply of this service arises accord- 
 ing to the same economic laws that the supply of any other 
 service arises. As in every community where there is a de- 
 mand for bricklayers a certain portion of the young will be- 
 come bricklayers, and will try to lay bricks in such a way as to 
 gain the highest wages, so in a community where there is a de- 
 mand for beggars a certain number are sure to become beggars, 
 and to study the professional accomplishments which will be 
 most likely to draw money from the pockets of the benevolent. 
 Hence, in the case supposed, mendicity will exist according to 
 
528 APPLICATIONS OF ECONOMIC SCIENCE. [V. 54. 
 
 the same laws that govern the existence of other trades and 
 occupations. 
 
 53. It is often said that imbecility and mendicity are a 
 growth of civilization, being unknown in primitive communi- 
 ties. Hence men look upon them as they look upon the dis- 
 eases of civilization, namely, as something inseparably associated 
 with progress. But a very little consideration will show that 
 there is no such necessary connection. Why are there no 
 beggars in comparatively poor and simple communities? "We 
 answer, for the same reason that there are no great actors, 
 philosophers, or mathematicians in such communities. It is 
 because the community cannot afford such luxuries. Where it 
 is perfectly certain that no one can get anything in alms by any 
 method of begging, mendicity can never arise. If, as may 
 sometimes be the case, a child grows up too imbecile to make 
 a living or do any work, his parents, friends, relatives, or ac- 
 quaintances take charge of him as best they can, and are care- 
 ful that he is not allowed to wander away and starve. Men- 
 dicity can gain a foothold only when the community gets so 
 wealthy and benevolent as to present an economic demand for 
 beggars and paupers. 
 
 54. A natural reply to the above considerations will be 
 that they presuppose the mendicant to voluntarily adopt the 
 profession of being miserable, and that, if it can be shown that 
 this miserable condition arose without any overt act on his 
 part, the law of supply and demand will not cover the case. 
 
 Cases in which this answer would be correct are not incon- 
 ceivable. The extreme difficulty of deciding whether the 
 misery of any special mendicant is or is not intentional might 
 be urged on either side ; but in a scientific discussion we are 
 concerned with the principles of the case, rather than the 
 special facts. To show what view we are to take of the possi- 
 ble antithesis between voluntary and involuntary misery, let us 
 consider another case. 
 
V. 54.] OF CHARITABLE EFFORT. 529 
 
 Here is a little girl, born of poor and rather demoralized 
 parents, who is being reared without any definite object in life. 
 From early childhood she becomes aware that sums of money 
 which seem to her fabulous in amount are raised by rich people 
 for the benefit of the poor. If she lives in Europe, she is ac- 
 customed to seeing boxes in churches plainly marked " For the 
 poor," and she finds out what it means before she can read. 
 On getting a little older she becomes conscious that she has no 
 chance to get any share of this money except by being even 
 poorer than her parents. If she learns to cook for wealthier 
 people, to do housework, to sew, to nurse ; and if she uses the 
 knowledge thus acquired in such a way as not to be a burden 
 upon others, then she will have no right to any of this money. 
 To get her share of it, she must remain poor, miserable, and 
 worthless. To see what effect this may have upon her educa- 
 tion and aspirations, let us look at human nature from another 
 point of view. 
 
 We may say that, in a certain sense, men are by nature poor, 
 miserable, and worthless. That is to say, if a child grows into 
 a man without ever being taught or required to exercise his 
 faculties, he will grow into this kind of a being. To make a 
 decent living, even of the lowest sort, he must take pains, prac- 
 tise self-denial, seek for acquaintances, and make for himself a 
 good character among his fellow-men. It is therefore not nee 
 essary, in order that the demand for objects of charity should 
 be supplied, that any person should deliberately make up his 
 mind to be a beggar. To become such all he needs to do is to 
 do nothing. He can then with a greater or less approximation 
 to truth say, " I have never tried to become a burden on soci- 
 ety, and yet I can get no work ; I have nothing to do ; I am 
 nearly starved ; I shall soon be naked ; I have no house in 
 which to lay my head ; I cannot get money for the barest ne- 
 cessities of existence." 
 
 The lesson is this : Although what the man says may be true, 
 yet, if there had been no charity, he and his parents would 
 34 
 
530 APPLICATIONS OF ECONOMIC SCIENCE. [V. 55. 
 
 have taken a different view of life, and he would have had a 
 different training and a different history. 
 
 55. The question may now be asked, Does it follow from 
 all this that no effort to benefit our fellow-man by giving him 
 of our own subsistence can be otherwise than vain or injuri- 
 ous ? Are we to see thousands of our fellow-beings suffering 
 the evils of poverty without making an effort to relieve them ? 
 Are we to see them in wretchedness and misery without an 
 effort to alleviate their condition ? Is a certain fraction of our 
 race doomed to continue the lowest form of existence, do what 
 we may ? 
 
 We reply that the questions are not necessarily to be answered 
 in the affirmative on account of anything we have said. What 
 common-sense unites with science in saying is this : In order to 
 alleviate the race we must intelligently adapt our means to our 
 ends, and by merely following the blind impulses of our senti- 
 ments we do not secure such adaptation. The real difficulty is 
 that charitable effort, as we see it every day practised, is not 
 directed intelligently to the best ends. The ends to which it is 
 intelligently directed are comparatively unimportant ones. To 
 show this, let us see what should be the benevolent purposes of 
 a reasonable and philanthropic being and comj>are them with 
 the ordinary purposes of charitable associations. 
 
 Let us suppose that there are in this country one million peo- 
 ple in a state of such destitution that they should receive the 
 help of the charitable. Supposing the state of society to re- 
 main the same generation after generation, there will continue 
 to be a constant portion, say two per cent of the population, in 
 this deplorable condition. This brings to our minds three 
 classes of people who may need our help. We have, firstly, 
 the few score or hundreds whom we, or the organizations with 
 whom we are connected, can find in our own city. Secondly, 
 we have the remaining portion of the million whom we do not 
 see, and whom we must leave others to find. Thirdly, we have 
 
V. 55.] OF CHARITABLE EFFORT. 531 
 
 the possible future millions who are to live in this country in 
 future generations. 
 
 Corresponding to these three classes we have as many differ- 
 ent purposes which charitable effort may have in view. The 
 ordinary charitable society is devoted principally to the first 
 class, namely, those poor whom we can find within their own 
 sphere of operations. As a general rule their efforts do not 
 make any change in the character of the unfortunate people 
 with whom they deal, being mainly directed to the relief of 
 their immediate wants. Of course the society would like very 
 much to elevate them in their characters and constitutions, and 
 many such associations have this in view. But the chances are 
 that such efforts do not generally lead to any well-marked bene- 
 ficial result. 
 
 Another purpose we might have in view is the relief and 
 the elevation not only of the few poor we can find, but of the 
 whole million whom we suppose to live in the country. Finally, 
 a yet wider and higher motive is that of seeing that the pros- 
 pective poor and miserable of future generations are diminished 
 in numbers as much as possible. 
 
 We thus see that charity may have very different objects in 
 view ; and it is perhaps not quite just to say that charitable 
 associations do not intelligently adapt means to ends, for, as 
 a matter of fact, it must be considered that if their end is 
 merely to relieve those particular persons to whose ameliora- 
 tion their efforts are directed, then that end is certainly at- 
 tained by them. There can be no doubt that if we give a 
 supply of food and clothing to a half-starved family, the wants 
 of that family will be relieved so long as the supply holds out. 
 The real question is whether this kind of relief should be the 
 main object of our supposed reasonable and philanthropic being 
 who desires to do the greatest good by his efforts. 
 
 A very little consideration will show us that it should not. 
 To a reasonable being the interests of the mass of poor whom 
 he cannot reach should be as dear as the interests of the few 
 whom he can reach. The object of not adding to the number 
 
532 APPLICATIONS OF ECONOMIC SCIENCE. [V. 55. 
 
 of the poor and miserable should be kept in view, as well as 
 that of aiding the poor and miserable who now exist. The 
 diminution of the number of such beings in future generations 
 should be kept in sight as well as the diminution of those at 
 the present time. 
 
 The first answer to this will be that even if we grant it, yet 
 the great mass are people whom we can neither see nor help. 
 Still less can we do anything for future generations ; therefore 
 we will do our best work by attending to those who are within 
 our reach. "We must let the future bear its own burdens. 
 
 Here the philanthropic philosopher must join issue with the 
 charitable man. The way we deal with the poor and miserable 
 we see around us has a most important effect upon the poor 
 and miserable we do not see. The next generation will be 
 brought into the world by this generation, and it depends en- 
 tirely upon the acts of this generation how many poor and 
 miserable there shall be in the next. The law that like brings 
 forth like is as true with the human race as with animals and 
 plants. The greater the number of the degraded classes who 
 are allowed to produce offspring which are allowed to grow to 
 maturity, the more rapidly will these classes increase. "What 
 effect we wish our acts to have does not come into the ques- 
 tion in considering the consequences of those acts. What we 
 are concerned with is the natural consequences of our acts and 
 not the motives which prompt them. "We cannot evade the 
 conclusion that the inevitable result of our current forms of 
 charity is to enable the poor, miserable, and worthless elements 
 of the community to bring forth children, to enable those 
 children to escape the perils of infancy and grow to manhood, 
 and to deprive them of the strongest incentive to become use- 
 ful members of society, namely, the prospect that they will 
 starve to death unless they learn to make a living. This re- 
 sult is what the reasonable philanthropist must deplore. 
 
 The defect in. the current reasoning of the charitable is sim- 
 ply this : They consider that the effects of their charity termi- 
 nate with the relief of their beneficiaries. Hence when they 
 
V. 55.] OF CHARITABLE EFFORT. 533 
 
 find that an applicant is really worthy, they consider their case 
 fully made out. What they do not consider is the moral effect 
 of their work upon the demoralized classes at large, and espec- 
 ially upon the training of their growing children. 
 
 The question now arises whether there is any way of modi- 
 fying these effects. Must all charitable effort be directed sole- 
 ly towards enabling the degraded classes to live and propagate 
 without elevating them ? Can they not be elevated by such 
 action? The answer to these questions should come from the 
 socialist rather than the economist, and so does not properly 
 belong to the present work. It may, however, be remarked 
 that all classes of humanity do, to a certain extent, admit of 
 elevation, and that they can, generation by generation, be slow- 
 ly elevated if we properly adapt the means to the ends. The 
 great end we should have in view is that of enabling the indi- 
 vidual to earn a living by his own exertions. So far as our 
 charitable effort is directed towards that end and no other, so 
 far may its effect be beneficial. Society is greatly in want of 
 laborers of every order who can be relied upon. If the chil- 
 dren of the degraded classes could be taken in infancy, before 
 their bad habits have had time to form, and trained to earn a 
 livelihood, a certain proportion of them would be redeemed. 
 If those who could not be so trained were allowed to starve, 
 the number to grow up a burden on society would be dimin- 
 ished. The greatest difficulty in the way of such a policy is to 
 organize charitable effort in such a way that it shall be intelli- 
 gently directed to this end. The natural tendency of such 
 effort is the very opposite of that here pointed out. What we 
 really ought to do is to train, persuade, or compel every person 
 to earn his living under penalty of starvation. The funda- 
 mental idea of current charity is the wholly incompatible one 
 of enabling the favored few who chance to excite our sym- 
 pathies to get a living without earning it. Just so far as we 
 can free ourselves from this benevolent impulse and turn our 
 efforts in a more rational direction, so far may we hope that 
 charitable effort may yet be beneficial to the race. 
 
534 APPLICATIONS OF ECONOMIC SCIENCE. [V. 57. 
 
 56. We have seen in preceding chapters of this work that 
 every man who saves up and invests his money does really em- 
 ploy it in such a way as to benefit all laborers able to earn a 
 living. He does this by increasing the supply and lowering 
 the price of the necessaries of life. Of course he does not help 
 those who are unable to labor, because one who has no income 
 of his own can purchase nothing, no matter how cheap it may 
 be. We have also seen that the profits on an investment will 
 be greater the greater the advantage which it insures to the 
 community. If a capitalist's investment is a losing one, it 
 shows that the labor he has directed by it has not been em- 
 ployed in the most economical manner to supply the wants of 
 society at large. Without denying the possibility that intelli- 
 gent philanthropic effort may in the future do much for ele- 
 vating the most degraded of the race, we may at least lay down 
 this proposition : It has not yet been clearly shown that the 
 possessor of a fund can benefit the race by it in any more 
 effective way than by investing it in the best paying form of 
 capital. Better methods will no doubt be found in the future, 
 for the reason that this application of capital takes no account 
 of the training of children, and it is to this training that phil- 
 anthropic efforts should be directed. 
 
 57. Concluding Considerations. The study of political 
 economy has two objects. One is the pleasure which every 
 well-constituted man feels in understanding the processes which 
 are going on in the world. This pleasure is quite independent 
 of any relation of these processes to the wants of life. The 
 other object is to see how the interests of mankind may be 
 promoted by public action. 
 
 It is instructive to seek out a classification of the interests 
 which actuate men in promoting the good of themselves or 
 others. Our present stand-point leads us to consider three 
 motives to human action : 
 
 The love of self ; 
 
V. 57.] OF CHARITABLE EFFORT. 535 
 
 The love of a limited class having common interests and 
 feelings with one's self ; 
 
 The love of mankind at large. 
 Let ns consider these motives in order. 
 The love of self, or egoism, as it has recently been called in 
 philosophy, or selfishness, as its abnprmal development is famil- 
 iarly termed, is not so great an evil as is commonly supposed. 
 It would indeed be a most destructive agent if it were absolute; 
 that is, if men in general were so selfish as to care absolutely 
 nothing for the happiness of their fellows. But, as a matter of 
 fact, moral training and the habit of obedience to law have so 
 modified the inherent selfishness of the individual as to render 
 it comparatively harmless. One reason for this harmlessness is 
 that, as a general rule, every man can promote his own inter- 
 ests a great deal more effectively than he can promote any one 
 else's, or than any one else can promote his. Another is that 
 the selfish man can get little help from his fellow^men. But 
 the most cogent reason of all is that men cannot promote their 
 own economic interests except through promoting those of 
 their fellow-men. 
 
 The second form of love, that for the class to which we 
 belong, is, at present, the most dangerous one to which society 
 is exposed. How this is we shall show by comparing it with 
 the third form. 
 
 Love for humanity at large has before it a wide field for its- 
 beneficial exercise, if it can only be spurred to action and 
 directed into appropriate channels. But there are great diffi- 
 culties in the way of its most effective operation. It is almost 
 a hopeless task for any individual, acting by himself, to do very 
 much for the benefit of society at large, unless he is possessed 
 of power or wealth. Legislation has done little, because legis- 
 latures in general have never had the problem presented to 
 them, or made it a subject of special study. Their views 
 generally represent those of the community from which they 
 come, and the interests which they seek to promote are apt to 
 be temporary in their character, and only such as strike the 
 
536 APPLICATIONS OF ECONOMIC SCIENCE. [V. 57. 
 
 public at first sight. We may make this clearer by some illus- 
 trations as showing the general field of possible action which 
 lies before us. 
 
 In thirty or forty years nearly all the people now on the 
 active stage of life in this country will have passed from that 
 stage, and a new generation will have taken their places. To 
 one loving mankind at large the happiness of that coming 
 generation should be the first object. Now, although at first 
 sight it might seem almost hopeless to attempt doing anything 
 for this coming generation, yet by looking more closely we find 
 that its happiness depends almost entirely upon our own actions. 
 To promote its happiness we should bequeath to it physical 
 and moral health, a thorough training in correct principles of 
 action, and such laws and institutions as shall best allow it to 
 promote its welfare. "We should avoid allowing it to be en- 
 cumbered by criminals. Love of mankind at large should 
 prompt us to take such measures as shall discourage or prevent 
 the bringing forth of children by the pauper and criminal 
 classes. No measure of repression would be too severe in the 
 attainment of the latter object. The consideration due to a 
 degraded man of any class is as nothing compared with 
 that due to the society of the future. Many a good man has 
 gone to his grave through the failure of society to hang one 
 criminal. No higher or purer source of human happiness 
 exists than the tender sentiments of man towards man. But 
 these very sentiments are a source of enduring injury in the 
 repugnance which they generate to a really effective system of 
 dealing with the dangerous class in our population. 
 
 After promoting the birth of good stock, the next step would 
 be its proper education. Here only careful experiment can 
 show what society is able to do. The casual remarks which the 
 budding child hears dropped from its parents at table, and 
 .•from which he forms an idea of the spirit which animates men, 
 is a more powerful instrument of education, moral or immoral, 
 than any other. This would suggest the foundation of institu- 
 tions for the correction of children of tender use who are in 
 
V. 57.] OF CHARITABLE EFFORT. 537 
 
 danger of becoming criminals. But it is an open question 
 whether such institutions are or can be made to succeed. The 
 danger which besets most charitable institutions devoted to the 
 rearing of children is that of being conducted from a senti- 
 mental rather than a scientific point of view. 
 
 Let us now return to the second form of selfishness which we 
 have described, and which, as just remarked, is in the present 
 state of society, and especially in the United States, a most 
 dangerous one. It is dangerous on account of being vastly 
 more powerful and less repulsive than individual selfishness, 
 while much more injurious to society at large. When we 
 analyze the calls for legislation made upon Congress and the 
 State legislatures, the economic and social theories in the news- 
 papers, and the various factions and parties which contend for 
 influence in political affairs, we find that nearly all have the 
 interests of companies, corporations, or other special classes of 
 men in view, and that it is sought to promote these interests at 
 the expense of those of the public. 
 
 The most common example of this motive is seen in the 
 trades-unions and labor organizations which exist in nearly 
 every civilized country. The individual bricklayer would be 
 powerless in a war with society, but his feeling of sympathy 
 with all his fellow-bricklayers who are within reach leads to 
 a union with them, which comprises a general understanding 
 that each individual shall subordinate himself to the union at 
 large for the general benefit of the class of bricklayers. This 
 feeling extends in a diminished degree to similar unions of 
 other trades in the same community, as well as to the unions 
 of other communities. Thus we have a sort of network of 
 sympathy, strongest in binding the individual to those of the 
 same trade who immediately surround him, but yet including 
 within its range all the unions of the land. At first sight 
 there is something which looks praiseworthy in this devotion 
 of man to man, especially when we see, as sometimes hap- 
 pens, a number of individuals voluntarily suffering extreme 
 privation, and perhaps giving up opportunities for profitable 
 
538 APPLICATIONS OF ECONOMIC SCIENCE. [V. 57. 
 
 employment, in obedience to a supposed interest of their class. 
 Now, what is wanted is that this spirit of sympathy should in- 
 clude not merely the limited class which it does, but the whole 
 community. Failing in this, the philanthropist would like to 
 see it confined to such a field as would benefit the community. 
 As things now stand, the organizations are as purely selfish as 
 the most selfish individual, and are at the same time vastly 
 more powerful, and therefore more difficult to control. 
 
 We have presented these considerations in order to show 
 the student of political economy what a field there is for the 
 application of what he has learned, if he desires to take an 
 active part in the improvement of society. 
 
ADDENDUM. 
 
 A SUMMARY OF THE LEADING PRINCIPLES OP ECONOMICS 
 AS SET FORTH IN THE PRESENT WORK.* 
 
 The economist should understand : 
 
 That there is a general science of economics, founded on 
 those characteristics of human nature and on those relations 
 of man to his environment which are common to all civilized 
 people ; 
 
 That the principles of this general science have to be 
 specialized and modified to suit the circumstances of each peo- 
 ple to whom they are applied ; 
 
 That the main object of economic science is to enable us to 
 foresee the effects of economic causes (I. 24) ; 
 
 That all our conclusions rest upon the hypothesis that men 
 intelligently adapt means to ends, and seek their own interests 
 according to the best of their knowledge (I. 3, 17, 18) ; 
 
 That there are no universal theories in economics to be 
 applied without regard to time and circumstances, and that no 
 formula can be given which will save the statesman the labor 
 of working out each case on its own merits ; 
 
 But that economics furnishes the statesman with principles 
 most necessary for working out results ; 
 
 That capital is the result of abstinence from present gratifi- 
 cation for the sake of future good, and, in order to be 
 
 * This summary of economic principles is given in order to facilitate 
 their critical examination by the reader. They will also assist the student 
 in deciding whether his grasp of the subject is satisfactory. 
 
540 SUMMARY OF LEADING PRINCIPLES. 
 
 effective, must be so applied as to increase the ultimate product 
 of a fixed amount of labor (II. 29, 30) ; 
 
 That stocks, bonds, and every other form of interest-yield- 
 ing investments are rights of ownership in material exchange- 
 able capital (II. 31) ; 
 
 That the work of the organizer of labor is as necessary to 
 production as that of the laborer himself (II. 40) ; 
 
 That labor can slowly change its occupation without detri- 
 ment, and can thus adapt itself, within certain limits, to vary- 
 ing demands (II. 49, 50 ; TV. 38) ; 
 
 That all men performing economic functions of any kind 
 are engaged in labor designed to promote the good of their 
 fellow-men (I. 1, II. 53) ; 
 
 That the greater and the better the production of the 
 necessaries of life, the more perfectly will the wants of the 
 community at large be supplied (II. 54, 56) ; 
 
 That bank credits constitute an integral part of the volume 
 of the currency, and should be included with specie and bank- 
 notes in estimating that volume (II. 96-99) ; 
 
 That there is no such thing as an absolutely invariable 
 measure of value, and that the best approximation to an abso- 
 lute standard is found by making labor itself the standard as 
 nearly as possible (III. 5-11) ; 
 
 That the quantity of goods whicli can be sold in any market 
 under fixed conditions depends upon the price at which they 
 are offered, diminishing with every increase of price, and vice 
 versa (III. 14) ; 
 
 That the foregoing proposition is true only for each state of 
 the market separately, and that the quantity of goods which 
 can be sold at a fixed price will vary from time to time with 
 the public needs (III. 16) ; 
 
 That all the requisites of production are not equally at the 
 command of everybody (III. 21-28) ; 
 
 That rent of land arises only because the products of the 
 soil command a higher price than they would if they could 
 be produced in unlimited quantities (III. 33) ; 
 
SUMMARY OF LEADING PRINCIPLES. 541 
 
 That the net cost of production of many commodities de- 
 pends greatly upon the natural facilities which the producer 
 can command, and continually diminishes with improvements 
 (III. 45-47) ; 
 
 That the values of the total imports and exports to and from 
 any one country necessarily balance each other in the long-run 
 (III. 55-61) ; 
 
 In consequence, that any action which diminishes imports 
 must ultimately diminish exports in nearly the same degree 
 (III. 70, 71) ; 
 
 That the rate of interest is regulated by the supply and 
 demand of loanable funds (III. 72-75) ; 
 
 That every legal person, in the long-run and as a general 
 rule, pays out as much money as he receives. Hence any 
 increase in his receipts will be followed by a corresponding 
 increase in his payments (IY. 4) ; 
 
 That the economic effect of an increased flow of money 
 from any person cannot be completely determined until we 
 find what laborers the increase reaches (Bk. IY., Chap. YI.) ; 
 
 That there is no definite volume of currency necessary to 
 the transaction of the business of a community, but only a 
 definite relation between the volume of currency and the scale 
 of prices (Y. 30) ; 
 
 In consequence, that a scarcity in the monetary flow can be 
 remedied by a fall in prices as well as by an increase in that 
 flow ; but that this particular remedy is incomplete and un- 
 satisfactory, because all prices cannot thus adapt themselves 
 (IY. 40) ; 
 
 That an increase in the volume or flow of the currency does 
 not permanently help business, because it leads to a rise of 
 prices, and therefore to a greater necessity for money ; 
 
 In consequence, that we cannot increase the absolute value 
 of the total volume of currency by additions to that volume 
 (IY. 19) ; 
 
 That no increase of wages benefits the laborer if he has to 
 pay an increased price for the necessaries of life, as he always 
 
542 SUMMARY OF LEADING PRINCIPLES. 
 
 will unless his wages are increased by increasing the effective- 
 ness of his labor ; 
 
 That as a general rule a person can gain income only by 
 assisting his fellow-men to an amount equal to his income 
 (IV. 29) ; 
 
 That whenever the price of a commodity rises, some or all 
 persons engaged in supplying that commodity are gaining a 
 corresponding increase of income (IY. 30) ; 
 
 That no person can increase the demand for labor by ex- 
 pending his money in one way rather than in another, but 
 that, in whatever way he spends it, he is directly or indirectly 
 creating a demand equal to his expenditure (Bk. IY., Chap. 
 VI.) ; 
 
 That the demand thus created is for the particular labor 
 necessary to produce the commodities which he has demanded, 
 and that, in consequence, he directs labor by directing his 
 expenditure ; 
 
 That any change in the direction of labor produced by 
 change of expenditure can be made by a corresponding change 
 in the occupations of men (II. 49) ; 
 
 That by no device of government or society can everybody 
 be satisfactorily employed all the time ; 
 
 That demand for labor involves a relation between two 
 terms — the laborer's estimate of the value of his services, and 
 the wages which others can afford to pay him (IY. 39) ; 
 
 That the proportion of the unemployed will in the long-run 
 be nearly the same, whatever financial policy we adopt, and 
 however men spend their money ; 
 
 That any cause which prevents the rate of wages from 
 adapting itself to the varying demand for labor is injurious 
 both to the laborer and to society ; 
 
 That no labor-saving processes can diminish the sum total 
 of the demand for labor, because whatever money is thus 
 saved to any person goes to demand labor in some other direc- 
 tion (IY. 41); 
 *■ That the capitalist can gain interest on his investments only 
 
SUMMARY OF LEADING PRINCIPLES. 543 
 
 by helping his fellow-men who have not accumulated capital 
 (Bk. IV., Chap. IX.) ; 
 
 Consequently that the more miserly he is in his habits, and 
 the more careful he is in his investments, and the greater the 
 excess of his capital above that required by his personal 
 needs, the greater the good he does to his fellow-men ; 
 
 That a man takes from the common stock of goods only 
 what he actually expends in his own consumption (Bk. II., 
 Chap. IX.) ; 
 
 That the sole object of wealth is the sustenance and enjoy- 
 ment of individual men ; 
 
 That the benefit of every industrial establishment is 
 measured by the product it turns out, and not by the em- 
 ployment which it gives to labor or capital ; that, on the con- 
 trary, the labor and capital which it absorbs are to be placed 
 on the debit side of its account with society (Bk. IV., Chap. 
 XIII., and V. 13) ; 
 
 That the motives which animate men in the pursuit of 
 wealth are in the highest degree beneficent, and have led to 
 a system which insures to every man fit to live the maximum 
 of enjoyment from his labor, if he will only adapt himself to 
 the system (Bk. V., Chap. VI.). 
 
INDEX. 
 
 PAGE 
 
 Abstinence the source of capital 
 
 89, 397 
 Agriculture, relative diminution 
 
 of 141 
 
 Appropriation of natural wealth 78 
 Atkinson, production of U. S. . 469 
 Averages, law of 28 
 
 Bank of England 177, 510 
 
 Bank-notes 165 
 
 Relation to laissez-faire 454 
 
 Banks 157 
 
 Deposits and cheques 159 
 
 Circulation 161 
 
 Discount functions 162 
 
 Statements of balance 162, 164 
 
 Runs on 168 
 
 Unsound, in U. S 171 
 
 National, of U. S 173 
 
 Barter 58 
 
 Bastiat, the labor fallacy 428 
 
 His parody of protection 472 
 
 Beggars, supply of 527 
 
 Bimetallism 152, 154, 494 
 
 Argument for 495 
 
 Bounty, French, on sugar 474 
 
 Cairnes, non-competing groups. 117 
 Capital, definition and nature. 55, 82 
 
 Classification 84 
 
 Functions of 88, 396, 405 
 
 Property in 91 
 
 Transformation of 121 
 
 Reproduction of 87 
 
 Capitalist, his functions 397 
 
 Carey, II. C, cited 41 
 
 Cause and effect 18, 31 
 
 Cernuscbi on bimetallism 495 
 
 Charity, effects of 526 
 
 Cheques on banks 159 
 
 35 
 
 PAGE 
 
 Cheques, relation to currency. . 191 
 Circulation, the monetary. .316, 372 
 
 The industrial 326 
 
 Circulation, equation of 328 
 
 Laws of 338 
 
 Cities, growth of 141 
 
 Clearing-house 179 
 
 Coinage of money 149 
 
 Int. S 153,418 
 
 Present uncertainty of 155 
 
 Subsidiary 155 
 
 Combinations to keep up price 
 
 270, 518, 537 
 
 Commerce, foreign 278 
 
 Commodities, definition 55 
 
 Demand for 374, 404, 434 
 
 Communistic view of wealth.. 5. 127 
 Competition of foreign labor. . 104, 467 
 
 Determining price 248, 517 
 
 Among business men 252 
 
 Among producers 266 
 
 Congress as a regulator of in- 
 dustry 456, 458 
 
 Management of 458 
 
 Consumption, definition 59 
 
 Productive and unproductive 59 
 
 Copyright 233 
 
 Cost of production 257 
 
 Graduated 264 
 
 Credit, definition of 52, 157 
 
 Use as money 163, 189 
 
 Currency, volume of. . .155, 187, 320 
 
 Fluctuations in volume 342 
 
 Flow of 316 
 
 Regulation of 501 
 
 Customs duties 296, 459, 477 
 
 Debts, relation to standard of 
 
 value 214 
 
 Effects of payment 385 
 
546 
 
 INDEX. 
 
 PAGE 
 
 Deduction, example of 17 
 
 Deductive method, nature of. . . 25 
 Demand, relation to price 217,220,350 
 
 Equal to supply 222 
 
 Measure of 348, 355 
 
 Directs industry 369 
 
 For goods and labor. 374, 404, 434 
 
 Deposits in bank 159, 161 
 
 Diminishing returns 242 
 
 Division of labor 98 
 
 Dollar, "what it is 153 
 
 Absolute value of 213, 425 
 
 The fiat 507 
 
 Duties on imports 296 
 
 Economics, definition and field 13 
 Distinct from sociology and 
 
 morals 10 
 
 Logical method 14, 22 
 
 Efficiency of the laborer 103 
 
 Equilibrium of supply and de- 
 mand 266, 271 
 
 Exchange, definition 57 
 
 Friction of : 62, 106 
 
 Mechanism of 145 
 
 Foreign 183, 281 
 
 Graphic representation of . . . . 315 
 
 Fallacies in logical method 33 
 
 In conclusions 419, 472 
 
 Fiat-money 507 
 
 Flow of currency 316, 318 
 
 Fluctuations in supply and de- 
 mand 114 
 
 France, volume of currency in . 191 
 
 Free trade, argument for 461 
 
 Between States 476 
 
 Friction of exchange 62, 106 
 
 Gold, supply and demand 498 
 
 Stock of, in U. S. . . . .' 497 
 
 Government, functions of 452 
 
 Greenbacks of U. S 506 
 
 Gresham's law 413 
 
 Hard times 380 
 
 Income of persons 359 
 
 Corporate 361 
 
 Expenditure of 363 
 
 Laws of 365, 368 
 
 Tax upon 489 
 
 Induction, process of 17 
 
 Interest an element of cost 258 
 
 Origin of 88, 302 
 
 PAGE 
 
 Interest, rate of, how determined 
 
 304, 306 
 
 Relation to risk 310 
 
 Why paid 303 
 
 International trade 278 
 
 Iron ship-building in U. S 477 
 
 Irrigating companies, rights of 81 
 
 Jevons's theory of value 202 
 
 Knowledge is a factor in pro- 
 duction 27, 72 
 
 Labor, necessity and law of 6 
 
 Definition of 48 
 
 Employment of 412 
 
 Classification of 95 
 
 Organization of 97 
 
 Division of 98 
 
 Relation to capital 405, 408 
 
 Fallacies of 419, 472 
 
 Competition of foreign.. .104, 467 
 
 Laborer, who he is 93 
 
 Distinguished from capitalist 94 
 Condition of his prosperity. . 393 
 Improvement in condition. 388, 514 
 
 His wages 95 
 
 His efficiency 103 
 
 Foreign competitors 104, 467 
 
 Labor-saving improvements.. 99, 388 
 
 Laissez-faire 443 
 
 Land, rent of 241 
 
 Ownership of 79 
 
 Fertility of 244 
 
 Laughlin, demand for labor.... 434 
 Laws of nature, definition of .16, 18 
 
 Legal tender, money as 151 
 
 Loans by government 482 
 
 Logical processes 14 
 
 Luxuries, enjoyment of 395 
 
 Machinery, functions of 98 
 
 Effect on laborers 388 
 
 McLeod, his view of property. . 56 
 
 Malthusian theory 107, 112 
 
 Man, a reasonable being 23 
 
 Managers of railways 255 
 
 Of business 254 
 
 Manufacturing capital 409 
 
 Market, definition of 217 
 
 Foreign 475 
 
 Materials, raw, of production.77, 233 
 
 Mercantile system 286 
 
 Method of economics 9, 22, 31 
 
 Mill, demand for labor 434 
 
INDEX. 
 
 547 
 
 PAGE 
 
 Monetary ratio 153, 499 
 
 Money, necessity of 58, 145 
 
 Paper ". 415, 503, 506 
 
 Metallic 148 
 
 Requirements of 147 
 
 Coinage of 149, 153 
 
 Credit as 163,189 
 
 Purchasing power 213, 345 
 
 Value of 226, 346 
 
 Circulation of 318 
 
 What kinds preferred 413 
 
 Fallacies 420 
 
 Monometallism 152, 494 
 
 Argument for 496 
 
 Monopolies, nature of 230, 238 
 
 Classes of 233 
 
 Temporary 237 
 
 Effect of 239 
 
 As element of cost 259 
 
 Mortgages 66 
 
 Non-competing groups. 117, 377, 392 
 
 Occupations, gains in different 253 
 
 Organism, the social 5, 7 
 
 Organization of labor 97 
 
 Organizers, their functions. 101, 515 
 
 Panics, commercial 384 
 
 Paper money, irredeemable, law 
 
 of value 508 
 
 Depreciation of 226, 414, 507 
 
 Displaces metallic money. 414, 507 
 
 Patent rights 233 
 
 Political economy, its field 10 
 
 Its logical method 22 
 
 Its fundamental hypotheses. . 23 
 
 Its leading points 9, 31 
 
 Its nomenclature 47 
 
 Its processes 123, 128 
 
 Population, law of increase. . . . 108 
 
 Malthusian theory 107, 112 
 
 Changes in occupation 139 
 
 Requires capital 400 
 
 Poverty, conditions of 135 
 
 Influence of charity on 527 
 
 Prices, scale of 207 
 
 Absolute 209 
 
 Variations of, 1876-84 211 
 
 Relation to demand.. 217, 220, 350 
 
 Of breadstuff s 246 
 
 Effect of competition of 250 
 
 How determined 263, 273 
 
 Combinations to regulate 270 
 
 PAGE 
 
 Prices, international , 278 
 
 Relation to flow of currency.. 386 
 
 Production, definition of 57, 70 
 
 Requisites of 70 
 
 Improvements in 137 
 
 Cost of 257, 264 
 
 Determined by demand 372 
 
 In different countries 280 
 
 Effect of taxes on 290 
 
 Total, ofU. S 469 
 
 Profits 257, 262 
 
 Progress, marks of 141 
 
 Property, its relation to wealth 
 
 49, 53, 56 
 
 Mr. McLeod's view of 56 
 
 Prosperity, conditions of. . .134, 358 
 
 Protective tariff 459 
 
 Arguments for. .461, 463, 467, 473 
 
 Railways, regulation of 454 
 
 Ratio, monetary 152, 499 
 
 Rent of land 241 
 
 Relation to price 245 
 
 Element of cost 257 
 
 Reserve of banks 163 
 
 Of Bank of England 177 
 
 Of national banks 175 
 
 Retail prices 248 
 
 Revenue of government 479 
 
 Risk,relation to rate of interest, 310 
 
 Saving, effect on labor 388, 397 
 
 Sensitive commodities 218 
 
 Shipbuilding in America 477 
 
 Silver, supply and demand 498 
 
 Price of 154 
 
 Coinage of, in U. S 418 
 
 Skill in production 72, 233, 261 
 
 Smith, Adam, on taxation 488 
 
 Socialism 512 
 
 Difficulties of 520 
 
 Specie payments, suspension of 172 
 
 Speculative transactions 224 
 
 Spencer, Herbert, progress of 
 
 society 141 
 
 Standard of value 208 
 
 Steam-transportation, effect of.. 100 
 
 Strikes, effect of 387, 521 
 
 Supply, definition of 217 
 
 Supply and demand determine 
 
 price 217 
 
 Of monopolized products.239, 271 
 
 International 278 
 
 Equal to demand 222 
 
548 
 
 INDEX. 
 
 PAGE 
 
 Sustenance, definition of 82 
 
 Taxation 290, 479 
 
 Effect on production 290 
 
 Practical hints on 493 
 
 Effect on foreign trade 293 
 
 Taxes, classification of 484 
 
 Expenditure of 482 
 
 On income 489 
 
 On production 290 
 
 Telegraph companies 455 
 
 Telegrams, price of 276 
 
 Trade, international 278 
 
 Balance of 281, 286, 297 
 
 Effect of taxes on. . ..283, 290, 298 
 
 Advantages of 288 
 
 Transformation of capital 121 
 
 Usury laws 305, 511 
 
 Utility, its relation to value 200 
 
 PAGE 
 
 Value, definition of 62, 199 
 
 Measure of 63, 205, 424 
 
 Jevons, theory of 202 
 
 Relation to human needs. . . . 204 
 
 Tabular standard of 210 
 
 Of money 226 
 
 Volume of the currency 155,187, 320 
 
 Wage-fund 325 
 
 Wages, definition of 95 
 
 Absolute measure of 357 
 
 Element of cost 257 
 
 Effects of hard times on 382 
 
 Effect of protective tariff on.. 467 
 
 Relation to capital 411 
 
 Walker, classification of labor.. 95 
 
 On rent 241 
 
 Wealth, definitions of 48 
 
 Natural 77, 233 
 
 Inequalities in 513 
 
 Wealthy class, functions of. 397, 513 
 
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