Class ^HBS Book MQi9 Gopyiightl^^. COPyRIGHT DEPOSIT; OUTLINES OF ECONOMICS A 'Syllabus for Introductory Study ^ by HERBERT ELMER MILLS, Ph. D. PART L POUGHKEEPSIE, N. Y. 1906 ^ A ■ \ V {O LIBRARY of CONGRESS Two CopiM Receivid SEP 25 1906 C OMyrurnt Entry , CUSS /^ XXc. Nm COPY ». ^ Copyright, igo6, Herbert Elmer Mii,i,s. ENTERPRISE PRINT, POCGHKEEPSIE, N. Y. From the time of its first publication, fourteen years ago, Professor Marshall's Economics of Industry has been used in this Department with great satisfaction. Within the last few years, however, several excellent text-books by American authors have appeared. Each of these has its own points of superiority and deals v/ith topics not included by Professor Marshall in his presentation. These Outlines have been pre- pared with the intent of guiding the student in using these several books and of making available in unified, systematic form the particular excellencies of the different books. They are in no sense a substitute for text-books. Each student must have for constant use Marshall's Economics of Industry, ^Qdigev^s Ijztroduction to Economics, and Seligman's Principles of Econo7?iics. Other very desirable books are Bullock's hiiro- duction to the Study of Economics, Fetter's Principles of Eco- nomics, Gide's Principles of Political Economy (2nd Amer. ed.), and Mill's Principles of Political Economy. Lectures to the class will follow these Outlines. At the meetings in sections each student will be held responsible for fuller treatment of points indicated in the Outlijies ; for argu- mentative discussion of debatable questions ; and for constant illustration based on reading and personal observation. It is hoped that note taking during the lecture hour will be found unnecessary. Grasp of the thought, reflection and application are more desirable than voluminous but unassimilated notes. Part II. will take up Money, Banking and Credit, American Monetary History, Foreign Exchange, Securities, Investment, Speculation, International Trade. Department of Economics, Vassar College, September, iqo6. Outlines of Economics. CHAPTER I. INTRODUCTORY. I. Definition, Scope and Scientific Cliaracter of Economics. a. Definitions used at different periods of economic study- reveal the change in its character. Adam Smith, 1776 : Inquiry into the Nature and Causes of the Wealth of Nations. Nassau Wm. Senior, 1836 : '' The science which treats of the nature, the production and the distribution of wealth." John Stuart Mill, 1848 : " Writers on Political Economy profess to teach, or to investigate, the nature of Wealth, and the laws of its production and distribution." Wilhelm Roscher, 1854 : " The starting point as well as the object point of our science is Man." Luigi Cossa, 1877 : '' The science of the social ordering of wealth." Henry C. Adams, 1886: "Political Economy treats of industrial society." J. N. Keynes, 1890: " The science which treats of the phenomena arising out of the economic activities of mankind in society." Alfred Marshall, 1900 : " Economics is the study of man's actions in the ordinary business of life." Cossa, Introduction to Political Economy, pp. 58-65 ; Ely, Out- lines of Economics, Bk. I., ch. 11 ; Keynes, Scope and Method of Political Economy, ch. 3 ; Seligtnan, Principles, § 2. 6 Introductory. b. " ' Money,' or ' general purchasing power ' or ' command over wealth ' is the center around which economic science clusters ; this is so, not because money or material wealth is regarded as the main aim of human effort, nor even as afford- ing the main subject-matter for the economist, but because in this world of ours it is the one convenient means of measur- ing human motive on a large scale, ' ' Marshall, Principles of Economics, Bk. I., ch. 5 ; Marshall, Economics of hidustry , Bk. I., ch. 3. c. Not all subjects of study are sciences. The character- istics of the sciences are ability to classify facts or phenomena in orderly arrangement ; and to establish relations of sequence or cause among them. From these follows some possibility of prediction. Sciences have these characteristics in very different degrees — some being very exact and precise as as- tronomy and physics, while others are inexact or incomplete as meteorology and the science of the tides. In spite of the apparent freedom of the individual will, human actions are capable of scientific study, and, when masses are considered, of comparatively accurate prediction. The social sciences are incomplete and in many respects very inexact ; but, because of the more accurate measure it possesses, Economics is more exact than the others. Economics aims to discover truth and must be distinguished as a science from statesmanship, philanthropy, social reform which as arts endeavor, on the basis of the truth discovered by Economics and other sciences, to accomplish results. Marshall, Principles, Bk. I., chs. 5, 6, passim; Marshall, Economics of Industry, Bk. I., ch. 5, §§ 1-4; Gide, Principles of Political Economy, 2d ed., pp. 1-7; Cossa, Introduction, pp. 40- 57; Davenport, Outlines of Economic Jheory, pp. 1-7; Fetter, Principles of Economics, ch. i, § 3 ; Keyues, Scope and J\Iet/wd, chs. 1-3; Walker, Political Economy, 3rd ed., pp. 17-23; Selig- man. Principles, § 14 ; Cairues, Political Econoviy : its Character and Logical Method, pp. 25-42. Introductory. 7 2. Economic Law and Method. Economic laws are statements that certain action may be expected under certain conditions from the members of a social group in lines of conduct in which the strength of the motives chiefly concerned can be measured by a money price. Like most other sciences Economics uses both induction and deduction in discovering its laws. Marshall, Principles, Bk. I., ch. 6 ; Marshall, Economics of In- dustry, Bk. I., ch. 4, § 5 and Appendix A ; Seligman, Principles, § lo ; Cossa, Introduction, pp. 67-92; Gide, Principles, Bk. I., ch. 4 ; Keynes, Scope and Method, chs. 6, 7 ; Nicholson, Princi- ples of Political Economy, Vol. I., pp. iS-20 ; Seager, Introduc- tion to Economics, §§ 31, 32 ; Hadley, Economics, pp. 23-25 ; Cairnes. Political Eco7iomy : its Character and Logical Method, L,ecture III. 3. Relation of Economics to otlier Subjects of Study. Economics and the other social sciences are closely related and mutually dependent. Even when we endeavor to decide the appropriate course of social action in lines in which the motives are mainly economic and in which accordingly economic laws will be our chief guide, we get suggestion or definite instruction from History, Psychology, Sociology, Law, Politics, Statistics, Finance and other studies which deal with man individually or socially. But Economics having its own special field of investigation should be discriminated from all these other subjects. Cossa, Introduction, pp. 23-39; Seligman, Principles, §§ 12, 13 ; Seager, Introduction, pp. i, 2 ; Keynes, Scope and Method, chs. 4, 9, 10 ; Ely, Outlines, Bk. I., ch. 11 ; Marshall, Principles, Bk. I., ch. 5, §1; Fetter, Priuciples, ch. 2, § 2 ; Dictionaries and En- cyclopaedias for definition and scope of the various social sciences. 4. Importance of tlie Economic Factor in Social Development. " Economic Interpretation of History." It is asserted by some that since * ' the existence of man depends upon his ability to sustain himself, the economic life is therefore the fundamental condition of all life. ' ' Marx says: 8 Introductory. " The economic structure of society is the real basis on which the juridical and political superstructure is raised and to which definite forms of social thought correspond ; in short, the mode of production determines the character of the social, political and intellectual life generally." This "economic interpretation of history does not exhaust the possibilities of life and progress ; it does not explain all the nicities of human development ; but it emphasizes the forces which have hitherto been so largely instrumental in the rise and fall, in the pros- perity and decadence, in the glory and failure, in the weal and woe of nations and peoples. It is a relative rather than an absolute explanation." — Seligman. Seligman, Economic Interpretation of History ; Ghent, Mass and Class, ch. i; Marshall, Principles, pp. 1-4; Marshall, Econo- mics of Industry, pp. 1-4 ; Spargo, Socialism, ch. 4. 5. Value of the Study of Economics. The study of Economics gives better understanding of his- tory, deeper insight into our present social organization, guiding principles in connection with nearly all social activi- ties, deeper sympathy and interest in connection with some profound social and ethical problems, intelligence and discre- tion with which to temper our feelings in the presence of social evils. It also provides a mental discipline surpassed by few if any studies ; since it encourages precision, accuracy, discrimination, clearness of thought and expression. Many of its problems are of such difficulty that they require most intense application. A continued chain of reasoning is con- stantly necessary as in a mathematical demonstration ; but since the forces and factors that must borne in mind are very numerous, comprehension and grasp in an unusual degree are necessary. It gives a training in that kind of thinking which is necessary for success in every day life and action. Andrews, Institutes of Economics, § 16 ; Laiighlin, Study of Political Economy, chs. 2, 3; Cossa, Introduction, pp. 93-110; Patten, American Economic Association Publications, 5: 473-4S6. CHAPTER II. FUNDAMENTAL CONCEPTS. f. Wealth. a. In defining wealth we hold to common usage and dis- criminate between wealth and welfare even though etymologi- cally and ethically such distinction be unfortunate. Wealth (as used in Economics) does not necessarily mean abundance Those goods having ability to satisfy a desire, which are ex- ternal to the individual, and limited in amount constitute wealth. Wealth is that which has power in exchange. Wealth may be private or public {=. social, or collective). Some valuable sources or conditions of wealth are not wealth. Although from a logical and psychological standpoint there is no difference between a service and the utility of a piece of wealth, services are not included in wealth. b. There has been constant change and evolution in the forms of wealth with development of human desires. The forms of wealth at any time and in any country are deter- mined by and reflect the prevailing civilization. A large amount of wealth at present consists of very durable but very indirect means of satisfying wants. c. Since man's power to devote himself to higher aims and activities depends upon possession of wealth sufficient to satisfy fundamental needs and is often conditioned upon pos- session of other contributory wealth, wealth is essential to individual and social progress ; and the study of Economics is a study of that which conditions science, art and all higher life. Wealth does not necessarily advance welfare or civiliza- tion. It is the nature of man, his tastes and interests which 10 Fundamental Concepts. determine what things are wealth ; but these in turn are affected by his choice and use of wealth. Seligman, Principles, §§4, 5; Marshall, Principles, Bk. II., chs. I, 2 ; Economics of Industry, Bk. II., chs. i, 2; Davenport, Outlines, ch. 2; Bullock, Introduction, pp. 84-87; Fetter, Princi- ples, ch. 3; Gide, Principles, pp. 46-49; Andrews, Institutes, §§ i, 2, with notes; Clark, Philosophy of Wealth, ch. i. 2. Definitions Relating to Value. Utility is capacity to satisfy a want. Value is power in exchange or an estimate of utility. Price is value expressed in money. Demand means the quantity that will be taken at a given price. Supply means the quantity that will be furnished at a given price. Seager, IntroductioJi, § 26; Bullock, Introduction, §§ 107, in, 112. 3. Production and Consumption. Production is the creation of utility. Consumption is the destruction of utility. Labor is exertion with some other end in view than merely the pleasure involved in the exertion. Productive labor was formerly held to be only that which produced utility in durable form. All labor may be regarded as productive which accomplishes the end in view ; that is, which aids in the satisfaction of a want. Individual acquisi- tion is not necessarily social production. Marshall, Priftciples, Bk. II., ch. 3 ; Econotnics of Industry, Bk. II., ch. 3; Fetter, Principles, pp. 43, 257-260; Seligman, Princi- ples, §§ 119, 120; Clark, {Philosophy of Wealth, ch. 2; Gide, Principles , pp. 75-80. 4. Income and Capital. A piece of wealth is desirable because of the utility that comes from it. There is an income of benefit. Common usage does not apply this term to the utilities coming from consumption goods ; but does apply it to the utility coming from wealth used in production of further wealth ; and also extends the term to any addition to wealth whether coming Fundamental Concepts. 1 1 from use of land, from accumulated wealth used in produc- tion, or from human effort in forms of wages, salaries or profits. While the income is in reality one of utility or utility-producing wealth, it is commonly thought of and ex- pressed in terms of money. We think of income as a stream or flow — not as a store. One may sell for a lump sum his right to receive indefi- nitely an income from a piece of wealth, that is, its income may be capitalized as may any other income. Thinking, then, of such estimated lump-sum or capitalized values of in- comes of utility, we may say with Seligman that "the totality of capital is equivalent to the totality of wealth." But usage limits the word capital from the individual point of view to that " wealth which he devotes to acquiring an income in the form of money." — (Marshall). Further the usage of econo- mic discussion defines capital from the social point of view as ' ' the products of past industry used as aids to further pro- duction," (Seager), excluding land. While the particular pieces of capital may be called capital goods, the business man thinks of capital as " the complex of capital goods used in connection with each branch of production measured in money." — (Seager). Capital is classified from point of view of durability as fixed or circulating ; from point of view of mobility as spec- ialised or free. Marshall, Principles, Bk. II., ch. 4 ; Marshall, Economics of Industry, Bk. II., ch. 4; Seager, Introduction, §§ 60; 69-71 ; Selig- man, Principles, %%(>; 137; Fetter, Principles, pp. 114-X17; Bul- lock, Introduction, pp. 131-138; Davenport, Outlines, pp. 119-121; Gide, Principles, pp. 120-129 ! Hadley, Economics, pp. 5-7; Mill, Principles, Bk. I., chs. 4, 6; Nicholson, Principles, Bk. I., ch. 6, except § 7; Walker, Political Economy, Part II., ch. 3; Andrews, Institutes, § 28; Hearn, Plutology, ch. 8, §1; Palgrave, Dictioft- ary, article Capital. CHAPTER III. NATURE AND DEVELOPMENT OF ECONOMIC SOCIETY. I. Organic Nature of Society. A society is not an accidental aggregation of unrelated in- dividuals but is organic in character. It has the power of growth from within ; it manifests " differentiation " or spec- ialisation of function, and "integration " or that close inter- dependence and inter-relation of parts which creates an essential unity. Social evolution is in accord with the general evolutionary tendency from the homogeneous, or generalized, to the heterogeneous, or specialised. An efficient cause of progress has been that "struggle for existence " which results in the "natural selection" of those methods, institutions, structures, groups "which are best fitted to derive benefit from their environment." Social evolution is not merely biological but largely psychical. Whether this evolution results in progress or degeneracy depends upon whether or not it helps create a social environment favorable to that higher personality which is the goal of human existence. In the field of economic structure and activity the highly organic nature of modern society is preeminently apparent. Marshall, Principles, Bk. IV., ch. 8; Economics of Industry, Bk. IV., ch. 8; Fairbanks, Introduction to Sociology, pp. 31-44; Small and Vincent, Introduction to the Study of Society, pp. 87- 96; Ritchie, Principles of State Interference, pp. 3-51; Darwinism and Politics, pp. 1-83 ; McKechnie, The State and the Individual, pp. 1-26. 2. Characteristics of RAodern Industrial Society. Prominent in modern industry are separation of occupa- tions ; division of labor ; great diversity in required industrial Development of Economic Society, 13 skill ; opportunity for extensive wage employment of un- skilled laborers including women and children ; large indus- trial units ; trusts ; local specialisation of industries ; rapidity and cheapness of communication and transportation ; separa- tion of industrial functions ; the wages system ; enormous employment of capital ; profit as the test of success ; money ; the credit system with its elaborate machinery ; possibility of economic maladjustment ; crisis and depressions. Economic freedom, competition and recognition of the private property right are general characteristics of modern society that exert profound influence on all its economic and social relations and give rise to many of the more special characteristics mentioned above. These characteristics are not the result of conscious action or catastrophy but of a long process of evolution. 3 Evolution of Private Property. From communal ownership is developed individual owner- ship of weapons, animals, slaves, chattels, land. The origin of individual ownership is often force and fraud ; but the development and persistence of the system of private property rights has its real explanation in the fact that it encouraged industry, thrift and accumulation of wealth which aided the social groups possessing them to survive. The occupation, natural rights, labor and legal theories of private property have been replaced by the social utility theory. The private property right in its various aspects is, then, limited by this principle of social utility. Seligmati, Principles, ch. 9, and works there cited; Hadley, Economics, pp. 26-34; Fetter, Principles, pp. 362-369; Gide, Principles, pp. 428437; Ely, Outlines, pp. 257-264; Palgravc, Dictionary of Political Economy article Property. 4. Evolution of Freedom. Freedom in the sense of positive capacity for self-deter- mined action was unknown among savages. Subjection to 14 Development of Economic Society. nature, to the strong and to custom was accompanied by ex- termination of captives. Slavery, serfdom and tlie wage system, each introduced because of its relative economic superiority, were steps in advance. There is now a consider- able degree of freedom as of marriage, movement, occupation, association, consumption, production, contract, trade. Lib- erty is not an end but a means to that higher development of individuality which is the only real freedom. Liberty except as based on equality and a sense of social responsibil- ity is dangerous ; and hence we must by social control re- strict liberty to secure freedom. Positive individual free- dom is a social product. Seligraan, Principles, ch. ii; Hadley, Economics, §§ 29-44, 78- 82; Fetter, Principles, ch. 44; Ely, Outlines, p. 42, pp. 267-270; Webb, Industrial Democracy, pp 844-850; Problems of Modern Industry, ch. 10; Ritchie, Principles of State hiterference, pp. 83- 151; McKechnie, The State and the Individual, pp. 305-321; Ritchie, Natural Rights, pp. 135-147. 5. Evolution of Competition. Competition, a form of freedom, has undergone develop- ment. At first largely a rivalry between groups it becomes more and more extensive within the group. Under modern industry competition has tended constantly to replace custom as a determinant of price. While more necessary, it is also more pregnant with danger. It is the cause of progress, selecting those who can best serve society, leading to accu- mulation of wealth, protecting the consumer, encouraging energy. It is found between commodities, between individ- uals, between markets, between classes, between countries. It involves dangers and without initial equality of competitors may not realize its benefits. It must be limited and controlled by custom, co-operation, monopoly or government regulation. Selijjman, Principles, ch. 10; Marshall, Principles, Bk. I., chs. 2,3; Economics of Industry, Bk. I., ch. 2; Hadlej^ Economics, §§ 76, 77,87,97; Fetter, Principles, pp. 425-430; Hadl&y, Freedom and Respotisibility , ch. 5 ; Ely, Evolution of Industrial Society, pp. 123-163; Palgrave, Dictionary of Political Economy two articles on Competition. Development of Economic Society. 1 5 6. Evolution of Economic Stages. There have been various explanations of economic develop- ment ; as, barter, money," credit economies ; or from status to contract ; or from a militant to an industrial society ; or through hunting, pastoral, agricultural, commercial, indus- trial stages ; or stone, bronze, iron, steel ages. Although these are all suggestive and partially true, they are inadequate. From the economic standpoint there are ' 'three great stages known respectively as the self-sufficing economy, the trade or commercial economy, and the capitalist or industrial econ- omy." (Seligman.) Seligman, Principles, ch. 5 and works there cited ; Ely, Evolu- tion of Industrial Society, pp. 3 73; Bucher, Industrial Evolution, chs. 1-3. 7. Evolution of Industrial Organization. a. Including under "industrial organization" the rela- tion of the producer to the consumer, of the different classes and occupations of workers to each other, of the different classes of workers to capital and to risks of sale, of hand work to capital, we find constant development of more complex rela- tions. b. Under the 'yaw/Zv system" "production was carried on within the family, by the family, for the family." There was no market ; no wage ; no machinery ; little division of labor ; little capital ; little separation of industrial function. Tran- sition begins in the hiring of itinerant or more permanent workmen. This system is exemplified more or less fully in the slave plantation of early Rome, in the mediaeval manor, in the frontier farm, in the Southern plantation. c. Under the "guild ' ' or handicraft system the producer of a good produces it for others ; he owns tools and material ; he works by hand ; he works at a specific trade ; he may em- ploy others but they are "help" on their way to independ- ence and a status like his own ; he assumes the risk of finding 1 6 Development of Economic Society. a market and deals directly with the consumers of his prod- ucts. In the Middle Ages such producers formed associa- tions or guilds in each trade to promote the welfare of that trade. They came to regulate conditions of work and the character of goods and acquired large civic and political power. d. Under the domestic system the work is done by crafts- men as under the guild system but a capitalist takes the risks of sale and often furnishes the materials. The typical producer under the domestic system did not own raw material or finished product and tended to rent the more ex- pensive tools. This capitalist is not a hand-worker but an employer or entrepreneur. The market is a comparatively wide one. Means of transportation, of exchange and of handling capital are improved. In the textile industries this system was dominant in England from the sixteenth to the eighteenth century. e. Under Xkit factory system there is an enormous increase in capital in the form of buildings, machinery, power, mater- ials. Not only materials but machinery and place of work are owned or are controlled by employer. To utilize power, machines must be in one place so that many workers are in one factory. The worker is nothing else and his work is narrowly specialized. There is differentiation of industrial function. The market is greatly widened by enormously im- proved means of transportation. Exchange and credit are highly organized. This system began in England at the end of the eighteenth century as a result of great inventions in the textile manufacture. f. The efficient cause of the development of the later systems has been the superiority of each over the preceding in producing goods cheaply. In some lines of work since such superiority has not existed, the development did not take place and we have survivals of older methods. Development of Economic Society. 17 There is a large amount of literature upon the different phases of industry but many of these books are either too voluminous, too detailed or too neglectful of essential distinctions to be of use in this course. The whole subject constitutes the work of the course in Economic History. Seager, hitroduction, ch. i ; Seligman, Principles, pp. 88-95; Ashley, English Economic Hislory, passim as Vol. II., pp. 219-222: Bucher, Industrial Evo- lution, ch. 4; Hobson, Evohition of Modern Capitalism, chs. 2, 3; Toynbee, The Industrial Revolution, pp. 178-202; Veblen, Theory of Btisiness Enterprise, chs. 2, 3. 8. Development of Economic Thought. a. The economic thought of each age is a reflex of its economic life and economic problems. b. The prevalence of slavery and the consequent contempt for labor limited the economic thinking of the ancient world to questions of property right, division of labor, usury and money. c. The predominant religious character of the age and the development of industry and commerce by free labor made the mediaeval thinking center around the ethics of price, in- terest and money. d. The revival of commerce after the Crusades, changes of price due to money from the New World, debasement of coinage and particularly the growth of centralized states need- ing revenues, standing armies and navies, and owning colon- ies, aroused much practical politico -economic thinking. e. The resulting Mercantile System emphasized the neces- sity to a nation's welfare of a large stock of money resulting from a favorable balance of trade, of manufactures, of shipping, of large population and of colonies — all as essentials of a successful national policy. /. The philosophical and political thought of the eigh- teenth century and the errors of the mercantilist thinking led to a revolt. The Physiocrats emphasized food rather than money as wealth ; agriculture as the productive industry since 1 8 Development of Economic Society. it alone was said to give a net product ; natural rights ; natural law ; and freedom of all economic activity from governmental control. Laissez-faire. Quesnay, Turgot. g. Adam Smith was largely influenced by the Physiocrats, emphasizing the cosmopolitan point of view and natural lib- erty as a means to general welfare. But he finds in all in- dustry the source of wealth ; and his theory of distribution is a reflex of contemporary economic changes and conditions. His Wealth of Nations (1776) is the foundation of modern economic thinking. h. Production for large markets, the necessity of profit, the differentiation of industrial classes, the increase of capital brought to the front problems of value and distribution. These were treated by the English school led by Ricardo, Malthus, Senior and summed up J. S. Mill. Wealth, com- petition, non-interference were emphasized. i. The unfortunate social results of the new industrial system and the dehumanized character of the contemporary economic theory led to revolts on ethical grounds by Ruskin and Carlyle and on theoretical grounds by the socialists like Karl Marx. j. Against the deductive a pi-iori method of the English school the Historical school made great objection, advoca- ting inductive study and insisting upon the relativity of econ- omic theory. k. The Austrian school of the present returns to the de- ductive method but has a new psychological basis in its theory of utility. /. Contemporary British and American economists, feel - ing the influence of all these lines of thought, using historical and deductive methods, accepting the theory of marginal utility, show, as Seligman says "how and why social pro- Development of Economic Society. 19 gress and the growth of capital are intimately bound up with the advance of the mass of the workers." Se\ifCxna.n, Pri?iciples, ch. S ; Andrews. lusliiuie, §§ 5-15; Mar- shall Principles. Bk I., ch. 4; Gide, Principles, pp. 7-14; Ingram, History of Political Econo^ny (more conveniently used in its or- iginal form as the article Political Economy in Encyclopaedia Britannica); Qossa. Introduction, Historical Part; articles in Pal- grave, Dictionary, and in the International Encyclopcsdia; Price, Short History of Political Economy in England; Cohn, A History of Political Eco7iomy. CHAPTER IV. WANTS AND THEIR SATISFACTION. I. The Nature and Economic Significance of Wants. Human wants vary with race, climate, stage of civilization, individual development physically, intellectually, aestheti- cally, morally, religiously. They are capable of indefinite expansion ; limited in intensity ; competitive ; complimen- tary ; largely matters of habit and fashion. The want is the cause of economic activity. Wants cause activities but activ- ities cause new Avants. Marshall, Principles, Bk. III., ch. 2; Economics of Industry , Bk. III., ch. 2; BuUoci., In trodncf ton, pp. 79-84; Seager, Introduction, §§ 34. 37; Fetter, Principles, ch. 2; Gide, Principles, pp. 40-45; Hearn, Plutology, ch. 1; Andrews, Institutes, pp. 190-194; Dav- enport Outlines, % 8; Smart, Introduction to the Theory of Value, chs. 1-4. 2. The Nature of Demand as Based Upon Diminishing Utility. a. Utility is capacity to satisfy a want and in economic terminology does not necessarily mean productive of well- being. Demand denotes effective desire. b. "The utilities of additional units of any good to any consumer diminish naturally as his supply of units of that good increases." (Seager). c. Consequently, although he might use much more of the article if it were a free good, he ceases his purchases at the point where, in his estimation, the utility of the last addition to his stock is only equal to its cost. The utility of this last portion acquired is the marginal titility of the commodity to him. d. It follows that, as the price is lowered, the purchase of additional units will be made since their utilities will success- Wants and Their Satisfaction. 21 ively equal the falHng price; and, as the price rises, purchases will be diminished since this rising price will successively be greater than the estimate of the utility of the units previously bought. Hence results the Law 0/ Demand thsLt, other con- ditions remaining the same, the amount demanded increases with a fall and decreases with a rise in price. e. Demand schedules of individuals are different because the marginal utility of money varies to different persons and because of varying intensity of desire. /. " Value is not merely the expression of marginal util- ity; it is the expression of social marginal utility." (Selig- man). "Value in industrial society is the result of social valuation. It is not so much man's estimate as society's esti- mate of marginal utility." (Seager). g. " Most goods are not simple utilities but bundles of utilities," (Seager) and "value is the expression of the social marginal increments of utility which are bundled together or united in anything, and each of which is marginal to a dif- ferent class." (Seligman). Marshall, Principles, Bk. III.,cli. 3; Economics of Industry, Bk. III., ch. 3; Seager, Introduction, pp. 81-9S; Seligman, Prin- ciples, ch. 12; Fetter, Principles, pp. 21-29; Gide, Principles, pp. 52-59; 'QxxWock., Ititroduction, pp. S8-97, 110-113; Flux, Economic Principles, pp. 20-25; Pierson, Principles, ^^. 54-61; Carver, Dis- tribution, pp. 1-27; Clark, Distribution, ch.'i6; Davenport, Out- lines, pp. 14-16, 35-37; Smart, Introduction to Theory of Value, chs. 6, 7. 3. Elasticity of Demand. Elasticity of demand refers to the degree in which demand responds to changes in price. It varies greatly according to the nature of the article and the income of the purchaser. Marshall, Principles, Bk. III., ch. 4; Economics of Industry, Bk. III., ch, 4; Seager, Introduction, pp. 66, 67; Seligman, Prin- ciples, §102; Fetter, Principles, p. 29; VYvc^, Economic Principles, PP- 25-31. 22 Wants and Their Satisfaction. 4. Comparison of Utilities. " If a person has a thing which he can put to several uses, he will distribute it between these uses in such a way that it has the same marginal utility in all. For if it had a greater marginal utility in one use than another, he would gain by taking away some of it from the second use and applying it to the first". (Marshall). Similarly one's total expendi- ture of money or effort tends to be so directed that marginal utilities in different lines will be equal. "The utility of future goods is less to the normal consum- er than the utility of present goods of like kind and quality by an amount varying directly with the degree of futurity ". (Seager). Marshall, Principles, Bk. III.,ch. 5; Economics of Industry, Bk. III., ch. 5; Seager, Introduction, §36; Bvi\\ock,\Introduction, § 61; Davenport, Outlines, §§ 29-32. CHAPTER V. PRODUCTION OF WEALTH. A. GENERAIi CONSIDERATIONS. a. Production is the creation of utilities of form, time or place ; and is closely related to consumption. b. Production involves sacrifice and time. c. The factors of production are nature, labor, capital. Since production is a social process, the efficiency of these factors will depend largely upon the system or organization that brings them together ; and upon due appreciation of the significance of the human factor. Seligttian, Principles, ch. i8; Marshall, Principles, Bk. IV., ch. i; Economics of Industry, Bk. IV., ch. i; Seager, Introduc- tion, §§ 27, 28; Fetter, Principles, ch. 28; Bullock, Introduction, pp. 115-118; Andrews, Institutes, §§18-22; Mill, Principles, 'Sk.. I., chs. I, 2, 3; Clark, Philosophy of Wealth, ch. 2; Nicholson, Principles, Bk. I., ch. 2; Elemejits, pp. 32-47. B. NATURE. 1 . Classification of Nature's Contributions to Production. 2. Influence of Nature Upon Man's Economic Life. 3. Exhaustion of Natural Wealth. a. Some natural resources may be permanently exhausted. b. Some natural resources are incapable of permanent ex- haustion. c. Some natural resources replace themselves more or less completely by growth. 4. Man's Ability to Overcome Tendencies Toward Exhaustion. a. Minerals cannot be increased. Necessity of economy in utilization. Progress of science makes possible utilization of low grade ores which practically means an increase in quantity. 24 Production of Wealth. b. Fisheries in some cases seem inexhaustible. In other cases much may be done to overcome tendency to exhaustion. c. Forests. American tendencies. Need of scientific for- estry. d. Limited area of desirable building land. Methods of overcoming this limit. Modern building methods. Rapid transit. e. Fertility of the soil for agricultural uses may be in- creased by cultivation ; soil mixture ; irrigation ; draining and clearing ; fertilization ; artificial climatic conditions. 5. The Law of Diminishing Returns. a. At any particular time and in any particular stage of soil exhaustion and scientific knowledge, successive equal ap- plications of effort to a given area of land will, after a certain point is reached, yield returns less than proportionate. b. This law is frequently erroneously thought to refer to exhaustion of the soil. c. This law is frequently erroneously thought to refer to successive periods of time. Marshall, Principles, Bk. IV., chs. 2, 3; Economics of hidtistry^ Bk. IV., chs. 2, 3; Seligman, Principles, §§88, 132-135; Sealer, IntroductioJi, §§ 61-66; Bullock, Introduction, §§ 76, 96-99; Gide, Principles, pp. 86-103; Fetter, Principles, ch. 7, § ii. ; ch. 9; ch. 11; yiiW, Principles, Bk.I.,ch. 12; Andrews, Institutes, §§23,24, 34, 39; Hearn, Plutology, chs. 5, 6; Nicholson, Elements, Bk. I., ch. 6; Principles, Bk. I., chs. 4, 10. C. LABOR. I. General Considerations Regarding Labor. a. Definition. Productive and unproductive labor. (See ch. ii., 3). b. Labor of different individuals varies greatly in its pre- dominant characteristics — some being largely muscular, some manual, some inventive, some supervisory, some protective, etc. Production of Wealth. 25 c. Every satisfaction of a want involves the performance of labor. d. Work, which, within certain limits may be pleasure, education and wholesome discipline, becomes, if continued, irksome toil, intellectually stunting, morally debasing and economically less productive. e. The labor force of a country depends upon its (i) Quantity; (2) Quality. 2. Amount of the Labor Force. a. The labor force of a country depends directly upon the population. Increase of population depends upon (i) The birth rate. This is influenced by the marriage rate which is affected by conditions of prosperity. This lat- ter influence is due to the private property right, and to parental rather than social responsibility for maintenance. The number of births per marriage varies greatly in different countries and in different social classes. In recent years it has decreased in the United States, England and some other countries, partly because of an increasing standard of comfort and partly because of certain social tendencies. (2) The death rate. This is dependent upon many con- siderations — sanitary, medical, social, industrial and govern- mental. Other conditions remaining constant, the death rate tends to decrease with increasing prosperity. (3) Migration. The balance between emigration and immigration is an important influence upon the population of certain countries. In the United States immigration responds quickly to prosperity. (4) Prosperity tends to increase the rate of increase of population in the United States since it accelerates the birth rate and immigration, and retards the death rate. (5) It is socially better to maintain a certain increase of population by a low birth rate and a low death rate than by a high birth rate and a high death rate. 26 Production of Wealth. b. The labor force of a country is affected by the distribu- tion of population by age periods. The number of efficient laborers will be smaller in a country in which there is an un- due proportion of young children. c. The labor force of a country is affected by the distribu- tion of the population between productive and non-productive classes. In the latter are paupers, insane, tramps, idle rich and other drones. It is also decreased if there are too many relatively in certain professions or occupations, so that they are not fully employed. Certain countries suffer because the class of priests is relatively too large, being recruited by non- economic causes. d. The amount of labor depends upon the number of days in the year and hours in the day devoted to work. Many holidays for religious or other reasons and short working days seriously decrease productiveness in certain countries. How- ever, a lack of holidays and rest days and an excessive dur- ation of the work day exert an unfortunate influence on the efficiency of the laborer and decrease production. e. An increase in the population may exert an influence on production less than proportionate if it involves pressure on subsistence ; or more than proportionate if it allows co- operation and organization to a greater extent than were pre- viously possible. /. Note. Malthus' Theory of Population. Thomas Robert Malthus in the first edition of his Essay on Population (1798) maintained against Condorcet, God- win and others that great progress in human happiness was impossible since population tended to increase geometrically, while food increased only arithmetically ; with the result of pressure upon subsistence, except so far as population was limited by other positive checks such as vice, war, famine. The admission, in a second edition (1803), of the possibility Production of Wealth. 27 of the preventive check of "moral restraint" made more cor- rect his theory of population, but ruined his argument against the perfectionists. Against Malthus' theory it is urged that there are physiological, social and economic hindrances which prevent the birth rate attaining its maximum ; and that pro- gress in science and the arts reveals almost unlimited possibili- ties of improvement in raising and working up food supply and raw material. It is also claimed an increasing popula- tion is relatively more efficient because of better organization. Marshall, Principles, Bk. IV., ch. 4; Economics of Industry, Bk. IV., ch. 4; Seligman, Principles, ch. 4 and §130; Seager, Introduction,^^. 'i&i-7.<^\\ Bulloch, Ifitroduction, §§77-78; Fet- ter, Principles, chs. 20-21; Andrews, Institutes, §§ 25, 26, 27, 35; Hadley, Economics, pp. 41-51; GiAq, Principles, pp. 71-85, 666- 669; Mill, Principles, Bk. I., chs. 2, 3, 10 ; Nicholson, Principles, Bk. I., chs. 5, 11; Elements, Bk. I., ch. 7; Walker, Political Econ- omy, pp. 301-314; George, Progress and Poverty, pp. 81-124. 3. Efficiency of the Individual Laborer. a. The laborer is as rule more efficient as he is a well de- veloped man. Muscular strength, nervous energy, intelli- gence, taste, character affect his productivity although their relative importance in different occupations varies greatly. Nervous energy, intelligence, character (in the sense of hon- esty, industry, accuracy, resourcefulness, reliability) are in every line of work important. In some lines muscular strength has become relatively less necessary. One of the serious indictments against our present industry is that it blunts the artistic sense; but there is a growing perception of the need for taste in many lines of manufacture. b. The qualities which make one an efficient laborer de- pend largely upon the Standard of Living and respond more or less closely to its changes. The Standard of Living is largely dependent upon income. The quantity, kinds and combina- tions of food ; its preparation and cooking ; housing accom- modations, reasonable leisure, proper recreations and amuse- 28 Production of Wealth. ments ; time and means for education; avoidance of improper expenditure for stimulants and narcotics, etc., react sooner or later on efficiency. c. Hope, freedom, security and incentive affect product- iveness. Hence the system of industrial remuneration whether slavery, time wages, piece wages, profit-sharing, co-operation, premium-plan, economic independence is significant. The social system and the government have their effect, as have systems of land tenure and the property right. d. Occupational and industrial conditions affect general vigor, nervous energy, intellectual and artistic development, moral character. Particularly in the case of children is this true since they are in an undeveloped formative condition. Child labor is even from the merely economic point of view objectionable as a great draft on future efficiency. Compul- sory education and factory laws are aids to efficiency. e. Modern city life has its effect on the productive effic- iency of the laborer because of housing congestion, lack of air and play grounds, undue nervous stimulus, spread of con- tagion, etc. The strongest physique, nervous energy and character of the country tend toward the city and there tend to be exhausted. Such evil tendencies may be largely over- come by social effort. f. Efficiency is increased by education whether of common school, high or college, whether liberal, manual, trade or technical. Much education comes from other agencies than the school, as the home, the factory or shop, the systematic apprenticeship. g. The economic efficiency of a worker is largely deter- mined by the economic, intellectual, artistic, political, moral standards and institutions of the society in which he lives and especially of the social class to which he belongs. Man is a social product. Production of Wealth. 29 h. An individual's efficiency depends largely upon his finding that place for which he is most fit. Anything which hinders such adjustments, as social and industrial grades, or inequality of opportunity interferes with social efficiency. So far as a greater degree of economic equality is naturally se- cured, it increases equality of opportunity and hence efficiency. /. Economic progress like social progress generally has depended upon the elimination of the inefficient and the selection of the efficient. Although humanitarian efforts to prevent such elimination may and sometimes do tend to in- terfere with progress in economic efficiency, we need not con- clude that such philanthropy is necessarily uneconomic. Ef- ficiency depends partly upon the acquirement of much race tradition, knowledge, skill. Those naturally prone to elimi- nation but preserved by philanthropy may by such acquire- ment become efficient. Further the qualities of character necessary for efficiency in a society are not entirely the same as those for a Robinson Crusoe. Philanthropy by cultivating social traits may indirectly promote efficiency. j. Although those qualities which produce efficiency are partly the result of non-economic causes, still in a large de- gree economic efficiency is a direct response to the demand for it as shown in w^ages, salary and profits. Marshall, Principles, Bk. IV., chs. 5, 6; Economics of Industry, Bk. IV,, chs. 5, 6; Fetter, Principles, pp. 195-201; Seager, Intro- duction, ^^^. 120-125; Seligman, Principles, § 126, §130; Mill, Principles, Bk. I., ch. 7, Bk. II., chs. 5-9; Hearn, Plutology, chs. 3, 4, Hadley, Economics, § § 22-27, 362-368; Nicholson, Principles^ Bk. I., ch. 5, § 4; Andrews, Institutes, § 36. D. CAPITAL. 1. Definition and Distinctions. (See chap, ii., 4.) 2. Forms Which Capital Assumes. Bullock, Introduction, pp. 133-135; Seager, Eitroduction, pp. 132-134, Seligman, Principles, § 137; Marshall, Principles, Bk. IV., ch. 7, §^ 1-3; Economics of Industry , Bk. IV., ch. 7, § i; An- drews, Institutes, § 29. 30 Production of Wealth. 3. Advantages of Capitalistic Production. Although indirect and involving delay, capitalistic pro- duction is advantageous since it enables man to employ his strength more effectively or to use natural forces otherwise useless. Seager, Intt'odudion, pp. 125-126, 134-135; Bullock, Introduc- tion, pp. 131 132; Seligman, Principles^ §§ 138, 140; Hearn, Plzi- tology, ch. 8, §§ 2-4. 4. Capital Subject to the Law of Diminishing Returns. Although capital enormously increases production, it is still true that, at any particular time, with a constant labor force and provided there be no change in industrial knowledge and methods, the law of diminishing returns holds true in the case of successive units of capital. Seager, Introduction, pp. 128-129; Fetter, Principles, pp. 61 62, 66-72; Seligman, Principles, § 168. 5. Capital Involves "Abstinence" or "Waiting"; and Its Accumulation Depends upon a. Ability to save, or surplus of income above expendi- ture. b. Willingness to save which is encouraged by political and economic security, family affection and a high rate of in- terest. Since a future utility is regarded as less desirable than a present one, saving is largely dependent upon a rate of interest high enough to overcome the superior attractiveness of a present good. Some saving, however, is regardless of the rate of interest having in view a sum rather than an in- come, while in other cases the determination to secure a cer- tain income results in greater saving with a low than with a high rate of interest. Marshall, Principles, Bk. IV., ch. 7, §g 4-10; Economics of Industry, Bk. IV., ch. 7, §§ 2-6; Bullock, Inti^oductio?!, pp. 140- 141; Fetter, Principles, ch. 19; Seligman, Principles, § 139; Gide, Principles, pp. 688-692, 129-131; Mill, Principles, Ws.: 1., ch. 11; Nicholson, Principles, Bk. I., ch. 12; Elements, Bk. I., ch. 8; Hearn, Plutology, ch. 9. Production of Wealth. 31 6. Methods of Accumulating Capital. a. By saving and investing. b. By borrowing and investing. c. Accumulation of capital is much facilitated by modern financial methods and institutions, such as banks, savings banks, insurance companies, building and loan associations, etc., and by the representation of ownership by transferable stocks and bonds. Seager, Introduction, pp. 130-132; Bullock, Introduction, p. 139; Gide, Principles, pp. 692-694, 697-700; Hamilton, Savings and Savings Institutions. 7. Social Utility of Saving Capital. Economic (and hence social) progress has been largely de- pendent upon the accumulation of capital, since the amount of wealth production is largely determined by the quantity and form of capital. But wealth production is even more dependent upon the skill and training of the members of society. Social progress depends upon due proportion be- tween saving and wise consumption. Hamilton, Savings and Savings Institutions, ch. i ; Gide, Principles, pp. 694-697; Hadley, Economics, p. 147; Hearn, Pliitology, ch. 8, §§ 5-8; Hobson, Evolution of Modern Capital- ism, pp. 182-209. 8. Supply Price of Capital. There is a direct response of the supply of capital to the demand for it as revealed by changes in the rate of interest. E. INI>USTJRIAL ORGANIZATION. I. Production a Social Process. Production is not individual but a complicated social affair involving much "differentiation" of occupation, of pro- cess, of function, of locality. This differentiation involves interdependence of the parts of the industrial organ- ization. While this enormously increases the efficiency of 32 Production of WeaUh. production, it involves serious maladjustments and makes an injury to a part the concern of all. Marshall, Principles, Bk. IV., eh. 8; Economics of Industry, Bk. IV., ch. 8; Hearu, Pliitology, pp. 291-305. 2. Division of Labor : Co-operation. a. The productive efficiency of a people is much increased by the co operative efforts of workers. Co-operation even without differentiation of work often promotes ethciency but the economic gain is most apparent when each instead of be- ing a Jack-of-all-trades becomes a specialist. b. The cause is found in the economic advantage of a low- ering of cost of production. This is due to (i) increased dexterity; (2) shortening of apprenticeship; (3) saving of time in changing work; (4) stimulus to invention; (5) econ- omy of ability; (6) economy of material; (7) economy of tools and machinery. c. Against the immediate economic gain are alleged social disadvantages some of which are in the long run causes of economic loss. Such are physical injury, monotony leading to intellectual deterioration, dependence because of the nar- rowing of the field of employment, excessive employment of women and children, destruction of the aesthetic and con- structive faculties.. These are in part preventable by protec- tive labor legislation, shortening of the hours of work and an increase of educational and cultural opportunities outside of working hours. d. The application of the principle of division of labor depends directly upon the size of the market, which is deter- mined by the growth of population and the increase of trans- portation facilities. e. In modern industry there is a tendency, as a particular process comes to be mechanical and monotonous, for a ma- chine to take it over. Frequently these separate machines are Production of Wealth, 33 combined or replaced by a perfecting machine so that instead of many specialized laborers there are a few high grade labor- ers controlling and tending a complicated piece of mechanism. Smith, Wealth of Nations, Bk. I., chs. i, 2, 3; Marshall, Prin- ciples, Bk. IV., ch. (^\ Economics of Industry, Bk. IV., ch 9; Gide, Piinciples, pp. 173-182; Seager, Introduction, pp. 137-142; Bul- lock, Introduction, pp. 143-147; Seligman, Principles, §§ 127-129; Mill, Principles, Bk. I., ch. 8; Fetter, Principles, pp. 201-204; Nicholson, P rinciples, Bk. I., ch. 7; Elements, Bk. I., ch. 3; Hearn, Plutology, chs. 12, 13; Andrews, Institutes, pp. 69-73; Walker, Political Economy, pp. ^6-^(j;Tidhso-a, Evolutiofi of Mod- ern Capitalism, ch. 4, §§ 3-7; Plato, Republic, Bk. II., 369-371; Commons, labor Conditions in Slaughtering and Meat Packing, Quar. Jour. Econ., 19: i — Same article in Commons, Trade Un- ionism and labor Problems, pp. 223-228; see also pp. 324-329; Palgrave Dictionaiy, article Division of I^abor. 3. Localization and Specialization of Industry. a. Not infrequently a considerable proportion of an in- dustry is localized in a district, city or town. In some cases a large proportion of all the industrial activity of a re- gion or city is occupied in one industry. The former is called localization of industry and the latter specialization of in- dustry. b. The original cause of such localization or specializa- tion is usually the presence of raw material; favorable soil or climate; transportation facilities; sources of cheap power; racial qualities. c. When an industry has once established itself, new con- cerns tend to the same place because of its advantages, such as trade knowledge prevalent there; a local market for skill; sub- sidiary trades; specialized machinery; general good trade re- pute. Specialization involves some disadvantages, as too ex- clusive a demand for one kind of labor, severe trade depress- ions, serious labor troubles, d. Localization and specialization are limited by size of the market and hence have tended to increase with improve- ment of transportation facilities. 34 Production of Wealth. Tcvelfth Census of the United States, igoo, VII., pp. cxc-ccxiv. ; Marshall, Principles, Bk. IV., cli. lo; Economics of Industry, Bk. IV., ch. lo; Hobson, Evolution of Modern Capitalism, pp. 24 30. 105-116; Hearn, Plutology, pp. 305-314. 4. Size of the Business Unit. a. Efificiency of production is contingent upon the adjust- ment of the size of the business unit in each trade to its par- ticular needs. The tendency in typical modern industries has been toward eno mously large establishments employing thousands of laborers and millions of capital. In many lines of trade and manufacture the small establishment still prevails. b. Advantages of the large producer. (i) On the manufacturing or productive side. Economy of fixed capital, since specialized machinery and buildings can be kept constantly employed; of circulating capital; of technical skill; of materials since wastes and by-products may be utilized. Subsidiary industries may be maintained by large concerns. (2) On the commercial side. The large producer buys cheaplv, gets favorable transportation rates, handles freight cheaply, saves in selling expenses and advertising, often gets trade through a wide spread reputation. (3) On the side of general policy. The large producer can study markets, fashions, trade tendencies, development of localities. (4) Size itself gives power in the competitive struggle. c. Advantages of the small producer. (i) On the manufacturing side. In some trades a small factory has all possible efficiency coming from specialized machinery and division of labor. The owner can watch all processes carefully and prevent waste of labor and material. Subsidiary industries help the small producer while trade jour- nals spread knowledge. (2) On the commercial side. His advantages here are partly compensated for by alliance with expert jobbing and Production of Wealth. 35 v/holesale houses. In lines in which taste and individuality are desired the small producer has, at least, an even chance. d. The actual result in any line of business depends upon the relative importance therein of the above considerations. Examples \n\S\. easily suggest themselves. Marshall, Principles, Bk. IV., ch. 11; Economics of Industry, Bk. IV., ch. 11; Hobson, Evolution of Modern Capitalism, pp. 88-121; Seager, Introduction, pp. 149-152; Bullock, Introduction, pp. 170-178; Seligman, Prz'wrz^/^^, §§ 143-145; Gide, Principles, pp. 161-172; Mill, Principles, Bk. I., ch. 9, §§ i, 3, 4; Nicholson, Principles, Bk. I., chs. 8, 9; Elements, Bk. I., chs. 4, 5; Tivelfth Census of the United States, igoo, VII., pp. Ixxii-lxxv. 5. Business KSanagement. a. There is a distinct economic function of management. The entrepreneur or undertaker of business establishes the business ; brings together and organizes labor, capital and natural resources ; assumes the risks ; gets the profits. Even though he works with his hands and owns the capital, the function of management is distinct. b. The successful entreprefieur must have knowledge of his trade, its materials, processes, machines, market tenden- cies. He must be able to select, organize and control labor of all grades without friction. He must have financial ability, foresight, caution, decision and energy. c. The forms of management are (i) Individual ownership. This secures unity of purpose and direction ; but in typical modern industries one indi- vidual rarely possesses the varied talents necessary for success, frequently lacks capital, and may not care to risk all in one line. (2) The partnership increases capital and combines varied abilities. It sometimes means friction, divided policy and indecision. (3) The corporation or joint-stock company ensures large capital, continuity of existence, limited liability, publicity 36 Production of Wealth. when desirable, utilization of small capitals. There is often lack of personal interest on part of managers, and stockholders may be defrauded by those in control. (4) Cooperation, or managing ownership by workers or consumers, means direct personal interest; but lacks great managing ability and involves friction and divided responsi- bility. (5) Public ownership is another form of management. d. Sharp competition is continually eliminating those who have not ability, and, on the other hand, bringing needed capital to those who show success. There is a response of business ability to the demand for it. Marshall, Principles, Bk. IV., ch. 12; Economics of Industry, Bk. IV., ch. 12; Bullock, Introduction, §§90-91; Seligman, Prin- ciples, § 41; Seager, Principles, §§ 82-84; Fetter, Principles, ch, 29, ch. 30, § I ; Andrews, Institutes, §46; Nicholson, Principles, Bk. I., ch. 8, § \; Eleventh Census of the Utiited States, igoo, VII., pp. Ixvi-lxviii. F. FUTURE OF PRODUCTION. The efficiency of wealth production in the future depends upon the combined influence of all the factors considered in this chapter. The law of diminishing returns, exhaustion of natural resources and anything that affects unfavorably the efficiency of the worker or the accumulation of capital, are unfavorable. Increasing efficiency of the worker; growing wealth; invention; application of science to agriculture, in- dustry and transportation; more efficient organization possi- ble with larger population, etc., etc., are favorable to increas- ing per capita production. Marshall, Principles, Bk. IV., ch. 13; Economics of Industry, Bk. IV., ch. 13; Fetter, Principles, pp. 558 563; Mill, Principles, Bk. IV., ch. i; Nicholson, Principles, Bk. I., ch. 10, § 5, ch. 11, §4. CHAPTER VI. EXCHANGE. BALANCING OF DEMAND AND SUPPLY. VALUE. I. Development and Advantage of Exchange. a. Exchange has been a gradual development increasing with the change from a self-sufificing to a capitalist economy. It has been encouraged and shaped by natural transportation routes ; and is both a result and a cause of modern efficiency of transportation. b. Exchange makes it possible " to utilize wealth which would remain unused " ; it increases utility ; it increases productivity by allowing specialization ; it generally benefits both parties. Bullock, Introduction, g§ 104, 105; Gide, Principles, pp. 184- 186; 197-200; Andrews, Institutes, §§ 51, 52, 53; Fetter, Princi- ples, pp. 30-31; Nicholson, Principles, Bk. III., ch. i, §§3-6; Ely, Outlines, pp. 127-129; Pierson, Principles, pp. 67-72. 2. Markets. a. Market formerly meant a place of sale. It now means those " buyers and sellers who are in such free intercourse with one another that the prices of the same goods tend to equality easily and quickly." b. Markets are continually widened by rapid and cheap transportation and communication. That a commodity may have a very wide market, it must be large in amount, exten- sively desired, portable, and capable of grading and exact description. Marshall, Principles, Bk. V., ch. i; Economics of Industry, Bk. v., ch. i; Bullock, Introduction, § 108; Fetter, Principles, pp. 36-37; Seligman, Principles, p. 223; Nicholson, Principles, Bk. III., ch. 3; Elements, pp. 217-219; Hadley, Economics, § 88; Flux, Economic Principles, ch. 3. 38 Value. 3. General Considerations Upon Value. a. A prominent central fact in modern economic life is exchange of goods. Such exchange is conditioned upon a valuation accepted by buyer and seller. How is this value determined in the market of the moment ? Since such values are frequently obviously temporary, how are more natural values determined ? How are the departures of market from normal values to be explained ? What effect may monopoly have on value? How are such values related to wages, inter- est, profit and rent ? Such are fundamentally the problems of value. b. Nature does not produce in unlimited quantities the commodities we desire. To secure them requires labor or sacrifice. To secure greater and greater quantities (which to the individual have diminishing utility) requires more labor, which becomes irksome. Diminishing pleasure costs in- creasing pain. When the utility is equalled by the disutility, one stops effort to secure it. To the individual, marginal cost equals marginal utility. c. As value is determined by social 7narginal utility (see ch. 4, 2, f) so it is determined by social cost — not individual cost. Varying estimates of utility give the individual a sur- plus of total utility above total cost. This surplus does not affect value ; nor does the fact that a thing might cost a cer- tain individual more than the social cost affect its value. Value is a social problem. d. Utility determines value ; cost determines value ; but neither alone determines value. " We cannot speak of mar- ginal utility without implying cost ; we cannot speak of marginal cost without implying utility." (Seligman). e. Progress in civilization depends upon increasing the surplus of utility above cost, upon the just distribution of this surplus, and upon its wise consumption. Value. 39 f. Value being a ratio, a general rise or fall of values is impossible, but a general rise or fall of prices is constantly- taking place. Seligman, /'r/;/n/>/£?5, ch. 13; Seager, Introduction, §§47-53; Marshall, Pri7iciples, Bk. III., ch. 6: Bk. IV. ch. i; Bk.' V., ch. 2, § I, ch. 3, § 7; Economics of Industry, Bk. III., ch. 6; Bk. V., ch. 2, § I ; ch. 3, §7; Fetter, Principles, ch. 4; ch. 24, § 3; Gide, Principles, pp. 49-64; Clark, Philosophy 0/ Wealth, ch.'s; Nichol- son, Principles, Bk. III., ch. 2; Bullock, Introduction, § 95; Smart, Introduction to Theory of Value, ch. 8-9. 4. Market Value. Temporary Balancing of Demand and Supply. a. Buyers are influenced by the urgency of their needs (demand schedules), by the amount of money available (mar- ginal utility of money), by their estimates of the course of prices in the immediate future. Sellers are influenced by the urgency of their need of money, by the amount of their stock, by their estimates of future prices. b. If there are one buyer and one seller, there is no sale unless buyer's maximum equals seller's minimum. If it is higher, then price will be fixed between these limits accord- ing to relative skill in bargaining. c. If there are several buyers and one seller, the most eager buyer will get the article if he meets the seller's mini- mum • if there are several units, each may be sold separately or a price may be fixed just sufficient to sell all. d. If there are several sellers and one buyer, competition will enable the buyer to get the article at the minimum of the most eager seller, or at a price just below the minimum of the next most eager seller, or somewhere between these two. e. The most typical case is that of several buyers and several sellers. Here, as in preceding cases, it is not simply a question of individuals (as implied in some text books), but of quantities. Sellers compete as a class with buyers as a class, but further each seller competes with other sellers and each 40 Value. buyer with other buyers. If the lowest price of the most eager seller is higher than the highest price of the most eager buyer, there will be no sale. At a price which may be called the equilibrium price the same quantity will be offered and taken, and equilibrium will be established ; for at a higher price more will be offered than buyers will take, and com- petition among sellers will reduce the price, each reduction decreasing amount offered and increasing amount taken. Should price fall below equilibrium price conditions are reversed. f. "Under free competition there can be at a given time and place only a single price for the same commodity." "In case of competition the market price is always the one at which the greatest number of changes can be effected." (Seligman). Seligman, Principles, ch. 15; Seager, Introdiidion, %% 55-58; Marshall, Principles, Bk. V., ch. 2; Economics of Industry, Bk. v., ch. 2; Bullock, Introduction, %% 110-116; Fetter, Pi'inciples, ch. 5; Gide, Principles, pp. 186-196; Andrews, Institutes, %% 61-64; Hadley, Economics, %% 84-96; Nicholson, Elements, Bk. III., ch. 2; Principles, Bk III.^ ch. 4; Hobson, Economics of Distribution, ch. I ; Smart, Introduction to the Study of J'alue, ch. 10, 11 ; Pier- son, Principles, pp. 72-75; Davenport, Outlines, ch.. 4. 5. Normal Value. Balancing of Normal Demand and Normal Supply. a. Normal value of price " is the price which, apart from exceptional conditions, is expected to prevail, and to which actual prices seem constantly striving to adjust themselves." (Fetter) . b. Real cost of production consists of the efforts and sac- rifices necessary to production. The money that must be paid to call forth these efforts and sacrijices is the money cost or expenses of production. Cost of production means socially necessary cost of re -production. c. Expenses of production consisting of prices of mater- ials, wages, interest, wear and tear, earnings of management, Value. 41 etc., constitute the suppjy price " required to call forth the exertion necessary for producing any given amount of a com- modity.'' (Marshall). By the Principle of Substitution pro- ducers are contiuually trying to substitute a less expensive method of securing certain results for that in use. d. At a given time cost of production is " the marginal cost of production; that is, it is the cost of production of those goods which are on the margin of not being produced at all, and which would not be produced if the price to be got for them were expected to be at all lower." (Marshall). e. " While the normal value is at any given moment at the point of maximum cost, it is under a condition of progress continually moving in the direction of minimum cost." (Seligman). /. When the demand price is greater than the cost of pro- duction, the attempt of sellers to reap resulting profits leads to an increased supply which can, however, find a market, other things being equal, only at a lower price. When price is below cost of production, conditions are reversed. In either case price tends to equal marginal cost of production. " When we say that price is fixed by the cost of production, we really mean that it is fixed aif the cost of production." (Seligman). g. The longer the period of adjustment as compared with the length of the period of production of a commodity, the more closely will price approach cost of production. But in actual life equilbrium is rarely attained since in a progressive society cost of production constantly changes. h. In general it may be said that both market and nor- mal values are determined * ' by demand and supply but in case of reproducible goods the permanent equilbrium between demand and supply tends to adjust itself to the cost of pro- duction." 42 Value. /. In the case of certain commodities increasing demand means permanently higher cost of production; in the case of others it means constant cost; and in the case of still others it means lower cost. Normal values are correspondingly af- fected. j. " Not only in the case of wages and interest but in the case of economic relations and of concrete commodities, re- producible as well as non-reproducible, prices depend on mar- ginal efficiency ' ' which is the universal explanation of value. k. Selling value is a capitalization of estimated future uses, Seligman, Principles, §§ 103-109, 112-114; Marshall, Pi^'iticiples, Bk. v., chs. 3, 5; Economics of Industry, Bk. V., chs. 3, 5; Bul- lock, Introduction, %% 117-122; Fetter, Principles, ch. 30, ch. 43, §3; Clark, Philosophy of Wealth, chs. 5, 6; Ylohson, Economics oj Distribution, ch. 3; Nicholson, Principles, Bk. III., chs. 4-6; Car- ver, Distribittion of Wealth, pp. 25-52; Flux, Economic Princi- ples, ch. 4; Pierson, Principles, pp. 61-66. 6. Influences that Hinder or Complicate Determination of Value. a. In studying value competition has been assumed to exist. Anything that interferes with competition interferes with the ordinary determination of value. The following are the more important causes of such interference : (i) Custom. This implies absence of competition. There may be competition in quality, however, even though prices be customary. (2) Ignorance. Competition is based upon intelligence. Misdirected production is the result of ignorance. (3) Lack of freedom. (4) Authoritative regulation. b. Large fixed capital. Certain elements of cost change proportionately with the quantity of product; other elements are more or less independent of output. The former may be called prime, the .later supplementary costs. Supplementary costs are largely due to fixed capital. Since it is often wise Value. 43 to manufacture if supplementary costs are only partially or even not at all covered, it is obvious that adjustment of price to total cost of production may be delayed until the fixed cap- ital is adjusted. Also, since fixed capital cannot always be quickly supplied, price may remain above cost of production until capital is adjusted. There is here no new principle — only delay; but this condition is one of increasing practical importance. c. Rarely is the supply or demand for an article discon- nected from that of other articles. (i) Joint demand is a demand for the various factors nec- essary to produce an article. One of these joined factors may have its price much raised by a check to its supply if it is an essential but relatively small part of a much desired commodity, and if the other factors are elastic in demand. (2) Composite demand vs, a demand for an article for var- ious uses. The working of the laws of value is in such a case sometimes obscure, since a radical change in the demand for one use may have but slight effect on the total demand. (3) Joint supply is the supply of certain articles which are inevitably common products of a process. Some of these are called by-products and they are of increasing practical impor- tance. In such cases the cost is a joint cost of the whole and the normal price of all the parts together adjusts itself to the joint cost. (4) Composite supply is the meeting of a certain want by several rival articles that may be substituted for each other. A change in the cost of production of one may seriously af- fect values of rival products. lA2iXs\i2Ci\ , Principles , Bk. V., chs. 4, 6; Economics of Industry ,'&^. v., chs. 4, 6; Bullock, Introduction, §§ 123-129; Seligman, Prin- ciples, § 107; Hadley, Economics, § loi; Andrews, Institutes, § 69; Mill, Principles, Bk. III., ch. 16; Walker, Political Economy , pp. 104 iii; Nicholson, Principles, Bk. III., ch. 5, § 6; Twelfth Cen- sus of the United States, X., pp. 725-748; Flux, Economic Princi- ples, pp. 65-69. 44 Value. 7. Monopoly Value. When monoply exists, value does not tend to equal margi- nal cost. Value tends to be fixed at that point which will give the greatest net returns, having due regard to the effect of this price upon the volume of sales and profit on the unit. Marshall, Principles, Bk. V., ch. 13; Economics of Industry, Bk. v., ch. 8, §2; Seligman, Principles, § no; Bullock, Intro- duction, § 201; Seager, Introduction, §t^ 112, 113; Fetter, Princi- ples, ch. 33, § 3; Andrews, Institutes, § 67; Nicholson, Principles, Bk. III., ch. 7; Elements, Bk. III., ch. 4, §§ 3-6; Flux, Economic Principles, pp. 69-78. CHAPTER VII. DISTRIBUTION OF WEALTH. A. PKELTMINARY CONSIDERATIONS. I. The Problem of Distribution. Natural resources, labor, capital and managing ability co- operate to produce goods and their values. The owners of each of these must be rewarded in order that its aid may be secured. How is the value of a good divided among the co- operating agents? How are wages determined? Why do they vary among individuals and over periods of time ? What are the normal tendencies around which market fluctu- ations take place ? How are interest and its differences de- termined ? How are rent and profits fixed ? These are ques- tions of function — not of individuals since the same individ- ual may combine two or three functions. This problem is of fundamental economic and social importance. Marshall, Principles, Bk. VI., ch. i, § i; Economics of hidus- try, Bk. VI., ch. i, § i; Seligman, Principles, § 151; Seager, In- U-odnction, §§ 30, 93; Smart, Distribution, Bk. II., ch. i; Clark, Distribution, ch. i; Andrews, Institutes, §§ 97-99; Nicholson, Principles, Bk. II., ch. i, §§ i, 1; Elements, pp. 96-100; Sidgwick, Principles, Bk. II., ch. i. 2. National Income is the National Dividend. " The national dividend is at once the aggregate net pro- duct of, and the sole source of payment for, all the agents of production within the country: ... It constitutes the whole of them, and the whole of it is distributed among them, and the larger it is, the larger, other things being equal, will be the share of each of them." These shares are : wages, or the remuneration of labor; interest, or the earnings or product of capital; profits, or the income from 46 Distribution of Wealth. business enterprise; rent, or the income that accrues or is paid to owners of natural resources for the use of them. Marshall, Principles, Bk. VI., ch. 2, § 6; Economics of Indus- try, Bk. VI., ch. 2, § 5; Bullock, hitrodnctio7i, §§ 248-250; Smart, Return to Protection, ch. i. 3. All Incomes Paid from Capital Goods but not out of Capital. " All but the small part of income which is produced im- mediately before it is consumed comes . . . from the products of previous days' industry stored up as capital goods." But since a part of the product is constantly replacing these capi • tal goods the fund of capital is kept intact. Seager. Introduction, §§ 89, 93. 4, Normal Static Laws Underlie Dynamic Conditions. In actual economic life, especially in modern industrial countries, constant changes are taking place which disturb the equilibrium that competition would tend to establish. Population increases as does capital; skill of labor and effic- ciency of capital goods improve; methods of agriculture, man- ufactures, trade constantly progress; climate is variable; and consumption is constantly changing. Further, competition is far from perfect because of monopoly, ignorance, immobility. Consequently changes in the shares in the Distribution of the National Dividend are constant; but there are working under- neath these changes tendencies which in an unchanging so- ciety would result in normal, static distribution. B. NORMAL DISTRIBUTION. I. Hypothetical Static Society. Imagine a society like our own except free from change in population, in amount of capital, in method, in skill, in fertility, in habits of consumption ; and one in which com- petition is free and universal. Capital goods would be ex- actly replaced, prices would be normal and " the net product Distribution of Wealth. 47 and the real income of consumable goods would be identical. .... Real incomes will consist in such a society of the net product, .... the services of capital being to enable those who take part in production to secure at once in consumable form the equivalent of what they produce." (Seager). Unreal as such a society is, it is enough like the actual so that " we may say that real incomes come virtually from the net products of industry." Seager, Introduction, §§ 94, 95, 96; Clark, Distribution, ch. 25; Marshall, Principles, Bk. VI., ch. i, §§ 2-5; Economics of Indus- try, Bk. VI., ch. I, are somewhat difficult, but suggestive ac- counts of static conditions and their bearing on actual distribu- tion. 2. Profits in a Static, Perfectly Competitive Society. In such a society profits except as equivalent to the wages necessary to secure management would disappear, since all gains due to change and fortuitous conditions would be absent and competition would prevent any individual getting, for any length of time, more than that fair reward for actual effort which another might get. Seligman, Principles, pp. 354-356; Seager, Introduction, % 99; Carver, Distribution, pp. 286-287; Clark, Distribution, pp. 70, III, 112, 179, 290, 291, 405, 410, 411. 3. Wages in a Static, Perfectly Competitive Society. In such a society wages would equal final productivity of labor (marginal productivity) of the particular grade, since " if there is free competition and if all the laborers do their allotted tasks equally well, the share of the product ascribable to any of the workmen must be equal to the additions made by the last, or marginal, laborer actually at work. ' ' (Selig- man). ' ' Each individual laborer gets as wages approximately the equivalent of the amount which he individually can add to the product of the group to which he belongs." (Carver). Marginal productivity itself, however, depends upon numbers. Where will this margin be located ? Assuming what would 48 Distribution of Wealth. quite certainly be true, that in such a society a certain stand- ard of living will be held quite tenaciously through an accelera- tion or retardation of the marriage and birth rate ; and recognizing that the cost of producing a certain efficient supply of labor is equal to this standard, it may be said that the normal tendency of wages is to equal the cost of securing or producing labor. Marshall, Principles, Bk. VI., cli. i, §§ 2-8, 10; ch. 2, g§ 1-3; Economics of Industry, Bk. VI., ch. i, §§ 2-6, 8; ch. 2, i?§ 1-2; ^€i\^ma,n. Principles, % 175; Flux, Economic Principles, ^^. 118- 135; Carver, Distribution, pp. 135-15S; Clark, Distribution, chs. 7-8; Fetter, Principles, ch. 23, § 3; Gide, Principles, pp. 509-514. 4. Interest in a Static, Perfectly Competitive Society. In such a society interest would equal the final productivity of a unit of capital, since each " will push the investment of capital in his business in each several direction until what ap- pears in his judgment to be the margin of profitableness is reached." (Marshall). Were there perfect mobility of capi- tal the marginal productivity of capital in all trades would be the same because of the immediate transfer of marginal capi- tal from less to more productive uses. Marginal productivity itself, however, depends upon the amount of capital. Were capital unlimited, there could be no interest. Where will this margin be located ? Obviously at that point where the marginal productivity (or interest) is a sufficient reward to induce people to save that amount which will have this mar- ginal productivity. That is, interest is fixed at that point which covers that which may be called a metaphysical cost of producing capital. Each piece of capital goods must as a rule produce not only enough for its own replacement, but also an amount sufficient to induce that social abstinence or forbearance which results in capital. Much saving is not under the incentive of interest, but marginal saving is. Inter- est tends to be fixed by a balancing of productivity and reward of forbearance — by demand and supply. Distribution of Wealth. 49 Marshall, Principles, Bk. VI., ch. i, § 9; ch. 2, § 4; Economics of Industry, Bk. VI., ch. \,%T, ch. 2, §3; Seligman, Principles, §§ 167-168; Carver, Distribidion, pp. 220-256; Clark, Distribution, ch. 12; Gide, Principles, pp. 573-577. 5. Division of the Whole Product in Such a Society. In such a society since capital and labor not only co-operate, but compete ; and since marginal quantities of either are readily substituted for marginal quantities of the other when more efficient in proportion to cost, their marginal prices are relative to their efficiencies, "The law which determines the division of the product between labor and capital in com- petitive industries for a society in a state of normal equilibrium is, therefore, that each receives the share that it produces." (Seager). Seager, Introductio7i,%% 149, 150; MarshaW, Principles, /Sk.. VI., ch. I, §§ 6, 7, 8; Economics of Industry, Bk. VI., ch. i, §§ 6, 7, 8; Clark, Distributio7i, chs. 11, 12. 6. Summary of Normal, Static Distribution. The same tendencies hold for the prices of productive fac- tors as for the prices of commodities, that is, wages and in- terest tend to equal marginal productivity; but wages and in- terest in a static society would have a close relation to cost of securing the supply of labor and of capital. " Supply price and demand price tend to be equal: wages [and interest] are not governed by deiTiand price nor by supply price, but by the whole set of causes which govern demand and supply." (Marshall). The " National Dividend is at once the aggre- gate net product of, and the sole source of payment for, all the agents of production within the country; . . . the larger it is, the larger, other things being equal will be the share of each of them." An increase in the amount of any one agent will be an advantage to all by increasing the na- tional dividend; but may be disadvantageous to the particular agent, since the lowering of its marginal productivity may more than offset its share of the increased total production. Marshall, Principles, Bk. VI., ch. 2, §§ 6-10; ch. 11; Economics of Industry, Bk. VI., ch. 2, §§ 5-10; ch. 11. 50 Distribution of Wealth. C. PROFITS. CONDITIONS WHICH PREVENT THE REALIZATION OF STATIC CONDI- TIONS AND NORMAL DISTRIBUTION. L Changes in Economic Conditions. a. The hypothetical results described under "B " are con- ditioned upon the attainment and maintenance of equilibrium. In actual life there are constant changes taking place, some gradual, some radical, which prevent such equilibrium, so that actual distribution only tends toward the method described. Such changes are increases in population and in capital; im- provement in skill of labor and the efficiency of capital goods; better organization of labor and capital; changes in habits of consumption, variability of climate and season; and exhaus- tion of natural resources. b. There result changes in prices which make market prices higher or lower than the normal prices composed of wages and interest. Hence appear, even under sharply com- petitive conditions, entrepreneur'' s gains or losses. Such gains are profits in the strict sense and continue a long or short time according as competition can quickly or slowly re- store normal conditions. Seager, Ititjvdiictiou, pp. 169-173; 177-187; Marshall, Princi- ples, Bk. VI., ch. 7, § i; cli. 8, >^§ 7, 8, 9; Economics of hidustry, Bk. VI., ch. 7, § I ; ch. 8, §§ 5, 6; Seligman, Principles, g§ 152- 153; Carver, Distribution, pp. 268-278; Bullock, Introduction, §291; Clark, Distribution, ch. 5, 25; Sidgwick, Principles, Bk. II., ch. 2. 2. l\1onopolistic Conditions. a. Normal distribution depends upon the existence of com- petition. Since competition is frequently restricted by com- bination, some prices are determined in accordance with the law of monopoly value above normal value. Hence result monopoly profits. b. These monopoly profits, so far as they are due to prices higher than those which would prevail without monopoly. Distribution of Wealth. 5 i affect cost of living and diminish the real incomes of other factors of production. Seager, Introduction, §§ 109-113; Seligman, Principles, § 156; Bullock, Introduction, § 292. D. WAGES. I, Definitions and Discriminations. a. ' ' Wages include all earnings assigned to men for their work from lowest piece wages to highest annual salaries and ' wages of management. ' ' ' They also include the return which comes directly to a man for his labor. b. Time wages are paid for a quantity of time. Piece wages are paid for a quantity of result. The term efficiency wages may be used to describe " earnings measured — by the exertion of ability and efficiency required of the laborer." The relative advantages and disadvantages of time and piece wages depend upon the conditions of the particular trade, factory or job. The labor-cost under each tends to be the same. Efficiency wages tend to be equal in the same dis- trict unless much expensive machinery is used. c. " Real wages of labor may be said to consist in the quantity of the necessaries and conveniences of life that are given for it ; its nominal wages in the quantity of money." Real wages depend upon the nominal wages as modified by changes in the value of money, trade expenses, allowances, privileges, supplementary earnings, regularity of employment, certainty of success. Marshall, Principles, Bk. VI., ch. 3; Economics of Industry , Bk. VI., ch. 3; Bullock, Introduction, §§ 277-279; Seager, Introduc- tion, %\2)5'> '^e^tte^r, Principles, ch. 23, §§ i, 2; Andrews, Insti- tutes, §113. 2. Industrial Grades. There are infinite variations of efficiency from that of the most worthless of the ' ' residuum " up to that of the ablest ''captains of industry." For convenience five classes may 52 Distribution of Wealth, be recognized : unusual managing, artistic and professional ability; ordinary business, artistic and professional ability, and highly skilled mechanical ability; ordinary mechanical and clerical ability; unskilled manual labor ; the inefficient. Throughout history and over a great part of the world at present each grade has been recruited largely from its own children. In modern industrial democratic countries and especially the United States this is not so true ; but it is de- batable whether movement from grade to grade is now as easy as in our earlier history. Seager, Introduction, §§131, 138; Marshall, /';7;/rz)!»/^5, Bk. IV., ch. 6, §§ 5-8; Economics of Industry, Bk. IV., cb. 6, § 5. 3. Demand and Supply Determine the Wages of These " Non- Competing Groups." Transition from one grade to another being difficult and slow, wages are determined by the demand for and supply of labor of each grade. These grades cannot easily compete with each other. Thus are explained alike the wages of a great corporation president and of a laborer displaced by a machine. Seager, Introduction, pp. 228, 240; Bullock, Introduction, § 286; Cairnes, Leading Principles, pp. 57-73- 4. Causes of Differences in Real Wages. Competition moving labor from less to more productive trades, processes and regions, would tend to produce equality of wages were it not for certain hindrances and peculiarities in the action of demand and supply in reference to labor. Such are: a. Differences in native ability which, with full allowance for environmental influence, are most striking. b. Immobility of labor. In spite of growing ease and cheapness of transportation, unwillingness of laborers to leave certain regions leads to relative over-supply and under-supply in certain districts and trades. Distribution of Wealth. 53 c. The efficiency which enables men to enter the more highly paid trades depends largely upon the investment of wealth in giving right training; but this expenditure must be made largely by those who will not benefit by the result. d. Labor is perishable. The laborer must sell his labor at the best price obtainable or lose it entirely. His urgent need leads to bad bargains. e. Labor is at a disadvantage in bargaining as compared with the employer in respect to reserve power, competitive skill and knowledge of the market. f. Supplies of labor are slowly produced so that a relative deficiency is slowly made up and a relative over supply slowly removed. This is an effective cause of difference in propor- tion as the period necessary for acquiring the requisite skill is short or long. Marshall, Principles, Bk. VI., chs. 4, 5; Economics of Industry, Bk. VI., chs. 4, 5; Seager, Introduction, § 134; Seligman, Princi- ples, p. 413; Bullock, Introduction, § 294; Pierson, Principles, pp. 332 340; Mill, Principles, Bk. II., ch. 14; Nicholson, Principles, Bk. II., ch. 11; Pleinents, Bh. 11., ch. J ; Smith, Wealth of Nations, Bk. I., ch. 10. 5. Further Causes of Differences in Money Wages. Even when the net advantages and disadvantages of wages in different trades are the same, nominal differences may re- sult from the following causes : a. Cost of living. A large money wage may yield no more than a small one if the expenses of living are large. b. Cost of learning trade. c. A trade may have relatively small money wages because of the leisure or other attractions connected with it. d. Danger incurred. A high wage may be partly com- pensation for risks involved in the calling. e. Social esteem. Social esteem or prejudice may account for difference in wages. 54 Distribution of Wealth. /. A high money wage for the day, week or year may not involve high wages for the entire life of tlie worker, if work be irregular or if the length of effective working life be short. o. A low nominal wage may be accounted for by unusual chances for great success or certain promotion. Seager, Introduction, ^ 136; Marshall, Principles, Bk. VI., ch. 3. §§ 3-8; Economics of Industry, Bk. VI., ch. 3, §§ 3, 4; Bullock, hiiroduction, % 287 ; Seligman, Principles, § 17S; Carver, Distribu- tion, pp. 179-184. 6. Reasons for the Continuance of DifTerenoe in Real Wages. a. Differences in marginal productivity tend to fix wages. These differences in productivity are due to unequal abilities which are the result of all those facts of heredity and environ- ment which affect efficiency. In the environment may be emphasized such influences as home surroundings and standard of living, length and character of school training, child labor, caste and social prejudice, and all those influences considered in chapter v., C, 3. b. The continuance of a certain standard of wages is large- ly due to these wages which fix the standard of living, which in turn largely determine efficiency upon which productivity and, in the long run, wages depend. Such is the circle of influence. Seager, Introduction, %% 137, 138. 7. Influence of Wages on Supply of Labor. Wages in a static society would be determine4 by supply as well as by demand. Does the supply of efficient labor re- spond in real life to changes in demand as shown in wages? a. Increased remuneration stimulates to increased exer- tion. b. Increased remuneration stimulates to better prepara- tion and hence greater efficiency. Distribution of Wealth. 55 c. Increased wages, so far as they improve the standard of living, not only increase efficiency but increase the number of the population surviving to productive age. d. Increased wages tend over a great part of the world to accelerate marriage and to increase the birth rate, although in modern industrial countries this seems to be a cause of fluctu- ation 3 bout a gradually decreasing birth rate that has come with higher standards of material comfort. e. All things considered, then, an increase in wages above the prevailing standard of living (which is in a sense the cost of production of labor) tends to increase the supply of efficient labor. This standard of living is not, however, a fixed minimum of existence but a more or less elastic stand- ard held with varying degrees of tenacity by different groups and individuals. Trade Unionism tries to make this stand- ard of living universal and permanent. It tends steadily up- ward largely because of social action, Marshall, Principles, Bk. VI., ch. 2, §§ 1-3; Economics of In- dustry, Bk. VI., ch. 2, §§ I, 2; Seager, Introdtictton, §§ 160-164; Seligman, Principles, %% 174, 177; Carver, Distribution, pp. 164- 179; ^yxWoizk., Introduction, %i'i/\; Smart, Distribution, Bk. II., ciis. 14, 16, 17, 18; Fetter, Principles, ch. 21; Vi&rson, Principles, pp. 315-331; Webij, Industrial Democracy, pp. 632-643. 8. Conclusion as to Wages. In our actual dynamic society wages tend as in an imagin- ary static society to be fixed by productivity and the standard of living but very slowly and inaccurately. Since the econ- omic changes of modern times are constantly following one another, even that adjustment which might be brought about slowly is never realized. Many wages are higher or lower than our only standard of justice, merit, would set. Even though men are rewarded according to the values they pro- duce, these values are, because of social changes, variable and even fickle in some lines of production. Though the ten- dency is for men to be rewarded according to the efforts they 56 Distribution of Wealth. put forth and according to the skill they have acquired, they frequently are not. Here then is the basis for the charge that our distribution involves social injustice. But these changes "largely neutralize one another .... and cause the actual form of society to hover much nearer to the theoretical static form than would be possible if these influences worked separately." (Clark,) Further it is the profits resulting to e?itreprenetirs from these changes which are the incentive to economic improvements, the results of which, in the long run, go very largely to labor. Clark, Distribution, ch. 25; Marshall, Principles, Bk. VI., ch. 2; ch. 5, §§ 4-7; Economics of Industry, Bk. VI., ch. 2; ch. 5, §4; "Si^W^-mdin^ Principles, %% 176, 179; Seager, Introduction, §§ 155- 157; Smart, Distribution, Bk. II., entire, but especially ch. 13, 19, 28. 9. Wages Not Arbitrary. The departures of distribution from the principle of reward according to merit are not due to arbitrariness but to general social influences. Wages are social assessments of worth as judged at the time — often capricious and fickle but very largely on a sound basis. Smart, Distribution, Bk. II., chs. 1-13, and especially ch. i, an entertaining piece of sound argument. E. INTEREST. I. Definition and Discrimination. a. Interest, in form paid for the use of money, is really paid for the use of capital which the money represents. In Economics the term refers to the earnings of capital, whether a loan be involved or not. b. The rate of interest on ordinary long loans is not affected by the supply of money, but in financial centers since actual cash is often needed to meet obligations, the rate of interest on loans is directly affected by supply. Distribution of Wealth. 57 c. That which seemingly is a high rate of interest some times conceals wages of management. Seligman, Principles, pp. 392, 395; Bullock, Introductio?t, pp. 389, 396-39S; Marshall, Principles, Bk. VI., ch. 6, §4; Ecojiomics of Industry, Bk. VI., ch. 6, § 2; Fetter, Principles, ch. 16; An- drews, Institutes, §§ 108, iii; Gide, Principles, pp 568-572; Pier- son, Principles, pp. 225-232. 2. Normal Tendency of Interest Approximated In Actual Society. Since the mobility of capital is much greater than that of labor, actual interest approximates the normal much more closely than do wages. The transfer of capital from less to more productive employments is brought about mainly by the direction of the replacement fund. Capital goods which do not earn, in addition to their replacement fund, current rates of interest are not replaced, and the portion of capital thus set free is turned into capital goods of the sort that promise the greatest earnings. Because of this mobility of capital, there ig an approximation of interest rates in different employments to a general rate. Seager, Introduction, §§ 142, 147, 156; Carver, Distribution, pp. 214-215; Distribution, ch. 18. 3. Differences in Economic Interest. a. In spite of this tendency toward a general rate of inter- est, different capital goods are earning different rates because, an investment of capital once having been made with any degree of specialization and permanency, it cannot be with- drawn immediately. Any change in economic conditions may make the rate above or below the current rate. b. Differences in risk may also require larger earnings to attract necessary capital, although this apparently higher rate of interest is commonly a larger replacement fund. So social disrepute of trade may require a higher rate of interest to attract capital to it, although such higher rate is almost uni- versally composed partly of wages of management. 58 Distribution of Wealth, c. There are differences in marginal- productivity of capi- tal in different localities because of the limitatio of supply of capital in certain regions. Seager, Introduction, §§ 143-145; Flux, Economic Principles, pp. 90 96. 4. Differences In Loan Interest. Competition tends to make a uniform rate of interest pre- vail in the same loan market. So perfectly does competition work that a difference of rate on loans of the same duration is evidence of difference in security. In addition to differ- ences due to risk there are differences in loan rates in different regions. The money market is an international one. Seager, Introduction, § 146; Seligman, Principles, § 166; Bul- lock, Introduction, pp. 394-395; Marshall, Principles, Bk. VI., ch. 6, §§ 4-5; Economics of Industry, Bk. VI., ch. 6; Andrews, Institutes, %% 109-110. 5. Tendency of Interest. a. With progress in civilization (which involves increase of wealth and capital, not only absolutely but relatively to labor and natural resources) the total product of capital in- creases but its marginal productivity decreases. The rate of interest tends downward, but the quantity and quality of capi- tal are bettered to the advantage of the other factors in pro- duction. b. There is no reason to think that interest will fall to noth- ing, because every decrease in the rate increases demand for capital ; and because every decrease in the rate tends some- what to discourage saving. Seligman, Priticiples, §§ 169, 170; Seager, Introduction, § 302; Gide, Priticiples, pp. 577-581; Pierson, Pri7iciples, pp. 213-217, 6. Regulation of Interest. Interest, prohibited in the Middle Ages, was at first allowed in certain contingencies and then generally with a limitation of the rate. Such regulation still prevails in many American Distribution of Wealth. 59 states but is contrary to the general tendency toward econ- omic freedom. It is not only easily evaded but tends actual- ly to increase the rate to the necessitous borrower. Where equality in bargaining does not exist, regulation seems to have some justification. Seligman, Principles, § 171; Bullock, Introduction, § 268; Fet- ter, Principles, p. 135; Hadley, Economics, §§ 155-157; Andrews, Institutes, § 112. 7. Justification of Interest. For varying reasons in different ages objection has been made to the rightfulness of interest. Consideration of this topic is not within the scope of this course, but it should be noted that interest is now justified on the ground of social utility. The capital which is essential to progress would not be accumulated without tlie incentive of interest. Although the motive of saving is personal gain, the result is general ad- vantage. Bullock, Introduction, § 268; Seager, Introductiofi, § 299. F. RENT. I. Definition and Discrimination. Rent is the share of income that goes to the owner of any natural agent. Economic rent, or the real earnings of a natural agent, must be distinguished from contract rent, or the sum that one pays in return for the right to receive the earnings of a natural agent. The term rent is frequently extended to the sum paid for the use of other things than natural agents. Seager, Introduction, § 119; Seligman, Principles, § 159; Fet- ter, Principles, ch. 8; Nicholson, Principles, Bk. II., ch. 14, g i; Elements, Bk. II., ch. 10, § i. 2. The Basis of Rent. a. There would be no rent were there a superabundance of best land. b. There would be no rent if unlimited applications of capital and labor to land produced the same proportionate return. 6o Distribution of Wealth. c. Because of the scaricty of best land and because of the fact of diminishing returns, the necessary food and raw mater- ial demanded by increasing population can be secured only by resort to poorer lands or by less productive applications of labor and capital to the best land. The effective motive in either case is the higher price of the produce of land result- ing from increasing demand. d. Since all equal units of a crop will have equal value in the same market, the price, fixed at the marginal cost of pro- duction, will yield a surplus on that part of the crop raised at relatively greater advantage. This surplus arising from su- perior productivity of land above the extensive or intensive margin ot cultivation is economic rent. e. The income of permanent improvements obeys the same law as income ascribable to the land itself. Seagar, Introduction §§ 63, 120-122, 127; Bullock, Introduc- tion, §§ 272, 273; Seligman, Principles, I 160; Marshall, Princi- ples, ii'k. IV., ch. 3; ^§ 2-6; Bk. VI., ch. 9; Economics of Indus- try, Bk. IV., ch. 3, §§ 2-5; Bk. VI., ch. 9; Carver, Distribiction- tion, pp. 185-202; Gide, Principles, pp. 582-590; Davenport, Out- lines, pp. 75-85; Pierson, Principles, pp. 8492; Flux, Economic Principles, pp. 97 105; Mill. Principles, Bk. II., ch. 16, §§ 1-5; Nicholson, Principles, Bk. II, ch. 14; Elements, Bk. II, ch. 10; Walker, Political Economy, pp. 193-200. 3. The Relation of Rent to Prices. a. Generally speaking rent is the result of price — not price the result of rent. b. In the case of a crop raised in part on actual no-rent land, rent (that is the disposition of the surplus) does not in- crease price, although this surplus, being a part of supply, helps fix the price. c. "More commonly the marginal land for any particular use itself affords a rent because, though marginal for the given use, it is above the margin for some other use to which it might be applied." (Seager.) In such a case the marginal Distribution of Wealth. 6i rent is an element in price, but the differential rent due to the use of better land for this particular purpose does not increase price. d. The intensive margin of cultivation is a no-rent mar- gin. The price of the commodity thus raised intensively is not increased by the payment of rent but is determined by wages and interest at the margin. e. Wages and interest are necessary to secure the supply of labor and capital. They are therefore necessary elements in cost of production. " Rent, however, is wholly a result of production ' ' and not a causae. Seager, Introduction, § 127; Seligman, Principles, § 161; Bul- lock, Introduction, % 274; Marshall, Principles, Bk. V., ch. 8 Economics of Industry, Bk. V., ch. 3, § 8, and Appendix C; Car ver, Distribution, pp. 206-210; Smart, Distribution, ch. 26 Clark, Distribution, ch. 23; Pierson, Principles, pp. 93-99; Flux Economic Principles, pp. 109-114; Mill, Principles, Bk. II., ch 16, g 6; Hobson, Distribution, ch. 4, pt. i. ; Andrews, Institutes § 105; Walker, Political Economy , pp. 200-202. 4. Rent of Water Power and Mines. These rents are determined similarly to that of land. In the case of water power the marginal power used must yield a return large enough to pay interest on the investment of capital necessary for utilization. The rent of water-power is constantly limited by the cost of the possible substitutes for it. In the case of mines the product does not renew itself Hence the marginal mine ought rationally to be one which paid not only working expenses but enough to compensate for exhaustion of the deposit. Practically on account of the speculative nature of most mining there are no-rent mines and "the rent of better mines is measured up from them as a no- rent margin. " (Seager.) Seager, Introduction, §123; Marshall, Principles, Bk. V., ch. 8, § 6; fIux, Eco7iomic Principles, p. 108; Nicholson, Principles, Bk. II., ch. 14, § 5; Elements, Bk. II., ch. 10, § 7; Walker, Poli- tical Economy, pp. 212-216. 62 Distribution of Wealth. 5. Qualifications of the Law of Rent. a. The rotation of crops complicates but does not contra- dict the law of rent. The product of the entire period of ro- tation must be divided among the years to find the annual product. b. The variations of weather and price affect returns for a year ; but in stating law of rent the average return is assumed . c. Situation, transportation facilities or any other charac- teristic that affects utility, is as important as fertility in deter- mining rent. Seager, Introduction, §§ 124, 65; Bullock, Introduction, % 271. 6. Rent and the Land Owner. a. If the land is rented, contract rent tends to approxi- mate the economic rent more or less closely according to the extent that competition prevails. Custom, a feeling of obli- gation on part of the owner or other cause may leave part of the rent in the hands of the worker. • b. If the land is worked by the owner, the economic rent accrues to him. It is not always differentiated by him from other parts of his income. c. The capitilization of the rent at the current rate of in- terest fixes the selling price of land. d. In some regions rents are not competitive but are fixed by custom. Such are the system of farming on shares and the 77ietayer system. Marshall, Principles, Bk. VI., ch. 9, §§ 6, 8; ch. 10; Economics of Industry, Bk. VI., chs. 9, 10; Se^&ger, Introduction, %% 126, 128; Bullock, Introduction, ^^270, 275; SeVigman, Principles, §163; Vetter, Principles, ch. 15; Gide, Principles, pp. 606-612,; Flux, Economic Principles, pp. 114- 117. 7. Tendency of Rent. Other things remaining the same, an increase of population or of the standard of living raises rents. This is true both of Distribution of Wealth. 63 rural and urban lands. This tendency may be checked by improvements in production or transportation which increase supply. Seligman, Principles, §162; BviWock, Introduction, % 2^6 ; Gide, Principles, pp. 590-593; Davenport, Outlines, pp. 86-92; Flux, Economic Principles, pp. 11 2-1 14; Pierson, Principles, pp. 107- 120. 8. Justification of Rent. Private property in land rent is attacked by different classes of social critics. "The question of the justification of rent is not one of its existence but of its disposition." While from the individual point of view there seems much ground for objection to individual appropriation of that which is in part the gift of nature and in part social product, long ex- perience shows private ownership of land has all in all ad- vanced social welfare. Some of the "unearned increment" (not, however, peculiar to land) might be heavily taxed with social advantage. Seligman, Principles, § 164; Seager, Introduction, % 299; Smart, Distribution, pp. 306-308; Gide, Principles, pp. 593 600. G. CONCLUSION AS TO ACTUAL DISTRIBU- TION. a. The rewards of the factors of production are derived from and depend upon the values of the commodities they produce. But in a more fundamental sense the values of commodities depend upon these rewards of the factors of pro- duction. The values of commodities and the shares in distri- bution are but two ways of regarding the same sum. The National Dividend is the National Income. b. The same fundamental principles determine the values of commodities and of the factors of production. In each case it is the marginal utility ; but the margin is fixed by the forces of supply or in other words by the cost of production. Both in the case of commodities and of the factors of produc- 64 Distribution of Wealth. tion, the departures of market, or actual, values from normal values are to be explained similarly. c. Even in our actual changing society distribution is not accidental or arbitrary ; nor is it under the control of the powerful ; but tends to approximate to the principle of re- ward according to deserts. But the rapid changes in modern society, the interference with the perfect working of compe- tition, the monopolistic conditions that prevail and the im- mobility of labor due largely to its not being a mere com- modity, result in many departures from a desirable result. There is, then, opportunity for social effort to minimize these departures from an ideally just distribution. The Labor Problem deals with such topics. CHAPTER VIII. CONSUMPTION. (References will be found at the end of the chapter. ) I. Definition and Discrimination. Consumption is the destruction of utility. Economic con- sumption is the destruction of utility for the sake of advant- age; it is either unproductive of wealth or reproductive of wealth. Uneconomical consumption is waste. 2. Dependence of Consumption on Utility. a. A thing has utility because of the psychological condi- tion of the consumer. Hence the consumption of a person depends upon his psychological organization and character. b. " The art of consumption consists in knowing when to leave off in one thing and to begin in another. The ideal of consumption is attained when the marginal utilities of the ar- ticles consumed are all equal." (Nicholson). 3. Dependence of Consumption on Price. a. Consumption is directly dependent upon price and therefore constantly limited or stimulated by all changes in methods of agriculture, manufacture, transportation and com- munication. b. This dependence of consumption on price frequently leads people to be affected unduly by prices. Useless things and articles of poor quality are bought because of low nomi- nal price. The desirability of intelligence and self-control are evident. c. Price, however, has significance only when compared with income. Normally, income not only does but should fix 66 Consumption. consumption, since income represents a person's production of utility as socially estimated. Ought a person to consume more utility than he produces ? It should be remembered that many most valuable social services are not directly paid for. 4. Dependence of Consumption on Distribution. The degree of equality in distribution in a social group shapes its consumption. The same group income on an ante- bellum plantation and a Brook Farm would produce very dif- ferent results. Communal or social consumption is economi- cal of wealth- but economy is not desirable at the expense of broader social considerations. 5. Effect of Consumption on Production and its Metliods. a. The stimulus to economic progress and industry is found in wants. A large proportion of all consumption tends directly or indirectly to further production of wealth. b. Where capital and labor are not fully employed, de- mand for commodities may increase employment of labor. c. Ordinarily, demand directs rather than employs labor. The mere destruction of wealth does not produce wealth. The consumer determines the form of wealth produced. De- mand for luxuries is no more a demand for labor than any other expenditure. The direction of labor into certain lines results in a. pennanent medins of further production or enjoy- ment, in contrast with that which is merely transitory. The consumer determines whether a beautiful or an ugly thing shall be produced. He chooses between a rapid or slow destruc- tion of wealth. d. Consumers determine the numbers employed in each occupation. Some of these occupations are educational and tend to encourage development of productive skill; while others are debasing and not productive of wealth. LOFC. Consumption. d'j e. Consumers determine industrial methods. Whetlier it be sweatshop or factory; child labor or skilled adult labor; hand or machine; craftsmanship or highly specialized labor, is for the consumer to decide. The department store and the trust are due to the patronage of the public. 6. Relation of Consumption to Accumulation. Saving is in reality the accumulation of wealth, most of v/hich becomes, by investment, capital. If all should save in an extreme degree, there would be a falling off in demand for the very goods which the saving would help produce. The right proportion between saving and consumption is attained automatically through price, wages and interest. At present the greatest need is an increase of expenditure for the promo- tion of efficiency in workers. 7. Wasteful Consumption. There is much waste of Avealth due to the choice of the perishable rather than the durable ; to imperfect utilization ; and to individual rather than social ownership of certain forms of wealth. Not all high prices involve great cost. 8. Ethical Aspects of Consumption. a. Because of the reaction of the use of wealth on character, it is a profoundly ethical question what one buys and consumes. b. Even more important is the effect of one's consump- tion on the lives of others. Because of the complicated nature of our productive system, the purchase of an article which may in no way injure its consumer, may involve physical, intellectual, artistic and moral debasement to others. Although for the most part unconsciously, there is, perhaps, no way in which the average person influences the lives of others more constantly than by his expenditure. Unneces- sary personal service, degrading occupations, long hours and bad sanitary conditions in store and factory, the sweatshop, 68 Consumption. child labor and many other industrial evils could not exist were consumers aroused to their ethical obligations and or- ganized so that they might be informed. The Consumers' League aims to meet this need. Labor Legislation and the Trade Union Label are further forces in this direction. As Democracy in its social sense, or as Miss Adams puts it, "identification with the common lot," prevails, the aroused conscience of the consumer will be a great force working for social advancement. 9. Consumption Reflects Social Progress. The civilization of every period is largely shown by its consumption — its buildings, weapons, utensils, objects of art, clothing, etc. The costumes of the different classes in the middle ages were a reflection of the constitution of the society of the time. The disappearance of these distinctive caste costumes is a part of our democratic tendency. That alleged "aping of their superiors" which leads those of small incomes to dress like the well-to do is but a striving to realize that Christian Democracy which most profess. Statistics of consumption throw much light on the question of the progress of the working classes. Seligraan, Principles, % 228; Seager, Introduction, §§ 43-46; 294, 295; Marshall, Principles, Bk. III., ch. 6, §§ 4, 5; Eco7iomics of Industry, Bk. III., ch. 6, 4^3; Fetter, Principles, chs. 40, 41 ; Gide, Principles, Bk. V. ; Bullock, Inlroductiott, g§ 65 68; Andrews, In- stitutes, %% ^o, 124-131; Davenport, Outlines, pp. 330-344; Ely, Outlines, Pt. IV.; Walker, Political Economy, Pt. V.,cli. 3; Mill, Principles, Bk. I., ch. 3, §§ 46; Hadley, Economics, pp. 318-335; Bastiat, Essays on Political Economy, Essay " That which is seen and that which is not seen"; Palgrave, Dictionary, articles Con- sumption and LuA'ury ; Iveslie Stephen, Social Rights and Duties, Essay on Ivuxury; de Laveleye, Z//.i-«r_j/ ; Elements of Political Economy, pp. 243-264; Thompson, T/ie Purse and the Conscience; VsLwce-ii, 3Ianual of Political Economy, -pYi- 19-29; Ruskin, Time and Tide, Lecture 2nd; Alunera Pulveris, ch. 6; Crouni of Wild Olive ; A foy For Ever \ Unto This Last ; Say, Treatise on Politi- cal Economy, Bk. III., chs. 4, 5; Smart, Studies in Economics, chs. 8, 9, 10; Taylor, Exercises in Political Economy, ch. 9; Richardson, The Woman Who Spends; Blatchiord, Merrie Eng- land, ch. 23; Ely, Problems of To-day, ch. 15; Devas, Political Consumption. 69 Economy, pp. 6-7, 21, chs. 6, 7; Roscher, Principles of Political Economy, Vol. II., pp. 221-252; Allen, Democracy and Diamonds, Contemporary, 59 :666; Adams, 77z^ Social Mittistry of Wealth, Int. Jour, of Ethics, 4:173; Davidson, Luxury and Extrava- gance, Int. Jour, of Ethics, 9 :54; Devas, 77?^ Moral Aspect of Consumption, Int. Jour, of Ethics, 10:41; Greg, What is Culpa- ble Luxury? Contemporary, 21 : 216; Smith, Mr. Greb on Culpa- ble Luxury, Contemporary, 22:126; de Laveleye, Morals of Luxury, Pop. Sci. Mon., 28:669; Leroy-Beaulieu, The Office of Luxury, Pop. Sci. Mon., 47 : 25; The Social Function of Wealth, Pop. Sci. Mon., 48 :829; Martin, Ls the Lavish Expenditure of Wealth Justifiable ? 19th Century, 44: 1024; Moran, The Ethics of Wealth, Am. Jour. Sociology, 6 : 823; Sidgwick, Luxury, Int. Jour of Ethics, 5:1; Simey, Luxury, Ancient and Modern, Econ. Rev., 12:146. Luxury in America, Spectator, 82:482; The Duties of the Very Rich, Spectator, 78:168; Culpable Luxury, Spectator, 77:511; Ward, The Use and Abuse of Wealth, Forum, 2 : 549; Reports and pamphlets of the Consumers' L,eague and of the National Consumers' League. OUTLINES OF ECONOMICS A Syllabus foPv Introductory Study by HERBERT ELMER MILLS. Ph. D. PART II. POUGHKEEPSIE, N. Y. 1907 ^v>V LIBRARY of OONGResS One Oouy Received _.CQpyiKht Entry CW5S A AAc. No, CQPY B. Copyright, igoy, Herbert Ei649 Real estate, . 30,000 Deposits, . • • 754,237 Other assets, . 2,659 ^879,886 Expenses, . Reserve, . . 1,506 120,100 ^879, 886 Dunbar, Theory and History of Baulking, ch. 3; Seager, Intro- duction, §§ 184, 185; White, Money and Banking, pp. 229-239. 4. The Check System. a. When a bank credit takes the form of a deposit it be- comes a circulating medium through the check system. If A who draws the check and B who receives it have accounts in the same bank, the amount of the check is charged against A's account and credited to B's. A's original debt to B is paid by a transfer of a claim upon a bank without the use of money. b If A and B have accounts in different banks, the check drawn by A upon the Farmers Bank is credited to B in the Merchants Bank when there deposited by him. The check is now a claim of the Merchants Bank upon the Farmers Bank. When paid directly or indirectly by this, it is charged against A's account. A's debt has been paid by book entries involving transfers of claims. c. The clearing house is an institution for facilitating ex- change and settlement of checks. One is found in every city of financial importance. To the clearing house each bank sends every business morning all the checks upon other banks in the city received by it the previous day so arranged as to be distributed quickly to banks against which they are drawn. From the other banks each bank receives all the checks drawn against it and deposited in them the previous day. The checks brought in by a bank represent its total credit or claim ; those received by it at the clearing house represent Credit and Banking. 21 its debit or obligation. Tlae difference represents its debit balance which must be paid in money during the day; or its credit balance which it is entitled to receive. The sum of claims against the clearing house equals the sum of its obliga- tions; and the sum of credit balances must equal the sum of debit balances. The clearing house not only saves much time, expense and danger, but it greatly decreases the amount of actual money necessary to settle balances. In smaller cities clearing house balances are sometimes settled by drafts upon New York. d. Checks drawn upon banks in smaller cities and de- posited in banks in other cities ("country checks ") are paid by a more or less round about system of transfer from bank to bank. They are frequently finally settled either by off- setting obligations or by drafts on a financial center. e. It is clear that by the mechanism of the check system deposits based upon loans, or in brief credit, are a most im- portant medium of exchange, increasing and decreasing auto- matically with changes in business, but always dependant upon the existence of sufficient legal tender reserve to insure its prompt liquidation. f. At certain times of acute financial crisis when banks, which were in reality sound, were not possessed of sufficient reserve to pay obligations promptly, clearing houses have issued certificates, in return for securities deposited. Such certificates were used by the banks in settling clearing house obligations, setting free much cash reserve for the urgent needs of the community. Even the mere announcement that the clearing house would issue such certificates has been suffi- cient at times to allay panics, Dunbar, Theory and History of Banking, ch. 4; Johnson, Money and Currency, pp. 46-51; Seager, Introduction, § 183; White. Money and Banking, pp. 240-255; Hadley, Economics, pp. 232-238: Scott, Money and Banliing, pp. 218-226; Cannon, Clearing Houses. 22 Credit and Banking. 5. Bank Currency. a. The bank note is a promise to pay and, as has been shown, is essentially like the deposit since it is credit used as a means of payment. Being in convenient denominations and often resembling government paper money, it circulates freely as money among all, including those unable to judge of its safety and those practically unable to refuse to accept it. Even the best systems of redemption do not insure that con- stant test of worth which is found in the case of the check. For these reasons, based upon long experience, some protec- tion of note holders as distinguished from other creditors of a bank has been generally deemed advisable. The more im- portant methods are the following : b. It is frequently made a prior lien upon the assets of the bank. This method may be combined with others. c. It is sometimes protected by the deposit (by the issuing bank) with some government authority of collateral security such as government bonds. From the sale of such securities in case of the inability of the bank to meet its obligations the note holders are reimbursed. If the securities accepted are carefully prescribed and if overissue is prevented by require- ment that the notes be printed or stamped by the government, absolute safety is secured by this method, but elasticity, or quick response of the amount of notes to the fluctuating needs of business, is absent. d. The Bank of England notes up to a certain amount are protected by government obligations to the Bank. Above that they are protected by an equivalent amount of gold becoming thus coin certificates. Absolutely safe they in no way add elasticity to the currency. e. In some banking systems, notably the Canadian, bank notes have been protected by a safety fund collected from all the banks by a percentage tax and used to pay the notes of Credit and Banking. 23 any insolvent bank. The fund in such cases is reimbursed entirely or in part from the assets of the bank according as the notes are or are not a prior lien. In the Canadian system such notes are limited to the amount of a bank's capital, are not legal tender, are promptly redeemed at redemption centers through the country and bear interest from the time of a bank's failure to redeem until they are paid. These pro- visions in connection with its branch bank features make the Canadian bank-note currency absolutely safe, elastic and very sensitive to the needs of different parts of the Dominion. /. The German banks are like the Bank of England in that they are allowed a certain amount of uncovered circula - tion, namely, 385,000,000 m. and that above this amount all notes must be protected by an equivalent amount of cash except as stated below. Unlike the Bank of England the German banks may issue uncovered notes by paying a tax at the rate of 5^ per annum upon the notes thus issued. Further the cash held must equal one-third of the circulation and the other two-thirds must be protected by short term business paper. This system secures a specie basis, but allows an expansion in time of monetary stringency. g. Easy redemption will do much to prevent excessive issues and ensure safety. It is absolutely necessary unless notes are protected by specie or bonds, and desirable even then. Dunbar, Theory and History of Banking-, ch. 5; chs. 8, 10, 11 contain explanations of the French, English and German bank note currency; Scott, Money and Banking, ■p'p. 166-176; ch. 10 describes foreign bank systems; Fetter, Principles, pp. 465-468; Seligman, Principles, § 197; Johnson, Money and Currency, pp. 331-339; Hadley, Economics, %% 2T$-2'S)q; Nicholson, Principles, Bk. III., ch. 19; White, Money and Banking, ch. 15 contains accounts of the foreign bank note systems ; Bagehot, Lombard Street. 6. General Regulation of Banks. a. Experience shows that public regulation is essential to soundness. Such public control usually insists upon publicity 24 Credit and Banking. in the form of frequent statements. It sometimes provides for governmental inspection. b. Specific regulations are sometimes made as to allowable investments ; amounts that may be loaned to one person ; the proportion of reserve ; the paying up of capital, etc. Scott, Money and Banking, ch. 9. C. DANGERS OF CREDIT. a. Unwise extension of credit promotes unwise expenditure and extravagance. It sometimes encourages unwise govern- mental or corporate expenditures. b. Unwisely extended in business it promotes speculation and raises prices as does any increase of the medium of exchange. Such rising prices encourage further speculation and unwise investments. These tendencies may continue in ever widening circles until a vast volume of business is being done upon an artificial basis. Sooner or later confidence, which is the basis of credit, is shaken, prices fall rapidly, speculative undertakings and even sound ones fail, panic results and is often followed by a long period of depression before confidence can be restored and credit established. Hadley, Economics, §§274-280, 333; Walker, Political Economy , pp. 174-186; Selignian, Principles, ^ 198; Marshall, Economics of Industry, Edition of 1891, pp. 151-153; Jones, Economic Crises. CHAPTER XI. AMERICAN MONETARY HISTORY. I. Colonial and Revolutionary Bills of Credit. a. Bills of credit, receivable for taxes and frequently legal tender, were issued by the American colonies to provide for war expenses, or ordinary expenses, or to make loans to pri- vate individuals. In spite of various provisions designed to secure redemption and to prevent depreciation, they were almost invariable issued in excess, leading to depreciation, speculation, loss to creditors and injury to business. b. Despite this experience and the warnings of prominent men, the Continental Congress issued large amounts of Con- tinental Currency to meet war expenditures. This money rapidly depreciated and ultimately became worthless in spite of laws fixing prices and forbidding discrimination against it. The results were the usual results of paper issues. White, MoJtey and Banking, Bk. II., chs. 2, 3; Bullock, Mone- tary History of the United States, pp. 29-78; Dewey, Financial History of the United States, §§ 9-11, 15-17; Hepburn, Contest for Sound Money, pp. 53 60. 2. Establishment of Our National Monetary System. a. The Federal Constitution provides that Congress shall have power "to coin money, regulate the value thereof, and of foreign coin ;" and that "no State shall coin money; emit bills of credit ; make anything but gold or silver coin a tender in payment of debts." b. At the beginning of the national government many kinds of English, Spanish and French gold and silver coins were in circulation. In different parts of the country these 26 American Monetary History. were differently valued in the various monies of account. Hamilton, as Secretary of the Treasury, made a report to CcThgress in 1791 on the coinage. Although preferring a gold unit he recommended bimetallism in order not to reduce the money in circulation. He advised the adoption of the ratio of 15:1, that being the market ratio at the time. He recommended that the weight of silver (371^ grs.) in the Spanish dollar, then widely used, be made the unit and, con- sequently, that the gold dollar contain 243^ grs. c. The act of 1792 establishing our national standard fol- lowed Hamilton's recommendations. It provided for free coinage of gold and silver at the ratio of 15:1. The silver unit was a dollar of Zl'^}i g^^- pure silver and the gold unit was an eagle of 247.5 g^^- pure gold. d. The value of silver declined after 1792. Consequently the mint ratio undervalued gold which disappeared when coined and soon was no longer brought to the mint. Although the situation was much obscured by the circulation of foreign gold, the use of bank notes and the exportation of new United States coins, the standard was in reality a silver monometallic one. Bimetallism failed. Dewey, Financial History of the United States, %% 27, 29, 30, 44 ; White, Money and Bafiking, pp. 31-34; Johnson, Money and Cur- rency, pp. 341 343; Scott, I\/o7iey and Bankiuff, pp. 329 332; Lauglilin. History of Bimetallism in the United States, cli. 2; Walker, International Bimetallistn, pp. 110-116; Hepburn, Con- test for Sound 3Ioney, chs. I, 2. 3. The Change to Gold Monometallism. a. A growing demand for a change that would lead to a restoration of gold to our circulation resulted in the law of 1834. The restoration was brought about by changing the ratio to 16:1. This was accomplished by reducing the weight of gold in the dollar to 23.2 grs. In 1837 a law revising the coinage laws raised the weight of gold in the dollar to 23.22 American Monetary History. 27 grs., making the ratio iS-gS-f-:!- The weight and ratio of gold and silver hare not since been changed in standard coins. b. This act overvalued gold, the market ratio at the time being 15.73: i. Silver disappeared from circulation, even the subsidiary coins being withdrawn. This tendency was acceler- ated by the gold discoveries in California. c. The lack of minor coins caused such inconvenience that in 1853 a law was passed making silver coins of denomi- nations less than one dollar token coins with legal tender quality limited to five dollars. The weight of pure silver in one dollar's worth of these coins, face value, was fixed at 345-6 grs. d. The result of these laws was, while nominally retain- ing bimetallism, to establish practically the gold standard with an excellent subsidiary coinage system. No further change in the laws governing the metallic currency was made until 1S73. Dewey, Financial History of the United States, § 90; White, Money and Banki7ig, pp. 34-36; Johnson, Money and Currency, pp. 344 346; Laughlin, History of Bimetallism, chs. 4, 5; Hep- burn, Contest for Sound Money, ch. 3. 4. The Paper Currency of the Civi! War Period. a. The enormous and sudden increase of government expenditures due to the war necessitated the use of every possible source of revenue. The expenditures for the four fiscal years 1858-1861 were $272,826,000 ; for the four fiscal years 1862-1865 they were $3,348,400,000. At first bor- rowing by bonds was resorted to, and then gradually increased customs and internal revenue taxes to the limit of endurance. The increased taxes became effective only slowly. b. To meet pressing needs of the early years of the war Congress authorized the issue of legal tender government notes receivable by and payable to the government except for 28 American Monetary History. duties on imports and interest on the public debt. The act of Feb. 25, 1862, provided for $150,000,000 ; that of July II, 1862, for ;gi5o,ooo,ooo and that of March 3, 1863, for ^150,000,000. Of the $450,000,000 authorized, $431,000,- 000 were outstanding June 30, 1864. This action was bitterly opposed by many at the time and there is much reason to believe that more vigorous and far sighted use of the taxing power at the beginning of the war, supplemented by the issue of bonds, would have furnished sufficient funds without re- sorting to paper money. c. Measured in gold these notes showed immediate depre- ciation. They declined steadily to 62 in February, 1863 ; then rose gradually to 79 in August, 1863 ; then fell steadily and rapidly until they reached 39 in July, 1864; from that time until the end of the war they rose gradually, standing at 74 in May, 1865. Somewhat more slowly, prices of com- modities revealed this depreciation, while wages rose very tardily. This meant a heavy burden upon the people already suffering from heavy taxes. The rise in general prices cannot be ascribed entirely to inflation, being due to various causes including the heavy taxes on domestic and foreign produc- tions. According to the Aldrich Report the course of prices and wages was as follows : YEAR. i860, 1861, 1862, 1863, 1864, 1865, d. The financial difficulties caused by the war and the drain upon bank and government reserves caused the suspen- sion of specie payments, Dec. 30, 1861. With the issue of PRICES. MONEY WAGES 100. 100. 100.6 100.8 117. 8 102.9 148.6 IIO.5 190.5 125.6 216.8 I43I American Monetary History. 29 the "greenbacks" the depreciation of paper increased so that by the summer of 1862 even the silver subsidiary coins of lower standard were driven from the circulation in accord- ance with Gresham's law. From this time until several years after the war, only paper was used in ordinary transactions. e. The deficiency of small change caused great incon- venience. Fractional currency and copper coins were issued by cities and individuals. Postage stamps were largely used in small trade. In July, 1862, Congress authorized the issue of postage currency in-small denominations. In March, 1863, Congress authorized the issue of paper fractional currency receivable in payments to the government and exchangeable for legal tenders. These remained the small currency of the country until some years after the war. . /. Although not in circulation gold was needed by the government to pay interest on the debt ; by importers to pay duties ; and for trade with other countries. This gold was bought with paper and constantly fluctuated in its price according to actual or expected changes in business, financial, political or military conditions. An exchange for dealing in gold was opened in New York and gold became a favorite subject of speculation. Because of the alleged evils of this speculation. Congress passed a bill in 1864 forbidding deal- ing in gold for future delivery. Since this law prevented legitimate purchase of gold, it caused a sharp rise in the paper price of gold. The law was repealed fifteen days after its passage. g. The question of the constitutionality of the legal tenders was early- raised and the early decisions of the Su- preme Court were unfavorable, although the cases brought involved limited questions such as the use of the notes to settle contracts entered into before the legal tender act was passed. In one of these cases, however, (1869) the Court by 30 American Monetary History. four to three implied that the legal tender clause was both improper and unnecessary. In 1871 the membership of the Court having changed, it was decided that the legal tender notes were constitutional as a war measure. In 1884 a de- cision was rendered that they were legitimate even when issued in time of peace. This decision, which itself reveals the influence of the Civil War in enlarging federal authority, was bitterly attacked by some historians and constitutional lawyers. All in all, popular opinion agreed with the Court and there is no further question of the power of the Federal Government to issue legal tender notes. h. During the same period the Confederate States were experiencing to the utmost the evils of paper currency. Im- mense quantities were issued by the Confederate government, by the individual states, by individuals and corporations under authority received from the States. They all became practically worthless soon. Dewey, Fina7icial History of the United States, §§ 116- 125, 131, 155, 156 ; White, Mo7iey and Banki^tg, Bk. II., ch. 3, Johnson, Money and CurreJicy, pp. 272-290, Hepburn, Contest for Sound Money, chs. 8, 11. 5. Monetary Reconstruction. a. Various views as to the best policy toward United States notes prevailed after the war, from the extreme attitude in favor of immediate resumption of specie payments to that which favored an increased use of government notes. At first (1866) Congress adopted a policy of gradual contraction, but growing opposition to a reduction of the circulating medium brought about a repeal of the contraction act in 1868 after ^44,000,000 had been withdrawn. b. The panic of 1873 revived the demand for more paper money. The Secretary of the Treasury re- issued $26,000,- 000, making the total outstanding $382,000,000. Congress in 1874 passed a bill for the permanent increase of the cur- American Monetary History. 31 rencyto $400,000,000. This bill authorizing an increase of paper in time of peace was vetoed by President Grant, who thus checked the inflationist movement, although the Green- back party was active and in some sections powerful from 1876 to 1880. c. In January, 1875, the Resumption Act was passed pro- viding for reduction of the greenbacks to $300,000,000; for the substitution of silver coin for the fractional currency ; and for the resumption of specie payments on January ist, 1879. To secure gold for this purpose the Treasury could sell bonds. d. The Treasury gradually accumulated gold from the surplus revenue and from the sale of bonds — a favorable con- dition of trade aiding this process. A fortnight before the date set the premium on gold disappeared and on January ist, 1879, specie payments were resumed with no difficulty. In May, 1878, Congress prohibited the further permanent re- tirement of greenbacks, and the amount then outstanding ($346,681,000) still remains. These notes are redeemable in gold, but are re-issued when so redeemed. Dewey, Financial History of the United States, §§ 143-147. i54- 161; White, Money and Banking, pp. 174-181; Hepburn, Contest for So^md Money , chs. 9, 10; Noyes, Thirty Years of American Finance, chs. 1-3. 6. Silver Legislation. 1873-1893. a. In 1873 the United States was legally a bimetallic country, but silver was so undervalued that it was not coined, so that gold was the standard. In fact paper money, some- what depreciated, was the money of circulation and prices were reckoned in it In 1873 a law for the revision of the coinage was enacted. This law incidentally dropped from the list of coins the long disused silver dollar. Although the bill had been before Congress for two or three years, this provision attracted no attention, for no one wanted a more 32 American Monetary History. expensive dollar. The law was later described as "the crime of 1873." b. However, the decline in the price of silver beginning at this time made this change one of great significance. The advocates of enlarged circulation, defeated in their attempts to secure paper inflation, saw that, but for the law of 1873, their desire for cheaper money would have been realized in part by the enlarged use of silver. They now vigor- ously demanded the restoration of silver to free coinage. The continued decline in silver and the rise of paper money toward equality with gold strengthened their cause among all who demanded cheaper money. A bill for the free coin- age of silver was passed by the House in November, 1877. It was amended by the Senate so as to limit the amount coined and secure the profit to the government. In this form it became law over the presidential veto in 1878. c. The provisions of this law of i8j8 (sometime called the Bland, or the Bland-Allison, act) were that the govern- ment should buy each month not less than two nor more than four million dollars worth of silver bullion at the market price and coin it into dollars containing 371.25 grs. of pure silver ; that these dollars should be legal tender ; and that certificates of deposit in denominations of not less than ten dollars might be issued upon the deposit of such coin with the government, such certificates being receivable for public dues, but not legal tender. d. The predicted quick transition of the United States to a cheap silver standard did not take place because the amount of silver issued was so limited. On the other hand the rapid development of the country in population, wealth and com- merce, required more money. The silver issued met this need, which would otherwise have been satisfied by a natural inflow of gold. The decline of the bank circulation also made a place for silver. During the depression of 1884-1886 American Monetary History. 33 the surplus revenues of the government made it possible to hoard the silver issues which were temporarily in excess. A comparatively small amount of silver dollars circulated, but the silver certificates were kept out, especially after the pass- age of an act in 1886 providing that they might be issued in small denominations. e. The agitation for free coinage continued, having some support from the decline in the price of silver and the decline in general prices. Since a presidential veto would prevent the passage of a free coinage law, the Sherman law was passed in 1890 as the price paid by the Republican party for the votes of a few silver Senators necessary to the passage of the McKinley high tariff bill. In view of the sharp political issue joined slightly later, it is significant that this bill was passed by a Republican Congress and President, /. This Sherman Laitj of i8go provided that the govern- ment should issue legal tender notes to be used in buying 4,500,000 ozs. of silver monthly at the market price. With a temporary exception only so much silver was to be coined as was needed for the redemption of these Sherman notes. Further, they might be redeemed in gold or silver at the dis- cretion of the Treasury, it being declared the policy of the United States to keep the two on an equality. The purchase provisions of the law of 1878 were repealed, but silver certifi- cates were still to be issued. g. The amount of currency forced into circulation by the law of 1890 was greater than that which resulted from the law of 1878, although the need of more money was no greater. Further, the kind of money issued, the treasury notes, made a greater demand on the gold reserve. Unfavorable trade con- ditions led to gold exports. The treasury funds were de- pleted by large expenditures while the McKinley act had decreased customs revenues. The combined result was a por- tentous drain of the gold reserve, upon which the maintenance 34 American Monetary History, of the gold standard depended. The Cleveland administra- tion, March, 1893, inherited from its predecessor a panic which became acute in July. Through the strenuous efforts of President Cleveland a special session of Congress (August to November) repealed the purchase provisions of the act of 1890. Dewey, Financial History of the United States, %% 170-173, 186- 189; Taussig, Silver Situation in the United States, Part I.; White, Money and Banking, pp. 191-205; Johnsou, Money and Currency, pp. 2)4^-3^o; Laughlin, History of Binietallisvi in the United States, chs. 7, 13; Hepburn, Contest for Sound Money, chs. 12, 13, 17; Noyes, Thirty }'ears of American Finance, chs. 4-8. 7. The Great Silver Controversy. I. GENERAl^ CONSIDERATIONS. a. The panic of 1893-4 was a serious one. Government revenues decreased, hundreds of banks failed, deposits de- creased, bank clearings were low, railroads went into the hands of receivers, failures were numerous, production of all kinds and notably of coal and iron decreased, distress and unemployment prevailed. ^. Prices, as shown by index numbers, declined steadily, being lower in 1896 than at any other time since the Civil War. The condition of the agricultural population especially in the West was unfortunate. Prices of all sorts of agricul- tural products were very low. The principal and interest of the mortgages with which the farms had been bought became an increasing burden. e. The Harrison administration had left to the Cleveland administration a treasury in which the gold reserve was lower than it had been since the resumption of specie pay- ments, a low cash balance of any sort, heavy expenditures and a decreased revenue. The Wilson-Gorman tariff still further decreased revenues. The amount of government paper re- deemable in gold was larger than ever and available means of American Monetary History. 35 redemption small. Legitimate need for gold and particularly a fear of suspension of gold redemption led to a great increase in notes presented for redemption. In January and Novem- ber, 1S94, and in February and December, 1895, the Treas- ury sold bonds to secure gold to maintain specie payments, the total addition to the debt in this time of peace being over ^262,000,000. These sales, especially one called the " syndi- cate ' ' agreement, caused fierce criticism of the administration by the silver advocates who claimed that silver should be used for redemption and that a corrupt conspiracy of bankers and administration had adopted an illegal procedure. d. The prevailing discontent based on economic condi- tions revealed itself politically. In the South and West the Populists gained great strength as did a radical wing within the Democratic party. President Cleveland by his gold monometallic policy had lost the support of his own party in Congress. Within the Republican party a minority favored free coinage of silver while many others were willing to make concessions to the silver men as a matter of policy. Only in the East was there a positive advocacy of gold monometallism and throughout the rest of the country this was thought to be due largely to the selfishness of the creditor class. e. The Democratic National Convention met at Chicago in 1896. The free coinage faction had control from the start, passed a strong free coinage platform and nominated Wm. J. Bryan for the presidency because of his brilliant speech in favor of silver. The Republicans declared against free coinage of silver except by international agreement and thus caused a secession of western silver members of the party. From a non-committal attitude, the Republican nominee, William McKinley, gradually took one of strong advocacy of what was called " sound money." After one ot the fiercest campaigns in the country's history the opponents of free coinage won. Because of the strength of the silver men in the Senate the 36 American Monetary History. administration elected could do no more than maintain the status quo. f. Although the arguments advanced in the campaign of 1896 had reference, in part, to a particular situation they in- volved such a comprehensive consideration of general monetary principles in an actual situation that a resume of the discus- sion seems worth while. Dewey, Financial History of the United States, §§ 189-195; Noyes, Tliirty Years of American Finance, chs. 9, 10; Hepburn, Contest for Sou7id Money, pp. 373-391; Johnson, Money and Cur- rency, pp. 356-360; White, Money and Bantling, pp. 202-211. II. THE ARGUMENT FOR AND AGAINST FREE COINAGE IN 1896. a. The question of stability in the standard of value. (i) The bimetallists argued that their policy would secure greater stability in the standard of value. They claimed that under monometallism the standard of value is sub- ject to all the results of change in demand or supply of the [chosen metal, while under bimetallism, since the two metals would not be likely to change in the same direction simultaneously, the monetary demand would be transferred to the cheaper, thus preventing as great fluctuation as would otherwise take place. Further, the very size of the money base would prevent fluctuations in supply having the same effect as under monometal- lism. (2) The monometallist, on the other ^hand, contended that the fluctuations in the standard of value, although not so great under bimetallism, would be more frequent, since they would be caused by changes in the supply of either metal. They further contended that, while the argument of the bimetallist might be sound when the legal ratio Vas close to the market ratio, it had no potency in the particular situation under consideration American Monetary History. 37 since not bimetallism but silver monometallism would be the result of the policy proposed. b. The question of a " par of exchange." (i) The bimetallist urged bimetallism as furnishing a " par of exchange" between gold and silver using coun- tries. He alleged that gold using countries had recently suffered because of the absence of such a par of exchange, the gold value of their exports constantly decreasing because of the fall in the value of the silver with which they were paid for. Further, such a par of exchange would encourage the flow of capital from country to country. (2) The gold monometallists denied that trade is *'so much hampered by fluctuations in relative money values as is often asserted." Further free coinage of silver by the United States alone would mean that this country would be silver monometallic and thus lack a par of exchange with all the important industrial and commer- cial nations. c. The argument as based on the prices of commodities. (i) The silver advocate dwelt particularly upon the social and industrial evils due to falling prices. Index num- bers proved the fact of falling prices. Falling prices are disastrous to farmers, to merchants, to laborers, to debtors — all of whom are the active, energetic classes. Falling prices throughout history have been accompanied by depression and disaster. The fall in prices since 1873 was ascribed to the demonetization of silver and the con- sequent increased demand for gold to do so much more of the world's monetary work. Although there had been an increase in the production of silver, it was not so important as certain previous changes in the relative production of gold and silver had been. In these earlier 38 American Monetary History. cases the new metal had under bimetallism been absorbed without great effect on the ratio, and so it would have been after 1873, if silver had not been demonetized. (2) The gold advocate ascribed falling prices to changes in methods of production and transportation. Further, prices ought to fall since the real cost of production measured in labor has fallen. The price of labor meas- ured in gold has not fallen, and this is the fairest test of the stability of value of money. The increase in prices which would follow remonetization of silver would work great injustice to the thrifty creditor class, including all who have small savings. It would decrease the real value of all fixed incomes. It would decrease the real incomes of laborers, since prices would rise more rapidly than would wages. (3) The silver advocate denied that changes in methods of production and transportation explained the fall in prices, since equally revolutionary changes in methods of production between 1849 and 1873 were accompanied by rising prices. He insisted that the value of labor ought to increase, since the results of progress should accrue to the producing classes and not to those having incomes from accumulated wealth. This desirable con- summation would result from bimetallism. d. The possibility of maintaining a bimetallic standard at 16 to I. (i) The extreme gold monometallist contended that bi- metallism was always a failure, and pointed to the ex- perience of the United States, of France and of the Latin Union. He contended that a great flood of silver would drive all gold out of circulation and result in metallic inflation and depreciation. American Monetary History. 39 (2) The silver advocate contended that bimetallism was not impossible even for the United States alone, since the amount of free silver was so slight that it could be absorbed into the circulation of the United States with- out displacing all the gold. Even if it did, this would not be so serious a result as the continuance of the exist- ing low prices. (3) The international bimetallist agreed with the advocate of free coinage of silver as to the evils of gold mono- metallism. He contended that the experience of the United States was of no significance as to the possibiHty of bimetallism by international agreement. Further, he claimed that for seventy years bimetallism in France was not only successful, but rendered the world a great ser- vice by preventing the serious effects on the ratio of value- which would otherwise have resulted from revo- lutionary changes in the relative ^production of the precious metals. Arguing vigorously for the possibility and necessity of international bimetallism, he agreed with the gold monometallist that free coinage of silver by the United States alone would result in silver monometallism at a depreciated standard with disastrous consequences. (4) The contention of the international bimetallist is that, if a number of leading nations agree to coin both metals freely at a common ratio, any change in the ratio of value will cause such an increased demand for the cheaper and decreased demand for the dearer that the market ratio cannot long vary from the legal ratio. Tohnson, Bloney and Currency, chs. n, 12; Hadley, Economics, vv 208-2^1 ; Bullock, Introduction, §§ 191199. Taussig, Silver Situation in the United States, Part II; Walker, International Bimetallism; Political Economy, PP-^ 463-4.75 ; Scott ^/.«CV ««rf Banking, chs. 14, 15; Nicholson, Principles, Bk. Ill, ch. ib. Money and Monetary Problems, pp. 246 311. 40 American Monetary History. 8. Establishment of the Gold Standard. For a time after the election of 1896 the advocates of silver continued their agitation and in the Senate won some slight victories. After 1898 the enormous increase in gold pro- duction weakened the argument for free coinage of silver so far as it was based on the insufficiency of gold. Enormous crops and a favorable condition of industry and commerce removed much of the general economic discontent which was the real basis of the silver movement. Rapidly rising prices due to these conditions undermined the free coinage argument so far as it depended on falling prices. In 1900 Congress passed a law which provided that gold is the standard of value and making it the duty of the Secretary of the Treasury to maintain all other monies at a parity with it ; that all United States notes shall be redeemed in gold and that a reserve fund of $150,000,000 shall be maintained for this purpose; that the Treasury notes of 1890 shall be retired and that silver certificates shall be mainly in small denominations. Dewey, Financial History of the United States, § 198: Johnson, Money and Currency, pp. 360-363; Hepburn, Contest for Sound Money, ch. 18. CHAPTER XII. AMERICAN BANKING HISTORY. I. The First and Second United States Banks. a. The first Bank of the United States was chartered by the federal government in 179 1. Its capital was ^10,000,000, of which the government furnished one-fifth. Its notes were not specially protected, but circulated without depreciation. The Bank served a useful purpose as a regulator of the existing state bank circulation. It acted as the government's financial agent. Because of the opposition of the state banks, its charter was not renewed when it expired in 181 1. b. The second Bank of the United States was chartered for twenty years in 1816. Its capital was ^35,000,000, of which the government furnished one-fifth. Its notes had no special protection. It acted as the government's financial agent. It became involved in politics and its charter was not renewed. Neither of these banks is of any significance from the standpoint of monetary principles, but they had great importance in connection with the political history of the time. They rendered good service in connection with the general finances of the government and the country. Ti&^&y, Financial History of the United States, §§ 43, 58, 67, 68, 70, 71, 86-88; on pp. 97, 118, 143, 197 in Dewey will be found extensive references on this subject ; White, Money and Banking, pp. 278-314; Hepburn, Contest for Sound Money, pp. 62-73, 81-112. 2. State Banking Before the Civil War. a. Until the establishment of the National Banking System during the Civil War, a large part of the actual monetary circulation of the country consisted of notes issued by banks 42 American Banking History. chartered by the States. The laws under Avhich these banks were formed varied greatly. In some states there were almost no restrictions upon the formation and management of banks. b. This lack of uniformity and wise regulation, behind which was an unintelligent and apathetic public opinion, resulted in all sorts of banking abuses. Capital was fre- quently not paid up, or was paid by personal notes, or by money borrowed of the bank itself. Note issues were often excessive in proportion to capital, were not protected by sufficient reserve or, in some cases, by any at all. Note re- demption was practically impossible in the case of most notes since they circulated far from the home of the issuing bank, since the banks were intentionally located in inaccessible places, since public opinion was hostile to redemption — especially when demanded by non-residents ; and since legal hindrances were placed in the way of such redemption. The lack of uni- formity of the notes and the crudeness of workmanship made issuing of spurious notes, counterfeiting and altering very general. The notes of good banks were quickly returned for redemption, leaving a great mass of more or less depreciated circulation. While banks and business men were able to some extent to protect themselves by bank note " Detectors " and " Reporters," the ordinary individual constantly suffered loss. c. These evils led, especially in the older states, to various attempts to rectify them. The Suffolk Bank of Boston brought New England bank notes up to par by becoming a kind of clearing house for the redemption of notes. Country- banks were individually obliged to keep a fund with the Suffolk for the redemption of their notes. Actually the notes of each bank were largely offset by the notes of other banks which it forwarded to the Suffolk for redemption. The banks that tried to resist this method of redemption were called upon to redeem their notes in specie at their own counters. This system worked successfully from 1818 to 1865. American Banking History. 43 d. Another attempt at improvement was the New York state safety fund system which was introduced in 1829. Each bank was compelled to pay to the State one-half of one per cent, of its capital annually until a fund of three per cent, of its capital should be accumulated. This fund was to be used to make up deficiency of assets of any bank that failed and was, after such impairment, to be restored by further assess- ments upon the banks. Although the experience was not satisfactory, it showed that this method of protecting note holders would succeed if issues were registered to prevent over-issue ; if notes were made a first lien on assets ; if the safety fund was used only for the redemption of circulating notes; if, as soon as a bank failed, its notes might be pre- sented for redemption. e. Still another method was the special pledge system tried with success in New York and unsuccessfully in other states. Experience taught that this system would be successful only if the best public bonds were accepted as securities excluding mortgages and other kinds of securities ; and if the notes were registered to prevent over-issue. White, Money and Banking, pp. 315-356; Dewey, Financial History of the United States, §§ 66, 69; Hepburn, Xbra^'^i-^f for Sound Money, pp. 89-93, 131-139. 3. The United States National Banic System. a. During the early days of the Civil War, the Secretary of the Treasury, Salmon P. Chase, recommended that the national government take charge of the bank circulation of the country by chartering banks which could issue notes secured by United States bonds. His main motive was to find a market for these bonds. The law establishing this system was passed in 1863, but thoroughly revised in 1864. It has since been amended frequently and at times in im- portant respects. In 1866 state bank notes were forced from circulation by a ten per cent tax. 44 American Banking History. b. The Comptroller of the Currency has general charge of the United States banks, having authority to charter, to examine, to require statements of condition and in other ways to exercise general supervision. c. The capital, which must be paid promptly in cash, varies according to the size of the place. The nimimum for a town under 3,000 population is ^25,000 ; for places having between 3,000 and 6,000, ^50,000 ; between 6,000 and 50,000, $100,000 ; over 50,000, $200,000. d The powers of these banks are limited to a strict banking business. They are not allowed to own real estate permanently except a banking house. They are subject to various restrictions designed to secure safety. e. The reserve must consist of lawful money. In cer- tain cities designated as reserve cities a bank's reserve must equal 25^ of its deposits. All other banks must keep a re- serve of 15^, of which three-fifths may be deposited in banks in reserve cities. A reserve city bank may keep one-half of its reserve on deposit in banks in certain designated central reserve cities. A 5^ fund deposited at Washington for re- demption of notes may be counted as part of the reserve. When the reserve is below the legal limit, loans may not be extended until it is made good. /. A bank may issue notes equal to the par value of bonds deposited by it with the Comptroller of the Currency, but they may not exceed in amount the market value of the bonds nor the capital stock paid in. Five per cent, of its circulation must be kept by each bank on deposit with the Comptroller for redemption of its notes. The notes are legal tender in all financial relations between the United States and an individual except in payment of interest on the debt of the United States and in payment of import duties. They are legal tender between national banks, but not other- American Banking History. 45 wise. No notes of less than five dollars may be issued and only one-third of a bank's circulation maybe in that denomi- nation. The banks pay a small tax on circulation. Not more than ^3,000,000 of circulation may be retired in one month. g. The defects of the National Bank system are mainly connected with its circulation. Although absolutely safe, the bank currency is not elastic. The amount of circulation needed varies greatly at different times of the year largely because of what is required for "moving the crops." A good bank currency should be the element of the circulation capable of expansion and contraction. The bank notes as now issued cannot increase or decrease quickly. Many propo- sitions for a change of the note system have been made. At this time (1907) there is strong feeling in favor of allowing banks to issue part of their circulation without bond security but subject to a tax increasing as the amount of such circula- tion increases. The proceeds of this tax, it is further sug- gested, could be used as a fund for payment of the notes of insolvent banks. Dewey, Financial History of the United States, §§ 138, 139, 163-165, 174, 200, 209; White, Money and Banking, pp. 372-384 ; Dunbar, Theory and History of Banking, ch. ii; Seager, Intro- duction, pp. 338-342; Bullock, Introduction, § 185; Hepburn, Contest for Sound Money , pp. 320-362. CHAPTER XIII. INTERNATIONAL EXCHANGE. a. Most international payments are settled by the use of credit instruments essentially in the same manner in which domestic payments are made. A in London owes X in New York ^1,000, and Y in New York owes B in London ;g 1,000. B draws a bill of exchange on Y for $1,000. A buys it of B and sends it to X who presents it to Y and collects the money. The two debts have been paid without the move- ment of money. b. Such bills when drawn upon important financial centers, and pre-eminently when drawn upon London, may by endorse- ment pass from country to country forming an international currency. A in London owes M in Tokio ; P in Tokio owes X in New York ; Y in New York owes B in London. M makes a draft on A and sells it to P, who by it settles his debt to X. X sells it to Y, who by it pays B, who collects the money from A. c. Bills of exchange are commercial or documentary if drawn against exports of merchandise ; financial or bankers^ if drawn by bankers. They are " sight " if payable on presentation ; and "time," if payable a certain length of time after date. The time bill will be lower in price than the sight bill by the interest for the ensuing period. d. The " par of exchange " between two countries is the expression of the value of the standard unit coin of one country in terms of the standard unit coin of the other. Since the English sovereign contains 4.866-|- as much gold as a gold International Exchange. 47 dollar, the par of exchange between England and the United States is one pound sterling = $4,866-]-. e. Exchange between two countries is said to be at par when the amount of specie given for a bill of exchange in one country is exactly equal to what will be received for it in the other. When the obligations of a country are exactly the same as its claims upon foreign countries, exchange in that country will tend toward par, since the supply of bills at par will then exactly correspond with the demand at par. / Since trade conditions are constantly changing, ex- change is rarely at par. If a country's obligations are greater than its claims, the demand for bills of exchange (at par) will be greater than the supply and they will sell at that premium which will cause an equilibrium. If its obligations are less than its claims, then correspondingly bills of exchange will be at a discount. g. The limits of these fluctuations are found in the cost of importing or exporting specie. The premium on bills of exchange cannot ordinarily go above the cost of exporting specie nor below the cost of importing it. These limits are called the "gold points." In time of great monetary strin- gency such normal limits may be passed. h. A country's balance of credit or debit (upon which the price of foreign exchange depends) cannot be ascertained by examining solely exports and imports of commodities. There must also be taken into account securities bought and sold, expenses of travellers, ocean freights, interest on obligations of one country held in others, commissions and any other items affecting balance of liability. i. Business is done largely upon credit ; credit depends largely on specie reserve ; specie reserve is affected by gold imports or exports ; such movements of specie depend upon the price of foreign exchange. The rate of foreign exchange. 48 International Exchange. then, has great significance to merchants, manufacturers, bankers and speculators. Seligman, Prijiciples, § 201; Seager, Introduction, §g 205-209; Bullock, Introduction, pp. 268 272; 339-344; Fetter, Principles, pp. 485-488; Johnson, Money and Currency, pp. 85-102; Andrews, Institutes, %% 95, 96; Nicholson, Principles, Bk. IIl.,ch. 26; Had- ley, Econoniics, pp. 238-241; Scott, Money and Banking, ch. 12; Mill, Principles, Bk. III., ch. 20. CHAPTER XIV. ECONOMIC NATURE AND FUNCTION OF SPECULATION. a. Speculation in one form or another is a prominent fact in present economic life. To it are attributed many evils such as that it is purely gambling ; that it causes artificial prices and corners ; that it injures producers and investors ; and that the gains of speculators are mere extortion. b. Gambling is economically disadvantageous. This is not because the utility of the gain in case of success is less than that of the possible loss, as President Hadley says, for this is not true if the odds are favorable ; but because gambling discourages industry and social productiveness. ,;. Insurance, on the other hand, encourages industry and promotes social welfare. d. Nearly all modern business involves speculation, since while goods are in process of production or sale, changes in price may result in great gain or loss. The manufacturer, the wholesale or retail merchant, the builder, the farmer, are speculators whether they will or not. e. To some extent these risks may be avoided by con- tracts for future delivery. At the inception of the work the builder or the manufacturer may contract for future delivery of labor or material. The manufacturer may contract to sell his goods and to buy his materials so as to avoid many uncertainties. Such arrangements, however, do not do away with speculation, but transfer it to a class who specialize as speculators. -nch a class to succeed must be skilled forecasters of futuic mand and supply. If they estimate that a certain commod-*'^' will in the future be lower in price than now, all 50 Economic Nature and Function of Speculation. things considered, they sell for future delivery, confident that they will buy for even less. If they believe the price will be higher they buy for future delivery, confident that the future price will yield a profit. In each case their action tends to secure a greater uniformity of price over a period than would otherwise be found. There results a survival of a class of skillful speculators who estimate the course of prices with great accuracy. g. The motive of such speculators is to make a personal gain, and the method is practically a wager. Bu. there results a great social advantage. By the action of speculators supply tends to be equalized in time and space so that prices tend to be steadier. This results in securing the greatest possible social utility from such supply. h. There seems to be no easy method of distinguishing between good and bad speculation. Both use the same com- modities and the same methods. Both use largely borrowed money. False reports, corners, manipulation and anything which tends to fix prices artificially rather than to ascertain what they naturally tend to be, interferes with the equaliza- tion of supply over a given time, and consequently to result in an economic loss to the community. Further, the ease with which the business of speculation may be taken up entices many who overestimate their capacit\ in this direc- tion. That this results in economic loss is true, but specu- lation is, in this respect, different from other businesses only in degree. Further, such mistaken speculators are rapidly eliminated from business. /. It seems clear that reason and experience are against attempts to regulate speculation by prohibiting the sale of commodities for future delivery. Hadley, Economics, chap. 4 ; Seligman, Principles pp. 359- 366,369; Seager, Introduction, pp. 174-T77; Fetter, Fri'^tiples, chap. 36 ; Emery, Speculation on the Stock and Produce Ex- changes of the United States. CHAPTER XV. PROTECTION AND FREE TRADE. I. Definition and Discrimination. a. Protection means "the policy of encouraging and developing home industries by means either of bounties paid to home producers or of duties imposed upon goods imported from abroad." b. Free trade means trade carried on in such way that no protection is afforded the home producer. Duties on com- modities not produced in the country are consistent with free trade. So are duties upon foreign commodities which are also produced in the country, if they are accompanied by equivalent excises. c. A tariff levied mainly for revenue may give incidental protection. A protective tariff may produce great revenue. d. An increase of the rate of the protective duty may lower revenue by greatly decreasing importations. e. The taxation of foreign goods which cannot be pro- duced at home encourages home industries theoretically, since to some extent it results in substitution in consumption of similar home-produced articles. Bullock, Introduction, §§ 238, 239. 2. History of Governmental Relations to Foreign Trade. a. Under Mercantilism (15th, i6th and 17th centuries) governments restricted and aided trade by many methods and in nearly all lines. Import and export duties, bounties, 52 Protection and Free Trade. navigation laws, prohibition were all used to develop a nation's trade and manufactures. This was largely, however, under the influence of the balance of trade theory. h. The general movement for freedom in the eighteenth century included a demand for greater freedom of interna- tional trade. Adam Smith vigorously attacked the Mercan- tilist system, set forth the advantages of free trade and became the recognized spokesman of this policy. His influence was far-reaching, not only upon economists, but also upon statesmen. c. Although William Pitt, the younger, revealed the influ- ence of Adam Smith, the first actual progress in England toward free trade was accomplished by Huskisson between 1823 and 1828. In 1837 the famous anti-corn law agitation began, and, under the leadership of Richard Cobden and John Bright, continued until the repeal of the Corn laws in 1846. The free trade policy was gradually extended until in 1869 the present absolutely non-protective system was intro- duced. In the last few years a movement for protection has gained ground. Mr. Balfour, assenting to the superiority of free trade in general, doubted its wisdom for England in the midst of a protectionist world, and favored protection as a retaliatory measure and as a basis for reciprocity. Mr. Chamberlain, further, favored protection with reciprocal discriminating tariff agreements with the colonies in order to strengthen the Empire. But in the elections of 1906 England declared emphatically for continuation of free trade. d. The tariff policy of the United States. (i) The first national revenue system included a tariff law which, mainly designed to secure revenue, was moder- ately protective. Such was our national policy for some years. (2) From 1807 to 181 5 the Embargo, the Non-intercourse Act and war cut off foreign commerce, turned the de- Protection and Free Trade. 53 mand for certain products toward the home producer and acted as extreme protection. When these condi- tions passed away the protected home producer, suddenly- exposed to the full force of foreign competition, secured in 1816 the first distinctly protective tariff. (3) Laws passed in 1832 and 1833 provided for reduction and then a gradual decrease of duties. Although in- creased duties were imposed in 1842, the act of 1846 again provided for low rates. So satisfactory were the results of low tariff that in 1857 a further reduction was made. (4) For revenue reasons high duties were imposed during the Civil War. Incidentally, these duties involved heavy protection. Industries that thus came to be de- dependent on protection were unwilling to dispense with it, when after the War the urgent need of revenues there- from had passed away. The political weakness of the South (where low tariff views had prevailed) and the growing political strength of the industrial regions favored a continuation of the high war tariff. (5) At times agitation for revision of the tariff was active, but the changes made were insignificant. President Cleveland's famous tariff message in 1887 made the tariff again a live political issue, but a Republican Senate prevented change. On the contrary, a Republican vic- tory in the elections contested over this question, led to the passage of the very highly protective McKinley act in 1890. (6) The popular discontent with this act soon placed the Democrats in full control, and in 1894 the Wilson- Gorman act was passed and became law without the President's signature. This measure (a compromise and badly devised) was highly protective and did not fairly represent the policy of tariff-reduction. Unsatisfactory to nearly all, it was short lived. 54 Protection and Free Trade. (7) In 1897 the Dingley act introduced the most highly- protective system the country has known. It is still in force (1907). There has been even among protec- tionists some reaction against extreme protection. Mr. Blaine and President McKinley declared for reciprocity. Because of local industrial conditions or because of antipathy to the protected trusts, the revisionist tendency has at times been marked. e. The general expectation in the middle of the nine- teenth century that the contemporary tendency toward free trade would continue, was mistaken. France, Germany, Italy, and, in fact, practically all countries maintain high protection. Seligman, Principles, % 202; Dewey, Fi^iancial History of the United States, %% 35. 36, 73, 78-84, 102. 107. 113, 114, 119, 127, 128, 167, 180, 181, 187, 192, 196; Gide, Principles, pp. 310-318; Pal- grave, Dictionary of Political Economy, vol. II, p. 148, article Free Trade, Modern History of; The Americana article on Free Trade. 3. Some General Controversial Considerations. a. There is much fallacious argument on both sides based on alleged results. Post ergo propter. Countries have pros- pered under each system. The United States was very flourishing under low tariff from 1846 to 1861, and under high tariff from 1897 to 1907. Panics occurred under low tariff in 1847 and 1857, and under high tariff in 1873 and 1884-6. b. Many forces affect a country's prosperity — natural re- sources, human efficiency, education, wars, forms of social organization. It is, then, difficult to trace the exact in- fluence of free trade or protection. The results of each are undoubtedly often much exaggerated. c. The free trader in asserting, as he sometimes does, that the government cannot tax one for the benefit of another, misrepresents the protectionist attitude, for protection claims Protection and Free Trade. 55 that it benefits all. The free trader, frequently, also demands a more extreme application of latssez /aire than is in har- mony with modern thought and practice as to the relation of government to industry. d. On the other hand, the actual establishment of a new industry by protection does not necessarily justify it. Almost any industry might be established in almost any country by protection ; but it might be at too great cost. e. We cannot settle this controversy by regarding the consumer alone as does the free trader often ; nor by regard- ing the effect on a few producers as does the protectionist. For references see end of the chapter. 4. The Argument for Protection. a. The "balance of trade " argument emphasizes the de- sirability of securing a large share of the precious metals by discouraging imports and encouraging exports of commo- dities. A favorable balance of trade will result in an import of money, and thus a nation will get wealthy. Intelligent protectionists no longer use this argument. b. For a long period the ' ' home market ' ' argument was influential in the United States. It was " thought to reconcile the interests of the agricultural South and West with those of the manufacturing North. It rested upon the proposition that the prosperity of the American farmer depends upon a regular and constant market for his products, and that such a market is to be obtained only by building up manufacturing centers within the country." (Seager. ) c. The " infant industry " argument asserts that a country well fitted in natural resources and in the character of its people to carry on a certain industry, may not be able to establish it without protection because of the competition of other nations in which the industry has long been carried on. A temporary burden upon the consumer is justified because 56 Protection and Free Trade. of the later results. Competition within the country will eventually reduce prices. Friedrich List, a German Economist (19th century), asserted that the industrial development of a country includes five stages ; hunting and fishing, pastoral life, agriculture, manufacture for home supply, manufacture for export. In the case of some nations this evolution is checked in the transition from the agricultural stage by competition of nations that have progressed further. Hence, said List, temporary protection is necessary to enable a country to pass from the agricultural to the manufacturing stage. d. The " wages argument " for protection has taken two phases in the United States. Early in our history, protection was said to be necessary to overcome the disadvantage of the American manufacturer due to the high wages he must pay. Later it was asserted that wages had become high because of protection. Now the two are advanced together ; wages are high because of protection and we must continue protection in order to overcome the industrial disadvantage of high cost due to high wages. e. The advantages of "diversified industries" have re- cently been emphasized. A well-rounded economic develop- ment with different kinds of occupations is necessary to social progress. Without protection a country may be one- sided in its development with an undue tendency toward agriculture or manufacturing, resulting possibly in early exhaustion of some kinds of natural resources. Diversified industries, says the protectionist, securing "a more efiicient utilization of labor and capital and a help to enterprise, will result in higher wages as well as greater profits, a better standard of life for the workman and a more prosperous condi- tion for the manufacturer." /. It is sometimes said that by protection a country may make foreigners pay its taxes. The imposition of the Protection and Free Trade. 57 pro-protective duty will compel the foreign manufacturer to reduce his price in order to retain his market in the taxing country. With slight or even no increase in price to the domestic consumer, the government gets its revenues at the expense of the foreigner. g. In order to be independent of other nations in time of war a country should establish by protection those indus- tries producing necessities of existence and war materials. For references see end of the chapter. 5. The Argument for Free Trade. a. Against the ' ' balance of trade ' ' argument it is said that wealth does not consist of money only; that an excessive stock of money, if it could be secured in this way, would so affect prices as to stimulate imports and discourage exports ; that imports must in the long run pay for exports; and that international movements of money depend not upon relation of exports of commodities to imports of commodities, but of total credits to total liabilities. d. Against the '' home market " argument it is claimed that the home market is no steadier than the foreign ; that the development of transportation has decreased the cost of moving goods ; and that the need of the United States at present is foreign markets. c. The ' ' infant industry ' ' argument is held to have little weight now, since we are able to compete with the world in nearly every line of manufacture and have passed from an agricultural economy. Further, it is said that "infant in- dustries ' ' never are willing to dispense with that aid which was designed to be temporary ; that while admittedly pro- tection should be granted only to those industries which are quite sure to succeed ultimately, this aid is applied generally and without discrimination ; and that the protection of agri- cultural industries is not consistent with this theory. More- 58 Protection and Free Trade. over, as evidence that industries can and do develope with- out protection, emphasis is placed on the development of manufactures in the newer parts of the United States, in spite of the competition of the older manufacturing regions within the country. d. The free trader asserts that wages are fixed by produc- tivity and little dependent upon the tariff. He calls attention to the fact that wages in the United States, because of the high level of productivity, have always been high in unprotected as well as in protected industries and that protected laborers are itvi as compared with the unprotected. High wages do not necessarily mean high cost, but frequently low cost. Com- parative costs rather than comparative wages determine ability of manufacturers to compete with those of other nations. While the withdrawal of protection might destroy certain industries, the level of general wages would not fall after readjustment had taken place. Wages are low in Russia and Germany, although these countries are strongly protectionist. Further the free trader asserts that protection, by interfering with the most natural and efficient production, actually tends to make wages lower than they would otherwise be. e. The free trader, while not denying that diversification of industries is desirable, contends that it may be secured at too great cost ; that much diversification is inevitable in every country ; that in the United States we cannot fail to have great diversification because of the variety of climate and resources ; and that infinite wisdom and foresight are neces- sary to secure a proper diversification artificially. Natural development is safer. f. To make the foreigner pay our taxes is unethical ; and is possible only in a few cases. Moreover the foreigner can, if this argument be sound, make us pay his taxes. Protection and Free Trade. 59 g-. The military argument may have some weight for other countries, but little for the United States, because we produce nearly all necessaries. /i. More positively, the free trader asserts that freedom of international trade, like freedom of internal trade, increases production of wealth by bringing about the " most efficient utilization of economic forces. " " The freer the conditions of exchange the more highly will the division of labor be developed. Difference in the productive capacities of dif- ferent countries fit some to produce some things, others, others. If free trade is permitted .... the conse- quence will be a larger joint produce and a larger share of wealth for each country." (Seager.) t. Protection, if effective, increases prices, burdens the consumer and is class legislation. J. By increasing the cost of raw material protection in- jures many manufacturing industries. This argument has been advanced vigorously in some parts of the United States recently. Our export trade is injured by taxing raw materials. Jk. Protection leads to the exhaustion of raw materials. /. Protection involves business uncertainty. m. Protection leads to political corruption, undue in- fluence from protected interests on political parties and legis- lation, and log-rolling. Campaign funds are supplied by pro- tected parties. n. While theoretically there is much to be said for pro- tection (especially in connection with nascent industries) if designed by a judicious, disinterested and exceedingly wise authority, actual conditions and practical experience condemn it. For references see end of the chapter. 6. Conclusion. a. With much strength and much weakness in the argu- ment on each side it is not strange that both popular and 6o Protection and Free Trade. expert opinion should be divided. Each must form his own conclusions. b. However, the one who accepts the conclusions of the free trader must remember that, in the United States, our whole industrial and commercial system is adjusted to pro- tection. Progress toward free trade, if it be desirable, must be gradual, discriminating and mindful of actual conditions. c. On the other hand the protectionist should remember that there is little argumentative support for continuous and universal protection. Hence no particular tariff is permanent and sacred. Changing conditions require frequent revision. Seligman, Prhiciples, §§ 203-205; Seager, l7itroduction , §§ 210- 216; and his article on Protection in International Encyclopcedia; Bullock, Introduction, pp. 355-373; Hadley, Economics, §§ 466- 488; Fetter, Principles, ch. 51; Gide, Principles -p-^. 318-346; An- drews, Institutes, %% 56-60; Mill, Principles, Bk. V., ch. x. , § i. LEAp'08 (Duttines oi (gconomics A SYLLABUS FOR INTRODUCTORY STUDY by HERBERT ELMER MILLS, Ph. D. Part (Dm POUGHKEEPSIE, NEW YOKK Nineteen Hundred and Six ■■y^ IK" "^ w " -f .tf» 0» Sr ^' ^ ^^3...^"^ -^^r- rjf >,'5*<9f;>^«M| utlincsoi (Economics A SYLLABUS FOR INTKODUCTORY STUDY by HERBERT ELMER MILLS, Ph. D, Part Ctt30 POUGHKEEPSIE, NEW YORK Nineteen Hyndred and seven