S held 071 d' Co77fpa7iy's Text-!Books, IlilVs Elements of Mhetoric and Comjiosition By D. J. Hill, A.M., President Lewisburg University, author of tlie Science of Rhetoric. Beginning with the selection of a theme, this book conducts the learner through every process of composition, including the accumulation of material, its arrangement, the choice of words, the construction of sentences, the variation of expression, the use of figures, the formation of paragraphs, the preparation of manuscript, and the criticism of the completed composition. MilVs Science of Mhetoric An introduction to the Laws of Effective Discourse. By D. J. Hill, A.M., President of the University at Lewisburg. 13mo, 300 pages. This is a thoroughly scientific work on Rhetoric for advanced classes. Intellecti By Fb sity. The JElen By Fr. sity, and 12mo, clo LIBRARY OF CONGRESS. UNITED STATES OF AMERICA. es Univer- i Univer- ,hou£and. Elements . -.-^- ^ "~~~" — " By Francis Wayland, D.D., late President of Brown Uni- versity. 12mo, cloth, 403 pages. Recast by Aaron L. Chapin, D.D., President of Beloit College. No text-book on the subject has gained such general accept- ance, and been so extensively and continuously used, as Dr. Wayland's. Dr. Chapin has had chiefly in mind the icants of the class-room, as suggested by an experience of many years. His aim has been to give in full and proportioned, yet' clear and compact statement, the elements of this important branch of science, in their latest aspects and applications. Sheldo7i d' Co7npai7y's Text-Sooks. Avery- syNatural Philosophy, 460 pages. By Elroy M. AvEKY, A. M. The book is an earnest and eminently successful attempt to present the facts of the Science in a logi« .'^' FIRST PRINCIPLES \ POLITICAL ECO]SrOMT. One volume. 16ino. 225 pages. Concisely presented for High Schools and Academies, by Aabon L. Chapin, D.D., President of Beloit College. II. WAYLAND'S ELEMENTS OF POLITICAL ECO]SrOMY. Recast, and revised by Aakon L. Chapin, President of Beloit College. FOR COLLEGE USE. One volume. 12mo. 425 pages. Copyright, 1879, By SHELDON & CO. Electrotyped by Rand, Avery, 6^ Co., Boston. PEEFACE. From several quarters, there came a call for a concise compend of the principles of Political Economy, which could be used as a text-book for advanced classes in high schools and academies. In this little book, the author has attempted to respond to that call. He has not tried to make a book for children, nor to make the science easy for youth of more maturity; but he has endeavored simply and clearly, in as few words as possi- ble, to present the subject for the study of persons who have learned something of the power of language, and have been trained to think and reason for themselves. The '* Exercises " thrown in all along are not intended to furnish teachers with questions on the text. Every one fit to teach this and kindred subjects will frame his; own questions best. But they are designed, like the- problems in arithmetic or algebra, to suggest practical applications of the principles and topics of discussion which will introduce some diversity of opinions, and extend the range of the subject somewhat beyond the limits of the text-book. The book is a condensed presentation of the matter iii iv PREFACE. contained in the larger work recently issued as a modifi- cation of Wayland's Elements of Political Economy ; and, for a fuller treatment of the topics noticed, reference is made to that book. It is desirable that every teacher should also have at hand for reference one or more other ■works of prominent writers, such as those of Adam Smith, McCulloch, Mill, Fawcett, Thornton, and Jevons, of England ; Roscher of Germany (an excellent transla- tion of which has recently appeared) ; and those of Bowen, Perry, Carey, Thompson, Bascom, A. Walker, F. A. Walker, Sumner, and D. A. Wells, of our own country. Generally the author's aim has been to give a clear statement of principles, avoiding the advocacy of one side or the other of disputed questions. In the last chapter, however, positive opinions are expressed on the issue between protection and free trade, partly as an example of the application of principles to pending questions, and partly to indicate the present strong drift of both philosophical and practical economists on that question. If it shall serve to elicit opposite views for full discussion in the class-room, the author's aim will be best accomplished; for it is his earnest hope that this introduction of this important branch of science to the study of our schools may tend to a more intelligent apprehension of economic laws on the part of our peo- ple generally. Beloit CoLiiEGE, Jan. 1, 1880. CONTEIsTTS. INTRODUCTION. DEFINITIONS AND DIVISIONS. PAGE Political Economy defined 6 Fundamental truths. Wealth defined 6 Sources of wealth, original, secondary. How increased. Value defined 7 Its maximum and minimum limits. Divisions of the Science 8 exebgises 10 PART I. PRODUCTION. Threefold Subdivision 11 CHAPTER I. section i. — of labor. Labor defined 11 Kinds of labor : 1. Physical labor. 2. Mentallabor. What physical labor does. What mental labor does directly : 1. Discovery. 2. Inven- tion. 3. Oversight. Mental labor indirectly concerned in production. Changes effected by Labor 13 1. Transmutation. 2. Transformation. 3. Transportation. Exercises 15 V VI CONTENTS. section ii. — means for increasing the effect- iveness of labor. Agents of Nature most available .... 16 Animal power, sunlight, gravitation, wind, steam, gunpow- der, &c., electricity and galvanism, chemical forces. Agents fob directing Power 17 How Natural Agents make Labor Effective . . 18 Division of Labor defined . . . ... .19 It implies analysis and distribution of parts. Advantages of Division of Labor .... 20 1. Shortens apprenticeship. 2. Saves time. 3. Increases dexterity. 4. Suggests inventions. 6. Employs diverse capacities. Exercises . . . . 21 SECTION ni. — labor IN GREAT MANUFACTURING establishments. "What such Establishments require .... 23 1. Large capital. 2. Many laborers. 3. Rapid production. 4. "Wide markets. 5. Executive ability in superintend- ence ; in finances. Why not set up at once in a New Country? . . 24 How they promote the General "Welfare . . 25 1. They multiply and cheapen products. 2. Increase variety of gratifications. 3. Favor certain employment for laborers. 4. Balance diff'erent branches of industry. Evils incident to Division of Labor .... 26 1. Endangers physical health. 2. Dwarfs minds. 3. Im- pairs independence. 4. Risk of sweeping disaster. 5. Fosters jealousies and antagonisms. Exercises ,28 CHAPTER II. of capital. Capital defined . .30 Mistakes corrected : 1. Capital not synonymous with wealth. 2. Nor with money. 3. Does not include human quali- ties. Origin of Capital, the Fruit of Labor saved . .32 Forms of Capital 33 1. Implements and machinery. 2. Materials. 3. Means of subsistence. 4. Finished products. Consumption OF Capital .34 Destruction passing on all its forms. CONTENTS. Vii Productive and Unproductive Capital ... 36 Fixed and Circulating Capital 36 Exercises 37 CHAPTER III. the co-operation of labor and capital. Labor and Capital Partners 39 Most harmoniously united in one person. Why this cannot be Universal 39 1. Capital tends to increase. 2. Men's tastes differ. 3. Large establishments necessary to some forms of production. Conditions which favor the Union of Capital and Labor 41 1. General distribution of capital. 2. Ratio of capital to number of laborers. 3. Assurance of just reward to each. This depends on, a, division of property; b, just laws ; c, freedom to both capital and labor. 4. Intellectual and moral culture. Exercises 43 PART n. CONSUMPTION. The Nature of Consumption 45 Kinds of Consumption 46 CHAPTER I. involuntary consumption. Natural Consumption 46 Accidental Consumption 47 What insurance does. Immaterial and Notional Consumption ... 48 Exercises 48 CHAPTER II. VOLUNTARY CONSUMPTION. Two Objects, Reprodu(3tion, Gratification . . 50 section i. — consumption for reproduction. The Rule of Economy 51 For capital; a. Use no more than necessary, b. Use the cheapest possible, c, Exhaust all utilities. For labor: a, Use no more than is needed, b, Use labor adapted to the purpose, c, See that the labor ia per- formtid. vm CONTENTS. Cakeful Study of Processes essential to Economy, 53 Restrictions on either Labor or Capital against Economy 53 Economy promotes the General Welfare ... 53 Exercises 54 SECTION II. — CONSUMPTION FOB GRATIFICATION. Kinds of Gratification 55 1. Those which preserve health and life. 2. Those which delight the senses. 3. Intellectual gratifications. 4. So- cial gratifications. 5. Moral gratifications. The Rule of Economy applicable to all ... 57 a, Consume only the needed amount, b, Make consumption perfect, c, Select carefully the gratifications. The Reciprocal Relation of Consumption and Pro- duction 58 Extreme frugality and extreme luxury to be avoided. Exercises 60 CHAPTER III. public consumption. The Nature of Public Consumption . . * ,61 The Purposes to which it is applied .... 62 1. For support of government. 2. For public improvements. 3. To advance science, and difi'use intelligence. 4. For popular education. 5. For care of afflicted classes. 6. To relieve poverty. 7. For a nation's defence. Two Rules of Economy in Public Consumption . 65 Exercises 65 PART III. DISTRIBUTION. Distribution defined .67 The Parties to be recognized ..... 67 Laborers, owners of capital, the government. Subdivisions 68 CHAPTER I. the remuneration of labor. Terms used, "Wages, Salaries, Commissions, Fees . 69 section i. — nominal and real wages. The Distinction between Nominal and Real Wages, 70 CONTENTS. IX Causes of the Difference 70 1. Money fluctuations. 2. Forms of payment. 3. Regular- ity of employment. 4. Duration of power to labor. section ii. — the efficiency of labor. The Distinction between Nominal and Real Cost OP Labor 72 Causes of Difference of Efficiency .... 72 1. Race-qualities. 2. Diet and clothing. 3. Personal habits. 4. Degree of intelligence. 5. Technical education. 6. Cheerfulness. Exercises 74 SECTION III. — considerations WHICH DETER- mine the rate of wages. "Wages imply a Contract 76 Considerations which determine the Rate . . 76 1. Cost of living, necessary wages. 2. Value of the prod- ucts, maximum limit. 3. Custom. 4. Competition, most influential of all. 5. The Golden Rule. Combinations to resist Competition .... 80 Strikes, trades-unions, combinations of employers. Exercises 84 section iv. — causes of variation in the remuneration of labor. Circumstances affecting Competition .... 85 1. Ease or diflBculty of the employment. 2. Skill required. 3. Trust involved. 4. Constancy of employment. 5. Probability of success. Salaries, Commissions, and Fees 87 Labor so compensated involves : 1. Superior natural gifts. 2. Personal character. Extraordinary Compensation in Learned Profes- sions 88 The Case of Authors and Artists .... 89 Offices of Honor, Clergymen, and Scientists . . 89 Be»iuneration fob Women's Labor .... 90 Reasons why it is less than that of Men ... 90 1. Physical and mental constitution. 2. Home sphere. 3. Prospective marriage. 4. The actual organization of industry. 5. Feminine instincts. 6. Partial sup- port from friends. The Case of Women of Genius . . . . . 92 X CONTENTS. Conclusions 92 a, Absolute equality unattainable, b, Present inequality unreasonable, c, How relief is to come, d, Woman queen in the home. EXEBCISES 94 CHAPTER II. the eemunekation of capital. The Justice of Reiviuneratign for Capita_l . . 95 Threefold Subdivision 96 SECTION I. — RENT. Rent defined 97 Rent of Agricultural Lands 97 Productiveness depends on Fertility and Situation, 97 Rent of City Property depends on Location . . 98 Why Rents rate less than Interest .... 98 Exercises 99 section ii. — interest and dividends. Interest defined 100 The Term implies a Mutual Advantage . . . 101 Interest on Capital not Wrongful Usury . . 102 Circumstances which determine Rates of Interest, 102 1. Bisk, depending on: a, personal character; b, character of the business ; c, character of the government. 2. Convenience of the investment: a, facility of transfer; b, permanency; c, punctuality in payment of interest. 3. The profits of industry. 4. Ratio of demand to supply of capital. Why Interest is High in a New Country. . . 106 Usury Laws explained 106 Why Usury Laws are Unreasonable .... 106 1. They violate a right of property. 2. Civil law cannot fix prices. 3. The jjrice of capital most variable. 4. These laws increase burdens. 5. Such laws never enforced. Dividends defined . . 108 They depend on success of industry. They include interest and profits. Exercises 109 CHAPTER IIL DISTRIBUTION OF PROFITS. Profits defined Ill CONTENTS. xi Items of Expense to be deducted from Proceeds . Ill 1. Wages. 2. Salaries. 3. Interest. 4. Insurance. 5. Taxes. Percentage on Capital not a True Measure of Profits 112 Three Members of the Partnership to be recog- nized 113 Capital, executive agency, labor. A Fair Distribution of Profits harmonizes Labor AND Capital 114 Co-operative Associations .116 Exercises 116 CHAPTER IV. revenues of the government. The Claims of Government take Precedence of OTHER Claims 118 Taxation, the Maxim of Free Government . . 119 Adam Smith's Maxims 119 Direct and Indirect Taxation 120 Tariffs defined 121 Duties, Specific and Ad Valorem 121 National and State Taxation in the United States, 122 National Taxes 123 a. Excises, b, Stamps, c, Licenses, d. Income tax. State Taxation, how lmposed 125 Equitable Taxation should reach All Kinds of Property 126 Liability to Double Taxation 126 Exercises 127 PART IV. EXCHANGE. IsrPORTANCE OF THIS DEPARTMENT 129 CHAPTER L NATURE, NECESSITY, AND AGENTS OF EXCHANGE. Exchange defined 130 Value the Central Term 131 The Law of Supply and Demand 131 Three Classes of Commodities 131 1. Things which cannot be multiplied. 2. Things easily multiplied. 3. Things multiplied at extraordinary cost. XU CONTENTS. Fundamental Principles stated by Mill . . .132 1. Value a relative term. 2. Market value depends on sup- ply and demand. 3. Cost defines natural value. 4. The natural value of some things a scarcity value. 5. Things that have a scarcity value not easily increased. 6. A monopoly value is a scarcity value. 7. The natural value of an article equals the cost value of the most costly portion. 8. The condition of stable equilibrium in exchange is that things exchange at their cost value. Necessity of Exchange 134 Between individuals ; between nations. The Agents of Exchange 136 Merchants, Retailers, Middle-Men .... 137 Factors, jobbers, shipping-merchants, importers, bankers, brokers, underwriters. Outgoing and iNCoanNG Currents of Trade . . 138 Exercises 140 CHAPTER II. MONEY AN INSTRUMENT OF EXCHANGE. Difficulties of Exchange by Barter .... 142 Money defined 143 section I. — THE functions OF MONEY. Money as a Standard of Value 144 Money as a Medium of Exchange 145 Essential Qualities of Money 146 1. Stabilitjr of value. 2. Universal acceptableness. 3. Di- visibilitj'^ without loss of value. One Substance should fulfil both Functions . . 147 Money not necessary as a Medium of Every Ex- change . . . 147 Every Thing comes to have its Price 148 Articles used as Money 148 Uniformity of Money throughout the World de- sirable . . « 149 Exercises 150 section II. — SPECIE. Qualities which fit Gold and Silver for Money . 153 1. They have intrinsic utility. 2. They cost labor. 3. They concentrate great value in small bulk. 4. They are divisible without loss. 5. They are of uniform quality. 6. They can be easily verified. 7. They are indestruc- tible. 8. They are adapted to each other. CONTENTS. xiii Legitimatb Agency of Government respecting Money I55 1. To name a legal tender. 2. To regulate coinage. Things to be regarded in Coinage .... 156 1. Quality of the metal. 2. Size of coins. 3. Form of coins. Seigniorage I57 What may be done with Worn Coins and Foreign Coins 158 The Question of a Double Standard .... 169 Gold for main standard, silver as subsidiary. General Truths respecting Money .... 160 1. The cost of money equals the cost of the article exchanged for it. 2. Freedom of commerce equalizes the supply of money. 3. The amoimt of money small in propor- tion to exchanges made. 4. Increase of money in a country not of itself advantageous. 5. Abundance of money not an index of prosperity. 6. A false maxim refuted. Exercises 162 CHAPTER III. CREDIT AN INSTRUMENT OF EXCHANGE. Credit defined 164 section I. — THE forms OF CREDIT. The Leading Forms in which Credit appears . . 165 1. Book-accounts, 2. Loans. 3. Mercantile paper. 4. Bank- deposits. 5. Stocks. 6. Bonds. 7. Circulating notes. section II. — the useful functions of credit. Mistakes corrected 167 Credit is not capital, — does not create capital. Borrower and lender cannot use the same capital at once. The Useful Functions of Credit stated . . . 168 1. It brings wealth into use as capital. 2. It draws out in- dustrial talent. 3. It quickens exchanges. 4. It is a direct instrument of exchange between individuals, between distant cities, between nations. 5. It may be put into paper-money. section hi. — the ABUSES OF CREDIT. Some Abuses of Credit stated 172 1. Too freely granted. 2. By wild speculations of borrow- ers. 3. By extravagant living of debtors. 4. By con- fidence-operations. 6. By betrayal of trusts. 6. By over-estimate of assets. 7. By excessive issue of paper- money. XIV CONTENTS. Mischiefs caused by these Abuses .... 174 a, Fluctuating prices; 6, Honest men pay for bad debts; c, Trade made a game of chance ; d. Moral sense dead- ened; e, Force of contracts relaxed. EXBBCISES 175 CHAPTER IV. BAimS AIKD PAPER-MONEY. Banks, Agents of Credit .177 section i. — offices of banks. Four Offices of Banks 178 1. To collect and keep money-deposits. 2. To negotiate money-exchanges, — peculiarity of British exchange. 3. To make loans and discounts. 4. To issue circulat- ing notes. section n. — the united-states national- bank system. Main Features of the Law . . . . . . 182 The Liabilities of National Banks .... 184 1. The capital stock. 2. Circulating notes. 3. Deposits. 4. Balances due other banks. 5. Surplus funds and issues. 6. Undivided profits. 7. Miscellaneous lia- bilities. The Resources of National Banks .... 185 1. Loans. 2. United-States bonds to protect circulation. 3. Bonds and stocks held as investments. 4. Balances due from other banks. 5. Real estate. 6. Exchanges and cash items. 7. Currency. 8. Funds to redeem circulation. 9. Miscellaneous items. The Sources of Profits of Banks . ... . 185 1. Interest: a, on United-States bonds; 6, on circulating notes; c, on capital and reserves; d, on deposits loaned. 2. Premiums on exchange. 3. Commissions for col- lections. Private Banking Houses and Savings Banks . . 186 section iii. ^-paper-money. Distinction between Paper-money and Money-paper, 187 Kinds of Paper-money 188 1. Mercantile currency. 2. National-bank currency. 3. Mixed currency. 4. Credit currency. 5. Paper-money secured by real estate. CONTENTS. %.y Chaeacteristics of Paper-money 190 1. Convenient. 2. Economical. 3. Involves always credit. 4. Can never serve as a standard of value. 5. Can cir- culate only in the country where it is issued. 6. Liable to fluctuations. 7. Causes prices to fluctuate. 8. Gov- ernments tempted to issue it without limit. 9. Made a legal tender, it is a forced loan. 10. A cause of panics. 11. Tends to make commerce a game of chance. 12. Blunts the pubUc conscience. Exercises 193 CHAPTER V. international trade. Fundamental Propositions 195 1. All nations of one blood. 2. Earth and its resources given to the one human race. 3. Earth's resources best developed when each country produces that for which it is best adapted. 4. Earth's blessings best dis- tributed by free mutual exchanges. New Facilities for Intercommunication welcomed . 196 False Doctrines formerly prevalent on Inter- national Trade 197 The Theories of Protection and Free Trade dis- tinctly stated . . 198 Arguments for Protection considered . . . 199 1. Protection necessary to Varied Industry . . 199 Varied industry admitted to be a blessing, a, Every coun- try has varied resources; b, also diversity of talent; c, men have diverse wants ; d, varied industry makes a home-market ; e, it favors social and moral advance- ment. Fur Protection is not necessary to Varied Indus- try 201 a, Industry has a natural growth, b, Free competition the healthy stimulus to that growth, c, Varied industry springs up as fast as increase of labor and capital war- rant, d, The instinct for accumulation a safe guide. €, Artificial stimulus produces re-action. /, Foreign products are purchased with fruits of most effective labor, g, Foreign competition cannot crush natural growth, h, Artificial nursing makes a sickly growth. Pi'otection cannot add to natural resources, nor create capi- tal, nor create men of skill. It can only change the direction of capital and labor. yvi CONTENTS. 2. Protection maintains National Independence . 204 Two kinds of independence. Protection fosters independ- ence of isolation. 3. Agricultural Products need a Home-market . 206 Free trade the condition of a healthy home-market. Positive Objections to Protection .... 208 1. It fosters antagonism of industries. 2. It leads to over- production. 3. It reduces revenues of the State. 4. It is an unstable policy. 5. It demoralizes legislation. 6. It corrupts public morals. The Experiment of Free Trade between our States 210 The Golden Rule applicable to Nations . . .211 Exercises . . 212 INTRODUCTION. DEFINITIONS AND DIVISIONS. Political Economy is the science which shows how things intended to satisf}^ our wants are pro- duced, and how they are consumed ; how they are distributed among a people, and how they are ex- changed one for another all over the world, The science springs from four fundamental truths : 1. God has made men creatures of many wants, and filled the world in which they live with means for satisfying those wants. 2. The labor of men is necessary to draw out the materials of nature, and to fit them for use in meet- ing men's wants. 3. The exertion of labor establishes for the laborer a right of property in the things which he produces. 4. The right of propert}' implies the right of ex- change or sale, and diversity of labor necessitates between men exchanges of the fruits of their labor. Three desires in men contend for the master}' : — 1. Desire of ease. This tends to repress labor. 2. Desire of present gratification. This tends to consume the fruits of labor at once. 5 6 POLITICAL ECONOMY. 3. Desire of means for future gratifications. This tends to stimulate labor, and to save its fruits. A man or a nation grows rich only as the third of these desires overrules the other two. Wealth is the collective name for all useful things which can be owned and exchanged. Some things are ver}^ useful, yet the}^ form no part of wealth, because they cannot be exclusivel}^ appropriated. Such are air, sunlight, and commonl}^ water. Other things, such as bread, salt, cloth, iron, houses, &c., are capable both of satisfying wants, and of being exclusively possessed and exchanged. Only these are properlj^ accounted wealth. The original source of wealth is the bounty of God in nature. The secondary source of wealth is human labor directed to bring forth the bounty of nature in form, in time, and in i;)lace, to meet the wants of men. Wealth is increased only by constant reproduction, i.e., by destroying some useful articles to bring forth others. Thus the wheat that is sown must die, in order that a new crop may spring from it, yielding thirty, sixty, or a hundred fold : the leather in the hide must be cut up to make shoes, in which form it meets wants. If a man consumes all his wheat, he willhave none to sow. The tanner prepares his leather, expecting it to be used up for shoes. Ab- stinence and foresight attend all productive labor. Thus industry and frugality are indispensable con- ditions of the increase of wealth. INTRODUCTION. 7 Value is purchasing power, or that quality in an object which gives it power to command other objects in exchange. The term supposes alwaj's a compari- son of two objects with reference to an exchange. Thus vahie is a relative, not an absolute, quality. Two things are combined in this qualit}' of value, — first, utility, that is, adaptedness to satisfy want or gratif}^ desire ; second, cost, that is, some labor necessarj' to produce the object. We can think of nothing which has greater utility than air and light ; but the}' have no value, because they are so freel}^ supplied to all that the}^ cost no labor. If one has spent a daj^'s labor in making a table, he will not give it to his neighbor for air or light which he can have for nothing ; nor will he exchange it for a box which he could make with half a day's labor. So, in general, the value of an article is determined very much by the labor which it costs to produce or pro- cure it. Things are exchanged at what is called their natural value, when the terms are adjusted by the relative cost, labor for labor. The utilit}" of an object is its desirableness for gratification. This maj' vary with circumstances, such as individual taste, the fashion of the day, the emergenc}" of the hour, &c. To one who cannot read, a book will have no use ; for his own gratifica- tion he will give nothing for it. One will readily give a gold watch for a loaf of bread when there is no other means of saving him from starvation ; then the value, the purchasing power, of the loaf, rises a thousand-fold above its actual cost. These two elements thus define the extreme limits 8 POLITICAL ECONOMY. of value. The most one will give for an object is determined b}^ his estimate of its utility, or the gratification it will afford him. The least a man will ordinarily take for an object is determined by its cost, or the labor necessar}^ to produce it. Between these limits value may temporarily fluc- tuate, as the relations of supply and demand vary. When the supply of an object is small, and many persons desire it, the purchasing power of that ob- ject is increased by competition among the bu3'ers. When a larger quantity of an article has been pro- duced than is wanted, the purchasing power of that article is diminished by competition among the sell- ers. But this state of things, in either case, will not continue long ; for free competition tends always to settle the value of all things upon the natural basis of cost. Divisions. — Political economy treats of the pro- duction of things to satisfy wants. Hence the two leading divisions of the science are Production and Consumption. Production is the process of labor applied to ob- jects of nature to adapt them to the satisfaction of wants. We can neither create nor annihilate any part of matter; but we can modify almost every thing so as to impart to it some utility, — that is, we can create value. Under this division, therefore, are considered the processes and laws by which labor gives value to things. The substances thus brought out are called products. Consumption is the act of destroying utilities INTRODUCTION. 9 either for immediate gratifications, or to produce some new utility for future gratifications. The actual destruction of values is necessaril}' involved. Under this division are considered the laws which govern the economical use of w^ealth to satisfy w^ants or gratify desires. There are among men great diversities of capacity for labor. It is therefore good economy of produc- tive effort to unite the labors of many persons on a particular product, so that each may contribute the part which he can do best. Yet each person has a variet}^ of wants, while his own labor is devoted to one thing. He must therefore get what he needs in exchange for what he makes. Hence arise two other branches of our science, logically subordinate to those just mentioned, though practicall}' of the highest im- portance. They are Distribution and Exchange. Distribution embraces questions of equity and practical methods pertaining to the assignment to different laborers of their respective shares of values produced. Here are considered the difficult problems growing out of the mutual relations of employers and employed. Exchange is the act of transferring things from one to another, according to their values. Each individual is busied in creating one utilit}', and wants a thousand. Each countr}' produces of cer- tain articles far more than it needs, and needs many others which it cannot produce at all. Hence the necessity of universal and ceaseless exchange. Under this division are considered the instruments, 10 POLITICAL ECONOMY. the laws, and the processes, which relate to the mutual transfer of values. The most difficult problems of political economy- belong to the departments of distribution and ex- change. EXERCISES. 1. Mention some articles of wealth. 2. Tell what you know of the manner in which they are produced. 3. Name what you can of the utilities of each. 4. Do savages, or civilized men, have the most wants? Why? 5. Why has air no value ? 6. When and why may water have value ? 7. How does iron exist in nature ? 8. State wliat you can of the processes of labor which render iron useful. 9. If a farmer gives a bushel of wheat for a razor, why is it a fair bargain ? 10. Wlience comes the great value of the diamond ? 11. Why does the value of an article decline as it goes out of fashion ? 12. What events in Europe may enhance the value of the American farmer's wheat-crop ? Why ? 13. Why has cotton less value than wool ? 14. What different kinds of labor are represented in a yard of calico? 15. How are the ten cents paid for that yard of calico distributed to the several parties who have labored to pro- duce it ? 16. How does a merchant's labor add value to the goods he sells ? 17. Why are strawberries and peaches generally cheapest in the market Saturday afternoon ? 18. How does foreign commerce benefit our agriculturists and manufacturers ? 19. How do railroads help to develop the wealth of a country ? POLITICAL ECONOMY. PART I. PRODUCTION. Production is the process of drawing out means to satisf}^ human wants b}^ labor applied to natural objects. Labor is the first essential. Some prod- ucts of former labor are also requisite to begin with. To these the name Capital is given. This branch of political economy will therefore be best presented under three subdivisions. The first will treat of Labor, the second of Capital, and the third of the co-operation of these two factors. CHAPTER I. SECTION L — OF LABOR. Labor is the voluntary exertion of human beings put forth to attain some desired object. The processes of production give scope for the exercise of all the faculties of man. Hence two kinds of labor are to be recognized : — 1. Physical labor, in which muscular exertion is the chief thing. 11 12 POLITICAL ECONOMY. 2. Mental labor, which engages chiefly the facul- ties of the mind. All productive industry combines some ph3^sical and some mental effort. Even the day-laborer must exercise his mind to handle his shovel with judg- ment and skill. In general, labor is effective in proportion as it is directed by intelligent mind. Physical labor only moves things. It depends on the capacity of living muscle to contract and ex- pand, as governed by the will. But this power to produce motion under the control of intelhgent mind gives man unlimited command over the forces of nature to achieve his purposes. Mental labor is directly concerned in the produc- tion of wealth in three ways : — 1. In investigation to discover the properties and laws of matter. So .chemical research made known the substance phosphorus, and its property of start- ing into flame under friction. 2. In invention to devise methods and instru- ments by which the properties of matter may be made to meet human wants. So matches were in- vented, — a very simple instrument, by which phos- phorus is used to kindle our fires. So the spinning- jenny and the power-loom were devised to facilitate and cheapen the process of making cloth. 3. In oversight and superintendence. In the sim- plest kinds of labor, mind must direct muscle. Where numbers are joined in labor for a given product, one ingenious mind, superintending, gives effect to the muscular exertions of a score of igno- rant workers. OF LABOR. 13 It is obvious, that, in the wide range of produc- tive industry, mental labor is quite as essential as ph3'sical labor. Whatever, therefore, quickens the mental activity and promotes the intelligence of a people, tends to the increase of their wealth. Mental labor is also indirectly instrumental in production, as it is applied to improve the ph3'sical health and the mental capacit}' of individuals, and to maintain order, justice, and security in human societ}'. Here belong the mother's care in nursing and training children ; the teacher's labor to de- velop the minds of 3'outh ; the law3'er's counsel and pleadings to define and maintain the rights and ob- ligations of men under the rule of civil law ; the minister's efforts, b3' the truths and precepts of God's word, to form good consciences, and improve the public moral sense ; and the varied services of legislators and officers of government to insure sta- bilit3^ and order in the very structure of society. Though these labors do not directly bring forth material products, they favor all the productive industry of a people, and are as essential to the best results of its processes as the manual labor of the farmer or the blacksmith. The Changres effected by Labor applied to matter may all be reduced to three, which are indi- cated by the three words, Transmutation, Transfor- mation, and Transportation. 1. Transmutation is a change in the elementary form of matter. So, by the labor of the farmer, carbon, gases, and water are changed into wheat ; 14 POLITICAL ECONOMY. by that of the chemist, acids and alkalies are changed into salts ; by that of the tanner, skins and tannin are changed into leather. 2. Transformation is a change in the aggregate form of matter. The shoemaker transforms a hide of leather into shoes ; the smith transforms a piece of iron into a horse-shoe ; the spinner transforms a bale of cotton into thread, and the weaver trans- forms the thread into cloth. 3 . Transportation is a change in the place of mat- ter, as when a cargo of wheat is transported by ship from New York to Liverpool, or ten tons of dr^' goods are transported by rail-car from New York to Chicago. In a general way these changes represent respec- tively the agricultural, the mechanical, and the com- mercial departments of human industry ; and each contributes an important element of utihty. He who makes the flour, and he who transports it to the people who need it, render as important services for the satisfaction of wants as the farmer who raises the wheat. These divers forms of labor stimulate and support each other. These several forms of labor enter in diflerent degrees into the value of different articles. Thus butchers' meat and green vegetables derive most of their value from transmutation ; clothing, cutlery, &c., derive the greater part of their value from transformation ; and the value of bulk}'' articles like coal is determined very much by the cost of trans- portation. In most articles, however, we see more or less of all these forms of labor combined. Bv OF LABOR. 15 new devices and increased facilities for either of these forms of labor, production is enlarged and improved, and comforts are multiplied. EXERCISES. 1. What is the difference between labor and play ? 2. What is skill ? 3. How are man's muscle and mind and a force of nature combined in driving a nail ? 4. What kinds of labor produced the magnetic tele- graph ? 5. How does that invention aid production ? 6. What services do the chemist and pattern-drawer in a calico-mill render ? 7. How is the payment of a high salary to the manager of a cotton-mill good economy ? 8. How is production favored by the brain-work of stu- dents of science, of inventors, of lawyers, of teachers, of legislators, judges, and magistrates ? 9. If you buy a pocket-knife for fifty cents, how many and what forms of labor does the price represent ? 10. How do good roads favor production ? 11. How do the operations of thieves and swindlers affect production ? 12. Do gamblers and speculators contribute to the increase of wealth ? 13. How does the prevalence of drunkenness affect the industry of a community ? 14. Are men who labor in the learned professions fitly called non-producers ? 16 POLITICAL ECONOMY. SECTION II. — MEANS FOR INCREASING THE EFFECTIVENESS OF LABOR. Economy of labor is an important consideration in the increase of wealth. Man's physical power is limited, and his strength is soon exhausted. But there are forces of nature which are stronger than he, and some of which never tire. These he can bring into his service, and so at the same time re- lieve the burden and multiply the products of his labor. There is also great difference in the capacities of different men. Some have strong muscles and dull minds. Others have strong minds in weak bodies. Some are specially fitted for one kind of labor, and others for another. The fruits of labor will there- fore be increased, if many join hands under a sys- tematic arrangement which sets every one to doing the particular work for which he is best fitted. There are thus two ways in which the effective- ness of human labor may be increased : — First, by devices for employing the agents and forces of nature. Second, by a sj^stematic division of labor. 1. The agents and forces of nature most available for production are : — a. The muscular power and instincts of animals. b. The light and heat of the sun. c. The force of gravitation, especially in falling water. EFFECTIVENESS OF LABOR. 17 d. Moving currents of wind. €. The exj^ansive force of steam. /. The explosive force of gunpowder, d^'namite, &c. g. The attractions and repulsions of electricity and galvanism. h. The action of chemical forces. To these we must add, for combining and direct- ing all kinds of forces, the mechanical principles or powers ; viz., the lever, the pulley, the inclined plane, the wheel and axle, the wedge, and the screw. The properties of matter embodied in these agents are the gift of God, and of themselves cost us noth- ing. But in most cases, to make them available, some instrument must be employed which has cost labor. Thus, to control animal power, we need yoke or harness, cart or wagon, &c. ; a lens enables us to intensify the light and heat of the sun ; by means of a water-wheel or pendulum we command the force of gravitation ; by a wind- wheel we catch the force of moving air ; by a steam-engine we ac- cumulate and direct the expansive force of steam ; by a hammer we combine the principle of the lever with the force of gravitation and the density of steel ; and the complicated machinery' of a cotton- mill is but an adjustment of various means to the great purpose of physical labor, which we have seen to be to produce and direct motion. These instruments, when simple, like a hammer, a spade, a plane, are called tools. When complicated, like a fanning-mill, a spinning-jenny, or a steam- engine, the}^ are called machines. Some instruments 18 POLITICAL ECONOMY. are required in every kind of labor, for human limbs and muscles and brains unassisted can accom- plish but little. The inventions of the last fifty years have introduced elaborate machinery into all branches of industry. One man with a pair of horses, a plough, a drill, and a cultivator, can culti- vate ten times as much land as he could with only a spade and hoe. This use of natural agents increases the effective- ness of labor in two ways : — First, it enables one man to do the work which must otherwise require a number of persons, and so either sets free a portion of labor for other occupa- tions, or greatly multiplies and cheapens products. Second, it achieves vi^hat no amount of labor un- assisted could perform. So the telegraph-machine is a means of instantaneous communication between places a thousand miles apart ; the locomotive can propel a train of cars at the rate of forty or sixty miles an hour ; a screw-macliine will turn out screws by the million, with a uniformity and nicety of finish which could not be attained by hand-work. The great benefit thus realized is in multipljing the means of satisfying human wants, and bringing them within the reach of all classes of people. An incidental disadvantage is, that, with the introduc- tion of labor-saving machinery, man}^ persons are thrown, at least temporarily, out of emploj^ment, or are compelled to learn new methods of labor. It involves also the danger of over-production in cer- tain articles, and of a general disturbance of the harmonious relations of different branches of Indus- EFFECTIVENESS OF LABOR. 19 try. Nevertheless the good results far outweigh the evil ; and we may hope that the problem, now before the world, of adjusting the system of labor to the new condition of things, will soon find a happy solution, which shall be equitable and advantageous to all. 2. Division of Labor applied to production means that different kinds of labor be distributed to different individuals and classes so that all shall do that for which they are best fitted. The principle is illustrated on a broad scale in the peculiar industries of different countries adapted to their respective advantages. Thus tea is a spe- cial product of China, cotton of our Southern States, cutlery of England, silk goods of France and Italy. In all civilized communities people take up differ- ent trades and professions according to their several capacities, tastes, and circumstances. The results of labor are both increased and improved when the farmer and the baker, the blacksmith and the jew- eller, the weaver and the tailor, the merchant, the lawyer, the doctor, &c., each devotes his energies to the work of his particular calling. This order of things marks the chief difference between savage and civilized life. But as a technical term of political economy, divis- ion of labor has a more specific application to labor employed on particular products. Suppose, for ex- ample, an establishment for the manufacture of watches is projected. The watch is made up of many different parts. Obviously it will economize 20 POLITICAL ECONOMY. labor to assign each part to one man or set of men. Thus the wise apphcation of the principle involves two things : — 1. An analysis of the article to be produced, and of the work to be done, into distinct and simple parts. 2. A distribution of these parts to the persons employed, so that each workman shall confine him- self as nearly as possible to a single operation. The system is complete when the several opera- tions keep each other going, — when there are no superfluous hands, and none are kept idle waiting on others' movements, — when the several processes fit into each other like the gearing of smooth-running machiner3^ The special advantages of division of labor may be stated as follows : — 1. It shortens the period requisite for one to become an expert workman. It is quite evident that one operation can be learned more quickly and more perfectly than ten or twenty. 2. It saves the time -which "would be lost in pass- ing from one kind of work to another. B3" the law of habit, an operation often repeated becomes easy ; mind and muscle adapt themselves to one form of labor, and acquire a capacity for continued exertion. It will take some time to " get brain and hand in " to another operation. Where complicated tools must be adjusted to different kinds of work, this consid- eration is of more importance. " Time is monej'','* said Franklin. This is especiall}' true in all matters concerning the production of wealth. EFFECTIVENESS OF LABOR. 21 3. It increases the dexterity of the worltmen. Repeated "practice makes perfect." The mind, the e^'e, the hand, are trained to quickness and precision by the repetition of a single operation. In a boiler-factory the rapidity and precision with which the man plies Ms hammer to form the rivet- heads is wonderful. He has acquired this dexterity by devoting" himself to this single operation. 4. Division of labor suggests the contrivance of tools to facilitate operations. Manj^ of our most valuable inventions have originated with workmen whose attention was devoted to particular processes. New improvements are thus continually brought forward. 5. Division of labor brings into most profitable service all diversities of talent and capacity. In the manufacture of fine glass-ware, one part of the process requires high artistic genius ; another, judg- ment and skill, the fruit of experience ; another, ful- ness and strength of lungs ; and others, the simplest forms of manual labor. It were poor econom}' to set a raw hand to engi'ave a delicate pattern, or to send the artist to carry the vessels from the fur- nace to the annealing-oven. By systematic arrange- ment each can be kept doing that for which he is best fitted, and for which he receives wages accord- ing to its importance. EXERCISES. 1. How much can a man do for himself without any tools ? 2. What force of nature does the Indian's bow bring iuto service ? 22 POLITICAL ECONOMY. 3. Is there any definable limit to man's dominion over other animals and the forces of nature ? 4. Name the animals which have been subdued to serve man. 5. Name as many as you can of the useful inventions of the present century. 6. What natural agent does the mariner's compass ren- der available, and for what purpose ? 7. What natural agents are employed in photography, and by what means ? 8. On what agencies of nature do the agricultural crops depend ? 9. What is the function of the great balance-wheel in a mill for rolling iron ? 10. By what principles is the power of a slowly-moving water-wheel distributed to a hundred whirling spindles ? 11. What natural agents and what mechanical powers does an axe combine ? 12. Mention some of the purposes to which the natural agent heat is applied. 13. Why are inanimate forces preferable to animal power ? 14. State the comparative advantages of water-power and steam-power. 15. Give an illustration of the principle of division of labor, and how it increases the effectiveness of labor. 16. State the various kinds of labor involved in making a pair of shoes. 17. Suppose a man works alone at shoemaking, doing all the parts himself, how can he economize his labor ? 18. Why do shoes made in a wholesale way in a factory cost less than shoes made to order ? 19. How does the division of labor affect the employment of women and children ? 20. How does it develop and employ the highest talent ? 21. Do the use of machinery and the division of labor make labor more, or less, respectable ? MANUFACTURING ESTABLISHMENTS. 23 SECTION III. — LABOR IN GREAT MANUFAC- TURING ESTABLISHMENTS. The two means for increasing the productiveness of labor, treated of in the previous section, are so mutually related that the one involves the other. The use of labor-sa\ing machinery' unites many per- sons in the same process of production, and necessi- tates the distribution of the parts of the process. On the other hand, the division of labor to any great extent is ordinarily impracticable, except in connec- tion with the use of machinery. Both tend to the setting-up of large establishments, in which the full benefit of these means of increased productiveness is realized. For their successful operation, these establish- ments require 1. Large investments of capital in machinery, buildings, &c. 2. Large numbers of laborers, of different grades, under one general management. 3. The rapid production of articles in great quan- tities. 4. An extensive market for the disposal of the products. 5. Great executive abilit}" of two kinds, — a. In the superintendence of the mechanical pro- cesses. h. In the general financial management of pur- chases and sales, credits, collections, and sharp competitions on a large scale. 24 POLITICAL ECONOMY. The application of the two principles may be said to be limited bj- these several considerations. In a new country there is little accumulation of either wealth or population : the demand for particular articles is small ; facilities for transportation, which would widen the market, are few ; and the first emigrants, though young and energetic, have yet to develop mutual confidence and high executive abihty. Hence labor begins with each man's doing by ^himself all kinds of work with few and simple tools. But in due time diverse industry is devel- oped as naturally as a tree grows. As wealth is accumulated, and population increases, new wants arise, and new means of satisfying them are provided. As roads and bridges are made, and railwaj^s push themselves on, the market is widened, enterprise is stimulated, talents are brought forward, and great establishments are set up for production on a large scale. Such a natural growth is far more healthy and sound than the premature development which comes from forced, artificial appliances. When a large establishment has been started, a deficiency in either of the five particulars named may prove disastrous. If the funds at command are all put into what the English call " the plant," the enterprise may fail for lack of working capital ; or skilled laborers may be scarce ; or the products may be diminished through insufficient or unfit material ; or, on the contrar}^, the products may be in excess of the demand, with no provision for enlarging the market. Most disastrous of all is the lack of ex- ecutive ability and wisdom in either the detailed MANUFACTURIXG ESTABLISHMENTS. 25 processes of the manufacture, or the general ad- ministration of the business. When, however, these conditions are fulfilled, b}^ a harmonious combination of all the elements in due proportion, the highest efficiency of labor is attained. The general welfare is thus greatly promoted in several ways. 1. Primarily and chiefly, products are multiplied and cheapened. The large establishment economizes labor, as appears in what was said of division of labor. It economizes materials, sa\ing every item of utility in the scraps and odds and ends which in production on a small scale would be thrown awa}''. Thus, in the large packing-houses, the hoofs, the horns, the bones, even the blood and refuse matter, of the animals slaughtered, are utihzed. It econo- mizes supervision also ; one man of brains being able to oversee and direct the operations of five hundred or a thousand workmen easily and effectively. As a consequence, the cost of articles is reduced, so that thousands instead of hundreds of people can afford to use them. Thus the great cotton-factories have brought down the cost of common muslin from fift}^ cents to six cents per 3'ard, and all classes of people can use it freely and abundantly. 2. Production on a large scale tends to increase the variety of objects which minister gratifications. How many new and beautiful fabrics made of cot- ton have the great factories given to the world ! The article caoutchouc, called India-rubber formerly, because its only known use was to rub out pencil- marks, is now brought out from large establishments 26 POLITICAL ECONOMY. for working it. in a hundred forms, adapted to ren- der most important services. The concentration of labor quickens invention. 3. Such organization of labor increases the cer- tainty of the steady employment of laborers. On the first introduction of labor-saving machinery, work- men have been often thrown into a panic lest they should lose emplo3'ment ; but almost invariably, under the augmented production and reduced cost, the demand is so extended that the labor required is increased, instead of being diminished. Thus the actual condition of the English weavers was greatly improved by the introduction of the power-loom. Notwithstanding occasional fluctuations consequent on over-production and financial revulsions, the ten- dency of large manufacturing establishments is to insure constancy of employment to laborers of all grades. 4. This S3^stem of large productive operations helps to maintain a proper balance between diflFerent branches of industry. Increased production in one department stimulates activity in every other, both by the example of success, and b}^ an actual demand for other products, to meet the various wants of large numbers of people gathered. So, graduall}^, the use of machinery and the division of labor are combined in large establishments for making all kinds of articles, from friction-matches to locomo- tive-engines ; and some common interests bind all together. MANUFACTURING ESTABLISHMENTS. 27 Certain evils incident to the minute divis- ion of labor in large establishments must also be noticed. 1. There is danger that the physical health and vigor of laborers will be impaired. There is more or less involved, long and close confinement to a single operation, which overtasks one limb or set of muscles, in a posture which cramps and oppresses the vital organs, under exposure to deleterious gases and exhalations, and to the breathing of air bereft of ox^^gen, and charged with carbonic acid. There are also strong temptations to the confinement and excessive labor of children not full-grown, and to the overtasking of women, unfitting them to be healthy mothers. The vital statistics of large manufactur- ing towns present painful facts illustrating this evil. 2. There is danger that the mind will be contracted and enfeebled. When one's attention and energies are absorbed for ten hours each da}' in sharpening pins or counting buttons b}^ a machine, his soul must be cramped, and its development hindered, unless special means are taken to counteract the tendency. 3. The division of labor involves some loss of in- dependence and self-respect. The number of those who manage business for themselves is diminished ; and men dependent on wages lack something of that manliness of character which is gained under the responsibility of a business of their own. 4. When a large establishment fails, it involves a sweeping disaster. The fate of great numbers of workmen hangs on the wisdom of one manager. Thus the mischiefs of a general financial crisis are aggravated. 28 POLITICAL ECONOMY. 5. Mutual suspicions, jealousies, and antagonisms are fostered in large manufacturing establishments. The natural inequality of men is increased. Some chafe under subordination to others ; and one rest- less, jealous spirit may disturb the cheerful labor of hundreds. On the other hand, the possession of power prompts some emploj-ers and managers to an imperious disregard of the rights of those under them. These evils are to be recognized, yet they are not incurable. By many manufacturing companies spe- cial pains are taken to counteract them, with favor- able results. We ma}^ hope for relief to come from the present agitation of the labor- question, and from whatever measures promote intelligence and foster the sentiments of justice, and good- will. EXERCISES. 1. Describe any large manufacturing establishment you may have visited. 2. What natural agents are brouglit into use by its machinery ? 3. How many persons are employed in it, and how is the work distributed among them ? 4. How much are the articles produced improved and cheapened ? 5. Where do these articles find a market ? 6. What special qualities has the superintendent ? 7. What is the condition of a people who have no machinery or division of labor ? 8. Is it luxuries, or necessaries, that are most produced in large manufactories ? 9. Is it the rich, or the poor, who are most benefited by the reduced cost of manufactures ? 10. Is it wise, or foolish, for the laborers in Mexico to MANUFACTURING ESTABLISHMENTS. 29 destroy reapers and other labor-saving agricultural ma- chinery introduced ? Why ? 11. Will the setting-up of a large factory in your town affect laborers favorably, or unfavorably ? Why ? 12. Why are laws needed to regulate the employment of children in factories ? 13. How may the danger to the health of laborers in factories be relieved ? 14. What can be done to save minds from being dwarfed ? 15. Must one necessarily sacrifice a proper spirit of inde- pendence and self-respect by becoming an employe in such an establishment ? 16. What is the effect of successful enterprise in one branch of industry on all others ? 30 POLITICAL ECONOMY. CHAPTER IL - OF CAPITAL. Its Definition. Capital is that part of -wealth which is employed, or designed to be employed, in production. Since this word is used vaguely, we need to adhere to a strict definition. Let us notice two or three mistakes which tend to confuse ideas on this subject. 1. Capital is not synonymous -with wealth. All capital is wealth ; but all wealth is not capital. Sup- pose a farmer's crop this year gives him a hundred bushels of wheat to spare. He may lay it up in his granary for his own future use ; or he may sell it for gold, and bury the gold for safe keeping ; or he may spend the gold for a fine picture with which to adorn his parlor. In either case it is a part of his wealth ; but since, in either case, it will do nothing to increase his next year's crop or income, it is not capital. If, however, he exchanges his surplus wheat for a horse, or spends the avails of it on labor to clear and drain his fields, or bu3's with it a share of stock in a flouring-mill, he turns this part of his wealth into capital. His wheat is gone, or the money is gone ; but in the horse, or the improved land, or the share in the mill, it is to work out for him more wealth next year. OF CAPITAL. 31 2. Capital is not synonymous with money. Money buried in the ground produces nothing. A man intending to start a woollen-mill ma}^ need first to turn some of his property into mone}^ with which to pay for buildings, machinery, &c. His fifty thou- sand dollars deposited in the bank for this purpose is his prospective capital ; but it will not become for him actual capital till it is paid out for a build- ing, a water-wheel, spinning-jennies, and power- looms. When his establishment is complete, his money will be all gone ; but now he has his capital all ready for service. Money in circulation is an instrument of exchange, and so performs an impor- tant function for all productive industr}' ; but it is just a wheelbarrow to pass things from one to another. The confusion of ideas comes from the fact that capital, and indeed all wealth, is estimated in terms of money ; but in reality only a small por- tion of an individual's or a nation's capital is in the foiTM of money ; and alwa3'S the quality of money is of far more consequence than its quantity. 3. Capital does not properly include human qualities, such as strength, skill, judgment, energy, integrity. These are often spoken of loosely as a part of capital. Certainly they are very important elements of production, and are the result of pre- \ious productive effort ; but they are qualities of labor, and so, in the distinctions of our science, are more properly classed under that head, as we have seen. Varying the form of our definition a little in view of these mistakes, we may say Capital includes all 32 POLITICAL ECONOMY. material products devoted to purposes of further production. The Origin of Capital. Capital is always the fruit of past labor saved. A farmer's bo}' once received as the first wages of his labor an ewe- lamb. He might have sold the lamb, and spent the avails on his immediate gratification ; but he chose to keep it, and care for her and her 3'oung. The clip of wool and the natural increase from 3'ear to year were in like manner saved, till he came into possession of a valuable flock ; then he sold the flock, and with the avails commenced business as a merchant. Thus the first-fruit of his labor saved became the nucleus of a capital which fostered the industries of two continents. Such is universall}' the origin and growth of capital. It begins in saving, and grows by the continued exercise of industry and frugality. The first step of the savage towards civilization is to learn forethought and self-denial. In this aspect of the matter, capital is simply past lahor embodied, and reserved for present labor to' work with. Hence we see that labor and capital are not so diverse as many suppose. In nature they are akin, and indispensable to each other in the processes of production ; always combined for a common end. They are set in antagonism to each other onl}" through a popular sentiment, or an or- ganization of society radically false and wrong. Forms of Capital. The products of previous labor appear as capital in many and varied forms, but all ma}^ be grouped under four heads : — OF CAPITAL. 33 1. Implements and machinery by -which present labor is made effective. Here are inckicled the cart, the plough, the divers tools, machines, and useful and laboring animals of the farmer ; the axe, the plane, the awl, and the hammer of the mechanic; the engines and various machiner}- of the manufac- turer ; and the wagon, the ship, the railwa}' and its rolUng-stock for the transportation of goods. To this category belong also the land and its improve- ments b^- drainage, irrigation, fences or hedges, &c., and buildings for barns, workshops, storehouses, and manufactories. To all of this the general term Fixed Capital is often applied. With the activity of invention, and the multiplication of machinery, the amount of capital in this form becomes very large. 2. Materials to which present labor is to be applied. Under this head ma}' be set down the farmer's seed and manure ; the manufacturer's raw materials, such as lumber, cotton, iron, wool, leather, &c. ; his sec- ondary materials, such as 3'arn, steel, gold-leaf, &c. ; and his auxiliary materials, such as coal for raising steam, chlorine for bleaching, acids, alkalies, and dj'e-stuffs for coloring. All these come with values, as the products of former labor, to have their values increased by new transformation under present labor. 3. Means of subsistence for laborers. Men must have food and clothing and shelter while the}' work. This must come from previous labor, as the crops of last year sustain the farmer and his help wliile this year's crops are maturing. Under this head must be embraced dwelling-houses, as well as all kinds of 34 POLITICAL ECONOMY. provisions and apparel needful for the support and comfort of families. In large establishments the provision made for salaries and wages covers all these items. 4. Finished products waiting for a market. The process of production is not completed till the prod- ucts pass from the producer's hands. A farmer may not choose to dispose of his crop as soon as it is gathered. At certain seasons, the manufacturer may be compelled to accumulate a large stock of his goods, in readiness for a brisk sale when the market opens. For the time, the crop, or the stock of goods, absorbs a portion of capital. This necessity is incident to every line of productive industry, and allowance must be made for it in providing capital for the business. In civilized societj^, something in these forms of capital is essential to every kind of production. The blacksmith who works b}^ himself must have forge and anvil, hammer and tongs, for instruments ; some iron for material ; a home, with some store of clothing and food, for his subsistence ; and a few finished horseshoes hanging in his window, ready for the first call. And the capital of a great cotton- factory, though counted by millions, may all be resolved into these four forms. The Consumption of Capital. Though capital is the fruit of saving, 3'et it is the fixed law of pro- duction that labor applied to capital destroys valile of one kind in order to bring forth a superior value of another kind. OF CAPITAL. 35 This change is passing on capital in each of its forms. The instruments slowly and surely wear away by use, the materials are immediately de- stro^'ed, food is rapidly consumed, clothing more slowly, and the house more gradually still, but none the less surely ; and the finished product sold is lost to the producer, to appear again in new implements, new materials, new means of subsistence, and new products. This is the unceasing round of values destroyed for the sake of greater values produced. The difference between the value consumed and the value produced is the profit, — the end steadily aimed at. It matters not in what form the value re-appears, provided only it is greater than that destroyed. If a value is destroyed to produce another only equal to it, we lose our labor. If a value is destroj'ed, and nothing is reproduced, we lose both labor and capital. Individuals and nations grow rich onl}^ as the value created is superior to the value of both the labor and capital consumed. Mr. Mill says, " The greater part, in value, of the wealth now existing in England, has been produced by human hands within the last twelve months. A ver}' small proportion indeed of that large aggre- gate was in existence ten 3'ears ago ; of the present productive capital of the countr}', scarcely an}* part except farm-houses and a few ships and machines ; and even these would not, in most cases, have sur- vived so long, if fresh labor had not been emplo3'ed within that period in putting them in repair. Capi- tal is kept in existence from age to age, like popula- tion, not by preservation, but by reproduction." 36 POLITICAL ECONOMY. Productive and Unproductive CapitaL 'By our definition, all capital is, or is designed to be, productive. Wealth that is not productive is not capital. But capital is sometimes unprofitably in- vested, as in a mill or a railway- abandoned. Some- times in a financial revulsion, or in consequence of over-production, the business of a great factory is suspended. In these cases, for the time, capital is unproductive. Then it loses its ordinary profit ; and, besides, machinery unemploj-ed generall}' suf- fers damage quite as fast as when running. Sound economy requires that capital be constantl}^ joined with labor, and so made productive. Fixed and Circulating Capital. We notice these as terms quite commonl}' used ; but the dis- tinction they indicate is neither very important nor very accurately defined. In general, fixed capital means little more than land, buildings for both busi- ness and dwelUngs, tools, and machiner3\ Circu- lating capital means finished products in passage from producers to customers. Thus fixed capital brings out its fruits in circulating capital. And since, in prosperous production, the values produced are greater than those consumed, the surplus of cir- culating capital is very naturally turned into fixed capital for enlarged operations. A particular article maj' be set down under the one head or the other, according to its relations. A plough, for instance, in the plough-factory, just finished, or in the hands of the merchant, is circulating capital ; held b}' the farmer for use, it is a part of his fixed capital. OF CAPITAL. 37 Money, though it circulates more freely than an}- thing else, must be classed with fixed capital. It is an instrument of exchange, which, like a wagon, a ship, or a locomotive, runs to and fro continually, only to move other things. EXERCISES. 1. Is a workman's coat an item of capital ? How is it with his Sunday suit ? 2. Is money deposited in a bank for safe-keeping merely capital to the depositor ? What if the banker loans that money to a manufacturer ? 3. When may a piano-forte be regarded as an item of capital ? 4. Suppose a man has great skill as an engraver, but no plates nor tools to employ his skill. Is his skill capital ? Can the plates be made productive capital without the skill ? 5. Do the savings of a miser increase capital ? 6. What risks are involved in putting one's savings into capital ? 7. What is the ultimate effect of extravagant living on production ? 8. If a seamstress pays for a sewing-machine out of her earnings, what does the machine represent ? What advantage does it yield ? 9. Illustrate the forms of capital in the case of a cabinet-maker working by himself. . 10. Illustrate the same point in any large factory with which you are familiar. 11. What capital is necessary for a wood-chopper who works by the day ? 12. If the Pacific Mills pay each week six thousand dol- lars wages, what items of capital does the sum represent? 13. What items of capital appear in the annual inventory of a shoe-factory ? 14. How is the capital consumed in the yearly wear of machinery replaced ? In estimating profits, what allowance must be made for this ? 38 POLITICAL ECONOMY. 15. A farmer paid five hundred dollars for stock in a railway running near his farm. The subsequent sale of the road under foreclosure of bonds made the stock worth- less. But the facilities of the road add ten cents a bushel to the price at which he sells his wheat. Is the capital which he put into the railroad productive, or unproductive ? 16. When is a threshing-machine fixed, and when circu- lating capital ? CO-OPERATION OF LABOR AND CAPITAL. 39 CHAPTER III. THE CO-OPERATION OF LABOR AND CAPITAL. In the processes of production, Labor and Capital are Partners, Co-ad jutors for a com- mon end, Sharers in a joint result. Each is ne- cessary to the other ; each is helpless without the other. The most stalwart man can produce nothing without food and clothing, tools and materials, — the fruit of previous labor, i.e., capital. Facto- ries filled with ingenious machinery, warehouses full of cotton, stores of finished goods, capital in whatever form or amount, can do nothing to in- crease itself. Thus labor and capital are the two necessary and inseparable factors in the production of wealth. For their co-operation these elements meet most harmoniously in the same person; that is, when the laborer owns capital enough to emplo}' his own labor. Then one will, one self-interest, controls both, and jealousy is excluded. But this adjust- ment cannot be universal, for three reasons : — 1. Capital under the application of labor tends to increase, so that the man soon finds in his hands a surplus, to emplo}* which he must seek another, who has only labor, to work under him. Thus a distinc- 40 POLITICAL ECONOMY. tion between laborer and capitalist, emplo3'er and emplo3-ed, is sure to rise. 2. The great diversity of capacities and tastes among men necessitates a separation into two classes. Often the man strongest, and most skilful for labor, has no tact to manage business, and save its returns. On the other hand, men of great finan- cial ability are not infrequently physically weak, and unfit for manual toil. 3. Certain forms of production must be carried on in large establishments, where are combined large amounts of capital and great numbers of laborers. The advantages of machinery and the division of labor can be secured in no other way. Some things, like ships and locomotives, can be made only by such combinations ; and even such things as pins, buttons, and matches are most economically pro- duced on a large scale. Thus the two factors are separated : the capital falls to some persons, and the capacity to labor to others. The abstract equality and mutual depend- ence of the two factors is disturbed, jealousies spring up, and short-sighted self-interest produces antagonism between them. As the parties meet to enter into contract, the capitalist has the advantage, because he has something which he can live on ; while the laborer must work, or starve. The capital- ist is tempted to use his advantage ; and the con- sciousness of dependence makes the laborer sensitive, and suspicious of wrong. Against their own true interests, the parties are led thus to array themselves against each other. COOPERATION OF LABOR AND CAPITAL. 41 Conditions on which the Harmonious Union and Eflfective Co-operation of Labor and Capital depend : — 1. A general distribution of capital; that is, SUch a condition of things, that the capital of a country is in many rather than few hands ; that laborers themselves shall have, or be encouraged to secure, some capital. All means which help laborers to save their earnings favor this condition. 2. The ratio of the amount of capital to the number of laborers. It is a fundamental principle of Politi- cal Economy that industry is limited by capital, and ever}' increase of capital demands increase of labor. The grand regulator is free competition on either side, under which the tendency is towards an equi- librium ; for nature provides for the steady increase of both capital and labor in some definite proportion. 3. The certainty that labor and capital shall each have its just reward. Nobody questions the right of the laborer to a reward for his toil. If we remember that capital is the fruit of past labor saved, the right of its owner to a reward for its use is equally plain. The reward of each must come from the product of their union. To insure this certainty of reward, certain things in the social organization are essential. a. There must be division of property, personal ownership in every thing that can by labor be made an object of value, and appropriated. Without this, capital cannot be. The theory of communism is false to nature, and fatal to industry. b. A prevalent moral sentiment and just laws must 42 POLITICAL ECONOMY. give security to property-rights. These safeguards are needed to prevent robber^' and fraud by individ- uals, and to restrain governments from oppression. C. There is needed, for both capital and labor, perfect freedom, unrestricted by monopolies, or special legislation. The inherent right of every man to do what he will with his own, provided he do no wrong to his neighbor, is not to be questioned. Ordinaril}', each will judge best for himself as to the use he will make of both his labor and his capital. 4. The general intellectual and moral culture of a people is an important condition of the effective co-operation of labor and capital. Intelligence in the laborer adds to his efficienc}^ Honesty and in- tegrity are of the highest consequence to the safe investment of capital. With reference to the co- operation of the two, it is important that both parties, as they meet, be able to take broad views of their common interests and mutual dependence. Harmon}'" between the two requires mutual respect ; and the basis of this is self-respect on the part of each, which springs from a clear, intelligent under- standing of relations, rights, and privileges. Thus means for the general education of a people, and the culture of good consciences by all religious influ- ences, have an economical value which cannot be over-rated. There is reason to believe that laborers have some occasion to complain of hardships from the oppres- sion of capital ; yet the wrong is not all on one side. The agitation of questions at issue between the parties will do good, if it leads to a better under- CO-OPERATION OF LABOR AND CAPITAL. 43 standing and a controlling regard for their common interests. But measures which directl}' increase jealousy between them, organizations which contem- plate hostility and violence, can only aggravate the evil, and work damage to both sides. Combinations on either side to rule out fair competition, and repress freedom of individual judgment and action, are positively and only mischievous. Whatever tends to increase the intelligence, and promote the thrift and independence, of laborers, is helpful to hearty and profitable co-operation. EXERCISES. 1. Illustrate the partnership of labor and capital in the case of a blacksmith who owns his shop, tools, &c., and works by himself. 2. Suppose, at the end of a year, the blacksmith has a surplus of earnings. How can he use it to extend his busi- ness ? 3. Explain the co-operation of labor and capital when he has a hired man working with him. 4. How are labor and capital partners in a watch-factory, whose capital, valued at a hundred thousand dollars, is owned by a hundred stockholders, and employs a hundred hands ? 5. In what ways might a laborer in such a factory turn his surplus earnings into capital ? 6. Suppose a skilful workman, with little tact for mana- ging business, and a poor workman, with great executive ability. Is it best that each should attempt to run a small business of his own ? 7. Which is best for a country, — to have its land, as in England, owned in large tracts by a few landlords, or to have it, as in our country, held in small farms owned by those who work them ? 8. Wliat is the effect on industry of a social organization which divides people into fixed classes, as rich and poor? 44 POLITICAL ECONOMY. 9. Show how competition affects the union of capital with labor, when the laborers are few in proportion to the amount of capital, and vice versa. 10. Does the world owe any man a living without labor ? 11. If the property of a town were all held in common, how would industry be affected ? 12. How does the lack of division of property among the Indians hinder their civilization ? 13. Can labor and capital meet in successful co-operation where the public sentiment tolerates fraud and robbery ? Which party there suffers most ? 14. Show the effect on capital and labor of an oppressive government, like that of Turkey. 15. What are monopolies ? How do they interfere with the advantageous co-operation of labor and capital ? 16. Suppose a government offers a bounty for the pro- duction of woollen goods. Who pays the bounty ? Is it just and equitable ? 17. Is it good policy, by bounties or high protective tariffs, to build up one branch of industry at the expense of all others ? 18. When labor is scarce, and the profit of production is large, can any combination of employers to keep down the wages of labor long succeed ? 19. When there is no profit on the production of cotton- goods, can a strike on the part of the mill-hands prevent the reduction of wages ? 20. What means do you think best adapted to promote justice, mutual confidence, and good-will between laborers and capitalists ? CONSUMPTION. 45 PAET TI. CONSUMPTION. The Nature of Consumption. All the pro- cesses of political economy contemplate actual gratifications as the ultimate end. This is the legitimate use of wealth. It can be attained only by consuming the results of production. Con- sumption is thus the counterpart of production, and in its widest signification it is simpl}' the de- struction of value. B}' this is meant not the anni- hilation of material substances, but the extinction of particular forms of utility. Thus when bread is eaten, when a coat is worn out, when a tree is felled, when a hide of leather is cut up, the particu- lar utilit}' which each possessed is destroyed. It is in the nature of things an established law, that we can neither create new values, nor gratif}' our desires, except by the destruction of existing value. It is to be noted, however, that one act of con- sumption does not necessaril}' destroy all the utilities of an article. The linen of a worn-out shirt has still an important utilit}^ as material for the manu- facture of paper. From the ashes of burned wood may be extracted an alkali useful in making soap. 46 POLITICAL ECONOMY. Hence economy in consumption requires effort to exhaust the utilities embodied in all objects. Kinds of Cod sumption. There are several ways in which values are destroj'-ed by the extinction of utilit}^, all of which come within the range of our broad definition of consumption. Sound economy must make account of all. A general distinction is made as we speak of consumption as Involuntary or Voluntary; i.e., as effected without or with direct design on the part of man. CHAPTER I. IKYOLUNTARY CONSUMPTION. Under this head three specifications may be named. 1. N^atural Consumption; that is, the waste of utility, the destruction of value, which is the work of nature. All things tend to decay. Wood and vegetables rot, iron rusts, linen goods become mil- dewed, woollen goods and furs are moth-eaten, grain in store heats and spoils, flour turns sour, and all things in use, even gold and silver, insensibly wear away. To this head is to be referred also the destruction caused by locusts, chinch-bugs, vermin, &c. " It is estimated that in England the destruc- tion caused by rats, mice, insects, &c., amounts to ten shillings an acre per year, equal to ten million pounds per annum." The degree of this kind of consumption varies with the climate of different regions. It appears in INVOLUNTARY CONSUMPTION. 47 one form under the influence of heat, in another under the power of cold. It is most general and most rapid in tropical countries. It is most within the control of man in the Temperate Zone, but no part of the world and no form of wealth is wholly exempt from this liability. Sound econom}' calls for prudent foresight and diligent labor to prevent as much as possible this kind of consumption. Yet, after the best that man can. do, there will be much of waste and loss from this cause, which must be carefully taken into account in the estimate of wealth and in plans for its increase. 2. Accidental Consumption. Under this head may be included those sudden calamities which carry sweeping destruction before them, proceeding some- times from the carelessness of men, sometimes from the unforeseen and inexplicable action of nature's forces. Such are great fires, railway-collisions, steamboat-explosions, shipwrecks, floods and torna- does, earthquakes and volcanic eruptions, ava- lanches and land-slides. The annual destruction of values in these wa3's is \evy great. Wealth in every form and in all countries is more or less liable to be thus suddenl}' consumed. No human art or foresight is competent to prevent it altogether. To meet this liability various methods of insurance have been adopted. But insurance cannot prevent the loss caused by destructive accidents. It only relieves individuals b}* distributing the loss when it occurs. When a house is burned, the destruction of value is absolute ; the wealth of the communit}'' 48 POLITICAL ECONOMY. is by so much diminished. If it was insured, the impoverishment of the individual owner is prevented onlj' b}' bringing man}' to share the damage. 3. Immaterial and Notional Consumption. These terms are used by Roscher to indicate that decline of value which comes from lapse of time or change of fashion. Thus the chief value of a daily newspaper is gone when it is a week old, although in itself it is the same thing as on the day it was issued. So, too, all sorts of fancy-goods, six months after they are brought to market, lose a considerable part of their value b}^ a change of fashion. If we remember that value is simply " purchasing power," it is evident, that, in the light of our science, these causes effect a consumption which is as real as that which comes from the actual destruction of the articles. Manufacturers and mer- chants and consumers also must take this loss into account. This kind of consumption varies much in different nations, and with different classes of people. In Germany fashions change much less than in France. In some countries, while the aristocratic and wealthy classes change their dress with the fashion, the conrw mon people wear their clothes till they go to pieces, '' In general, this kind of consumption increases with the advance of civilization. EXERCISES. 1. Hhistrate the relation of consumption to production in a particular instance. 2. Are all men producers ? Are all consumers ? INVOLUNTARY CONSUMPTION. 49 3. Illustrate the definition of consumption by the ordi- nary expenses of a family. 4. Can you think of any gratification which can be attained witliout some destruction of value ? 5. When a barrel of flour is made into bread, what is consumed ? 6. "Wlien the bread is eaten, what other consumption takes place ? 7. When a manufactory stands idle for six months, what kind of consumption is involved ? 8. Why is it good economy for a farmer to keep his tools and machines under cover when not in use ? 9. The burning of Chicago created a great demand for labor and materials for rebuilding : was the loss occasioned by the fire thereby diminished ? 10. A ship and cargo, worth together half a million dol- lars, were totally wrecked at sea; but thirty days after- ward insurance amounting to four-fifths of their value was paid to the owners. What was the total destruction of value involved, and on whom did the loss fall ? 11.' In Germany, military officers are required to wear buttons marked with the initials of the reigning sovereign: what special effect on the value of their uniforms must follow the emperor's death ? 12. "\Ylien and why is it good economy for a merchant to sell his fancy-goods at less than their cost ? 13. Wliich involves the greater consumption of ladies' dresses, actual wear, or change of fashion ? 14. What is the effect of frequent changes of fashion on production ? 60 POLITICAL ECONOMY. CHAPTER II. VOLUNTARY CONSUMPTION. There are two objects for which men of their own purpose destroy existing values. The one is the increase of wealth by reproduction; the other is immediate gratification. E.eproductive consumption demands care, skill, and labor, while consumption for gratification ordinarily requires neither. Hence the former is more or less irksome ; the latter is a present jo}^ We can rarel}^ use the same value for these two distinct and opposite purposes. One cannot eat his cake, and have it to sell for something else. A man cannot spend a hundred dollars for a social entertainment, and have the same money as capital in his business. On the other hand, the value in- vested in tools and materials for production is not available for the suppty of food for the table or fur- niture for the house. These two kinds of consump- tion may therefore be best presented in distinct sections. CONSUMPTION FOR REPRODUCTION. 51 SECTION I. —CONSUMPTION FOR REPRODUCTION. In presenting the laws of production, it was shown that the creation of vakies requires a union of capi- tal and labor in which both are consumed. Sound econom}" respecting consumption for this object pre- scribes the general rule, that the destruction of value for the desired product be always the least which will meet the necessity. This rule is apphcable to both capital and labor. As respects capital, the following suggestions are in point : — a. The amount of capital should be no greater than is necessary. In cutting cloth for garments, leather for shoes, boards for furniture, &c., there is opportunity for great saving or great waste of ma- terials. In agriculture, sowing done b}' drilling saves much seed. Care in the selection and adjust- ment of tools and machinery ma}^ also do much to diminish the cost of products. It is unwise to emplo}^ a steam-engine of a hundred horse-power, when only half that amount of power is needed ; or to use delicate cutting- tools for coarse work. h. The kind of capital employed should be of the lowest value that will accomplish the purpose. Straw is a cheaper material for paper than rags ; 3'et, for man}' purposes, paper made parti}' or wholly of straw serves well. Chemistry applied to the arts has introduced cheaper dye-stuffs for prints. Re- search and invention are thus constantly economizing 52 POLITICAL ECONOMY. the cost of production, and every manufacturer needs to avail himself of the fruits of such stud3\ The frequent adulteration of articles is an abuse of this principle. In such cases, the aim is to pass off goods, under false appearances, for what the}^ are not ; which is simply fraud, never to be justified. C. Every utility of the substances employed in production should be exhausted. There are frag- ments which may be saved. Thus in the manufac- ture of jewelry, the filings and sweepings of the workroom yield a considerable value. There are secondary utilities which may be developed, as the refuse of a large slaughter-house furnishes materials for soap, candles, and glue. Formerl}" the seed of the cotton-crop was mostly thrown away ; now from the kernel large quantities of valuable oil are ex- tracted ; the oil-cake furnishes excellent food for cattle and sheep ; the hull of the seed yields soluble phosphate of lime and potash for manure ; and the spent hull makes a white and clean paper-stock. By realizing these new values the cost of producing cotton-fibre is reduced. A chief advantage of production on a large scale is, that it warrants different operations for develop- ing these minor utilities, which in small establish- ments are wasted. As respects labor, the rule of economy suggests three corresponding points : — a. The labor employed should be neither more nor less than will effect the intended result. A super- numerary laborer wastes both his own time and that CONSUMPTION FOR REPRODUCTION. 53 of others. A deficiencj' in the number of laborers tends to confusion, and precludes the most economi- cal division of labor. The great advantage of ma- chinery is not that it diminishes labor, but that it multiplies the products of a given amount of labor, and so economizes production. h. The grade of labor should be carefully adapted to diflferent operations. All the advantages of ^^ di- vision of labor " come into account here. It is wise, when great skill is required, to employ a man of skill at high wages. It is unwise to put such a laborer upon work which can be as well done hy an unskilled workman at less wages. C. The labor paid for should be all performed. To secure this, efficient superintendence is all-essen- tial. " Time is mone}'," saj's the maxim. Certainly it is mone}^ to him who pa3's money for it. Every hour paid for that is spent in idleness is so much unprofitable consumption, — an absolute loss. Good superintendence often makes all the difference be- tween success and failure in the conduct of busi- ness. From these considerations it is evident : — 1. That the economical consumption of capital and labor depends chiefl}^ on the careful stud;- and accurate knowledge of the nature of the processes of production. 2. That all restrictions on the freedom of capital and labor are opposed to economy of production. 3. Economy of labor and capital in production promotes the general welfare, b}- saving from destruc- 54 POLITICAL ECONOMY. tion much that may be made tributary to the satisfy- ing of human wants. EXERCISES. 1. Illustrate the distinction between consumption for reproduction, and consumption for gratification. 2. Suppose a man buys a piano-forte for $500, and then mortgages the piano for $300 with which to buy tools for his business. Does the same value serve the double purpose of gratification and reproduction ? 3. Give examples of waste and saving in the materials of production. 4. How do contrivances for the more perfect consump- tion of fuel in steam-engines favor production ? 5. Name an article which has been both cheapened and improved by the use of cheaper materials. 6. Is the use of barytes, instead of white-lead, for mak- ing paint, a legitimate economy ? 7. Name an instance of a secondary utility secured by productive operations on a large scale. 8. What is the consequence of employing five men on the work of four ? 9. Is he always the most economical laborer who works for lowest wages ? 10. What need of a foreman at high wages in each department of a cotton-factory ? 11. Which is the best regulator of consumption for pro- duction, prescriptive law, or free competition ? Why ? 12. Would it be a blessing to either laborers or the com- munity if labor were restricted to eight hours a day ? CONSUMPTION FOR GRATIFICATION. 55 SECTION n. — CONSUMPTION FOR GRATIFICA- TION. The ultimate end of all industr}' is to provide for the wants of men, and to minister to their happiness. The products of industr}- may fitl}' be consumed on several kinds of gratification. 1. Gratifications essential to the preservation of health and life. All men require food, clothing, and shelter. Hence these are called necessities. The term is, however, used relativel}', not absolutel}''. The measure and qualit}' of goods needed in this form varies with circumstances, such as climate, grade of civilization, occupation, and social position, and also with the taste, temperament, and education of different persons. A l^amboo hut, a measure of rice, and a few 3'ards of cotton cloth, suffice for the pariah of India. A respectable citizen of our coun- try requires values a hundred-fold greater. 2. Gratifications which delight the senses and tastes. The mere sustaining oT existence comes far short of fining out the measure of men's capacity for enjoyment. Such things as delicacies for the table, beautiful dress and equipage, ornamental fur- niture, the products of fine art in painting, statuary, architecture, and music, pubhc exhibitions to please the e3'e and the ear, yield rich gratifications to peo- ple of taste. The desires which run in this direction are natural. Their gratification, within due Hmits, is refining and elevating. Means for these gratifica- 66 POLITICAL ECONOMY. tions may be drawn from the resources of nature, and quite generall}' distributed. It is morall}^ and sociall}' healthful for people of ever}^ class to enjoy some things which they esteem luxuries. At the same time, there are in this direction dan- gers to be carefully avoided. Appetites unnaturally formed and unduly pampered may gain the mastery, and lead to indulgences which produce misery instead of happiness. These things may minister only to a desire for vain ostentation, which breeds discontent, envyings, and jealousies, —the bane of happiness. And men are sometimes led by a refined taste into ruinous extravagance, which exhausts their means, and robs them of even the necessaries of life. Self- control and prudent forethought should ever regulate both the desires and their gratification. 3. Intellectual gratifications, from fit exercise of the mind and the acquisition of knowledge. These affect the higher part of men's nature, and }ield a pleasure exceedingly rich and pure, with a consump- tion of values comparativel}' small. All are capable of enjoyment in some degree from this source, and the capacity for it increases as provision for it is enlarged. 4. Social gratifications, through the exercise of hospitality and all acts of friendliness, in the varied contact of men with one another. B3^ the constitu- tion of our nature we are formed for mutual inter- course and fellowship, and through the good-will which seeks to please others we find a rich gratifica- tion for ourselves. Such gratifications bind society by strong and healthful ties, and promote the general hnppinor's. CONSUMPTION FOR GRATIFICATION. 57 5. Moral gratifications, through the culture of a good conscience toward God and toward men, and the exercise of benevolence. To secure these, some value must be consumed in the support of religious institutions and in gifts of charit}'. B}' such expen- ditures the noblest capacities of our nature are drawn out ; and for the expenditure there is returned the richest satisfaction, — a satisfaction not hmited to the moment, but abiding for the lifetime of the soul. The rule of economy applicable to consumption for gratification is essentiall}- the same as that laid down for reproduction. It may be stated in a gen- eral way thus : Sound economy dictates that we secure the largest and best gratification at the least practicable consumption of values. This rule sug- gests a. That the quantity of articles consumed be limited by the actual needs. Americans may learn economy in tliis respect from most European peoples. Quite generally our tables are loaded with a profusion of food which is simply wasteful. Ordinarily it is more economical to purchase supplies for the house- hold from day to day, at retail, than at wholesale, though the prices paid are higher. So, too, it is commonly unwise to purchase an article just because it is cheap. The first and main question is always, ''Is it needed?" b. The consumption should be as perfect as pos- sible, exhausting every utility. The surplus of a dinner may provide for the next breakfast. An article of clothing outgrown b}'- one child ma}' be made over for a younger. Bad cooking is alwayy 58 POLITICAL ECONOMY. wastefuL Hence it is good economj^ to provide a house with the best cooking-utensils, with fuel that produces most heat, and with competent servants. Hence, too, a knowledge of domestic econoni}^ and a careful superintendence of the operations, on the part of the mistress of a family, is of the highest consequence to home comfort. C. Good judgment is to be exercised in the selec- tion of our gratifications. Of two gratifications that are equal, it is wise to choose the least expensive. That which favors phj'sical health is to be preferred to that which tends to disease. Those which refine, strengthen, and elevate our being are to be chosen, rather than those which degrade and weaken us. In our individual gratifications we have occasion to regard social consequences, and, both for our own sake and for the good of others, choose those which improve, in preference to those which demoralize, society. In general, intellectual and moral pleasures are inexpensive, as compared with sensual gratifications, and those which minister to fashion and vanity. The cost of an hour of drunken frolic or gluttonous feasting will buy books for a j^ear's higher enjoy- ment ; and the sums spent in the ostentatious dis- play of dress, at the beck of the despot Fashion, would furnish means for many deeds of charity which would fill with perennial joy the hearts of both giver and receiver. Before leaving this topic, a few things need to be said on the reciprocal relation between production CONSUMPTION FOR GRATIFICATION. 59 and consumption for gratification. The production of goods is alwa3's carried on with reference to their consumption, and rapid and ample consumption is the true stimulus of production. As another has expressed it, " 3IateriaI welfare consists in an ample consumption : ample production assures abundance ; and, under tlie law of competition, abundant pro- duction assures rapid and more equal consumption." Extreme frugality would leave goods in the hands of producers uncalled fot, and at once throw laborers out of emplo3''ment and out of the means of living. Extreme luxury would consume resources and hinder the accumulation of capital necessary for j^roduction. The problem is, to find the golden mean which shall keep the balance that sustains prosperous industr}^, by a steady demand for its products. The problem can be solved onl}' as each man studies it, and finds the solution for himself by using his means for healthful gratifications, at the same time hmiting his gratifications bj' a due regard to his means. Where great inequalities of condition prevail, the lavish expenditure of the rich in luxurious consump- tion is no doubt a blessing, as it gives emplo3Tnent and the means of living to the poor. But for the greatest general good there is a better use of the superfluous wealth of the rich, by its emplo3'ment as capital in a wa}' to give the poor a chance to increase their means, and at the same time to multiply and cheapen products so that all the people — the rich and the poor alike — may have more of comforts and luxuries within their reach. 60 POLITICAL ECONOMY. EXERCISES. 1. Name what you think are necessaries of life. 2. Name the luxuries enjoyed in your home. 3. Name some articles which are necessaries in one family and luxuries in another. 4. Can you name an article now regarded as a universal necessity, which was unknown two hundred years ago ? 5. Illustrate the different wants of people of different classes and of different countries. 6. Is it an extravagant outlay for a rich man of culture to spend twenty thousand dollars for a library ? What if his library is kept for show, and seldom used ? 7. Illustrate the evil of undue indulgence in luxuries. 8. Are cheap goods always the most economical ? 9. When is a large outlay for a social entertainment justifiable ? 10. Is there any exception to the rule that one's gratifi- cations should be limited by his income ? 11. When is it important to learn how to spend, as well as how to save ? 12. Is it desirable that all should restrict their expendi- tures to bare necessities ? 13. How can we dispose of our surplus food-products, unless we use tea, sugar, silk, &c., brought from other countries ? PUBLIC CONSUMPTION. 61 CHAPTER IIL PUBLIC CONSUMPTIOK, The Nature of Public Consumption. Under the social instinct mankind gather and Uve in com- munities. This gives rise to certain common wants, which are provided for b}^ public agents of the government, using means drawn from those who compose the society or state, bj^ taxation. These common or public wants can be satisfied only by the destruction of values, just as in indi- vidual consumption. It is to be remembered that the values thus destro3'ed are a part of the property of individual citizens taken for public use. In gen- eral, the government has nothing to expend but what is contributed by its tax-paj'ing citizens. In ancient times despotic governments called out thou- sands of their people to labor directl}^ in building city- walls and other public works, and collected from others the food necessary to sustain them, and the materials to be used. This was a direct and obvious draft on private propert}^ for public use. In medi- aeval times, when a sovereign made war, he called on his vassals to send each his quota of men, fur- nished with horses and armor, and food for their sustenance. Each individual thus felt immediately the burden of the values destroyed in public con- 62 POLITICAL ECONOMY. sumption. The same thing is involved in the modern system of providing for the public consump- tion by taxes paid in mone}'. The farmer sells a portion of his grain, and with the money paj^s his tax ; the next day the commissary of an army may take the same monej^ and buy up the same grain for the use of the government troops. Or, if the pro- cess is more complex and roundabout, it comes ulti- mately to the same thing, — a part of the farmer's crop is consumed, its value destro3'ed, not for his private advantage, but for a public use. A clear apprehension of this very simple truth is needed to correct a notion entertained by man}^, and often expressed, that large public expenditures are a benefit, provided only the money remains in the countr}^ In all public consumption it is goods, real values, that are destroyed. The wisdom of the expenditure is determined by inquiring what propor- tion the benefit attained bears to the value destro3"ed. The benefit, however, may appear in an immaterial form, as in the maintenance of justice and the pro- motion of general intelligence. The thing to be insisted on is that there shall come a real good as large as possible, from a destruction of value as little as possible. The Purposes to whicli Public Consumption is properly applied may be specified as follows : — 1. For the support and administration of govern- ment. Law and order are grand essentials of good societ}^ On them depend the security of private property and of personal enjoyment. To secure PUBLIC COXSUMPTION. 63 these, legislators, executive officers, and judges must be supported, and buildings furnishing suitable accommodations for these functions of government must be erected at the public expense. It is good economy to pay salaries sufficient to secure the best talent for these services. 2. For works of public convenience, commonly called public improvements. Here are included such things as paving, cleaning, and lighting the streets of a city, providing water-works and sewer- age, constructing roads and canals, improWng har- bors, building and sustaining light-houses, &c. These works confer benefits upon the whole commu- nit}'. • It is just, therefore, that they should be paid for out of the common treasur3\ For them, also, it is often necessar}' that private propert}' be taken for public use, by the right of eminent domain, a right peculiar to the government. 3. For advancing science, and diflFusing intelli- gence for common interests. Under this head be- long exploring expeditions, astronomical observa- tions, geological surve3's, coast-surveys, meteorolo- gical observations, entomological investigation, and the whole post-office sj'stem as a means of diffusing intelligence and promoting social conamunication. Expenditures for these things 3'ield broad, general benefits of the highest importance. By its S3'stem of storm-signals, our National Observatory" saves yearly wealth exposed to the dangers of the sea, whose value is a hundred-fold that consumed in its maintenance. 4. For the promotion of popular education. The 64 POTJTICAL ECONOMY. prosperity of a countr}' depends very much on the intelligence of its people. General education tends to a wise application of industry, and makes it more effective. It brings labor and capital to meet more nearly on an equalit}^, and promotes the harmony of their co-operation. It is of advantage to every honest man to have intelligent men to associate and to deal with. For such a common blessing it is fit that the common funds provide, to some extent, and at the same time, that scope be given for private beneficence to be exercised for the same end. 5. For the care of classes afflicted by peculiar calamities or deprivations. Hospitals for the sick and for the insane, and institutions in which the deaf, the blind, and the feeble-minded may by peculiar processes receive an education, are here referred to. Our common sjTupathies and benevolence prompt such means of relief for the unfortunate. They can be most economically provided b}^ the government. Their benefits must be largely gratuitous because such misfortunes come in largest proportion upon the poor. 6. For the relief of poverty. The poor we have always with us. Every encouragement should be given to the exercise of private charit}' for its relief, because Christian beneficence brings a blessing to the giver as well as to the receiver. But there is necessity also for some public provision for the poor, to meet some cases which fall outside the range of private beneficence, and also to offer some facilities for the poor to do something towards their own support. It is unwise, however, to dispense either PUBLIC CONSUMPTION. 65 public or private charity in a wa}^ to encourage pauperism. 7. For the nation's defence. The general good is involved in the nation's life. While selfishness rules human hearts as it does, especially in in- ternational relations, exigencies will arise when nothing but military force will save a nation's life. Such exigencies must be anticipated b}' due appro- priations for forts, and armies, and navies, and the various munitions of wai\ When war is inevitable, then no expense is unreasonable which is necessary to prosecute it with the utmost vigor. Yet it must ever be remembered that war is always destructive, terribly destructive, of both wealth and of men who produce wealth. With reference to the whole range of public con- sumption, sound economy dictates two plain and simple rules : — 1. The style and scale of national expenditures should be such as to command the respect and honor- able pride of the people without useless display. 2. The methods of national expenditures should be such as to hold all agents of government to a direct and strict responsibility, and to insure the utmost fidelity in the discharge of all trusts. EXERCISES. 1. Illustrate the destruction of values drawn from pri- vate wealth, in the public lighting of city streets. Wliat benefit accrues therefrom, and who enjoy the benefit ? 2. Is fraud in public expenditures less criminal than in 66 POLITICAL ECONOMY. private relations? What false sentiment prevails on this subject ? 3. Name the blessings of good government which war- rant expenditures for its support. 4. The members of the British Parliament receive no compensation for their services : what objections to apply- ing the same rule to our members of Congress ? 5. Why should the general government maintain light- houses, instead of leaving the citizens of each port to pro- vide their own ? 6. Give reasons for or against the policy of railways being built and run by the government. 7. Should the government control the operations of the electric telegraph as it does the postal system ? 8. Why is it right for a legislature to appropriate money for a state geological survey ? 9. Why is it right that a man who has no children be taxed for public schools ? 10. What benefit accrues from monuments, Fourth-of- July celebrations, &c., to justify the outlay of public funds f(5t* such purposes ? 11. Why should a state maintain special institutions for the care of the insane and the education of the deaf ? 12. Why should criminals in a state-penitentiary be com- pelled to work? 13. Should those whom sickness or calamity has reduced to poverty feel disgraced by accepting public relief ? 14. Mention some of the evils of pauperism as it exists in England. 15. How does war stimulate production ? Does this fact make war less a calamity ? DISTRIBUTION. 67 PART III. DISTRIBUTION. We have seen, that, for the production of wealth, labor must be joined with capital ; that various kinds of labor and divers forms of capital are involved ; that the general industry of a people includes the labor of men of various occupations and profes- sions ; and that the protection of good government is essential to prosperous industr3\ The value of each article produced, estimated b}^ its cost, repre- sents, therefore, a number of different services ren- dered by different persons. Thus problems arise respecting the distribution, to each one concerned in the process of production, of his share of the value created. The third division of our science is occupied with these problems, and may be defined thus : — Distribution is that department of Political Economy which determines the principles on which the proceeds of industry are divided among the par- ties concerned in their production. The parties to be recognzied are three : First, the Laborers of all grades, whose energies, physical and mental, are directly or indirecth' engaged. 68 POLITICAL ECONOMY. Second, the Owners of the Capital, the fruit of past labor saA^ed, and now combined with present labor for a joint result. Third, the Government, which secures the safet)^ and the rights of all, and which draws on the proceeds of industr}^ generally for its maintenance. Bat the stimulus to all industr}^ and enterprise is the anticipation of profits, i.e., a surplus of values produced above those consumed ; and the success of industry is measured by its profits. Hence arises a special question of prime importance, respecting the apportionment of the profits. This department will be treated, therefore, under four subdivisions, viz. : — 1. The Remuneration of Labor. 2. The Remuneration of Capital. 3. The Distribution of Profits. 4. The Revenues of the Government. CHAPTER I. THE REMUNEKATION OF LABOR. Terms used. The compensation of labor is ex- pressed b}'' different terms. Mr. F. A. Walker saj's that "of English-speaking people, three - fourths probabl}', two-thirds certainly, subsist on wages." This term is applied to manual labor of all grades. It means a stipulated reward for services rendered, rated either by the time occupied or by the work accomplished, b}' the day or b}' the piece. It pre- THE REMUNERATION OF LABOR. 69 supposes the relation of emplo3'ers and employed, bound b}^ mutual stipulations, which may be varied or terminated on short notice. Salary expresses a fixed sum of money, reckoned usually by the 3'ear, for services which involve brain- work and responsible trust. Thus in a large manu- factor}^, the mass of laborers receive wages, but the treasurer, the superintendent, &c., have salaries. Clerg3'men, teachers, and civil officers are generally compensated b}^ salaries. The term implies an en- gagement of some permanence, and a grade of ser- vice requiring special qualifications and previous education. Some agents are compensated by commissions; that is, a certain rate per cent of the value involved in each transaction. The term is applied to brokers, insurance-agents, collectors, travelling salesmen, and the like. In this case, the employer is responsible only for what is actualh' done ; and the agent's reward depends on his personal enterprise, tact, and fidelity. Lawyers, physicians, and certain civil officers are remunerated by fees. The term originated probably in the gratuity formerly offered by a party benefited for a service done. Hence more or less indefinite- ness in this mode of remuneration. The rate is adjusted for each particular service by usage, or by the arbitrary demand of the party rendering the service, or by the good- will of the party served. The questions respecting wages involve the most difficult problems of Distribution, and demand our first attention. 70 POLITICAL ECONOMY. SECTION L— NOMINAL AND REAL WAGES. Nominal wages are wages estimated in terms of money. Real wages are measured by the necessaries, com- forts, and luxuries of life, which they will command. It is important to observe this distinction, in com- paring the rates of wages in different countries and at different periods. The monej^-wages of an Eng- lish laborer may be much less than that allowed an American ; but the prices of all things which sup- port life may be so much lower in England than in America as to nullify the difference. The laborer who receives the lowest money-wages may be the best off. In 1843 the rate of wages for an Ameri- can day-laborer was one dollar per day ; in 1865 the nominal rate was doubled : 3'et the one dollar of 1843 would buy a third more of comforts than the two dollars of 1865. Several causes tending to produce this difference are worthy of notice. 1 . The most influential of all is the fluctuations in the purchasing power of money. A sudden increase in the amount of that which passes as mone}^ must diminish the purchasing power of each dollar. The fact appears in enhanced prices for all commodities. The use of paper money leads generall}^ to sudden expansions and contractions. The worst mischief of such fluctuations falls on those who live b}^ wages. 2. The form of payment often makes a difference NOMINAL AND REAL WAGES. 71 between nominal and real wages. While wages are generall}^ reckoned in mone}', they are not alwa3's paid in mone}'. With farm-laborers, their board is counted as a part of their wages. Manufacturing laborers are sometimes paid by the " truck-system," as it is called ; that is, by orders on stores, where prices are fixed somewhat arbitraril}-, ruling out competition. 3. The greater or less regularity of employment affects the real value of wages. In agriculture, brick-making, house-building, the fisheries, and the like, labor is in measure precluded at certain seasons and crowded at others. The real remuneration of labor must therefore be estimated not by the wages of one day or one month, but b}^ that rate as quali- fied by the regularity or irregularity of each occupa- tion. 4. Tlie duration of the power to labor must be taken into account in determining the difference between nominal and real wages. Vital statistics show that the number of 3'ears during which a man can expect to have strength and vigor to earn wages varies with men of different nationalities, in difierent climates, and in different occupations. Glass-blow- ing, and almost all work in mines, are exhausting occupations. Men can continue them but few years. To know the real compensation of labor, therefore, we must estimate the wages of a lifetime. If the use of machiner}^ tends to depress nominal wages, it tends also to multiply and cheapen the necessaries of life so as to enhance real wages. The laborer of to-day enjojs many comforts which 72 POLITICAL ECONOMY. were hardly known a half-century ago. At the same time the fact of having enjo3'ed these things freely makes it a hardship now to be in any degree deprived of them. SECTION" IL — THE EFFICIENCY OF LABOR. Labor, as an element of production, must be esti- mated not by the time occupied, nor by the rate of wages paid, but by the efficiency of tlie labor itself. With respect to efficiency, men differ greatly. All who have occasion to employ numbers of men know this very well, and must recognize a distinction between the nominal cost of labor, indicated by the wages paid, and its real cost, estimated by the value of the work done. The English contractor, Mr. Brassey, found that a London bricklayer employed at five shillings a day did more work than two coun- try workmen who were each paid three shillings and sixpence a da}^ "We may name the following causes of difference in efficiency : — 1 . Peculiar qualities of blood and race. Physical influences, such as local climate, customar}^ food, and habits of hfe, continued through man}- genera- tions, modify the physical structure of a race. Hence come differences in height, weight, muscular strength, and especially in nervous force and spirit. Thus the Chinese and Japanese fall below the aver- age of men in stature, and the Scotch rise above it. The French, without great size or vigor, are more than ordinarily quick and active. The Eng- THE EFFICIENCY OF LABOR. 73 lish and Germans have great patience and endur- ance. Peculiar characteristics become hereditary, and mark whole races. 2. The quantity and quality of food and clothihg. A man who lives chiefly on potatoes or rice cannot have the strength and vigor of those who have a more varied and generous diet. This matter is carefully studied in the rearing of working-animals : why should it not be as much regarded with respect to working-men? Clothing and food help each other in maintaining the warmth of the bod}''. 3. Habits respecting cleanliness of person, and purity of air and water. Whatever depresses a man's vitality must diminish his efficiency. What can more effectually impair health and depress nerv- ous force, than to live, as too many laborers do, crowded in narrow, filthy tenements, where the sun- light is excluded, and the water is contaminated with sewage-matter, and the air is charged with noxious poisons? 4. Intelligence is an important element of efficiency in a laborer. One who has learned to read and write has thereby improved his capacity to learn and exercise a trade. Intelligent laborers can think for themselves, and with little superintendence strike for the object aimed at in their labor, at the same time exercising their invention to devise means for increasing the efficiency of their toil. 5. Technical education and industrial associations increase the efficiency of labor. Instincts are heredi- tary ; and one gains unconscious tuition by contact and familiarity with organized industry. In asso- 74 POLITICAL ECONOMY. elation with good workmen, a boy grows into habits of quick observation and manual dexterit}', and so learns the best part of his trade before be begins his regular apprenticeship. 6. Cheerfulness and hopefulness of spirit help much to make labor efficient. These qualities grow out of self-respect, social intercourse, and the labor- er's personal interest in the result of his work. Slave-labor lacks these elements, and is therefore unprofitable. The laborers may be put on starva- tion-wages, and so reduced to the level of slaves. It is for the interest of employers, as well as of laborers, that wages should be such as to inspire cheerful hope. EXERCISES. 1. If the annual product of a watch-factory is valued at half a million dollars, among what parties must this sum be divided ? 2% What claim has a stockholder of the company on the product ? 3. How will the workman who makes only hair-springs get liis share ? 4. Whence come the means to pay the tax of five hun- dred dollars laid on the property ? 5. How large a portion of the fifty employes will receive wages ? 6. Who of them will be paid salaries ? 7. How will the salesman who travels to sell the watches be paid ? 8. How is the lawyer employed to collect bad debts compensated ? 9. Nominal wages are now in 1879 fifty per cent lower than in 1873 : how is it with real wages ? 10. Illustrate how an increase of money affects real wages. THE EFFICIENCY OF LABOR. 75 11. Under an expanding currency, do wages rise as soon or as high as the prices of goods ? Why ? Which, wages or prices, first go down under a contraction of currency ? 12. What objection may a laborer laake to receiving his wages in orders on a store, especially if the store belongs to his employers ? 13. Why is it right that the nominal wages of a brick- layer should be higher than those of a shoemaker ? 14. Do you know any reason why the smelters of lead- ore should be paid higher wages than farm-laborers just by them ? 15. What causes combine to make our native American or Yankee laborers peculiarly efficient ? 16. Why is it good economy for a manufacturing com- pany to provide neat and convenient tenements for their employes ? 17. Is it a wise and just law which compels laborers to send their children to school for a certain portion of their time ? Wliy ? 18. What is the advantage of thorough apprenticeship to a trade ? 19. Does the habit of singing while at his work impair, or improve, a laborer's efficiency ? 76 POLITICAL ECONOMY. SECTION III. — CONSIDEEATIONS WHICH DETER- MINE THE RATE OF WAGES. Wages imply a contract between two parties, — a promised reward for promised services. The two parties join in the contract for their mutual advan- tage, j'Ct each having a separate interest. The wages agreed on must be determined by some regard to each of these separate interests. 1. On the side of the laborer, the first considera- tion is the cost of living. The man depends on his wages to provide for himself shelter, food, and cloth- ing, that he may be kept in health and vigor, fit for work. More than this, since man is short-lived, children must be reared, in order that the stock of laborers may be continued. There must be also some provision for the laborer in his old age, when he is too feeble to work. Whatever is essential to the support of the laborer and family, must thus be taken into the account ; and this consideration deter- mines what some writers term necessary wages. Its chief force is to define a limit below which wages cannot be set to continue long without inducing misery, and reducing the number of laborers. The cost of living varies in different climates, and, to some extent, according to the habits of dif- ferent races and classes of people. Hence in warm countries wages may be lower than in cold. The habits of the Chinese enable them to live on less wages than Americans. It is, however, a bad sign THE KATE OF WAGES. 77 for a people's prosperity and happiness, when wages are pressed down to this lowest limit. The compen- sation of labor should be such as to give the dili- gent and thrifty a chance to multipl}' their comforts and improve their condition. 2. On the side of the emplo3^er, the main consid- eration is the value of the products. The emplo3er embarks his energy and capital in a branch of pro- ductive industry, expecting from the sale of the products to have a surplus for his own reward, after pa3ing wages and all other costs. His power to pay wages depends on the purchasing power of these products. When their price in the market rises, he can afford to pay higher wages ; when it declines, he may be compelled to stipulate for re- duced wages. The value may be so reduced that he will have no alternative but to close his opera- tions, and extricate his capital as best he ma}^ The chief force of this consideration is to define a limit on the other side, — a limit above which wages cannot rise to continue long without ruining the business. The laborer comes to the negotia- tion, asking at least such wages as are necessarj' for his support. The emplo3^er comes, offering at most such wages as he thinks the value of the products will enable him to pa}'. The actual agreement will strike a point between the two extremes, fixed by other considerations hereafter to be named. -These two considerations suggest this general statement. The minimum limit of wages is the rate necessary for the support of the laborer and his family. The maximum limit is the rate determined by the marlcet- 78 POLITICAL ECONOMY. value of the products. The mere will of either party cannot safely change these fixed limitations. 3 . The customary rate of "wages is a consideration of some force in determining the rate that shall be. There is alwaj^s a presumption in favor of existing usage, which, in the negotiation, may be pleaded on one side or the other with some effect. This con- sideration resists any contemplated change. Thus, when, in 1865, an inflation of the currency in the United States had increased the cost of living, and at the same time increased the prices of products, there was need that wages be advanced ; but em- ployers clung to the old rates, and yielded very reluctantly to the rightful demands of their employes. Ten years later the condition of things was just the opposite. Both the cost of living and the prices of all productions were greatly reduced, and employers were constrained to reduce wages accordingly. But then the laborers clung to existing rates, and resisted the proposed reduction, often with violence. This is, however, a qualifying, rather than a determining consideration. Like the law of inertia in phj^sics, it resists or impedes all changes of wages. 4. Competition is beyond all others the controlling consideration, determining the rate of Tvages. The other considerations named have some weight. This, while it cannot nullify, does overbear them. Competition is the struggle of tTvo or more persons to gain the same thing at the same time. Many labor- ers are seeking wages, and high wages, at the same time. Many emplo3^ers are seeking profits as large as possible at the same time. Competition becomes THE RATE OF WAGES. 79 active just in proportion to the comparative num- bers on either side. If the number of laborers is large in proportion to the emploj'ment offered, a sharp competition arises between those seeking work. Each, rather than lose his chance for wages, will lower the rate at which he will contract. If the number of employers is large, with a large amount of capital in proportion to the number of laborers, a sharp competition arises among emplo3'ers. Each, rather than lose his chance for anticipated profits, will raise the rate of wages he is willing to pay. If, for any reason, the wages in a particular branch of industry rise above the ordinary rate, a speedy rush of laborers into that employment inten- sifies competition till the wages are brought down. On the other hand, if a particular branch of pro- duction yields profits above the ordinarj' rate, there comes a rush of emplo3^ers with their capital into that business ; wages are raised, and products are multiplied and cheapened till profits are brought down to the ordinary level. Competition thus tends to bring wages and profits to an equilibrium most favorable to the interests of all. In the nature of things, competition is inevitable : it has a blessing in it, and it is simply absurd to ignore or con- demn it. If competition were universally free and fair, it would do much to remove present inequalities of condition, and the burdens and the benefits of human industry would be equally distributed. But over- reaching selfishness is continuall}' interfering with competition to make it neither free nor fair. We 80 POLITICAL ECONOMY. cannot rule out all competition. It would be neither just nor wise to do so if we could. But much ma}' be done to resist abuses of the principle, and to give full scope for its natural and beneficent function. 5. The Golden Rule of Christ, ''Whatsoever ye would that men should to 3'ou, do ye even so to them/' presents a consideration which both Political Economy and Christian Ethics may fitly recognize and enforce in its application to the question of wages. Genuine self-interest, as distinct from rank selfishness, dictates the adoption of this rule. There are pleasing indications that it is in increasing meas- ure regarded in the mutual relations of labor and capital. Men like Mr. Bright in England, and cor- porations like the Pacific Mills in our country, act- ing on this principle, show clearly how it tends to soften animosities, to inspire mutual confidence, and to eflfect genial co-operation, so as to increase the eflSciency of industry', and give all an equal share in its products. Certain combinations to resist competition must be noticed in this connection. Combinations on th part of laborers take two forms, strikes and trades unions. A strike is a mutual agreement of a number of workmen to stop work until their emplo3'ers accede to certain prescribed terms. It must be admitted that laborers have a right to define terms of the contract with their emplo^'ers, and to refuse to work except on those terms. It is their right also to '^% THE RATE OP WAGES. 81 combine in counsel and effort to maintain their com- mon interests, and earnestly to press their claims. But one set of workmen have no right to interfere with the freedom of others who do not choose to join the strike. The first, the most sacred, the dearest right of every laborer, is the right to do •what he M^ill with himself, his time, his strength, his skill. Yet since the strike, in order to be effective, must rule out all competition, threats and violence, instead of simple persuasion, are resorted to as means of preventing other laborers willing to work from doing so. This is a flagrant outrage on the most precious right of freemen. As a strong and determined assertion of a reason- able claim, a strike may do good service ; but the claim is reasonable only when the necessities of the laborers require, and the prices of products permit, the increase of wages, or whatever better terms are insisted on. Then there is a better wa}' : it is b}- a frank and open negotiation between the parties. In prosperous times, there is little occasion for strikes. In adverse times, strikes can accomplish only dis- aster to all parties. For, as Mr. Brassc}' sa3's, "Strikes against a falling market always fail." Trades-unions are combinations of laborers of particular trades in permanent organizations to promote the general interests of their respective fraternities. These associations often perform the functions of mutual benevolent societies. Contri- butions are made for the relief of sick, disabled, and distressed members ; and measures are em- ployed to promote S3'mpathy, social enjo3'mcnt, and 82 POLITICAL ECONOMY. mental culture. They thus render beneficial ser- vice, and are worthy of praise and encouragement. But often these associations attempt to regulate wages, by resisting competition, in two wa3's : First, by promoting and. sustaining strikes, in which they are likely to aggravate the evils already referred to, because under them the strike is better organized and more domineering. The}^ are apt also to insist on uniformity of wages irrespective of the varying abilities and efficiency of diflFerent workmen, which involves injustice to superior artisans as well as to emplo^'ers. Second, by restricting apprenticeship, which is simply an attempt to rule out free compe- tition, and give to a limited number of persons a monopoly of certain forms of skilled labor. This involves the injustice and mischief which are inher- ent in the very principle of monopoly. If generall}' carried out, it would set the various branches of industry in antagonism to each other, and tend, as Mr. Brasse}^ sa^s, "to establish that subdivision of caste which has been the great curse of India.** When managed for these ends, trades-unions involve heavy taxes on the members, and often subjection to selfish and reckless leaders, who seek their own personal interests rather than the common good. On the other side, combinations of employers are often formed to resist competition. Such combina- tions sometimes attempt to regulate the prices of products, creating a monopoly in the general mar- ket. Their action in this form belongs to the department of exchange. They attempt also to THE RATE OF WAGES. 83 regulate wages by agreements not to pay above certain rates. While the right to enter into such agreements cannot be questioned, the actual combi- nation involves an abuse of the power of capital to tjTannize over labor and dictate terms. It pro- duces in the laborer a sense of injur}', and incites antagonism and attempts at retaliation, which pre- vent the cheerful co-operation of the two great factors of industr3\ Such combinations seldom succeed in controlling wages except for ver}' brief periods. To be effec- tive, the combination must embrace all who are engaged in a particular industry, and also all the capital likely to be drawn into it. If the wages fixed b}' the combination are so low as to make the profits larger than those of other forms of business, free capital will rush in and bid for laborers by rais- ing wages, thus renewing competition, and defeating the end sought. Experience shows that combinations on either side, to i)revent free competition, cannot, for any long time, materially influence the rates of wages. Such attempts interfere with the natural law of supply and demand, which is the grand regulator of wages for the best interest of all concerned. When issues arise between the parties to the labor-con- tract, the surest way to a fair adjustment is by frank mutual explanations, or, in the last resort, b}- joint reference to just arbitration. In most cases, the occasion of difficulties ma}' be forestalled by the culture of mutual good-will in active co-operation for the common good, intelligently apprehended and prosecuted on both sides. 84 POLITICAL ECONOMY. EXERCISES. 1. Can either party, employers or employed, arbitrarily fix a rate of wages for labor ? 2. Can the government, by law, fix a rate which will stand ? Why not ? 3. Why ought not laborers to be content with wages which suffice for their bare support ? 4. Illustrate the effect of climate on the scale of living, and by consequence on the rate of wages. 5. When the cost of living is increased, are laborers to be blamed for demanding higher wages ? 6. Are manufacturers to be blamed for reducing wages when the prices of their products decline ? 7. When business is depressed, is it right that high dividends to stockholders should be maintained by reduced wages? 8. Illustrate the conservative influence of custom on wages in some one trade. 9. Why is the rate of wages generally higher in a new than in an old country ? 10. Illustrate the effect of a financial panic on wages. 11. What reason have laborers to think that free compe- tition bears most hardly on them ? 12. If over - population by sharp competition reduces wages to the starvation limit, can a strike relieve the case ? How can such a case be relieved ? 13. State the results, good or bad, of any strike which you have known about. 14. State Avhat benefits and what evils you have known to come from membership in a trades-union. 15. What consequences would follow if the policy of limiting the number of apprentices were carried out in all forms of industry requiring skill ? 16. What is there to prevent the application of " the Golden Rule " in the mutual relations of laborers and their employers ? REMUNERATION OF LABOR. 85 SECTION IV. — CAUSES OF VARIATION IN THE REMUNERATION OF LABOR. Evidentl}' all kinds of labor are not compensated alike. Competition tends to produce uniformit}' of compensation. AVhatever, then, diminishes the in- tensity of competition, opens the way for other ' causes to produce variation. Several circumstances thus affecting competition ma^^ be named : — 1. The ease or difficulty, the agreeableness or dis- agreeableness, of the einploymeiit. For easy work, many are ready to compete ; but from hard work, man}' draw back, and the number able to put forth great muscular effort is small. Mining- work under ground is disagreeable ; the number willing to en- gage in it is much less than of those ready to do pleasanter work on the surface : hence onl}' a better compensation will induce an}' to go below. It is not an uncommon thing for a gentleman to pay a male cook more than his private secretary ; the dignity attached to the one office, and the menial character of the other, accounting for the difference. 2. The skill required in the operation. Here we note the difference between simple labor and edu- cated labor. Skill can be acquired only by practice and training, which cost both time and money. It becomes thus an investment, for which the possessor ma}' justly ask a compensation. Unusual skill sup- poses unusual natural endowment, the rarity of which precludes sharp competition. 86 POLITICAL ECONOMY. 3. The amount of trust involved in the occupation. Ill services about banks, or which in an}^ way involve the handling of money ; in manufactures where, as in the case of jewehy, the precious metals are put into the hands of workmen as materials ; in railway operations, where the safet}' of man}- persons and of large amounts of property depends on the conduct of a single engineer, — in these and similar cases, good judgment and incorruptible integrity, as well as skill, are required. This combination of qualities is comparatively^ rare. Hence, while the demand is imperative, the supply is small, and competition for such places is restricted. For such positions, it is good economy to pay trustworthy men extraordinary compensation. 4. The constancy or inconstancy of employment. In out-door occupations, such as those of the car- penter and brickla3^er, work is interrupted by bad weather, rainy days, and the winter-season. The compensation for the working time must be larger than ordinar}', to cover the time when work must be suspended. 5. The probability or improbability of success. This consideration applies more to what are called the professions than to ordinar}' trades. He. who learns the trade of a carpenter ma}' be almost sure of finding emplojiiient at some compensation ; but one who studies for the profession of a law3xr has hardly an even chance of being able to live by his profession, and, at best, must persevere through 3'ears of unremunerated toil, to establish a reputa- tion which will assure him full success. The hiorh REMUNERATION OF LABOR, 87 remuneration for successful practice is the prize which sustains one in the earlier stages of the race. The remuneration of labor by salaries, com- missions, and fees, involves some peculiarities which must be noticed. 1. The labor which is thus compensated is gen- eralh' of a kind that requires both superior natural gifts, and special and expensive education. 2. It is also true of it, that on the one side, per- sonal character and reputation, and on the Other, the respectability, dignity, and permanence of the ser- vice, are highl}' estimated. These considerations, more or less, rule out ordi- nary competition, and put the mutual contract in each case on special grounds. The whole number of those whose labor is thus compensated is small, compared with the great bod}' of those who receive wages ; and, to the few so favored, a large share of the proceeds of industry is actually distributed. This seems like injustice ; but it must be remem- bered that it is chiefly public and administrative services that are compensated by salaries and fees. In an}' productive enterprise, — a woollen-mill or watch-factory, for instance, — a wise and vigorous executive administration is essential to make the business profitable. It is for the interest of every one in the establishment who receives wages, that, for the place of high trust, the best talent should be secured by a salary sufficient to command it. So, too, all private interests are promoted when public affairs arc guided by men of ability and integ- 88 POLITICAL ECONOMY. rity. For offices of government, which require men of more than ordinary capacit}--, it is right, there- fore, that more than ordinary compensation should be provided. The apparent injustice is entirely relieved, if the wa}' is open for ever}- one to make the most of him- self, and to rise in position and emolument accord- ing to his real merit. This is illustrated in the case of George Stephenson. He began his career as an engine-bo}^ at the lowest wages. As his mechani- cal genius was developed, he was made an engine- wright, and put upon a salarj' of a hundred pounds a year, when he thought his fortune was made. But by patient stud}' and labor he invented the loco- motive-engine, and became " the father of railways." Then the services of his later 3'ears received munifi- cent remuneration. The world, enjoj'ing unspeak- able benefits from his achievements, pronounces that remuneration justly and worthily bestowed. In the learned professions, especially those of law and medicine, men of highest ability and repute receive extraordinary remuneration, simpty because such men distance competition and custom. Where great interests are at stake, it is sound economy to emplo}" the best legal talent at any price. In a crisis of life or death, the best medical counsel is cheap at any cost. After the reputation has been achieved, law^^ers like Webster and Choate, and physicians like Mott and Parker, would be over- whelmed with business if they did not limit it by high charges. It is not unusual for members of these professions to agree upon a scale of fees to REMUNERATION OF LABOR. 89 be charged. But such agreements can fix only the minimum limit, leaving an open range above for compensation to be increased according to each ine's ability and reputation. These higher rates : re the prizes which stimulate the efforts of 3'oung aspirants in these professions. The difference of remuneration is most marked in the departments of literature and fine art. A few lines from the pen of a Bryant or a Longfellow, a few strains of music from a Jenn}^ Lind or a Kel- logg, a painting done by a Church or a Bierstadt, a statue from the chisel of a Thorwaldsen or a Powers, command prices tliat seem to common folk absurdl}' extravagant. But these products are in- imitable fruits of highest genius, which sets those who have it above all competition, in the enjoj'ment of an unrestricted monopol3\ Generally men in all callings and professions in- sist on the liighest remuneration they can command. But often the honor, dignit}', and permanence of certain positions are considerations of weight on the other side. Thus a lawyer, whose practice would 3'ield an income of tvrenty-five thousand dol- lars, may accept a place for life on tli£ bench of the United States Supreme Court at a salary' of ten thousand dollars. Men devoted to scientific research, clergj'men, and teachers, are, as a whole, confessedh' under- paid, when compared with men of equal abilit}^ and attainments in other professions. But with man}' of them, delight in the stud}^ of truth, and devotion to the work of Christian beneficence for the well- 90 POLITICAL ECONOMY. being of mankind, which find satisfaction and joy in the service itself, go far to balance, in their esti- mation, the meagreness of their pecuniary reward. The remuneration for women's labor in most employments is less than that of men for similar services. The fact is apparent on ever}^ hand. In present circumstances, the following reasons, though they may not altogether justify it, account for the fact. 1 . It is a prevalent opinion, that for miscellaneous labor, women are by physical and mental constitution inferior to men in the qualities essential to highest efficiency. In the spinning-room of a cotton-fac- tory, men are emploj'ed almost entirelj', because women have not the strength to handle the jennies. In the weaving-room, two or three men work with a hundred women. The women tend the looms as well as, or better than, the men ; but for oversight, the men are needed to meet exigencies for which women are supposed to be unequal. 2. In the order of nature and in the constitution of society, the sphere of activity for most women is ordained to be in the home, each the solace and help of a husband, and the nourisher and mentor of their children. This fact tends to rule out women from many occupations, and to create the impres- sion that it is unwomanly to enter them. 3. The w^ages of men are adjusted to the presump- tion that each has or will have. a family to provide for ; and those of vromen, to an anticipation that each will in due time, by marriage, be relieved of her own REMUNERATION OF LABOR. 91 support. A very large proportion of the women who to-da}^ depend on their own labor are 3'oung l^ersons who are passing, one after another, into new relations, where the}' are to be cared for by men's earnings. 4. Productive industry is now organized on tlie assumption that women's w^ork is to receive less com- pensation than men's. In most cases, the greater cheapness of female labor is the chief reason for emplo^'ing it. The prices of all commodities into which this kind of labor enters are diminished there- b3^ If the rule is a false one, it cannot be suddenl}^ changed without deranging the entire systems of production and exchange. 5. There are feminine instincts w^hich prompt women to draw^ back from many occupations because they are coarse, or involve too rough jostling v*^ith the world. These instincts are natural ; and when they are crushed out, the charm of womanhood is gone. Yet the prevailing tendency is to make them excess- ive, so as to produce a morbid sentiment of false delicacy. The foregoing considerations limit the number of occupations open to women ; and these are so crowded, that competition is intense, and low wages are inevitable. 6. This competition is made sharper by the fact that many w^omen veho seek employment are partly or w^hoUy supported by other resources than their own labor. These can and often do underbid others who have nothing but their wages to depend on. Not infrequently, too, the fact of their better 92 POLITICAL ECONOMY. - » circumstances, their better appearance, and, it may- be, their superior intelligence, secures for them the preference. Notwithstanding all this, there are exceptional cases even now, where women of superior energ}" or genius command for their services a remunera- tion equal to that accorded to men for like work. This is especiall}^ true of women's work in fine art. The female stars in music and the drama, such as Kellogg and Siddons ; in painting and sculpture, such as Eosa Bonheur and Harriet Hosmer ; in poetry and light literature, such as Mrs. Browning and Mrs. Stowe, — receive from an admiring public ample compensation for their productions. Occa- sionall}', too, a woman possessed of great executive ability for managing business wins for herself a full reward. But these exceptions are so few as to prove, rather than controvert, the rule. As the case now stands, good judgment must accept the following conclusions : — a. In the nature of things, there are reasons why, in general, the remuneration for women's work should fall somewhat below that of men. Absolute equality between the sexes in this respect is not likel}' to be attained. b. This inequality, as a present matter of fact, is much greater than is either right or necessar}'. The distress that comes from it cries out in the name of justice and philanthrop}' for relief. c. The needed relief can come onl}^ as the sphere of competition is widened, and its inte n si t}- relieved, by opening for women free access to all fit occupa- REMUNERATION OF LABOR. 93 tions. The chief obstacle to this is the ban imposed b}' women themselves on one another, under the tjranny of fashion and prejudice aiid mawkish sen- timentalism. There is no good reason wh}^ with women, as with men, honest work well done should not be alwa3's respected and honored. A change of opinion on this point, in female circles, will be a change of public opinion. d. In the quiet sphere of domestic life, woman renders to society her noblest, most blessed service, — a service whose worth cannot be estimated in terms of current money. Her position of queenly power in that sphere must ever be carefuU}' guarded. On the whole, the outlook of to-da}^ is full of hope for the success of a conservative reform, which shall correct existing wrongs without impairing those most sacred rights of woman which centre in the home. EXERCISES. 1. Why pay a glass-blower for five hours' work more than a porter in the same establishment for a whole day ? 2. Why are extraordinary wages paid to men who work at rolling iron ? 3. Why do men working in a powder-mill expect higher wages than they would ask in a flouring-mill ? 4. If a man spends five years learning the engraver's art, how is he to be compensated for his outlay of time and money ? 5. Illustrate how a trustworthy character may have a money-value. 6. Why is a higher price charged for a coat made to order than for one of a wholesale stock ? 7. Wliy are the wages of a locomotive-engineer higher than those of a fireman whose work is harder ? 94 POLITICAL ECONOMY. 8. If seven out of ten who study law fail of success, what inducement is there to seek the profession? 9. Why is it right that the general scale of salaries should be higher than that of wages ? 10. On what grounds may an eminent surgeon charge a fee of a thousand dollars for an operation which occupies hut two hours ? 11. Is it unjust for an artist like Powers to ask what he will for the products of his genius ? 12. Is it wrong for a clergyman to change his place for an increased salary ? 13. Why do women prefer to live in a garret, and earn a pittance with the needle, rather than to go into domestic service in comfortable homes at good wages ? 14. What would be the consequences, good or bad, if the salaries of female teachers were made the same with those of males of the same grade ? 15. Is it desirable that women should engage in field- work, or in the legal profession ? REMUNERATIOX OF CAPITAL. 95 CHAPTER II. THE REMUNERATION OF CAPITAL. Justice requires that the owner of capital should be compcD sated for its use. Capital is a necessaiy partner with labor in the production of wealth. Its two most important forms are : first, the "plant," i.e., the buildings, tools, and machinery to work in and to work with ; and, second, the mate- rials to work upon. Labor and skill can do nothing till these are provided. Capital is the fruit of past labor preserved by self-denial. One's right of property in that which he has earned and saved is the same as his right to his present power to labor. ' No man expects to put forth his powers in present labor w^ithout some reward. Wh}^ should one be expected to give the use of the fruits of his past labor and self-denial without reward? The hope of such reward is the special inducement to dihgence and saving. Sup- pose James Brown has health and strength and skill as a blacksmith, but no shop, no tools, no iron. John Smith has b}'^ previous labor and thrift become the independent owner of a shop and its appurte- nances, but, broken in health, is unable to work. Each is helpless without that which the other can furnish. Both will derive advantage from the union 96 POLITICAL ECONOMY. of these two properties, the power to labor, and the capitaL This union may be effected in either of three waj^s, — Smith ma}' hire Brown to work with his shop and tools and iron, and pay him wages, taking the surplus of the proceeds for himself; or Brown ma}- hire Smith's shop and tools, and pay him rent for their use, taking for himself the sur- plus of all he can earn ; or Brown may bu}' of Smith the shop and tools, giving him, since he has no money, a note and mortgage for their value, on which he is to pay interest ever}^ 3'ear. Can an}'- body question the riglitfulness of either of these transactions? They are but three modes of doing one and the same thing, — that is, of bringing labor and capital into partnership. The first estabhshes the relation of emploj'er and employe ; the second, that of landlord and tenant ; the third, that of creditor and debtor. Each involves a simple shar- ing of the joint product of industr3% This simple case illustrates the equitable gi'ounds of the remuneration of capital in all its aspects. The principle is the same, if Brown borrows money for the purchase at the bank, and pa3's the interest there ; or if ten persons contribute means for the purchase, and so make a stock company'', each to receive dividends on the profits of the business instead of interest. For the fuller presentation of the subject, it may be considered under three heads ; viz., Rent, Inter- est, Dividends. RENT. 97 SECTION I. — RENT. Rent is the compensation paid for the use of land and its appendages, commonly called real estate. It implies ownership of land, and a right on the part of the owner to receive a compensation for its use when he lets it to another. In Great Britain and other countries, where the influence of the old feudal S3'stem is still felt, the problems of rent are man}-^ and complicated, because the titles to lands are encumbered by entails and mortmains. But in our countr}' lands are held in fee-simple, which makes the ownership absolute, and the transfer by sale or lease eas}' and simple. For agricultural purposes, the amount of rent which land will command must depend mainl}' on its productiveness, which is determined by the fer- tility of the soil, and the situation with reference to a market for the produce. Fertile lands near to a good market command the highest rent, because the farmers are assured of both good crops and good prices. With reference to a new countr}'' inland, the opening of railways and other facilities for tranportation enhances rents : first, by virtually bringing the lands near to the old markets ; and, second, by favoring the emigration of population to build cities and develop varied industries, and so to form new markets. Beauty of situation, good neighborhood, and prox- imity' to schools and churches, are also minor con- 98 rOLITICAL ECONOMY. siderations of more or less weight in determining the rents of agricultural lands. In this countr}", farms are quite commonly rented *' on shares ; " that is, the landlord receives in com- pensation for the use of his land a certain propor- tion of the crops. The capitalist thus shares with the laborer the risks as well as the profits of the business. In cities, rents for lots and buildings are deter- mined almost entirel}' by location, with respect to centres of business, the character of the neighbor- hood, and the freaks of fashion. A store in the centre of business will rent for much more than one half a mile off, because a merchant there will sell ten times as many goods as in the other location. A residence in a respectable or fashionable quarter of the cit}^ commands the highest rent, because it secures pleasant surroundings, or gratifies pride and vanit3\ With the growth of cities, the centres of business and the fashionable quarters are subject to change from time to time, so as materiall}^ to var}'' the rent-value of property ; and this fact needs to be considered when capital is invested in that form. Generall}', except in the favorite locations of great cities^ rents are fixed at a lower percentage on the market value of the property than the average rate of profits from business, and less than the average rate of interest. The chief reasons for this are the greater security of capital in real estate, and the probabilit}'', that, with the advance of societ}-, the value of real estate will be increased. Property RENT. 99 in land cannot be run away with, nor destro3'ed, nor fraudulent!}' disposed of; and not infrequentl}', by the mere rise of A-alue, a small capital in this form grows into a fortune. EXERCISES. 1. What would be the effect on indiistiy if a rule were established, that an owner of capital could have no com- pensation for its use when loaned to another ? 2. Under such a rule, which would suffer most, laborers, or capitalists ? 3. If it is right for one to borrow capital for his own advantage, is it wrong for the lender to claim a share in that advantage? 4. What does the term " real estate " include ? 5. Could the resources of the earth be developed to advantage, if there were no private property in land ? 6. Wliy will a poor fann near a seaport command higher rent than one of richer soil a hundred miles away ? 7. How has the opening of railways to the West affected the value of New-England farms ? 8. Why does the character of its neighborhood affect the value of a farm ? 9. Illustrate the great inequalities in the rate of rent for city property, and the reasons therefor. 10. Why should the average rent for real estate be but five per cent on its value, when the average interest for money is eight per cent ? 11. Can you give an instance, and the facts, of a fortune made by the purchase and management of real estate ? 100 POLITICAL ECONOMY. SECTION IL— INTEREST AND DIVIDENDS. Interest is the compensation paid for the use of capital estimated in money. This is to be preferred to the more common definition of interest as "the price paid for the use of money," because it covers the whole ground. Money as the medium of ex- change is the most convenient form in which loans can be made. When credit is extended in an}'' wa}', the value is set down in terms of mone}^ on which interest may be reckoned as the parties agree, or as the law may prescribe. But it should alwa3's be borne in mind that what the borrower wants is not the mone}^ but the capital which it represents, or for which it is immediatel}^ expended. Thus one ma}' bu}- land for a site, and have a building erected on it, and purchase a steam-engine and machiner}^ for a mill, and cotton to be worked up, at each step giving his note for a part of the value, to be paid at a future date with interest. Or, instead of doing this, he may borrow of a friend or at the bank money enough to meet his deficienc}', giving his note for the whole with interest ; and then set up his establishment complete, b}' purchases made for cash. The transactions are essentially the same. In the first case, the loan is made of the capital directly, without passing any money ; in the other case, the mone}'^ is only a means of reach- ing the capital. The land, the mill, the engine, the machinery, and the cotton are what the manufacturer INTEREST AND DIVIDENDS. 101 wants, and what he actually borrows as capital for his business. Interest is reckoned at a certain per cent of a certain value defined in terms of mone}', which is called the principal. The percentage is called the rate, and is usually stated as the rate per annum, though often pajable at shorter intervals than a year. The word interest is a Latin verb, and means, "it is of advantage." The term implies a mutual advan- tage to borrower and lender, and thus recognizes the natural and necessar}^ partnership of capital and labor. It is for the advantage of the skilful laborer to borrow, at a reasonable interest, as much as it is for the advantage of the capitalist to loan. Were there no money-lenders, there could be no mone}"- borrowers ; and, were there no mone3^-borrowers, the industrious artisan would be the greatest sufferer. The parties come together for their mutual advan- tage. Wh}", then, should it be thought any more odious for one to lend for his own advantage, than for another to borrow for his own advantage ? So far as the transaction itself is concerned, both must be regarded as equall}^ honest and honorable. This mutual advantage marks the chief difference between a loan and a gift. A gift implies benevolence: a loan implies interest. A giver sacrifices his own advantage for the benefit of the receiver : a lender and a borrower confer each a benefit on the other, adjusted as equitably as possible. Lenders are sometimes avaricious, exacting, oppressive. So, too, borrowers are sometimes profligate, negligent, fraudulent. These are abuses which selfishness 102 POLITICAL ECONOMY. thrusts into this, as into all business transactions. The}' ought not to impeach the legitimacy of the transaction itself rightl}' conducted. Some people think it wrong that interest should be taken, because under the name usury the Scrip- tures denounce it, and our Saviour prescribes it as a rule of Christian love, that men should lend, hoping for nothing in return. But the cases contemplated in the Scriptures are loans made to relieve pressing necessities of the needy, not loans of capital made with a view to profitable industry. The law of Christian charit}', which bids us give to the poor, looking for no return of either principal or interest, is still binding ; but it does not apply to loans which are only a means of uniting labor and capital in a common enterprise, for their mutual advantage. It seemed necessary to say so much to correct certain false ideas which are put forth and are gaining cur- rency in these days. Interest, properly understood and regulated, involves no extortion, works no in- jury, but confers great and important benefits, by encouraging both saving and the judicious employ- ment of capital saved. The Rate of Interest is determined chiefly by four considerations, viz., risk, convenience of invest- ment, profits of industry, and the ratio between sup- ply and demand of capital. 1. Risk. When one makes a loan, he puts a portion of his property out of his own hands into the control of another. There is a chance that it may never come back to him. His compensation INTEREST AND DIVIDENDS. 103 must be proportioned to that chance. If he holds pledges which make him secure, he will be content with a small interest ; if he has no security, and the borrower proposes to embark in a doubtful enter- prise, he can be induced to make the loan only by the promise of a large compensation. The risk depends upon several circumstances. a. The personal character of the borrower qualifies the risk. The character that can safel}' be trusted involves industry and sobriet}', skill, good sense, pecuniar}' abilit}', and moral integrity. Where these are combined in the borrower, the probabilities are strong that he will succeed, and honestly fulfil his promise to pay ; and the lender runs but little risk. b. The character of the business in which the bor- rowed capital is to be emplo3'ed affects the risk. Capital invested in a powder-mill is in great danger of sudden destruction ; in farming operations it is almost absolutel}' safe. Mone}' loaned to a specu- lator in mining-stocks is put into bubbles that a breath may burst ; loaned to an industrious me- chanic, it ma}' not move so fast, but it is sure to come around in time, with increase. C. The character of the government affects the risk incurred in lending capital. A despotic government, which plunders its citizens by irregular and oppres- sive taxation, makes all private property and all industry insecure. Thus in a country like Turkey a great risk attends all pecuniary contracts, and the rate of interest is high. Where the laws are bad, or are inefficient to maintain justice, for lack of force in their execution, there is great risk in loaning 104 POLITICAL ECONOMY. capitaL We do not wonder that in mediaeval times the Jewish money-lenders charged enormous rates of interest, when we understand that the laws fur- nished no safeguards for their protection : they and their contracts were subject to the caprice of petty lords, who were little better than robbers b}' pro- fession. So, too, the stability of a gOA'ernment is an important consideration. A revolution often dissolves contracts, dissipates securities, and renders obligations valueless. Hence in Mexico the rate of interest is very high, while in Great Britain it is very low for both public and private loans. 2. The convenience of the investment has an im- portant bearing on the rate of interest. Three points have here to be considered. a. Facility of transfer. One who loans his capital likes to have it so invested that he can easily com- mand it for his own use in case of need. A bond of the United States, or a certificate of stock in a well-established bank, may be easily transferred and made available. 6. Permanency of investment. A lender at the same time desires that a good investment should run on undisturbed as long as practicable, unless he has occasion to recall his capital. A government-bond that runs twenty years will for this reason be taken up at a less rate of interest than one that runs only five years. C. Punctuality in the payment of interest. Those who loan their capital wish to count with certainty on their interest, and to secure it without trouble. A well- secured bond, with interest-coupons attached, INTEREST AND DIVIDENDS. 105 given by a prompt business man, will ordinaril}' command mone}' at a low rate of interest, because of this convenience. British consols, which represent the consolidated debt of England, run at from three to four per cent interest, because they combine these three advan- tages in the form of investment they offer. For the same reason our United-States bonds are eagerly bought up at a premium, though they bear only four or four and a half per cent interest. 3. The profits of industry vary at different times and in different countries, and affect the rate of interest. Here we look at the matter from the standpoint of the borrower. He must consider what he can afford to pay, and that evidently must depend on the profit he can gain by the use of capi- tal. If, as sometimes happens, a business 3'ields so large profits that the capital is doubled in a 3'ear, one can well afford to pay twenty-five or even fifty per cent for capital to be emploj^ed in such a busi- ness ; whereas, if through any cause a particular industry 3'ields onl3^ three per cent of profit, one cannot afford to pa3' even six per cent for capital to be embarked in that business. 4. The ratio between supply and demand of capital, more than an3' other one cause, determines the rate .of interest. This is onl3' a recognition of the principle of competition acting here as elsewhere. When the number of borrowers is large, and their wants are large, but the amount of capital available is small, the competition is sharp on the side of the borrowers, and thej- bid up on the rate of interest. 106 POLITICAL ECONOMY. When the conditions are reversed, the competition is sharp between the lenders, and they bid against each other b}^ offering loans at lower rates of interest. The best adjustment of supply and demand de- pends on the freedom of capital; that is, the unfet- tered liberty of ever}^ man to employ his capital in an}^ innocent way he pleases. Such freedom tends alwaj'S towards a healthful equilibrium, which sup- ports industry by securing to both partners a fair and satisfactory- reward. In a new and prosperous country interest is al- wa3's high, because the profits of industry are large, and the suppl}' of capital on the ground is small, while to distant capitalists the risk seems great. But the constant tendencj' of civilization is to re- duce the rate of interest, because wealth increases rapidl}^ both by immigration and by the natural fruits of industry, and because risk is diminished by more perfect securities. This process goes on b}^ certain fixed laws. The natural development is healthiest. The action of those laws is onl}' marred and hindered by the untimel}- interference of legis- lation. Usury Laws. These are laws designed to restrict the rate of interest by a defined limit. The}' inter- fere with the freedom of capital, and are in conflict with the first principles of sound political economy, as several considerations show : — 1. They violate a right of property. A man has the same right to the market-rate for the use of his capital in mone}-, as he has to the market-rate for INTEREST AND DIVIDENDS. 107 the rent of his house, or the hire of his horse, or the charter of his ship. 2. The civil law cannot fix a price for the use of capital, an}' more than it can fix a price at which flour, or iron, or any other commodity, must be sold. In all these matters, the law of competition is supe- rior to the civil law. 3. The price of capital is more variable than that of other commodities. This is made evident in the great marts of business, by daily quotations of the rate of interest. 4. These laws, instead of diminishing, actually in- crease the burden of interest to the most needy bor- rowers. The lender must be compensated for the additional risk from the penalty of the law. 5. Such laws are never fully enforced, as is obvi- ous from the daily newspaper reports just referred to. Men who want mone}' will pay what the}' please for it, and those who have it to loan will get what they can. Such*laws only put law-abiding capital- ists at a disadvantage, or drive them out of the market for the benefit of unscrupulous sharpers and Shy locks. Money is a necessary of life in active industry and trade, and for that reason it ought to be left free to the action of the natural law of supply and demand. In active commercial centres this is com- ing to be understood. Every State should have a statute defining a legal rate of interest for cases in which the contract indicates no specific rate. Beyond this, legal sanction and security for all reasonable contracts in loaning capital, under free 108 POLITICAL ECONOMY. competition, constitute the surest safeguard against excessive interest. It is a hopeful sign that in Great Britain, and in Massacliusetts and other American States, usury laws have been abolished. Dividends. This term denotes the remuneration of capital invested in stock companies. These com- panies unite contributions of capital from a number of persons for large operations, such as cotton or woollen factories, banking, insurance, railwa3'S, tele- graphs, &c. The whole capital is divided into shares, usually of one hundred dollars each, which are freel^'^ bought and sold in the stock-market. With a company honestly managed, as the business runs on, accounts are balanced semi-annually, and the proceeds are ascertained. The surplus of these proceeds, after providing for all expenses, and laj'ing aside a reserve to meet emergencies, is divided to the stockholders, giving a certain percentage to each share. • This form of compensation for the use of capital is marked b}^ two peculiarities : First, the remunera- tion depends altogether on the success of the industry in each case. Second, the dividend embraces two elements ; viz., interest and profits. If the mill, the railway, or whatever, has barel}' paid other expenses, capital will have no remuneration ; if it has earned enough to pay the capital ordinary interest, the dividend is identical with interest ; if it has earned more, so as to make dividends of ten or twenty per cent annually, the capital receiA^es extraordinary remuneration. The chance or expectation of such INTEREST AND DIVIDENDS. 109 extraordinary remuneration, and the convenience of investments in that form, are the chief inducements for putting capital into stocks. The mismanagement, frauds, and defalcations which attend the operations of stock-companies, involve great sacrifices. A careful estimate of the results of such investments would probabl}- show average returns much less than ordinary' interest. EXERCISES. 1. Show the rightfulness of interest in the case of a farmer, who, growing old, sells for ten thousand dollars the farm he has worked for forty years, and loans the money at eight per cent, expecting the interest to support him for the rest of his days. 2. Illustrate the advantage to a young skilled mechanic, of borrowing capital to set him up in business. 3. If a manufacturer sells a farmer a reaping-machine, taking his note for payment to be made in three annual instalments, why is it right to charge interest on the de- ferred payments ? 4. Why should a grocer sell his goods at a less price for cash than if he gives the buyer six months' credit without interest ? 5. If it is right for a machinist to take a note with inter- est in part payment for a steam-engine, is it wrong for a banker to take a like note with interest, for money loaned, that the buyer may pay for the engine at once ? 6. What considerations induce capitalists to prefer to invest in government bonds which pay four and a half per cent, rather than in notes and mortgages at eight per cent ? 7. Why is it that the government of Chili can hardly borrow money at ten per cent, while the British govern- ment borrows all it needs at three per cent ? 8. How could a poor man, who in 1843 pre-empted gov- ernment land in Wisconsin at $1.25 per acre, afford to pay, 110 POLITICAL ECONOMY. a year after, fifty per cent interest for money to complete his purchase of the government ? 9. What reasons combine to cause a high rate of inter- est in our young Western States ? 10. Account for the decHne of interest in Illinois since 1840, from twenty-five per cent to eight per cent. How much has direct legislation done to cause that decline ? 11. When is a high rate of interest a sign of prosperity ? when of adversity ? 12. State some of the ways in which usury laws are evaded. What is the moral effect of laws thus openly disregarded ? 13. Can a stock-company be justified in declaring divi- dends not earned, and borrowing money to pay them ? 14. Why are stock-companies specially exposed to frauds ? 15. What do you understand by the " bulls " and " bears " of Wall Street ? DISTRIBUTION OF PROFITS. HI CHAPTER III. DISTRIBUTION OF PROFITS. Writers on Political Econom}' have used the term profits with much looseness and ambiguity. Many define it to mean the remuneration paid for the use of capital. Mill sa3'S profit embraces the three items, interest, insurance, and wages of superintendence. Mr. Walker represents profits as the share which falls to the employer or manager. This loose and varied use of an important term is not scientific. Our science requires the term with a specific mean- ing, properl}^ expressed, we think, in the following definition : — Profits are the net proceeds, — the surplus of values, after all necessary expenses of production have been deducted. According to the principles laid down in previous chapters, the following items are to be included in necessary' expenses : — 1 . Wages paid for common and skilled labor of all grades. 2. Salaries paid for oversight and management, including all superintendence and administration, mechanical and financial. 3. Interest on capital invested. 4. Insurance to guard against certain risks. 112 POLITICAL ECONOMY. 5. Taxes paid for protection from the government. If the products of an industrial establishment provide for these expenses, and nothing more, the business just sustains itself, but it fields no profits. In such a case, since all parties get their legitimate compensation, thej^ may be satisfied to run on so for 3'ears. But in general the expectation of profits is the necessar}^ stimulus of enterprising industr}*, and the aim is to make profits as large as possible. "When one combines in himself the functions of operative, manager and capitalist, wages, salary, interest and profits if there be an}', all come to him. No question of distribution arises ; but even in such a case, it is well for one to keep his accounts so as to define what is properlj^ to be reckoned as wages for labor, salary' for management, and inter- est for capital : onlj' so can the profits of the busi- ness be accurately estimated. Though a common usage, it is yet a serious error, to express the measure of profits in a business, by a percentage on the capital invested, as though the profits belong exclusivel}^ to the capitalist. In many cases, the labor is of more account than the capital. A shoemaker with a capital of five hundred dollars may, b}^ untiring industry' through a year, make his proceeds count a hundred per cent on that amount, and yet receive an insufiftcient return for his labor. Twenty per cent on five hundred thousand dollars invested in a great manufacturing establishment may pay well for labor and management and ordi- nar}^ interest on capital, with a large margin for profits. Hence it is often better for one to work DISTRIBUTION OF PROFITS. 113 for wages or a salarj^ in connection with a large establishment, rather than attempt an independent business. So with truth is it said, '-^ It is in the nature of trade and manufacture that great capital drives small capital out of the field : it can work for smaller returns." It is evident that, according to our definition, profits can be legitimatel}^ increased onl}" in one of two wa3'S, either by reducing expenses, or by increas- ing tlie amount and the value of the products. It is for a wise and faithful manager carefulty to study- both sides of the problem ; and hence his is the most important service, and it deserves the highest compensation. But it does not follow, therefore, that the entire profits should be appropriated to the manager, or ^'' entrepreneur ^^^ as the French temi him. For a fair distribution of profits, there must be combined with these views of the nature of profits, a full recognition of that partnership which we have seen to be a fundamental principle of productive industry. In this partnership there are three mem- bers, — the capital, the executive capacity, and the labor. Each is entitled to a fair compensation for the service rendered, and each is entitled to a share in the surplus fruits of their co-operation. AYe may not say either an equal share or equal compensa- tion ; because capital takes the gi'eater risk, and is hable to the heaviest losses, and it is fair that this chance of greater loss should be balanced by a chance of greater gain ; because, also, the amount 114 POLITICAL ECONOMY. of profits is due chiefly to the executive wisdom and energy of the manager, and he is entitled to a pro- portionatel}^ larger share in the returns. After due allowance for these considerations, however, there is a share which justty belongs to the labor, and which should be distributed among those who make up this third member of the fiim, according to each laborer's merit and grade in the service rendered. The rising antagonism between labor and capital will be best counteracted, we believe, by measures adapted to secure a fairer distribution of profits on this basis. To devise the best measures for this will require much earnest stud}", and experiments carefully conducted with good- will and patience on both sides. No doubt it will be found that meas- ures must be varied to suit difi'erent cases and cir- cumstances. What works well in one case ma}^ not do so in another. Tact and common sense must be used to apply the principle which is one and common. There are obstacles in the way of the immediate adoption of such measures. False ideas on the part of both workmen and their employers must be coj:rected, mutual confidence must be estab- lished, and common usage must be changed. These are things not to be accomplished in a day. Yet there is good reason to believe that if attention is turned earnestly on the study of this specific object, obstacles will be overcome, measures will be defined and successfuU}^ applied, and the result wiU be more of justice, harmony, and efficiency, in the actual operations of industry, and abiding rehef from dan- gers which threaten the peace and prosperity of the nation. DISTRIBUTION OF PROFITS. 115 Co-operative associations are designed to secure a more equitable distribution of profits in the interest especiallj' of workmen. Tlieir ordinary plan is for a number of workingmen of some one branch of industry' to join their means and their hands to carrj'- on business, expecting to divide the entire proceeds among themselves b}' some defined rule of equit}^ Some such organizations have succeeded for a time, but most of them have soon ended in failure. The reasons are obvious. There is apt to be a deficienc}' of capital, which puts the associa- tion to a disadvantage in competition with other estabhshments. Again, jealousies among the mem- bers are apt to spring up, and prevent the harmony and unit}^ of action which are essential to best results. A greater difficult}' is to secure the man- aging ability, on which, after all, success mainly depends. A majority- vote in mass-meeting cannot fulfil the function of a " captain of industry ' ' of judgment and will-power to plan and direct. Such associations, it has been said, aim to dispense with the '"'' entrepreneur ^^^ and divide his proper remuner- ation. This means onl}' that the laborers are tr^'ing to appropriate all the profits to themselves, which involves essentially the same mistake as when the capitalists or managers tr}^ to take the whole. The partnership heartil}' entered into, vigorously- main- tained, and so conducted as to insure the rights of each class of members, is most lil^ely to estabhsh an equitable distribution of profits. 116 POLITICAL ECONOMY. EXERCISES. 1. A cabinet-maker with a capital of $15,000 employed six men, the average of whose wages was $12 each per week; paid a bookkeeper a salary of $600, and managed tlie business himself. He paid for rent, taxes, and insur- ance, $1,200, and legal interest was seven per cent. After replacing capital consumed, the proceeds of the business for a year amounted to $12,000. Allowing $2,000 for his compensation as manager, what were the profits for the year? 2. For the subsequent five years the proceeds averaged $15,000 per year, and ten per cent of the profits were annu- ally distributed to the employes in addition to wages and salary: what amount of profits fell to each of the parties during that period ? 3. The next year, by sharp competition, increased cost of lumber, and dull trade, the proceeds were reduced so as barely to meet expenses, as before defined: why would it be worth while to keep on in such a case ? 4. Then came a financial revulsion ; and for three years the proceeds annually came $2,000 short of meeting ex- penses, and the pay of all employes was reduced ten per cent: what was the actual loss to the several parties? 5. With the return of better times, $5,000 added capital was invested in the introduction of steam-power and machinery, by which the annual products were doubled in amount; and for the next five years the annual proceeds rose to $20,000: what were the annual profits? Distributed as before, what share fell to each of the parties ? 6. Estimate the profits of the business for the whole period of fifteen years. 7. If the whole establishment had been burned up at the time of greatest depression, with insurance to the amount of only two-thirds the value, whose would have been the loss ? 8. Suppose a blacksmith, working by himself with a capi- tal of $300, earns in a year $400 : has he made any profits ? 9. If a great cotton-factory produces annually 20,000,000 DISTRIBUTION OF PROFITS. 117 yards of cloth, and the superintendent contrives to reduce the cost of production one mill per yard, how much will the profits thereby be increased, supposing prices are un- changed ? ' 10. The cost of production remaining the same, suppose the market-price to advance one cent a yard: how much will the profits be increased ? 11. What effect on the efficiency of labor, and economy in the use of materials, may be expected from allowing labor- ers a share in the profits ? 12. State the main features of any co-operative associa- tion you know of, and its results. 118 POLITICAL ECONOMY. CHAPTER IV. REVENUES OF THE GOVERNMENT. Good government, efficiently administered, is essential to prosperous industry and social enjoy- ment. Every citizen derives a benefit from such a government, and ma}^ fitly be called on to contribute a portion of his wealth for its maintenance. The govermnent represents a common public interest superior to any private interest : its claims there- fore justly take precedence of all others. Since the public revenues must be drawn from the proceeds of a people's industry, the consideration of this topic comes properly under this division of our science which treats of distribution. Taxation is the means employed to gather from a people the revenues of its government. To devise and apply an equitable sj^stem of taxation, is one of the most difficult problems of legislation, — a prob- lem which should be studied in the light of pohtical econom}^, with reference to its one object; viz., the raising of a revenue for the state. In despotic governments, the will of the ruler determines arbitrarily both the measure and the methods of taxation, and great inequahty and op- pression prevail. It is a fundamental principle of REVENUES OF THE GOVERNMENT. 119 free and just government, that taxes shall be im- posed by representatives of the people through rea- sonable and proportional assessments on all estates, and that they shall be collected b}" agents acting under defined powers and direct accountabilitj*. Adam Smith's Maxims. The father of modern political econom}" laid down four rules of equitable taxation as follows : — 1. " The subjects of every state ought to contribute toward the support of the government as nearly as possible in proportion to their respective abilities ; that is, in proportion to the revenue vehich they re- spectively enjoy under the protection of the state. 2. ** The tax w^hich each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contribu- tor, and to every other person. 3 . ** Every tax ought to be levied at the time and in the manner in which it is most likely to be convenient for the contributor to pay it. 4. " Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state." These maxims embod}' leading principles of equity, b}'' which all schemes of taxation may be tested. Direct and Indirect Taxation. According to Mr. Mill's definitions, "A direct tax is one which is demanded from the very persons who it is in- 120 POLITICAL ECONOMY. •tended or desired should pa}^ it. Indirect taxes are those which are demanded from one person, in the expectation and intention that lie shall indemnify himself at the expense of another." A poll-tax, a tax on land, live-stock, tools, furniture, &c., and an income tax, are examples of direct taxes. Duties on imported goods, and excises on home manufac- tures, are examples of indirect taxation ; the im- porter or manufacturer who pays the tax, adding the amount of the tax to the price of the goods, to be ultimately paid by the consumers. Direct taxation fairly applied conforms most fully to the principles embodied in the maxims just stated. But it involves labor and expense in col- lection, prompts concealment and evasion, especially with respect to personal property, and provokes dis- satisfaction, because men, when they pay the tax, know and feel the full force of the burden. Indirect taxation violates nearly all of Mr. Smith*s maxims, and imposes the burden unequaUy, each one paying not according to his ability, but accord- ing to his necessities, so that a poor man with a large family often contributes in this way for the support of the government much more than his neighbor with ten times his wealth. But indirect taxes, being laid in gross on goods at the port of entry or at the n^anufactor}^, are easily collected, and are cheerfully submitted to, because no one thinks of the tax he pays when it is hidden in the price of the goods he buys. Direct taxes are certainly most in harmony with the genius of a republican government whose strength lies in the intelligent support of a free REVENUES OF THE GOVERNMENT. 121 people. Such a people ought to know what taxes they pay, and w^hen and how they pay them, that they may watch with becoming jealous}^ over the public expenditure, and make their voice heard in all legislation on matters of finance. It must be confessed, however, that no nation has 3'et attained to such a standard of general intelhgence, honest}-, and patriotism, as warrants the dispensing with the convenient and easy method of raising revenues by indirect taxation. We have need, therefore, to give it some further consideration. Tariffs. This term signifies strictly the lists of imported articles subject to tax, with the duties laid on each class. Protective tariffs, designed to encourage certain home manufactures, will be con- sidered in another place. The tarifi" is noticed here only as a revenue measure, — one form of indirect taxation. Duties are imposed in two forms, specific and ad-valorem. Specific duties are taxes laid on articles by the piece, the pound, the yard, the gallon, &c., without reference to their value. Ad-valorem duties are indicated by a defined percentage of the value of each class of goods. Specific duties are simpld and clear. The collector needs to know onl}' the quantity of the goods, and easily reckons the duty to be paid. But in this case the tax is unequal. Suppose a duty of ten cents per pound laid on tea. The value of the tea consumed by the poor is thirty cents a pound, while that used by the rich is valued at a dollar or more : hence the poor man pa3's a tax 122 POLITICAL ECONOMY. of thirtj^-three and one-third per cent, while the rich man pa3^s only ten per cent on the valuation. Ad- valorem duties lay the tax more equall}', but involve more difficulty in collection, since the value as well as the quantity of the goods must be ascertained. This opens the way to fraud by means of false invoices : hence the government is compelled to employ a host of appraisers, who come into alter- cations with importers, and sometimes take bribes, and sometimes refuse to recognize an invoice that is honest and true. For revenue purposes, the best tariff is one that lays a specific duty of moderate amount on a com- paratively short list of articles which are not pro- duced at home. In many countries, the heaviest duties are laid on commodities, such as intoxicating liquors, the consumption of which is regarded as injurious. As a check on immorality, the measure is of little avail, for experience shows that the con- sumption of such articles is not materiallj' dimin- ished hy the tax ; but, as a source of revenue, it is found to yield large results. National and State Taxation, The Constitu- tion of the United States authorizes Congress to impose taxes in everj^ form, subject to the qualifi- cations that direct taxes must be apportioned to the several States according to their respective popula- tions, and that all duties, imposts, and excises must be uniform throughout the United States. It ex- pressly forbids any State to lay any imposts or duties on imports or exports, except for executing REVENUES OF THE GOVERNMENT. 123 its inspection laws. Hitherto, the National govern- ment has been sustained for the most part bj- indi- rect taxes, in the form of duties on imports, while the State governments depend on direct taxes. To provide for the expenses of the recent war of the Rebellion, however, the general. government adopted four other forms of taxation, which deserve a brief notice : — a. Excises. Congress laid taxes on certain arti- cles of domestic manufacture, to be collected by the sale of stamps, which must be aflSxed hy the manu- facturer, or b}' an officer of the government, to the goods, before they were thrown on the market. This is an indirect tax, which involves gi-eat ex- pense in collection, since the government must keep agents in every part of the country to guard against evasion of the tax. From a large list of articles thus taxed at first, onlj' liquors and tobacco are now taxed in this wa}'. 6. Stamps. This, too, is an indirect tax, levied hy requiring stamps to be attached to various in- struments and forms of business in order to give them legal force. By this means the postal ser- vice is almost wholly provided for at a ver}^ slight charge to the people. It was also applied to bank- checks, deeds, notes, wills, &c. It is an economi- cal and equitable mode of distributing the public burdens, for it touches directl}' the wealth of the country' in transition, and at points where it needs government protection to insure security. Great Britain raises over fifty millions of revenue each 3'ear from the sale of stamps. 124 POLITICAL ECONOMY. c. Licenses. This is a tax imposed by requiring men to bu}^, at specified rates, government certifi- cates authorizing them to engage in certain kinds of business. It is objected to such taxation, that it discriminates unequally among industrial occupa- tions. In its favor, it is urged that it draws from parties such as peddlers, insurance-companies out- side the State, and some professional men who could not otherwise be reached, a just return for the protection of the government which they enjo}'. d. Income tax. This is a form of direct tax levied by imposing a certain percentage on the annual incomes of individual citizens. Theoreti- cally, this is the most equitable of all taxes, since it touches men exactly according to their abilities. If, however, the percentage is uniform for all incomes, it must bear heavily on those whose incomes are small. To relieve this, two measures are adopted. The first is to exempt all incomes below a certain amount ; the other is to establish two or three grades, and make the percentage greatest on the larger incomes. The chief objections to an income tax are the difficulty of ascertaining men's real in- comes, and the labor and cost of collecting it. The British government has nevertheless, employed this method of taxation for forty-five j^ears so success- full}', that nearly one-sixth of the annual revenue of the kingdom is derived from this source. The United States collected an income tax for ten 3'ears, from 1863 to 1872. In 1866 the amount thus col- lected was about sixty-one millions. Actual expe- rience under the law tended to relieve difficulties and objections. REVENTTES OF THE GOVERNMENT. 125 Under State authority, all taxes are direct, laid on persons b}' poll-taxes, on property b}' assessment, and on certain kinds of business by licenses. The poll-tax is ordinarily' a small amount leaded on every male citizen who has attained his majorit}'. It recognizes the protection which the government extends to persons, and is often made in theory a condition of the electoral franchise. Taxes on property are imposed in all the States bj' essentiall}' the same method. Assessors are elected in every town and cit}', who estimate the value of all property subject to taxation. Real estate is commonl}' set down at from twenty-five to thirt}' per cent less than its market value. Per- sonal property is sometimes returned in prepared lists b}' the owners, and sometimes estimated by the assessor. In the first case, the owners ma}- be required to make oath to the completeness and truthfulness of their returns ; in the other, if the owner thinks the assessor's estimate too high, he may '* swear it down " to what he believes to be the true amount. The original assessments are in most of the States referred to boards of equalization ap- pointed for each count}- ; and their judgment is subsequently reviewed by a general board for the State. Upon the basis of the valuation of property so determined, the taxes for State purposes are apportioned to each county, cit}', and town. Each count}', cit}', town, and school-district is authorized to levy taxes for its local purposes. These also are apportioned on the basis of the State valuation, except in case of certain city improvements, such 126 POLITICAL ECONOMY. as opening, paving, and lighting streets, which are charged upon the adjoining property. Sound econ- omy dictates that all these taxes be collected in each town or city-ward at one time by one collector, furnished with a tax-list covering all. If other means fail to secure the taxes, goods may be seized, and lands may be sold, to make up the amount required, the title thus given being made complete after a certain period allowed the original owner for redemption. ^Equitable taxation requires property of every kind to be assessed. In actual experience, however, prop- erty in the form of real estate bears the larger share of the burden. Personal property can be easily concealed or removed by those who wish to evade their share of the taxes ; and, with men of weak consciences, the temptation is strong to make false returns, and even to commit perjury, when detection is almost impossible. Property in railways, banks, &c., is usually taxed as a whole by the State within whose jurisdiction it lies. If each individual stockholder is also taxed for his share, there is evidently a double taxation on that property. The same thing happens often when one is re- quired to pay a tax on the evidences of debt which he may hold, such as notes, bonds, mortgages, &c. These things are onlj^ symbols, whose multiplication makes no increase of real wealth. Suppose A B holds his neighbor's note for two thousand dollars, secured by mortgage on a farm worth four thousand. The property is one, the farm. The note and mort- REVENUES OF THE GOVERNMENT. 127 gage only indicate that A B lias a lien on that property for one-half its value. The credit given and received has added nothing to that value. The one property is justly subject to taxation. Who shall pay the tax? In strictest equity, each of the parties should pay a half; but, in the very terms of the mortgage, the mortgagor engages to pay all taxes that may be levied on the land. This is a part of the contract, and the interest is adjusted to that usage. If the mortgagor is taxed for the whole farm, and the mortgagee is also taxed on the mortgage he holds, there is evidently a double taxa- tion on two thousand dollars. These cases show the difficulty of adjusting a system of taxation in accordance with strict equit}^ A perfect S3"stem seems an unattainable ideal ; but it will be approximated just in proportion as senti- ments of honesty and patriotism are cultivated among a people, and as legislators apprehend and apply in their action on this subject the fundamental princi- ples of Pohtical Economy. EXERCISES. 1. What source of revenue has our government other than taxation ? 2. What was the effect on the people of Rome, when the government was wholly maintained by the plunder of the provinces, without taxation at home ? 3. Is it desirable that a people should be altogether re- lieved from contributing to the support of their govern- ment? 4. On what grounds are the public taxes made a first lien on all private property ? 5. Is it right that an aristocratic or priestly class should be exempt from taxation ? 128 POLITICAL ECONOMY. 6. Can you tell how the Turkish government levies its taxes, and what is the effect on the industry of its people ? 7. What question respecting taxes was a prominent issue in the war of the American Revolution ? 8. Can you state the mode of collecting taxes in France in the eighteenth century, by "farmers-general," and the wrongs that attended it ? 9. How does taxation by duties on imports conflict with the first and second maxims of Adam Smith ? 10. Why is the close of the year generally chosen in our country as the time for collecting taxes ? 11. Is that an economical kind of tax of which half the amount is consumed in the cost of collection ? 12. Illustrate the difference between specific and ad- valorem duties. 13. Can you state some of the complications and absurdi- ties of our American tariff in this year, 1879 ? 14. If by requiring stamps of small amounts on bank- checks, notes, deeds, wills, &c., a revenue of several mil- lions can be raised, with no expense for collection beyond the cost of printing the stamps, is there any good reason why the measure should not be adopted ? 15. What good reasons can be urged by honest and patri- otic men against a moderate income tax ? 16. Is it a good sign for our nation, that the people seem averse to direct taxation, the measure and pressure of which they can exactly know and feel ? 17. Is it any less dishonest, by evasion, to cheat the gov- ernment out of a legitimate tax, than to cheat a laborer out of his wages, or a creditor out of his dues ? 17. Illustrate the method of assessing and collecting State taxes, by the case of a tax-receipt from the collector of your own town or city. 19. What is the meaning of a '^ tax-title " to land ? 20. State any instance of double taxation which you know of. 21. On what grounds may school and church property be exempt from taxation ? EXCHANGE. 129 PART IV. EXCHANGE. Wealth is transferred from producers to con- sumers by manifold exchanges. The division of labor which increases production necessitates ex- change. With advancing civilization the processes of exchange are systematized into a very compli- cated and extensive social machinery, — how com- plicated, one may see if he will try to trace the cotton in the shirt he wears back to the field on which it grew ; how extensive, will appear if one will consider how many parts of the world contrib- ute to the sum of daily comforts with which his table and his home are furnished. Hence, in the science of Political Economy, exchange holds the place of highest importance ; and some have pro- posed to adopt, as a title for the science, the term Catallactics, the science of exchanges. A full but concise presentation of the first princi- ples of this part of our subject will be given in several distinct chapters. Only b}'^ a clear appre- hension of these principles can the hard problems of economics be solved. 130 POLITICAL ECONOMY. CHAPTER I. THE NATURE, NECESSITY, AND AGENTS OF EXCHANGE. As a specific, act, exchange is a transaction in "Which two parties voluntarily transfer to each other the right of property in certain items of w^ealth w^hich are regarded as equivalents. Observe that the trans- fer must be voluntary, else it involves robbery* : it must convey on each side a right of property, else it is fraud. It is often said that exchange may be either of commodity for commodity, as when one gives a table for a pair of boots ; or of commodity for labor, as when one gives fift^^ pounds of flour for a day's work at mowing ; or of labor for labor, as when a mason gives a day's work in exchange for a carpen- ter's work for a da3\ This is proper enough to indicate the precise form of the transaction ; but in reahty it is not the labor itself, but the value in some form of wealth, the product of the labor, which is contemplated. Value is thus the central term of this branch of our science. Just here let the student turn back to the definition and explanations of value as given on pages 7 and 8. From the views there given we THE NATURE OF EXCHANGE. 131 derive the following formula, applicable to all ex- changes : — Value = cost + or — the effect of the ratio of demand I to supply. The general arena of exchange is called the market, a term which signifies not so much a localit}", as the actual relation of demand to supply at the place and time contemplated for making exchanges. By demand is meant the extent of desire for an article. Supply expresses the quantit}" of the article at hand to meet that desire. Between these two factors competition works continually variations in the value of conimodities. When demand is great in proportion to supply-, value is enhanced by com- petition among the buyers. When supply is great in proportion to demand, value is reduced by compe- tition among the sellers. So, for the variation of value under the law of demand and suppl}'-, we have another simple formula, as follows : — Value rises directly as the demand, inversely as the supply. The tendency of free competition is to produce an equilibrium between suppl}* and demand (see p. 79), and so to make cost the general standard of value. Mr. J. S. Mill distributes all things that are bought and sold into three classes. First, There are things of which it Is physically impossible to increase the quantity beyond certain narrow limits. Such are ancient sculptures, paint- ings of old masters, rare books or coins, and wines produced only under peculiar conditions of soil, climate, and exposure. 132 POLITICAL ECONOMY. Second, There are things which at a moderate out- lay of labor and capital can be multiplied indefinitely. With laborers and machinery enough, such things as cotton and woollen goods, shoes, hats, &c., might be multiplied a thousand-fold, or at least till the limit of the earth's capacity to ^^ield materials is reached. Third, There are things which can be produced in limited quantity at a given cost, but to increase the quantity involves a much greater proportional cost. Such are the agricultural products of a defined area of land. A field that yields twentj'-five bushels of wheat to the acre ma}^ be made to yield fortj^ bushels, but the cost will be more than doubled. With these distinctions in mind, the following fundamental principles of exchange, as presented for the most part by Mr. Mill, are plain and almost self-evident. 1. Value is a relative term. All goods sold are paid for in goods of another kind. Whoever sells a thing becomes in the act a purchaser of some other thing, and the value of each is simply what it brings in the trade. The values of all things can never, therefore, rise or fall at once. A rise of value on one side implies a fall on the other side. Here the distinction between value and price must be observed. Price is value expressed in terms of the single article money. If the amount of money in a country be suddenly increased, as was the case in the United States in the years from 1861 to 1865, the prices of all things will rise together, because money is cheapened. The prices of wheat and THE NATURE OF EXCHANGE. 133 broadcloth may thus be doubled at the same time without changing the value of either : it will take the same amount of wheat to bu}^ a 3'ard of broad- cloth as before. If it takes twice as much wheat to buy a hat this year as it did last, the fact implies a change of value on one side or the other. If the hat holds the same relation to all other articles as before, it is evident that wheat has for some reason declined in value. If all other articles must be doubled to buy the hat, it is evident that the hat has risen in value. 2. The temporary or market value of a thing depends on the demand and supply; rising as the demand rises, and falhng as the suppl}' rises. As a thing grows cheaper, however, under an increased suppl}', the demand increases in gi'eater proportion ; because every step downward in the value widens the circle of those who are able to buy the article. 3. Things have also a permanent, or, as it may be called, a natural value, to which the market value, after every variation, tends to return ; and the oscil- lations compensate for one another, so that on the average commodities are exchanged at about their natural value. 4. The natural value of some things is a scarcity value ; but most things naturally exchange for one another in the ratio of their cost of production, or at what ma}' be termed their cost values. 5. The things which are naturally and permanently at a scarcity value are those of which the supply cannot be increased at all, or not sufficiently to sat- isfy the whole demand which would exist for them at their cost value. 1B4 POLITICAL ECONOMY. 6 . A monopoly value means a scarcity value. Mo- nopoly cannot give a value to any thing, except through a limitation of the snppl}'. 7. Every commodity of which the supply can be indefinitely increased by labor and capital exchanges for other things proportional^ to the cost necessarj- for producing and bringing to market the most costly portion of the supply required. The natural value is synonymous with the cost value ; and the cost value of a thing means the cost value of the most costly portion of it vi^hich the market demands. 8. If competition be free, the perturbations of value caused by variations of demand and supply continue only during a period which cannot exceed the length of time necessary for increasing or dimin- ishing the supply. Under the pressure of competi- tion, demand and supply rush towards an equilib- rium; but the condition of stable equilibrium is when things exchange for each other according to their cost, or at what is fitly called their natural value. The Necessity of Exchange springs from the diversity of nature's resources, the diversity of human capacities and tastes, and the w^ide reach of human desires, all of which prescribe for human industry the principle of division of labor. As men advance in intelligence, their desires are multiplied ; at the same time, by discovery and invention the resources of nature are unfolded in full proportion. Desire stimulates invention, and successful invention wakes new desires. There is no assignable limit to the THE NATUEE OF EXCHANGE. 135 development of either men's desires 'or nature's resources. Out of man's social nature spring sympathies, attractions, interests, which widen his associations, and multiply his opportunities, as both a giver and receiver of good things. Hence comes a law of interdependence, which forbids that any man should live either for or b}' himself alone. Thus human industr}^ is varied ; and each does that for which he is best fitted, or which he likes best, while mutual exchanges enable each to get what he wants by giving what he can spare. Where the diverse labor of man}" is combined to produce a single object, exchange is the indispensable means of breaking up and distributing the value, SO that each may receive his share, and use it to meet his wants. The little screws which a man in a watch-factor}' makes by the thousand will not them- selves feed or clothe him. The part which each one of a hundred men contributes to the building of a steam-engine is of no use apart from the whole, and 3'et no one can rightly appropriate the whole. But the complete watch or engine ma}- be exchanged for food and clothing and other things which are desira- ble and exactly suited to the needs of all concerned. The same principles apply with equal force to exchanges between different nations. In many cases the aptitudes of different natioQS for the creation of pecuhar products is fixed by unchangeable geographi- cal and physiological law. Moreover, a nation at one period of its history is best adapted to produce certain articles. It is obviously best that each 136 POLITICAL ECONOMY. nation should devote its energies to the production of those things for which it has the greatest facilities, and by exchange with other nations make the sur- plus of its own products provide the products of other countries which its people need. Through the mutual intercourse of nations for trade, civiliza- tion is developed, and the happiness of the human race is increased. Thus the conditions of our being demand the processes of exchange as imperatively as the processes of production. The Ag-ents of iExchangre. Exchange is a distinct department of useful industry, by which commodities are transferred from the producers to the consumers, in such places, at such times, and in such quantities, as are most convenient. It involves labor, and so adds to the cost of objects ; it adds also to their desirableness, by bringing them within the reach of those whose wants are to be gratified. Thus in both ways it enhances their value to the benefit of both parties. By it the producer is helped to dispose of his products, and the consumer gets things just where and when and as they will best meet his wants. Obviously this labor will be most economically performed by persons who devote themselves exclusively to it, receiving a fair com- pensation for their service. This compensation is made up by a percentage charged on the values transferred, of which each party pays a portion ; that is, the producer sells his products to the ex- changer for something less than he would ask of the consumer directl3^, and the consumer pays the ex- THE NATURE OF EXCHxVNGE. 137 changer a little more than if he bought directl}^ of the producer. But the expense of conducting the exchanges is far less than it would be without such intervention. Merchants is a general name for those who devote themselves to the business of exchange ; but the term embraces a gi'eat variety of agents. We can attempt onl}' a concise exposition of a few names and services. In the commerce of every community are to be recognized two great currents of trade, — an outgoing current and an incoming current. The outgoing current bears awa}^ what a people have to spare ; the incoming current brings back what a people want. In a new country a retail mercliant stands at the turning-point where these currents meet. He gathers up in small quantities the surplus products of his neighborhood, and starts them on the current of outgoing trade, to float, it may be, half round the world to find their ultimate consumers ; in exchange for these, he dispenses to his neighbors small quantities of foreign products which they need. As population increases, and products are multi- plied, another agent appears on the ground, called a middle-man, a produce-buyer, a commission-dealer. By arrangement he buys up for some house at a commercial centre the grain, the cotton, the wool, the pork, the butter, or whatever of one kind or of many kinds of produce may be ordered, and is paid by a percentage on the values purchased. With the introduction of railways come in the warehouse-men, doing the same thing at every station. From these the goods are sent to the consignee or produce-broker 138 POLITICAL ECONOMY. in the interior city, — Chicago or Buffalo, for in- stance. They pass on the goods to the shipping- merchant in the great seaport, like New York or Baltimore, thence to be exported to the ends of the earth. In former times, when manufactured articles were made by hand, in a small way, at the homes of workmen, they were gathered and thrown on the current of trade in much the same manner. But since the use of machinery has concentrated manu- facturing in large establishments, these products are passed out upon the currents of trade through the agenc}'' of factors or commission-merchants, each factory or mill having its own agent of this kind at the commercial emporium, who manages the sale of its goods in the general market, and is compensated sometimes by salary, oftener by a percentage on the amount of sales. A domestic factor renders this service in the countr}' in which the goods are made ; a foreign factor attends to the business in another country. The incoming current of trade may be best traced by taking a stand at a port of entry, — sa}^ New York. Here the agency of the importer is first to be noticed. He studies the wants of his own coun- try, and the products and prices of foreign countries generally, with respect to a particular class of com- modities, and imports what he thinks the people will use. These goods he sells generally in bulk, by sample, to wholesale merchants in his own and other cities. They in turn open them more full}', and sell by bale or case to jobbers. Of them the retail THE NATURE OF EXCHANGE. 139 merchants buy by the piece or small package, to be passed to individual consumers in such quantities as the}^ desire, and the distribution is complete. To this list of agents must be added bankers, brokers, &c., — the whole class of those who have to do with money and credit, the instruments of exchange ; also those who as underwriters and insurers distribute the risks, by land and by sea, involved in trade. Thus in outline we get a view of the manifold processes and agencies of exchange. Their compli- cations are intricate ; yet by a hidden law of self- adjustment the machinery works out its legitimate result, so that the wants of men are met with little waste of the products of industr3\ Rapid exchange is the necessar}^ stimulus to production. When trade is dull, aU industry languishes : when it is brisk, labor works on with cheerful hope, assured of its reward. The legitimate service of exchangers adds something to the utilit}- of all things that pass through their hands. It tends to cheapen every thing offered in the market, and to enrich the market by a thousand-fold multiplication of comforts and luxuries for the life of man. How absurd, then, the outcry sometimes made against merchants, that the}^ produce nothing, and are but drones and leeches of society ! Nevertheless sound economy requires that the number and expense of these agencies be reduced as far as practicable, consistently with the end to be attained. There is also good reason to protest against the abuse of a necessary instrumentality 140 POLITICAL ECONOMY. sometimes witnessed, when a trader or a company of traders combine to produce an artificial scarcity, that by suddenly raising prices they may rob the people, and enrich themselves. Those operations which produce corners in wheat, and the like, outrage the first principles of justice and honesty. Too many of our so-called "boards of trade" tolerate and encourage such abuses of trust and power. EXERCISES. 1. Trace the exchanges througli which the material of your knife has passed, from the iron-ore in the mine, to your hand. 2. If you pay a hundred dollars for a stolen horse, why is it not a valid exchange ? 3. What two elements define the extreme limits of value? 4. Why does a merchant need to study daily the news- paper-list of current prices ? 5. How does the failure of the crop in England increase the value of American wheat ? 6. When we have a large American crop and no foreign demand, how is the value of wheat affected ? 7. What gives the extraordinary value to a genuine painting done by Raphael ? 8. If it required eight bushels of wheat to pay for a ton of coal last year, and only six bushels this year, how can you tell which article has changed in value ? 9. When will a change of price indicate a change of value ? 10. The introduction of the power-loom increased the supply of cotton-cloth a hundred-fold. What effect had this on the value of the article? What effect on the demand ? 11. What is the effect of a patent-right on the value of a patented article ? 12. What does the maxim, "Competition is the life of trade," mean ? Is it true ? THE NATURE OF EXCHANGE. 141 13. What useful functions do merchants perform ? 14. By which of the three occupations, agriculture, manufacture, or commerce, do men grow rich fastest ? Which involves the greatest risks ? 15. When the commerce of a nation is prosperous, which will have the greater value, its exports or its imports ? 16. Why is it right that the retail merchant should charge a higher percentage on the price of the goods he sells than the wholesale merchant ? 142 . POLITICAL ECONOMY. CHAPTER II. MOI^Y AN INSTRUMENT OF EXCHANGE. We have seen that the processes of production are much facihtated and improved b}' the use of proper instruments or tools. Proper instruments are no less necessary for the processes of exchange. Barter, that is, the direct exchange of one commodity for another, involves many inconveniences and seri- ous difficulties. For instance, a man has made a table which he wants to exchange for bread, shoes, and a hat. His product is one thing, and indivisible : the things he wants are manj^ and diverse. Plow can he effect the desired exchange ? It will take a builder, with six hired carpenters, three months to build a house : how shall he provide his workmen with dail}^ food, &c. , unless by some device he can draw on the value of the house before it is finished? When a man does nothing but make rivets for knife-handles, how is he to subsist by exchange in kind ? A yet greater embarrassment in exchange by bar- ter comes from the difficulty of adjusting the equa- tion of value between different articles. How is it to be determined whether a shovel is a fair equivalent for a pair of boots, or a bushel of wheat for a book? By what rule shall it be settled that a farm-laborer MONEY AN INSTRUMENT OF EXCHANGE. 143 is fairl}' compensated for a month's work by a suit of clothes? Under the pressure of these difficulties, men have been driven to invent means of relief. Savages have adopted certain pretty shells, which they called wampum, as counters for exchanges. By a common instinct, civilized peoples of different ages and coun- tries have used silver and gold as a medium of exchange. In the complicated operations of modern com- merce, money and credit are the two great instru- ments of exchange. In the order of both tirae and importance, mone}^ comes first ; and without it the other has no meaning. Yet credit, though onl}'^ a symbol of mone}', is the grand instrument which ac- complishes the greater part of the world's exchanges ; when properly regulated, rendering a service whose value cannot be measured, but, when abused, caus- ing unspeakable convulsion and disaster. The nature and functions of these two instruments will be presented in this and the next chapters. Money is some useful product of labor, universally desired, to whicli all other commodities are referred as a measure of their relative values ; which is em- ployed also as an intermediary instrument for the actual exchanges of different kinds of wealth for each other. It is of the highest importance that all which is embraced in this long definition be clearl}^ appre- hended. To unfold and illustrate the chief points, we present them in two sections. 144 POLITICAL ECONOMY. SECTION L— THE FUNCTIONS OF MONET. Our definition indicates two functions of money. First, Money establishes a universal standard of value. Second, Money is a medium for the exchange of values. As a standard of value, money performs an office like that of a pound- weight, or a yard-stick, or a gallon-measure. These instruments are adjusted to measure each a certain quality, viz., weight, or length, or bulk. Just so the money-dollar is adjusted to measure the quality called value. Obviously, whatever is used to measure a quality in another thing must itself possess that quality. Hence, only a thing of value can measure value. But, according to the definition of value heretofore given, two elements combine in the value of any object; viz., utility, or desirableness, and cost, the exponent of labor. Whatever substance, then, is used as money, must be desired as a means of grati- fication ; and, the nearer it comes to being always and everywhere desired, the better is it fitted for its purpose. It must be also a substance which can be obtained only by labor ; and, the more uniform the amount of labor necessar}' to obtain it, the better will it serve its purpose as money. It is indis- pensable that these two elements be combined. Hence our definition says money is " some useful product of labor," for nothing else can have value. THE FUNCTIONS OF MONEY. 145 Furthermore, it is important that any standard of measm'ement be fixed -with exactness, and kept as invariable as possible. An India-rubber yard-stick would be a ver}^ uncertain standard of length. The French meti'ic sj'stem has for its base the ten- millionth of the quadrant of a terrestrial meridian, called a metre. It cost seven years of great labor to determine it with exactness ; but, once ascer- tained, it stands forever unchangeable, and furnishes a standard unit of measurement for all the mate- rial qualities, length, surface, volume, and weight. Nature furnishes no such absolutely fixed and in- variable unit of value ; but certainly, for their stand- ard of value, men need to select the thing in nature which is most stable and unalterable in the elements of utiUty and cost. Such a substance, once adopted and generally accepted, determines by comparison with itself a price for every thing ; and then, in the transactions of trade, all things are exchanged directly or indi- rectly b}^ these prices. But let it be ever remem- bered, that the price of a thing is simpl}' its value measured by money; and, just in proportion as the value of money is variable, all operations of ex- change must be attended with uncertainty and confusion. In its second function, as a medium of exchange, money performs an oflSce like that of a basket, or a wheelbarrow, or a cart, — it is simply an instrument of transfer. The real object of all trade is to effect an exchange of commodity for commodity. The 146 POLITICAL ECONOMY. difficulty of doing this directl}' by barter has been already noticed. Money comes in to relieve that difficult3^ B}^ means of it, two simple exchanges readily accomplish what could not be effected by one. Thus the man can sell his table for money ; that is, he puts the value of the table into mone}-, just as the farmer jjuts his eggs into a basket. The money is easily divided ; and the baker, the shoemaker, and the hatter are readj^, each for a portion of the money, to give him the bread, the shoes, and the hat he needs. In all the manifold and complicated operations of trade, mone}', as it passes from hand to hand, is fulfilling this simple office of a vehicle of transfer, or, as it is better termed, a medium of exchange. One silver dollar may thus effect twenty different exchanges in a day, just as a wheelbarrow may be used to transport twenty different loads. Such a common medium of exchange must have three essential qualities. First, Precision and stability of value : the same qualities which we saw to be essential for the first- named function of money. Second, Universal aeceptableness, so that it will be readily received by everybody for things offered in sale. Third, Divisibility into parts, representing, with- out loss of value, different degrees of value, so as to furnish an exact equivalent of any required amount. We can conceive that one substance might be adopted as a standard of value, and another em- THE FUNCTIONS OF MONEY. 147 ployed as a medium of exchange ; but this would involve many practical inconveniences. For the wide and varied operations of exchange, it is quite necessar}^ that the same substance should fulfil these two functions, combining in itself the qualities es- sential for both. This does not impl}', however, that money must be actuall}' used as a medium in every exchange. With a standard of A'alue once fixed, commodities can be measured b}' it, and have their price fixed, and then be directl}' exchanged for each other. Thus the farmer's wife brings her basket of eggs and her firkin of butter to the village grocer. The price for these articles is fixed in terms of mone^' ; the prices of the grocer's tea and sugar and spice are fixed in the same wa}'. Then, b}^ a simple com- parison of prices, the one class of articles is set over against the other, and the trade is consummated without an}' pa3'ment of money on either side. Just this thing is going on all the time in the commerce between New York and Chicago. By processes hereafter to be explained, car-loads of goods are balanced off against car-loads of wheat, to the amount of millions of dollars, without an}- actual pa3'ment of money. Thus most of the world's trade is reall}' exchange in kind. At everj^ step the reckoning is kept in terms of money, and in the last settlement the balance must be paid in money. In the multifarious transfers of trade, monej'' comes into close identification with all wealth ; for every thing that has value comes at some time to have its price, that is, to be estimated in terms of money. 148 POLITICAL ECONOMY. Hence the great mistake, to which thousands of men still cling, of regarding money as the most desirable of all things to be brought into a country. This mis- take can be best corrected b}' a clear apprehension of the fact that money is but an instrument of ex- change, itself forming but a very small part of the world's wealth, and capable of increasing wealth only as it carries every other kind of wealth where it is most needed to satisfy human wants. Any article which has value may perform the functions of money. Thus, by different nations, and in different ages of the world, various articles have been emplo3^ed. Peoples who live b}^ hunting use skins as money. In the territor}^ of the Hudson Ba}' Company the beaver-skin is the unit of value, and their money-table runs thus : ' ' Three martens are equal to one beaver, one white fox to two beavers, one black fox or bear to four beavers, a rifle to fifteen beavers." Pastoral nations use cattle as an instrument of exchange. Homer tells us that the armor of Diomede cost nine oxen. The Greeks and Romans stamped their earhest coin with the figure of an ox or a sheep. Hence the Latin word for mone}^, pecunia, from pecus, cattle. In ancient Syracuse an(^ Britain, money was made of tin ; in Sparta, of iron ; in Carthage, of a preparation of leather ; in Burmah, of lead ; in Russia, of platinum. In Scotland, formerl}', nails were used ; among the Chinese, pieces of silli ; in Tartar}^, cubes of pressed tea ; in Abyssinia, salt. Slaves passed as money among the old Anglo-Saxons, tobacco iii Virginia, THE FUNCTIONS OF MONEY. 149 codfish in Newfoundland, bullets and wampum in the earl}' histor}- of Massachusetts, logwood in Cam- peach}', sugar in- the West Indies, soap in Mexico. J But from the time of Abraham, who paid to the children of Heth ' ' three hundred shekels of silver, current money with the merchant," until now, silver and gold have been the chief mone}^ of the civilized world. It should be noted, however, that, when any thing used as mone}' is devoted to another use, its functions as mone}' cease. Gold or silver coin turned into plate, just as reall}'' as tobacco or sugar passed to a consumer, is no longer money. We have seen that whatever is used for money must be a thing universally desired. If a nation were isolated from all others, so that its exchanges were wholly internal, it would be enough that its money be acceptable to its own people alone. But with the advance of civilization, more and more does the stream of each nation's trade flow outward to meet and cross and blend with the streams from ever}^ other nation, in the great ocean of a world- wide commerce. Hence the necessity that the sub- stance adopted for the standard of value and the medium of exchange be the same and uniform in all countries, the world over. The most profitable exchange for any country is to export what is most abundant and therefore least valuable at home, and to import what is most wanted and therefore most valuable at home. Mone}' may accumulate in one country so as to be lower in value than other commodities. Then it is of advantage 150 POLITICAL ECONOMY. to send away the money, and in exchange to bring in needed commodities. This can easily be done, if the money of each country is the same with that of every other. Such a uniformity of mone}' throughout the civil- ized world would tend to prevent that fluctuation in the value of money which disturbs and deranges all operations of exchange. With freedom for mone3^ to flow out or to flow in to one and another countrj^ as a temporar^^ surplus or deficiency may demand, universal commerce becomes a great reservoir, to maintain its value at a common equilibrium ever}'- where, just as the ocean maintains the sea-level uniform for the world. It is obvious that the adoption by any community or state of a kind of mone}'' that is not acceptable in other countries must exclude that people in great measure from the commerce of the world. Hence the mischief of an irredeemable paper money, or of a standard of specie at variance with that of other commercial nations. For a country which adopts these expedients, the result is inevitably to impede trade, and to impair industry. EXERCISES. 1. Show how division of labor creates a special necessity for money to aid exchanges. 2. Ilhistrate the special difficulty which a painter would find, under strict barter-exchange, in disposing of a fine picture that cost him two months' labor. 3. Can you conceive of the conditions of trade, if there were no means of fixing prices for commodities ? 4. If there were no money, what inducement would THE FUNCTIONS OF MONEY. 151 there be for one to produce more than he needed for him- self, or how could one accumulate wealth by saving? 5. It has been said, "There is no machine which saves as much labor as money does." Is the statement true? Show how money is a means of saving labor. 6. Why might not the pebbles of a gravel-lull be used as money ? How are slips of pictured paper any better for the purpose ? 7. What qualities for use as money have precious stones, such as rubies, sapphires, and diamonds ? What important quality do they lack ? 8. A farmer sold fifty bushels of wheat for $50. He then bought a suit of clothes for $20, paid $10 for a gown for his wife, and $10 for shoes for his children, and bought $10 worth of sugar, rice, tea, and coffee. Illustrate the two functions of money in the transactions. 9. What would be the effect on trade, if gold and silver coin were liable, as formerly, to be debased at the arbitrary will of a sovereign ? 10. The values exchanged during a single day In New York have been reported as high as $400,000,000. In what respect was money concerned with them all, and in what respect with but a small part of the exchanges? 11. Can you account for the fact that during this year (1879) the foreign trade of the United States brought home large amounts of gold and silver money ? 12. How will the importer in New York decide whether to send out wheat, or money, in payment for his goods bought in Liverpool ? 13. Is it good policy for a government to forbid the expor- tation of specie, when that will buy the goods wanted from abroad to better advantage than any thing else ? 14. For what utilities besides their service as money are gold and silver desirable ? Would they be used as money, if they could be used for nothing else ? Are they still money, when wrought into gold-leaf or silver spoons? 15. The Spartan government tried to guard the people from avarice and luxury by making iron money for the country : can you tell with what result ? 152 POLITICAL ECONOMY. 16. If other leading commercial nations make gold the one standard of value, what will be the consequence if our government insist on making silver the standard for this country? SPECIE. 153 SECTION II.— SPECIE. The precious metals, gold and silver, possess certain qualities, peculiarl}' combined, which give them special fitness to fulfil the functions of mone}'. Hence, when prepared and marked for that pur- pose, the}' are called specie. These qualities may be particularly noticed as follows : — 1 . Gold and silver have an intrinsic utility. Their briUianc}^, their malleability, their resistance of cor- rosion, and their permanence, make them desirable for personal ornaments, for plate, and for the mani- fold decoration of temples, houses, and equipages. For this reason they have alwaj^s had a charm for all sorts of people. Their use as monej^ only en- hances, and makes more constant and stead}', their general desirableness. 2 . These metals are obtainable only by labor ; and the amount of labor necessary to obtain them is more invariable than that which pertains to other sub- stances. Now and then one has stumbled upon a nugget of pure gold of great value ; but ordinarily, gold and silver are obtained b}' labor in long and patient search, in washing sands, breaking rocks, reducing ores, and separating the pure metals from other substances. The amount produced is depend- ent on the labor employed. In respect to the two elements of value, desirable- ness, and cost measured by labor, gold and silver are permanent and uniform beyond an}' other products. 154 POLITICAL ECONOMY. Hence their value is more stable than that of any thing else. 3 . These metals concentrate a large amount of value in a small bulk. Tliej^ are conveniently portable. One maj- easily carry in his pocket the value of a wagon-load of wheat or a car-load of cattle when put into the form of gold. 4. These substances are capable of minute division without loss. A gold eagle or a silver dollar may be di^^ded into ten equal parts, and each part will have the value of just one-tenth of the original coin. Not so Yrith diamonds, which also concentrate value. A large diamond is worth man}^ times its weight in small diamonds ; and, once broken into pieces, its original value can never be restored. 5. These metals are of uniform quality. Pure gold or silver is the same alwaj^s and ever^n^rhere ; readil}' alloj'ed to make the coin harder, but easily restored to its original purit}' without loss. 6. The value of a definite portion of these sub- stances can be easily verified. They are malleable, easil}' wrought into any shape, and capable of re- ceiving and retaining a distinct impression. Their lustre, uniform weight, and resistance to the action of acids, make it eas}' to detect adulteration. 7. These metals are nearly indestructible by acci- dent or use. No ordinary fire consumes them ; they are not decomposed b}^ atmospheric influences ; they wear away ver}^ slowly. 8 . These two metals are adapted to each other for the different exchanges, large and small, w^hich the trade of the civilized w^orld requires. Gold toO mi- SPECIE. 155 nutely divided would be counted with difficult}', and easil}' lost. For large exchanges silver would be inconvenient, on account of its great bulk. The}' are thus well adapted in use to supplement each other. These metals are emplo3'ed as the money of the world, not because ordained to this b}' authorit}' of human governments, but because in the ordinance of nature the}' possess in peculiar degree those qualities so essential to represent precise amounts of value, and are ever exchangeable for the same amounts of value. In the strictest sense, these metals coined constitute the only real money uni- versally recognized. There is nevertheless a legitimate agency of government \vitli respect to money. Men use money in exchanges for the same reason that they use hammers in driving nails, — because they thus save time and labor, and the work is thereby better done. Yet the convenience of money may be in- creased by the action of the government in two ways. First, By indicating a uniform instrument of ex- change; that is, by establishing the precious metals as a legal tender. If I owe a man for a hat, and he will not take the silver I offer in payment, but de- mands beaver-skins, I may not be able to procure them : if, on the other hand, I offer him leather, and refuse to give him any thing else, he may be de- frauded.. To prevent disputes, the government needs to enact a law, specifying what shall be a 156 POLITICAL ECONOMY. fall and valid discharge of such an obligation when nothing definite has been agreed upon. Such a law need not interfere with special contracts for the exchange of particular objects. Second, The government can, better than any other part}^, prepare the metals used as mone}^ for the purpose by coining. It is evident that the coin- ing of money cannot be safely intrusted to individ- uals. It would present temptations to dishonest}'^, too great for ordinar}- human virtue. Hence, in all civilized countries, the coining of money is regarded as the sovereign act of the government through care- fully selected agents. In our countrj^, this, with all other rights of full sovereignty, is vested in the National Government alone. Congress has the ex- clusive power to coin monej'. In the coinage three things must be regarded : — First, The quality of the coin. The metal of the coinage must be of uniform purity. It is of advan- tage to mingle with the pure metal some jDortion of alloy, to make the coin harder, and the better to set the standard of purity at an exact point. But the precise measure of this adulteration should be fixed by law, invariable and clearl}^ made known. Second, The size of the coins should be adjusted to the convenience of exchange. If too large, they cannot well be carried about, nor fitted to different values ; if too small, they are liable to be lost, and increase the trouble of counting. Also, different pieces should be adjusted to each other so as to be conveniently enumerated. For this, the decimal system, as adopted in the United States and in France, is probably preferable to any other. SPECIE. 157 Third, The form of the coins should be such that each piece shall indicate definitely its value at sight. For convenience in counting and piling, flat coins are best. To diminish friction, some thickness is requisite. The surface should bear a well-marked impression ; common so far as to indicate the na- tionalit}^ of the coinage, differing so far as to dis- tinguish different pieces, and in full relief so as to make apparent any filing or wearing-away of the metal. The same end is subserved by milling the edges, and raising the rim. It is advisable, also, that the amount of pure metal be stamped on the face of each coin. Since the manufacture of coins requires labor with expensive machiner}", and since the act of coinage does impart a blight addition of value to the metal, it is right that the owner should pay for the service rendered. The charge made for coining bullion brought to the mint is called seigniorage. At the United-States mint the seigniorage for gold coins is only one-fifth of one per cent. In continual use, coin becomes worn, its impres- sion is effaced, and its value is diminished. Being thus unfitted for circulation, it is but fair that the government should repair the loss, and not leave it to fall wholly on the last holder. Accordingly our government provides that gold coins of the United States may be received at the treasury at their denominational value, provided that, after a circula- tion of twent}' 3^ears, the}- are not reduced in weight more than one-half of one per centum. The government has also authority to control the 158 POLITICAL ECONOMY. circulation within its own territory of foreign coins. Otherwise, worn and depreciated coin of other coun- tries ma}^ come in, and drive out its own superior money. Thus some years ago, our government ordered that worn Spanish and Mexican silver coins should be received onl}^ at a discount of twent}^ per cent on their face- value, though they were really depreciated only ten per cent. This made the old coins worth more as bullion than as coin ; and they were collected and melted. The heterogeneous monetary sj^stems of different countries involve troublesome fractional operations in reducing the coinage of one countr}^ to that of another. It is therefore very desirable that the attempts to secure a system of correlated interna- tional coinage for the civilized nations of the w^orld should succeed. A slight change in the systems of the leading commercial nations will secure uniformity. If with this change a uniform system of weights and measures could also be adopted, the exchanges of the world would be greatly facilitated. Governments have often transcended their legiti- mate powers in legislation about mone}'. Thus laws forbidding the exportation and importation of money, laws arbitrarily changing the value of the coinage, and law^s making any thing but gold and silver a legal tender, involve injustice, mischief, and often absurdity. The Question of a Double Standard. The use of both gold and silver as money is highly advan- tageous, almost indispensable ; but the question is SPECIE. 159 raised and much agitated, Should the standard of value be defined in terms of each metal, and both be made legal tender to an unlimited extent? If the relative value of the two metals were constant, so that they would always rise or fall together, there would be no objection to the double standard. But in the nature of things this is impossible ; for each metal has its independent sources of suppl}', and value, as we have seen, varies with the fluctuations of supply. When two kinds of mone}- of different valuation are thrown into the trade of a country together, it is a law, as fixed as the law of gravita- tion, that the cheaper money, of inferior value, w^ill drive out the dearer money, w^hose value is greater. If the government comes in often to adjust the relations of the two metals, this interference dis- tm'bs the operations of trade. This difficult}- would be relieved in measure, if all commercial nations were to adopt the double standard ; but even then some international congress would need from time to time to define the relative value of the two metals. For its function as a standard of value, it is of the highest importance that the value of money be as invariable as possible. Thus far in the history of the world, gold has been the more stable of the two metals. It would seem, therefore, most advan- tageous that gold should be adopted as the main standard, w^ith a w^ide range for the employment of silver as subsidiary coin. In that case, the advan- tages of the two metals would be secured ; each would become the complement of the other, fulfil- 160 POLITICAL ECONOMY. iing its function as money in a sphere to which the other is not adapted. The views given of the nature and functions of money warrant the following propositions as infer- ences or corollaries : — 1. In every exchange, the cost of the money em- ployed is to be regarded as equal to the cost of the article for which it is exchanged. If ten dollars is the price of a barrel of flour in Lima, it is because the cost of producing so much silver there is equal to the cost of producing the flour and its transporta- tion. This is the natural law of exchange, varied onl}'- b}^ incidental circumstances and artificial ap- pliances, which temporarily affect the supply of money or of goods. 2. The universal freedom of commerce, and the use among all nations of the same kind of money as the instrument of exchange, must tend to equalize any variations in the cost or in the supply of money. The commerce of the world is the great reservoir, the ocean encompassing the globe, into which aU contributing streams of mone}' flow ; and its level is essentially the same ever^'where. B}' a law as sim- ple and constant as that of the tides, the money- market will regulate itself, provided trade is free and money real and the same everywhere. 3. The amount of money in any country and in all countries is very small in proportion to the whole amount of vrealth and of values exchanged. As a standard of value, mone}- regulates all exchanges. As a medium of transfer, it is actually employed in SPECIE. 161 but few. It performs its oflEice best when it moves rapidly. It flows from one countr}- to another only in the process of equalization just spoken of. 4. It is of no advantage to increase the amount of money in a country, unless it is demanded by an increase of production and of active trade. Money is onl}' an instrument like a plough or a power-loom. It is of no advantage to a community to have a hundred ploughs when onl}" fift}" can be used, or fort}' looms when twent}' will do all the work. In a citj' isolated from the rest of the world, to double the amount of money will merel}^ double prices. If its trade with other places is free, the superfluous mone}' will float away on the tide of commerce to some place where it is needed, just as a surplus of wheat or cotton goods must do. 5. The abundance or scarcity of money in a coun- try is not of itself a trust^vorthy index of prosperity or adversity. We must look back of the fact to its cause. A scarcity of money, caused by an increase of products and great activity of trade, is a sign of prosperity. Money abundant because business is stagnant, and exchanges are few, indicates adver- sity. 6. The maxim, "It matters not what becomes of property, so long as the money is in the country," is false and delusive. Labor and capital valued at a million dollars were expended on a great manufac- tory which proved an utter failure. So much prop- erty was lost, none the less so because the mone}* paid out in setting up the establishment is still cir- culating among the people. The money was in that 162 POLITICAL ECONOMY. case but the instrument of throwing away so much of value. It cannot bring back the values lost. If a thief should empty your storehouse in the night with a wheelbarrow, it would not relieve your loss to find the wheelbarrow in the morning, left for some honest use. The minds of many are mystified on this subject by the complications of credit with money. A great part of the apparent variations in the value of money in different countries and at different epochs is due to the same cause. Real money held to its rightful functions iB one of the most useful inventions ever devised. One sa^'S, not extravagantly, " Money, in a nation's economy, is what the blood is in the life of the animal. It is, so to speak, the common reservoir in which all food is first dissolved, and by which, at a later stage, the elements of nutrition and preserva- tion are distributed to the several organs. There is indeed no machine which has saved as much labor as money." EXERCISES. 1. Specify some of tlie purposes, other than money, for which gold and silver are used. 2. Is the absorption of the precious metals for these purposes a benefit, or an injury ? 3. In estimating the cost of gold, what must be set off against the good fortune of some who obtain rich lumps with only the labor of picking them up ? 4. If gold should become as abundant and as easily ob- tained as iron, how would its fitness for money be affected ? 5. Platinum is a rare and useful metal : why is not it as well fitted for money as gold ? SPECIE. 163 6. What means are adopted to test the genuineness of gold and silver coins ? 7. We have coins made of copper and nickel : what qualities of real money do they lack? 8. Could a mere enactment of government prevent the use of gold and silver for money ? 9. Could a law of Congress cause circles of leather, stamped, to pass as money ? Why not ? 10. Illustrate the necessity that the government should define some legal tender. 11. When Jesus was asked whether the Jews ought to pay tribute to Csesar, what was the pertinence of his asking in reply, whose image the coin of the country bore ? 12. Why would not little solid globes of silver, such as the Chinese use, answer the purpose of money as well as our coins ? 13. Why do the manufacturers of silver prefer silver coins for the material of spoons, &c, ? 14. Where large amounts of specie are transferred, is the transfer made by count, or by weight ? Why ? 15. When Germany was composed of a great number of petty sovereign states, what inconvenience did travellers meet with respect to their money ? How is that incon- venience now removed ? 16. If commercial nations should adopt a uniform stand- ard and system of coinage, and uniform weights and meas- ures, how would the study of arithmetic in our schools be affected ? 17. Can any act of Congress keep the ratio of value be- tween gold and silver permanent ? 18. If silver dollars are worth more than gold dollars, which will disappear? 19. How is it determined that you must give a silver dol- lar for a good pocket-knife ? 20. The great fire in Chicago consumed property valued at $200,000,000, but scarcely any of the money in the city was destroyed : was the loss any less because the money remained ? 164 POLITICAL ECONOMY. CHAPTER III. CREDIT AN INSTRUMENT OF EXCHANGE. In its broadest sense, credit is confidence in the truthfulness and integrity of a fellow-man. Some exercise of it is essential to the very existence of human societ}'. The simplest services cannot be interchanged without credit. If you hire a laborer for a day's work, 3'ou trust him as one able and faithful to do the work, and he trusts 3'ou for his pay till the end of the day. Civilization advances with the growth of such mutual confidence. As a technical term of Political Econoni}', credit is trust in the promise of an equivalent to be rendered at a future time, for values immediately transferred. In the processes of exchange, credit becomes a substitute for money, and so a distinct and indis- pensable instrument for effecting all kinds of ex- changes. A very small part of the exchanges of the world's commerce is effected b}' the direct agenc}' of mone}'. Credit is the instrument em- ployed for all the rest. Its utility can hardl}^ be over-estimated. At the same time it is a dangerous instrument, because so liable to abuse. In treating the subject, we need to notice sever- ally, the forms of credit, the useful functions of credit, and the mischievous abuses of credit. THE FORMS OF CREDIT. 165 SECTION" I. —THE FORMS OF CREDIT. The leading forms in which credit enters into the operations of exchange are, — 1. Book-accounts. A seller extends credit to a buj'er b}" simpl}' charging the value of his purchase to him on his book. Tlie butcher wants the baker's bread, and the baker wants the butcher's meat." Each makes his morning purchase of the other, to be charged in account. On the da}- of settlement the two accounts are summed up, and the difference on the one side or the other is paid in mone^', or carried forward to new account. So, too, a farmer anticipates the returns of his harvest by a running account at tlie store. In either case the direction to make the charges implies the promise to pa}'. 2. Loans. A lender trusts the promissory note of the borrower, engaging to pay with interest, at a definite date in the future, the money now loaned, or the mone3'-value of the goods now sold. The borrower ma}^ give securit}' for the promise of his note by a chattel-mortgage, or a mortgage on real estate. 3. Mercantile paper. In this case the promise takes the form of a negotiable note, given by a job- ber to a manufacturer or importer, or bj^ a retailer to a jobber for goods bought to be sokl again. The note runs for a sliort time, — thirt}*, sixt}', or ninety days, — to be provided for by the avails of a second sale. Such paper is often passed to second hands, 1G6 POLITICAL ECONOMY. find may itself become a marketable article in the communit3', subject to the regular dealings of brokers. 4. Bank-deposits. The depositor gives his banker credit for mone}' put into his hands to be j^aid on his order, and accepts a certificate of deposit, or an entr}^ on his bank-book, as the promise, the voucher, for the transaction. The orders by -which the de- posits are drawn out are called checks. These ma}^ float about, with a limited circulation, as tokens of credit at home. Or, on a wider range, taking the form of bills of exchange, the credit thus originated may reach round the globe, doing good service in the exchanges of individuals and of nations. 5. Stocks. A number of persons wishing to com- bine their capital for manufacturing, banking, build- ing a railwa}^, or whatever, form a stock-company-. Each gives credit to the company for the capital he puts in, and accepts a certificate of stock as the promise, or voucher. These stock-certificates are transferable ; and credit in this form becomes an article of merchandise with a current price, more or less variable, from causes natural or artificial. 6. Bonds. These are issued by corporations, cities, states, and nations, as evidences of debt. Whoever holds these gives credit to the bodj^ cor- porate or politic, whose promise is embodied in the bond. These, like stocks, are made articles of merchandise, and are sought b}" many for the invest- ment of money. They are also often made the sport of wild and reckless speculation, and so credit furnishes instruments for stock-gamblers to play with. THE USEFUL FUNCTIONS OF CREDIT. 167 7. Promissory notes, issued bj banks or govern- ments, and designed to pass from hand to liand as currency. Such are our United-States " green- backs " and national-bank notes. In this category are inchided all forms of " paper money." The pub- lic, receiving and using these, gives credit to the governments or banks, and confidence rises or falls with all causes which affect the ability or the sta- bility of the promissor. In this form credit flies everywhere, and attaches itself to every transaction of business ; safe and helpful, or Uable, like a bub- ble, to sudden inflations and collapses, which shake and unsettle all trade and all industr}'. It is beheved that all forms of credit in use may be classed under one or other of these heads. In all cases the true basis of credit is real wealth, existing or prospective, supposed to be at the com- mand of the party trusted. Its essence is confidence in the ability, truthfulness, and integrity of the party trusted. SECTION IL — THE USEFUL FUNCTIONS OF CREDIT. As we take up this topic, a few words are needed in the outset to correct some false notions quite common. Credit is not capital. It is onl}' a means of transferring capital from one person who cannot use it, to another who can. If a man has borrowed ten thousand dollars to set up a flouring-mill, giving 168 POLITICAL ECONOMY. his note for the amount, there is but one capital, and it is all in the mill. The note which the lender holds is a simple symbol of the one capital, indi- cating that it belongs, not to the miller, but to the holder of the note. Credit does not of itself create capital. It has no magical power to make something out of nothing. Wealth does not grow by the mere act of passing from hand to hand. It can be increased only b}' union with labor. Credit transfers it for such a union : it can do no more. The same capital cannot be used by both the bor* rower and the lender at the same time. A farmer who has lent a neighbor his plough, cannot at the same time use the plough on his own field. No more can B use for his own purposes the thousand dollars which he lent to A. He may get a thou- sand dollars b}^ selling the note to C at its face value, and C ma}^ sell it to D, and so on till it gets to Z ; but each moA^e onl}^ changes the lender of the one original sum. In the end the whole series of transactions will be settled by one act, when A pa3's Z, and takes up the note. But credit, when held to its legitimate functions, renders important services to all departments of industry. 1. Credit brings wealth into the form of capital, and makes it available for the increase of wealth. Widows, minors, aged persons, professional men, otherwise occupied, and unfamiliar with manufac- tures and trade, are often the owners of property from which they need an income ; but they cannot, THE USEFUL FUNCTIONS OF CREDIT. 169 b}" their own labor, make it productive. By means of credit this wealth is made productive capital for the benefit of all parties. Credit also gathers up the small savings of man}', and puts them into union with labor for profitable use. 2. Credit gives efficiency to the industrial talent of a people. By means of it man}' a poor man, of strength and skill, obtains the needed capital by which alone his powers can be employed and devel- oped. A large portion of the most successful busi- ness-men in our country have begun with only their own faculties and energies, and a character to com- mand confidence, and bring them capital on credit. In the light of these two of its functions, credit is indispensable, both to the full drawing out of the capital of a country, and to the full development of its industrial talent. Thus it touches both the springs of productive industry, — capital and labor. 3. Credit quickens exchanges. The crops of the farmer stored in his granary, and the products of the manufacturer waiting for purchasers, are capi- tal lying idle. By selling to the middle-man or the jobber on credit, this wealth is set moving at once towards the consumers who need it, and the pro- ducers have means for new products. Rapid ex- changes turn over capital often, and with every turn wealth is multiplied. The most important functions of credit fall within the sphere of exchange. 4. Credit serves directly as an instrument of ex- change. This is evident in book-accounts. A buys of B, and B buys of A ; the values being entered in the account on either side. On settlement there 170 POLITICAL ECONOMY. may be a small balance to be paid in money. But for the greater part of the transfers, the credit-entry has sufficed. The aggregate of exchanges thus effected is very large. The same thing is done on a larger scale by credit in the form of bank-deposits. Suppose four men do business at the same bank. A pa3^s B a hundred dollars for a horse, bj^ his check on the bank. B ma}^ make a paj^ment of the same amount on the same daj^ and in the same way to C, and C to D, and D again to A. The four checks are passed into the bank. On each of four accounts in the bank corresponding entries are made. At the close of the day the accounts stand as thej' did at the beginning. But those entries have effected four exchanges, without drawing out or even counting a dollar of money. The New- York Clearing House is a central bank of deposits for all the banks of the citj' ; and the scale on which credit fulfils the function we are speaking of is illustrated by the fact that transac- tions of exchange for one day, amounting to more than two hundred million dollars, are settled in the space cf one hour, requiring the transfer of only a few thousand dollars in mone}'' to provide for small deficiencies here and there. Credit fulfils a like office in adjusting exchanges between distant cities. The sales and purchases of every community, as well as of every individual, must be substantially equal. The agricultural prod- ucts sent from Chicago must pay for the goods brought from New Y'"ork. The chief instrument of THE USEFUL FUNCTIONS OF CREDIT. 171 this exchange is credit, in the form of drafts, passed through the banks of the two cities. Thus produce- dealer A in Chicago ships five thousand dollars' worth of wheat to B, his consignee in New York, and makes a draft on B for the amount, which he deposits in his Chicago bank. The bank forwards the draft to the bank in New York with which it deals, and the same da}' sells to C, a Chicago mer- chant, its draft on the New- York bank for five thousand dollars, to pa}' for goods he has received from a New-York importer. The return of the drafts all around closes the transactions ; and credit has eifected the exchange of wheat for dr}- goods, with onl}^ the labor of making a few ledger-entries, and writing two or three letters. The case is essentiall}- the same between the chief trading cities all over the world. The foreign trade of Boston is mainl}' an account-current with all the cities of the world with which she has com- merce. Provisions sent from Boston to the West Indies are made to pay for tea imported from China, by means of credit in the form of bills of exchange, passed through Liverpool as an intermediate centre of trade.* 5. Credit, to a limited extent, may be safely put into the form of currency or paper-money. It is a rule of sound econom}', to use the cheapest tools which will serve the desired purpose. If promissory notes of banks, to an amount equal to double the specie the}' hold, will effect exchanges well and safely, the real value of half the gold and silver, fixed in money, may be devoted to other purposes. 172 POLITICAL ECONOMY. So far the instrument of exchange is cheapened, to advantage. This use of credit, however, runs close upon the line of danger, and needs careful restric- tions. For all these functions of credit a basis of sound money is indispensable. Nothing but real money made of gold and silver can furnish the universal standard of value required. This is the ballast of the ship of trade. Credit furnishes the sails. Any ballast that easil}^ shifts in a storm brings danger to the ship. The credit which circles the world, and binds all civilized nations together b}" the common interests and mutual service of universal commerce, must be sustained by the all-pervading presence of money, whose value, is uniform and stable. SECTION IIL — THE ABUSES OF CREDIT. Credit is in its nature illusory, since it springs out of men's hopes, and rests on prospective rather than real wealth. Hence there is an element of danger alwaj's in close connection with its legitimate use, and it is especially liable to abuse. Some of its abuses may be named, as follows : — 1. Credit is abused when too freely granted. Thus the thriftless spendthrift runs up an account, never to be paid. In his eagerness to trade, the New-York jobber trusts his goods to a swindling adventurer, who runs to some little Western cit}*, rushes off the goods at less than cost, and disap- pears just as his notes fall due. Too often bankers have to mourn over their too easy allowance of over- drafts. THE ABUSES OF CREDIT. 173 2. Credit is abused by the wild speculation of borrowers. One who does business with borrowed capital is bound to avoid great risks. But often men working with the capital of others embark recklessl}' on uncertain ventures, in which they would not risk their own propert}'. Thus the capi- tal of banks is sometimes involved in gambling operations of the stock-exchange. 3. Credit is abused by the extravagant living of debtors. It is said that of those who enter the mercantile profession, ninetj'-nine of ever}' hundred fail. Nine-tenths of these failures are due to rash ventures and extravagant expenses, incurred with- out regard to pending debts. 4. Credit is abused by confidence-operations. The term includes schemes of speculation, which have onl}^ credit for their basis, whether organized under a temporar}' illusion, like the operations in Western lands in 1836, or with a fraudulent purpose, like many mining-companies. The commercial history of the world is full of instances of the strange facil- ity with which the imagination and credulity of men are imposed upon. 5. Credit is abused by the betrayal of trusts. Cashiers and bookkeepers conceal their thefts by false entries ; presidents perjure themselves, swear- ing to false statements ; stockholders' notes are counted as cash capital ; trusted agents run awa}^ with funds of their employers. Such acts are pos- sible, and all too common, under loose methods of credit. 6. Credit is abused by the over-estimate of assets, 174 POLITICAL ECONOMY. sometimes for purposes of fraud, sometimes through simple self-deception ; every man desiring to see the bright rather than the dark side of his business- prospects. 7. The most sweeping and mischievous abuse of credit appears in the excessive issue of paper-money. This touches all the processes of exchange with disturbing force, and is the source of panics and commercial crises. Some of the mischiefs caused by these abuses of credit may be mentioned. a. They cause ruinous fluctuations of prices. Mr. Mill says, " In a state of commerce in which much credit is habitually given, general prices at any moment depend much more on the state of credit than on the quantity of mone3^'* 6. Honest men are compelled to pay for the losses which proceed from bad debts. The profits of the merchant must be enough to guard him from loss in the risks he runs, and these come from his pa3'ing customers. c. These abuses of credit tend to turn all trade into a game of chance. Here and there a splendid prize is won, and it dazzles men's e3^es. d. Through familiarity w^ith failures and frauds, the moral sense is deadened w^ith respect to a debtor's obligations. How can it be otherwise when a bank- rupt's settlement with his creditors at fifty cents on the dollar is a common fact? e. The abuse of credit tends to relax the bonds of law^ for the enforcement of contracts. As a matter of fact, under this influence, the collection THE ABUSES OF CREDIT. 175 of debts b}^ legal process has become difficult, almost impossible. These evils call for earnest and persistent efforts to raise the tone of public sentiment and common practice respecting credit. The honest part of the debtor class are most of all interested in securing such a reform. EXERCISES. 1. What would be the effect on the social life of men, if mutual distrust prevailed ? Illustrate. 2. Illustrate by an actual or supposed case each of the forms of credit named: viz., book-accounts, loans, mercan- tile paper, bank-deposits, stocks, bonds, and circulating promissory notes. 3. A bought fifty dollars' worth of goods of B ; B bought nothing of A, but bought fifty dollars' worth of C, and C bought.fif ty dollars' worth of A ; corresponding charges are made on the several book-accounts: how can the whole be settled by credit, without the payment of any money ? 4. Explain a usage common with banks, called "dis- counting mercantile paper." 5. Suppose you buy twenty-five dollars' worth of books in New Haven, Conn., and send in payment a draft for the amount made by a Kenosha bank on a New- York bank: explain the functions of credit in the transaction. 6. B holds a certificate for a thousand dollars of the stock of the First National Bank of Chicago: what does that certificate mean ? What is meant by the expression, "hypothecating stock" ? 7. A grocer pays a farmer a five-dollar United-States greenback for a firkin of butter: is it a money-payment or a credit-payment ? Prove your answer. 8. Suppose Congress at its next session should order a hundred million dollars additional greenbacks to be issued: would the act add that amount to the capital of the coun- try? 176 POLITICAL ECONOMY. 9. Suppose, instead, a hundred million gold dollars should be issued from the mint : would the capital of the country be increased by so much ? 10. How does a savings-bank increase capital ? 11. liow does credit help a manufacturer to anticipate the sale of his products for the payment of his employes ? 12. Can you explain the "letters of credit" which many use to provide for their expenses in travelling in Europe ? 13. Is it a wrong to a man to ask for some evidence of his character before extending credit to him ? 14. Is it right for one who is doing business on borrowed capital to embark in doubtful speculations ? 15. What is the real cause of most of the defalcations which so often occur ? 16. Is it generally either unjust or unkind to insist on the prompt and faithful fulfilment of pecuniary obligations ? 17. Is it advisable to restore the laws of imprisonment for debt which were in force in all our States sixty years ago ? 18. Why should not defalcation be classed with theft and robbery as a grave crime ? BANKS AND PAPER-MONEY. 177 CHAPTER IV. BANKS AND PAPER-MONEY. The word bank is of Italian origin. In the infancy of European commerce, the Jews in Italy were wont to assemble in the market-places of the principal towns, seated on benches, ready to lend and exchange mone}' : hence the term "bank,** from banco, a bench. When an}' of these money- lenders failed, his bench was broken, and so we have the word bankrupt. In the S3'stem of modern commerce, banks are the chief agents of credit. Credit, as we have seen, holds an important place in the processes of exchange. The principle of division of labor re- quires that some persons should make it their spe- cial business to direct and manage its complicated machinery. In banking institutions, men devote themselves to the systematic administration of credit for the manifold service of trade and industr}', a service which is indispensable and invaluable. Like all other good agencies, this may be abused and misdirected. This danger will be best guarded against, when the legitimate functions and uses of banks are well understood by all classes of people. 178 POLITICAL ECONOMY. SECTION L — THE OFFICES OF BANKS. Banks fulfil four distinct offices : — 1 . The collection and custody of money-deposits to be the basis of credit in trade. If all the exchanges of a community were to be eifected by monej^ alone, every business-man must have in his own keeping a considerable amount of money. To guard this from robbery and loss, would involve no little pains and expense. In doing any large business, the mere counting of the specie paid and received would require much labor. It is an important office of a bank to relieve these risks and labor, by establish- ing, in a convenient locality, a safe central reposi- tor}'' for the specie of a communit}', and charging a cashier and other officers with the responsibilitj' of its safe keeping and transfer. Then, as individ- uals deposit what they receive, and draw for what they pay, credit is made, in the manner heretofore described, to effect a great part of each day's ex- changes, while the money lies secure in the vaults prepared for it. It would be good economy to make such an arrangement, even if all who enjoyed its benefits had to contribute directly to pay the banker for his service. But the compensation de- rived from their other offices enables the banks to do all this gratuitously. 2. Closely allied to this is the office of banks in negotiating money-exchanges. The coin issued by one nation does not pass freely in another country THE OFFICES OF BANKS. 179 where it is not known. A German immigrant com- ing into New York will need to turn the thalers he brings fi-om his native land into American dollars. At the bank he can do it safely b}' paying a small fee, for there the relative value of the two coinages is well understood ; and the next da}', perhaps, some one going abroad will call on the bank for exchange the other vt'ay. But a more important and exten- sive business of this kind is needed to provide for paj'ments to be made in distant and foreign places, b}' drafts and bills of exchange. A genuine draft on Chicago is acceptable in all the North-western States. A draft on New York is good in an}^ part of our country. A bill of exchange on London will* command mone}' for its possessor in an}- cit}' of the civilized world. Banks, through the credit they have with each other, are prepared to furnish their customers with orders of this kind as the}' may desire, their payment being for the most part actu- ally made b}- the exchange of goods shipped to and fro. This resolves the commerce of the world into barter-exchange. The banks charge a slight pre- mium for exchange of this kind, the rate varying with the balance of trade between different places. The dail}' newspapers of leading cities give the prices-current for exchange as they do for goods bought and sold. The quotations for British exchange are peculiar, and need explanation. The premium for exchange on London will be seen ordinarily stated at from nine to ten and a half per cent. This apparently high rate is due to the fact, that, at the time our 180 POLITICAL ECONOMY. government was formed, the old Spanish milled dollar was in use, and $4.44 was fixed as the rate at which the pound sterling must be computed at our custom-houses. Since then our American coin- age has been changed ; and the relative value of gold and silver has changed, so that now a pound sterling equals $4.86 of American coin, but the old mode of computation is continued : hence British exchange in New York is at par when it is quoted at nine and a half per cent premium, the difference between $4.44 and $4.86. This needs to be borne in mind in all calculations of the cost of bills on London. 3. To make loans and discounts is another office of banks. The union of capital and labor is neces- sary to produce wealth. But often one has the capital, and another the capacit}^ to labor. A bank, as an agent of credit, brings the two elements to- gether in the most expeditious and convenient way. He who has capital puts it into the bank to be loaned for him. He who needs capital can go to the bank, and borrow. "The banker, devoting him- self to this occupation of loaning, becomes expert in the negotiations, keeps himself informed as to the character and responsibility of borrowers, and understands all the legal forms essential for a valid contract. The terms loan and discount indicate two dif- ferent modes of lending, adopted by different classes of banks. Savings banks receive on deposit the small savings of great numbers of people, make loans for long time secured b}' real estate or other THE OFFICES OF BAXKS. 181 ample securities, and collect the interest semi-annu- all}' as it accrues. Commercial banks gather funds of the wealth}' as their capital, and the temporar}' » deposits of men in active business, and make their loans for short time, sixt}' or ninetj' da3-s, on per- sonal securit}'', taking interest in advance as a dis- count or deduction from the principal sum borrowed. 4. A fourth office performed by many banks is to issue promissory notes for general circulation as a substitute for specie. This creates one kind of paper-mone}', which will be treated of in a subse- quent section. A few words here will suffice to indicate the manner in which such notes are thrown into circulation. A portion of specie is set apart as the basis of the issue. Thus the bank loans not the specie which it holds, but its own notes paj-able in specie, receiving in return the notes of Individ- uals guaranteed b}' indorsers- for the amount loaned, to be paid at a future day. Reall}-, the bank loans its own credit. The notes thrown out are mere sj'mbols of value, not representatives of it as specie is. If the amount issued is just equal to the amount of specie in the vaults, the holders of the notes have a double security ; viz., the specie in the bank, and the obligations of those to whom the notes were loaned. The security might be considerable- reduced with safet}-, bj' issuing notes somewhat in excess of the specie in reserve, since the}' could never be all presented at once. But, without well- devised checks, this course leads to danger. This office is not necessarily associated with the others named. 182 POLITICAL ECONOMY. In the fulfilment of these offices, banks, as public corporations of known character, offer inducements for the introduction of foreign capital. This inci- dental benefit is of great importance to the advance of a new country. Through these offices, banks render important services to the finances of sovereigns and states, steadj^ing and strengthening the bands of govern- ment, and furnishing timel}' aid in the emergencies of war and of great national enterprises. SECTION II. — THE UNITED-STATES NATIONAL- BANK SYSTEM. The limits of this work do not give place for a history of banking, or an}' notice of foreign banks. The present bank-system of our own country must, however, be briefl}' presented. This s^'stem was established b}" Act of Congress in 1863. It is under the charge of a bureau of the Treasury Department, the chief officer of which is the comptroller of the currency. Under this act a national bank may be organized b}' an}^ number of persons not less than five, the capital in any instance to be not less than $100,000, except that in cities containing a population not exceeding six thousand, banks msij be established with a capital of not less than $50,000 ; in cities having a population of fift}- thousand or more, the capital of each bank must be not less than $200,000. Not less than one-third of the capital must be Invested in United-States bonds, upon the security UNITED-STATES NATIOXAL-BAXK SYSTEM. 183 of which circulating notes may be issued equal in amount to ninet}' per cent of their current market- value, but not to exceed ninet}' per cent of the par value of the bonds deposited. The notes, officiall}^ certified by the Treasurer of the United States and the Register of the Treasury, are receivable at par in the United States in all pa3-ments to and from the government, except for duties on imports, inter- est on the public debt, and in redemption of the treasur^'-notes. They are redeemable on demand in lawful mone}' of the United States. A subsequent act of Congress laid a tax of ten per cent on the circulating notes of previousl}' exist- ing State banks, in consequence of which most of those banks re-organized under the national S3^stem. Thus our present bank-currency consists of notes of national banks, which are of uniform value in all parts of the countr}^ the payment of which is guaranteed by the government. Provision is made for frequent visitation of the banks by government officials, to investigate their operations ; stated re- ports are called for ; and the comptroller of the cur- rency may appoint a receiver to wind up any bank which is in an unsound condition. The national banks may receive deposits, sell bills of exchange, and loan mone}'' at the rates of interest allowed b}' law in the States where the}^ are located. For the circulating notes this S3'stem pro- vides all the securitv which the credit of the United States can give. But it provides no security for deposits and other liabilities, except that all share- holders are held Individually liable to the extent of 184 POLITICAL ECONOMY. the amount of their stock, in addition to what they have paid for their stock. Tlie law now fixes no limits to the number of banks that ma}- be organ- ized, or to the total amount of notes that may be thrown into circulation. The circulation has ranged from three hundred to three hundred and fifty mil- lion dollars. Of the more than two thousand na- tional banks which have been organized, very few have failed, and the pubhc has incurred no loss on the currency. From Feb. 25, 1863, to Nov. 1, 1879, there had been organized 2,438 national banks. Of these only 81 had been placed in the hands of receivers to be closed, 307 had gone into voluntary liquida- tion ; leaving 2,050 in operation at the last-named date, with capital $455,240,000, deposits $713,400,- 000, and circulating notes outstanding $337,181,- 418. The system will be further illustrated by a state- ment of the liabilities, the resources, and the profits of the banks. The Liabilities are as follows : — 1. The capital stock. 2. The circulating notes. 3. Deposits. 4. Balances due to other banks, especially from banks in the great cities to those in the country. 5. Surplus funds and reserves, held to strengthen the banks against contingencies, which are a virtual addition to the capital, and belong to stockholders. 6. Undivided profits and unpaid dividends. UNITED STATES XATIONAL-BANK SYSTEM. 185 7. Miscellaneous liabilities, small obligations not classified. The Resources embrace the following items : — ^ 1. Loans, which represent the chief business of the bank. 2. United-States bonds deposited with the comp- troller. 3 . United-States bonds and other stocks and bonds held as investments. The reserves take this form. 4. Balances due from other banks. 5. Real estate, a place for business and property taken for debts. 6. Exchanges and cash items, — bills of exchange, drafts, &c., on hand. 7. National-bank notes and legal-tender notes, held to meet daily calls for currency. 8. Legal-tender notes and specie, for the redemp- tion of cu'culation. 9. Miscellaneous resources, small items not classi- fied. In a regular bank statement the liabilities and resources thus presented balance each other, and the items on either side show the actual condition of the bank. The sources of Profits of banks are, — 1. Interest, from several distinct sources. a. Interest on United-States bonds deposited with the comptroller. 6. Interest on circulating notes loaned. c. Interest on the remaining capital and reserves loaned, or held in productive stocks. d. Interest on a portion of the deposits also loaned. 186 POLITICAL ECONOMY. 2. Premiums on exchange. 3. Commissions for collections. Claims from abroad are often sent to a bank, as an agent of established character, for collection. With prudent management the profits of banking are sure, and compare favorably with those of any other business. The undue expansion of loans, in order to increase profits, involves the danger of throwing the centre of gravit}^ outside the base, with a consequent downfall. Private banking-houses exist in all parts of the country, and fulfil all the offices named except the issue of circulating notes. Some of these have gained a character and standing which command a ^world-wide confidence. Their credit rests upon personal integrity, wise management, and large resources accumulated through years of devoted industry. Savings banks, mostly without capital, simply re- ceive and loan deposits. The savings banks of our country, 673 in number, thus manage funds amount- ing to over $750,000,000, drawn from some millions of depositors. In Ma}^ 1879, the entire banking business of our country was represented by 6,360 institutions, whose aggregate capital was $656,500,000, and which had credited on their books deposits amounting to $1,- 893,500,000. The comptroller of the currency, in his report dated Nov. 1, 1879, estimates the circulating me- dium of our country as follows : — PAPER MONEY. 187 Treasury-notes (greenbacks) outstanding National-bank notes outstanding . Gold in the treasury .... Silver in the treasury .... Coin in the banks Estimate of coin held by the people Total $346,681,016 337,181,418 157,960,193 50,078,020 42,173,741 231,4 78,515 $1,165,5'53,503 SECTION III.— PAPER MONET. Real Money is made of the precious metals, and is capable of representing all kinds of values, be- cause it has value in itself. But on account of its bulk, its weight, and its costliness, some more con- venient instrument is desirable for many operations of exchange. The "ancient coixunercial nations felt this need, and took various measures to meet it. The Carthaginians adopted a sjmbolic mone}', made of an}' object of the size of a coin, enclosed in a leather envelope, and stamped with the seal of the state. The Doge of Venice, and other sovereigns of the middle ages, issued leather mone}^ as a prom- ise of future pa3'ment. The Chinese, as far back as the seventh century A. D., had various kinds of paper money which the}' called "flying coins." The necessity is acknowledged to-day, and all com- mercial nations are using some kind of paper money. Roscher notes well a distinction to be made be- tween paper money and money paper. The latter term embraces drafts, bills of exchange, certificates of stock, bonds of cities, states, &c., and like forms on paper, which are definite calls for money, titles of ownership, evidences of debt. These are bought 188 POLITICAL ECONOMY. and sold, and so, in a sense, circulate ; but, like substantial goods, they require money to circulate them. Paper mone}^, on the other hand, is intended for circulation, in the place of mone3\ It must be itself ever afloat, as a means of floating ever}^ thing else. It is made up of promises to pa}^ money, but to no definite person, in no definite place, at no definite time ; good for the functions of money in purchases and sales, just so far and just so long as men believe the promise. Several kinds of paper money may be specified. 1. There is what Mr. Walker terms mercantile currency. This signifies promises of banks to pay certain amounts of money on demand ; the bank holding the full amount of coined money or bullion in reserve to fulfil the promise of ever}' bill issued. Such were the notes of the Bank of Amsterdam as first issued ; such are, and have been for more than two hundred and fifty years, the notes of the Bank of Hamburg. Such are the gold-certificates of the United-States Treasury. These involve only truth- fulness and integrity on the part of the bankers or oflScers of the government to insure entire credit. Such notes combine the convenience of paper with the security of specie. Its basis is solid and im- movable. It is paper money resting on real money. 2. There is our national-bank currency, which consists of bank-notes secui-ed b}^ a reserve of gov- ernment-bonds instead of specie ; the government holding the securities, guaranteeing the fulfilment of the promises, and requiring the banks to hold specie in readiness, suflScient to make payments PAPEli MONEY. 189 when called for. Here the strength of the security is measured b}^ the credit of the nation. It is paper mone}' resting on money paper. 3. Mixed currency. This is composed of written promises to pay specie on demand, issued by banks in excess of the actual amount of specie held for their redemption. It is called mixed because its basis is partly coined mone}^ and partly credit in the notes of their customers discounted by the banks. The notes of the Bank of England and of the Bank of France are of this character ; and such were the notes of the old State banks and of the United-States Bank in our country. The strength of the securit}' in this case depends on the propor- tion of specie to credit. When so-called "wild- cat" banks were started, with no capital except the notes of stockholders, and no specie, there was nothing but credit to sustain the circulation, and banks and ckculation soon collapsed together. 4. Credit currency. This consists of engraved notes, bearing promises of a government to pay specified sums of money. The Continental money of Revolutionary times, and the present United- States treasurj'-notes, are examples of this kind of paper-money. On the face of the greenback we read, "The United States will pay the bearer ten dollars." On its back we read, "This note is a legal tender at its par value for all debts, public and private, except duties on imports, and interest on the public debt." This engraved slip of paper is, then, only an evidence of debt. The legal tender clause on its back forces men to take it in payment 190 POLITICAL ECONOMY. of goods. But as it passes from hand to hand it simply transfers debts : it cannot pay them. You owe 3'our butcher ten dollars, and give him a green- back in pa3'ment. You are released therebj-, but the government is now the debtor in jouv place. It is not itself, as a gold eagle would be, a quid pro quo for the butcher's meat : yet it will serve as a medium of exchange, while men have faith in the government. But let the suspicion arise that the government can not or will not fulfil its promise, and the purchasing power of these paper slips at once declines, and quicklj^ comes to nought, as did the Continental money and the paper money of the Con- federate States. 5. Paper money secured by real estate. Such were the assignats of France. In the Revolution of 1789, large estates of the Church, and of wealthy .nobles who had fled from the country, were confis- cated, and made the basis of paper mone}', made up of promises of the government for a certain number of francs, each note being at the same time a cer- tificate of title to a certain amount of land of the same value. But the troublous times caused the value of lands to depreciate ; and, when the amount of assignats issued rose to more than fortj'-five billion francs, the promise and the assigned land- title became worthless. From this view of what paper money is, the fol- lowing statements are evidently true. They are also confirmed b}- actual experience. 1. It is a verj' convenient instrument of exchange. PAPER MOXEY. 191 2. As respects its material it is economical; so far as it can safely be used in place of real money, it sets free, for other uses, the more costly gold and silver. 3. It has in it alwa3's the element of credit. Even a gold-certificate is nothing to me except as I cred- it the statement that the treasurer holds the gold ready to pay it. The managers of the Bank of Amsterdam betraj^ed their trust ; and, as soon as the fact was known that the gold was gone from its vaults, its notes were good for nothing. 4. While paper mone}' maj' be a convenient me- dium of exchange, it can never serve as a standard of value. Its promise must be expressed in terms of real money, dollars ; and a dollar means a speci- fied number of grains of silver, a defined, substan- tial value. The paper note must cany with it the vision and the hope of a silver dollar, at some time to be realized, or it can have no purchasing power. If our government should say, by word or act, that the actual redemption of its greenback promise is not to be expected, its treasmy-notes would drop to the ground like autumn leaves, utterl}' worthless. 5. Paper mone}^ can ordinarily circulate only in the country where it is issued. 6. Paper mone}' is itself liable to fluctuate in value. It will be always compared with gold ; and if, by increased issues, it is out of proportion to the standard, gold will be at a premiiun, which means always that paper is depreciated. 7. By the expansion and contraction of its issues, paper mone}* tends to keep the prices of all com- modities fluctuatins:. 192 POLITICAL ECONOMY. 8. Governments, whether republican or monar- chical, when once they have begun to issue paper money, are under strong temptation to go on increas- ing its volume, till its redemption is impossible. It is said that no paper money issued by a govern- ment on its own credit alone has ever been re- deemed. It is to be hoped that our nation will prove an exception to this statement, and give to the world an example of truthfulness and honesty worthy to be imitated. 9. A law, like our " legal- tender act," making the circulation of the government's paper money compul- sory, simply forces a loan from a people. In its exigency the United States wanted guns, ships, pro- visions, &c. It ordered them of the manufacturers, and paid in promises, which was, in effect, borrow- ing instead of purchasing. Then, to relieve the manufacturers, it passed a law compelling the people to take the promises, and so to carry the loan. 10. The expansion and contraction of paper mone}^ disturbs all the functions of credit, and is to a great extent the real cause of commercial crises, panics, and hard times. 11. The instabilit}' of paper money tends to re- solve all commercial transactions, and especially credit transactions, into games of chance, — losing games for the many. 12. The promises of paper mone}'' unfulfilled tend to blunt and deaden the public conscience, and to demoralize a people. The upshot of all is, not that paper money is to be altogether banished, for that is impossible, but PAPER MONEY. 193 that its issue and its use must be carefully restricted b}^ all the appliances of wise legislation and sound public sentiment. EXERCISES. 1. What inconveniences would be experienced in the business of a town of six thousand people without a bank ? 2. How does a bank increase the capital of a com- munity ? 3. What benefit do farmers derive from banks ? 4. If you have a doubtful coin, why do you take it to the bank to be tested ? 5. What is the effect of a large shipment of grain from Chicago to New York on the premium charged in Chicago for New- York exchange ? 6. What advantage is it to the owner of capital to loan his money through a bank ? T. Wliat advantage is it to the borrower to get his loans from a bank ? 8. Wliich involves the larger outlay for interest, a pri- vate loan for a year of $10,000, at eight per cent, or the same amount taken from the bank by discount, renewed every sixty days through the year ? Calculate the differ- ence. 9. In what respects is our national-bank system more advantageous than the former system of State banks to the general business of the whole country ? 10. Is it as profitable to the bankers ? 11. In the bank-statements of liabilities and resources, which are the items, on either side, of chief consequence, as indicating the soundness of a bank ? 12. Which are most important with reference to its profits ? 13. What profit has a national bank from its circulating notes ? 14. What embarrassment may they cause to the bank ? 15. If another war should compel our government to 194 POLITICAL ECONOMY. double the amount of its bonded debt, what would be the effect on our national banks ? 16. Explain the relation between sound and prosperous banking, and the general prosperity of business. 17. State in detail the conveniences of paper money. 18. State in detail its evils or dangers. i9. Which kind of paper money named in the text is safest ? 20. "Which involves the greatest risks ? 21. What is the special danger of paper money issued by governments ? 22. What caused the rapid advance in prices from 1863 to 1870? 23. How were the profits of business affected by that inflation ? 24. Was the re-action from 1873 to 1879 avoidable ? Was it healthful to business, though trying and painful ? 25. If no attempt had been made to resume specie pay- ments, what must have happened to our paper money ? What to business generally ? 26. Who get the advantage of fluctuations incident to the too free issue of paper money ? Who suffer most from its disastrous effect ? 27. Kead the story of the *' Mississippi Scheme," and state John Law's fallacy. Is not the same fallacy involved in the reasoning of those who advocate the continued and unlimited issue of American paper money ? Are not like consequences probable ? 28. What would be the effect of prohibiting the issue of circulating notes of less denomination than ten dollars ? How is it in England and in France ? INTERNATIONAL TRADE. 195 CHAPTER V. INTERNATIONAL TRADE. 1 . The nations of men are of one blood, and con- stitute one family. 2. All the face of the earth, with its great divert sity of resources and productions, is given to the one human race. 3. The blessings which the earth has to yield are developed in largest measure as the people of every land devote themselves to the production of those forms of wealth for which their country is best adapted. 4. The happiest distribution of those blessings is secured by intercommunication and mutual ex- changes, made as free as possible between all nations. Accepting the first of these propositions as the teaching of Christianit}', confirmed by reason and common sense, the other three embod}' the first principles of Political Economy in their broad ap- plication to the highest welfare of mankind. After the lapse of centuries, the world is now fast coming to act on the practical belief of these simple funda- mental truths. . Within the last hundred 3'ears the discoveries of science and the activit}' of invention combined have astonished the world b}^ the new 196 POLITICAL ECONOMY. facilities furnished to give extension and freedom to the mutual intercourse and trade of nations. All civilized people hail with jo}' the beneficent changes which have come to each countr}^ and to the world by the introduction of steam to give speed and cer- tainty to navigation, of the locomotive and rail-car to shorten distance as measured b}^ time, and of the electric telegraph, which annihilates time and dis- tance, and permits contracts and all commercial negotiations to be adjusted to present facts in all parts of the world. The common sense of men, expressed by their instinctive, prompt adoption of these inventions, pronounces universal freedom of trade a common blessing. In accord with this prin- ciple, the civilization of the world is advancing with rapid strides. Until a comparativel}^ recent period there was nothing which could properly be called international trade. We do indeed read in histor}-, as far back as its records go, of overland merchantmen, like the caravan of Ishmaelites to whom Joseph was sold ; of cities like Tyre and Carthage, and some of the Greek cities, which grew rich and great by a sort of world-wide commerce ; and in the mediaeval time of the Italian cities, Venice, Genoa, and others, whose trade swept the seas, and brought in to indi- vidual merchants and to the coffers of the state wealth untold. But those merchant-caravans and fleets of commerce were mere go-betweens for peo- ples who stood aloof, in antagonism towards each other. These traders went everywhere, buj'ing whatever they could at the cheapest, and selling INTERNATIONAL TRADE. 197 what they could at the dearest, and took the chief advantage to themselves. Thej grew rich out of their contact with all, but they awakened no com- mon interests between the different peoples they visited. They left only the incidental benefit of furnishing each with some things they did want, and carr3'ing away some things they did not want. That trade fostered no international good-will, and gave rise to no free international intercourse. False doctrines then prevailed, as, that '' Nations are natural enemies to each other ; " "In trade, one nation can gain only what another nation has lost ; ' ' "A nation's wealth is increased only as money is brought in and held fast;" "Better to give two dollars which remain in the country for a com- modity, than only one dollar which goes out of the country." These false doctrines led to the most harassing restrictions on all commercial intercourse. Different trades were organized as rival guilds, each guarding carefully its own secrets, and eager to secure special privileges. Tolls were collected at every city's gates on all goods brought in. Each nation sought to build up its own industry by break- ing down that of others. Strange and absurd laws were enacted, defining what things the people should and what they should not consume, and resisting or distorting all the natural laws of trade. Happily, other and better views have now, in great measure, supplanted the old false doctrines, and the absurd regulations have for the most part disappeared from the statute-books. One theory, however, which originated in the mediaeval ideas 198 POLITICAL ECONOMY. of feudal isolation, still lingers with tenacious hold on man}^ minds, and with power to swa}^ the policy of states, our own free Republic especially, against the principles of sound economy. It is that which is known as the theory of protection, carried out in the enactment of protective tariffs. The limits of this work do not admit of an extended discussion of this theory. We cannot, however, do less than to attempt a concise statement of the question as it now agitates the public mind, in the light of those first principles of our science which we have been studying. The Theory of Protection distinctlj^ stated is, that, in order to promote home industry, the im- portation of certain articles, from countries where they can be produced cheaper than at home, should be prohibited or restricted by heavy duties. In direct opposition to this, — The Theory of Free Trade affirms that a na- tion's wealth and prosperity are best promoted by maintaining the utmost freedom for the exchange of all commodities among its own people, and with the people of other countries. The mere statement of the principles suggests two conflicting economic sj^stems. In practical legisla- tion two corresponding policies have been in conflict through all the history of our nation. There seems no place for compromise : truth and wisdom must lie on one side or the other. In the discussion of each department of our sci- ence, freedom appears as the natural law of industry INTERNATIONAL TRADE. 199 and trade. But on the face of it the theory of pro- tection involves an interference with freedom ; an interference which affects all of the four depart- ments, — production, consumption, distribution, and exchange, though applied most directly to the last- named. Is it not plain, then, that the presumption is against the theorj^ that the bm-den of proof is laid over upon its advocates? What are the argu- ments urged to sustain it ? We can notice onl^- the thi'ee most important and plausible. It is said, — 1 . Protection is necessary to secure that variety of industry and that balance of diflferent industries ■which are essential to a people's prosperity. This is the broad proposition which underlies and in- cludes all arguments for the sj'stem. In form the argument is logical. It gives for a major premise the affirmation that a varied and balanced industry is essential to a people's prosperity. The minor premise is that protection is a necessary means to varied and balanced industry. If the premises are admitted, the conclusion is sound : a protective pol- icy must favor a people's prosperity. The truth of the major premise cannot be ques- tioned. On the other hand, it is worthy to be pre- sented in full force, resolved into several particulars, as a kind of summar}- of economic principles. a. Every country has a great variety of resources, and the development of all its resources conduces to its greatest wealth. b. Among the population of every country there is a corresponding diversity of native talent, and 200 POLITICAL ECONOMY. labor is most effective when every one has scope for doing that for which he is best fitted. C. The actual -wants of men are equally diverse, and the highest happiness of a people depends on the degree in which these varied wants are provided for. d, A diversity of occupations makes a home-mar- ket for all sorts of products, saving cost of trans- portation, favoring division of labor, and binding all classes together by ties of mutual helpfulness and common interests. e. Varied industry favors the social and moral ad- vancement of a people, quickening and broadening minds, enlarging hearts, and impelling to noblest action in the lines of rectitude and benevolence. These statements will be readily accepted by all candid minds. As bearing on the question under consideration, they need but a single qualification. It does not follow that a people must hasten by all means to develop every source of wealth existing among them, or maintain at all hazards every pos- sible form of industry. The people of Barbadoes have ample facilities for raising table-vegetables, but they have greater advantages for raising sugar. Hence it may be good policj^ for them to produce mainly sugar, and get the other provisions from other countries, where the cost of raising them is greater, perhaps, than it would be on their own soil. Man}?" such cases do exist, but they are exceptions which prove the rule. The real issue is joined on the second or minor premise, — protection is necessary to secure diversi- INTERNATIONAL TRADE. 201 fied industry. This proposition is met by a flat denial, and the positive affirmation that there is a better and surer way of reaching that result. Where no interference or obstruction is allowed, there comes a spontaneous development which is safe and con- stant, because it is in accordance with nature's law. This thought may be unfolded in a few distinct, yet connected, propositions. a. There is a natural growth of human industry, the laws of which are as fixed and certain as those which pertain to the growth of a tree. 6. Free competition is the healthy stimulus to that growth. c. Under the natural law of development, industry will be applied to the several native resources of a country as fast as the increase of labor and capital lYill w^arrant. d. Men's instinct for accumulation, following di- verse individual capacities, tastes, and predilections, is the safest guide to determine the order in which labor and capital shall be applied to those various resources. Under it, whatever promises a profit will be undertaken as soon as it can be without sacrifi- cing a greater profit elsew^here. e. The attempt to force labor and capital into certain employments before their time deranges the order of nature, and produces re-actions which hinder the desired result. /. At any stage of this development, if exchange is free, foreign products are purchased w^ith the fruits of a people's most eflFective labor, that is, with those articles which they can then produce to the best 202 POLITICAL ECONOMY. advantage ; which the}^ can best afford to part with, because the}^ are obtained at the least cost. By all such advantageous trade, capital, the prime element of varied industry, is increased, and labor is sus- tained. g. When, by this natural progress, a people come to take up a new industry for which they have nat- ural advantages and God-given capacity, no foreign competition can crush it; for, even in its infanc}', it is charged with the nation's life and strength. h. An industry which is not indigenous, which has no natural advantages, or which is prematurel}'' set up and fostered by artificial means, can have only a sickly, uncertain life, and is supported at a wasteful expenditure of a nation's resources. The strong reason urged on the other side to prove that protection is necessary is thus presented : — ''Foreign competition crushes out* the home pro- duction of all but the rudest and coarsest articles of manufacture, and prevents the estabhshment of a varied industry, unless the government interfere, as the personification of the nation and its co-ordi- nating power, to restore the equilibrium by discour- aging imports." If the question is raised, how foreign competition is able to do this, the answer must be that the for- eign COUntr}^ has either superior natural resources, or more abundant capital, or laborers in greater numbers, and better skilled for the work to be done, or possibly all these advantages combined. If this be so, it may be asked again, how can government interference, discouraging imports, counterbalance INTERNATIONAL TRADE. 203 these advaDtages? It is quite evident that protec- tion cannot add to the natural resources of a coun- try. It can never give to France the coal-fields of England, nor bring to the prairies of Illinois the water-powers of New England, nor secure to Ger- many the cotton-raising facilities of our Southern States. Obviously a protective tariff cannot create capital. Capital springs and grows only by industry and frugality. It is the fruit of saving. And cer- tainly legislation has no power to create men, or endow them with skill. Population increases both by births and by immigi'ation, according to the abundance of the necessaries of hfe which are fur- nished ; and a people grow in skill as the}^ grow in intelligence, and bring their faculties into active exercise. AU that protection can do is to concentrate capi- tal and labor on one emplo3'ment, and for this it lays a special burden on all others for the benefit of the favored occupation. The advocates of this policy keep out of sight the fact that it can do noth- ing more than to change the direction of capital and labor, and that the duty is a tax laid upon the many for the benefit of a few. When articles of foreign production are imported, they are to be paid for by the products of home-labor and capital; and the question of economy is. Which is the cheapest? Which will bring the largest returns for a certain amount of labor, — to make these articles ourselves, or to make something else with which to bu}- them? Left free from government interference, home labor and capital will lay hold of whatever natural re- 204 POLITICAL ECONOMY. sources a country possesses, and, with reference to both home wants and foreign wants, produce the thino*s most feasible and desii'able at the cheapest possible rates. The surplus of these products will pay for the foreign goods. Capital will be increased by both the productive industry and the trade ; and, as a people grow strong in capital and in men, it is not possible for foreign competition to restrict their industrj^, or to prevent their taking up aU the variety of industry which their needs require, and the facili- ties of their country favor. Competition, free and fair, is ever the strongest and healthiest stimulus of both productive industry and wide- spread active trade. 2. It is strongly urged that protection is a neces- sary means of maintaining national independence. This is a specious argument, because the phrase "national independence" has a patriotic ring, to which the popular ear and the popular heart are peculiarly sensitive. But, as it stands in the propo- sition before us, it simply covers a subtle sophistry. For individuals and for nations there are two kinds of independence. One may withdraw from his fellow-men to a cave in the wilderness, and thus keep himself alive, and possibly find interest and enjo3^ment in a hermit-hfe. He may glory in his independence. But is there any thing noble in such isolation? Is it the wa}'- for a man to make the most of himself? The independence of genuine manhood is of another sort. It is individuality of capacities, acquisitions, and character, which is able INTERNATIONAL TRADE. 205 to stand on its own basis in full and free relations with fellow-men. It is, in the midst of societ}', a distinct personality, giving and receiving, support- ing and supported, blessing and blessed, through the varied intercourse which nature prompts, and by which the completest development of the man and of the race is advanced. So of nations, there is an independence of isolation, such as China and Japan until recentl}' maintained. But that independence which is the strength and glory of a nation is of another kind. It is an individuality of national resources and character which stands up in the full brotherhood of nations, and in the consciousness of its own strength enters into all offices of mutual dependence through which nations grow, and civili- zation makes progress. The poUcy of protection fosters the narrower kind of independence. It is a restrictive policy. Carried out to its logical conclusion, it leads to isolation. The sophistr}'^ referred to consists in the conceal- ment of this fact, while the term "national inde- pendence " is put forth in its broader, nobler sense. In an economic point of view, the real independ- ence of a nation is commercial independence. That means, not that it does not need or will not have the productions of other nations, but that it is able to command them. The basis of such independence is the home-production of wealth. The way to increase wealth is to use to the best possible advan- tage the gifts of nature, and then, in the world's great mart, sell where things can be sold on the best terms, and buy where things can be bought on 206 POLITICAL ECONOMY. the best terms. The nation is strongest and most complete in her independence, which can open most freel}" every avenue for the wealth of the world to flow in upon her, because, as the fruit of her own vital energies, freely exerted, she has wealth in abundance to give a fair equivalent. A nation comes to this full maturity bj^ a steady natural growth, just as a child comes to full man- hood. In both cases freedom is the law of growth. Fair competition helps a nation's growth both in general wealth and in particular industries, just as the wrestling of a boy with one older and stronger than himself helps to develop in him particular muscles, and the pluck and vigor of a whole man- hood. When at times worsted and thrown, the boy may rise and sa}^, "You beat me now, but I don't give up the contest. Let me get my growth, and I'll show jou what I can do." The effort by protection to hasten a nation's independence is like binding an infant's limbs in splints, that he ma}^ sooner stand alone. The artificial appliance may develop prematurely a single function, but it is at a wasteful expense of general vigor, and is quite sure to induce chronic weakness and deformity. 3. The advantages of a home market for agri- cultural products are often urged in favor of the protective system. It is certainl}^ an advantage to a farmer to find, in a manufacturing \illage near, a market for his produce. But, if this market is made and sustained for him by a protective tariff, he must pay for tools, for salt, for dry-goods, for many of INTERNATIONAL TRADE. 207 the manufactured articles he needs, from twenty to fifty per cent more than the}^ would cost under the rule of free trade. This adds to the cost of pro- ducing his crops, and offsets what he ma}- save in the expense of transportation to the distant com- mercial city. But here, as in the first case, we take issue directl}' on the main point. The assumption that protection creates the home-market is a fallacy. These centres of varied industry grow up naturally and healthil}^ with the increase of population and wealth. Me- chanical genius, the investigating turn of mind, the energj^ of will-power, managing capacity, — these qualities come not of protective tariffs. They are the gifts of God to men. Left to themselves, and stimulated by competition, the}' spontaneously la}' hold on all gifts of God in nature, and, using all available capital, set up the workshops of industry, wherever best opportunities are presented. Furthermore, the term " home market," in this discussion, has force onl}' as it implies the produc- tion at home of all manufactures Tvanted, and the consumption at home of all agricultural produce raised, — a condition of things attainable, if at all, only after the lapse of centuries. Meantime a people must bu}- the things they cannot produce, by selling the surplus of that which the}' can pro- duce. For a long time to come this country will have a large surplus of breadstuffs, cotton, petro- leum, silver and gold, to dispose of. We can sell to others only as we give others a fair chance to sell to us. Domestic commerce and foreign commerce 208 POLITICAL ECONOMY. are necessaril}^ interlocked. The prices of agricul- tural products in our home markets are detennined by the prices in markets abroad. Where trade is freest, the prices will, on the average, be the best. Hence free trade is the essential condition of a sound and healthy home market. Of all classes, those devoted to agriculture bear the heaviest share of the burden laid by the protective tariff, while they reap no direct benefit from it. There are positive objections to the system of protection, which may be concisely stated as fol- lows : — 1. Protection introduces and fosters antagonism between the different industries of a countrj% The idea of giving protection to ever}' branch of indus- try is absurd. The theory implies special encour- agement to certain manufactures bj'' taxing all other interests in their behalf. The dut}' which protects the woollen-manufacture increases the cost of the wool- grower's clothing, while the competition of cheap wools from abroad keeps down the price of his product. A tariff on the foreign wools will enhance the cost of material to the manufacturer. So two parties whose interests are really one are set against each other. 2. The unnatural stimulus given by protective legislation leads to over-production, and consequent stagnation and failure. The first effect of a high dut}^ is to raise prices, and increase the profits of the protected industry. This causes a rush into that branch of production, till it is quickly overdone, and a disastrous re-action comes. INTERNATIONAL TRADE. 209 3. Protection diminishes the legitimate revenues of the state, at the same time that it lays a heavy tax on the people. Just so far as the tariff is pro- tective in its operation, it reduces the imposts from which the government gets its income ; yet, just so far as prices of the protected article in the market are enhanced by the tariff, all consumers pay a special tax for the benefit of the favored producer. 4. In its application, the policy of protection must be unstable, disturbing the course of industry by frequent changes. This follows inevitably from the conflict of interests just referred to. When the duty on iron is high, all who use iron as the mate- rial of then* industry clamor against it. So new candidates for the special favor press their suit for a change of the tariff in their interest. With every session of Congress movements are made for some change of the tariff. A protective tariff can never be made fair and equal to all ; for its fundamental principle is an unjust favoritism, against which those not favored instinctively protest and contend. 5. Protection tends to demoralize our national legislation. The lobby of the Capitol is thronged with representatives of certain manufactures, seek- ing to obtain or to perpetuate special protection. Money is freely used, and bargains are made to combine the friends of separate measures, when votes are given. Proposed acts come thus to be judged of not by their real merits, but by their relation to personal interests. 6. Protection tends to corrupt the public morals and the public service. It offers strong temptations 210 POLITICAL ECONOMY. to the violation of law by smuggling. The resist- ance of men's consciences to this temptation is slight, because the tariff-law rests on no ground of absolute right. The nice sense of honor and right is deadened ; and the making of false invoices, the swearing of false oaths, and direct bribery at the custom-house, are regarded as venial sins. Officials of the government come into collusion and partner- ship with these crimes, and betray the sacred public trusts with which they are charged. Until within the last half-century, the protective policy has ruled the industry and trade of the world, with only here and there an exception, like Holland in her best dajs. Free trade has had scarcely a chance to try its experiment. Its principles are, however, illustrated and sustained in the hundred years' history of our nation's independent life. The States of our republic, in their extent of territory, their diversity of resources, the varied races and endowments of their people, and their distinctive interests, constitute a world by themselves. For- tunately our Constitution forever forbids the pro- tective policy to restrict their trade with each other. Here is a broad arena for the experiment of free trade. For nearl}^ forty 3'ears the writer has watched the course of that experiment in the unfolding growth of a young Western State. Her chief in- dustry was at the first, and must long continue to be, agriculture. But as population poured into the prairies and groves, and agriculture yielded a sur- plus of home capital, and a basis of credit was laid INTERNATIONAL TRADE. 211 for the introduction of Eastern capital, every kind of industry suited to her climate and conditions has been successfully established. Her mines have been worked, her water-powers have been utiHzed, villages and cities have sprung up suddenly, and the diverse genius and taste of her sons have found ample scope and stimulus for profitable exercise. According to the theory of protection, the competition of New- England manufactures, brought in freely by the best faciUties for cheap and rapid transportation, should have " crushed out the home production of all but the rudest and coarsest articles of manufac- ture." But the facts are all against the theory. Woollen-factories, cotton-factories, shoe-factories, iron- works, machine-shops, paper-mills, establish- ments for making agricultural implements, all have been set up and carried on with a success that promises to be abiding and expanding. This result of a brief but fair experiment of the principle of free trade confirms every phase of that doctrine, and shows that what is philosophically sound and true is also practically safe and w^ise. The Golden Rule of Christ is full of wisdom and righteousness in its application to the intercourse of nations. We cherish the fond hope that the day is not distant when the nations will conform their policies to the rule, and " do each to others as they would have others do to them." Then the theory of protection, with its false ideas of antagonism and selfish isolation, will have no place ; but, instead, the brotherhood of nations as well as of individual 212 POLITICAL ECONOMY. men will be recognized, and the broad philanthropy which Christianity inculcates, and aims to make uni- versal, will have free scope to work out the world's emancipation from all wrong and evil. In such a state the first principles of sound Political Economy will find their consummate application. EXERCISES. 1. Illustrate the effects of steam applied to navigation on the commerce of the world. 2. What benefits have accrued therefrom ? 3. What effect had the opening of the Erie Canal on the condition of the early settlers of Western New York, as respects the wheat they raised ? as respects the goods they needed ? 4. Did that improvement help, or hinder, the increase of their wealth ? Did it hasten, or delay, the introduction of manufactures in the region ? 5. If it is expedient to restrict the importation of goods from abroad, why should so much expense be laid out in removing obstructions to free communication ? 6. How is the department of production affected by the policy of protection ? 7. How does it affect consumption ? 8. How does it affect distribution ? 9. How does it affect exchange ? 10. Explain the difference between a revenue tariff and a protective tariff. 11. Show how a tariff of forty per cent on iron wiU tax the farmers. . 12. Will such a tariff yield much revenue to the govern- ment ? Who gets the benefit of the tax ? 13. How and when is it expected that the farmers will get an indirect benefit from the tariff ? 14. If a farmer can buy a suit made in England for ten bushels of wheat, is there any justice in compelling him to pay fifteen bushels for a suit of American manufacture ? INTERNATIONAL TRADE. 213 15. If the tariff excludes a great part of English manu- factures, can we expect the English to buy freely our corn and pork ? If we expect to sell to a foreign country, must we not also buy of them ? 16. If capital is accumulated by agricultural industry, and labor grows abundant, is any artificial means needed to turn it to the setting-up of manufactures ? 17. While capital and labor applied to farming are yield- ing satisfactory returns, is it expedient to turn them to some other employment not so profitable ? 18. Is Robinson Crusoe's independence a thing to be desired ? 19. Does Chinese isolation, as it was, meet your ideal of national prosperity ? 20. Explain how a high tariff tends to over-production in the industries protected. 21. Why might not a tariff be adjusted to favor all branches of industry alike ? 22. Can you tell any thing about corruption in the custom- house in New York ? 23. How would a low rate of duties, uniform on all im- ported goods, relieve that corruption ? 24. Has any protective tariff in our country been allowed to continue long without changes ? 25. Can you tell how the iron interest in our country has been affected by such frequent changes of the tariff ? Sheldo7i d' Com2)a?iy's Tcxt-!Sooks, OLNEY'S SERIES OF MATHEMATICS. Olncy's J'rimarj/ Arithmetic Illustrated Oliiey's Elements of Arithmetic Illustrated... Olney^s JPractical Arithmetic Ohiey^s Science of Arithmetic Olncy's Introduction to Algehra Olncy's Complete Algebra Olney's IBooh of Test Examples in Algehra. . . Olncy's TTniverslty Algebra Olncy's Ele^nents Geom, <& Trigonom, (Scli. Ed.) Olney's Elements of Geometry, Separate Olncy's Elements of Trigonometry. Separate.. Olney's Elements of Geometry and Trigonom- etry, (Uniy. Ed., with Tables of Logarithms.) Olney's Elements of Geometry and Trigonom- etry, (University Edition, without Tables.) Olney's General Geometry and Calculus The universal favor with which these books have been received by educators in all parts of the country, leads the publishers to think that they have sui^plied a felt want in our educational ap- pliances. There is one feature which characterizes this series, so unique, and yet so eminently practical, that wo foel desirous of callin'>- special attention to it. It is The facility with which the books can be used for classes of all grades, and in schools of the widest diversity of purpose. 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The adaptation of each book to its particular purpose, the smaller work preparing the scholar to understand the full development of the subject in the larger one. 6th. In the larger work the science of Physiology is brought out as it now is, with its recent important discoveries. 7th. Some exceedingly interesting and important subjects arc fully treated, which, in other books of a similar character, are either barely hinted at or are entirely omitted. 8th. These works are not mere compilations, but have the stamp of onginality, differing in some essential points from all other works of their class. 9th. In beauty and clearness of style, which arc qualities of no small importance in books for instruction, they ivill rank as models. 10th. The subject is so presented that there is nothing to offend the most refined taste or the most scrupulous delicacy. PALMER'S BOOK-KEEPING. 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