FROM THE LIBRARY OF
i       prfPrfe.s So  {(rcnt Phnidc )~ii
V|NI^^l^^IbAN|  OF THE UNIVERSITY OF HEIDELBERG
PRESE NTED TO TH E
UNIVERSITY OF MICHIGAN
BY
dllt, PJitplo par5olls
OF DETROIT
_ _ _!                 t 8 Z I








ELEMENTS
OF
POLITICAL ECONOMY.
BY
ARTHUR LATHAM PERRY,
ORRIN SAGE PROFESSOR OF HISTORY AND POLITICAL ECONOMY IN
WILLIAMS COLLEGE.
Qu(d pro quo.
SEVENTI EDITION, REVISED AND ENLARGED.
NEW YORK:
CHARLES SCRIBNER AND COMPANY,
654 BtOADWAY.
1 s 72.




Entered according to Act of Congress, in the year 1870, by
ARTHUR L. PERRY,
in the Office of the Librarian of Congress, at Washington.
RIVERSIDE, CAMBRIDGQ:
STEREOTYPED AND PRINTED BY
H. 0. fIOUGHTON AND COMPNY.




To
MY ONLY BROTHER,
BAXTER EDWARDS PERRY, ESQ.,
OF BOSTON,
WHOSE FAITHFULNESS TO HIS CLIENTS IS ONLY SURPASSED BY
HIS KINDNESS OF HEART,
IS
Dbfs TbAftfon of m       l 33ook
FRATERNALLY INSCRIBEP








TABLE OF CONTENTS.
CHAPTER I.
PAGB
ON THE HISTORY OF THE SCIENCE.. 
CHAPTER II.
ON THE FIELD OF THE SCIENCE...      36
CHAPTER III.
ON VALUE.....                   46
CHAPTER IV.
ON EXCHANGE..* 91
CHAPTER V.
ON PRODUCTION.                        105
CHAPTER VI.
ON LABOR.......        119
CHAPTER VII.
ON CAPITAL.....151




vi                CONTENTS.
CHAPTER VIII.
PAGE
ON LAND....... 167
CHAPTER IX.
ON COST OF PRODUCTION.                   1 *.   186
CHAPTER X.
ON MONEY........          205
CHAPTER XI.
ON CURRENCY IN THE UNITED STATES...  297
CHAPTER XII.
ON CREDIT......... 832
CHAPTER XIII.
ON FOREIGN TRADE.                        368
CHAPTER XIV.
ON THE MERCANTILE SYSTEM....       439
CHAPTER XV.
ON AMERICAN TARIFFS....                 451
CHAPTER XVI.
ON TAXATION.........                     472




ANALYSIS OF CHAPTERS.
CHAPTER I.
ON THE HISTORY OF THE SCIENCE.
PAGB
A. Definition of the science...1
B. Its basis and mode of development..  1
C. Its history..                     2
a. Oriental traffic. Abraham..      2
b. Hints in Homer, Ezekiel, Nahum, Herodotus..  3
c. Greek opinions.......
(1) Xenophon's "Ways and Means," and "Householder".......                 4
(2) Plato's " Republic"......   5
(3) Aristotle's "Economics," " Politics," " Ethics". 6
(4) Three reasons why Greeks did not develop this
science........  7
(5) Their practical rules were good..  8
d. Roman opinions...               9
(1) Cicero's " De officiis".....  9
(2) Cato, and the Moralists.       10
(3) Two reasons for their views...  10
(4) Liberality of Roman laws of property.   11
e. Middle-age opinion. Religion and the Universities.  11
f. The Bullion Theory, and its policy... 12
g. The Mercantile System.....  15
(1) Its origin.....15
(2) How defended......            16
(3) The Balance of Trade...    17
(4) Nations that adopted it....  19
h. Recoil from the Mercantile System....20




fvml             ANALYSIS OF CHAPTERS.
i. Outline of the labors of its opponents.        21
(1) English writers.....       21
(a.) The pamphleteers.             21
(b.) John Locke... 21
(c.) David Hume...             22
(d.) Adam Smith....23
(e.) Malthus, Ricardo, McCulloch, Senior, Mill 25
(f) The Bullion Report of 1810...    26
(g.) Henry Dunning Macleod.           26
(2) French writers.                           27
(a.) Quesnay, The Physiocrats, Agricultural System.......    27
(b.) Condillac..           28
(c.) Say......              29
(d.) Bastiat... 30
(3) Italians. Genovesi...                  31
(4) Germans. Zoll-Verein, List, Stein, Rau.    32
(5) Americans..National interest in the subject. 33
(a.) Secretaries of the Treasury..            33
(b.) Congressmen. Commissioner Wells           34
(c.) A partial list of writers.              34
(d.) Henry C. Carey, Walker, Bowen.         35
CHAPTER II.
ON THE FIELD OF THE SCIENCE.
A. Political Economy as taught by Adam Smith...36
B. It is not a part of Moral Science...   36
a. Its basis expediency, and not duty.      37
b. It has points of contact with morals...    37
C. It is a political, i. e. a social science...   38
a. Men in isolation not amenable to it...      38
b. God made men for society....39
c. God the author of economical laws...   40
d. Man in isolation weak, in society strong...40
e. Provisional view of the gains of exchange.      41
D  Some leading definitions of the science... 41
a. The word wealth useless as a scientific term.   42
b. First reason of slow progress in the science. 43
c. Condillac's or Whately's definition...    44




ANALYSIS OF CHAPTERS.                      ix
d. Value is a relative word..                        * 44
e. Second reason of slow progress..         45
CHAPTER III.
ON VALUE.
A. Value not a quality of one thing..                 46
B. Origin of the word value......    46
C. It implies a kind of comparison..            47
D. Two persons and two owners required to fix value          48
E. An action of exchange required....    48
F. Value of the pencil in cents.                         49
G. Exigencies of language......       50
H. The value of anything always stated in terms of something else.                                       51
I. The motives to an exchange.....       52
J. The simplest case of value..                      54
K. The ultimate definition of value....       56
L. Only six cases of value possible....         56
M. Ownership is always mutually transferred.       57
N. Value best studied through the term services.  - 57
O. Distinction between service and commodity..       58
P. Macleod's definition of value...               59
Q. Definition given satisfactory, because
a. It covers anomalous cases....      59
(1) Analysis of services exchanged..            61
b. It expands the field of value to its true limits.    64
c. It separates the notion of value from matter.66
d. And from some obstinate illusions of language         68
e. And discriminates utility from value.                71
(1) Utility is free and ultimate...    73
(2) Value is mediate, and involves effort.           73
(3) Utility is usually a common factor..    74
(4) And is eliminated from influence on value          75
f. Mistakes from confounding utility with value.        76
R. Value a different thing from price.                      77
a. Numerical illustrations.....77
b. Effect of improvements on value...        78
S. No perfect measure of value attainable..         80
T. Limitations of value in the two elements of efforts.     81




X                ANALYSIS OF CHAPTERS.
U. Limitations in the two elements of desires..    83
V. Equation of supply and demand..                85
W. Every rise or fall of demand tends to check itself.  86
a. Through a consequent rise or fall of value...87
b. Through action on supply....         88
X. Three classes of services in the law of their value   88
a. Those augmentable without increased difficulty.  90
b. Those augmentable through increased difficulty.   89
c. Those not augmentable at all..            89
CHAPTER IV.
ON EXCHANGE.
A. Principles of human nature involved in exchange.     91
B. Society a hive of buyers and sellers.                92
C. God's will as indicated in diversity of natural gifts.  93
D. Association and individuality..                      94
E. Interest the sole motive in exchange....      94
F. All exchange depends on diversity of relative advantage  95
a. Illustration of the tailor and blacksmith..    96
b. The greater the diversity of relative advantage, the
more profitable exchanges become...   96
G. Freedom, association, invention, essential to just diversity  97
H. The right to free exchange a natural right..     98
I. Governments formerly interfered with it.   98
a. And thereby destroyed natural gains..         99
b. And barred a natural progress...       99
J. But latterly have conceded it within home boundaries  100
a. Illustration from Napoleon's policy....100
K. Opposed to free exchange are monopolies...    101
a. Arbitrary prohibitions on the sale of home services.102
b. Arbitrary restrictions on the admission of foreign services........    102
c. Patents and copyrights unobjectionable monopolies. 104
CHAPTER V.
ON PRODUCTION.
A. Laws of Political Economy are cheering...    105
B. Definitions of " Produce,"" Producer," " Product". 105




ANALYSIS OF CHAPTERS.                     xi
a. Similar meaning of the Latin pro,-ucere.     105
b. Inadequate analysis of Adam Smith.                  106
C. The beneficent law underlying production..         106
a. Illustration of the mill...                 107
b. Illustration of the loom...                       107
c. Illustration from agriculture...108
d. Tendency towards a common right in inventions.    109
D. Effect on values of Nature's help in production..110
a. Illustration of the gloves...         111
b. Motive to introduce machinery....111
c. Commodities decline in value relatively to labor     111
E. A general glut of products impossible..       112
a. Proofs of the proposition.                        112
b. Dr. Chalmers' fallacy..                 112
c. Each interested in the welfare of all.     113
d. Law of partial gluts....             113
e. Production demands intellectual attainments..    113
F. Production increased by Division of Labor..       114
a. Example of the pins.                             114
b. Example of the watches..                      115
c. Advantages of the division of labor.              115
(1) Improved dexterity..,. 115
(2) The saving of time...         115
(3) The invention of tools.                      115
(4) Less waste of material....    116
(5) More economical distribution of labor.. 116
(6) A saving in the use of tools...         116
(7) The advantages of wholesale and retail.       116
d. Disadvantages of division of labor..    117
(1) Monotonous work becomes irksome... 117
(2) Tendency to dwarf the powers...    117
(3) Undue dependence of the workmen.            117
e. Limitations to the division of labor..     117
(1) From the extent of the market.,            117
(2) From the nature of the employment                118




xii              ANALYSIS OF CHAPTERS.
CHAPTER      VI.
ON LABOR.
A  Physical labor consists in moving things.           119
a. Some illustrations of this.                        119
B. Physical labor defined....    120
a. Nature helps gratuitously in production.          120
C. Men have found helps in producing motion               120
a. The domestic animals.                   121
b. The weight of water and force of wind               121
c. Steam.                                              122
d. To apply these capital is needed..                122
e. Labor, power-agents, capital cooperate in material
production..122
D. The technical definition of labor..         122
E. Principles of the remuneration of labor.         123
a. Distinction between skilled and common labor        124
b. A natural monopoly unobjectionable.            125
e. Reward of skilled labor higher..         125
(1) From the scarcity of appropriate original gifts. 125
(2) From the lack of requisite industry.         125
(3) From the lack of suitable training.         125
F. The law of supply and demand the law of wages          126
G. But this law as modified through supply by
a. The agreeableness of the employments.              126
b. The easiness of learning them....        127
c. The constancy of work in them..         129
d. The amount of trust involved.              129
e. The probability of success.....     131
f. Custom, prejudice, and fashion..                   132
g. Legal restrictions and voluntary associations.     133
[I. Demand for labor how constituted.                 134
a. By the presence of capital.....        135
b. The more capital the stronger the demand            135
c. Wages-fund a dividend....                137
d. Number of laborers a divisor...         137
e. The average rate of' wages the quotient...    138
I. Popular remedies for low wages ineffectual... 138
a. Government cannot act directly....    139
b. But may indirectly and beneficially.              140




ANALYSIS OF CHAPTERS.                     xiii
c. Public opinion may be useful.                        141
d. The Malthus law of population... 142
(1) No natural antagonism   between fecundity and
food...                                  143
e. Strikes are futile...                      143
(1) Are false in theory.....             144
(2) Are pernicious in practice.....146
(3) Illustrations of this.....             147
(4) Workmen and capitalists are copartners.     148
f. Cobperation nothing new in principle...     149
(1) Legislation has narrow limits in economy.. 150
(2) Should give equal rights to capital and labor.   150
CHAPTER VII.
ON CAPITAL.
A. Relations of capital to labor and power-agents.. 151
B. Definition of capital....    151
a. Mr. Carey's definition faulty..                 151
b. Distinction between capital and other property.     152
C. How capital arises....            153
a. Origin of tools.......    153
b. Progress in tool-making......154
c. Capital brings gratuitous forces into play..    155
d. Value of products created by aid of capital tends to
decline relatively to the value of those less aided
thus.........155
D. The remuneration of capital...               155
a. Definition of profits.....155
b. They spring from abstinence..                   156
c. And are as legitimate as wages....156
d. Illustration from the flax-factory..    156
e. Illustration fiom ordinary loaning..            158
f. The capitalist creates a beneficent fund..  158
g. Strength of the motives to abstinence depend
(1) On liberty......    159
(2) On equality...                      159
(3) On security.                                     159
E  Relations of capitalists to laborers.....159
a. No antagonism between them...    160




xiv              ANALYSIS OF CHAPTERS.
b. Dependence of capital on laborers..            160
c. Dependence of laborers on capital..         161
d. The laborer interested in the increase of capital. 161
e. The capitalist not injured by high wages.         161
F. Mr. Carey's law of distribution....     162
a. Arithmetical illustration..                   163
b. Profits the leavings of wages....       164
c. Tendency towards equality of condition amlong men   164
G. Distinction between circulating and fixed capital.    164
a. Changing proportions between those...    165
b. Transformation of one into the other...166
CHAPTER VIII.
ON LAND.
A. Best test of a generalization.....       167
B. Questions of land have been vexed questions..    167
C. Means at hand of settling them.. 168
D. First proposition.......    168
a. Ownership came in under work...       169
b. Lands originally valueless....    169
c. What is sold is not the inherent qualities of the soil. 170
d. Old lands always for sale.....    171
e. Their proprietors cannot sell God's gifts..171
f The United States give away lands                    172
g. The English companies in the 17th century. 172
h. The current proverb at the West.                   172
i. The value of lands like all other values..173
E. Second proposition.....         173
a. Proof of it....                 174
b. Gradual occupation of the earth in consequence.   174
c. Mr. Carey fails to break down this law..      175
d. His own law not inconsistent with this...   175
F. Third proposition........ 176
a. Exemplification of the principle...    176
b. Produce rises as estimated in other commodities. 176
G. Fourth proposition.                                    176
a. Ricardo's law of Rent..177
b. The truth in it.......    178
c. The errors in it..          178




ANALYSIS OF CHAPTERS.                     XV
d. The true doctrine of rent....    179
II Fifth proposition.....                 179
a. Fee-simple best, and reasons why...         180
b. Moderately small farms best, because
(1) The motives to production are more universal      181
(2) Better supervision is thus secured..       182
(3) The masses are better educated.          182
(4) National strength is better maintained..182
c. Illustrations from France..                       183
d. Illustrations from England and Scotland.. 184
e. Illustrations from Ireland....         185
CHAPTER IX.
ON COST OF PRODUCTION.
A. Is there such a thing as natural value?..     186
B. Foresight important in production..                186
C. Cost of production sometimes the element of effort.    187
a. Illustration from amputation....       187
b. Illustration from knife-making..              187
D. Cost of production in relation to improved processes.  189
E. Cost of production made up of two elements..    190
a. Cost of labor..... 190
b. Cost of capital......, 190
F. c. Cost of labor made up of three elements..       190
(1) Efficiency of the labor.....         190
(2) Rate of nominal wages...            190
(3) Cost of the wages-material...         190
d. Three purposes of this analysis....191
(1) To show the many elements in commercial calculation.....          91
(2) To explain the diversity in nominal wages. 192
(3) To explain the division between wages and
profits......              194
e. Cost of capital made up of three elements.       196
(1) The rate per cent.....           196
(2) The time of advance......197
(3) The risk of deterioration..              197
G. Higher cost of labor ends in lower profits.       199
H. A uniform rise or fall of wages does not affect value    199




xvi              ANALYSIS OF CHAPTERS.
I. An unequal rise or fall does affect it         e       199
J. The same, mutatis mutandis, is true of profits.    199
K. Machinery an important element in cost of production. 200
L. Machinery not injurious to the wages of labor, because
a. Labor is required to make, repair, and work it.     201
b. It cheapens products and thus widens the market.    202
c. It cheapens products used by the laborers... 202
M. Price of raw materials tends to approximate the price of
finished products.....    202
a. Illustration in cotton cloth... 203
b. Illustration in lace...                   204
CHAPTER X.
ON MONEY.
A. Money can be understood.      o       o            205
B. Inconveniences of barter.              e    o         206
C. Money an invention- convenience sake         o. 207
D. Its sole characteristic, a generalized purchasing-power  207
a. Value in a book, and value in money  o..    208
E. Money economizes labor..... 208
F. Brings buyers and sellers together.                   209
G. Generalizes a purchasing-power in point of time. 209
H. Makes it portable, divisible, and loanable...    209
I. First proposition...,..    o       210
a. Meaning of the word medium.        0         210
b. Illustration of the railroad ticket... 211
c. Small ratio of money to property..                  212
d. Hume's comparison....      213
e. Money a generalized capital..    o         214
f. The amount needed determined by its nature as a
medium....                 215
g. Rapidity of circulation in this connection  e.    217
J. Second proposition...218
a. Explanation of the word measure.                   219
b. Relations of denominations to the medium    o       220
c. Liability to error...         222
d. French system of weights and measures...224
e. This second function complicates the subject of money  225
K. Third proposition...                     226




ANALYSIS OF CHAPTERS.                  XVi 
a. Different materials used as money. 226
b. Gold and silver are the best.                     226
(1) On account of their steady value..227
(a.) On account of the steady demand for them  229
(b.) Their uniform cost of production..     230
(c.) Their quantity.                        231
(d.) Their fluency....              233
(e.) Every rise or fall tends to check itself.  236
(f) A more or less rapid circulation.        237
(2) Because they are self-regulating               238
(a.) Legal relations of gold to silver         239
(b.) Subsidiary coins..                     240
(c.) The matter of alloy.                242
(d.) Universal Coinage. Ruggles, Elliott.      243
(e.) Natural laws of distribution.          246
(3) They are portable, divisible, and impressible. 249
L. Fourth proposition...                          252
a. Grounds of it..                               253
b. Dutch illustrations....               254
c. English illustrations...                     256
d. American illustrations..,.        259
M. Fifth proposition...                          262
a. The element of credit in money         o      o    263
b. Difficulties about credit.                       265
c. John Law and his system.        o.            269
d. The French assignats   2..                 272
e. American Continental money     m                   275
f. American legal-tenders..,       276
g. American State bank money e.                277
h. American national bank money     2.                2 79
i. History of the Bank of England.                 281
j. Different spheres of money and credit. 288
N. Sixth proposition...              288
a. Origin of usury fallacies..         *       289
b. Exposure of these fallacies....         291
c. Inconsistencies of governments... 295
d. Action of England...       296
e. Action of Massachusetts and Rhode Island. 296
f Retraction of Adam Smith...       296
b




XVlll           ANALYSIS OF CHAPTERS.
CHAPTER XI.
ON CURRENCY IN THE UNITED STATES.
A. Great variety in our forms of money.           297
B. Colonial currencies...   e298
C. The depreciation of Colonial bills.   o            298
D. Massachusetts redeems her bills.                   299
E. Parliament forbids their issue to the Colonies.     299
F. The Revolutionary paper...        299
G. Alexander Hamilton and English finance.    o      301
H. Mr. Morris' Bank of North America.,         302
I. The "pine-tree " coinage of Massachusetts..     304
J. Hamilton's Report as Secretary of the Treasury.   305
K. A national bank then needful... 306
L. Its constitutionality denied.                 306
M. Charter of the first United States Bank..      307
N. Practical operation of it..                        308
O. Multiplication of State banks... 309
P. Second bank of the United States.                 310
Q. Jackson's opposition to it.                  311
R. The" Specie Circular".....          312
S. The sub-treasury system..                     313
T. The increase and character of the State banks.    314
U. The Continental coppers..             314
V  The decimal system of Federal money.    315
W. The dollar-unit...               316
X. The mint of the United States...        317
a. Under-valuation of gold....   318
b. Over-valuation of gold..                      319
c. The changes of 1837.                         320
d. The changes of 1853..      ~             321
e. The copper coinage..                322
Y. The national bank system of 1863.                 322
a. Its patriotic origin...323
b. Method of organization under it.                324
c. Its benefits..... 325
d. Its dangers.......    327
e. Different kinds of money in our currency..   330
f. Too much in quantity and inferior in quality.  332
g. Bonamy Price's view of' currency...     332




ANALYSIS OF CHAPTERSo                   xix
h. Business will not grow up to present volume.        333
i. Money does the driblets of business.                334
j. Amasa Walker's plan of a perfect currency.         335
k. Author's plan of a perfect currency... 335
CHAPTER      XII.
ON CREDIT.
A. The peculiarity of credit.                      337
B. The terms debt and credit.                           337
C. The terms loan and borrow..                        337
D. Definition of credits and debts.                      338
E. Vast amount of transactions in them e                   339
F. The instruments of credit are
a. Promises to pay..                              340
b. Orders to pay..                                     340
c. Promises to pay are
(1) Book-accounts.... 340
(2) Promissory notes of individuals and nations  e   341
(3) Bank bills....                            343
(4.) Bank deposits..                             344
(5.) Discounted notes....                 346
d. Orders to pay are
(1) Bills of exchange....    348
(2) Checks or drafts.... 355
G. The advantages of credit...                   356
a. It passes capital fromless to more productive hands. 356
b. It economizes the general operations of exchange. 359
c. It dispenses with the use of masses of coin..   360
(1) But never can dispense with coin altogether. 361
(2) Deposits different from bank notes..         362
H. The disadvantages of credit..                      363
a. It sometimes makes capital unavailable.  o.    363
b. It leads to commercial crises..364
(1) Cause and course of a crisis...    364
I. A national debt a sort of mortgage                     368
a. It has incidental advantages.                      368
b. But greater burdens.....           368
c. Each generation should bear its own burden..    369
d. The unfunded debt should be cancelled        *      370
e. The funded debt paid in gold..              372




Xx               ANALYSIS OF CHAPTERS.
CHAPTER XIII.
ON FOREIGN TRADE.
A. No new principles in foreign trade.                   374
B. But a separate treatment needful.                      374
C. Diversity of relative advantage...              375
D. Grounds of national diversity..377
E. When international exchange is profitable.         377
a. French silks and English cottons,.       377
F. Desires, efforts, estimations, as before.   e         379
G. Unequal absolute cost illustrated...     380
H. Equal absolute cost illustrated..                  381
I. Limits of value in foreign trade... 382
J. Equation of international demand...         384
a. Arithmetical illustrations....               384
b. Same principle in gold, or other articles.         386
K. Purchase by exports is cheap purchase...       386
L. Folly of attempting to " compete" in everything         387
M. Effect on trade of improved processes..            388
a. The benefit will be shared by both nations.       389
b. Sometimes more by the second nation                 389
N. Cost of carriage.....                     390
a. It increases cost of production..              391
b. Each nation does not necessarily pay its own.        392
O. International trade should be free..       392
a. The mercantile system restricted it..        393
b. The protective system restricts it..         394
P. Origin of the word tariff...              394
Q. Nature of the thing tariff...            395
R. Distinction between revenue and protective tariffs      395
a. A distinct principle underlies them.  e            396
b. The two ideas cannot be united.                    97
c. Low-duties more productive. Free Trade defined       398
$. Objections to free trade answered.                   400
a. It is not a theory......400
b. It will not depress wages.                     402
c. Why protection has been advocated..           405
d. Manufactures would not collapse under freedom       408
e. Nor would diversity suffer....       411
f. No difference between commerce and trade.         415




ANALYSIS OF CHAPTERS.                  xxi
(1) The administration of Colbert....417
g. High profits do not make protection needful.     419
h. Nor do high wages.. *          426
(1) Analysis of wages.....         427
(2) Explanation of low cost of labor... 428'. Objections to protection stated....             430
a. It is extra-governmental..                     430
b. It is a matter of finesse....                431
c. It is a wasteful way to reach the end proposed.   433
d. It makes a promise never kept..                 431
e. It gives birth to smuggling and frauds..      436
J. It defeats itself...                       436
U. The voice of experience on free trade..          437
a. The Greek example..                 437
b. The Roman example..        437
c. The English example...             437
d. The imperfect French example..           441
e. The German example.                           442
f. The Belgian example...       443
CHAPTER XIV.
ON THE MERCANTILE SYSTEMI.
A. Three epochs in the science of exchange;.        445
B. Fallacies of the mercantile system... 446
a. Illustrations from England and France.          446
b. Smugglers became the principal traders...447
C. First device of the system, prohibitions.    450
D. Second device, high duties....              450
a. Illustration ftom the silk manufacture           451
b. Abolition of the silk duties...           452
c. The guilds........    454
d. Corn-laws..       *......      455
e. Considerations condemning this device.     ~ *  456
E. Third device, bounties....         457
F. Fourth device, colonies..               458




xxii              ANALYSIS OF CHAPTERS.
CHAPTER XV.
ON AMERICAN TARIFFS.
A. England's policy towards the American Colonies         459
a. The "Navigation Act"...             460
b. Prohibitions on manufactures..                462
c. Considerations condemning the colonial policy      463
B. Want of power to regulate commerce under the Confederation......         465
C. The Tariffs under the Constitution.. 466
a. The " Hamilton Tariff" of 1789.                    466
(1) Its low duties....... 466
(2) Its steady revenue.                            467
(3) Its principles of tonnage and protection..468
b. The "Calhoun Tariff'" of 1816....       468
(1) Unfortunate connection of tariffs with politics. 469
(2) The restrictive system fairly entered upon      470
c. The " Clay Tariff" of 1824..... 470
(1) Higher duties.                            470
(2) Protected interests not satisfied.             470
1. The " Tariff of abominations" of 1828..         471
(1) Protection had become unpopular... 471
(2) Daniel Webster first votes for protection.    471. The " Compromise Tariff" of 1833...       471
(1) Presidential canvass hostile to protection.   471
(2) The sliding scale of lower duties.            471
f. The "Whig Tariff" of 1842.....      472
(1) Average of duties very high...       472
(2) Factitious character of the industry stimulated  472
g. The "Walker Tariff" of 1846.. 472
(1) Low duties, but discrimination.              472
(2) Increase of revenue.. 473
h. The "Tariff of 1857"....    473
(1) Lower duties, and increase of free list.      473
(2) Falling off of revenue, average of duties.      73
i. The "Morrill Tariff'"   of 1861...473
(1) It was not called for by the people...    473
(2) It was unfavorable to government credit.       75
(3) Its free list delusive..             476




ANALYSIS OF CHAPTERS.                   xxiii
(4) Too many articles taxed, too high rates..  476
(5) Not so productive as British tariff..    477
(6) False principles of tariff of 1871... 479
(7) Six general remarks on present protection.    479
CHAPTER XVI.
ON TAXATION.
A, Taxation legitimate on principles of exchange.  484
B   The Right of Property is the power to render services  485
C. Taxes, then, fall properly on exchanges..487
D. And should be proportionate to them..       488
E. Taxes are either direct or indirect.. 489
a. Direct taxes fall on income or expenditure.       489
b. Indirect on imports or services in transition..489
c. An income tax unexceptionable in principle..    490
d. Taxes on expenditures, special, and hence objectionable......                       491
e. A house-tax, however, less so..491. General advantages and disadvantages of each form    492
F. Credits are properly taxed......      492
G. Productiveness and propriety of the income-tax.    493
-I. Duties and taxes, to be productive, should be low. 494
a. The whiskey-tax......    495
I. Duties and taxes should be simple.,.            495
a. Specific and ad valorem duties should not be combined  495
b. Specific duties better than ad valorem... 495
c. The tax on cigars..496
J. Vexatious and unproductive taxes should be thrown off. 496
a. Improvement in internal revenue...         497
b. Just such required in the tariff..            497
c. No part of legislation to foster industries..   497
d. An excise should go with certain duties..       497
e. Productiveness of the Internal Revenue Law..    498
K. Taxes should be collected just before disbursement. 498
L. Poorer citizens should be mostly or wholly exempt.    498
M. Who pays indirect taxes?..                499
N. Atkinson's scheme of taxation.....    500








ELEMENTS OF POLITICAL ECONOMY.
4
CHAPTER I.
HISTORY OF THE SCIENCE.
POLITICAL ECONOMY is the science of exchanges,
or, what is exactly equivalent, the science of value.
Properly to unfold this science, requires an analysis
of those principles of human nature out of which
exchanges spring; an examination of the providential arrangements, physical and social, by which it
appears that exchanges were designed by God for
the welfare of man; and an inquiry into the laws
and usages devised by men to facilitate or to impede exchanges. The science, accordingly, is built
np partly on facts of consciousness and partly on
facts of outward observation. When its propositions are strictly deduced from acknowledged principles of human nature, and are shown to be consonant with the structure of the world and of society;
when they are simply and logically set forth in a
system; and when, in their light, human institutions
and laws relating to exchanges are correctly explained
and estimated; then the science of value is soundly
based and orderly unfolded. An attempt to base and
to develop the science of value thus will be made in
the following pages; but before that work is fairly
entered upon, it will be well to take a preliminary




2       ELEMENTS OF POLITICAL ECONOMY.
glance at the history of the science, and to trace the
steps by which successive inquirers have brought
Political Economy to its present stage of developmel 
While labor is as old as the race, and exchanges
are as old as society, and while doubtless in all ages
individual inquirers have tasked their minds with
some portions of the subject, Political Economy as a
science can hardly be said to have existed till within
a period comparatively recent.  Men exchanged
among themselves services and commodities, and
found their account in exchanging, long before the
dawn of authentic history.  The first commercial
transaction on record dates back about two thousand
years before Christ. It was the purchase by Abraham of the cave and field of Machpelah. "And
Abraham weighed to Ephron the silver which he had
named in the audience of the sons of Heth, four hundred shekels of silver, current money with the merchant." All this implies at that early day fixed conditions of trade. There were merchants as a class.
Silver by weight was already a medium of exchange
passing from hand to hand. It was current money
with the merchant. In the absence of written documents a bargain was made in the presence of living
witnesses. It was " in the audience of the sons of
Heth, before all that went in at the gate of his city,
that the field and the cave were made sure unto
Abraham for a possession."  An earlier passage in
the life of Abraham shows that gold as well as silver
was already reckoned an article of merchandise. It
is said that Abraham departed from Egypt "very
rich in cattle, in silver and gold."




HISTORY OF THE SCIENCE.         8
Homer makes no mention of money, as he undoubtedly would have done had he been acquainted
with it, but there are many passages in his poems
that indicate a brisk direct exchange of products as
characteristic of those times and countries. There
was also then and there a sort of common measure
of things exchangeable. Various things are mentioned in these poems as being worth so many oxen.
The twenty-seventh chapter of Ezekiel gives a vivid
picture of the immense commerce centering in Tyre.
Nineveh, according to the prophet Nahum, "multiplied her merchants above the stars of heaven."
Herodotus makes the probable statement that the
Lydians of lesser Asia were the inventors of coined
money; and the same writer describes with minute
accuracy the caravan routes by which Carthaginian
enterprise penetrated the interior of Africa for the
sake of a trade in dates and salt and gold-dust and
slaves. The records of the voyages of Hanno and
Hamilco show the Carthaginians daring unknown
seas also in the interests of traffic; coasting outside
the pillars of Hercules, southward to the mouths of
the Senegal and Gambia, and northward to the
British Isles.  Athens, Alexandria, Venice, Lisbon,
Amsterdam, London, and New York, have been
among the busy marts on the Mediterranean and
the Atlantic, while counterparts to their activity in
trade have existed in all ages in the farthest east.
The earliest writer known to us who treated economic subjects at any length is Xenophon.  Before
the middle of the fourth century before Christ this
accomplished Athenian published a treatise " On
Ways and Means."  This early essay, not indeed on




4       ELEMENTS OF POLITICAL ECONOMY.
Political Economy, but on some of the subjects with
which that science has to do, contains, together with
much that is fallacious, some sound and liberal principles. Its object is to propose methods for enhancing the prosperity of the Athenian State. Praising
the soil, the climate, the mines, the coins, the commercial position of Athens, Xenophon suggests that
the State offer various encouragements to the settlement of aliens, in order to swell the active population and increase the revenue from the aliens' tax;
that merchants and shipmasters of all nations receive
special honors in the city, in order to attract more of
them thither and thus augment the income from
duties on imports and exports; that prizes be offered
the presidents of the courts to expedite the trial of
commercial causes; that inns, warehouses, and marts
for the sale of goods be erected at the public expense
for the sake of the rents; that government as such
undertake commercial enterprises; that especially
the silver mines be worked on the most extensive
scale, as well on government account as by private
and joint-stock adventurers, so that the State might
enjoy direct profits in addition to the prices and the
twenty-fourth part of the produce of the mines purchased by individuals; and that finally a council of
peace be instituted, by whose mediation war might
be avoided, and the State, in the enjoyment of durable tranquillity, enter gradually upon these measures
of national improvement, which, moreover, ought to
be begun and continued by consulting the ancient
oracles, and by supplications to the gods, Xenophon also wrote a treatise entitled "' The Householder," in which there is a discussion of the various




HISTORY OF THE SCIENCE.         5
parts of domestic economy, and a pretty full treat.
ment of the subject of agriculture.
Plato in the eleventh and twelfth chapters of the
second book of'his " Republic," admirably sketches
one important principle of the science, namely, the
necessity men are in, from their multifarious wants,
of uniting in society, in which each individual may
devote himself to that branch of industry for which
he is best fitted, and then by exchange supply his
remaining wants. " More will be done, and better,
and with greater ease, when every one does but one
thing, according to his genius, at the proper times
and when at leisure from all other pursuits." But
this speculative view is adduced to account for the
origin of a political state, and is so far from being
carried out to its practical applications either economically or politically that Plato goes on to advocate community of goods in the leading class of his
ideal state, and the exclusion of husbandmen and
artisans from all share in the government.
Aristotle is sometimes called the father of Political
Economy. He is certainly the father, if not of the
science, of this name of the science, which name,
however, he uses in a very different sense from that
in which it is now used. At the opening of the
second book of his'Economics " he distinguishes
economy into four kinds, the regal, the satrapical, the
political, and the domestic. By the first he means
the central, and by the second the provincial, administration of a great empire like that of Persia; by
the third, the administration prevailing in free states;
and by the fourth, what we also mean by domestic
economy. It is in the last sense, as indeed the name




6        ELEMENTS OF POLITICAL ECONOMY.
(oKos, family, and vroos, law) implies, that the ancients
generally conceive of economy; and hence, although
Aristotle is the first to use the term political economy, it is not so much in his "' Economics" as in his
"Ethics" and " Politics" that we find his real contribution to our science. According to Aristotle's
division of the practical sciences, Ethics treat of the
nature and welfare of man apart from the social relations; Economics view him under the social relations of the family; and Politics under the social
relations of the state. In all three of these treatises
accordingly of this transcendent thinker are to be
found acute definitions, shrewd remarks, and pretty
copious information, relating to the proper science of
Political Economy. This, for example, is a perfect
definition of property: - "But by property we mean
everything, of which the value is measured by money."
(Ethics, IV. i.)  The proper boundary line between
economy and morals is drawn as follows: —" Whenever there is no agreement made about the service performed, those who confer a favor freely for the sake
of the persons on whom they confer it, cannot complain; for the value of it is not measured by money,
and no equivalent price can be paid." (Ethics, IX. i.)
The same chapter accurately describes the ultimate
phenomenon of value as between the two persons
exchanging: - " For each fixes his mind on that
which he happens to want, and for the sake of that
will give what he does give."  Aristotle understood,
as well as any one understands at present, the function of money as a.measure: - "Money, therefore, as
a measure, by making things commensurable,-equalizes
them; for there could be no commerce without ex



HISTORY OF THE SCIENCE.          T
change, no exchange without equality, and no equality
without the possibility of being commensurate." (Ethics, V. v.) In direct opposition to Plato's proposed
community of goods, he insists strongly upon the
rights and benefits of private property (Pol. II. v);
apprehends the true origin of money, and that it is,
in common with all other forms of property, a mere
means, no more than they, an end in itself (Pol. I.
ix.); and estimates agriculture highly, as the ground
of all other arts, and as most favorable to health,
morals and good government. (Econ. I. ii.) Still
Aristotle was not wholly emancipated from the prejudices of his time. Remarkable as was his sagacity
in matters economical, he yet held views incompatible with a sound and complete science of economy.
For example, these: - "And indeed the best regulated
states will not permit a mechanic to be a citizen; for
it is impossible for one who lives the life of a mechanic
or hired servant to practice a life of virtue."  (Pol.
III. v.) " For usury is most reasonably detested, as
the increase of our fortune arises from the money itself, and not by employing it for the purpose for which
it was intended."  (Pol. I. x.) " It is clear then that
some men are free by nature, and others are slaves,
and that in the case of the latter the lot of slavery is
both advantageous andjust."  (Pol. I. v.)
There appear to be three principal reasons why
the Greeks, who were so intellectually capable of it,
did not develop any true system of Political Economy. In the first place, their affairs of private life
were wholly subordinate to those of public life; and,
consequently, the varied forms of private and associ.
ated industry could not win that attention, which, at




8       ELEMENTS OF POLITICAL ECONOMY.
present, they are able to compel. To the Greeks the
State was everything, and the individual only that
which the State allowed him to be. In the second
place, the institution of slavery threw its shadow
over most of the branches of industry. It was inevitable that employments committed mainly to slaves
should seem mean to the free. Only agriculture and
commerce, carried on on a large scale, and scarcely
these, escaped this damaging influence. Even Aristotle, who says, " The best nation is a nation of farmers " (Pol. VI. iv.), says also, "Neither should they
who are destined for office be husbandmen." (Pol. VII.
ix.) It lessened no man's consideration, however, in
the public opinion of the Greeks, to have any kind
of industry carried on on his account, provided he
did not work at it with his own hands. In the third
place, the constant recurrence of wars interfered
sadly with the free expansion of industry.
Nevertheless, the Greek States showed practical
good sense in their economical regulations. They
fell into no such egregious follies as have marked the
legislation of modern states. There was no interdieting the exportation of raw materials; no favoring of manufactures at the cost of the agricultural
class; no prohibitions on the export of specie; no
efforts to preserve a factitious balance of trade; and
no duties on imports except for purposes of revenue.
The usual customs' duty in the port of Athens was
two per cent. of the value of the goods. The duty
laid by Athens in the ports of her subject-allies was
generally five per cent.; and when in a few exceptional cases the rate was raised to ten per cent., it
was regarded as extortion. In all essential respects,




HISTORY OF THE SCIENCE.          9
therefore, there existed freedom of industry and freedom of trade.1
We should expect beforehand that the more practical Romans, lovers of law and order, and exhibiting
to the world many of the high qualities of citizen
life, would make some valuable contribution to the
science of exchanges. In this we are.disappointed.
Though in the earlier and better days of Rome, agriculture was highly esteemed, the blighting institution
of slavery brought labor, the mechanical arts, and
commerce more and more into disrepute. The lands
were tilled by slaves. Slaves became the artisans of
the country. As always happens under such circumstances, the freemen, the citizens, came to feel themselves above such degrading occupations. It is piti.
ful to hear Cicero declaim against the noble rights
of labor. In the " De Officiis" there is a whole paragraph of condemnation for those branches of manufacturing and commercial industry which ought to
be regarded not only as honorable but as the life and
strength of the State. One sweep of his pen pushes
out of the pale of respectability the whole class of
mechanics. " All artisans are engaged in a degrading
profession," says he. Again, " there can be nothing
ingenuous in a workshop."  Trade and commerce
fare no better at his hands. When carried on on a
small scale they are to be regarded as disgraceful;
when on a large scale they must not be greatly condemned! When social prejudices and views of labor
like these are promulgated by the foremost man of
his time, the best educated and the most liberal,
1 See Boeckh's Public Economy of Athens, and Heeren's Ancient Greece,
chap. x.




10      ELEMENTS OF POLITICAL ECONOMY.
there is no longer room for surprise at the lack of
Roman contributions to Political Economy.
Moreover, the Roman moralists regarded the accu.
mulation of wealth as undermining those virtues in
which they placed the perfection of character. Cato,
the censor, in his denunciations of luxury, which is
the result of accumulation, was a representative of
the whole class of moralists. Their position ought
not to surprise us for two reasons. First, the stream
of the Roman wealth, much of it at least, proved a
curse and not a blessing, not because wealth is not a
blessing, but because its waters instead of being diffused everywhere, rushed at once into a few huge
reservoirs -there was no natural and general distribution of it.  Second, the source of most of the
wealth was as illegitimate as its absorption by the
few great families. It did not come from the peaceful and gradual development of the national resources; it came from conquests, from tributes, often
from  official extortion from  the provincials.  A
comprehensive theory of value will hardly be helped
forward in connection with such moral notions, such
views of labor, and such methods of gain, as prevailed at Rome.
In all that related, however, to the proper acquisition and exchange of property, and to the management of the ordinary sources of national income, the
Romans exhibited a strong sense of justice, together
with moderation and practical wisdom. They taught
the world something in the matter of taxation.
They opened up new sources of revenue, from which
governments still think it useful to draw. They
levied duties in their ports as a simple expedient of




HISTORY OF THE SCIENCE.        11
taxation. They knew nothing of what has since
become famous under the name of Protection. The
rate of the duties in Cicero's time was five per cent. of
the value of the goods; in the time of the emperors,
two and one half per cent.; and the highest duty
known to the Roman custom-house was twelve and
one half per cent. Augustus introduced an excise-tax
of one per cent. on the value of all things which were
sold. The same emperor laid a tax of five per cent. on
legacies and inheritances. There was a tax on bachelors.  In the provinces at least, a door-tax was
sometimes exacted. The public lands, the mines,
the salt-works, and especially the tributes, were the
remaining sources of income.1
The confusion consequent upon the breaking up
of the old Roman empire; the settlement of the
barbarian nations in the seats of the ancient civilization; the gradual growth of feudalism, than which
no system could be more hostile to a free and varied
industry; the almost exclusive occupation of men's
minds during the Middle Ages, with religious questions, and with the intricacies of the disputatious
schoolmen; the prevalence of the monkish idea that
contact with the world was contaminating; the fact
that the universities were under the control of the
clergy, who only allowed in them a meagre curriculum of scholastic studies together with the civil law;
and the fact that war and rapine, rather than the
supply of their mutual wants, gave occasion to the
intercourse of nations with each other; all these
contributed to divert attention for centuries from the
subject-matter of the science of exchanges,
l See articles " Vectigalia " and 4" Portorium " in Diet. of Antiouitiea.




12      ELEMENTS OF POLITICAL ECONOMY.
In our survey thus far, if we have found little positive light thrown as yet upon the science of value,
we have at least discovered some of the reasons why
such light could not be thrown. Absence of investigation and discussion however does not necessarily
imply the lack of a theory. In truth, there was a
half-developed theory of value, which exerted a prodigious influence, certainly from Cicero's time, even
down into the seventeenth century. It is remarkable
that this earliest general doctrine of value, which I
shall venture to call the Bullion Theory, came into
currency in direct contravention of the great authority of Aristotle.  That philosopher taught clearly
that money is but an instrument towards a further
end, and derives all its importance from being an
instrument; but the later less acute observers, perceiving that gold and silver were the money of all
civilized nations, fell into a curious mistake in regard
to the nature of money, and came to give tp these
metals a factitious importance by regarding them as
the real and only wealth. They overlooked the fact
that these metals are a commodity, that they owe
their value to efforts and desires just as other commodities do, and that they are bought and sold like
all other commodities. With useful products of any
kind one can always buy gold and silver. To trade
is nothing but to barter one commodity for another,
-to exchange corn for silver and silver for corn.
Unless the trade is fraudulent, the one is equally
valuable with the other; and it would seem as if the
simple consideration that men are willing to part,
and do constantly part, with gold and silver to buy
other things, would have been fatal to the prejudice
that the precious metals are the only wealth.




HISTORY OF THE SCIENCE.
There were however two things that seemed to
sustain the Bullion theory. One was, that money is
always the measure of value. " How much is it
worth?" The answer comes, so many dollars. Dollars are the denomination in which value is reckoned,
just as degrees of the thermometer are the denomination by which heat is measured. The difference
between value itself and the measure of value- between a bushel of wheat and that round measure by
which we determine that there is a bushel -seems
obvious enough; but money has this peculiarity, it
is not only a measure of value, but, so far as this
expression is ever true of any one commodity, it has
value in itself. There is no heat in a thermometer,
and no wheat in a bushel-measure, but a dollar is not
only a dollar measure, but a dollar value, and we can
see how the fact that dollars both had value and were
the measure of all other values, gave some plausibility to the notion that the dollars were all. The other
thing that made the Bullion theory plausible was the
use of gold and silver as the universal medium of
exchange. They came to be such medium simply in
consequence of their convenience and their nearly uniform value; and because they were such a medium,
everybody wanted them, and whoever had them
could get with them whatever else he wanted. Because the great thing was to get money, men seemed
It think that money was the only thing to be got!
I cannot find that the Bullion theory had anything
better to support it than these two deceptive pillars;
and yet for a very long period, and by many wellinformed men as well as by all the unthinking, ii
was considered to stand upon an immovable founda




14      ELEMENTS OF POLITICAL ECONOMY.
tion. The commercial policy that sprung from this
theory was obvious and well-nigh universal. If gold
and silver are the only wealth, then by all means
keep the gold and silver in the country! Get all
you can in, and let as little as possible out! Accordingly very early the nations passed laws to prohibit
the exportation of gold and silver. We learn from
Cicero, incidentally, that this was done repeatedly at
Rome. In one of his orations he says, " The Senate
solemnly decreed both many times previously, and
again when I was consul, that gold and silver ought
not to'be exported."  According to Adam Smith,
there are ancient acts of the old Scotch Parliament,
which prohibit under heavy penalties the carrying
gold and silver forth of the kingdom.  The same
thing was done by France and England, and probably by every other nation in Europe. Spain tried
this experiment of prohibition under noticeable conditions. She had domestic mines, but also became
proprietor in the sixteenth century of the rich metallic treasures of Mexico and Peru. The precious
metals were literally poured into her bosom. Their
export she prohibited under the severest penalties.
The prohibition was largely futile, since these are
things that can easily be smuggled out. So far as
the prohibition was effective the metals in consequence sank rapidly in value. They are only good
to buy with; and as the Spaniards were not allowed
to buy with them abroad, they soon found that they
could buy relatively little with them at home; which,
of course, increased the smuggling out. Spain persisted in this policy until her commercial decay
proved to her and to all the world, not only the folly




HISTORY OF THE SCIENCE.       15
of such attempts to obstruct the natural current of
commercial circulation, but also the important truth
that national wealth consists not in the mere abundance of gold and silver. Had the Bullion theory
been correct, to encourage the importation of the precious metals, and discourage their exportation, would
have been the high road to national prosperity. But
the Bullion theory was not correct; and the clearness of our views in Political Economy will largely
depend upon our thorough emancipation from the
prejudice that gold and silver are any more valuable
or any more desirable than the products for which
they exchange. They constitute a part, but only a
small fractional part, of the values of any country.
The discovery by the Portuguese of an ocean path
to the Indies in 1497, and the general waking up of
the European mind during the next century, gave a
vast impulse to commerce. On the last day of that
century, Dec. 31, 1600, Queen Elizabeth chartered
an exclusive company entitled " The Governor and
Company of Merchants of London trading into the
East Indies."  They were empowered to export all
sorts of goods free of duty for four years; and also
to export foreign coin or bullion to the amount of
~30,000 a year, ~6,000 of the same being previously
coined at the mint; but they were at the same time
put under obligation to import, within six months
after the completion of every voyage except the first,
the same quantity of silver, gold, and foreign coin
that they had exported. The enemies of the Company soon complained that this last condition was
not complied with, and that it was, besides, highly
injurious to the public interest, and contrary to all




16      ELEMENTS OF POLITICAL ECONOMY.
principle, to allow gold and silver to be sent out of
the kingdom.
The advocates of the Company, on the other
hand, though they did not venture to assail the doctrine that wealth consists in gold and silver alone,
took narrower ground, and asserted that the export
of money is advantageous, whenever the articles
bought by it and imported, are chiefly reexported to
other countries and sold for as much money as was
originally carried out; and also whenever the export
of coin, and the consequent import of commodities,
occasions, though indirectly, a greater value of exports from home of native products. Thomas Mun,
a writer of that period, quoted by Adam Smith,
compares the trade of the merchant exporting gold
and silver, to the seed-time and harvest of agriculture. " f we only behold," says he, "the actions
of the husbandman in the seed-time, when he casteth away much good corn into the ground, we shall
account him rather a madman than a husbandman.
But when we consider his labors in the harvest,
which is the end of his endeavors, we shall find the
worth and plentiful increase of his actions." In
these excuses now set up for the exportation of bullion we may mark the beginnings of a second general
commercial theory, which is usually termed the Mer.
cantile System. This child of the bullion theory became in turn the cause of the death of its parent.
The advocates of the East India Company gradually
learned to take broader ground, and at last boldly
contended that bullion was nothing but a cornmodity, and that its exportation should be made as free
as that of other commodities. These views gained




HISTORY OF THE SCIENCE.        17
strength; many eminent merchants not connected
with the Company adopted them; and in 1663, the
House of Commons repealed the statutes prohibiting
the exportation of foreign coin and bullion, and gave
the Company and private traders liberty to export
them in unlimited quantities.'
The Mercantile System, though, as compared with
the previously existing bullion theory, it was a considerable step in the progress towards sounder opinions, was itself fallacious in principle and pernicious
in action. It gave its care, not indeed to prevent the
direct export of the precious metals, but to make the
general exports of a country greater than its imports,
so that a balance should come back in gold and
silver. The sole aim of the system was to preserve
what was called the Balance of Trade. A famous
phrase this, the balance of trade! The legislation,
the politics, the diplomacy, and the wars, of nearly
two centuries were full of it.
By the balance of trade was meant the excess of
the value of the commodities exported over the
value of the commodities imported, which excess, it
was supposed, would always come back in the form
of gold and silver. Hence unlimited pains were
taken to make the exports greater than the imports,
and the excess was regarded as the measure of a
country's commercial prosperity. Various devices
were employed to make the exports great and the
imports little. To increase the amount of exports,
bounties were offered to domestic producers, to encourage them to sell as much as possible to foreign
countries. With the same end in view, the raw materials of domestic manufactures were forbidden to
1 M'Culloch's Con2mercial Dictionary, Art. East India Comnpany.




18      ELEMENTS OF POLITICAL ECONOMY.
be exported, so that the finished products, thereby
rendered greater in amount, might help swell the
exports. Colonies were planted with similar intent,
that the mother country might find an open market
there, and swell her exports. To diminish the aggregate of imports, prohibitions were laid on the bringing in from abroad articles which could be made or
grown at home; and heavy restrictions imposed on
imports from those countries with which the balance
was supposed to be unfavorable, while the same
articles, perhaps of an inferior quality, were admitted on easier terms from countries with which the
balance was supposed to be better. Thus everything was sought to be regulated in view of an
imaginary balance of trade. The Mercantile System
was the prolific mother of those commercial restrictions, those attempted regulations of manufactures,
those doctrines of monopoly, of corn-laws, and colo.
nies, which have fettered industry almost up to the
present time.
The particular fallacies that lurk in the Mercantile
System, and the tortuous and cramping policy that
grew out of it, will be more fitly discussed at a later
stage of our inquiries; this is a proper place to indi.
cate in general that the whole system is based on a
misapprehension. It overlooks entirely the mutual
benefit to the parties of every act of exchange, without which benefit the exchange clearly would not
take place at all, and makes the whole advantage of
commerce consist in a certain balance of gold and
silver, which comes back to that one of the parties
which has managed to part with more of its own
commodities. It seems strange that it did not occur
to those people, that, if it were worth while to trade




HISTORY OF THE SCIENCE.        19
at all, the benefits of the trade were rather to be
measured by the amount and value of what was
received, than by the amount and value of what
was parted with! Moreover, the system takes for
granted, that traders carry forth goods to foreign
countries to receive back goods and bullion worth as
much, - less goods, indeed, and the balance in bullion. Why on that principle should the goods be
carried forth at all? The labors, the ri~ks, and the
exchanges all made; the goods and the balance
received; and the country just as well, but no better off than before! The whole wisdom of the Mercantile System was to sell as much as possible and
buy as little as possible, -a wisdom which is evident folly, inasmuch as it is not possible to sell without buying, or to buy without selling. The sound
reason, that justifies the East India Company in
exporting the metals or other commodities, and at
the same time condemns the Mercantile System, is,
that the goods purchased by the exports are of greater
worth, when imported, than what was exported to
pay for them.
The leading commercial nations of Europe, nevertheless, fell into the meshes of the Mercantile
System.  Portugal, Spain, France, Holland, and
England, all gave their attention to the balance of
trade, all laid restrictions on the natural freedom
of industry, and all applied the system rigidly to
their colonial dependencies. These restrictions on
trade, especially on the importation of manufactured
goods, and on the exportation of corn and raw mateirals, to say nothing of the bounties which the people
were taxed to pay, were to the last degree vexatious
and onerous; while the penalties for their infringe



20       ELEMENTS OF POLITICAL ECONOMY.
ment were in many cases cruel and even barbarous.
Various writers in the different countries, and particularly in England, where the laws in question were,
perhaps, the most oppressive, began to attack the mercantile theory and the policy that had grown out of
it. And it is to this series of writers in long succession, some overthrowing one false position, and some
another, one establishing a truth here and another
there, that we owe the gradual development and
present state of the science of Political Economy.
The science has gradually emerged from the waves
of thought dashing and roaring, around the Mercantile System. It is still necessary, at least on the
continent of Europe and in the United States, to:ornbat some of the remains of the old mercantile
legislation. England is believed to be the only country which has erased from her statute-book the last
vestiges of the system. This she has done in direct
consequence of the skill and power with which the
political economists have guided the public opinion
of that country; and it is on account of their success, as well as on account of the superior numbers and weight of English thinkers in this field of
inquiry, that it is proper now to consider first the
English contributors to the modern science of Political Economy. We shall then attend to what the
French- have done towards building up the science;
and, with a few remarks on the Italian and German
writers, shall close this sketch with a brief recital of
American views and writers.
It is not necessary in a book like the present to go
into much detail respecting individual authors, oi
their claims to priority of discovery in the realm of
economical truth. This has already been well done




HISTORY OF THE SCIENCE.        21
by Mr. McCulloch in the " Introductory Discourse "
prefixed to his admirable edition of Adam Smith's
" Wealth of Nations," to which I am indebted for
some of the facts and thoughts already stated, and
soon to be stated, in this chaper; and will doubtless
be exhaustively done in Mr. Macleod's " Dictionary
of Political Economy," of which one volume has
already appeared. My object is to give a brief
but just outline of the labors of the principal thinkers, with the practical aim of preparing my readers
for a better apprehension of the discussions which
follow.
Omitting the pamphleteers, who not seldom struck
upon an important truth here and there in their zealous debates on questions of taxation, trade, poorlaws, or other point of government policy; and who
are to be regarded as the pioneers in economical discovery, pushing their way into the wilderness in one
direction and another, and thus, as it were, piloting
the great writers who came after, -John Locke may
first be mentioned, whose " Two Treatises of Government" were published in 1690, in justification of the
English Revolution of 1688, in which he incidentally
illustrates the distinction between utility and value,
and all but establishes this one of the fundamental
truths of Political Economy, namely, that value is
the birth of effort, and not the gift of Providence.
He says: —" For it is labor indeed that puts the difference of value on everything;" again:-"Whatever bread is worth more than acorns, wine than water,
and cloth or silk than leaves, skins or moss, that is
wholly owing to labor and industry; " again:  " It is
laICor then that puts the greatest part of value upon
land, without which it would scarcely be worth any



22      ELEMENTS OF POLITICAL ECONOMY.
thing;" and once more:-" Supposing the world
given, as it was, to the children of men in common, we
see how labor could make men distinct titles to the several parcels of it for their private uses." 1 These passages are an early, if not the very earliest, statement
of a truth destined in our own day to transform the
face of the science of economy; but Locke himself
was hardly aware of its pregnant nature, and did not
deduce from it the conclusions which it is well able
to bear. In the controversy concerning the recoinage of silver money in the same reign, Locke did
good service by his tracts on money, in preventing
the lowering of the currency standard, and in diffusing sound principles (not unmixed with several
errors) on the nature of money. He justly taught
that it was as absurd for the State to attempt to fix
the price of money, as to fix the price of cutlery or
broadcloth.2
David Hume, more distinguished as a historian
and writer on strictly philosophical subjects, must
yet be mentioned with honor in any sketch of the
rise of the science of economy. He was the friend
and forerunner of Adam Smith. His Political Essays
were published in 1752. The titles of some of these
are as follows: - " Of Commerce,9" " Of Money,"
" Of Interest," " Of the Balance of Trade," "' Of the
Jealousy of Trade," "Of Taxes," " Of Public Credit:' In these essays are to be recognized, not only
the clear-flowing style which makes it always a
pleasure to read Hume's " History of England," but
also liberal sentiments largely emancipated from the
fetters of the mercantile system. The views pro1 Locke, book ii. sections 39, 40, 42, 43.
2 Macaulay's England, chap. xxi.




HISTORY OF THE SCIENCE.         23
pounded are interesting even where they are not
sound. Of commerce, he says, "Foreign trade, by
its imports, furnishes materials for new manlfactures 
and, by its exports, it produces labor in particular commodities, which could not be consumed at home. In
short, a kingdom that has a large import and export,
must abound more with industry, than a kingdom that
rests contented with its own commodities. It is therefore more powerful, as well as richer and happier."
I am aware of no earlier hint of the great truth
afterwards fully developed by Say, that there can
never be a general over-production, than these words
from the same essay: —" If strangers will not take
any particular commodity of ours, we must cease to
labor in it.  The same hands will turn themselves towards some refinement in other commodities which
may be wanted at home; and there must always be
materials for them to work upon, till every person in
the State who possesses riches, enjoys as great plenty
of home commodities, and those in as great perfection
as he desires; WHICH CAN NEVER POSSIBLY HAPPEN."
The absurdity of the then current notions concerning
the Balance of Trade is triumphantly exposed by
Hume, in the essay under that title; and in the conclusion of the essay on the Jealousy of Trade, occur
these noble words:-" I shall therefore venture to
acknowledge, that, not only as a man, but as a British
subject, I pray for the flourishing commerce of Germany, Spain, Italy, and even France itself."  Hume
throws some new light on the subject of Money;
although his discussion of it is marred by the assumption, that a less quantity of the metals would
answer every purpose of commerce as well as a
greater, and have as much value; which would only




24      ELEMENTS OF POLITICAL ECONOMY.
be true on the supposition that the less quantity cost
as much effort to produce it, and its minuter subdivisions were as convenient in exchange;-a false
assumption from which he deduces this very false
inference:- -" Were all our money, for instance, recoined, and a penny's worth of silver taken from every
shilling, the new shilling would probably purchase
everything that could have been bought by the old;
and domestic industry, by the circulation of a great
number of pounds and shillings, would receive some
increase and encouragement."  Are men, then, usually willing to consider -} equal to 1? Besides,
Hume did not attempt to analyze value, or to ground
comprehensively the science of Political Economy.
That attempt was first successfully made by Dr.
Adam Smith, Professor in the University of Glasgow, who published in 1776 his great work on the
Wealth of Nations, in which many of the more important propositions of the science are established
beyond the reach of controversy. It will be noticed
that the publication of this work took place in the
very year in which American Independence was declared; and it was itself a sort of declaration of
independence of the false principles and foolish policy of the Mercantile System. Like the document
of Jefferson, it excited universal attention: like that,
it marks an era; and the results in the economical
world of the treatise of Smith have been scarcely
less striking and beneficent than the results in the
political world of the document of Jefferson.  Indeed, the merits and originality of Dr. Smith are so
great, that he has frequently been called, as Aristotle
has been by others, the father of Political Economy
It is not just that that title should be borne by either




HISTORY OF THE SCIENCE.        25
the one or the other; the science has grown up very
gradually, and through the contributions of a great
many thinkers; but the most prominent name among
them all is now, and doubtless always will be, the
name of Adam Smith.    He goes over the whole
ground, endeavors to bring the principles discovered
by others and those first demonstrated by himself
into one harmonious system, and by means of historical information makes his book as interesting as
it is instructive by reason of scientific discussion
He exalts labor, shows the immense advantages of
its division, and advocates its unshackled freedom in
all departments; he unfolds the benefits of commerce, and mercilessly exposes the weak points of
the restrictive and regulating devices of the mercantile system; he discusses money, capital; profits,
wages, rent, taxation, and public expenditures. A
book with such a scope, and published at such time,
of course contains many errors; but the wonder is,
not that there are so many, but that there are not
more. A groundless distinction made between productive and unproductive labor; the including of
vendible commodities only in the field of value; a
preference given to agriculture' over other forms of
production, and to the home trade over foreign trade,
a misapprehension in regard to the nature of rent; a
want of clear perception of the difference between
utility and value, and a consequent partial confusion
in the whole doctrine of values; an occasional inconsistency with its own principles, as when allowing that a State may regulate the rate of interest; a
lack of clear definitions a confused arrangement of
the topics discussed; and lastly, a prolixity that at




26      ELEMENTS OF POLITICAL ECONOMY.
times becomes tedious; are among the chief defects
of the Wealth of Nations.
Most of the English writers on this subject, since
the time of Dr. Smith, may be fairly said to belong
to his school. They have corrected many of his
errors, and made additional contributions to the
science in several respects, but, in the main, have followed out his principles, and, like him, confined their
discussions of value to tangible commodities. Mr.
Malthus, author of a very famous theory of population; Mr. Ricardo, author of a scarcely less famous
theory of rent, -both of which theories will be considered further on in these pages; Mr. McCulloch,
who clearly discriminates between utility and value,
but erroneously regards labor as the sole constituent
in the latter; Mr. Senior, author of the able, but not
sufficiently comprehensive, treatise in the Encyclopedia Metropolitana; and Mr. John Stuart Mill,
whose work has been deservedly more read in this
country than any of the rest, are the principal figures
in the long array of writers. The definition of the
science, to which, in general, they would all assent,
is, The science which treats of the Production, Distribution, and Consumption of Wealth.
Mr. Horner, Mr. Thornton, and Mr. Huskisson,
were the joint authors of the Bullion Report made
to Parliament in 1810, in which the true principles
of metallic and of paper money are stated with
demonstrative ability.
Mr. Macleod, the latest English author of note in
this field of inquiry, is a very able representative of
what may perhaps be called the modern school of
French economists. Their definition of the science
is the one enforced in these pages also, namely, The




HISTORY OF THE SCIENCE.        27
science of Exchanges. This definition is drawing to
itself the most recent investigators in France, England, and America; and the scientific development
of it has already put political economy into a new
and better posture. According to this view, exchangeability is the only quality requisite to bring
any service or commodity within the sphere of economic regulation. To Mr. Macleod's " Theory and
Practice of Banking" I am under obligation for
some information in matters of fact, and some distinctions in matters of science, made use of in some
of the following chapters.
If the French have done less than the English in
building up the science of Political Economy, they
have done well what they have done. They have
the honor of publishing the very first general treatise
under the title of " Political Economy." It was issued
at Rouen in 1615. To them also is due the credit
of having furnished the first writer who undertook
a systematic analysis of the sources of value, and
whose ingenious speculations gave rise to the first
school of Political Economy. This was M. Quesnay, a physician attached to the court of Louis XV.,
whose book was published in 1758.1 His fundamental positions expressed the reaction from the
principles of the Mercantile System as embodied in
the policy of Colbert, the famous finance minister of
Louis XIV. That policy gave a decided preference
to the industry of the towns and cities. M. Ques.
nay appeared as the champion of agriculture. His
system assumes that the physical earth is the only
source of wealth, and consequently that labor is
incapable of producing any new value except when
1 Adam Smith. Book iv., chap. ix.




28      ELEMENTS OF POLITICAL ECONOMY.
employed in agriculture. Artisans and merchants
are unproductive laborers, because there is no nett
produce remaining, as in agriculture, over and above
the expenses of production. The system mistook
the nature of rent; and falsely though tacitly assumed that wealth consists in matter. The novelty
of the theory however, its scientific shape, and the
liberal commercial policy coupled with it, gave it for
a time a great reputation; and it numbered among
its disciples no less persons than Turgot, the financier, and the elder Mirabeau. The former, when he
became controller-general of the French finances in
1774, proposed, in accordance with the principles of
Quesnay, the freedom of labor at home and of trade
abroad, and the substitution for existing taxes on a
multitude of articles, of a single tax on land; and the
latter was so far carried away by zeal for his master,
that he puts his work, in point of benefit to mankind,
on a level with the invention of writing and the invention of money. The numerous disciples of Quesnay were called Physiocrats, and constituted what is
termed the early school of French economists. Their
system is sometimes named the Agricultural System
in contradistinction from the Mercantile System.
Their views color many parts of the " Wealth of
Nations," and afterwards exerted a predominating
influence in the councils of the French Revolution.
To make the year 1776 doubly memorable in the
history of this science, the French philosopher Condillac published in that year a work entitled "Le
Commerce et le gouvernement consideres relativement
l'un ca'autre."  This work was comparatively neg.
lected at the time, and has never shared the popular
favor accorded to the other writings of the same au



HISTORY OF THE SCIENCE.        29
thor, but the definition of the science given in it,
namely, that it is the science of commerce, found
many years afterwards an intelligent champion in
Archbishop Whately, to whom the definition is commonly and perhaps properly referred; and this definition or one equivalent, is the one now generally
accepted.
In 1803, appeared in Paris, Say's " Traite d'4conomie politique," which soon became, and is even yet, a
standard work. Say is a skilful expositor of the sci.
ence, an able advocate of the freedom of commerce,
and the original contributor of the important demonstration that there cannot be a general glut of products - a general over-production. His doctrine of
value, however, is infected with a fundamental error,
namely, the confusion of value with utility, which
one of his own countrymen was destined completely
to expose, and td replace with the nucleus of satisfactory truth. That countryman of his was Frederic
Bastiat, whose book, entitled " Harmonies (conomiques," published in Paris in 1850, carried Political
Economy to a very advanced position, and is the
most important contribution to the science since the
time of Adam Smith. The gifted author died the
same year in which his book appeared, leaving unfinished an intention to recast and complete it. It is
not strictly a treatise of Political Economy, as it
does not touch upon several of the most important
subjects comprehended in that title, such as Money,
Foreign Trade, Taxation, and others, but there is in
it a masterly definition and exposition of value, and
a vigorous demonstration of the harmonious mechanism of society, by which, through the agency of liberty and property, God has designed the progressive




80       ELEMENTS OF POLITICAL ECONOMY.
amelioration of mankind. " All legitimate interests
are in harmony " is the key-note of the book. Bastiat encumbers his discussions by the attempt to use
technically the term " wealth," and his chapter under
that title is singularly perplexed and confused, affording again for the hundredth time an illustration of
the impossibility of using that word to advantage
for any scientific purpose whatever. While unfolding the la'rs of value in their manifold applications,
Bastiat incidentally but most effectually demolishes
the vagaries of communism, and establishes the right
of property upon unassailable grounds.  It is a
pleasure to acknowledge in the amplest manner one's
indebtedness to such a quickening writer as M. Bastiat is.  Whoever will compare carefully with his
book the following chapters on Value and Land,
will see how much I have profited by his discussions; and he will also see that I have made an
independent, not a servile, use of them. It is hoped
that the relations of utility to value are even more
clearly and ultimately put than he has put them.
Not to have availed myself of the truths which he
has actually established would be as unjust to science, as not also to have endeavored in the chapters
on Exchange and Foreign Trade to execute the commission which he left to his readers in these words:
-- I hope yet to find at least one among them who
will be able to demonstrate rigorously this proposition:
the good of each tends to the good of all, as the good
of all tends to the good of each; and who will, moreover, be able to impress this truth upon men's minds by
rendering the proof of it simple, lucid, and irrefragable." 1 M. Bastiat defines Political Economy as the
1 Stirling's Translation of the Harmzonies, page 92.




HISTORY OF THE SCIENCE.         81
Theory of Exchange, and Value as the Relation between two Services exchanged. His system turns
on the technical use, definition, and analysis of the
term Services. He derives all the economic phenomena out of the fundamental facts of human Wants,
Efforts, and Satisfactions. Value cannot exist separately from human efforts. Utility resides in the
materials and forces of Nature. "But these natural
forces, in themselves, and apart from all intellectual or
bodily exertion, are gratuitous gifts of Providence,
and in this respect they remain destitute of VALUE
through all the complications of human transactions.
This is the leading idea of the present work."  Thus
he himself expresses the matter.1
The Italian writers, though voluminous and respectable, have originated comparatively little within
the field of this science.  Several of them  commenced during the seventeenth century to investigate the nature of money, and came to the sound
conclusion that governments have no right to tamper
with the standard of value used by their subjects.
As early as 1764, a professorship of Commerce and
Political Economy was instituted at Naples, and
Antonio Genovesi, to whom Say and others would
assign a high rank among the contributors to the
science, was appointed to lecture in it. This was
the first established professorship in this department
of knowledge.   A collection of the best Italian
writers on the subject was undertaken, under the
patronage of Napoleon, in 1803, and subsequently
completed in fifty volumes octavo.
The Germans have done more perhaps for the
1 Stirling's Translation, page 62.




82      ELEMENTS OF POLITICAL ECONOMY.
science of economy through their.public action in
the Zollverein, than through the private contributions
of their numerous economical writers. The Zollverein, or Customs Union, was commenced by Prussia
in 1818, and has received the adhesion from time to
time of other German States, until now it embraces
all of Germany except Austria. Within this broad
territory, embracing a population of above 38,000,000,
the duties on imports are uniform, and uniformly
low; and there is no duty on exports except on
paper-rags.1  All interior custom-houses are swept
away. No foreign articles are excluded; many are
admitted free of duty; and those on which duty is
charged are arranged in thirty-seven simple classes,
the duties being always specific (generally by the
hundred weight), except in the case of carriages and
ships, on which the duty varies from five to ten per
cent. of value. The commercial prosperity induced
by these liberal regulations, the steadily enlarging
revenue from these low duties, and the growth of
domestic industry by the side of these practically
unrestricted importations, have taught the world a
more valuable lesson than often falls to the lot of an
individual thinker to teach.  It is true that the
founders of the Zollverein were not wholly free from
the prejudices of the mercantile system, but the results of the experiment so far confirm anything
rather than the principles of that system. Friederich List, an early champion of the Zollverein, some
time also a resident of the United States, who published in English his " Outlines of a New System of
Political Economy," at Philadelphia, 1827, and "Das
1 Zolltarif des Deutschen Zollvereins vom 1. Juni 1868 ab giiltig.




HISTORY OF THE SCIENCE.        33
Nationale System  der politischen Oekonomie," in
Stuttgart, 1841, and who, while advocating the principle of protection in his books, displayed a multifacious activity in behalf of many liberal schemes;
Ludwig Stein, Professor in Vienna, an indefatigable
writer and zealous free trader; and Professor Rau,
of Heidelberg, a correct and forcible writer and a
popular lecturer, may suffice, as examples merely, of
the individual writers of Germany.
The circumstances of the United States, as well
in colonial vassalage as in an independent position,
their experience with almost every variety of paper
money, the alternations of the national policy in
respect to trade, the long continued public discussions on the tendencies and results of a protective
tariff, and the efforts - State and National- which
have been made towards realizing a healthful currency, have been favorable to the cultivation of
economical studies.  To these circumstances may
now be added the pressure of a vast public debt, the
opportunity of watching the operation of a national
banking system, and the interest attaching to the
production of gold and silver in the western half of
the continent.  Attention to this subject, however
great heretofore, is likely to be greater in the time to
come.
The Reports of the Secretaries of the Treasury,
particularly those of Mr. Hamilton, Mr. Gallatin, Mr.
Walker, and Mr. McCulloch, have treated many
branches of the subject with marked ability. Much
economical truth has been brought out also in congressional speeches, for example, in those of Mr.
Webster, Mr. Calhoun, Mr. Benton, Mr. Silas
3




34     ELEMENTS OF POLITICAL ECONOMY.
Wright, Mr. E. G. Spaulding, Mr. Amasa Walker,
Mr. B. F. Thomas, and Mr. Garfield. The debate
in the House of Representatives, on the tariff, during
the spring of 1870, was more general and thorough
and able than any previous congressional tariff de
bate; and the point then raised by Judge Winans of
Ohio, that Congress has no constitutional right to lay
duties except to get money with which " to pay the
debts and provide for the common defence and general welfare of the United States," is a point of much
importance. Congressional reports, like that of Mr.
John Quincy Adams on Weights and Measures, and
that of Mr. Kasson's late committee on the Metric
System, have illustrated portions of the subject. The
annual reports of the Special Commissioner of the
Revenue, Mr. David A. Wells, have presented such
facts and reasonings in relation to the national industry, commerce, and currency, as have deserved and
have received the profound attention of the people.
Treatises more or less formal and complete have been
written by Daniel Raymond (1820), John Rae (1834),
Henry C. Carey (1835-1860), Professor Vet.hake,
President Wayland, Stephen Colwell, George Opdyke, Professor Bowen, E. Peshine Smith, Professor
Bascom (1859), Charles Moran (1860), E. B. Bigelow (1861), Amasa Walker (1866), John A. Ferris
(1867), George A. Potter (1868), E. G. Spaulding
(1869), Horace Greeley (1870), and by many others.
The economical works of Mr. Carey are to be noticed the more particularly, because he claims as
original with himself some of the fundamental positions of M. Bastiat. It is certain that these positions




HISTORY OF THE SCIENCE.        85
are common to the two writers; and it is to be presumed that M. Bastiat profited by some of the views
of Mr. Carey; but there is enough that is distinctive
in the two authors to justify the claim of each to
both originality and merit. Among Mr. Carey's
central principles may be enumerated the following:
That land gains its value from labor; that, generally,
poorer soils are first cultivated, then, those more fertile and difficult; that, what would be the cost of
their reproduction rather than their actual cost of
production, determines the value of commodities;
that the interests of classes and individuals are really
harmonious; that there is a tendency to increase in
the wages of labor, and to diminution in the rate,
though increase in the aggregate of the profits of
capital; that the advancement of society corresponds
to the degrees of association and liberty in it; and
that the prices of land, labor and raw materials tend
to approach the prices of finished commodities.
Mr. Amasa Walker's " Science of Wealth "' has
already passed through several editions, and is a
very high authority on all questions of Political
Economy. On the subject of Currency it is particularlj original and full, Wages, Trade, and Taxation are also subjected in it to admirable analysis
and discussion,
A second edition of Professor Bowen's " American
Political Economy" has been recently published,
As his treatment of the various questions of Money
was the strong point in the original edition of 1856
so his copious discussion of the recent financial ex4
perience of the United States constitutes a chief
merit in the book as it now a.ppears.




36      ELEMENTS OF POLITICAL ECONOMY.
CHAPTER II.
FIELD OF THE SCIENCE.
WHEN Adam Smith taught Political Economy in
the University of Glasgow, it was as a branch of
moral philosophy, and the substance of his "Wealth
of Nations" was delivered first in the form of lectures,
which made up a part of his moral philosophy course.
That course was divided into four parts: the first comprising natural theology; the second, ethics, or what
Paley terms the science of duty and the reasons of
it; the third jurisprudence, or that part of morality
which relates to justice; while in the fourth part he
examined those political and social regulations which
are founded on expediency, and which tend to increase the prosperity and power of a State.
Now, expediency is so radically distinct from duty
that there is no need of proving that Political Economy is not to be reckoned a part of moral philosophy
at all. The idea of obligation, on which the science
of morals is founded, and the idea of value on which
the science of economy is founded, are totally distinct ideas. There is one word that marks and circumscribes the field of morals. That word is Ought.
There is one word that marks and circumscribes the
tield of economy. That word is Value. Political
Economy does not aspire to place its feet upon the
ponderous imperatives of moral obligation. It finds




FIELD OF THE SCIENCE.        37
a solid and adequate footing upon the expedient and
the useful. As a science, it does and must discuss
and decide all questions upon economical grounds
alone. As a science, it has no concern with questions of moral right. If it favors morality, it does so
because morality favors production. It favors honesty because honesty favors exchange. It puts the
seal of the market upon all the virtues. It condemns
slavery, not because slavery is morally wrong, but
because it is economically ruinous. Moral science
appeals only to an enlightened conscience, and certain conduct is approved because it is right, and for
no other reason. Political Economy appeals only
to an enlightened self-interest, and exchanges are
made because they are mutually advantageous, and
for no other reason. Each of the two sciences, therefore, has a distinct basis and sphere of its own. The
grounds of Economy and morals are independent and
incommensurable.
Every science, however, has its points of contact
with other sciences; and this is particularly the case
with Political Economy in relation to moral science,
and is the reason why the two have sometimes
been confounded. The sound conclusions of the one
are harmonious with the sound conclusions of the
other. Both work together for the good of men, for
the amelioration of their condition. Their spheres,
though distinct, nevertheless touch each other. Duty
and interest lie alongside. The ultimate analysis
of property, for example, will, as we shall see, lead
the inquirer into the higher region of moral science.
In legislation also, the question is frequently at the
same time an economical and a moral question. Dr.




8   ELEMENTS OF POLITICAL ECONOMY.
Wayland has observed that "' almost every question
of the one science may be argued on grounds belonging to the other." But the grounds themselves, it is
important to remark, must be seen to be, and must
be kept, distinct.
In the next place, the very name of the science indicates that it is a political, that is, a social science.
It relates to men in a state of society, and not to
men in a state of isolation. The hermit, who neither
buys nor sells, who neither gives nor receives anything in exchange, is not amenable to the laws of
Political Economy. So far as men satisfy their own
wants by their own efforts without exchange, they
stand outside the pale of this science. Under those
circumstances the idea of value could neither have
birth nor being, and of course there would be no
such thing as a science of value. Robinson Crusoe
came to lead a very tolerable life upon his desolate
island by means of his own industry. He worked,
but then he worked to satisfy his own wants directly.
He did everything for himself. He had no opportunity to buy anything, sell anything, exchange anything. The whole course of such a life could never
have developed the idea of value, and the record of
the whole experience of such a solitary individual
would require no such word as value. If God had
made men so that their varied wants would best be
met by applying their own efforts to satisfy these
wants directly, without the intervention of exchange,
there would have been, there could have been, no
such science as the one to which attention is now directed. In that case, men would live, if they lived
at all, in perfect isolation. Every man would satisfy




FIELD OF THE SCIENCE.         39
his own desires by his own efforts. There would oe
no society, and no exchange.
But it is evident at the very first glance, that the
Creator has not made men thus. Society is God's
handiwork. It is the most complicated aid the
most wonderful, as it was the final, work of his
hands. The first man, as he stood alone in Para
dise, was indeed a wonderful structure,-wonderful
in his body, and in all his mental and spiritual powers. But it was not good that the man should be
alone. Society must be provided for; and in providing for a society of human beings, God impressed
upon that organization, as upon all others, its own
proper and peculiar laws. These laws embrace its
entire organization, in its lower, as well as in its
higher, parts. They cover the phenomena of exchange, just as they cover the phenomena of morals;
and no intelligent observer can watch their working,
when left intact and free, without being stimulated
and gladdened by the beneficent results to which
they lead.  If the footsteps of providential intelligence be found anywhere upon this earth, if proofs
of God's goodness be anywhere discernible, they are
discernible, and are found in the fundamental laws
of society. Certainly, if every man could satisfy all
his desires as well, by putting forth his efforts to that
end directly, he would do it. He would grow his
own food, make his own clothes, write and publish
his own newspaper, be his own doctor, in one word,
perform all needed services for himself. But God
has so oriered it that he cannot do this. He cannot,
in a state of isolation, with all his efforts, procure for
himself one thousandth part of the comforts which




40       ELEMENTS OF POLITICAL ECONOMY.
he easily procures for himself by less efforts, througn
exchange. Society and exchange are, under God's
ordination, matters of necessity, if men are to rise in
a scale of comforts perceptibly above the brutes.
And the reason is this. There are obstacles, in all
directions, to the satisfaction of men's desires  If
the desires are to be met, these obstacles are to be
surmounted.   But if one man undertakes to surmount any considerable number of these obstacles,
he miserably fails. His powers are not adequate to
the task; and hence we say, that in a state of isolation, men's wants exceed their powers. But, if he
devote himself to surmounting one class of obstacles,
as, for instance, those in the way of procuring suitable clothing, his powers are adequate to this, he soon
acquires skill in it, he learns to avail himself of the
gratuitous help of Nature, and the facilitating processes of art, he is able to realize large products along
his line, and is now in position to offer valuable services to society. Meanwhile other men have been
devoting themselves each to another class of obstacles, have concentrated effort and skill uponr them,
have succeeded by the help ofNature and art in surmounting them, and now offer their valuable services
to society.
Now, then, these services are mutually exchanged
in all directions, and men find, as it is God's clear
design that they should find, that, by making given
efforts along one line, and exchanging them for corresponding efforts along other lines, they obtain vastly greater satisfactions for their various desires than
they could obtain by direct effort. Why? Because
there is now a vast increase of useful products in




FIELD OF THE SCIENCE.         41
existence. Here we have reached, provisionally, the
true explanation of the gains of exchange. It is not
so much that by exchange men get better and cheaper
articles, as it is that they get more of them.  By
the division of employments, which is only possible
under a system of exchange; by the fact that, under
free exchange, men avail themselves of all the varied
advantages of Nature and position; the number and
variety of useful products created, the number and
variety of the services which men are able to render
to each other, are immeasurably augmented. More
is produced, more is to be exchanged, and therefore
there are more satisfactions of all men's desires.
Political Economy, therefore, which unfolds the reasons and the laws of exchange, finds its only field
in a state of society. It is truly a political, that is,
a social science.
In determining now more definitely still the field
of our science, we will look at some of the leading
definitions of it which have been given by different
writers. Mr. Senior defines it " the science which
treats of the nature, the production, and the distribution of wealth." Mr. McCulloch regards it "'the
science of the laws which regulate the production of
those material products which have exchangeable
value, and which are either necessary, useful, or
agreeable to man."  Archbishop Whately gives it
the name of " catalactics, or the science of exchanges."  Among several equivalent definitions
which he is at pains to give, Mr. Mill places first,6the science which treats of the production and
distribution of wealth, so far as they depend upon
the laws of human nature."  The French writers




42       ELEMENTS OF POLITICAL ECONOMY.
give definitions somewhat broader. M. Storch says
it "is the science of the natural laws which determine the prosperity of nations, that is to say, their
wealth and civilization."  M. Sismondi regards " as
the object of political economy the physical welfare
of man, so far as it can be the work of government."
And M. Say defines it as " the economy of society;
a science combining the results of our observations
on the nature and functions of the different parts of
the social body."  Mr. Carey defines it "'the science
of the laws which govern man in his efforts to secure
for himself the highest individuality and the greatest
power of association with his fellow-men."  And
lastly, Mr. Macleod offers the definition, -" the science which treats of the laws which govern the relations of exchangeable quantities."
It will be noticed that in several of the preceding
definitions the term wealth is introduced as a part
of the definition. This word wealth has been the
bane of Political Economy. It is the bog whence
most of the mists have arisen which have beclouded
the whole subject. From its indefiniteness, and the
variety of associations it carries along with it in
different minds, it is totally unfit for any scientific
purpose whatever. It is itself almost impossible to
be defined, and consequently can serve no useful
purpose in a definition of anything else. It has been
much debated, for example, among political economists, whether the term wealth includes anything
more than material products, such as houses, lands,
metals, tools, food; or whether the skill of artisans
and the services of professional men are also to be
reckoned as wealth. Some include under the term




FIELD OF THE SCIENCE.         43
only material products; others, as Mr. Mill, widen
the signification so as to take in those immaterial
services which result in an increase of material products; while others still, with evident violence to the
current meaning of the word, include under it all
things, whether material or immaterial, for which
something may be obtained in exchange. Thus the
meaning of the word wealth has never yet been settled; and if Political Economy must wait until that
work be done as a preliminary, the science will never
be satisfactorily constructed. It is simply impossible,
on such an indefinite word as this at the foundation,
to build up a complete science of Political Economy.
Moreover the word wealth includes the two distinct
ideas of value and utility, -ideas which must be
kept perfectly distinct, or else there is no sound thinking and no sound conclusions within this field. Men
may think, and talk, and write, and dispute to weariness, but until they come to use words with definiteness, and mean the same thing by the same word,
they reach comparatively few results, and make but
little progress. And it is just at this point that we
find the first grand reason of the slow advance hitherto made by this science. It undertook to use a
word for scientific purposes which no amount of
manipulation and explanation could make suitable
for that service. Happily there is no need to use this
word. In emancipating itself from the word wealth
as a technical term, Political Economy has dropped
a clog, and its movements are now relatively free.
Of the other definitions quoted, against which the
objection just considered does not lie, some embrace
too little, and others embrace too much. The only




44      ELEMENTS OF POLITICAL ECONOMY.
one which seems to the present writer to be exactly
right, is the definition given by Archbishop Whately,
namely, the science of exchanges. This definition,
or its precise equivalent, the science of value, gives a
perfectly definite field to Political Economy. Wherever value goes this science goes, and where value
stops this science stops. Political Economy is the
science of value, and of nothing else. To determine
with distinctness what value is, to separate it from
some things which have often been confounded with
it, and thus to lay a foundation for the science at
once satisfactory and complete, will be the work of
the next chapter. But it is in order at this point to
call attention to the second grand reason of the slow
advance hitherto made in this field of inquiry. Value
is a relative word. It is usually defined as purchasing-power, that is to say, the value of anything is
its power of purchasing other things. It is not an
independent quality of one thing, as hardness is a
quality of a stone, but it is a quality of one thing
as estimated in a corresponding quality of something
else. It is not a quality, in and of itself, of gold, but
a relation which gold holds to other things which
gold will buy. The notion of value is not conceivable except by a comparison of two things, and what
is more, of two things mutually exchanged. Political Economy therefore is based upon a relative idea,
and has to do from beginning to end with a relation.
Now in this there is an inherent difficulty, and a
difficulty too which can never be obviated. It lies
in the very nature of the subject. Men much more
readily apprehend an absolute idea than a relative
one. They more easily follow a discussion touching




FIELD OF THE SCIENCE.         45
the independent attributes of single objects, such as
length, breadth, thickness, and many others, than a
discussion touching value, which is not an attribute
of any one thing, but a relation subsisting between
two things. I am not aware that this difficulty has
ever been remarked on by any writer, but I am at
the same time very sure that it constitutes the principal difficulty in this class of inquiries, and has been
the main reason of the tardy progress hitherto made
in them.
In thus circumscribing the field of Political Economy, I am not disposed to deny the possibility of a
more comprehensive science than this is as thus
defined, or of even a number of sciences, as yet
undeveloped and unnamed, whose inquiry might
be, under what intellectual and physical conditions,
men, whether as individuals or as aggregated in society, might obtain the greatest amount of physical
comforts, or the highest degree of individuality, or
the widest control over the powers of nature. Several of the definitions cited above imply more general
inquiries than are relevant in a proper science of exchanges; and a good deal of the discussion in almost
all books that professedly treat of Political Economy
is drawn from territory that lies outside the strict
limits of that science. Whatever others have done,
or may hereafter undertake to do, I propose solely to
investigate the motives and the conditions that govern men in their exchanges. Such investigations
have a definite field of view; and if properly pursued, will lead to a statement of those laws that
constitute the Science of Value. To these, then, we
next proceed; and first of all, to an analysis of Value
itself.




46      r EMENTS OF POLITICAL ECONOMIY.
CHAPTER III.
ON VALUE.
IF I take up a new lead-pencil from my table, foi
the purpose of examining all its qualities, I shall
immediately perceive those which are visible and
tangible. The pencil has length, a cylindrical form,
a black color, is hard to the touch, is composed of
wood and plumbago in certain relations to each
other, and has the quality, when sharpened at the
end, of making black marks upon white paper.
These qualities, and such as these, may be learned
by a study of the pencil itself. But can I learn, by
a study of the pencil itself, the value of the pencil?
Is value a quality? By any examination of its mechanical, or by any analysis of its chemical properties, can I detect how much the pencil is worth?
No. The questioning of the senses, however minute,
the test of the laboratory, however delicate, applied
to the pencil alone can never determine how much
it is worth. These methods will discover the qualities that belong to the pencil as such, but I must
take another method altogether to determine its
value.
Will the origin of the word Value help in finding
a method by which I may discover the value of the
pencil? The word is derived from the Latin verb
VALERE, to pass for, to be worth. There is a hint of




ON VALUE.                47
a comparison in the original meaning of the term itself. Will the current use of language assist me
any further in finding out the way to learn the value
of my pencil? In current language, when the value
of anything is asked, the answer always comes in
the terms of something else. We ask, How much is
it worth? The answer is, so many cents or dollars.
The cents or dollars are very different things from
the things whose value we inquire after; and thus
we see again more clearly that value implies a cornparison of two distinct things; and, if so, of course
it is useless to try to ascertain its value by a study
of the pencil alone. But what kind of a comparison
between two things is needful, in order to ascertain
the value of either?  There is no use in laying
down a certain number of cents by the side of the
pencil for the purpose of fixing its value, as we lay
down a carpenter's square by the side of a stick to
ascertain its length; because the cents have no common physical quality with the pencil, as the square
and stick have in common the physical quality of
length. A simple comparison determines the relative length of the square and the stick, and it makes
no difference in the result whose the square is or
whose the stick is. A borrowed square is just as
good to determine length as any other, since that
circumstance does not affect the terms of the comparison: also, one man is competent to make the
comparison, and it is not needful that he be the
owner of either of the things compared.
But is a man who does not own a thing competent to fix its value? And is a man who does own
a thing competent to fix its value by himself alone?




48      ELEMENTS OF POLITICAL ECONOMY.
The true answer to these questions brings out two
peculiarities of that comparison by which value must
always be ascertained. Besides the two things compared, there must be always two persons comparing,
and each of these two persons must be virtually the
owner of one of the things compared.  Because I
think my pencil is worth fifteen cents, is it therefore worth fifteen cents? Somebody else must think
so too before that fact can be announced. Also, the
comparison that two thieves make between two
pieces of stolen goods would not go far in public
estimation towards fixing the value of either piece
of goods.  Somebody, then, who owns the cents,
must make a comparison with somebody else who
owns the pencil, or the value of the latter is not likely
to be truly ascertained.
But besides such a comparison, essential as this
is as towards the end in view, another step is needful before I can announce the value of the pencil.
Not simply a comparison but an action also is necessary. I think it is worth fifteen cents; an owner of
cents, with whom the comparison is made, thinks so
too; is it therefore worth fifteen cents? That is
more than I can tell yet. I say to him, Will you
take it and give me fifteen cents for it? He replies,
I think it is worth it, but I am not ready to give that
sum for it this morning: The value of the pencil is
not yet determined. In order to that there must be
an actual EXCHANGE of the pencil for the cents.
There must be two things, two persons, a comparison, an actual exchange by which each person shall
receive in fact or in ownership that previously held
by the other,- each rendering something for the sake




ON VALUE.                49
of the thing received, before the determinate value
of anything is possible to be stated. There may be
expected value, estimated value, but actual value
there is none, until a real exchange has settled how
much the value is. The value of anything is something else already exchanged for it. Value is not
simply a relation subsisting between two things, but
an actual fact established in connection with those
two things.  Quid pro quo is the universal formula
of value. The pencil is not worth fifteen cents, because I have not yet succeeded in obtaining that
sum in exchange for it.
Not dealing in pencils, nor liking to chaffer, and
finding it a little troublesome to discover what the
value of the pencil is, I ask myself what its value
was when I purchased it? That is an easy question.
Two days ago I paid for it the sum of ten cents,
United States currency. It was the storekeeper and
I. I owned the cents and he owned the pencil. We
compared these two pieces of property together, and
agreed to change ownership in them. I gave him
the cents for the sake of the pencil, and he gave me
the pencil for the sake of the cents. How much is
my pencil worth? I do not know. How much was
it worth two days ago? Ten cents exactly.
If this preliminary view be just, it is clear that
value is not in any true sense a quality residing in
any one thing, but is a relation of mutual purchase
established between two things. Nevertheless, it is
often convenient to regard value as a quality inhering in a commodity or service. The convenience of
such expressions as, the pencil has value," " gold
has value," is so great, that science will not consent
4




50      ELEMENTS OF POLITICAL ECONOMY.
to forego the advantage of using them, even though
they are not scientifically accurate. Science justly
prefers to make her language intelligibie and popular,
even at the hazard of perpetuating a misapprehension. On such subjects as these, she is compelled ik
part to use language as she finds it; but she is culpable if she does not fix at the outset with absolute
distinctness the meaning of her terms, however pop
ularly current, and then use the terms, always in the
same sense, never confounding a term with other
terms of a similar but not identical significance. In
allowing, therefore, such expressions as, "gold has
value," I do not use the term in any other than its
defined sense, I do not imply that value is a simple
quality, but I employ shortened forms of expression
long consecrated by usage, and avoid circumlocutions sure to become tedious. So also, by using
language that may imply that value exists before it
is realized in an actual exchange, I do not admit
that value exists independently of an exchange; men
employ foresight, put forth exertion, practice abstinence, in reference to a future realization of value:
it is proper, at any rate it is necessary, to speak of
them as already employed upon value, and of value
itself as a purchasing-power residing in this or that.
A concession to the exigencies of language is not a
departure from the exactness of science. It is not,
accordingly, true, speaking strictly, that value is a
quality of gold in the sense in which weight is a
quality of gold, because circumstances are easily conceivable, and have often occurred, under which gold
would have no value at all. To the crew of a boat
abandoned at sea, among whom the last biscuit had




ON VALUE.               51
been rationed out, a bag of gold belonging to one of
the men would not purchase a biscuit belonging to
another. The inherent qualities of the gold are
present. It is still hard, and yellow, and heavy
But valuable it is not. It will not purchase anything. Value, therefore, is not an inherent and
invariable attribute, but is the relative power which
one thing has of purchasing other things. This
power in any one thing will vary according to time
and place and circumstances. It may cease altogether, as in the case just supposed, or it may rise
under other circumstances to a very high degree;
but whenever it exists, it exists with reference to
some other thing, which either is, or is supposed to
be, exchanged with it. Ten cents had the power of
purchasing my pencil, and my pencil had the power
of purchasing ten cents. In this transaction the idea
of value is developed. A similar transaction first
introduced that idea into the world, and the endless
succession and variety of such transactions have kept
the idea in the world, and will keep it here till the
end of time. Value, then, speaking strictly, is not
an independent quality of the pencil, any more than
it is an independent quality of the cents. Both are
necessary in order that the value of either may be
conceived of. The value of the cents is estimated,
is measured by the pencil; and the value of the
pencil is estimated, is measured by the cents. In
one word, value is always relative, and never absolute. To say that anything has an absolute value
is a simple contradiction in terms.
But why was I desirous to part with good United
States money for the sake of the pencil, and the




52      ELEMENTS OF POLITICAL ECONOMY.
storekeeper to part with a good pencil for the
sake of the money? The answer to this question
will ground the science of value on the unchanging
principles of human nature. I experienced a want
which the pencil was adapted to satisfy. He experienced a want which the money was adapted to
satisfy. But between my want and its satisfaction,
both of which were personal to me, there lay an effort,
to be made either by myself or by somebody else in
my behalf. So, between his want and its satisfaction, both of which were personal to him, there lay
an effort, to be made either by himself or by somebody else in his behalf. If I had chosen to do so, I
might have made the direct effort necessary in order
to supply myself with a pencil. I might have made
the pencil for myself. It would indeed have been a
long and tedious process, would have required a
learning of two or three trades, a journey to some
plumbago-bed, the working and preparation of the
mineral, and various other subordinate processes;
still, in the course of half a life-time it might perhaps have been done, and I might by direct efforts
have supplied myself with a pencil as good as that
which I purchased. So, too, the storekeeper, unless
the laws had prevented it, might have procured for
himself by direct efforts the metal cents which I
gave him in exchange for the pencil. He might
have dug the ores for himself, refined, alloyed, and
minted them. Had we chosen respectively to take
this course, and each been able to satisfy his own
particular desire by his own unassisted efforts, the
orocesses in either case would have had no relation
to Political Economy. There would be in each




ON VALUE.                53
case a want, an effort, a satisfaction, but there would
be no exchange. As a matter of fact, however, we
exchanged the efforts which lay between our respective desires and their respective satisfactions. I desired a pencil, he relieved me of the effort necessary
to make it, and I experienced the satisfaction. He
desired the cents, I relieved him of the effort necessary to procure them, and he again experienced the
satisfaction. We each experienced our own desires,
and our own satisfactions, but we exchanged efforts.
Precisely in this exchange of efforts arose the phenomenon of value. I parted with my cents, which
had cost me an effort, in order to satisfy my desire
for a pencil, because my effort, represented in the
cents, was less than the effort it would cost me to
create the pencil. The shopkeeper parted with the
pencil, which had cost him an effort, in order to satisfy his desire for the cents, because his effort, represented in the pencil, was less than the effort which
it would otherwise cost him to procure the cents.
We exchanged efforts, therefore, for our mutual
advantage.
The principles of human nature, then, on which
the laws of value are grounded, are these: Men
have desires, are capable of making efforts to meet
these desires, and experience a satisfaction when
the desires are met. These three are indisputable
and universal facts. But while the desire and the
satisfaction are strictly personal to one man, that is
to say, belong to him and cannot be communicated
to another, it is not so with efforts. Efforts are exchangeable. You have a desire, I make the effort
to meet it, and you again experience the satisfaction.




54       ELEMENTS OF POLITICAL ECONOMY.
On the other hand, I have a desire, you make the
effort to meet it, and I again have the satisfaction.
We exchange efforts, but experience our own satisfactions.  Desires, efforts, satisfactions, constitute
the one circle of Political Economy, and value arises
in every case from a comparison of two corresponding efforts. Efforts are naturally irksome. Everybody wishes to realize as large a satisfaction as
possible from a given effort. If, by making that
effort for another, a larger satisfaction will be realized than by expending it directly for one's self, there
is an immediate and pressing motive to make the
effort for another, and to reach the satisfaction, not
directly, but indirectly, that is, by exchange. A precisely similar motive actuates that other person. If
his given effort will realize more for himself by being put forth for the first man, and by accepting the
first man's effort in return, he too will be anxious to
exchange efforts with the first. There is a mutual
advantage in thus exchanging. A given effort realizes better satisfactions for each of the parties, and
the reason for exchanges is thus seen to spring from
the most active and invariable principles of human
nature.
The exchange of the cents for the pencil, and the
pencil for the cents, is a simple case of value, but it
is not the simplest. In this case there is an exchange of one commodity for another commodity,
the idea of value is instantly developed, and we say
that the pencil is worth ten cents, or, what is exactly
equivalent, ten cents are worth the pencil. There
are two things in every exchange, -that which is
parted with and that which is received. Attention




ON VALUE.                55
should be constantly directed to both. Many errors
in science, and numberless mistakes in legislation,
have arisen from not attending to this circumstance,
as if it were the glory of trade to sell rather than to
buy, whereas it is not possible to sell without buying, because the pay must be taken for what is sold.
In every exchange, therefore, of commodity for commodity, the value of each is expressed in the other,
and the relation between the two purchasing-powers
is adjusted. This is the common case. The trade
of all past ages, and the present commerce of five
continents, presents us, in principle, with nothing
different from this. The commerce of the world is
substantially barter, that is, the exchange of commodities for commodities; and, though many purchases and sales may intervene, and money may
play its part in facilitating the exchange, and many
forms of credit may come in, before the transaction
is finally closed, these do not alter in the slightest
particular either the notion of value or its laws.
Each repeated purchase and sale presents us over
and over again with the same phenomenon, namely,
the equalization through exchange of two purchasing-powers. This is value, and is the sole subject of
our science.
The simplest case of value, however, will throw
light upon the more complex ones, and will be found
to include them. Two farmers, who are neighbors,
find, on talking over their respective crops, that one
has more hoeing and less haying this year than
usual, and the other less hoeing and more haying.
A says to B, " Come over and help me hoe in
June, and I will go over and help you hay in Julvy.




k 6      ELEMENTS OF POLITICAL ECONOMY.
B agrees. It is a mutual advantage. And so, to
use the old expression, which is better here than
any scientific terms could be, they change works. B
does a service for A, and A does a service for B.
The two services balance each other. They are
mutually exchanged one for the other; and in the
very proposal thus to exchange them the notion of
value is conceived, and in the exchange itself value
is both produced and measured. B's help in hoeing
is worth A's help in haying.
This exchange of one service for another service
presents the simplest case of value; and I now proceed to show that it essentially includes all other
cases. If it can be shown that value is always and
everywhere the same thing, that it is always and
everywhere THE RELATION OF MUTUAL PURCHASE ESTABLISHED BETWEEN TWO SERVICES BY THEIR EXCHANGE, Political Economy will be seen to possess
one grand characteristic of the great sciences, namely,
simplicity. This can be shown. There are only six
cases of value conceivable, because there are only
three kinds of things that are ever economically exchanged. These latter are, 1st. Material Commodities, like the pencil; 2d. Immaterial Services, like
those of the teacher; 3d. Forms of Incorporeal Property, like a United States bond. We may have,
then, first, an exchange of commodity for commodity, as the pencil for the cents; second, of commodity for service, as five dollars for the advice of a
lawyer; third, of commodity for some form of incorporeal property, as a Waltham watch for a copyright;
fourth, of service for service, as in the case of the
two farmers just mentioned; fifth, of service for an




ON VALUE.                57
incorporeal, as a year's work for a five hundred dollar bond; and sixth, an incorporeal for an incorporeal, as a bond for so many railroad shares.1
What is mutually transferred in all these cases is the
ownership or property in something. Material products may or may not be passed over to the purchaser at the time of the sale, but the ownership goes
over to him in all cases. Personal services, unlike
material products, are not commonly resalable by
the purchaser; sometimes they are, as when one
hires out for a time his own hired man. Most species of incorporeal property are transferable at will,
as bank checks, patent-rights, and promissory notes.
But this transfer of ownerships a feature in all cases
of value, though less obviously so when simple services are rendered, does not present the best aspect
for the complete understanding of value.  That
aspect is presented through the term services.
It is mutual services, as well as mutual ownership,
that are exchanged in these six cases; and the word
services carries us deeper into the central phenomena
of value. Thus the client, with five dollars in his
pocket, is just as much in position to do the lawyer
a service, as the lawyer is in position to do him a
service. The counsel is serviceable to the client, and
the dollars are serviceable to the lawyer, and so they
exchange. And just so when commodities are exchanged with each other.  The hatter serves you
with a hat, and the shoemaker with a pair of boots,
and you serve them with six dollars each; or if the
hatter be in want of boots, and the shoemaker of a
hat, they serve each other with their respective prod1 Compare Macleod's Banking, page 9.




58      ELEMENTS OF POLITICAL ECONOMY.
ucts.  In every case of value, therefore, without
exception, what is really exchanged, whether a commodity intervene or not, are mutual services; and
value is then produced, and only then, when two persons are in position to render each other a service;
and the respective services being rendered, that is
exchanged, and the balance being struck, we have
the value of one expressed in the other.
Do I, then, obliterate the old distinction between
services and commodities? Yes, I do, as far as
the laws of value are concerned. I use the term
" service" in a broad sense, which includes the specific sense and something more. I mean by it, the
rendering of anything for which something is demanded in return. People sometimes do for others
what are called services, out of sympathy, from benevolence, from duty; but.the characteristic of these
is that they are free; nothing is demanded in return.
These, therefore, fall in the sphere of morals, and
are outside the pale of Political Economy. There
is no such thing as exchange proper within the field
of morals, and there is nothing else but exchange
proper within the field of economy. This principle
alone marks the boundary-line between the sciences
referred to. A service, then, in the language of this
science, and as the word will henceforward be used
in these pages, is anything rendered to another in
view of a return, and for the sake of a return. The
man who furnishes you a barrel of apples, does you,
in this sense, a service equally with the physician
who attends upon your fever; and you pay them
both on precisely the same principles. You rendei
to each an equivalent service in return. To pay




ON VALUE.                59
them money is to render them a service, just as to
furnish you apples and medical advice were a service to you. Whether a commodity, as apples,
intervene or not, is, as far as value is concerned, a
matter of indifference. The more specific use of the
term "service," as opposed to a commodity, is indeed convenient, and will, doubtless, continue to be
used: the broader sense is exceedingly useful, and,
by its aid, we clear up the whole subject of value.
This ultimate definition of value, namely, that it
is the relation of mutual purchase established between two services, is substantially, but not in form,
the definition of M. Bastiat. Mr. Macleod's definition is also excellent, though I cannot give it the preference: —  The value of any economic quantity is any
other economic quantity for which it can be exchanged."
If the question relate to the value of any specific
thing whatever, Mr. Macleod's answer is perfect; if
the question be, What is Value? the other answer
seems to me to be equally satisfactory. The reasons
why we may feel complete confidence in it will appear in a more and more striking light as we proceed,
and until we conclude.
In the first place, this definition covers naturally
and easily all those anomalous cases of value which
have been so hard to reduce under any other general
view. Take for instance the case of the value of the
diamond. The English school, and especially Mr.
McCulloch, claim that labor is the source of value,
and that the purchasing-power of everything is pro?
portioned to the labor which it has cost  But, take
care. There must be error in this statement. Valhe
is not always proportioned to the mere labor the
thing has cost, Often it is. Frequently it is not.




60      ELEMENTS OF POLITICAL ECONOMY.
For example, as I am strolling along the sea-shore I
accidently perceive a splendid diamond among the
pebbles. It is but a moment's labor to appropriate
the prize, but do I on that account sell my diamond
for one dollar less to the jeweller or the prince? No.
I am now in position to do a great service to anybody wanting a diamond. I demand a large service
in return, and get it. I say to the man who wants
it, give me ten thousand dollars for my prize, and
you shall have it. It would be poor mercantile logic
for him to reply: Your labor is not worth more than
one cent a minute, and it did not cost you but one
minute's labor to get that gem, and certainly one
cent, therefore, is a fair price for the diamond. He
rather reasons in this way: Can I by going myself
to the diamond-bearing regions, or in any diamond
market elsewhere, procure for myself so good a gem
as this by a less sacrifice than ten thousand dollars.
He resolves this question mentally; and, if negatively, I am sure of getting my price. In that case
I am offering him a service worth at least ten thousand dollars. No one else is in position to render
him the same service at so favorable a rate. If, on
the other hand, there be other diamond dealers offering gems as good as mine for less than ten thousand
dollars, then I have pitched my demand too high;
my service is not worth that sum, because there is
some other person ready to render the same service
for a less sum. The value of my diamond, therefore, is proportioned, not to the labor which it has
cost me, but to the service which I am able to render to the purchaser with it, compared with the service which he is able to render to me. I take advan




ON VALUE.                61
tage of his desire for the diamond, and crowd up the
price as near as I can to the point at which he will
either forego the possession of a diamond altogether,
or can obtain a similar one from some other party.
He takes advantage of my desire for the money,
and crowds down the price as near as he can to the
point at which I can either find another purchaser,
or should prefer to retain the diamond myself. The
comparison and adjustment of these two, my service to him and his service to me, fixes, for that sale,
the value of the diamond.
And here we must stop to notice what an exceedingly good word the English language provides us
with, in this term service. It explains perfectly all
anomalous, as well as all common cases of value.
It combines in its own proper meaning all the ele.
ments which make up and which vary value. First,
it implies always two persons, the person rendering
and the person receiving the service. Next, it always
implies some effort on the part of the person rendering, and some satisfaction on the part of the person
receiving the service.  Thus when one service is
spoken of there are always implied two persons and
two things, and the two things are the effort of one
person and the satisfaction of another. But when
two services are spoken of as exchanged, as is always
the case in Political Economy, there are implied, as
before, two persons, each of whom makes an effort
for the other, each of whom is recipient of a satisfaction which comes from the effort of the other,
and each of whom estimates in the light of his own
satisfaction that which is received as compared with
that which is rendered. It is this reciprocal estima



62       ELEMENTS OF POLITICAL ECONOMY.
tion alone that constitutes value; and it is the excellence, I may almost say the glory of the term service, that it gathers up in its own signification all
the elements which go to determine value, and which
ever vary its amount. As here is the very kernel
and core of our science, illustration will be well
bestowed at this point. Let the parties be A and
B, in position to render each other a mutual service.
A has a desire which B's effort can meet, and B has
a desire which A's effort can meet. Up to the point
when the exchange takes place there are only four
elements that play any part in the transaction as
preparatory to it, namely, two desires and two efforts.
In the act of exchange itself two other elements
come into being, namely, two relative estimates, A's
estimate of B's effort for him as compared with his
own effort for B, and B's estimate of A's effort for
him as compared with his own effort for A. As a
result of the exchange, and as that for the sake of
which the whole series took place, there appear two
other elements, namely, two satisfactions. Here is
the whole of it. Now, then, any change in any one
of the first four elements will vary value; and there
is nothing else in the world that can vary it. If A's
desire for that which B is ready to render be lessened, the other elements remaining the same, A's
estimate of B's effort as compared with his own is
lessened, and value is at once affected. If A's desire
be increased, other things being equal, his estimate
of B's service as compared with his own is increased,
and value is affected. Just so any diminution or enhancement of B's desire for that which A is ready
to render, acts at once upon B's estimate of A's




ON VALUE.                63
effort as compared with his own, and consequently
acts at once upon value. Again, any change in
either effort as compared with the other, such as its
becoming more or less onerous than the other, will
of cOurse affect the estimate of the one as measured
by the other, and- of course also will vary value.
These first four elements then are not only the elements out of which value subsequently springs, but
also are the elements any change in any one of
which, the others remaining the same, will tend to
vary value, and without a change in some one of
which, relatively to the others, value never will be
varied. The term services expresses just these elements which play and vary as preparatory to the
realization of value. Value itself is realized from
the adjustment of the fifth and sixth elements, that
is to say, from the equalization of A's estimate of
B's service with B's estimate of A's service. This
adjustment also, together with the remaining elements, the two satisfactions, are all implied in the
expression mutual services, or, if you please, two
services exchanged. If any of my readers object to
this paragraph as abstract, I have only to reply that
it is no more abstract than the subject-matter; and
if any of them find difficulty in the relative nature
of the transaction unfolded, in the fact that the
views and comparative estimates of two persons
must be kept in mind throughout, I can only say,
that this science starts with a relation and has to do
with a relation every step of the way to the end.
This is the one intrinsic, unavoidable difficulty that
lies at the threshold of the science; and whoever,
by taking pains at the outset, familiarizes this diffi



64      ELEMENTS OF POLITICAL ECONOMY.
culty to his thoughts, and thus overmasters it, will
walk thenceforward with positive pleasure through
the whole economic domain. And if there ever was
a science grateful for a word, as lessening its inherent difficulties and helping explain its phenomena,
Political Economy, which has wandered these twice
forty years in the wilderness of wealth, thankfully
accepts in the term service its latest and most important gift.
In the second place, the definition of value which
is here given expands the field of Political Economy
to its natural limits. Even Adam Smith, and the
English economists generally, while defining wealth
as consisting of material commodities only, have
experienced a difficulty in excluding from the domain of the science certain mere services, and in
denying that value resides in these services. Some
have endeavored to avoid the difficulty in one way
and some in another. Some have stigmatized those
who render a mere service to society as unproductive laborers, and have gifted with the title of productive laborers all those who bring forward some
vendible commodity. John Stuart Mill, as we have
seen, enlarged his definition of wealth so as to take
in all those sorts of mere services whose action goes
directly to swell the volume of material commodities. It is conceded then that value resides in some
services; why not then in all services which are put
forth for the sake of a return? Why allow value to
a service which comes to be embodied in a commodity, and deny the term to another service just as
necessary to our comfort that is not thus embodied?
Why class the brick-maker as a productive laborer,




ON VALUE.               65
and refuse the epithet to the hod-carrier, without
whose help the bricks would never reach their ultimate destination? The truth is there is no ground
for this distinction; and the very difficulty which
the various writers have found in trying to make it,
is a pretty sure proof that it ought not to be made
at all. By making its definitions such that value
can only be supposed to reside in tangible commodities, Political Economy excludes itself, without any
good reason, from a large portion of its own field.
Let us see if there be any good reason. For example, a man buys a spelling-book for his boy, for the
sake of his learning to read. He then hires a teacher
to teach him to read. According to the usual definitions the spelling-book has value, while the service
of the teacher has none. But why has it none? It
has to be paid for, certainly, as much as the spellingbook has to be paid for. There are two separate
exchanges; first, of money for the spelling-book, and
second, of money for the service. Both are made
with the same object in view, namely, that the boy
may learn to read. The want of a spelling-book
and the want of a teacher are the two external
obstacles in the way of reaching that object; and
the father overcomes them both by similar means,
that is to say, by an exchange; and there is no such
difference in the two transactions as will justify or
even tolerate the distinction sought to be made between them.  The teacher sells his service. The
shopkeeper sells his book. The father renders a service to each equivalent to that received from each.
Political Economy now claims jurisdiction over both
transactions alike, and affirms value as truly of the
5




66      ELEMENTS OF POLITICAL ECONOMY.
service as of the commodity, and more truly of the
service than of the commodity, inasmuch as it stands
ready to prove that so far as value resides in any
commodity it resides there simply in virtue of the
human services which have been concerned in its
production and which will be subserved by its exchange. What is ultimate, therefore, in all exchange,
is services and not commodities; and the services
which are bought and sold in every department of
life, the services, for example, of the lawyer, the physician, the clergyman, the teacher, the editor, the
musician, fall as much within the province of Polite
ical Economy as the traffic of commodities in the
market-place. Our science asserts its claim of jurisdiction wherever services are mutually exchanged.
A third advantage of the definition of value now
given, and one closely connected with the last, will
be seen in the fact that it frees the discussion from
a perplexing error which has long infected this class
of inquiries, namely, that value is somehow or other
connected with matter. This notion has controlled
the definitions of wealth; has led, as we have just
seen, to groundless distinctions among services; and
has taken possession of language so thoroughly that
no judicious writer will attempt at this late day to
dislodge it from that strongest of the citadels of
error. Rather than disturb the current nomenclature of business he will allow such expressions as
these to stand: Gold has value, strawberries have
value. But it is very easy to show that value does
not reside in matter, or in any form of matter, but
only in human services exchanged; and that, therefore, value is never of God's creation, but always of




ON VALUE.               67
men's exertion.  We shall see abundantly, before
we finish the chapter, that utility is one thing and
value quite another. No effort of men can add one
particle to the existing matter of the globe, but it has
been supposed that the efforts of men, by changing
the form of existing matter, impart the quality of
value to it, and that thenceforth the value remains
fixed in the matter itself. The efforts of a woodman,
for example, with the cooperation of nature, can transform the stock of a tree into wooden bowls, and value
is now supposed to reside in the vendible bowls, and
the current language is, that each bowl has a value
of fifty cents. Why has it a value of fifty cents?
Clearly enough, to reward his service who felled the
tree, and sawed the block, and then hollowed out the
bowl. But the service having been employed upon
the matter, and being embodied in it, is not what is
really sold now the matter, and not the service? I
answer, No. What is really sold is the service, and
not the matter. And this, which at first sight might
not be thought important, but which is really very important, becomes apparent as soon as we reflect that
any changes in the conditions of the service instantly
affect the value. Our woodman has on hand a stock
of one hundred bowls, which he offers for sale at
fifty cents apiece, as fairly rewarding his personal
services in their production. But, unknown to him,
an enterprising neighbor has invented a machine
which enables him to make bowls in every respect
equal to the others, and to offer them at twenty-five
cents apiece. Whoever now wants a wooden bowl
can have that service rendered him for twenty-five
cents return. The first man finds that he cannot




68       ELEMENTS OF POLITICAL ECONOMY.
sell a bowl for over twenty-five cents, and that his
stock of one hundred has sunk at once in value from
fifty dollars to twenty-five dollars. What is the
matter with his bowls?  The matter is not in the
matter.  The matter is all there, and the form of
the matter is all there, but the value is just one half
escaped, because the service which he can render to
a buyer by a bowl has been, by the enterprise of his
neighbor, just one half lessened. Value then follows
the fortunes of services, and varies as they vary, just
as much when they have been employed upon commodities, as when they are independent of them,
and we see that the value resides in services compared, and not in matter at all.
I now proceed to indicate the manner in which
language came to be used in such a way as gives
color to the notion that value resides in the commodities rather than in the services. An instance
will bring the whole subject before us clearly. In
many parts of the United States delicious wild
strawberries may be had in their season for the
simple picking. The pastures and meadows are
open to every comer, and the strawberries are considered to belong, not to the owners of the fields,
but to any one who takes the labor of picking the
fruit. Let us suppose that my family are fond of
the berries, and that no member of it likes to undergo the labor of picking them, and that I hire
some girl, who offers her services for the purpose,
to go to the fields and gather some of the fruit for
us. When she returns I pay her for her service.
She does not conceive of any value residing in the
strawberries themselves. Neither do I. She makes




ON VALUE.                69
a series of efforts for the gratification of my family,
and is paid for her efforts. Language recognizes
the true state of the case, and she does not say now
that she sells us the berries, and we do not speak of
buying the berries of her. She thinks only of her
service, we think only of her service, she is paid only
for her service: language is exact in the premises.
The next day, as the girl is about to go for us again,
my neighbor says to her, " You bring me as many,
and I will pay you as much."  The third day, a
second neighbor makes a similar bargain with her,
and she brings strawberries for the three families,
and is paid in each case for her service. The girl,
on the fourth day, taking it for granted that we shall
be likely to want strawberries that day also, does not
wait to be sent, makes no bargain for her services
beforehand, but goes and gathers the fruit. This
time there is a change of language when she comes
to my door. She now offers to sell me strawberries.
" How much are they worth?" I ask. She names
probably the same sum which she had before received for the service of picking the same quantity.
She could not materially increase it, because there
are doubtless other girls who are ready to render the
service which she before rendered, at the same rate.
But attention is now drawn away from the service
to the berries, and the idea of value is attached to
the berries, and language adopts the illusion, and
says, "the berries are worth so much."  Who does
not see, however, that the transaction is substantially
the same as before?  Who does not see that it is
only by a figure of speech, convenient indeed, but
still only a figure, that the berries are now said to




70      ELEMENTS OF POLITICAL ECONOMY.
have value? If there be no difference ill the.ast
case as compared with the former cases in the two
desires and in the two efforts, it is plain to reason
that there can be no difference in the value, and consequently no difference in that which is really sold.
But my desire for the berries, my effort as represented
in the price paid, her desire for the money, and her
effort as represented in the picking, are all just as before. She expected me to take them, and I took
them as before. The value, therefore, the purchasing-power, resides not in the berries, but in the service; that is to say, in that which she renders as
compared with that she receives; and it is only a
freak of language which leads us to suppose otherwise. This is but a simple instance, but the principles of the instance are applicable to all commodities
whatsoever.  It is only mediately and figuratively
that commodities can be said to have value at all;
and if we use the common language, and say that
they have value, we must always remember that
they have it simply and solely in consequence of the
human services which have been employed upon
them, and which may be subserved by them, as
related to those other human services for which they
may be exchanged. If this be true, and it seems to
me certain that it is true, it throws a flood of light
upon the whole field of value. More attention must
be given hereafter, in Political Economy, to persons,
and less to things. Man and his wants, man and
his efforts, become at once the chief topics, while
the material products on which efforts are employed,
and which minister to wants, sink in relative position. It follows also from this distinction, that there




ON VALUE.                71
is not so much difference as is commonly supposed,
when a man works for others, and when he sets up
for himself, - between a journeyman and a master.
The journeyman sells his services, and the master
sells nothing more or other than his own services.
The services of the master may not be manual, they
may be merely supervisory, or they may be connected with the use of his capital; but the finished
product, when it is ready for the consumer, represents the aggregate of the human services which
have been employed upon it, and whoever sells it,
sells those services, and its ultimate value is determined, as all other value is, by a double comparison,
the purchaser's comparison of the service of the
product to him with that which he renders, and the
seller's comparison of the service he receives with
that of the product. Service for service, in the last
analysis, rather than commodity for commodity, is
the rule of value and the law of exchange.
It may be observed, in the fourth place, that a
principal merit of the definition of value insisted on
in this chapter, is the discrimination which it allows
between utility and value. It is absolutely essential
that these two ideas be not confounded. But they
are confounded in all the earlier writers on wealth.
The word wealth itself inextricably confounds them.
Whole discussions in Adam Smith are marred by
his not consistently attending to the distinction,
which he himself draws in one place, between
"value in use and value in exchange:" meaning
by the former expression simple utility. Say mixes
up the two ideas even more completely than Adam
Smith does; and the errors of the two writers in this




72      ELEMENTS OF POLITICAL ECONOMY.
respect gave rise to the twentieth chapter of Mr.
Ricardo's book,1 in which the difference between
utility and value is pretty clearly unfolded. Mr.
McCulloch, too, always insists upon this difference,
and correctly maintains that the distinguishing characteristic of utility is, that it is gratuitous; although
the theory of value of each of these writers is too
narrow, unduly restricting the field of Political Economy by assuming that value rigidly inheres in commodities only. The example of these writers shows
that the distinction referred to can be made even under their definition of value, but it is not so easily and
practically made as under the true definition, because
in the true definition attention is inevitably drawn to
two persons, instead of to one thing, and utility, which
is simple capacity to gratify any desire, is neatly dis.
criminated, even in the nomenclature itself, from the
mutual efforts by which the mutual desires are met.
The word service enables us to draw the distinction,
and to hold it fast.
Utility, then, is the capacity which any thing or
any service has to gratify any human desire whatsoever. Political Economy has nothing to do with
the estimation in which different desires are held by
a philosopher or a moralist. It is enough to constitute for it utility, if anything will meet anybody's
desire or serve anybody's purpose. In this sense,
which is the etymological and only just sense of the
word, ardent spirits have utility just as wheat has
utility. The same thing may have no utility for
one man, a low utility for another, and a very high
utility for a third; since the first has no desire for it,
1 Principles cf Political Economy and Taxation.




ON VALUE.                73
the second a feeble, and the third a strong desire for
it. Desires are personal to individuals. There is
no common standard with which they may be compared. They are not exchangeable. Utility is the
capacity which anything has of meeting any one of
these desires at any time or in any place. But some
things have this capacity in a high degree which
are never exchanged, which are never bought or sold,
and which consequently can have no value. The
air we breathe, the light in which we recreate ourselves, the water we drink from the spring or brook,
all have the highest utility, but no value. They
connect themselves with no service. We give nothing for them. They, and such as they, are the
direct gifts of God. They are gratuitous.
But utility is always present in all value also,
since it is an element in all service; and the utility
that appears in connection with value is always derived partly from Nature and partly from man. It is
impossible to say, in any given case, how much is
attributable to Nature and how much is attributable to man. It might seem at first sight, as if,
in the case of the diamond, or in the case of the
strawberries, the utility were wholly the gift of Nature, but the diamond undiscovered among the
pebbles, and the strawberries unpicked upon the
meadows, can hardly be said to have utility, much
less value. The human service that fits each of
thes" to meet a present desire is an essential contributor to their utility. On the other hand it might seem
as if the utility of a painting were wholly referable
to the art of the painter; but the tenacity of the canvas, the flexibility of the brush, and the brilliancy of




74       ELEMENTS OF POLITICAL ECONOMY.
the colors, are the contribution of Nature. Although,
therefore, all utility that ever appears in connection
with value is "partly due to the efforts of men, it is
none the less essential to clear thinking in this department to separate distinctly in the mind the utility
from the value. The utility of a service may be
great and its value little; the utility of a service may
be great and its value also great. They are distinct
things. They become, as it were, commingled in the
service rendered, but the utility is one thing, and the
value a distinct thing. Utility is ultimate: value is
mediate. Utility is absolute with reference to the
individual: value is always relative. The utility involved in every valuable service is derived from two
sources, —the free contribution of Nature, and the
onerous contribution of man; but the value of such
services in general tends perpetually to become proportionate to the onerous human contribution, and
not to the aggregate utility. If the service be unique,
if only one person or a few be in a position to render
it, no useful principle can be laid down, which shall
discriminate the two components of the utility; but
in respect to the vast mass of services, of which a
market rate can be predicated, it is very clear that the
competition with each other of those who are ready
to render them, will fix the current value at a point
which shall just about compensate for the onerous
elements involved. That portion of the utility which
is the free gift of Nature will be very nearly a common factor in that whole set of services. The action
of competition will eliminate this common factor,
and tend constantly to determine value on the basis
merely of what man has done to impart utility to




ON VALUE.                75
those services. Thus, if ten men bring ten horses to
the market to exchange against money, though the
utility of the horses be derived in large degree from
the free gifts of Nature, yet there are some of the
owners who will be willing to part with their property at a price that will compensate them for what
they themselves have contributed towards that utility.
The action of these will tend to fix the price of the
whole ten. There is no tendency in value, then, to
proportion itself to the aggregate utility of a service,
but there is a tendency in value to proportion itself
to the aggregate of the onerous human efforts represented in a service.
This principle, which I deem important, perfectly
accounts for the low value of many services, which
may be said nevertheless to have a high utility. The
girl brings delicious strawberries to my door in summer. Their utility is great, their capacity to gratify
my palate and that of my family is exquisite, but
her effort in picking and bringing them is relatively
little, and therefore it is little that I pay her. She
cannot charge me one farthing for all that has been
done for the fruit in the wonderful laboratory of Nature. Should she attempt to do so, there are doubtless other girls willing to bring me the fruit for a fair
equivalent for their personal efforts only.  Utility
and value, then, are different things; we must certainly believe this, when we see some things, as air,
possessed of the very highest utility and no value at
all; and other things, as strawberries, possessed of a
high utility and a low value.
The history of economy is full to a surfeit of the
theoretical errors and of the practical blunders which




76      ELEMENTS OF POLITICAL ECONOMY.
have come from confounding value with utility; and
from not attending to the fact that all utility, until
some human service has been mingled with it, is
absolutely free. God is a Giver. He gives sunlight,
and air, and water, in abundance. He gives the
earth, with all its materials, and with all its powers,
and with all its spontaneous fruits, gratuitously to
man. At the very first, He gave to man, " dominion
over the fish of the seas, and over the fowl of the
air, and over every living thing that moveth on the
earth." So far forth as these gifts minister directly
to men's wants, there is utility indeed, but no value.
But since, for the most part, human services are
required to mould these gratuitous materials, to harness these gratuitous powers, to make these gratuitous fruits and animals available for use, and since
services for this purpose are exchanged among men,
value springs up in connection with these utilities,
but must not be confounded with them. The utilities, disengaged from the service, are free. God
never takes pay for anything, and has not authorized anybody to take pay in his behalf; what is paid
for is the service of man, and not the bounty of
Nature. Even the powers of Nature which men
avail themselves of by machinery, such as water,
wind, and steam, all work for nothing: water gravitates, and wind blows, and steam puffs, for nothing.
These all, and such as these, help to create utilities,
but ultimately no value. Value is in the service
which makes the machine, and in the service which
tends it, but in the power which moves it, unless
that power be human muscle, there is no value.
Value must be carefully distinguished from Price.




ON VALUE.                77
The price of anything is its purchasing-power expressed in money; the value of anything is its purchasing-power expressed in any other purchasingpower whatever. Price is a relative word, but specific; value is a relative word, but general. When
we speak of the price of a service, we mean the
sum of money which that service will buy; but
when we speak of the value of a service, we mean
the command in exchange of that service over other
services generally.  Thus, we say, " This coat is
worth twenty-five dollars;" that is its price. The
value of the same coat never could be completely
expressed, because it would require a comparison not
only with hats and gloves and boots and vests, but
with all other things which are ever exposed for sale.
Therefore, for convenience' sake, value is commonly
reduced to price. By knowing the price of various
things, we readily compare their value relatively to
each other. Thus, when we know the price of the
coat at 25 dollars, and of gloves at 2, of hats at 5,
and vests at 10 dollars, we easily determine the
value of the coat as estimated in gloves, hats, and
vests, namely, that its value as compared with theirs,
is respectively 12}, 5, and 2.- times theirs. The value
of anything may remain nearly uniform while its
price may greatly vary.  At the present writing
(1871), the prices of almost all commodities are
much above the normal rate, because the currency
of the country is much depreciated as compared
with gold; but the value of these commodities, that
is to say, their power of purchasing each other, is
just about as it was before the depreciation be.
gan. All other commodities have risen in relation




78      ELEMENTS OF POLITICAL ECONOMY.
to the one commodity, money; or, which is the same
thing, money has fallen in purchasing-power in rela.
tion to all other commodities; and there is in consequence a universal rise of prices; but it would be a
total mistake to suppose that values have risen. A
bushel of corn, now selling at one dollar, will buy no
more labor, or hay, or cloth, than it used to buy when
it sold for less than one dollar a bushel; because the
labor, hay, and cloth have risen in relation to money
in the same proportion as the corn has; while in relation to each other no changes have supervened.
Services and commodities, with few exceptions, exchange with one another at the old rates,- value
is unaltered; but exchange for money at much
above the old rates, —prices have risen. Moreover it is not possible that there should be any general rise or fall of values, as there may be a general
rise or fall of prices. A rise in the value of anything
implies a fall in the value of those things with which
you compare it; that is to say, if it will buy more
of them, they will buy less of it. Its rise in value implies their fall in value, and conversely. Every rise
in value of any service involves a corresponding fall
in other services; and every fall in value of any
service involves a rise in value of other services;
and therefore, a general rise or fall of values is impossible. Nothing is more common than a rise or
fall of value in particular services. Suppose, for
instance, an improvement in machinery by which
broadcloth can be made with one half the former
effort, and that no change has been made in the
efforts requisite to make the gloves, hats, and vests
of our former example, and no change in the views




ON VALUE.                79
of those who wish to exchange them. The coat
will sink at once to about half its former value, not
only in relation to gloves, hats, and vests, but in relation to everything which does not happen to be
affected by a similar depressing cause. It is correct to say that the value of the coat has fallen. As
estimated in gloves, hats, and vests, its value now is
only 6{, 2A, and 11 times theirs, respectively. But
while coats have fallen in relation to the other commodities, the other commodities have risen in rela.
tion to coats; and if similar improvements should
be made in the machinery by which gloves, hats,
and vests are made, so that one half less effort will
bring these also to market, views of parties as before
remaining unchanged, they will exchange now for
coats exactly in the same ratios as at first, namely,
12-, 5, and 2-, respectively, for 1. As soon as the
improvements affect all the commodities equally,
value stands just as it did before the first improvement was made. Views of the parties remaining
the same, it is only an advantage or disadvantage
affecting some services and not others, that will
vary their value in exchange: whatever affects them
all equally will have no effect upon value. Thus, a
universal rise of wages in any country, provided they
rise in all departments of effort equally, will have
not the least effect upon value; and we have just
seen that a universal rise of prices at present experienced in this country, has no effect whatever
upon the general purchasing-power of services in
exchange, but is only a token that the one commodify, money, has fallen relatively to them.
It only remains in this elementary discussion of




80      ELEMENTS OF POLITICAL ECONOMY.
value to inquire whether there is, or can be, any
measure of value - any standard, by a comparison
with which we may determine the general purchasing-power of different services. It has commonly
been supposed that there is such a measure, and
political economists have expended a great deal of
strength in endeavoring to discover what it is. The
results have hardly been commensurate with the
zeal and patience of the search.  Adam  Smith
seems at one time to regard labor as the best measure of value, that is, the quantity of labor which any
commodity will buy as the best gauge of its power
to buy commodities in general. At another time he
seems to think that corn is a better measure of general
exchange value than labor.  Others have thought
that price furnished the best attainable standard of
comparison; in other words, that the quantity of
gold or silver which anything will purchase, will best
enable us to determine the quantity of all other
things which it will purchase.  Others still have
supposed that the cost of production of any commodity would give the most accurate rule by which to
decide the value of the commodity, that is, the degree
of its command over purchasable articles generally.
But the truth is, a measure of value in the sense in
which it has been sought after by these writers, is
something impossible to be realized. It never would
have been sought after, unless value had been supposed to be a rigid quality inhering in commodities,
and, when once placed in them by whatever process,
to be invariable. We have seen, however, that value
is not a quality inhering in any one thing, but is
a relation subsisting between two services which




ON VALUE.                8I
two persons are in a position to render to each other;
and that this is not an inflexible relation, but is variable by any change in the views of the two persons)
by which either of them puts a different estimate
upon the service about to be rendered as compared
with the service about to be received.  We have
seen sufficiently already, that there are four things,
and only four, any change in any one of which will
vary value; and that these four things are two desires and two efforts, the two desires belonging to
two persons, and the efforts made by two persons
each for the other. Now these four elements are in
their very nature so liable to vary, and as a matter
of fact do so constantly vary, that no man who
clearly perceives what value is, will waste time and
ingenuity in searching for an invariable standard of
that which in its nature is variable and relative.
But while no reliable measure of value is possible
to be found, there are certain limitations and principles of much importance which ought to be given
in this connection. Since the foundation of value
lies partly in the effort made by the person serving,
and partly in the effort saved to the person served,
and since in every exchange each of the parties is
reciprocally serving and served, the outermost limitations of value are easily seen. A and B will not
exchange services, unless the effort which each renders to the other is less onerous than the effort which
each would have to make if each served himself directly. It costs a certain effort for me to bring water
from the spring; I am willing to pay a neighbor for
bringing it for me, but I should not be willing to
make a greater effort for him in return than the ef6




82      ELEMENTS OF POLITICAL ECONOMY.
fort is to bring it myself; neither should I be wiling
to make an effort for him which I regarded just as
onerous as the bringing the water: unless there is
some service which he will accept less onerous to
me than that, I shall continue to bring the water for
myself. On the other hand, he will not render the
service to me of bringing the water, unless it be less
onerous to him than the doing that for himself which
I am ready to do for him. This principle, applicable to all exchanges whatsoever, draws on the one
side the outermost line, beyond which value never
can pass. It may be asserted with confidence that
no man will ever knowingly make a greater effort to
satisfy a desire through exchange, than the effort
needful to satisfy it without an exchange. Moreover, within this outermost limitation which is made
by the comparative onerousness of the respective efforts, there is a second limitation of a similar kind.
To pursue the same illustration, while I should
never make an effort for another in return for his
bringing the water, greater than that required to
bring it myself, the return effort may be very much
less than that effort, and may sink down to a point,
below which I can get no one to bring the water
for me. Suppose I estimate the effort required to
bring the water myself as 10; and that there are
several persons who would be glad to do that service
for me for a return service which I estimate as 8;
and that there are two persons who are willing to
do it for something which I estimate as 6; and that
there is only one person who will do it for a return
service which I regard as 5. It is evident that the
extreme limits of the valu~ of that service to me are




ON VALUE.                83
10 and 5. Higher than 10 it cannot go, lower than
5 it cannot sink. I should render the service estimated as 8, rather than forego having the water
brought for me; but I shall render the service estimated as 5, just as long as there is any one person
who will make the exchange with me on those terms.
If he declines the'exchange, I fall back on one of
the two persons in the class above him, and value
rises now from 5 to 6. It will be steadier at 6 than
it was at 5, because there are two persons ready to
render the service at that rate. If each, however, in
turn should give out, I should then be obliged to fall
back upon the larger class ready to serve me for a
return service of 8. At this point the value would
be very steady from the presence of numerous competitors anxious to serve me at that rate, and it
could by no possibility rise above 10. Between 10
and 5 the value may fluctuate, but it cannot overpass these limits in either direction. Therefore we
may say that the maximum value of any service in
exchange is struck at the point where the recipient
will prefer to serve himself, rather than make the exchange; and the minimum value of any service in
exchange is struck at the point below which the recipient cannot get himself served. These two limits,
it will be observed, are found in the two elements
which we have called efforts.
But there are also limitations of value in the two
elements which we have called desires. In the foregoing illustration, it is supposed that my desire for
the water is all the while of uniform strengths and
the desire of each of the three classes willing to serve
me for the return service is uniform also, though




84      ELEMENTS OF POLITICAL ECONOM1.
each class makes a different estimate of the comparative efforts. Let us now suppose that the efforts
on either side remain invariable, but there is a
change in the element of desire. Any capacity in
anything to gratify any desire of anybody is utility.
For simplicity's sake, let us look only to the one
man who was ready to bring the water for a return
service which I estimated as 5, and suppose that he
is the only man who will do me the service on any
terms. Let now the utility of the water to me be
increased, and let him know that fact, all other elements remaining as before, and he can crowd up
the value of his service towards 10, according to the
intensity of my desire. Of course he cannot crowd
it over 10, but the limit below that will now be determined by the relative strength of my desire. On
the other hand, if my desire be as before, and the
two efforts as before, and his desire for my return
service be increased, and I know it, and I the only
man who can render him such a service, I can crowd
down the value of his service below 5, according to
the intensity of his desire. Of course I cannot
crowd it down below a point, which we will call 3,
at which, rather than continue his service at that
rate, he will forego the exchange altogether.  But
value may vary between these limits, 10 and 3, according to the varying intensity of our mutual desires. If it should so happen that both these desires,
my desire for his service and his desire for mine,
should increase simultaneously and proportionably,
value would not be affected; the exchange would go
on at the same rate as before. Or if both desires
should diminish simultaneously and proportionably,




ON VALUE.                85
value would not be affected. The same is true of
efforts.  If both efforts suddenly become twice as
onerous, or one half as onerous as before, the desires remaining the same, the value of the two services estimated in each other would stand just as
before. Thus we see that the natural limits of value,
and all the variations in value, are to be sought for
and will be found in the play and interaction of the
four elements out of which value itself springs.
We shall now be able to understand clearly what
is meant by Market-Value and its variations, and
also the action of Supply and Demand.  MarketValue is the rate at which services of all sorts are
exchanging at the present time in the various departments of society. What determines that rate?
What determines that corn is now selling in the
market for 1 dollar a bushel?     Two  desires
come in to determine it, - the desire of people for
corn, and the desire of farmers for money. Two ef.
forts come in to determine it, - the effort of farmers
to raise and bring a bushel of corn to market, and
the effort of people to secure 1 dollar in money.
The presence of corn in the market, or its being
ready to be immediately brought there and offered
in exchange for money, constitutes what is called a
Supply of corn; money offered, or ready to be offered, in exchange for corn, constitutes what is called
a Demand.   This is commercial language, and is
sufficiently accurate, although it must be remembered that each commodity in reality constitutes a
Demand for the other, and is a Supply in reference to
the other. But, speaking commercially, the money
ready to be offered for commodities is the Demand,




86      ELEMENTS OF POLITICAL ECONOMY.
and the commodities ready to be exchanged foi
money are the Supply. What, then, is the law of
market-value?  The law of market-value is the
equation of supply and demand: that is to say, the
rate of the exchange is adjusted when money enough
is offered to take off within the usual times the
commodities on hand. Demand and supply are
thus equalized, and the current market-rate is determined. If demand for any reason becomes quickened, and the supply not increased, there is competition among buyers for the stock in market, and
market-value tends to rise.  If demand becomes
sluggish, the supply remaining the same, there is
competition among sellers to dispose of their stock,
and market-value tends to sink.  So far it is the
action on value of the element of desire, which expresses itself through demand. How far can this
action go?  Demand being increased, supply remaining the same, value rises: how far does it
rise?  In the ratio of the increased demand, say
some; if the demand be one third increased, the
value will be one third higher. By no means is this
true. The value may rise far higher than that pro.
portion, or it may not rise in anything like that proportion. It depends upon circumstances, and upon
the nature of the commodity.  We must remember that demand not only acts upon value, but value
acts upon demand. As value rises, the number of
those whose means or inclinations enable them to
purchase at the new rate is constantly diminished.
There are ten persons who may wish an article at
one dollar, of whom not over four will wish it at
two dollars, and perhaps only one at three dollars.




ON VALUE.               87
Every rise in value then, under the influence of increased demand, tends to cut off a part of that demand, that is, to lessen the number of those who
will purchase at the increased price; and the value
will rise only to that point, whatever it be, where an
equalization takes place between the supply and demand, between the quantity of corn, for example,
offered at the enhanced rates, and the quantity of
money in the hands of those willing to exchange it
for corn at the enhanced rates. Thus we see that
every rise or fall of demand, and the consequent
rise or fall of value, tends to check itself. An increased demand for any article or service, other
things being equal, enhances its value; but the enhanced value in turn lessens the demand by lessening the number of those who will purchase, and the
new market-rate is struck at the point of equalization between the old supply and the new demand.
Just so, if demand is slackened, value declines; but
declining value in turn increases the demand by
bringing the article within the range of a larger
number of purchasers, and the decline is arrested at
the point of equalization between the new demand
and the old supply, and a new market-rate is determined.  Everything oscillates under the variations
of demand, but the point of stable equilibrium, if I
may use the expression of anything so unstable as
market-value, the point of. stable equilibrium is
always the equation of supply and demand.
In the preceding paragraph we have supposed
supply to remain unchanged, and have followed the
law of value through the variations of demand,
which, money being invariable, as is here supposed,




88      ELEMENTS OF POLITICAL ECONOMY.
expresses the element of desire. Supply expresses
the element of efforts, and market-value varies with
the variations of supply. We have seen that every
rise or fall of demand tends to check itself, and will
check itself even without variations in the supply;
but it is commonly checked at an earlier point by
variations in the supply. A brisk demand enhances
value, and enhanced value commonly stimulates supply, and increased supply checks the rise. A slack
demand lowers value, and lowered value commonly
lessens the supply by the action of holders and speculators,- holders withdrawing their stock for a better market, and speculators buying now when the
article is cheap, to store away till it shall be dearer.
Thus rise of value from increased demand is doubly
checked; first, by restricting the number of purchasers, and second, by increasing the supply: the fall
of value from slack demand is doubly checked;
first, by enlarging the number of consumers of a
now cheaper article, and second, by diminution of
supply by the action of holders and speculators.
This law of the equalization of demand and supply,
thus doubly and harmoniously working, is perhaps
the most comprehensive and beautiful law in political economy. But we must note the action on value
of changes in supply only, demand continuing
steady. If the supply be short, and cannot be increased at all, as is the case with choice antiques and
certain gems and paintings by the old masters, value
may rise to any point, and will be struck, as before,
at the precise point of equality of the demand then
existing with the supply there offered. The French
government paid, in 1852, 615,300 francs for a paint



ON VALUE.               89
ing by Murillo, which had belonged to Marshal
Soult.  The genuine Murillos are comparatively
few, and their number cannot be increased, and
their merit causes a strong desire to possess them,
and their value rises in consequence of the limitation of supply to a point beyond which no one purchaser can be found.  When this painting was
offered in Paris for sale, many parties were anxious
to purchase it, but the equation of demand and supply was reached, and its value was determined only
when one party distanced all other competitors
and offered a sum greater than any one else would
give. There was one painting; there could be but
one purchaser; value rose under the influence of
demand, and could not be checked by increase of
supply; and the equation was complete when the
demand was practically restricted to one party, and
that the highest bidder. The same principle controls
all sales of this sort.
If the supply, instead of being absolutely limited,
can only be increased with difficulty, or after the
lapse of time, similar but less extreme results will be
observed. Suppose pianos are selling in any community at $300 each, and there are twenty persons
in that community who wish a piano immediately,
and that there are but fifteen pianos on hand, and the
number cannot be increased for six months. The
value will rise above $300. How much above? To
that point, whatever, it be, at which only fifteen of
the twenty will be willing to purchase at the new
rate. The equation of supply and demand will be
reached by a rising value which cuts off five competitors  This is the principle, working only roughly




90      ELEMENTS OF POLITICAL ECONOMY.
indeed in practice, - working only by the estimates
and good judgment of dealers,- but the principle
is this. A better illustration of this class of cases is,
perhaps, the grains and other products of the earth.
When these have been gathered there is no more
home supply for a year.   Any deficiency in the
crops will raise their value, not at all in the ratio of
the deficiency, but according to the relations of the
diminished supply to a new demand. It will depend on the facility of importation, and other causes,
but it has frequently happened that an estimated deficiency of crops amounting to one third has doubled
and even quadrupled the usual prices.1
In the only remaining, and far more numerous
class of cases, in which the supply of commodities
and services can be readily and indefinitely increased,
every rise and fall of value is speedily checked by
the action of supply; and the comprehensive and
harmonious law already referred to keeps value in
this class of cases comparatively steady.
The general theory of value has now been given.
While we shall find no case of value, or its variations, which this theory does not cover and explain,
we shall find particular principles which act in certain cases upon demand and supply, and thereby act
upon value. We have now seen what value is; how
it arises; the elements which alone can vary it; and
the universal law which limits it.
1 Tooke's History of Prices.  Quoted by J. S. Mill.




ON EXCHANGE.               ( ]
CHAPTER IV.
ON EXCHANGE.
THE strength and safety of our conclusions in
Political Economy are derived from the simplicity
and certainty of the forces at work. No man has
ever denied the great facts that lie at the basis of
exchange. That men are possessed of desires, that
efforts are necessary in order to meet these, and that
satisfactions are the result, are propositions universally admitted. From these simple truths spring all
the laws of our science.  Efforts are exchangeable.
One man may and does put forth the effort necessary for the satisfaction of another man's desire.
But since the effort is not for himself but for another,
and since to put forth efforts is not naturally agreeable to man, and never becomes so, except in connection with the satisfaction to which they minister,
he will demand for his effort some corresponding
effort made for him. This is a simple fact. No
man will work for you for nothing. If you cGink he
ought to do so, there is no law against yovu, trying
to induce him to do so.




92      ELEMENTS OF POLITICAL ECONOMY.
How now does it happen that society is one vast
hive of buyers and sellers, every man bringing something to the market and carrying something off? We
speak of the commercial classes, but all classes are
commercial. Everybody exchanges. You do something for me, and I will do something for you, is the
fundamental law of society. From this results the
division of employments, and all the various professions. Every man brings his own product and exchanges with society as best he may. The farmer
brings his produce -and exchanges. The mechanic
brings the product of his skilled labor-and exchanges. The laborer brings his strength, and the
teacher his knowledge, and they are ready to do service - for a consideration. The merchant, the physician, the lawyer, the clergyman, the editor, the
lecturer, the singer, the actor, and so on to the end
of the list, are all in position to render services to
society, and justly expect to receive an equivalent
service in return. Indeed, when we look out upon
society, the most striking thing we observe about it
is, that these exchanges are going on, in a thousand
directions at once, determining all employment and
professions, reaching everywhere and permeating
everything, and all this the more rapidly and perfectly as knowledge and civilization advance. Since,
therefore, as a matter of fact, men do constantly put
forth onerous efforts to satisfy other men's desires,
in order to receive back from them the results of corresponding efforts in return; since this mutual exchange of services is everywhere present in society,
not in the market-places only, but in every department of life, there must be in this exchange some




ON EXCHANGE.              93
great GAIN. We now inquire particularly what this
gain is. What is the motive that leads men universally to exchange?
The answer to these questions will bring us to the
gratifying conclusion ithat the laws of exchange are
based on nothing less. solid than the will of God.
The desires of men are not only various in kind and
indefinite in degree, but also tend to increase in
variety and extent by the progress of knowledge and
freedom. To the gratification of almost all these
desires, however, there are obstacles interposed, some
of which are physical and some moral; and these
obstacles are so great in all directions, that the powers of the individual man are utterly incompetent to
surmount them. They mock at his weakness, and
throw him back upon his destitution. Without
association with his fellow-men, there is no creature
so helpless, so unable to reach his true end, as is
man; and therefore it is, that the impulse to association is one of the strongest of our natural impulses.
Men come together, as it were by instinct, into society; and, associating themselves together in a society, it is very soon discovered, not only that there
are various desires in the different members of the
community which are now readily met by cooperation and mutual exchange, but also that there are
very different powers in the different individuals in
relation to those obstacles which are to be surmounted. There is a vast diversity in natural gifts.
One man has physical strength, with no mechanical
ingenuity; another combines with a feeble body a
wonderful knack for contrivance; a third has a
philosophical turn, liking to examine into the laws




94      ELEMENTS OF POLITICAL ECONOMY.
of nature; and a fourth has a bent and genius for
traffic. Now, then, Nature speaks in this diversity
of gifts in as loud a voice as she can utter, in favor
of such a degree of association and exchange as shall
allow a free development of these varying capacities,
while they work upon the obstacles to the gratification of men's wants which are appropriately opposite to them. Mr. Carey is right in his principle that
the degree of individuality depends on the degree of
association, each advancing hand in hand with the
other; but he seems to me to be wrong while he
lacks confidence in the natural forces at work tending
to the highest degree of association and consequently
to the highest degree of individuality. There is no
social force stronger than interest, and interest is
driving society continually to exchange, and to a
wider and wider application of the principles of exchange, that is to say, to a higher and higher degree
of association, which allows of course a continually
freer development of individuality. When interest
fails as a motive power, at least in this department,
it is vain to appeal to or to trust an inferior and factitious motive power.
It is interest that leads men to exchange. It is
because a given effort put forth for another, in view
of a return, realizes more of satisfaction than when
put forth directly for one's self, that exchange ever
takes place. Why does it realize more? BECAUSE
THERE IS DIVERSITY OF ADVANTAGE BETWEEN DIFFERENT MEN AND BETWEEN DIFFERENT NATIONS, IN
DIFFERENT RESPECTS.  All exchange depends on
diversity of relative advantage; and diversity of relative advantage exists by God's appointment among




ON EXCHANGE.              95
individual men, and among the nations. Reserving
this national diversity for a later discussion, it is
very clear that a diversity of advantage in different
things displays itself as between the individuals of
every community large and small. There is no
village in which one man has not an advantage over
his neighbors in the making of coats, another in the
shoeing of horses, another in the curing diseases,
another in the keeping a school; while each of those
neighbors may have an advantage over each of these
in some other art or avocation. This diversity of
advantage in various directions depends, in every
advanced state of society, partly upon diversity of
original gifts, partly upon concentration of personal
effort upon the one set of obstacles that lie in the
path of a single branch of business, and partly upon
the use, and familiarity in the use, of the gratuitous
forces of nature which lend their aid towards overcoming these obstacles. As the result of one or two
or all of these, one man comes to have a legitimate
advantage over others in his own branch of business,
whatever it is; and the others come to have a legitimate advantage over him in their own branches of
business, whatever they are; and if he has desires
which their efforts can satisfy, and they desires which
his efforts can satisfy, nothing more is necessary to
a profitable exchange between them than this relative advantage at different points. The tailor and
blacksmith can profitably exchange their respective
efforts just as soon as each has a relative superiority
to the other in his own trade, provided of course each
has a desire for the product of the other; and the
greater the relative superiority of each to the other,
6




96       ELE3IENTS OF POLITICAL ECONOMY.
the more profitable is the exchange to both. This is
a point of considerable consequence, and will repay
some pains in illustration. If the blacksmith can
shoe horses only a little better than the tailor could
shoe them, and the tailor make coats only a little
better than the blacksmith could make them, there
will be only a slight advantage in their mutually exchanging efforts. For the sake of definiteness, let us
say, that the tailor's capacity in making coats is 6,
and his capacity in shoeing horses is 5; and the
blacksmith's capacity in shoeing horses is 6, and his
capacity in making coats is 5. Each has a relative
superiority to the other of 1, and if they exchange,
there is an advantage of 2 to be divided between
them. Now let us suppose that each, by exclusive
devotion to his own trade, by developing his latent
skill and ingenuity, and by availing himself of all the
forces of nature at his command, comes to have a
capacity in his own business of 15, his capacity in
the other business remaining as before at 5. Each
now has a relative superiority to the other of 10, and
when they exchange there is an advantage of 20 to
be divided between them.  The motive to an exchange, and the gain of an exchange, are ten times
greater than they were before. Therefore we lay
down the principle, as universally applicable to all
exchanges, that the greater the relative superiority
at different points, the more profitable do exchanges
become. If this principle is just, and I flatter myself
that it will be found to be just, it follows, that every
man who has anything to exchange, is directly interested in the success of his fellow-citizens, that every
trade finds its advantage in the increasing develop



ON EXCHANGE.              9
ment of other trades, and that all discoveries and
inventions by which Nature is made to pay tribute
to any art is, restrictions apart, so much clear gain
to the world at large. In the light of sound principles, what has been sometimes called the jealousy of
trade is simply silly.
All exchange, then, depends on difference of relative advantage, because without some difference of
relative advantage, each party could serve himself
directly just as well as he could be served by the
other party, and there would be no motive at all for
an exchange. As soon as there is any difference of
relative advantage, there begins to be-a motive for an
exchange, and a gain as the result; and the motive
and the gain become stronger and greater as the difference increases; so that the gains of exchange are
the greatest in that state of society in which the
freest opportunity is allowed to every individual to
employ his peculiar powers in work for which he is
best fitted, in which desires are so various and employments so diversified as to give a chance for all
kinds of efforts, and in which men avail themselves
to the utmost of those natural advantages and gratuitous powers which lie open to their disposal.
Freedom, association, and invention, are the three
things which make exchanges as profitable as they
can become, and which will carry society, so far as
exchanges can do it, to the highest pitch of prosperity. Of these by far the most important is freedom,
because, where freedom is conceded, association and
invention follow in time by laws of natural sequence.
By freedom is meant the right of every man to employ his own efforts for the gratification of his own
7




9   ELEMENTS OF POLITICAL ECONOMY.
wants, either directly or through exchange.  Each
man's right of freedom is limited of course by every
other man's right of freedom which he is not at liberty to infringe; and also, in certain respects, by what
is called the general good, of which the judge must
be the government under which he lives. Under
these limitations, which limit in common all other
rights, the right of exchange is just as much of a
right as the right of breathing.  It stands on the
same unassailable ground. Every man has a natural, self evident, and inalienable right to put forth
efforts for his own well-being; and whenever two
men find-that by exchanging efforts with each other,
they can better promote their own happiness, they
have an indisputable right, subject only to the above
limitations, to exchange; and it is a high-handed infringement of natural rights, a blow aimed at the
life and source of property, when any authority
whatever interferes to restrict or prohibit the freedom of exchange, except that act be justified by a
solid proof that other private or public rights which
are as well based as the right of exchange are infringed thereby.
Happily, since governments have become more
enlightened than formerly, they perceive for the most
part that they have no right to interfere with this natural right of their people, and also, that, by interfering with it, they would do them an incalculable injury.  The only motive to a mutual exchange of
services, is always and everywhere the mutual benefit
of the parties. After every fair exchange, each party
is richer than before, has more satisfactions, otherwise
there would be no exchange, I esteem the service




ON EXCHANGE.               99
1 receive more highly than the service I render, otherwise I should not render it. The man to whom I
render it esteems that service more highly than the
service he renders to me.  We are both gainers.
And since almost everybody in every community
has something to exchange,- either service or commodity, and nobody exchanges except in view of a
gain, it is clear that free exchange benefits everybody, and harms nobody. Moreover, under a system
of free exchange, every man is allowed, under the
stimulus of self interest, to follow the bent of his
own mind, to work away at those obstacles to the
gratification of human desires which he feels himself best able to overcome, and to avail himself of
all those helps in his work, of which Nature offers to
him a full store. Under these circumstances, obstacles give way in all directions: the amount of material products produced and offered for exchange is
vastly augmented; the number and variety and
excellence of the services proffered is indefinitely
increased; the diversified and rapidly increasing desires in such a community are readily met by exchange; all peculiar facilities are taken advantage of,
and the difference of relative advantage becomes
great in all directions, and a new day of industrial
and commercial prosperity is ushered in.  Under
freedom all men have the greatest possible motive
to produce, because they can dispose of their efforts
to the best advantage.  They can purchase with
these efforts what they will, and when they will, and
where they will. Thus freedom leads to extended
association, and, speedily also, to the invention of
machinery and all labor-saving appliances. There



100     ELEMENTS OF POLITICAL ECONOMY.
fore, since free exchange indefinitely multiplies, in
number and variety, the services which men may
render to each other; since, by means of it, men's
satisfactions bear a larger and larger proportion to
their efforts; and since the only possible motive
to an exchange is a mutual benefit of the parties,
no reason can be given, no good reason ever has
been given, why exchanges should not be the freest
possible.
After long centuries of meddlesome and vexatious
interference with the freedom of industry and the
rights of exchange, by limiting the number of apprentices to each artisan, by dictating what should
and what should not be manufactured or grown, by
attempting to determine what should and what
should not be imported and exported, and by arbitrary burdens on certain classes, and arbitrary privileges granted to others, the more enlightened nations
of the world have come at length to perceive that
wealth and power and progress are dependent on
free exchange, at least within their own boundaries.
Common sense reigns now, for the most part, in this
thing, within the limits of the individual nations.
When Bonaparte brought half of Western Europe
under French dominion, the previously existing custom-houses and toll barriers of the interior fell as by
a stroke, and free trade became the rule between
French, Dutch, Germans, Italians, and Spaniards,all who were subject to his sway. But when his
vast empire was dissolved into its original independent kingdoms, up shot the custom-houses again,
around all the petty frontiers, and each State was




ON EXCHANGE.             101
busy to reimpose on itself the fetters which his
powerful hand had broken.1 Just as if the benefits of exchange depended on the accident that the
parties to it are subjects or citizens of the same governmnent 
Opposed to free exchange are monopolies. A
monopoly is a legal restriction imposed by the government upon the sale of certain services or commodities. This restriction is ostensibly laid for the benefit of certain persons or classes, and limits of course
the competition to which they would otherwise be
subject in their business, and tends therefore artificially to raise the value of that which the privileged few offer for sale. If the view be limited to
these persons alone, monopolies would certainly
seem to be advantageous, but what of the purchasers and consumers of their wares?  They all are
obliged to pay a higher price for what, were it not
for the monopoly, they could obtain at a cheaper
rate, since the only object in laying the restriction, is
to enhance the price for the benefit of those possessing the privilege. Monopolies, therefore, infringe the
right of exchange, are unjust and odious in their
nature, and are in practice abominable.  Nearly all
governments have been chargeable, at times, with
successful attempts to make things thus artificially
dear to the mass of the people. Queen Elizabeth
called the power of granting patents of monopoly to
her favorites " the fairest flower of her garden." Towards the close of her reign, her abuse of this power
had reached an intolerable height, and some of the
most necessary articles of life, such as salt, iron,
1 Senior. Page 177.




102      ELEMENTS OF POLITICAL ECONOMY.
calf-skins, vinegar, lead, paper, and many others;
were in the hands of patentees, and could only be
procured at exorbitant prices. In 1601, the House
of Commons met in so angry and menacing a mood,
in consequence of this abuse, that Elizabeth was
obliged to promise at least, that the monopolies complained of should be abolished. The famous Act
of Parliament of 1624 declares that all monopolies,
grants, letters patent for the sole buying, selling, and
mlaking of goods and manufactures, shall be null and
void. This Act effectually secured the freedom of
industry in England; and in the opinion of excellent
authorities, has done more to excite the spirit of invention and industry, and to accelerate the progress
of wealth in that country, than any other in the
statute book. The Act excepts, however, patents
for fourteen years to the true and first inventors of
new manufactures within the realm, and also the
grants by Act of Parliament to any company, for
the enlargement of foreign trade. Under this exception, the East India Company possessed, up to 1834,
the exclusive right to vend tea in England. During
the last years of this monopoly, and notwithstanding
the quantities of tea smuggled into the country, the
people of England paid more than $7,500,000 a year
for their tea beyond the price at which tea of equal
quality was sold, under a system of free competition,
in Hamburg and New York. Opium is still, for
purposes of revenue, a government monopoly in
British India.  In France, tobacco is a close monopoly in the hands of government for revenue purposes. It is noticeable that monopolies never real
ize to their possessors the full pecuniary advantage




ON EXCHANGE.             103
of which the public are robbed by their action.
Thus, while Englishmen paid $7,500,000 extra annually for their tea, the Company, by their own
showing, did not realize much more than half that
sum from their privilege; owing to the inertness
of their servants removed from the stimulus of competition. " The spirit of monopolists," says Gibbon,
" is narrow, lazy, and oppressive. Their work is more
costly and less productive than that of independent
artists; and the new improvements, so eagerly
grasped by the competition of freedom, are admitted
by them with slow and sullen reluctance."
A second form of motnpoly is that in which governments by restrictive duties try to exclude foreign
competition in certain articles, leaving the domestic
dealers open only to home competition. This" is
done in connection with, sometimes under color of,
levying duties for revenue. Duties laid for this purpose, however, as we shall see more fully hereafter,
are very different in principle, amount, and action,
from those properly laid for revenue. They violate
a natural right of exchange, as the others do not,
and are always followed by injurious consequences.
Sometimes the hope of unusual gains from producing an article whose foreign supply is thus restricted, seduces capital and labor from other profitable channels and concentrates them upon this
business; and the home competition, thus artificially
stimulated, becomes intense and feverish, the business is overdone, an element of distrust and unsteadiness is introduced, the weaker houses are ruined,
and only the stancher firms tide over the depression consequent upon overdoing, and control the




104     ELEMENTS OF POLITICAL ECONOMY.
market for a while at a monopoly price. But the
losses of home competitors; the losses of those who
would otherwise have been foreign competitors;
and especially the losses of those home producers
who would have exchanged products with those
foreign competitors, overbalance many fold these
gains. Sometimes, again, home competition is even
less active after the imposition of such duties; and
then the manufacturers and dealers, relieved, in great
measure, from the stimulus of competition, are less
on the alert for improvements, less attentive to the
quality of their goods, less compliant to their customers; and the consumers are obliged, not only to
pay a tax levied for the benefit of the monopolists,
but also an additional tax on account of their want
of enterprise and spirit.
Very different is the third form of monopoly, that
involved in the granting of patent-rights and copyrights. Society does well in protecting, by law,
inventors and thinkers in the sole use of their respective productions for a limited time. Otherwise,
men would have less motive to think and to invent;
since in that case only the public-spirited and the
rich would or could devote themselves to an important branch of the public progress. A patent or
copyright is merely a return service which society
renders for a service received. It violates no man's
right of property, as an ordinary monopoly does, but
is a provision to protect a right of property. In
the United States a patent lasts for seventeen years,
and is not reissued. A copyright lasts for twentyeight years, and may be renewed by the author, his
widow, or children, for fourteen years longer.




ON PRODUCTION.            105
CHAPTER V.
ON PRODUCTION.
WHILE it is impossible to make discussions in
Political Economy amusing, it is also impossible
intelligently to conduct them without constantly
coming to conclusions which are most cheering.
We shall find a gratifying law underlying the operations of production, which demonstrates that God
designed man to be a producer, and to produce under conditions of constantly increasing advantage.
The world with its forces, and man with his motives, are so admirably constructed, that these conditions of increasing advantage cannot fail, under
freedom, to redound to the benefit of the masses of
men. We will first determine what production is,
and then the cheering law that underlies it.
Every man who puts forth an effort to satisfy the
desire of another, with the expectation of a return,
is, in the language of Political Economy, a Producer. The Latin word producere means to expose
anything to sale. Our derived word to produce means
the same. A Product is anything thus exposed, that
is, a service ready to be rendered. Adam Smith, who
is sometimes called the father of this science, used
these terms in a restricted sense, and thereby almost
unfitted them to do their proper work. He confined
production to the occasioning of changes in material




106     ELEMENTS OF- POLITICAL ECONOMY.
objects. He gifted with the title of producer the
farmer, the mechanic, the miner, the hunter, and
fisherman, because they bring to the market a material commodity; and refused the honor of the term
to those who render simple services, however essen
tial. This is wrong. It proceeds from an inadequate
analysis of value. That which is produced, that with
which we have to do, is not matter but value. They
who originate value are producers. But we have seen
that value is not an attribute of matter, but a relation
of services. The service may be employed upon matter. may be embodied in it, but what is really sold is
not the matter, but the service; and services are all
the time being sold, as those of the singer, the teacher,
the clergyman, which have no connection whatever
with matter. These services have purchasing-power,
these persons originate value, and therefore, they are
producers. Certainly, in an inventory of all values,
a certain part would be found connected with material objects, but not the largest part.  Our language must be broad enough to cover all the cases.
Therefore, Production is the rendering of any service
for which something is demanded in return.
Now let us examine the underlying law of Production. Production is effort. But efforts are irksome.
Is there, then, no way to lessen efforts, to make them
less onerous, and, at the same time, more productive? Yes, thank God, there is! We may bring to
our aid the gratuitous help of Nature! The world is
full of powers which we may employ to facilitate
our work. For example, at first people ground their
grain by hand; and it was a weary, weary task to
sit cramped at the mill all day, and turn, and turn,




ON PRODUCTION.            107
and turn.' The effort was great, and the result was
small. At length it occurred to somebody that the
weight of water would turn a wheel, and that the
wheel might turn the mill-stones. Once thought of,
the water-wheel was soon an actual fact. Instead
of human strength, Nature works now, and what is
better, works for nothing! Man's service is still
needed, he feeds the hopper, tends the bags, but he
does not ache so badly! Nor is this all. One day's
labor is now vastly more productive. More grain is
ground, bread comes easier to the poor, and the
wheel which free water turns blesses its millions
with a cheapened product!
Let us take another illustration. The old handloom was the only means antiquity knew of for procuring clothing. The shuttle was thrown by human
muscle. Every thread cost a throw. This work
was mostly done by women. The word wife is
supposed by some to have been first derived from
the word to weave. While the slave woman sat on
the ground, and turned the handle of the mill to
grind the grain, the wife was exalted to the dignity
of the loom, and worked away at the monotonous
task, thread by thread, thread by thread. Doubtless
the hand-loom was a great improvement on the
earlier processes, and was itself gradually improved
as the centuries went by, each improvement being
the substitution either of a gratuitous force of Nature for an irksome human effort, or an easier process of art for a more laborious one. Every step of
improvement was a lessening of obstacles with reference to a given satisfaction. All the way up to
1 Exod. xi. 5; Isa. xlvii. 2.




108      ELEMENTS OF POLITICAL ECONOMY.
our present admirable machinery - the power-loom,
which weaves, as if by magic, while a child can
tend it —every step has marked a lessening of
efforts relatively to utilities. The utility, the satisfaction, the yard of cloth, has cost less and less of
human effort, not only to the producer, but, through
exchange, to everybody. Accidental causes in different countries may interrupt this progress for a
little time in any single direction, but the law will
soon assert itself again in spite of these causes.
And this progress, thus briefly illustrated in the two
cases of flour and cloth, has been going on, and is
constantly going on, in all directions; more stiikingly, perhaps, in the production of material commodities, in which the powers of Nature may be indefinitely applied by machinery, but at the same time
there are no services of any kind which are not facilitated in some degree by the progress of knowledge
and experience; and the benefits of this increasing
advantage come home, through exchanges, to everybody; and, consequently, the satisfactions of all bear
a larger and larger proportion to their efforts.
This, then, is the underlying and benevolent law
of production, that God has placed freely at men's
disposal such materials and forces in Nature, that,
availing themselves skilfully of these, onerous efforts
bear a less and less proportion to realized utilities.
Men have a strong motive to substitute, whenever
they can, force for muscle, machinery for labor. The
farmer who used to cut all his meadow-grass with a
hand-swung scythe, then rake it up with a handdrawn rake, and then pitch it into the loft with a
handfork, now mows and rakes and pitches with a




ON PRODUCTION.            109
machine. And it is a beautiful consequence of this
law, that all improvements in machinery, all inventions, all substitution of Nature's forces for human
labor soon become the common property of mankind.
Patent rights speedily expire by their own limitation,
secret processes are sure to become known, and the
competition of the different men who, under a system
of freedom, will be sure to use these gratuitous helps,
will compel each of them to sell their product at a
rate graduated only by the actual human service
rendered; so that, the liberal gifts of Nature, though
seemingly monopolized at first by ingenious men,
are not long intercepted in their descent towards the
masses of mankind. An invention of great merit
even at first does not benefit the patentee alone; as
a patentee, his interest leads him to lower the price
of his product, to bring it within the reach of a
wider circle of consumers; and so soon as the patent
has expired, the benefit has at once a wider reach.
The steam-engine, for example, has long been common property. There are, indeed, certain features
of the more perfect engines still restricted in their
manufacture by the rights of individuals, and this
will always be so while invention continues busy,
but the perpetual tendency in all inventions is from
individual property towards a common right. And
it is here in place to remark, that the application of
machinery to all departments of production, and the
introduction of improved processes of every name,
can hardly in the first instance be prejudicial to any,
and are sure ultimately to be beneficial to all.
What is the effect on values of these processes
now made easier in all directions? Clearly, since




110     ELEMENTS OF POLITICAL ECONOMY.
value is nothing but the relation between two ser.
vices exchanged, no effect at all is produced on values, if the improvements have gone on equally in all
directions. Everything exchanges just as before. If
the improvements have not gone on equally, then
the value, that is, the purchasing power, of those
products is diminished in whose production the improvements have been relatively greater. As the
service has now diminished, the value, other things
being equal, has diminished'along with it. For such
a service less can be demanded in return. The
utility of the product, on the other hand, that is,
its capacity to gratify desire, remains as before. A
less effort produces the same utility. The portion of
effort thus set free, however, is not probably idle. It
will be still put forth to create a larger number of
products of the same kind, each one of which indeed
has less purchasing power than before, but the aggregate value of which is much greater than before.
For example, when machinery is employed in the
making of gloves, which before were cut and stitched
by hand, the value of a pair of gloves, estimated in
anything whose production has not been altered by
a similar improvement, will infallibly decline; but
the aggregate value of all the gloves made in the
establishment will be greater than before, because
otherwise there would have been no motive to introduce the machinery. Does, then, the machine originate value, contrary to the doctrine in the chapter on
value? Not strictly.' The machine originates utility, since each pair of the now increased number of
gloves has the same utility as a pair of the former
fewer number; and the maker is able to render a




ON PRODUCTION.            111
service to a greater number of persons than before;
and it is true, that, for a time, especially if the process be not yet generally applied in glove-making,
before value has a chance to adjust itself to the new
state of things, he will realize extra gains; he will
obtain, in part, the old price for his product, and it
would seem, in this case, as if the machine created
value. Nevertheless, it is only a transitory state of
things. Just as soon as machines come to be generally employed in the business, value adjusts itself,
through competition, to the real human service rendered, and the extra gains of the first operators are
cut off. The gain of the reduction has now become
permanent to all consumers of gloves. It is this
interval between the old price and the new which
gives to producers the margin for their enterprise,
and a sharp spur to invent and adopt improvements.
The improvements once become general, the gain
redounds to the whole community. The value then
of all services which have been facilitated by improved processes, is constantly being lessened relatively to services not equally facilitated; and here
we gain the first glimpse of a truth, which will
afterwards appear in the clearest light, namely, that
the value of commodities tends to decline as compared with human labor, and therefore, that there is
inwrought into the nature of things a tendency
towards the elevation of the masses of men in a
scale of comforts.
A leading proposition of production is the following: - Production may go on indefinitely in all directions without ever a fear of reaching a general glut
of products. This proposition was first fully devel



112      ELEMENTS OF POLITICAL ECONOMY.
oped by Say, in the fifteenth chapter of his well.
known treatise on " Political Economy," and the proof
of it, and some of the consequences of it, are well
worthy of our attention. I shall put the proof of it
in this form: the desires of men which the efforts of
other men can satisfy, are unlimited in number and
indefinite in degree; and therefore, mutual efforts
can continue to be put forth in exchange, until
these unlimited and indefinite desires of all men are
all met- a goal which never can be reached. This
proposition demolishes at a stroke the fallacy which
pervades Dr. Chalmers' book on " Political Economy,"
namely, that the universal market is limited, and
therefore, were it not for the unproductive consumption of the rich and luxurious, and the equally unproductive consumption of wars, there would soon
be a general glut, and production must cease for the
lack of a vent for its products. What constitutes a
market for anything? This, that somebody desires
the service thus offered, and is willing to render a
return service acceptable to the offerer. Only two
things can limit the universal market, first, a lack
of desires, and secondly, a lack of return services.
But there can be no lack of desires at any time, and
there will be the greatest plenty of return services
where production is most busy and most universal.
Therefore, again, no general glut of products is possible to occur. A truth which we have already seen
in another connection, reappears here as a consequence of this proposition, and will reappear again
and again, namely, that all persons are interested
commercially, as well as morally, in the prosperity of
other persons, and each nation which has anything




ON PRODUCTION.            113
to exchange, is directly interested in the prosperity
of all other nations; because the more production
everywhere, the better market everywhere. A market for products is made by products in market.
But while no such thing as a general glut of products ever did, or ever can occur, a glut in respect to
certain services is very common. Through want of
foresight, or miscalculation, particular services are
offered in too great abundance, or of a kind not
adapted to the demand, and in respect to these the
market is truly said to be glutted. This frequently
happens with editions of books; more copies are
printed than can be sold at remunerative prices.
Also when fashion changes, the goods which were
fashionable, but are so no longer, are apt to be in
excess of the demand. The only precaution that
can be taken to avoid losses of this character, is the
cultivation of foresight, by studying as accurately
as possible the nature of human desires, and the
changes that have been observed to take place in
them. This constitutes mercantile sagacity; and
the most successful producers in all departments are
those who best develop this sagacity, who adapt
their services to the existing and coming demand,
who, to excellence in the substance of their services,
add taste and attractiveness to their form, who tend
rather to lead the fashions for the many than follow in their wake. The field of production is like
the billowy and heaving sea: to navigate most successfully requires foresight, a wise' courage, a power
of adaptation to varying circumstances, skill to veer
and tack when the wind changes, and a will to run
before a favoring breeze with all sails set. Produc8




114      ELEMENTS OF POLITICAL ECONOMY.
tion, as a general rule, is no dead level of monotonous exertion; since its sphere is life with its wants,
man with his desires; and there is scope for the
development of ingenious mind in almost all of its
departments.  Since all exchange is due to the
diversity of relative advantage, whoever develops
his powers of observation, of application, of adaptation, to a higher point, and avails himself more
skilfully of all peculiar facilities, will reap a larger
share of the harvest of exchange.
The immense increase of production, and the superior perfection of products consequent upon what
he calls the Division of Labor, was fully pointed out
by Adam Smith. The chapter in which this author
treats of the division of labor, has always been the
most famous, and is still one of the most interesting
in the " Wealth of Nations." We have already seen
how exchange is stimulated and made profitable by
the diversity of employments, and by the application of all peculiar gifts to the corresponding obstacles which lie in the path of production: this is the
more general truth of which Adam Smith's principle of the division of labor is a specific part. He
means by this term the dividing up of a process or
employment into particular parts, so that each person employed can devote himself wholly to one
section of the process. The proposition is, that by
means of the division of labor, the processes of production are vastly facilitated. He cites, as an illustration, the manufacture of pins. One man draws
out the wire, another straightens it, a third cuts it.
a fourth sharpens the points, a fifth grinds it at the
top for receiving the head. The making the heads




ON PRODUCTION.            115
consists of two or three distinct operations, each
confided to a single person. The remaining processes are similarly divided up, and the result is,
according to Dr. Smith, that in a single establishment, employing only ten persons, 48,000 pins are
made in a day, while if each man went through all
the processes himself, he could hardly make twenty
pins a day, or two hundred for the whole establishment. Perhaps a more striking illustration of the
division of labor may be found in the art of watchmaking. According to evidence brought before a
committee of the British House of Commons, there
are one hundred and two distinct branches of this
art, to each of which a boy may be put apprentice;
and when his apprenticeship is expired, he is unable,
without subsequent instruction, to work at any other
branch. The watch-finisher is the only person, out
of the one hundred and two, who is able to work in
any other department than his own. The causes
of increased efficiency imparted to production by
the division of labor are reduced by Dr. Smith to
three: -
1. The improved dexterity, corporeal and intellectual, acquired by the repetition of one simple
operation.
2. The saving of the time which is commonly
lost in passing from one species of work to another.
and in the change of place, position, and tools.
3. The invention of-a great number of machines
which facilitate and abridge labor in all its departments. Because the simple task which complete
division of labor gives to each operator is precisely
what machinery may most easily be made to per.




116     ELEMENTS OF POLITICAL ECONOMY.
form, and what the operator, if intelligent, will be
most likely to devise machinery for. Add to these
advantages of the division of labor these other: —
4. The saving of the waste of material, partly as
the result of this improved dexterity; and frequently,
also, as the result of the shorter time required to finish up the product.
5. The more economical distribution of labor by
classing the operatives according to their strength,
skill, and experience. The easier parts may be performed by women and by children, whose labor is
less expensive; the ruder parts by ruder hands; and
only the more difficult processes by the most skilful
workmen, who must be highly paid. Next to the
first, this advantage is the most important.
6. There is a saving in tools. The various implements, being now in constant use, yield a better
return for their original cost; and therefore their
owners can afford to have them of a better quality,
and this, too, facilitates production.
7. It brings the producers and consumers into
more intimate and safe relations. The division of
labor between the wholesale and the retail trade is
of great advantage. The retailers know their local
markets, and supply them without loss or waste from
the wholesale reservoirs. The wholesale reservoirs
neatly control the various streams of production,
according as demand is slackened or intensified.
Thus, for example, a large city is daily supplied
with fresh meat, without the loss, perhaps, of a hundred weight.
There are some disadvantages resulting from this
division of labor: -




ON PRODUCTION.            117
1. The work becomes in some departments monotonous and irksome, while some variety of occupation would afford relief by employing different
muscles, or different faculties of the mind.
2. There is some tendency to dwarf the mental
and corporeal powers, through exclusive attention to
one part only of a complicated process.
3. When this part has been learned, and long
made the means of a livelihood, a person has less
power to adapt himself to change of circumstances,
and becomes too much dependent on the continuance of the business in that form.
The degree to which the division of labor can be
carried, depends in part upon the extent of the market, and in part upon the nature of the employment.
To recur to Dr. Smith's illustration of the pins: if
the market would only have received 24,000 pins
a day from that establishment, instead of 48,000,
the division of labor could not have been carried to
the same extent, because if it had been, the men
would be idle one half the time. In that case, some
of the men would be dismissed, and some of the
separate processes be combined, and production
would be less efficient from the limitation of the
market. Production, therefore, is most profitable
when the market is broad enough to allow a full
division of labor, and complete employment to all
the operatives; and, the market being presupposed,
is more likely to be profitable in large establishments
than in small; because, (1) the division of labor can
be carried to a fuller extent; (2) more perfect machinery can be afforded; (3) relatively less superintendence is required; and (4) the scraps and ends of a




118     ELEMENTS OF POLITICAL ECONOMY.
large business are frequently of sufficient importance
to justify one or more subordinate branches of business in connection with the main business. For
example, a large saw-mill may profitably furnish
lath as well as lumber, since the refuse boards and
slabs may go to lath. A wholesale butchering establishment of neat cattle might profitably have, in connection with the sale of meat, a tannery to dispose
of the hides, a comb manufactory to dispose of the
horns, a glue manufactory to dispose of the feet, a
stall for the hair, which is useful in plastering, while
the offal might be chemically disposed of in fertilizers.
The nature of the employment also limits the
degree to which the division of labor may be carried. Agriculture, for instance, allows less of this
division than most other departments of production,
because its various operations cannot, from the
nature of the case, become simultaneous. When
the sowing is once done, the producer must wait
some months upon Nature, till his agency is again
required in the reaping. This fact, that agriculture
can be less facilitated by the division of labor, and by
the use of machinery, than most other departments
of material production, constitutes one ground of an
important truth, which we shall hereafter perceive
stands also on another and firmer ground, the truth,
namely, that agricultural products tend constantly to
rise in value as compared with other commodities.




ON LABOR.              119
CHAPTER VI.
ON LABOR.
IT is a curious thing, and one that draws after it
very important consequences, that physical labor
consists simply in moving things. When a man
works with his hands, all that he does, or can do,
is to produce a series of motions. Human muscles
are only capable of two things, namely, producing
motion, and resisting motion. All the marvellous
results of human labor in all the world, have flowed
from so simple a matter as the contraction and expansion of muscle. Work is motion, and weariness
is weariness of muscle. The world of materials is
so cunningly constructed, that, when they are moved
into right position the powers of Nature do the rest,
and objects of utility are the result.
When the pioneer fells a tree, he moves his axe
through the trunk, and then the power of gravitation
seizes the tree, and brings it to the ground. He produces a series of motions upon the tree, but the final
motion, by which the century-girdled oak comes
crashing to the earth, is not of his producing. Nature does that. Wool, cotton, and flax, have by
nature a certain tenacity of fibre. Man moves these
fibres in certain relations to each other by an instrument called a spindle, and the result is thread. Then
the threads are moved in certain relations with each




120     ELEMENTS OF POLITICAL ECONOMY.
other by an instrument called a shuttle, and the result is a web of cloth. The tailor moves his shears
through the cloth, and then his needles, and the result
is a coat, -the object of utility for which all these
processes were gone through with. The farmer first
moves the ground, then moves his seeds into it,
moves his sickle through the standing corn, moves
his corn to the granary and mill, moves his meal
from the mill to the larder, at which last point the
housewife begins to operate upon it in a new series
of motions. She moves the meal to the kneadingtrough, and, having well moved it there, moves it to
the oven, and, from the oven, after due interval,
moves it to the table, at which point production
ceases, and consumption begins.
Physical labor, then, is, and can be, nothing but
this, an effort, by which materials or implements are
moved with reference to a given result. Nature furnishes all the materials, and all the primary qualities
of which we avail ourselves in production.  She
cooperates at every step. We pay her absolutely
nothing for all she does. All we can shirk off our
own shoulders, and throw upon hers, is so much clear
gain. And it is a most happy circumstance that
this is being done more and more completely in the
production of nearly all commodities.  Nature is
good, to use a commercial term, for all she can be
made to carry.
Now, since motion is the only thing which man is
required to furnish in the production of commodities,
he naturally looks around for helps in this matter.
The first thing he lighted on, as a help to produce
motion, was the domestic animals. The ox, the ass,




ON LABOR.              121
the horse, were doubtless domesticated in the very
beginnings of society. Men want these animals to
produce motion for them —simply that. And as
they can be used in so many different places, and
for such a variety of purposes, and are so cheaply
reared, they are exceedingly convenient as a motive
power, and will probably never be superseded. The
discovery and application of the great motive powers
of water and steam have scarcely occasioned a
lessened demand for the earlier and humbler motors,
oxen and horses. Some of my readers will probably
remember the time, when the introduction of railroads was opposed by some people, on the ground
that the value of horses, and the business of team.
sters would thereby be destroyed. Experience has
demonstrated in this case, as it does in all similar
cases, that improved machinery, and improved facilities of all kinds, so far from harming any class of
persons permanently, are likely to be a gain to all
classes of persons. At least, they only are harmed,
who stupidly hold on to the old methods.
Labor, having employed from a very early time
as a motive power the domestic animals, secured
after a while, as inanimate auxiliaries, the waterwheel and the windmill; and, much later, the steamengine. It is a point that has scarcely been noticed,
even if it has ever been noticed at all, that all these
auxiliaries, whether animate or inanimate, produce
simple motions of the same kind as, and only supplemental to, the motion produced by a human arm.
The most ponderous engine merely reduplicates that
which the arm of a child is capable of; while in
point of delicacy and firmness of touch, perhaps no




122     ELEMENTS OF POLITICAL ECONOMY.
machinery has yet been devised which can subdivide
and apply this motion as skilfully as the human
fingers can. It is said, that some of the lace made
wholly by hand, is finer and more delicate than any
yet woven by machinery, although the introduction
of machinery into lace-making has cheapened th
product, according to Dr. Ure, to about - of its for
iner cost. What we call power, then, however produced, is simple motion. But in order to subdivide
these motions and apply them to the various purposes
of production, implements of all sorts are needed,
and implements, as we shall see in the next chapter,
are always the gift of capital. But no power however mighty or however delicate, and no implements
however perfect, can ever dispense with some portion of human labor. Not until machinery can be
taught to think, to adapt means to ends, will human
labor cease to play a chief part in production. These
therefore, are, and always will be, the three requisites
of material production LABOR, POWER-AGENTS, CAPITAL.
Besides physical labor, there are the various forms
of mental efforts put forth by men to satisfy the
desires of other men, and with reference to a return.
So far as exertion, physical or mental, is put forth
for amusement, or for a pure benevolent motive, it
has nothing to do with Political Economy. It is only
exertion wuhich decmands for itself something in exchange, that is technically labor. Labor, which is
primarily mental, such as most professional labor,
the labor of the editor, the teacher, the architect,
has of course little connection with motion or with
commodities. But it is not on that account less




ON LABOR.               123
useful or less valuable.  The exchange of simple
services depends on the same principles, gives rise to
the same phenomena, and is amenable to the same,
science as all other exchanges. One man, as the
violin-maker, offers services in which a commodity
intervenes; another, as the violinist, offers services
in which no commodity intervenes; each has gained
in his own art a point of relative advantage as compared with other men, and these doubtless have
gained some point of relative advantage as compared
with them; each, by the sale of his respective service, meets some desire of the buyer, and is paid on
the same principle as the other. The violin-maker
of Cremona, who sold his instruments for five hundred francs apiece, was no more and no less a laborer,
in the language of our science, than Paganini, who
sold an hour's playing in the theatres for five thousand francs.
Having now seen what.labor is, let us pass to the
principles that determine its remuneration. I can
see no reason why the purchasing-power of labor is
not determined in the same way as the purchasingpower of all other things; and, if so, there is no
difficulty in pointing out the general law of wages.
I go back constantly to first principles, because I
believe that first principles really control everything.
Chance effects there most certainly are; but, as they
happen now on one side and now on the other, they
balance each other, and leave all the great working
forces unaffected. For the sake of convenience, a
distinction may be made at this point between professional and common labor, —a distinction which
is not indeed very definite, but which is sufficiently




124     ELEMENTS OF POLITICAL ECONOMYo
so for the purpose in hand. The wages of professional labor of all sorts run up and down upon a
scale whose extremes are much wider apart than the
extremes of the scale which marks the variations in
the wages of common labor, while at the same time
the principle that determines the value of both forms
of labor alike is the principle that determines all
other value, namely, the law of Supply and Demand.
The wages of professional labor, however, are so far
different from the wages of common labor as to
demand a somewhat distinct treatment. Why could
Daniel Webster demand a fee of a thousand dollars
for attending to a single case in court, Paganini a
like sum for an hour's playing on a violin, and Jenny
Lind at least as much for an evening's singing in a
concert? Because there was in each case a strong
demand for a peculiar service, and only one person
in the whole world who could render that service, at
least in the same perfection.  The demand was
large, the supply was small, and the value consequently great. The highest efforts of professional
skill will always receive a high reward, whenever
there is one person even, who, together with a strong
desire for the product, has also the power to give a
service in return; and especially whenever there are
many persons who have a similar desire and power,
to whom, as in the case of Paganini and Jenny Lind,
the service can be rendered in common without
lessening the satisfaction of each individual. That
the supply is small in these higher regions of skilled
effort, is due partly to the fact, that Nature is not'avish in her gifts of peculiar talents, and partly to
the fact, that those who have received have assidu



ON LABOR.              125
ously cultivated them, and have reached in consequence a high point of relative advantage. These
persons have what may be called a natural monopoly in their respective fields of high effort, because
there are few others who have the natural gifts and
the acquired skill which enable them to come in
competition with them. But the objections which
lie with such force against artificial monopolies, cannot be urged at all against a natural monopoly; for,
if the road to excellence be open to all, and no artificial obstructions thrown in the paths of any, there
is no blame but rather praise for him who distances
all competitors, and demands for services of peculiar
excellence a large remuneration. John Sartain is a
superior engraver: he enjoys a natural monopoly in
the highest walks of that art; the wages of his labor
are very high; yet nobody can complain of this,
since he has had no factitious privileges, but has
fairly attained his excellence under freedom. Exchange rejoices in all diversity of advantage that is
the birth of freedom, but reprobates with all her force
advantage that is gained by artificial restrictions,
because artificial restrictions always infringe on
somebody's right to render services for a return; and
the right to render services for a return is the fundamental conception in the right of Property. The
wages of professional labor, then, are determined by
the relations between the demand for such labor and
the supply at hand; and are usually higher than the
wages of common labor, because the supply of such
laborers is restricted by the lack either (1) of appropriate original gifts, or (2) of the requisite industry,
or (3) of the means of suitable education and traininig.




126     ELEMENTS OF POLITICAL ECONOMY.
Within the great law of supply and demand, there
are several important subordinate principles, which
go to vary the wages of both professional and common labor, principally through their action upon
supply; and it is now in order to consider these,
before we pass to consider the wages of common
labor. In common with all the writers who have
succeeded him, I shall avail myself freely at this
point of the labors of Adam  Smith. That writer
considers that there are certain circumstances in the
employments themselves, which either really, or at
least in men's imaginations, make up for a small
pecuniary gain in some, and counterbalance a great
one in others.
1. The agreeableness or disagreeableness of the
employments will have an influence in determining the rate of wages paid to those who engage in
them. The more agreeable employment will attract
the larger number, and will experience in consequence the press of competition, and the rate of
wages will be lessened by the increased supply of
laborers. The more disagreeable employment will
feel less the pressure of numbers, and will secure,
other things being equal, a higher rate of remuneration in consequence. Among the elements which,
in spite of the diversity of natural tastes, make any
employment agreeable or disagreeable to the laborers, are (1) the less or greater exertion of physical
strength required, (2) the healthfulness or unhealthfulness of the labor, (3) its cleanliness or dirtiness,
(4) the degree of liberty or confinement in it, (5) the
safety or hazard of the. employment, (6) the esteem
or disrepute of it in public opinion. To illustrate




ON LABOR.               127
each of these in order, the stone-mason, the glassblower, the scavenger, the factory operative, the
worker in a powder-mill, the smuggler, will each
receive a larger compensation owing to the peculiar
element of disagreeableness involved in his employment; arid he will be able to demand and secure it
through the action of the disagreeableness upon the
supply of such laborers.  Of all these elements,
public opinion is perhaps the most operative; and
if this be favorable to an employment, and some
social consideration be attached to it, and only common qualifications be required for it, the wages in it
will infallibly be low. This is probably the main
reason why so many young women prefer to teach,
rather than be employed in mills, shops, or offices, and
why the wages of female teachers are so-pitifully low;
although each of the elements of agreeableness specified above may also contribute something towards
the same result. If a business be decidedly opposed
to public opinion, it must hold out the inducement
of a large reward, or nobody will engage in it. This
explains the abnormal gains-of the slave-trade, the
liquor-business, of gambling-houses, and of lotteries.
2. The easiness and cheapness, or the difficulty
and expense, of learning different employments,
will have an influence on the rate of wages paid
in them. The more quickly and cheaply one can
learn to perform the duties of a place satisfactorily,
the less, so far forth, will be his wages; because
there will be many who will compete with him in
rendering such services; the more time, difficulty,
and expense involved in learning a business, the
larger, so far forth, will be the wages secured by it;




J 28    ELEMENTS OF POLITICAL ECONOMY.
because fewer persons have the means, the foresight,
the patience, to prepare themselves for such an avocation. This is the principal ground of the difference in the wages of skilled and unskilled labor.
The artisan has, at least, given time, and the professional man has given both time and money, to fit
themselves to render the services which they now
offer to society; and it is right, therefore, for them
to demand a higher rate of compensation than is
accorded to operatives and common laborers. But
a right to demand does not always carry along with
it an ability to secure: in this case it does, through
the reduction of numbers which these obstacles at
the entrance occasion, and the consequent weakness
of competition. To put a boy apprentice to a trade,
requires on the part of the parents a foresight, an
ability to get on without his immediate help, and
sometimes an amount of money for his board and
clothes, which all parents do not possess; and consequently, the number of skilled artisans, who must
learn when they are young if at all, are relatively
few compared with common laborers, and are able
to realize a much higher rate of wages than they.
In the professions, if we confine our attention to
th se persons who are thoroughly trained for them,
we shall find a higher rate of compensation still,
and one made higher on the same principles;
although we must here bear in mind the counter-working influences which tend to increase the
competition in the professions, namely, the respecta.
bility which attends them, the desire of knowledge
for its own sake which is gained in connection with
them, the instruction wholly or in part gratuitously




ON LABOR.               129
offered to those in course of preparation for them, and
the desire to do good, without regard to pecuniary
reward, which actuates many who enter upon them.
3. The constancy or inconstancy of employment
is a consideration that affects wages. If the employment be such that it can only be carried on
during nine months of the year, the wages of the
day or month will be greater than they would be if
it could be carried on during the twelve months.
The laborer looks to the aggregate earnings of the
year, and will hardly take up a trade which affords
employment but a part of the time, unless some
compensation can be found in the higher wages for
that time. This is the chief reason why the day's
wages of the mason and the house-painter, in this
climate at least, are higher than those of the carpenter or smith. The coachman, also, may stand
by his horses half the day or night, with no call
for his services, and must have, therefore, a proportionably higher fare from those whom he  does
transport. In general, it is found that men prefer
a constant employment with a lower rate of wages,
than an inconstant one, with a prospect of higher
pay for the particular jobs actually done, and be.
cause they prefer that, those who take up with the
other are able to secure a higher rate of pay in their
less eligible avocation. Counter working this, however, are the desires which many men have, for
intervals of leisure in their business; and the opportunity to make these intervals subservient to
another branch of business or means of livelihood.
4. The amount of trust involved affects wages.
Men in responsible positions secure a higher rate of
9




130      ELEMENTS OF POLITICAL ECONOMY.
pay for their services than can be accounted for, except by a reference to the unwillingness of people
to intrust great interests to others, unless they are
men of established character for probity.  Such
men, men who combine all the other requisites
for an important post, with a well-known honesty,
are comparatively rare; and, when they are found,
will receive a very high compensation for their services. Treasurers of corporations, cashiers of banks,
and holders of trust-funds generally, are examples in
point. Shall we say, then, that men offer their honesty in the market, as they offer their skill, and are
paid for the one as for the other? No! Their skill
has been acquired to sell, and for no other reason;
but their honesty, if it be genuine, has another basis
altogether; and he who is honest, simply because
honesty is the best policy, is not honest at all! The
very characteristic of honesty is that it cannot be
bought! It has a moral, and not a mercantile foundation. In point of fact, a man who has the full
confidence of his fellow-citizens, as an honest man,
and at the same time all the other qualifications
requisite for a post of high pecuniary trust, is in
position, partly on the ground of his honesty, to
render a high service, and will receive for that service a high reward; but I protest, in the name of
morals, against the notion that honesty is a marketable article: it is rather an underlying element of
moral character, which fits men indeed to render
certain services, but the honesty is maintained, not
for the sake of the service, but has an independent
basis of its own. So, also, most people would prefer a deeply religious man for a preacher and spir.




ON LABOR.              131
itual guide, but it is a perversion of language to
maintain that in rendering these services a clergyman sells his religion. It is true that he sells services to the appropriate rendering of which his
personal piety contributes one element; but the
piety is not nourished for the sake of the services,
but for its own sake, and it must not be confounded
with that which is sold. Accordingly, while the
clergyman's vocation is sacred, and belongs to the
sphere of religion, his salary belongs to the sphere
of exchange, and its determination is wholly a business transaction. This distinction ought to be better understood than it is; and both clergymen and
people need to be reminded that the spiritual things
belong to one sphere, and the carnal things to another. The amount of a clergyman's salary, and the
time and mode of its payment, are matters of pure
business; and the clergyman himself is to blame if
he does not attend to them, and insist on them, on
business principles.
5. The probability of success in any employment
is a circumstance that has some influence on the
rate of wages paid in it, through the action of this
probability on the numbers of those who enter upon
it. If success is problematical, fewer will engage in
such a business, and those who do engage in it and
succeed, will reap a very high reward. Ten boys,
for example, put to the blacksmith's trade, ordinary
capacity being presupposed, will probably every one
succeed in becoming a tolerable workman; but of
ten boys of the same capacity put apprentice to an
engraver, probably not over three would ever reach
any high degree of skill and success; and therefore,




132      ELEMENTS OF POLITICAL ECONOMY.
the pressure of numbers will be felt much more in
the former than the latter art. So also, those who
take jobs by contract, and who consequently assume
some risks, are usually paid at a higher rate than
those who do work by the day. It is true that this
is owing partly to the fact that the contractor commonly uses his own capital, and must therefore be
paid profits as well as wages, and also that the
wages of superintendence are due to him as well
as ordinary wages; still there is a residuum  of
difference which can only be accounted for by the
risk he runs of a successful issue. The difference in wages from this fifth cause of variation,
would be greater than it is, were it not for the overweening confidence which most men have in their
own good luck. This confidence is seen in the rush
which is always made for newly discovered mining
regions, and in the facility with which even yet lottery tickets are sold. It is demonstrable beforehand,
on the doctrine of chances, that no lottery ticket is
worth so much as it is sold for, and yet men buy on
in spite of the demonstration; and experience in
California and at Pike's Peak, has sadly taught how
excessive was the confidence in their own success of
the men who flocked to those new El Dorados.
6. Custom and prejudice and fashion, have something to do with the determination of wages in some
departments. Custom, especially in former times,
has been very operative. The current fees of lawyers and physicians have been largely dependent on
custom, competition merely coming in to decide
how many such fees a man should get, rather than
lessening the amount of each particular fee. Cus



ON LABOR.               133
tom determines the wages when men take farms on
shares. But competition is now breaking down
custom in all directions, and will soon, I think,
reign supreme over the economic field. Prejudice
is closely allied to custom, and has some voice still
in adjusting wages, as may be seen, perhaps, in women's wages, crowded down to a point unreasonably
low, as compared with the wages of men. Custom
and prejudice may yield the field, but fashion, which
is one form of competition, will always have an
influence over wages. They who lead the styles in
any department whatsoever, will always offer their
services to society at an advantage to themselves,
and their rate of compensation will be legitimately
higher than the average rate.
7. Legal restrictions and voluntary associations
are another cause acting on wages, by acting on the
supply of laborers. Laws inhibiting or promoting
immigration, laws appointing the fees and salaries
of officials, tariff laws, whether prohibitory or only
restrictive, unequal taxation, and so on, all have an
agency in adjusting wages. Governments are comning, however, much more freely than formerly, to
leave everything except the wages of their own servants, and those things which they choose to tax, to
the simple and safe action of supply and demand.
The guilds of the Middle Ages, and the trades'
unions of our own day, are examples of voluntary
associations for the sake of regulating the wages of
the members by combined action. The restrictions
in the old guilds, limiting the number of apprentices to each artisan, determining the time a man
should serve before he could become a master, and




134     ELEMENTS OF POLITICAL ECONOMY.
so on, were very onerous, and have mostly passed
away. The trades' unions in this country cannot be
commended, because they tend to destroy the freedonm of personal action, and bring all workmen to
one level of wages. The spirit of Political Economy, which is the spirit of freedom, is against such
associations for such purposes. If any man has a
service to render, let him offer it freely, and make the
best terms he can. with whoever wants it.
Having looked at the principles that determine
the compensation of skilled labor, and also at some
causes tending to vary the wages both of skilled
and common labor, we pass now to a consideration
of those principles more particularly applicable to
the wages of common labor.    All value, as we
know, is a resultant of two desires and two efforts,
and is variable by any variation of either desire or
either effort. When the laborer offers a series of
efforts to another person, he does so in virtue of a
desire for something which that other person has to
give, for food, clothing, money; and the other person
has a desire for the efforts of the laborer, and is
willing to give in return the food, clothing, money,
or whatever it may be. The more laborers there are
who offer their service to this person, the more likely
he is to obtain the service at a cheap rate, since
there is a competition among the laborers to secure
that food, clothing, money, and so on, which he
offers in return for the service: the more persons, on
the other hand, who offer food, clothing, money, and
so on, to the laborers there present, the more likely
are the latter to receive a high rate for their efforts,
since there is a competition among employers to




ON LABOR.               135
secure such efforts. The number of employers and
the amount of that which they offer as return for
such efforts, constitutes the demand for laborers;
the number of laborers willing to render service for
what is thus offered in return, constitutes the supply
of labor: the current rate of wages of common
labor is determined by the adjustment, that is, the
equalization of the demand and supply. In what
we have said thus far in relation to wages, we have
referred chiefly to causes acting on the supply of
laborers, rather than on the demand for labor: we
must now look in the other direction, and anticipate
the discussions of the next chapter, so far as to say,
that all capital constitutes an immediate and pressing
demand for labor. Whoever desires a service which
a laborer can render, and lays by something to pay
for that service, creates that instant a demand for
labor; and especially, whoever accumulates raw materials which laborers are to work up, builds, buys,
or keeps machinery which laborers are to tend, or
puts himself in position to suffer loss by the ownership of lands, ships, or other property whatsoever,
unless laborers be employed to make them productive, creates thereby an instant demand for labor.
All such accumulations whatsoever, destined in the
owner's mind to be employed in further production,
all implements, buildings, and improvements, designed to assist labor, and raw materials which labor
must work up, are capital; and capital must be constantly united with labor, or the owners will suffer
an inevitable loss. The presence of capital anywhere constitutes a demand for labor. The more
capital there is anywhere, the stronger the demand




136     ELEMENTS OF POLITICAL ECONOMY.
for labor; and capital, therefore, is the poor man's
best friend. 1Mr. Carey regards the laborer as at a
disadvantage compared with capital, because the
laborer must at once dispose of his product, or
starve; which seems to me a superficial view of the
relation, because capital submits to an instant loss
when it declines to employ labor. Capital does not
like to lose its profit any more than the laborer likes
to lose his bread. In a true and general view, the one
is under just as much pressure to employ laborers, as
the other to get employment. They come together
of necessity into a relation of mutual dependence,
which God has ordained, and which, though man
may temporarily disturb it, he can never overthrow.
Labor, then, takes itself to the market to effect an
exchange with capital. It is only capital that employs labor. Now, the terms of the exchange, that is
to say, the average rate of the wages of common labor, will depend on the number of laborers compared
with the amount of capital there present. The aggregate of all the forms of capital there present, helps
to make up in the mind of the capitalist his motive for
employing labor, because the more he has invested
in buildings, machinery, and materials, the more
urgent is the necessity to employ laborers, in order
to make the investment productive; although only a
part of the capital is free to be offered in payment
of wages. Demand for labor is constituted, strictly
speaking, by that part of the capital which is available to be offered in the form of wages, but it is
clear, that, as a rule, demand, that is, the portion of
capital designed for the payment of wages, may
increase under the influence of increased desire,for




ON LABOR.              137
laborers, and an increased desire for laborers is a
necessary consequence of the increase in the aggregate of capital. Whether the portion designed for
wages will increase or not, on an increase of capital,
will depend on the number of laborers. It is certainly possible that capital may go on increasing,
while the wages-fund (the portion designed for wages) may remain stationary, or even diminish, owing
to the competition of an increased number of labor.
ers, and the diminished compensation going to each.
The number of laborers remaining the same, and
intelligently comprehending their position, the size
of the wages-fund will necessarily keep pace with
all increase of aggregate capital. This point of
connection between the two, this influence of the
whole capital on the desire for laborers, and consequently on the wages-fund, is a point which I do
not remember to have seen noticed by anybody, yet
which is obviously of much importance in unfolding
the relations of labor to capital. Now, wherever
there is capital there is a wages-fund, and we have
just seen what the connection is between the whole
capital and that portion of it which is ready to be
devoted to the payment of wages. If we call this
portion of capital; or wages-fund, a dividend, and
the number of laborers a divisor, the quotient will
be the general average rate of wages at that time
and place. This principle invariably determines the
current rate of wages in any country. If the laborers are few relatively to the amount of capital, there
will be a large dividend, and a small divisor, and
infallibly a large quotient. In the reverse case, when
laborers are many as compared with the capital




138     ELEMENTS OF POLITICAL ECONOMY.
that seeks to employ them, the large divisor and
small dividend will surely give a small quotient. In
the first case, capitalists will compete for laborers,
and wages will go up. In the second case, laborers
will compete for employment, and wages will go
down.
We see now what we are to think of many remedies popularly recommended for low wages. When
wages are very low in any country, or in any department of labor, there are some who think that the
government ought to interfere to better them, at
least to designate a minimum below which wages
shall not go; others propose that strong public opinion be brought to bear upon employers, to induce
them to give sufficient wages: others still maintain
that combinations among the workmen themselves,
for the purpose of dictating the rate of wages to the
employers, would be an appropriate and effective
remedy. Every one of these is a delusion, and so
is every other proposal that ignores the law of wages
just established. That which pays for labor in
every country, is a certain portion of actually accumulated capital, which cannot be increased by the
proposed action of government, nor by the influence
of public opinion, nor by combinations among the
workmen themselves. There is also in every country a certain number of laborers, and this number
cannot be diminished by the proposed action of government, nor by public opinion, nor by combinations among themselves. There is to be a division
now among all these laborers of the portion of capital
actually there present. Suppose there has been free
competition on both sides, and that the average rate of




ON LABOR.               139
wages as thus determined, is one dollar per day for
each laborer. Suppose that everybody thinks that
this is insufficient, and that government accordingly
issues a decree that wages thereafter must be one
dollar and a half per day to each laborer. This decree has no tendency to increase the size of the
wages-fund; that is determined by the general productiveness of labor, and by the division, under free
competition, between wages and profits; if the decree, therefore, were carried out, as it never could be,
the result would be that only two thirds of the
laborers there present could be employed at all,
and the remaining third must be supported by charity, or starve. The wages-fund is only sufficient to
give to all the laborers a dollar a day, and if the
government enforces a new distribution at a rate
one third higher, then one third of the laborers cannot be employed at all. There is no use in arguing
against any one of the four fundamental rules of
arithmetic. The question of wages is a question of
Division. It is complained that the quotient is too
small. Well, then, how many ways are there to
make a quotient larger? Two ways. Enlarge your
dividend, the divisor remaining the same, and the
quotient will be larger: lessen your divisor, the dividend remaining the same, and the quotient will be
larger. All accessions to capital, all investment of
profits in an enlarged business, all saving from expenditure for the sake of further production, will
increase the dividend, and, the number of laborers
continuing as before, the rate of wages will rise.
Or, if there be no accessions to capital, the wagesfund consequently standing as before, and the num.




140      ELEMENTS OF POLITICAL ECONOMY.
ber of laborers be diminished, as by emigration to
new fields of effort, or by enlistment in armies, the
divisor will be lessened, and the rate of wages will
rise. The reversed, suppositions will give, of course,
reversed results, and wages will go down.
Though not in the way proposed, there is a way
in which government may act most beneficially
upon this matter of wages. By faithfulness to its
peculiar trust, that is to say, by making the rights
of person and property as secure as possible, it gives
an impulse to enterprise, a spur to industry, makes
the desire of accumulation effective, and thus indirectly but most powerfully contributes to the increase of capital, to the fund out of which wages
are paid. Also, by fostering the means of education, and by the diffusion of knowledge among all
classes, government acts beneficially upon the laborers, to make them intelligent, to impart to them that
character and self-respect which fits them, in exchanging services with capital, to demand and secure
their full rights in the exchange. It is not denied
that capital takes advantage of the ignorance and
immobility of laborers, and sometimes secures their
services at a less rate than the just relations of
capital to labor then and there would indicate, but
the remedy for this is not in arbitrary interference
of government in the bargain, but in the intelligence
and self-respect of the laborers which shall fit themn
to insist on a just bargain. In this whole sphere of
exchange, the just and comprehensive rule always
will be, that when men exchange services with each
other, each party is bound to look out for his own
interest, to know the market-value of his own ser



ON LABOR.               141
vice, and to make the best terms for himself which
he can make. Capital does this for itself, and laborers ought to do this for themselves, and if they
are persistently cheated in the exchange, they have
nobody to blame but themselves.    Government
should give them all facilities for intelligence:
they should give themselves a character, and cherish a hearty self-respect, which there is nothing in
their position to diminish: towards such laborers,
capital occupies no vantage ground in an exchange
of mutual services.
Public opinion can do something towards bettering the wages of labor, in countries where they are
low, by organizing means to assist the laborers in
distributing themselves at points where their services are most in demand.. Societies in our seaboard cities, whose object it is to aid immigrants to
pass on from those cities where labor is very abundant, to the country towns and to the West, where it
is relatively much less so, are commendable in their
purpose and spirit. So also are emigration societies,
in countries situated as Ireland has been, where centuries of misgovernment combined with centuries of
ignorance, produced a temporary pressure of population on the means of support. Where such pressure exists, as it does also in China, it is a good
thing for public opinion to be favorable to emigration to newer and more fortunate countries, and
liberally to assist in the distribution of labor to those
points, wherever they may be, where capital is ready
and anxious to employ it.
It may surprise some who are familiar with books
on Political Economy, that I do not here adduce the




142     ELEMENTS OF POLITICAL ECONOMY.
influence of public opinion in restraining population
as favorable to wages, and inveigh against the force
of that spring of population which the Creator has
coiled up in the nature of man, as compared with
the weakness of that power by which the earth produces sustenance for man. Mr. Malthus, and other
economists, have discussed at length the tendency in
the law of human fecundity to outstrip in its results
the law of diminished returns from land; and have
expressed an apprehension that the time may come
when the earth shall be unable to support her children. They have enlarged upon the well-known fact
that in the United States population doubles every
twenty-five years; and have calculated that, at this
rate, the inhabitants of every country would, in the
course of five centuries increase to above a million
times their previous number; that the population of
England, for example, would, at this rate, in that
time, exceed twenty million millions, -a population
which could not get standing-room there. Such a
rate of increase certainly needs to be checked; and
Mr. Malthus divides the checks to population into
the positive and the preventive. The first increase
the number of deaths, the second diminish the number of births. The principal positive checks are war,
famine, and disease; the principal preventive check
is prudence. Of course it is better that the check
which limits fecundity should come into play, rather
than those which decrease longevity; and these writers are at pains to inculcate upon the laboring classes
prudence in marrying, and temperance after marriage.
These discussions are interesting in themselves, and
have attracted much attention; but I cannot regard




ON LABOR.               143
them as particularly pertinent to discussions on
wages. God has endowed mankind with a strong
impulse towards procreation.  But experience has
shown that it is not too strong for the purposes for
which it was given. Experience has also shown
that, as society advances, and men come more and
more under the influence of reason, and affection, the
preventive check comes silently and effectually into
operation. Experience has shown also that food and
comforts have more than kept pace with the stride
of population; since the inhabitants of the world, as
a whole, were never so well fed and clothed and
housed as now. The abstract antagonism of the law
of the increase of population with the law of the
increase of food is admitted; but HE who is author
of the laws is author also of natural counter-workings of them; so that a practical tendency towards
their coming into conflict is denied. Each human
being is as much constituted by Nature to receive
services as to render them, and each is as likely as
any of the others to become a capitalist; and therefore the law of population, the maladministrations
of men aside, has no scientific relevancy to the question of wages. Whenever population has pressed
on food, reasons for it are apparent outside of natural laws.
But will not strikes accomplish that for the raising
of wages which neither government nor public opinion can effect? A strike is a combination among
workmen for an increase of wages. They agree to
stop work altogether until their employers shall comply with their terms, and raise their wages to a certain definite sum. It is not to be denied that work



144     ELEMENTS OF POLITICAL ECONOMY.
men thus possess, under many circumstances, a verv
considerable reserved power which they can bring to
bear upon their employers. When the processes of
production are going briskly forward, when the manufactory is thoroughly furnished with competent
hands, and profitable orders are in waiting, it is no
laughable thing for the owner to be told, of a cloudy
morning, that his hands have all stopped work, and
refuse to lift a finger, until he shall agree to pay them
wages at a rate which they themselves dictate. Of
course, his first impulse is to discharge every man of
them, and endeavor to fill his factory with new hands
But this he cannot always do. At best it will take
time. Meanwhile his wheel or engine must be idle,
customers be lost, orders unfilled, and profits nowhere. And so, many an employer has surrendered
to a strike, when he felt that it was all unjust, rather
than undergo a still greater loss. It is admitted that
workmen may sometimes strike and gain their point,
but it is none the less true for all that, that strikes
are false in theory and pernicious in practice; that
they spring from utter misapprehension of the true
principles of wages; that they embitter relations
between employers and employed which ought to be
cordial and free; and that they rarely or never are
permanently advantageous to the workmen themselves.
In the first place, then, strikes are false in theory.
It is a very old adage, that it takes two to make a
bargain. Express this in the language of Political
Economy, and it will take this form: When two
men have mutual services to exchange, let them
come to a fair agreement as to the terms on which




ON LABOR.               140
they will exchange. Certainly, let each make the
best terms he can, but let the bargain always be free.
If one party, who happens to have the power to do
it, uses compulsion upon the other, it ceases to be a
bargain at all, and becomes a sort of robbery. If,
driving with my good horse along a lonely road, I
meet another man driving an inferior one, and he,
being the stronger man, compels me to exchanige
horses, it may be all very well for him, but I protest
that it is no bargain. It is robbery. Now, workmen
bring a certain valuable service to the market, just
such a service as the capitalist wants, and he has to
offer just such a service as they want, namely, wages.
Now let them come to a free and fair agreement on
the terms of their exchange. Let the workmen by
all means make the very best terms they can; let
them insist to the last penny on all which they can
get elsewhere, for the value of their service is determined, as the value of every other service is determined, by what it will bring. Let the employer do
the same. Let a fair bargain be struck. There is
no objection to this kind of striking; and the more
intelligence and skill and self-respect a workman has,
the better prepared he is to strike the bargain and
secure his just due. If the employer will not yield
him this, let him have done with it at once, and go
elsewhere. Or, if a just bargain has been struck,
and afterwards circumstances shall so alter that he
thinks he can rightfully demand more, let him frankly
demand it, remembering always that it is an exchange he has to do with, and that it takes two to
make a bargain. If he does not get for his service
vhat he thinks he ought to get, let him quit. He
10




146      ELEMENTS OF POLITICAL ECONOMY.
has a perfect right to quit. All this is legitimate
and fair and above board.
But a strike is wholly different. This brings compulsion into play. A combination among workmen
to leave an employer in the lurch, and especially a
combination which forces into its ranks by cajoling
or menaces, those who are unwilling to join it, is of
itself a confession of the injustice of the claim. If
the claim be just, there is no occasion to extort it.
If the value of the service rendered be equal to the
sum demanded, if this can be obtained elsewhere,
there is no need of consultation and conference, combination and conspiracy. Let each man go quickly
where he can get the most for his service. The fact
that this is not done, that means are brought to bear
upon the employer which are not ordinarily used in
bargains, -means of the nature of a threat —that
the justice of the claim is not relied on in a case
where, more than anywhere else, justice can enforce
itself, that full and free explanations are not had,
that no notice is given, that great damage is expected by their action to accrue to the employer, all
this seems to forget that the transaction between
employers and employed is a case of pure exchange,
a simple bargain of one service against another service.  Therefore, I say, that strikes are false in
theory.
But this is not the worst of it. Strikes are pernicious in practice. And the grand reason for this
is they tend to lessen the wages-fund. The production of all material commodities is a joint process.
Capital and labor both conspire in it. The gross
returns belong wholly to the capitalists and the lab, r



ON LABOR.               147
ers. The profits of capital and the wages of labor
are paid out of these returns and from no other
source. It is for the interest of both capitalists and
laborers that these returns be as large as possible,
because they are wholly divided between the two,
and if the whole be large the parts will also be large.
Profits being taken out, the rest is wages-fund; or,
more strictly speaking, wages-fund being taken out,
the rest is profits. It makes no difference practically
that the wages have been advanced to the laborers
while the production was still going forward, since
the wages really come out of the proceeds of the
joint process. The capitalist never means to pay
wages out of his previous accumulations, and ought
not to be expected to do so, and were he obliged to
do so, it would soon be worse for the laborers, since
these accumulations are the only stock which supports labor. It is not only just but needful for the
laborers, that wages shall be paid out of the proceeds of that on which labor is now expended.
Whatever, then, tends to lessen these proceeds,
necessarily lessens the wages-fund. Any interruption of the process of production by strikes, any
want of full and hearty cooperation between the two
parties to the joint process, will, if continued, infallibly make the wages-fund smaller.
Suppose it takes three months to realize the returns in some branch of manufacture. If, when the
workmen are paid off at the end of one three months,
they all strike at the beginning of the next, and both
parties hold out for three months, what is now the
chance for higher wages? It shall go hard even if
they get as much as before. And why? Because




148     ELEMENTS OF POLITICAL ECONOMY.
the mill has stood idle, and the owner has lost three
months' profits on the whole investment connected
with the mill.  They have lost wages for three
months, and now when they come to begin again,
they may not be able to wait, as before, till the end
of the cycle, and their wages must be advanced out
of a fund smaller than it would have been but for
the strike. The employer usually advances wages
out of his own, or borrowed capital, expecting to be
repaid from the results of current work. Sometimes
his mere expectation of large returns acts favorably
on the wages-fund.  But this employer has lost
profits and customers by the strike, and his business is
disarranged. His workmen by inflicting a loss upon
themselves have found an opportunity of inflicting
a loss upon him. Their loss is undoubtedly the
greater of the two. Therefore, I say, strikes are
commonly, and almost necessarily, a disadvantage
to the workmen themselves. The case just put is a
strong case to show the principle involved, but all
interruption whatever to the processes of production
by strikes, all consequent embittered relations between employers and employed, all want of hearty
working together of the labor with the capital, tend
to diminish the gross returns, and consequently, both
the wages-fund and profits. As far as this point is
concerned, there is no sense or reason in the common
jealousy of workmen towards employers. There is
no real antagonism between them. Their interests
lie along the same line. They are partners in the
same concern. Workmen who are intelligent, prudent, skilful, will infallibly get their due. Employers who are humane, urbane, fair, will find their
account in it.




ON LABOR.               149
In discussing labor and wages, it will be noticed
that i have made no reference to a subject a good
deal agitated at present in Europe and somewhat
also in the United States, namely, to cooperation.
This is a scheme originating with laborers themselves, under which they combine, either to purchase
their necessaries in common and hence at cheaper
rates because avoiding all profits of middle-men; or,
more especially, to engage in joint production, the
workmen furnishing the capital, all being copartners,
and of course all sharing pro rata the profits of the
concern. All this is well; and in countries where
laborers are under traditional disabilities, it may be
very promotive of their welfare; but any one can see
that no new economic principle is involved in it.
The workmen unite the character of capitalist and
laborer in their own persons, and both receive wages
and share profits; but the principles which determine
the amountbof each are the same as if the two went
in opposite directions. The practical success of the
scheme will depend in each case upon the question
whether there be any of the workmen of sufficient
organizing and executive ability to carry it through.
Workmen should have a chance to do this everywhere: it is done essentially whenever two or more
workingmen organize a firm to carry on any business. In the United States the greatest freedom
prevails; there is nothing to hinder any laborer from
becoming a capitalist; nearly all our capitalists were
formerly laborers; the savings-banks are open for the
smallest gains; and the shares of most joint-stock
companies are open to everybody who has means to
buy them.   There is only one consideration that




150     ELEMENTS OF POLITICAL ECONOMY.
seems to justify in this country any special jealousy
of laborers as such, towards capitalists as such; and
that is the fact, that the legislature does sometimes
confer, by means of corporate charters, and otherwise, certain extraordinary rights upon capital. So
long as capital and labor rest solely upon their natural rights, neither can have the advantage of the
other; but so far forth as advantage is given to capital by law, it is unjust to labor, and ought to be
vigilantly watched and counteracted by laborers.
The legislature, whether state or national, cannot be
too scrupulous in this whole matter. The proper
limits of legislative action upon economical subjects
are pretty narrow. Capital and labor should both
have the utmost liberty of action compatible with
social security; and the equal rights of each will, in
general, best be reached by leaving both to take care
of themselves, subject only to general laws relating
to person and property. If the legislature yields to
special claims of capital, it must expect to hear labor
also knocking at its doors. If capitalists " strike "
for artificial profits by means of a protective tariff,
why may not laborers "strike " for artificial wages?
The former have set the latter a bad example. Much
of the recent discontent of labor has come from this
greed of capital demanding and securing for itself
special privileges. Let alone. Legislatures are not
wise enough to say how many hours per day adult
laborers shall work, or how many dollars per day
capitalists shall pay them. To attempt to do either
is an economic abomination.




ON CAPITAL.              151
CHAPTER VII.
ON CAPITAL.
THE three requisites of production are labor,
power-agents, and capital. Of the first we have
now learned what can be learned, without attending
in turn to its counterpart - capital; of the second
we have learned already that all the powers of Nature
work gratuitously in the service of man; and of the
third, we are now to learn what it is, how it arises,
how it works, and what its influence is upon the
progress and amelioration of society. Political economy is able to show that there is no natural opposi-,
tion of interest between capitalists and laborers;
that capital is just as dependent on labor as labor is
dependent on capital; that each is equally interested
in the prosperity of the other, and that thus a deep
and admirable harmony subsists in this part, as in
every other part, of the social organism.
Capital is any product reserved to be employed in
further production. This definition will be found to
cover all the cases, to obviate many difficulties, and
to take the life out of many disputes. Mr. Carey defines capital as the instrument by means of which
man obtains mastery over Nature, including in it
the physical and mental powers of man himself,
and thus needlessly confuses the boundaries between
capital and labor. It is much simpler and better to




152     ELEMENTS OF POLITICAL ECONOMvY.
define labor, as has already been done, as physical
or mental exertion for the sake of a return, and to
define capital, as is now done, as any product outside of himself reserved by man for further production. There are many products devoted to immediate
consumption; that is to say, to the gratification of
present desires, without any reference to the rendering of future services by means of their help. Such
products are not capital. They are a portion of the
wealth of the community, they are valuable, but
capital they are not. All capital is wealth, but all
wealth is not capital. Only that portion is capital
which employs, assists, and pays for labor. All raw
materials are capital, all machinery is capital, all
funds destined to purchase these, and all funds destined for wages, are capital. As all values reside in
services exchanged, so all capital resides in services
accumulated with reference to an ultimate exchange.
It is only in the intention of the owner that capital
can be discriminated from other products destined
by him for the gratification of himself and his family,
or for benevolent purposes. Take a hardware manufacturer, for example, and he has a stock on hand of
finished hardware, a part of the proceeds of which
he will put back into his business in the form of
materials, tools, and wages, and another part will go
in the form of personal and family expenditure, and
it is only his intention that discriminates the first
part, which is purely capital, from the second part,
which, as far as he is concerned, is not capital at all.
It may indeed become capital in the hands of those
to whom he pays it out; and will become so, in case
they destine it as an aid to further production in




ON CAPITAL.              153
their several lines of business. The whole mass
of capital, then, in any country, is the whole mass of
those products, of whatever kind, which are destined
in the mind of their owners to be retained as an aid
towards rendering future services to society.
How does capital arise?  We have seen that
there are obstacles which lie in the way of the gratification of men's desires in all directions, and that
these obstacles can only be removed by human effort.
When a man devotes himself to one set of these
obstacles, with a view to surmount them, he is not
long in discovering, that if he had certain tools, his
work would be greatly facilitated; and having discovered that, it will not be long before he will attempt himself, or induce others to attempt, to invent
such tools. The beaver gnaws down the tree with
his teeth, from generation to generation; but man is
a being more nobly endowed than the beaver, and
no sooner had he occasion to fell trees, than something of the nature of an axe suggested itself to his
ingenuity. It is true, that his earliest attempts at
axe-making were probably of the rudest sort, but
just as soon as anything was devised, whether of
flint or shell or metal, that rendered easier the labor
of felling a tree, capital made a beginning along that
line of obstacles. Among the more gifted races,
progress in this direction was perhaps more rapid
than we are wont to think it was, since Tubal-cain,
even in the times before the flood, is said to have
been 1" an instructor of every artificer in brass and
iron." At any rate, we are at no loss to explain the
origin of capital: it is found in the motive that
exists everywhere, and that always existed, to lessen,




154     ELEMENTS OF POLITICAL ECONOMY.
if possible, a given irksome effort that is the condition of a given satisfaction. And this origin of
capital gives the key-note to its universal use and
indefinite expansion. Tools are invented and employed for no other reason than this, that, by means
of their help, the human effort is lessened relatively
to a given satisfaction.  The powers of Nature,
such as those which make the grain grow, bring the
tree down, turn the water-wheel, impel the locomotive, and send the message round the world, all stand
ready to slave in the service of man; but in order to
make their aid available for human purposes, there
must be a plough, an axe, a wheel, an engine, an
electric machine. These, and all other implements
whatsoever, from the tiniest needle to the most ponderous engine, are products created and retained for
the sake of further production. They are capital.
They are not capable of yielding in themselves
an ultimate satisfaction to human wants, but they
mediate between the powers of Nature, which they
enable us to make available for our purposes, and
those ultimate satisfactions. Nature furnishes all
the powers, and all the natural qualities of objects,
but labor can go but a very little way towards
making these available for the satisfaction of human
wants, without the aid of implements and contrivances which are produced by labor; and which,
being retained as an aid to future labor, are capital.
Since it requires tools to make tools, the progress of
capital at first was very slow; but, since every advance in mechanical contrivance makes still further
advances easier, there is a natural tendency, which
facts abundantly exemplify, to a more and more




ON CAPITAL.              155
rapid progression in the number and perfection of
all implements of production. The same motive
that impelled to the first invention, has impelled to
the whole series of inventions since, and will constantly impel to further inventions till the end of
time. This motive, - and there is no motive that
actuates man more universal, - is, to lessen the
onerous effort of human muscle, and to throw upon the
ever-willing shoulders of Nature more and more of the
burden of production. Every step of this progress
gives birth to a larger and larger proportion of satisfactions relatively to efforts; marks an increasing
control on the part of man over the powers of
Nature; and gives promise for the time to come. of
greater advantages still in both these two directions.
And it is because capital brings gratuitous natural
forces into service, and the more so as capital progresses, that the value of those things created by the
aid of capital tends constantly to decline as compared with the value of those things, in whose pro.
duction capital less conspires; and in the chapter
following the next will be developed from this point
one or two important laws of value.
Now, then, having seen what capital is, and the
human motive that brings it forward in production,
we next inquire after its remuneration.  The remuneration of capital is technically called profits: just
as wages are technically the remuneration of labor.
The present proposition is, that profits are the legitimate reward of a service, just as much, and in the
same sense, as wages are the legitimate reward of a
service. The distinctive service of the capitalist as
such, as distinguished fom the service of the laborer,




156     ELEMENTS OF POLITICAL ECONOMY.
consists in his voluntary abstinence from the use and
enjoyment of that which he contributes in aid of
further production. If a man puts a thousand dollars, which he might spend upon his immediate
gratifications, into a machine to be used in his business, the money immediately becomes capital; the
owner practices abstinence, and for this abstinence
justly expects a reward. This reward we call profit.
The expected profit is the only motive for the abstinence. He will not be content simply to get his
thousand dollars back, for that he has now: he must
have his thousand dollars with a profit. Suppose A
to be a manufacturer of flax fabrics, B to be a farmer
in his neighborhood, and C an expert mechanic acquainted with the current modes of spinning and
weaving flax. A has a capital of $10,000 invested
in his business, in buildings, machinery, materials,
and wages-fund, which nets him $1000 a-year clear
profit. At the end of the year, the question with
him is, whether he shall spend this $1000 unproductively in immediate gratifications, or, adding it to
his capital stock, increase his business with it. If
he concludes to do the latter, he must forego the use
and enjoyment of his $1000 for the present, he must
practise abstinence; and this he will not do, and
ought not to do, except in view of increased profits
to accrue from his business at the end of the next
year. If more flax is to be spun and woven in his
factory, more money must be invested to buy more
materials, to pay more laborers, or to pay for more
or better machinery. His contribution to the prospectively increased production is $1000, transformed
by his intention from simple property to capital,




ON CAPITAL.             157
devoted to production by a voluntary abstinence
from its present use and enjoyment, in view of a
future reward or profit. It is a service rendered by
one man to a joint process to be performed by many,
and gives him a just claim to a portion of the product. Is exertion irksome? So is abstinence. Are
wages legitimate? So are profits. B as a farmer
might devote all his fields to growing food and fruits
for the gratification of himself and family, but since
A now wants more flax fibre for his factory, he gives
up a part of his acres to growing flax, and this becomes a part of A's capital in the form of raw material; and the money received for it may become
capital in B's hands by being spent either in agricultural improvements, or in buying additional land.
The mechanic C, by giving time, exertion, and
money to the work, may invent an improved machine for spinning flax, to be introduced into A's
factory. The machine becomes a part of A's capital,
and the money paid to C for his machine is partly
wages, a reward for the labor bestowed on its construction, and partly profits, to replace to C the
money used in making the machine, together with a
reward for his abstinence from.the use of this money
until the machine was sold. Thus we see that capital, whether in the form of wages-fund, materials, or
implements, is always the result of abstinence; and
that whoever abstains from the present enjoyment of
anything, in order that that something may contribute
to a future production, renders an essential service;
and, consequently, that the reward of such abstinence, or profit, is just as legitimate as are wages.
This is very clearly seen in the common case in




158     ELEMENTS OF POLITICAL ECONOMY.
which one man loans capital to a second, to be used
by that second in his own business. Brooks has a
thousand dollars in hand which he is at liberty
either to enjoy unproductively, or to employ himself
productively, with the assurance of a profit; but is
willing to forego the use of it for a year in favor
of Smith, who is anxious to enlarge his business.
Brooks' abstinence is a clear service to Smith; and
at the end of the year, therefore, Smith not only
refunds the thousand dollars borrowed, but also sundry other dollars besides as a specific reward for this
specific service. If Smith keeps the money ten years
or twenty, it is no more than just that he should pay
this sum every year till the principal is refunded,
because the service is every year repeated, the abstinence is still practised in his favor. Therefore,
capital once acquired by abstinence, becomes, if the
abstinence be continued, a legitimate source of perpetual revenue to the owner, as well as a perpetual
source for the maintenance of laborers. Whoever
transforms his property into capital, establishes thereby a permanent fund whence he may draw an income, and laborers support, in perpetuity; because
the capital, though constantly disappearing in production, as constantly reappears in products, with
profits added: a fact which shows the folly of the
popular opinion which regards more favorably the
man who spends his money freely and unproductively, than the man who, turning his money into
capital, building a mill, or making other permanent
investments, creates by that means a fund in the
community, out of which permanent wages and
permanent profits can be paid. The strength of the




ON CAPITAL.             159
motives to abstinence in any country will depend
largely upon the character of the government, and
the organization of society there; these motives
being generally strongest where liberty of action,
equality of privileges, and security of property are
the greatest.
We turn now to the relations of capital to labor,
and to that law of the distribution of the products
between capitalists and laborers, which was first
promulgated by Mr. Carey, and which of itself fully
justifies his claim to be regarded as an important
contributor to the science of Political Economy. As
I regard some of the positions of Mr. Carey as fundamentally erroneous, and shall freely animadvert
on them in that view, I wish at this point to bear
testimony to his great merit as the original discoverer of the beautiful law of distribution, in the
light of which the future condition of the laboring
classes in all countries, if they are only true to
themselves, seems hopeful and bright. Capitalists
are interested in profits, and laborers are interestedr
in wages; is there, then, as is commonly supposed,
a deep-seated antagonism between them?  None
whatever. No profits can be realized unless labor
be united with the capital, because it is labor alone
that works up the raw materials, tends the machinery, and disposes of the products. Capital not
united to labor remains barren, giving birth to no
profit, nay, itself commonly becoming less. At any
rate, the idle mill and hoarded gold yield no profit.
Without the profit there will be no capital; since
no man will practise abstinence without the hope
of a reward: but without the labor there will be no




160     ELEMENTS OF POLITICAL ECONOMY.
profit; and therefore the very presence of capital in
any community, constitutes of itself a demand for
labor. The more of capital in any community, the
greater the demand for laborers, since it is through
laborers alone that the profits are realized. But the
greater the demand for laborers, the greater the reward of labor; and, therefore, laborers as such, are
interested in nothing so much as in the increase of
capital, and in the strength of those motives to abstinence, out of which capital springs.
Capital must have laborers. Laborers desire remunerative employment. It is the old case of values
over again. Labor offers a service to capital, and
capital offers a service to labor. They exchange to
the mutual advantage of both, and one is as independent as the other. The workmen may hold up
their heads.  They offer an honorable service on
which capital is absolutely dependent for its existence.  They offer a service as legitimate and as
respectable, as that of the clergyman who preaches
their sermons and baptizes their children, and are
paid on precisely the same principles. Let no employer feel too much exalted towards his workmen.
The money he renders them is no whit better than
the work they render him. The exchange is honorable, and the parties to it on the same level of advantage.  They are as necessary to him as he is
necessary to them. As a capitalist he cannot exist
without them; as laborers they cannot exist without
him. He is one blade of the shears, they are the
other blade, and it takes both blades to cut. It is
absurd to ask which blade cuts most, because there
is no cutting at all, unless both blades work together




ON CAPITAL.              161
More than this. Capital and labor are not only
essential to each other, but also each is bettered by
the prosperity of the other. If capital realizes a
good round rate per cent., every capitalist is anxious
to enlarge his business, whether as lender or active
operator, and employ as much of his wealth as possible, as capital. This process increases capital. If
men constantly put their profits only back into their
business, which, under a high rate per cent., they
will be pretty sure to do, capital rapidly increases.
But increase of capital is, in its very nature, an
increased demand for laborers. An increased demand for laborers, other things being equal, infallibly raises wages; just as an increased demand for
anything else raises its value. Therefore, laborers
are directly interested in the prosperity of capital,
because the prosperity of capital leads to its increase, and its increase leads to higher wages. As
a matter of fact, high profits and high wages, so far
from being incompatible, usually accompany each
other.
But is the capitalist equally interested in the prosperity of laborers? I think so. That he has to pay
high wages is not necessarily a dead loss to him.
This is no game of grab, in which what one gains
another loses; it is a case of joint production, in
which two parties conspire, and in which whatever
helps to enlarge the gross amount produced, helps to
increase the share falling to each party. If then, as
they undoubtedly do, high wages tend to make the
workmen more intelligent, industrious, frugal, and
inventive, they are not a loss to the capitalist, but a
gain.  Larger gross returns are thereby secured.
11




162      ELEMENTS OF POLITICAL ECONOMY.
Improved intelligence and skill of workmen affect
production, just as improved machinery, secured by
the aid of capital, affects it. Both alike enlarge the
aggregate of products to be divided between capitalist and laborer. Now, in the division of products
thus rendered larger in amount, what hinders capital
tirom getting a fair share? When a firm is prosperous, are not all the partners benefited? All that is
produced is to be divided; if more is produced,
more is to be divided. Intelligent, industrious, skilful workmen, are best for production, are best for
the capitalist, and therefore, high wages, which tend
to make them so, and which are a consequence of
their being so, are to be paid without grudging.
When the matter is sifted to the bottom, it is seen
that capital is as much interested in the prosperity
of labor, as labor is interested in the prosperity of
capital. All legitimate interests are in harmony.
I am now prepared to prove that all increase of
capital, while it redounds to the benefit of capitalists, redounds in a still higher degree to the benefit
of laborers. The demonstration is Mr. Carey's, and
is the law of distribution above referred to. The
proof is this. The rate per cent. of profits invariably goes down as a country grows older and richer.
This is a simple fact of history, which no one will
dispute. It has been exemplified alike in ancient
and in modern times, so that one is at a loss whence
to take the best examples, when all the examples are
so good. In England, three centuries ago, the legal
rate of interest was ten per cent., while now the
average rate is barely four in that country, and
lower still in Holland. During the first years of




ON CAPITAL.             163
mining operations in California, from eight to fif.
teen per cent. a month, with security of real estate,
was paid for the use of money, which enormous
rates have now declined to rates not much higher
than those paid in the States along the Mississippi
River, and in these also the rates are constantly
approximating those current in the older Eastern
States. It may be assumed, therefore, as an indisputable fact, that, as capital increases, the rate per
cent. for its use tends steadily to decline; but, while
less profit is received on every hundred, there are also
more hundreds, and consequently, there is an absolute gain to capitalists as a class, and both an absolute and relative gain to the laborers. Let us take to
figures. Let $100,000,000, while the rate of profit
is six, and $500,000,000, when it has fallen to four,
be expended in payment of simple wages. So far
forth, the value of the products to be divided yearly,
will be represented respectively by $106,000,000 and
$520,000,000. In the first case, $6,000,000 is profits,
and $100,000,000 is wages. In the second case,
$20,000,000 is profits, and $500,000,000 is wages.
Here is an absolute gain to capitalists. Profits have
gone up from six to twenty millions, are more than
three times as great as before. But wages have gone
up both absolutely and relatively. They have risen
from one hundred to five hundred millions, and are
five times as great as before. Profits have risen in
the ratio of one to three, but wages in the ratio of
one to five. This arithmetical example is put for
the sake of illustration, but the principle holds good
in every case where the rate per cent. goes down
in consequence of the increase of capital, and there.




164      ELEMENTS OF POLITICAL ECONOMY.
fore the advantages of ever enlarging capital are
even greater to the laborers as a class than to the
capitalists themselves. Most assuredly, if capital
now takes less out of every hundred, more is left to
labor. Profits and wages are reciprocally the leavings of each other, since the aggregate products
created by the joint agency of capital and labor are
wholly to be divided between them. This demonstration is extremely important; for it proves beyond
a cavil, that the value of labor tends constantly to
rise, not only as compared with the value of the
material commodities which, by the aid of capital,
it helps to create, a truth we have seen before, but
also as compared with the value of the use of its
co-partner capital itself; and therefore, that there is
inwrought in the very nature of things a tendency
towards equality of condition among men. God
has ordered it so. Self-interest is indeed the mainspring of movement in the economic world; but no
man can labor intelligently and productively under
its influence, without at the same time benefitting
the masses of men. His very savings, productively
employed, are the poor man's wealth.
It only remains to speak of the forms which capital assumes, and to divide these, in general, into
circulating and fixed capital. Circulating capital
comprises all those products, the returns for the sale
or consumption of which are derived at once and
once for all. Such are generally (1) all raw materials;
(2) funds destined for wages; (3) completed products
on hand for sale; and (4) all cornmmodities bought and
held for the sake of resale. Fixed capital comprises
all those forms of capital which are purchased or held




ON CAPITAL.             165
with a view of deriving an income from their use.
Such are generally (1) all tools and machinery; (2) all
buildings used for productive purposes; (3) permanent improvements in land; (4) all investments in
aid of locomotion, such as railroads, canals, ships,
and everything subsidiary to these; (5) all products
loaned or rented, or retained for that purpose; and
(6) the national money. "' The test of fixed and circulating capital is the inquiry, Are returns secured
by the retention, or by the transfer, of the particular
product? Tools in the hands of him who uses
them are fixed, in the hands of him who manufactures them, circulating capital." 1
As civilization advances, and the aggregate of all
forms of capital enlarges, there is a tendency towards
a relative increase of fixed capital, as compared with
circulating. This disproportion would become greater
than it actually does become, were it not for the fact
that almost all forms of fixed capital are subject to a
rapid deterioration of value, due partly to usual wear
and tear, and partly to the progress of improvements,
in consequence of which, what is old soon becomes
antiquated. In nothing, perhaps, is actual cost of
production so useless a guide to present value, as in
machinery, and other forms of fixed capital. New
and easier methods are being constantly invented,
and the result of their introduction is to lessen the
value of the old apparatus, and consequently to
lessen the value of the aggregate accumulations of
fixed, as compared with the current value of circulating, capital.  Production looks perpetually to
enis; and estimates means just in proportion to
1 Bascom's Political Economy, p. 71.




166      ELEMENTS OF POLITICAL ECONOMY.
their present efficiency to reach the end proposed.
If the end can be reached by a cheaper process, in
any department, the value of the former means will
fall; and the value of the former results secured by
these means, other things being equal, will fall also.
It has been estimated, that at the present time, tlie
proportion of circulating capital to fixed in France,
is one to eight; in England, one to three; in the
United States, three to five; proportions which are
believed to be much higher in favor of fixed capital
than formerly obtained in those countries.l It is
also worthy of notice that a too rapid and general
conversion of circulating into fixed capital may
prove temporarily injurious to large classes of persons. If all carriage-makers, for example, instead
of selling their carriages outright, and making new
carriages with the proceeds, should let them out on
hire, receiving their value only in instalments, it is
evident that they could not make so many carriages
as before, and that their workmen would suffer by
the change of method. So too, if, while a national
debt is being contracted for war expenditure, general
business become dull, and capitalists, preferring the
steady income from the national bonds to the uncertain gains of business, largely invest their circulating
capital in bonds, it is very clear that many laborers
would suffer a disadvantage. In the same view, a
mania for building railroads, or any other impulse,
by which large masses of floating capital are suddenly transformed into fixed capital, will surely be
followed by some temporary distress.
1 Carey's Social Science, iii. 56.




ON LAND.               167
CHAPTER     VIII.
ON LAND.
THE crucial test of a definition, a generalization,
a theory, is found in those seemingly anomalous
cases with which all science has to do, and which
come with such apparent reluctance under her painstaking classifications. If a definition given, or a
generalization propounded, reduce into order these
outlying cases without violence, as' well as cover
easily the more central phenomena, there is at once
created a strong presumption of their truth. Does
it cover all the cases? Does it account for all the
observed facts? These are tests of definitions and
of theories. The questions relating to the value of
land and of its products have been among the most
vexed questions of Political Economy, have exercised a vast amount of ingenuity, have led to careful
and commendable observations and investigations
in the whole field of agriculture, while the diverging
views that have been taken, the arguments adduced,
the conclusions drawn, and the spirit manifested,
in these discussions, form the most unrefreshing
portion of the history of the science. These questions, however bitterly debated in the past, are
approaching, even if they have not already reached,
a satisfactory solution. The value of land and of
the products of land have been almost uniformly




168     ELEMENTS OF POLITICAL ECONOMY.
regarded in the theories of wealth as anomalous
matters, to which peculiar principles are applicable,
and from which certain conclusions are deducible,
which color and modify results and prospects in the
whole field of value. Adam Smith, Ricardo, McCulloch, Senior, and Mill hold substantially one set
of views on land and its rent. Carey and Bastiat
hold views on that subject almost totally at variance
with the English writers; it seems to me that the
means are at hand for combining what is true in
these opposing views in a clear and consistent manner, and for settling the dispute.  I feel sure that
both parties are right in many respects, and are
wrong in some respects, and am not without some
hopes of being able in this chapter to reconcile the
difference, and to show that the value of land and
the rent of land are not anomalous cases of value,
but arise from human services rendered and exchanged, just as all other value arises, and vary
under the same laws as vary all other values.
A series of propositions, and'discussions under
them, will bring out what seems to be the truth in
this whole matter.
1st. The whole earth with all its productive powers
was given to men gratuitously of God under the simple direction that they replenish and subdue it.
No provision was made for particular ownership.
The whole earth, thus bestowed without partiality
upon a whole race, had in all its spontaneous products a great utility, but, for a time, no value whatever. The spontaneous fruits, when gathered by
any person, might become thereby possessed of value
from his effort expended, but to the land itself, on




ON LAND.               169
which no human efforts had been expended, the
idea of value could not have attached. No man
would have thought to say to another under such
circumstances, This field is mine: give me something for it, and you shall have it; and if he had,
that other would not give it, because such fields
were open on every hand to his occupation gratis.
It is not in human nature to render anything for
something which may be gratuitously obtained;
value has no place in a sphere where everything is
free. But it is well worthwhile to notice, that under
God's command, the earth was not only to be replenished but subdued.  Under this word subdue,
and under the work implied in that, came in the first
idea of ownership in land. When a family commenced this work of subjugation upon a piece of
land, when they enclosed it, settled on it, tilled it,
in any way whatever improved it by an expenditure
of their own toil, then first dawned upon their minds
the idea of possession, then first began the land to
be possessed of value, since now the family would
justly say to another, If you want this field, you.
must give us an equivalent for what we have expended on it. If the transfer took place, is it not
very plain that what was sold, was not the inherent
qualities of the soil, but the services which had now
been expended in its amelioration? The first family
received the soil and its powers gratuitously, and
then expended a series of efforts on its improvement;
but a similar series of efforts bestowed on other gratuitous land in the neighborhood would make it as
eligible as this now is; if, therefore, the family insisted on more than an equivalent for their exertions




1.70    ELEMENTS OF POLITICAL ECONOMY.
actually bestowed on the land, the other would reply,
For as much labor as you have given to your land,
we can make other free land as good as yours, consequently we can give you no more than a fair equivalent for your efforts. The value therefore of the
parcel sold, would be determined, not by the gratuitous elements involved, but by the onerous elements
involved, that is to say, by the efforts already made
by the first family in connection with the land, as
compared with the efforts of the second involved in
the remuneration offered. It is not possible in the
nature of things that God's bounty to the whole race.
should be thwarted by any number of individuals
through exclusive appropriation on their part of this
bounty.  What they received gratuitously, they
must gratuitously transmit; what they have wrought
of permanent improvements on the land, they may
justly demand a recompense for, and can secure it.
By their expenditure of efforts they have saved to the
purchaser a like expenditure of efforts, and for these
they can demand, and he will be willing to concede,
a recompense; but if they go further, and demand
pay for the natural qualities of the soil which God
gave and they have not improved, for the sun that
shines, and the rain that falls on it, the demand is
blocked at once by the common sense of the purchaser, He replies: There is land enough in its
natural state, with inherent qualities as good as
yours, the same sun shining on it, and just as much
blessed rain falling on it, which I can have for nothing. I cannot give you something for that which
costs you nothing, and which I can get for nothing
AS long as there is abundance of land still open




ON LAND.               171
to occupation, everybody will concede that this line
of argument is just, and that the general value of
land cannot rise above the estimated measure of the
human efforts actually bestowed on its improvement.
Though less obvious at first, the principle is just as
true after all the land has been taken up. Improved
farms are always for sale in every country, lands
once appropriated and ameliorated are perpetually
changing hands, and men enough are always found
willing to part with land, as with everything else,
for what it has cost them. If some proprietors are
unreasonable enough to try to intercept God's gifts
bestowed alike on all the generations, and endeavor
to exact a price for their land made up of compensation for what they and their predecessors have done
upon it, together with something added for what
God has done for it, their cupidity is instantly
thwarted by the readiness of others to dispose of
their land for a fair equivalent of their onerous exertions. Human motives are such, and everything
is so providentially arranged in this department, that
men cannot sell God's gifts; it would be derogatory
to the Giver, if they could.
What might be thus inferred from the nature of
the case, is abundantly confirmed by facts. As a
matter of fact and experience, lands are absolutely
valueless until some portion of human effort has
been expended on them, or in reference to them.
They may have utility, but they have no value,
Nobody will give anything for them. The United
States government has been selling for years some
of the best lands in the world for one dollar and a
quarter an acre, and this after the lands have been




172     ELEMENTS OF POLITICAL ECONOMY.
surveyed at government expense, local governments
provided for the settlers, and mail facilities and otner
privileges guaranteed to them. The same government is now giving away similar lands in homesteads to actual settlers, merely taking for the titledeeds nominal fees, whose aggregate amount does
not begin to meet the expenses incurred in connection with these lands. If lands had value, independent of human exertions, then would the English
companies and individuals who received grants in
the seventeenth century of vast tracts of as fertile
land on this continent as the sun ever visited in his
diurnal revolutions, have become rich as Crcesus;
but these companies and individuals did not become
rich at all, but rather poor. The amount realized
from the sale of their lands fell far short of reimbursing the expenses of colonization; and, after incurring
debts and endless vexations, most of the companies
and proprietors were glad to be rid of their lands at
any price. It is a current proverb now in regard to
wild lands at the West, that the more a man has of
them the worse off he is; and it is a maxim also in
the newer settlements everywhere, that improved
lands are worth the present value of the improvements and no more. And Mr. Carey is at pains to
prove at great length that the value of lands in all
old countries is now vastly less than they have cost
of actual human efforts in their subjugation and improvement; less, because the progress of capital and
inventions enables similar work to be done now at
much less outlay. We conclude, then, that the value
of land follows the law of all'other values; that it
arises only in connection with human efforts; that




ON LAND.               173
the utility in land sold is due in part to nature and
in part to man; that the utility from nature does
not commonly affect price; that landed property
rests back, like all other property, its ultimate defence
upon the right of making efforts for one's own welfare
and of not parting with these efforts except for an
equivalent; that land and the use of it have value
because the proprietor can by them render a service
to somebody else; and finally that the value ano
the rent of land vary, like all other values, under the
law of supply and demand.
2d. The powers of all land, under more laborious
culture, agricultural skill remaining the same, are subject to the law of diminishing return; in other words,
increased labor upon it, though increasing' the aggregate return of produce, does not secure an increase
proportioned to the increase of labor.
This is the fundamental proposition on which
Ricardo, and the English writers generally, lay such
stress, and on which they found the law of Rent, and
the necessity of restraints on population; while
Carey and Bastiat, impliedly if not expressly, deny
the proposition, and of course, the inferences deduced
from it. In my judgment, the proposition cannot
be logically denied. The law of diminishing return
from land is a law of Nature, and has played a very
important part in the occupation and culture of suec
cessive portions of the earth's surface. The proof
of the proposition is all the better for being short.
If by doubling the labor on a piece of land, double
the produce could be secured, and by quadrupling it,
quadruple, and so on, there would be no reason why
any man should ever cultivate more than a square




174     ELEMENTS OF POLITICAL ECONOMY.
acre, or even a square rod. He has a strong motive
to confine his culture to a small space, just so long
as the amount of produce is in the ratio of the labor
expended, because there is less locomotion of tools
and fertilizers and crops. The fact that he extends
his culture from one acre to another, and then to
distant acres, notwithstanding the inconveniences
and expense of transportation, is an irrefragable
proof of the proposition in question. Increase of
agricultural labor and expenditure on a given space
of land will secure a larger amount of produce, but
as a general law, the increased amount will not be
proportioned to the increased expenditure.  If it
were thus proportioned, if the law of diminishing
return did not exist, then, for purposes of agricultural production, a square acre is as good as a continent.
It is through this law of diminishing return, that
the Creator has secured the gradual occupation by
men of almost the whole earth. There is a strong
tendency to leave the old acres to advance upon
new, the old countries to emigrate to new, whenever the returns begin to bear a more unfavorable
ratio to the labor bestowed. The farmer will advance from the first to the second acre as soon as
he thinks that more produce can be obtained from it
by a given amount of labor than can be got by a
like expenditure of additional labor upon the first
acre, allowance being made for the increased inconvenience; and so, cultivation has gradually extended
itself, and men have become dispersed over the whole
earth. Other principles leading to dispersion have
undoubtedly cooperated, but this is the fundamental




ON LAND.               175
one, operative at all times, changing the course of
population, and consequently of empire.
Mr. Carey seems to think that this proposition is
dependent on another, and endeavors to break down
this by an attempt to break down that other. That
other proposition is, that in the course of occupation
the best lands are entered upon first, and that afterwards recourse is had to the poorer soils. He at'
tempts to prove that the exact reverse of this is the
historical fact, that cultivation has always been
begun upon the poorer soils, and that afterwards
the river bottoms and strong lands have been drained
and cleared and tilled. This discussion, however
interesting in itself, is irrelevant as far as the law of
diminishing returns is concerned, because that law
is nowise dependent on the order in which soils of
different productive power are entered upon in cultivation; it is true of all soils, whether rich or poor,
whether entered upon in the order of their fertility,
or in the inverse order; and I cannot help thinking
that Mr. Carey puts upon this matter of the order
of occupation, which he asserts has always been
from the poorer to the richer soils, an estimation
altogether disproportioned to its importance. Whenever men have entered upon new countries, they
have undoubtedly selected those lands first which
seemed to them most eligible, reference being had
of course to their present means of subduing them;
and whether these lands proved ultimately to be
better or worse than other parcels which they might
have chosen, is a point, which, however determined,
has no effect to disturb the fundamental proposition
in hand.




1n6     ELEMENTS OF POLITICAL ECONOMY.
3d. The operation of the law of diminishing returns
is retarded by all improvements in agriculture.
The discovery of new and more available fertilizers, the invention of better agricultural implements,
the light thrown by chemistry upon agriculture, the
consequent adoption of better methods of culture
and rotation of crops, the more perfect adaptation
to the various soils of the kinds of produce sought
to be raised from them, all these and similar improvements tend to increase the ratio of the produce
to the labor, and disguise the law just established.
The lands that are now under cultivation may be
made, under more skilful modes of culture, to yield
indefinitely more than at present, and the vast still
uncultivated lands of the world may come to render
an incalculable quantity of food to the world's pop.
ulation; but yet, as improvements are naturally
less continuous in this than in some other departments of production, as invention has less play, as
there is less opportunity for the division and cooperation of labor, as nothing can materially shorten the
time during which the fruits of the earth must ripen,
the value of agricultural products tends to rise relatively to manufactured products generally. Labor, for
a reason already given, and produce, for the reasons
now given, have risen and tend steadily to rise, as
estimated in general commodities.
4th. The rent of land is the measure of the service
which the owner renders to the actual cultivator, and
does not differ essentially in its nature from the rent
of buildings in cities, or from the interest of money.
Mr. Ricardo's famous doctrine of rent, is for substance, this: there are some lands in every country




ON LAND.               177
whose produce just repays the expenses of cultivation, and consequently yields no margin for rent;
and the cost of production on these rentless and
poorest lands under cultivation, will determine the
price of the produce; and as there can be but one
price in the same market, the produce raised on more
fertile lands will be sold for the same price, and this
price, besides paying the cost of production, will
yield a rent rising higher according as the land is
more fertile; so that the rent paid on any land is
always a measure of the excess of productiveness
of that land over the least productive land under
paying cultivation; and therefore, an increased demand for food in consequence of increased population, and the higher price resulting, will force
cultivation down upon still poorer soils, or else
compel a higher culture for less remunerative returns
on the old soils, according to the law of diminishing
returns, which in either case will raise the rents on
all the soils above that grade that just repays the
expenses of cultivation; so that it is the sole interest
of landlords, as such, that population should be dense
and food high, their interest being directly antagonistic to that of the other classes of the community.
This very ingenious and complicated theory, which
is supported by many other authoritative names besides that of its author, is too mechanical and rigid
to be a good scientific statement of universal facts.
It is true that, if 150 bushels of wheat are raised
each with x hours' labor, and 50 each with x + y
hours' labor, and 200 are wanted, the price of the
whole, offered at once, will not be below the rate
12




178      ELEMENTS OF POLITICAL ECONOMY.
x + y for the whole 200; but this fact is not sufficient to make the price of food and the rent of lands
anomalous cases of value, and it never would have
been supposed so, had not England been under infamous corn-laws which forbade importations, and
made everybody tributary to landlords. If a war
breaks out, and the founders have only 150 cannon
on hand, which cost x, and the order comes for 200
to be delivered at once, of which fifty will cost x + y;
the founders will as certainly be paid for the whole
200 at the rate x + y. When the trade in corn is
free, the Ricardo law of rent loses its formidableness,
and the simple law remains, applicable to all products that have a market-rate, that that rate must be
sufficient to compensate the cost of that portion produced with greatest difficulty, otherwise that portion
would not be produced. Of course, those who produce at the greatest advantage will realize extra
gains from this market-rate, so far forth as their advantage does not depress the market-rate. So far as
lands are taken on shares, or on permanent leases,
or so far as their products are exchanged directly
against other commodities and services, the law of
Ricardo has little application. As a matter of fact,
too, there is often more than one price in the same
market-town; and prices, and especially prices of
agricultural products, are varying all the while from
other causes than those affecting the cost of production. The following seems to me to be the whole
truth in regard to rent. That portion of utility in
lands that is the free gift of Nature is mostly a common factor eliminated from value by the action of:competition, as in the horses and strawberries, by




ON LAND.                179
which illustration was made in the chapter on Value.
A parcel of land of extraordinary fertility, or extraordinary beauty, or holding an extraordinary mine or
water-privilege, is assimilated in the law of its value
to other unique products. Its price, whether at sale
or rent, is only gauged by the service which the
owner can render the purchaser by it.  Still, the
efforts, care, and abstinence of its owners, or of others, have made up an essential part of the present
utility of the parcel. Of such things no market rate
can be predicated, because competition has no play.
With these unimportant exceptions, the rent of lands
is a simple recompense for the use of a productive
instrument, made such by human efforts.    The
owner has become proprietor of all the results of the
onerous exertions put forth upon that land, or in any
connection with that land, and allows the lessee the
use of these results.  Because the owner practises
abstinence in the lessee's behalf, rent is substantially
the same as profits; and as gross profits include the
wages of superintendence, so rent also partakes of
the nature of wages, so far forth as the owner still
takes an active supervision of his property. Proximity to markets, degree of fertility, state of improvements, and the variations of supply and demand,
will influence rent.
5th. That division of land is best for purposes of
production, which gives farms approximately equal in
size, to the cultivators; and the best tenure is the fee.
simple.
Taking the last part of the proposition first, the
fee-simple is better for production than any other
tenure, because when one owns the land he tills, he
takes a greater interest in it, it is his own, he has a




180     ELEMENTS OF POLITICAL ECONOMY.
constant motive to improve it, to make the produce
tion from it as great as possible, since all it produces is his own. If men work from motives, and
if the energy and persistence of the work be proportioned to the constancy and press of the motives,
then will the fee-simple most certainly make the
aggregate of produce greater than any other tenure
of land.  Moreover the fee-simple immeasurably
improves the character of the cultivators.  The
masses of men are educated and developed by
nothing so much as by the ownership of land. It
tends to; make them industrious, thrifty, independent, hopeful of the future, anxious to give their
children better privileges, as well as better lands,
than they themselves had. The testimony on this
point is abundant from many countries, and it all
goes to show that the peasant proprietor is a happier and more virtuous, as well as a more industrious and productive man, than the mere tenant and
farm-laborer; while similar testimony, as well as
common observation, proves, that lands under the
copyhold tenure, or leased at will, are far inferior in point of improvements and production, to
contiguous lands held in fee-simple. The zeal of
absolute ownership, especially if it be a limited
ownership, has been observed to produce almost
magical effects, as well upon character as upon
lands, transforming after a while the poorest into
excellent lands, and thriftless and desponding laborers into frugal and enterprising proprietors.
The practical play of the fee-simple draws after
it such a division of lands into farms moderately
large and approximately equal, as can be shown to




ON LAND.               181
be most favorable to the largest aggregate production. Wherever there is no primogeniture and no
entails, and owners can consequently sell a part or
all their lands, whenever it is their interest to do so,
lands naturally fall into those hands which are most
capable of using them productively, because such
persons can afford to pay more for them than anybody else; and the division that follows this impulse
of self-interest and this freedom of exchange is
likely to be into farms tolerably equal in extent and
moderately large. Such a division has naturally
taken place in New England, in the Middle States,
and at the West; while in the South, the institution
of slavery led to the system of large plantations
and few land-owners, which system, I believe, will
now, under the auspices of freedom, give way to the
better system of small farms and numerous proprietors. That the latter system is more profitable in
reference to production, as well as advantageous in
point of national character and a broadly based and
sound development of the national resources, is evident fiom a few considerations, and has been exemplified distinctly in the diverse experience in this
respect of France and England. 1. When the
mass of the agricultural population are owners of
the soil they till, the motives to productive cultivation are brought to bear most universally. These
motives are interest and hope. There is a high
pleasure in possession, and in self-guided exertion,
a strong stimulus to get as much as possible from
the land, and at the same time to keep good and
ever improve its condition. When the great body
of the land of any country comes under the action




182     ELEMENTS OF POLITICAL ECONOMY.
of such motives as these, then will the amount of
production be the greatest. 2. Aristotle quotes from
" the African 9 the saying that the best manure for
the land is the foot of the owner; a saying which
is often attributed to Dr. Franklin, and which is as
true as if its origin did not date back some centuries
before Christ. Franklin had read Aristotle. Personal
supervision, to be most effective, must be limited in
its sphere; and the best agricultural knowledge and
skill becomes comparatively weak when it attempts
to exhibit itself on too broad a surface. Because a
man can cultivate one hundred acres better than any
of his neighbors, it does not prove that he will cultivate fifty acres additional to them better than a
neighbor of inferior skill, who is the owner of those
fifty and no more. 3. The possession of small freeholds educates and gives energy to the masses.
That educates a man which calls forth varied efforts
of intelligence and will. To protect and advance
his own interests, to attend upon the seasons, to
watch and wait, to foresee and plan and labor, all
this will secure that a nation of freeholders will
never be a nation of ignorant, indolent barbarians.
4. National strength is best secured and maintained wherever there is a broad basis of independent yeomanry to lean back upon when heavy taxes
are to be raised and strong blows of battle are to be
struck in behalf of the nation.
France and England are instructive examples in
this whole matter. In France, since the abolition
of all entails and primogenital rights by the revolution of 1789, and under the action of the law requiring the equal partition of a man's landed estate




ON LAND.               183
among his children, the lands have become subdivided into small parcels, averaging about fourteen
acres to each owner.  Out of a population of
37,500,000, 8,897,00, or nearly one fourth, are proprietors of land either in town or country. Of improved and unimproved lands there are in France
about 122,500,000 acres owned by individuals. The
number of different lots of land, however, is about
140.000,000, or considerably less than an acre, on the
average, to each lot. About ten of these lots, on
the average, are included in one assessment of the
land-tax; the whole number of such assessments
being 14,123,117.  Of these fourteen million assessed properties, more than seven million are worth
less than $1,000; more than two million are worth
between $1,000 and $2,000; nearly two million
more are worth less than $3,000; while only 53,000
properties are worth more than $100,000. The estimated value of all these lands is $31,000,000,000;
and the annual net income $937,500,000. These
figures, which are all taken from the official returns
of the French government for the year 1866, are very
significant of the beneficial results of the land system of France. In point of a regular increase of
agricultural products; in point of an industrious,
frugal, cheerful peasantry; in point of a very general
desire and ability to purchase land; in point of
showing that subdivision ceases so soon as the lands,
if divided further, would be less profitable in production; in point of pauperism; in point of national
strength and weight, in spite of a centralized and
repressive government; in point of an ability in the
peasantry to loan to government, in an exigency,




184     ELEMENTS OF POLITICAL ECONOMY.
large sums of money in the aggregate; a long experience has shown that the practical workings of this
division havebeen most happy.
In England, on the other hand, the monster-farm
system prevails, the small proprietors have mostly disappeared, the law of entails and leases ties up the
landed estates from sale and division, less than 150
persons own one half of all the lands in England;
and not more than ten or twelve persons are in possession of one half of all the land in Scotland.  The
national results of this system are what we should
expect they would be. There are upper and middle,
and lower and lowest classes, but a homogeneous
English people are not to be found. Particular results are seen, in part, in what has been justly called
the irretrievable helotism of the laboring classes; in
almost eleven hundred thousand paupers in England
and Scotland alone in 1867; in an annual poor-rate
for 1866 in the two countries of 3$5,000,000, raised
by taxation; in unmeasured inequality in fortunes
and corforts; in the lack, felt alike in war and peace,
of a large class of sturdy yeomanry, the strength of
a State; and in a consequent sinking of relative
position, power, and influence, former times being
held up with the present, as compared with France
and the other first-class powers. No degree of merit
in the other parts of the English system, can ever
compensate the want of just and broadly liberal laws
of land. Still, the merits of other parts of the system
are alleviating results even here. Pauperism is declining. Wages are rising. The annual poor-rate
is growing less. The proportion of paupers to the
whole population in England in 1867, was, in round




ON LAND.               185
numbers, one to 20; in Scotland, one to 25; propor
tions much less frightful to contemplate than those
which prevailed previous to 1842.
The " encumbered estates law," applicable only
to Ireland, passed by Parliament in 1848, has had
the beneficial effect of multiplying the number of
landed proprietors in that island. Under this law
there can be brought into market, in whole or in
parts, estates encumbered with debt, and thus shut
out from improvement. " The proceeds of the sale
are paid into the Court of Chancery, to be distributed
by that court as equity may require, between the
owner, his creditors, the various encumbrancers, the
heirs at law, and all other interested parties." 1 Thus
millions of acres of heavily mortgaged lands have
passed from the bands of their nominal owners into
the hands of absolute proprietors, whose title is perfect because parliamentary, and whose interest and
zeal are' said to, have changed already the face of
their lands. In the first five years of this system,
more than one tenth of all the landed property in the
island was sold in the Irish Encumbered Estates'
Court; and the land thus sold was divided into
about five times as many distinct estates as before.
Up to 1870, the value of the lands sold in this. way
amounted to $170,182,015. The proportion of paupers to the population was only one to 80 in 1867.
Recent parliamentary legislation has relieved the
Irish of their forced tribute to the English Church;
and the hope may be indulged that Ireland has
already entered upon a period of substantial improvement and prosperity.
1 Bowen's Political Economy.  1st ed., page 521.




186     ELEMENTS OF POLITICAL ECONOMY.
CHAPTER IX.
ON COST OF PRODUCTION.
WE are now in position to be able to analyze the
cost of production, and to bring forward some sup.
plementary matters relating to value, which could
not be properly discussed, until the subjects of labor,
capital, and land, were, at least in their ground principles, understood. While we were inquiring, in the
chapter on value, whether such a thing as a measure
of value were possible, it was remarked that some
political economists have thought that the cost of
production of any commodity is the most accurate
measure of its general purchasing-power; and it
might have been added, that these writers consider
that there is such a thing as natural value distinct
from market value, that natural value is the cost of
production, and that market value oscillates perpetually around that, and tends constantly to return to it.
How far these views are just, how far cost of production constitutes a law of value within the allcomprehending law of demand and supply, is the
point to which attention is now directed.
It is noticeable, that while almost all people put
forth onerous efforts to satisfy the present and immediately prospective wants of other people, in view of
receiving back from them corresponding efforts to
satisfy their own present and immediately prospec.




ON COST OF PRODUCTION.        187
tive wants, there are some people, who have both
foresight and capital, who set to work to make
preparations in reference to services which they expect to render some time in the future; and it is
evident that this matter of the cost of production
has an especial bearing upon those classes of production in which permanent investments are made,
looking to future rather than to present exchanges.
It becomes necessary to attend to cost of production
simply because cost of production is sometimes an
exact measure of one of the elements out of which
value springs, namely, the element of effort. When
a surgeon, for example, charges fifty dollars for cutting off a man's leg, cost of production is an impertinent phrase in relation to such a service, and is no
measure of the effort; but when a capitalist invests
$20,000 in a cutlery establishment, hires all his
labor, and at the end of the year has produced 5000
knives, cost of production has a definite meaning as
applied to each one of the knives, and is an accurate measure of the one element of effort, which
goes, together with other elements, to determine its
value. It is not true at all that cost of production
alone determines the value of the knife, or is a measure of the value of the knife, but it is true that, in
this case, and in all cases in which a commodity is
produced by a definite capital invested for a fixed
time, and by labor wholly hired, or estimated as
hired, the cost of production is an exact measure of
one of the four elements which go to determine
value, namely, of one effort. Now let us suppose
that when these knives are exposed for sale, no such
return efforts are offered for them as are estimated




188      ELEMENTS OF POLITICAL ECONOMY.
by the maker as compensatory and remunerative.
He may, in order to avoid a still greater loss, sell
his knives below the cost of their production, but it
is evident that he will not go forward at present in
his enterprise of making knives. He will suspend
operations, or withdraw from the business; and his
action in this respect will affect the supply of knives
to lessen it; and the next equalization of demand
and supply will be likely to adjust a market value
more favorable to knife-makers. Or if, when the
knives are exposed for sale, they meet with an exchange at very remunerative rates, our capitalist is
now stimulated to increase his production, to put back
his profits into his business, and perhaps to invest in
it additional principal. His action in this respect will
affect the supply of knives to increase it; and the
next equalization of demand and supply, or if not
the next, some subsequent one, will be likely to adjust a new market value less favorable to knifemakers. Thus it is seen, that absolute cost of
production influences value not directly, but remotely, through its influence on supply. To suppose and to say that the cost of production of one
commodity determines its value in an exchange with
another, is to perpetuate the old mistake of ignoring
the second commodity, is to reiterate the fallacy that
value is an independent quality of one thing, is to
confuse the whole subject of value. When the
writers referred to speak of the "natural value"
of any commodity, they mean its absolute cost of
production; but, at this stage of our inquiry, it
surely cannot be necessary to repeat the thought
already so often expressed in substance, that an




ON COST 01 PRODUCTION.        189
analysis of one component part falls far short of determining the resultant of four component parts. I
do not think the expression " natural Value " is calculated to be useful. From the very meaning of the
word " value," if it is to have any consistent meaning at all, there can be no other kind of value than
market value, that is, value in exchange.
But while all this will doubtless be conceded to
be just, there are other points of view in which the
cost of production of any commodity comes to be a
very important matter. From its obvious relations to
supply, already exemplified, it is constantly, though
indirectly, influencing the value of the commodity
itself; and in respect to permanent investments,
looking solely to future production, it becomes the
main inquiry; because, while the cost of production
can never determine the, purchasing-power of the
product, it is always one element in determining it;
and also, especially, because the improvements which
are all the time being introduced into the mechanical and other processes of such production, which
improvements always tend to lessen the cost of the
product, have the effect to lessen the value of all
permanent investments, unless similar improvements
be inaugurated in connection with them. The march
of improvement is so constant, that old machinery
and old processes are rapidly depreciated; and a
calculated cost of future production in one establishment is almost sure to be disturbed by new laborsaving inventions in other similar establishments,
which will be able in consequence to offer the commodity at a lower rate than the rate estimated;
in which case the value of the product will not con



190     ELEMENTS OF POLITICAL ECONOMY.
form to the estimated or even actual cost of production in that establishment, but will pitilessly fall to
the point at which similar commodities are offered
by the more fortunate producers. For these reasons
we must inquire carefully after the elements of cost
of production.
These elements are two: cost of labor, and cost
of capital. These are the only onerous elements
that enter into production. Assisting the processes
are, indeed, the natural powers of land, water, wind,
steam, electricity, and so on, but as these are always
gratuitous, they form no element of cost. Labor
must have its wages, and capital must have its
profits, and also a sinking-fund from which to
replace the original capital when worn out or expended. It will be in vain to search for any other
ingredient of cost than these two.'
1. By cost of labor is meant, of course, its cost
to the employer, and not to the laborer himself,
in reference to whom the phrase would have no
definite meaning. Now, if we make an exhaustive
analysis of the cost of labor to the employer, we
shall find that there are three things, and only three
things, that go to determine its cost. 1. Efficiency
of the labor. 2. The rate of nominal wages paid.
3. The cost of that in which the wages are paid.
To illustrate each of these in order:- If a capitalist
hires two men to work for him at the same rate of
wages, and if the one is twice as efficient a laborer
as the other, the cost of his labor to the capitalist is
one half less than the cost of the other's labor. The
first element of the cost of labor is its efficiency. If
a capitalist, accustomed to pay one dollar a day, is
1 Compare J. S. Mill's Political Economy, book iii. chap. 4.




ON COST OF PRODUCTION.        191
now obliged to pay one dollar and a half a day to
his laborers, their efficiency remaining the same, the
cost of labor is increased in the ratio of 2 to 3. The
second element is nominal wages. If that commodity, whether money or other, in which wages
are paid, varies in cost to the capitalist, the cost of
the labor compensated by that commodity, nominal
wages and efficiency remaining the same, is varied
thereby of course. We shall discover in the next
chapter that the value of money is by no means
invariable, as we have already learned the variable
nature of all other values, and accordingly the third
element of cost of labor is the cost of that in which
the labor is paid. It is easy to see that there is
nothing else, aside from these three things, that can
ever affect the cost of labor. This analysis is not
given here for its own sake merely, but for some
ulterior purposes, of which the first is to show, how
various are the ingredients that enter into the computation which men ought rationally to make before
engaging in extended enterprises of production.
They must make calculations on the prospective
cost of production, since that is one element that
will determine the value of their future product. In
doing this they must calculate the cost of labor, and
the cost of capital; and the cost of labor alone
involves, as we have just seen, three variables, no
one of which can be safely neglected in the supposed estimation.
The second purpose is to explain from the analysis, that a great diversity of nominal wages may
exist in different countries without necessarily affecting the cost of labor. If English wages, for exam



192      ELEMENTS OF POLITICAL ECONOMY.
pie, aie, nominally, one half wages in the United
States, it is very poor logic to jump to the conclusion, that the cost of labor in England is one half
less than in the United States. That will depend
partly on the efficiency of the labor, and partly on
the cost of that in which the respective labor is paid.
If English laborers are only one half as efficient as
American laborers, then a difference of one half in
nominal wages, cost of money in the two countries
being the same, will occasion no difference at all
in cost of labor. Because nominal wages in England are lower than with us, many people think and
maintain, that the English have an advantage over
us, whereas it is notorious, and admitted even by
themselves, that American labor is more efficient
than English labor, and therefore there is no such
difference in cost of labor as the difference in nominal wages would indicate, even if there be any
difference in cost of labor at all. Just at this point
great confusion has existed in the popular mind, and
some by no means harmless fallacies are still current,
arising from the want of a due analysis of the cost
of labor. It is probable, all the elements being
allowed for, that the cost of labor in one country is
not very widely different from its cost in other countries; because, if there were much difference, there
would be a greater difference than is actually observed in the rate per cent. of capital; and this conclusion is strengthened, when it is remembered, that
in those countries in which the cost of labor is supposed to be low, as in England, the rate per cent. of
capital is also low; and in those countries, as the
United States, in which the cost of labor is sup



ON COST OF PRODUCTION.         193
posed to be high, the rate per cent. is also high.
Before leaving this point, I wish to remove one or
two causes of misapprehension, which have frequently infected discussions of wages. The terms
" high and low wages," are often used ambiguously;
some meaning by the words, a high or low nominal
rate; others, a high or low degree of comforts enjoyed by the laborers, as the fruit of their wages;
others, still, as Ricardo, using the words high and
low in relation only to profits, in which last sense,
if wages are high, profits are low, and conversely.
In the first two senses, wages and profits may both
be high, or both be low, at the same time and place,
but not in the last sense. When the first sense is
meant, the expression should be money wages; when
the second, real wages; when the third, relative
wages. Had this nomenclature been adopted and
consistently employed, many an angry dispute and
many a false conclusion would have been avoided.
Also, it has been thought by some, that high money
wages create high prices of commodities, that is to
say, that things are dear because laborers have been
paid a high price for their agency in producing them.
This does not follow. Their labor may be very
efficient, and may be assisted by first-rate machinery,
and the price of the commodities may be low,
although the money wages may be high. Money
wages must not be confounded with cost of labor,
because it is only one element of cost of labor. A
higher cost of labor in any department of production, other things being equal, will tend to raise the
price of the product, but not higher money wages
alone. Price is value expressed in money, and gen13




194     ELEMENTS OF POLITICAL ECONOMY.
eral rise or fall of prices is usually due to changes
in the currency. An inflated currency produces
universally high prices, as well of labor as of commodities, and for the same reason of labor as of
commodities, and it is a superficial view which
supposes, that, of these two effects of a common
cause, one is a cause of the other. On the other
hand it is sometimes supposed, that the exact re.
verse of this takes place, and that money wages
become high simply because the commodities which
the laborers consume have become high. This is
an error similar to the other. If an inflation of the
volume of the current money of the country has
supervened, then the price of labor rises by the same
impulse that carries up the price of commodities.
Both are effects; neither is the cause of the other.
But if the currency has remained sound and stable,
a high price of any of the commodities consumed
by the laborers, has no tendency, that I can perceive,
to raise the rate of money wages.   The higher
price of those commodities may have arisen from
deficient harvests, or from a higher cost of labor in
those departments, from inequality of taxation, or
other similar causes; but no one of these enables
capital to share the gross proceeds of production on
better terms with labor. Neither money, nor real,
nor relative wages can rise, as I see, merely from
high prices of the commodities which the laborers
consume. It seems to me, accordingly, that much
clear light is thrown from this analysis of the cost of
labor upon the whole vexed question of wages.
The third ulterior purpose of presenting this analysis is briefly to unfold the principles according to




ON COST OF PRODUCTION.        195
which the division between wages and profits is
practically made. It was Mr. DeQuincy who first
called profits the leavings of wages; but this is only
true when by wages is meant the cost of labor. The
gross products created by the combined action of
capital and labor belong in common to the capitalists and laborers, and are to be divided between them
in some way, and the analysis in question enables
us to perceive jusf how they are divided. Cost of
labor being deducted, the rest goes to capital as a
matter of course, and the proportion of this part to
the whole capital marks the per cent. for the given
time.  If this part falling to capital is large for
every hundred invested, the rate per cent. is high; if
small, low. The efficiency of labor and the state of
the currency being as before, a rise of money wages
will lessen profits, but no rise of money wages accompanying increased efficiency of labor, or resulting from inflated currency, has a tendency to lessen
profits at all. The capitalist as such is interested in
having cost of labor low, but not in low money
wages necessarily, because a low cost of labor is
consistent with high money wages, and with high
real wages too. Very efficient labor may be very
highly paid, and yet leave to capital a high rate per
cent. We here see again from another stand-point,
and from a deeper view, a truth we have seen before,
that there is no real antagonism but a real harmony
of interests between capitalists and laborers. Both
are alike interested in the combined efficiency of
capital and labor, that is to say, in the amount of
gross products created; and, in respect to the divis
ion of this gross amount, there is no more collision




196     ELEMENTS OF POLITICAL ECONOMY.
of interest than in making the dividends of the year
among the partners of a commercial house. The
cost of labor must first be defrayed; and this depends on its efficiency, its nominal rate of remuneration, and the present purchasing-power of money.
What is left is gross profits, and the relation that
this bears to the whole capital invested decides the
rate per cent. So far of cost of labor.
2. The second element in the cost of production
is the cost of capital; and this also must be analyzed
into three variables, no one of which can be safely
neglected in a computation which has for its object to
decide a prospective cost of production:- 1st, The
rate per cent.; 2d, The time for which the capital is
advanced; 3d, The form of the capital as liable to
slow or rapid deterioration. We must look at the
influence of each of these elements on cost of production.
(1.) Let us suppose that the rate per cent. at Amsterdam is 3, and the rate at New York is 7, that
the cost of labor is equal in the two cities, that the
time of advance is one year, and that there is no
liability of the capital to wear out; a commodity
made at Amsterdam with an outlay of $100 can be
sold for $103, while the same commodity made at
New York with the same outlay cannot be sold for
less than $107. The current rate per cent. is one
element of the cost of capital, and through this, of
the cost of production.
(2.) The effect of the time of advance on cost of
capital is more striking. Let the same supposition
be continued, except that the time of advance in
New York be extended to four- years.  The com



ON COST OF PRODUCTION.        197
modity will sell in Amsterdam, as before, at $103,
but in New York for not less than $131. This
principle is well illustrated also in the case of wine,
which to reach its perfection requires to be kept a
number of years. Even under the same rate per
cent. which we will suppose 6, a commodity made
in six months with an outlay of $100 may sell for
$103; while wine grown in the same six months
at the same outlay, kept five years, cannot be sold
without loss for less than $133. If the period of
advance be long, and the rate per cent. be high, the
cost of capital from the two causes enhances enormously the cost of the product; so that, it is only
countries like England and Holland, in which the
rate per cent. is very low, which can successfully
engage in enterprises requiring a large capital to be
invested for long periods before returns are realized.
This accounts for the fact that mining operations in
Mexico and South America have been largely carried
on by foreign rather than American capital. One
million of Dutch capital at three per cent., expecting
to realize returns only after twenty years, will be
remunerated by a product selling for $1,806,111; but
under like circumstances, American capital at seven
per cent., must have a return of $3,869,685, or lose.
(3.) Most forms of capital, especially that invested
in buildings, machinery, and the like, more or less
rapidly wear out, and a sinking-fund must be reserved from gross profits in order to replace the principal. This is the third element in cost of capital,
and through this cost, influences the cost of production, and through cost of production, affects, in the
manner already pointed out, the value of the prod.




193     ELEMENTS OF POLITICAL ECONOMY.
net. Suppose there are two commodities A and B
produced -in two establishments, in each of which is
invested a capital of $11,000, in one of which is a
machine costing $1000, which is wholly worn out by
one year's use, and in the other a machine costing
the same sum, which will last however for ten years.
Let the rate per cent. be ten, and the time consumed
in completing the products be one year. There is a
difference in the cost of capital in the two establishnments, and this difference indirectly but immediately
appears in the value of the respective products. To
A must be charged not only $1100, the interest on
the capital at the current rate, but also another
$1000, wherewith to replace the machine already
worn out by the year's production. A cannot be
sold without loss for less than $2100. B however
will cost less. To it must be charged, as before,
$1100, current rate of profit on the capital invested,
and only $100 to replace after ten years' use the
machine. B therefore can permanently sell without
loss for $1200.
Now, then, if my readers are willing to follow me
a little further along this dry and dusty road, we
shall be able to draw some important conclusions in
respect to value as depending on wages and profits.
While we have been seeming to attend to only one
of the four elements out of which value springs,
namely, one effort, of which cost of production is
always an exact measure whenever the effort is embodied in a commodity made jointly by paid labor
and capital, we have really been attending to the
other effort also whenever that effort is similarly
embodied; and since gold and silver money is a




ON COST OF PRODUCTION.         199
commodity, like any other, we have incidentally, in
this analysis of cost of production, taken some steps
towards determining the value of money. Now,
cost of production is made up of cost of labor and
cost of capital, and the first general conclusion is,
that if the cost of labor for any reason be enhanced,
nothing can prevent this higher cost from  taking
effect and exhibiting itself in lower profits.  The
second conclusion is, that money-wages, or any rise
or fall of them, provided they are uniform, or uniformly rise and fall, in those departments of production whose commodities exchange with each other,
have no effect at all upon value, since they are common factors in two costs of production, and like all
common factors, cancel each other; but any inequality of money-wages in these departments that affects
the cost of labor, will have an indirect but controlling
influence on the value of the commodities.  The
same is true of profits. So far as the rate per cent.
is common to all branches of production, the capital
advanced for the same period, with a similar risk of
deterioration or loss, and so far as any one or all of
these advance or recede uniformly and together, they
do not affect the value of any of the commodities
produced. But inequality in any one of these points,
varies the relative cost of capital, and consequently,
the cost of production, and consequently the value
of the product. It is at this point precisely that
there is opened up to us a clear view of the influence
of machinery upon values. So far as machinery
brings into play, as it always does, a gratuitous
natural force, it is outside the pale of value; but
since the machinery itself is one important form of




200     ELEMENTS OF POLITICAL ECONOMY.
capital on which rate per cent. must be paid, the
more machinery employed relatively to labor in the
production of commodities, the more do profits enter
into the cost of production, and the more powerfully
do changes in the rate per cent., in the time of advance, and in the risk of deterioration, tell upon the
value of commodities so produced, as estimated in
other commodities.
In other words, the more, or the more durable the
machinery in the production of a commodity, the
larger the element of profit in the price now absolutely reduced; on a rise of the rate per cent. therefore, the value of the commodity made by more or
more durable machinery will relatively rise.
Having traced completely the influence of machinery on profits, a few things must now be said on
its influence upon wages. Formerly the prejudice
was almost universal, and is still wide-spread in
many parts of the world, that the general introduction of labor-saving appliances does an injury to the
laborers by taking away their work. So strongly
has this been felt by the laborers, that in England,
and especially in Ireland, mobs and riots have usually accompanied the introduction of machinery into
those departments of production in which hand-work
had previously prevailed. If work were what laborers really wanted, the prejudice in question would
cease to be such, and become a sound opinion; since
the only object and result of introducing machinery
is to lessen work, at least with reference to a given
product; and the laborers, to be.consistent, should
not.stop with opposing new inventions, but should
destroy all forms of existing capital, that there might




ON COST OF PRODUCTION.        201
be work a plenty for simple human hands. What
the laborers really want, however, is not work, but
wages, or rather, those commodities for which their
wages are expended; and the question is, whether
labor-saving processes tend to lessen, not work, but
work's remuneration. There is no form of proof
that I know of, which amounts to a moral demonstrat;on that the substitution of machinery for labor cannot lessen the laborer's wages; the opposite has perhaps sometimes happened, and is possibly liable to
happen, especially in agriculture, in certain transitory
states of society. But the general appeal can be
made to experience with all safety. As a matter of
fact and experience, it has not been found true that
the introduction of improved processes, the substitution of Nature's forces for human muscle, has deteriorated the condition of laborers in those departments
into which the inventions have been brought, or the
condition of laborers generally. Exactly the reverse
has usually taken place; and wages are apt to be
highest rather than lowest in connection with the
most and the most durable machinery, and higher
rather than lower, after the introduction of more and
better machinery. Operatives in manufactories, for
instance, are, as a rule, better paid than farm laborers; and better paid in the first class than in the
inferior establishments. Teamsters, in this country
at least, and I suspect in all countries, are as well to
do as before the construction of railroads.  So of
spinners, weavers, and artisans of every name. In
explanation of these general facts, it may be noticed,
(1) that labor is always required in the construction
and repairs of all kinds of labor-saving appliances,




202     ELEMENTS OF POLITICAL ECONOMY.
and so far forth, a new market for labor is opened
up in place of any loss of market possibly resulting
from their introduction; (2) these forms of capital
always tend to cheapen the products which they
help to create, and such products because they are
cheap find a wider circle of consumers, and more
must be produced to supply a now broader market,
and so far forth the demand for labor may be stronger than it was before; (3) These improvements
cheapen also the commodities consumed by the
laborers themselves, and therefore a given rate of
wages now secures for them a higher grade of comnforts. Combining these observations with the law
of distribution already pointed out, and the conclusion is fairly established that the effect of machinery
is, and will be, rather favorable than otherwise to
the laboring classes.
Now, as a result of this entire discussion, attention must be called to a generalization, which has
been more or less fully noticed by several writers,
and with the presentation of which, this branch of
the subject will be concluded. Since, by the aid of
the different forms of capital, and such a division of
labor as that every part of it is made most efficient,
the cost of production of most kinds of manufactured articles tends to decline as compared with the
cost of production of food and raw materials, in
whose production these advantages are less perfectly
attainable, there is a constant tendency towards
approximation in the value, and, if money remain
unchanged, in the price, of raw materials and of
finished products; and in the degree of this approx.
imation will be found a gauge of the success with




ON COST OF PRODUCTION.        203
which gratuitous natural forces and improved facilities of art have been made available in production.
This single statement, clearly perceived in its
grounds, grasps and holds the principal results of
our discussions thus far. Examples of the principle
offer themselves on every hand. Let us look at
cotton cloth; an example somewhat marred at the
present moment by the consequences of the late civil
war, and disguised by a depreciated currency; but
which, allowance being made for these, is an excellent illustration. At the opening of this century,
the average price of raw cotton was just about
twenty cents a pound; at the middle of the century,
and onwards, the average price was just about ten
cents a pound. At the first period, although accurate tables are wanting, the average price of cotton
cloth could not have been less than sixty cents a
yard; at the second period, it could hardly have been
more than ten cents a yard. The absolute price of
raw cotton diminished in the interval in the ratio of
2 to 1; while the absolute price of cotton cloth
diminished in the interval in the ratio of 6 to 1.
Relatively to a yard of finished cloth, the raw material greatly rose in value, since at the first it took
three pounds to buy a yard, and at the last but one
pound. There was a marked approximation all the
while of the price of the finished product towards
the price of the raw material; in other words, less
and less difference of price was due to the cost of
manufacture, which lessening cost marks the ever.
increasing efficiency in the production of commodib
ties of the gratuitous powers of Nature applied
through machinery. According to Dr. Ure, the in.




204     ELEMENTS OF POLITICAL ECONOMY.
troduction of machinery into the manufacture of
lace, lessened the cost of that product in the ratio of
50 to 1; and thereby, and to that degree, approxi.
mated the price of a pound of such lace towards the
price of a pound of the cotton from which it was
made. Food, raw materials, and labor, and the last
more than the other two, tend steadily to advance in
their power to command, that is, to buy, most kinds
of finished products; and therefore, the millions who
labor with their hands, and the other millions who
own the soil and till it, have already advanced, and
will still more advance, in a scale of comforts, with
the advancing centuries.
In the opening paragraph of this treatise it was
stated, that to unfold the Science of Political Economy in a proper order and completeness would
require three things: namely, first, an analysis of the
principles of human nature out of which exchanges
spring; second, an examination of the relations of
men to the physical earth and to each other, by which
God's design is manifest that exchanges should be
practiced; and third, an inquiry into the laws and
usages devised by men to facilitate or impede exchanges. According to this plan, the first and second general branches of the subject have now been
treated, and we pass to the third, beginning with
Money.




ON MONEY.               205
CHAPTER     X.
ON MONEY.
THERE is no use in saying that money is such a
mysterious and complicated agent that nobody can
understand it. That is the language, of indolence.
Money is wholly a matter of man's device; it was
invented, just as any other instrument is invented,
to accomplish a certain purpose; and it would be
strange if men cannot comprehend what men themselves have devised. In all departments of God's
works, indeed, we constantly meet with what cannot be fully comprehended nor perfectly fathomed,
because an infinite mind has been there at work
upon an infinite plan. But there is no such profundity in the works of men; unfathomableness is not
an attribute of human skill; and since money is an
instrument devised by men to aid them in accomplishing a certain purpose, it is as unreasonable to
pretend that it is incomprehensible, as it would be
to pretend that the steam-engine is incomprehensible. I hold it for certain that whatever men have
devised, men can comprehend.
The general purposes which money was designed
to answer, and which it is found admirably to fulfil,
are best perceived under the supposition that there
were no money. Exchanges began, and were profitable, long before money came into existence. Men




206     ELEMENTS OF POLITICAL ECONOMY.
first exchanged services directly for each other, without the intervention of any medium. This form of
trade is called Barter. Hiram, king of Tyre, furnished to Solomon a certain quantity of cedars from
Lebanon, and Solomon, in return, furnished the Tyrians a certain quantity of wheat and oil. This may
serve as an instance of barter, although money had
been in current use long previously to that transaction, as is seen in the purchase by Abraham of the
cave and field of Machpelah, for which he weighed
out four hundred shekels of silver, current money
with the merchant. It is obvious, however, that
while barter is a great deal better than no exchanges
at all, there are inherent difficulties in that form of
exchange. Under pure barter, exchanges are pretty
much limited to those parties each of whom is in
position to render to the other such services, and in
such quantities, as the other stands in direct and immediate need of; it is not enough, under these conditions, that a man should have a service to sell, but
also he must find a man who wants that specific
service, and more than this, a man who not only
wants that specific service, but also has a service to
render in return, such as the first man wants. If A
has wheat which he wishes to exchange for a coat,
he must find a party who wants wheat, and who
also is in position to render a coat in exchange for
it, and moreover who wants just as much wheat as
will pay for a coat, no more and no less; if he wants
more, he may have nothing to render in exchange for
the excess which A is willing to accept; if less, A
may have nothing which the other wants, besides
wheat with which to help pay for the coat. Even in




ON MONEY.               207
the simpler states of society, the inconvenience, loss
of time, and deterioration of commodities involved in
direct barter, are very great, and in more advanced
states of civilization would be intolerable, if it were
possible, as it is not, for society to become advanced
under those conditions. Exchanges are so limited
in time, place, and variety, association is so hampered, and the development of all peculiar talents so
impeded, under a system of simple barter, that one
of the initial steps in the progress of all societies
has been to hit upon some expedient to lessen
these intrinsic difficulties; and so to facilitate exchanges.  This expedient has been the invention
of money, that is to say, the selection of some product, which, by general consent, instead of the particular purchasing-power of common commodities,
should have a universal purchasing-power; so that,
whenever anybody has anything to exchange, he
may first exchange it for this product, whatever it
be, and then with-this product purchase at any time
and place, whatever he may want. Money makes
no alteration in any law of value, but merely substitutes for convenience' sake in every transaction
in which it plays a part, a universal for a specific
purchasing-power; a book, for example, has a specific
purchasing-power; there is somebody who wants it,
and is willing to give a sum of money for it; and
the owner by the sale of it parts with a product
which has only the power to purchase something
fron a few persons, and receives a product which
has the power to purchase something from all persons; it is not true to say that the book is worth
more than the money, or the money is worth more




208     ELEMENTS OF POLITICAL ECONOMY.
than the book, because they are just worth each
other, as is demonstrated by the sale; but it is true
to say that the seller of the book has substituted in
the place of a limited purchasing-power, of which
he was proprietor, a general purchasing-power, of
which he has now become proprietor; and that the
command of the money, which has no more value
than the book had, does carry along with it a superior command over purchasable articles generally
In one word, value in the form of money is in a
more available shape for general purchasing, than
value in any other form. This is the exact expression
for what truth there is in the common vague remark,
that money is different from all other commodities;
in point of value, it is different from other commodities in just one respect, namely, while they have the
power of buying some sorts of things from some persons, it has the power, derived from the usages of
society, to buy all sorts of things from all persons.
It might seem, at first sight, as if the introduction
of money, instead of simplifying the operations of
exchange, would only complicate them, since it
necessitates two exchanges, where otherwise there
would be but one; but reflection, as well as experience, is able to convince us that there is no machine
which economizes labor like money; no instrument
which plays so important a part in production; no
invention, unless it be the invention of letters, which
has contributed more to the civilization of mankind.
While men still exchanged in kind, and knew no
other mode, the purchasing-power of a service was
very much confined in place, and would not be
parted with except in view of the return service




ON MONEY.               209
actually there present, the ultimate parties to an
exchange must for the most part come together
locally, in order to effect an exchange; under a
money system, this is no longer necessary, for it is
sufficient to constitute a market for any commodity
that it is wanted anywhere on the globe, the middle
man, paying the seller for it in money, transports it
thither, and receives back his money with a profit
from the ultimate consumer. Thus money brings
conveniently buyers and sellers together commercially, no matter how far separated locally. So,
also, money generalizes any purchasing-power in
point of time. The fruit-dealer, for example, must
dispose of his product quickly, or it perishes on his
hands, but by transmuting his perishable product
into money, he may keep its power of purchase
locked in this form as long as he lists; the money,
indeed, is only good to purchase with, but it puts an
interval at the pleasure of the holder between selling and buying, and with this generalized power in
his pocket he may buy when he will, and what he
will, and where he will. Money, too, makes any
purchasing-power portable, divisible, and loanable.
A man may carry the value of his farm in his purse,
and may divide it up for a thousand different purchases, and especially is able to loan it in this form,
to receive it back again with interest at a future day.
Value in any other form than money is not generally suitable for loaning, because there are comparatively few who are willing to borrow a merely
specific purchasing-power, and guarantee its return
in that form with the due increase; but money, as a
generalized agent, will command all services at all
14




210     ELEMENTS OF POLITICAL ECONOMY.
times, will serve at any man's bidding, and work ill
all sorts of harness, and therefore it is rarely difficult
for men to loan any sums of money they have not
Immediate use for, and to make every moment of
their own abstinence pay tribute in interest, and the
advantages to both lenders and borrowers secured
through this form of value - money- are incalculable. Thus we see the reason why governments,
corporations, and individuals, -when they borrow,
borrow money. This general view of the uses and
advantages of money will show it to be one of the
most potent of the social agents, and will serve also
to introduce our first specific proposition.
1. Money is a medium of exchange.
The word medium in this proposition, is to be
taken in its etymological and strict sense, as something that comes between two extremes, and serves
also to relate them to each other.  Money is exchanged for other things, as a means, and not as an
end; it is a very great help in exchanging all other
things, but is never exchanged for itself in an ultimate transaction. Small boys, indeed, swap cents,
but men, the miser excepted, who is under a deplorable fallacy of the senses, use and estimate money
first as the medium which facilitates the real exchanges of society.  What is really exchanged is
the wheat, the cloth, the lumber, the furniture, the
service of every kind, and money is but the instrumnent making those exchanges easy, which might
perhaps go on without it, though with difficulty and
loss  It is somewhat like a railroad ticket. Transportation to a given place is what is really bought
when one buys a railroad ticket. The evidence of




ON MONEY.               211
the purchase is the bit of paper. It comes in as a
medium between the traveller and the railroad company, and while it facilitates the real exchange, it
also partly disguises it. The resemblance holds in
the main feature, but in two respects the likeness
fails; money is not a specific ticket for one purpose,
but is a general ticket for all purposes of purchase;
and secondly, metallic money stands as a value in its
own right, at the same time it is serving as a medium, while the ticket does not.  Still, we are all
desirous to get money, not for the sake of the money,
but for the sake of those things which the money will
buy. We part with it freely and constantly for those
things which we care more about. What we really
care for is what the money will buy, is the command
over all services and commodities which the possession of money insures. If we could give our own
service or commodity, whatever it is, and receive
directly in return the service or commodity which
we want, whatever it is, there would be no need of
money. This is generally inconvenient, and sometimes impossible. Therefore we introduce a middle
term  between the two extreme terms. Money is
a good mean which helps exchange the two extremes. And the value of the money of any country is a very small fraction, probably not over one
fortieth, of the value of that which it helps to exchange. By the last census the estimated value of
real and personal property in the United States was,
in round numbers, $16,000,000,000.  The whole
currency of the country in 1860 was certainly less
than $400,000,000; so that the money of the country
stood to its aggregate material wealth in the ratio




212     ELEMENTS OF POLITICAL ECONOMY.
at least of one to forty. Besides all that portion
of this real and personal property which changed
hands in that year, the currency helped to exchange
all the simple services, as those of professional men,
teachers, servants, and so on, which were rendered
in that year, and which are not included in the census estimate, except partially and indirectly, so far
as the returns to such services had been transformed
into real and personal property. If we suppose that
transactions to the value of $16,000,000,000, were
concluded in this country in the year 1860, and
that $4000,000,000 constituted the money in circulation, then it follows that each dollar of money circulated on the average forty dollars of value, or,
what is the same thing, each dollar of the circulation made on the average forty payments, in the
course of the year. It is, of course, impossible to
determine with exactness the aggregate value of
the money exchanges of any country for any given
period, but if this could be determined, and should
then be regarded as a dividend, for which the aggregate money of the country were a divisor, the quotient would express what has been called the rapidity
of circulation, that is, the number of times which
each dollar changes hands on the average in order to
effect the given amount of exchanges; and it would
also express how many more times the value of that
is which the money of a country helps to exchange,
than its own value is. That it should express this
last, however, accurately, we must suppose that the
same product is exchanged by the help of money
only once between the producer and the consumer.
Probably the ratio of one to forty is above rather




ON MONEY.               213
than below the true ratio of the aggregate money of
the commercial nations to the money value of those
products, reckoned only once, which this money
helps to exchange. Therefore we see that the hub
and spokes, and rim of the wheel of exchange consist of services and commodities of every description; while, to borrow the famous comparison of
Hume, money is but the grease which makes the
wheel turn easier. It is a vast mistake to suppose
that the grease is the wheel itself.
Hume's comparison, though exact as far as it goes,
and for the purposes for which he used it, is nevertheless capable of misleading the mind. It is true
that money is the grease which facilitates the revolution of the wheel of exchange, but it is also true
that the dimensions of the wheel itself are vastly
greater than they would have been had it not been
for money. Money indeed helped exchange the products that already existed at its first invention, but
by far the largest part of products since have come
into existence largely through the agency of money.
We get quite too low a view of the function of
this potent agent, if we think of it merely as an
aid in circulating products that would have existed
whether or no; some products would have existed
whether or no, and money certainly is of great use
and convenience in helping bring these to the ultimate consumers; but this is a partial and wholly
inadequate view of the true function of money as a
medium of exchange. The fact that such a medium
is in universal circulation, and that the holders of
it are ready to exchange it against any sort of services adapted to gratify their desires, exercises a




214      ELEMENTS OF POLITICAL ECONOMY.
kind of creative power, and brings a thousand prod.
unts to the market which would otherwise never
hlave come into existence. Since money will buy
anything, men are on the alert to bring forward
something which will buy money; and since money
is divisible into small pieces, an incredible number and
variety of small services are brought forward to be
exchanged against these pieces, which services we
have no reason to suppose would ever be brought
forward at all, were it not for the strong attraction
of the money. In this point of view, the true
nature of money is best perceived, when it is considered, as it really is, as a very important portion
of the capital of the world. Capital, as we have
already learned, is any product reserved to be employed in further production. The circulating medium of any country is the most active, the most
profitable, and the most essential of all those instruments reserved in aid of further production. The
axe, the plough, the spindle, the loom, the wheel, the
engine, are all instruments, are all capital, and they
each aid respectively some part or parts of the processes of production; but money is a form of capital
which stimulates and facilitates all the processes of
production without exception. Just as we have seen
that money is a form of value generalized, so is it also
a generalized form of capital, that is to say, it is an
instrument capable of aiding all production in every
department, while every other instrument is capable
of aiding but few processes in one department.
Without money, there could be no thorough division
of labor, because there would be no adequate means
of estimating or rewarding each one's share in a come




ON MONEY.               215
plicated process. By means of money, all services,
small or great, contributing toward a common product, are neatly measured and paid for by some
one, who thereby becomes proprietor of tae whole
product; or, if the contributors choose, they may wait
till the product itself is sold, and then the money
received is divisible without loss to each contributor,
according to the service rendered. Thus the influence of money, as capital, pervades the whole field
of exchange, from centre to- circumference, facilitating every transfer, and stimulating to new transfers.
Money, then, is a medium of exchange; and the
question arises in this connection, how much of it is
wanted? Clearly, only so much as will serve the
purposes which such a medium is fitted to subserve;
there should be enough fairly to mediate between
the services actually ready to be exchanged then
and there, and also enough fairly to call out other
services, proper and profitable in the then circumstances of society, and whose only obstacle to a
profitable exchange then and there, is the lack of a
facilitating medium. All increase of money beyond
this point, which the very nature of money itself
marks out as the boundary, leads to a diminution
in value of every part of it, to a consequent disturbance of all existing money contracts, to a universal rise of prices which are illusory and gainless,
to unsteadiness and derangement in all legitimate
business, and to a spirit of restless enterprise and
speculation, which seeks to draw off the excess of
money in untried and reckless experiments. These
consequences from this cause have been again and
again witnessed in every commercial country, and in




216     ELEMENTS OF POLITICAL ECONOMY.
the United States on a gigantic scale during the
nine years past.  I cannot help thinking that Mr.
Carey, who has thrown so much light on certain
portions of the field of Political Economy, is decidedly in the wrong in the view he maintains that
there cannot be too much money in any country.
No writer has brought out more clearly than he has,
the intimate relations of money with all industrial
development; but he seems at times to forget that
money, essential and potent as it is, is essential
and potent only as a medium. The real subjects of
exchange are mutual efforts, mutual services, and
money is the instrument merely that comes in between the real services exchanged to facilitate the
exchange; and therefore it seems to me to be perfectly conclusive on the point to remark, that the
quantity of money needed in any country, or in the
whole world, is limited by the number of the services ready to be exchanged, to facilitate the exchange of which is the good purpose and end of
money. The physical and mental powers of men,
which alone give birth to services, when considered,
as they must be in this connection, as belonging to
a given number of men at a given time and place,
are strictly limited; and although the presence of
money then and there is both a stimulus and an aid
to their bringing forward services of all sorts to the
market, there are obvious limitations both in their
powers and in their circumstances; and the quantity of money needed among them is just that
quantity which will fairly act as a medium in exchanging the services which they are able and
willing to render to each other. All increase in




ON MONEY.               217
the quantity of money beyond that point would
have, and could have, the only effect of increasing
the nominal prices of services, without making the
services themselves any greater in number or better
in quality. It is with money exactly as it is with
any other form of capital, allowance being made for
the fact that money is a kind of generalized capital.
How many ships does a commercial nation need to
employ? As many as will fairly take off its exports
and bring in its imports. Ships are wanted for one
definite purpose; and when enough are secured to
answer that purpose, all additions to the number will
lessen the value, that is, the purchasing-power of
ships generally. So of all instruments whatever.
Enough is as good as a feast. Enough is better
than more. In regard to every form of capital, the
point of sufficiency is determined by the quantity of
work to be done. Now, money is a form of capital,
an instrument, having this peculiarity only, that it is
capable of aiding to a certain extent all branches of
production; and the point of sufficiency in the quantity of money for a country, or for the world, is determined by the amount of products of all kinds,
otherwise ready to be exchanged, and only waiting
the facilitating agency of an exchange medium.
The quantity of money being given, an increased
aggregate of exchanges can be facilitated by it, by
means of a greater rapidity of circulation of that
given quantity. $400,000,000, changing hands forty
times, will effect exchanges to an aggregate of
$16,000,000,000 in a year; the same sum, by a
circulation doubly rapid, will effect twice that aggregate of exchanges; so that, it follows, that an




218     ELEMENTS OF POLITICAL ECONOMY.
increased amount of business to be done, does not
necessarily require an increased volume of money
but sometimes only a brisker use of that already in
circulation. As in mechanics, so in money, the
whole power is the product of the two factors,
mass and velocity. Money is like any other tool,
the more constant its use the more profitable its
agency. If $16,000,000,000 of value are to be exchanged, it is very much cheaper that $400,000,000
of money should do the work, changing hands forty
times, than that $800,000,000 should be employed,
changing hands only twenty times. The quick
movement of a small mass is better than the torpid movement of a big mass, both in what it saves
of expense, and in what it presupposes of the general conditions of exchange. It only remains under
this proposition to add, what will be more clearly
perceived when we come to treat of foreign trade,
that no enterprising commercial nation, so long as
the natural right of exchange is left unimpeded, and
so long as the money of the nations consists of gold
and silver, or paper, the genuine representative of
these, can ever lack, for any great length of time, a
sufficient quantity of money to serve as its medium
of exchange.
2. l1oney is a imeasure of value.
I hope it was made very plain, under the preceding proposition, what is meant when it is said that
money is a medium of exchange. Closely commingled with its function as a medium, money has
another very delicate function, as a measure of value.
How important this second function is may be seen
by supposing for a moment that there were no in



ON MONEY.               219
strument in existence capable of performing it.
Without a common measure of values of different
sorts, it would be inconvenient, not to say impossible, to carry on traffic at all. For instance: A
baker has only loaves of bread, and wishes to buy a
hat, a horse, a house. How many loaves shall he
give for each? Without some common denomination in which these differing values can be expressed,
and by means of which they can be brought into
numerical relations with each other, it would be an
awkward piece of business to effect even the three
exchanges; and every time he wished to purchase
another article, there must be an independent calculation from different data, to decide the terms of
the exchange. Introduce now some common denominations in which each of these values can express
itself, and the difficulty disappears in an instant.
" My loaves are worth ten cents each," says the baker.
" My hat is worth ten dollars," says the hatter. The
terms of exchange, then, are 100 for 1, and no parleying. So of the rest; so of everything that is ever
bought or sold. Dollars and cents are the denominations in which values are reckoned, and by which
they can be compared with each other numerically,
just as feet and inches are the denominations by
which different lengths are compared, and pints and
quarts the denominations by which capacity is nmeasured; and the builder and the surveyor would not
be more at a loss in their work without the units of
length, or the vintner without the units of capacity,
than everybody would be at a loss without the units
of value.  Dollars and cents are, as it were, the
language in which values express themselves; and,




220     ELEMENTS OF POLITICAL ECONOMY.
without some such language, the busiest marts of
exchange would soon become not only a silent but a
deserted scene.
The difference between money as a medium and
money as a measure is one that should be clearly
delineated and perfectly apprehended, because there
is no such thing as adequately understanding the
subject of money unless the two functions be kept
distinct in the mind, as well in their single as in their
commingled action. The original measure of value
in France, England, and Scotland, was the pound
weight of silver. No coin of that weight was ever
struck; but a pound of silver was cut into 240 coins
called pence. Twelve of these pence were called a
solidus, or shilling. Thus as applied to silver, the
symbols lb. and ~ denoted equivalent weights, the
former of uncoined metal, the latter of metal coined.
But in course of time, more than 240 pence so called,
and at last in Elizabeth's reign, 744 pence, came to
be coined out of a lb. of silver. Yet all the while,
240 of these pence were called a ~. ~ and lb., both
a contraction of the Latin libra, were no longer
equivalent. The lb. of weight continued stable: the
~ of money had dwindled to less than one third.
Yet the name pound continued to attach to 240
pence, although the pence embodied a less and less
quantity of silver. As the medium contained a less
quantity of silver, so the measure, that is to say, the
denomination, represented a less quantity of silver.
This example will help us understand the difference
between money as a medium and money as a measure. Dollars and cents perform their duties as a
medium by virtue of their being commodities; they




ON MONEY.               221
perform their duties as a measure by virtue of
their being denominations. Yet the denominations,
though spelled and sounded as before, vary with
every change that takes place in the medium.
There are two kinds of changes to which a metallic money is liable, considered as a medium of exchange.  First, a less quantity than before of a
precious metal may go to a certain coin. In 1834,
the gold eagle of the United States was reduced in
weight from 270 to 258 grains, and the alloy increased to one part in ten from one part in twelve.
This was taking out more than six parts of gold out
of every 100 parts, in all the gold coins of the country. Yet the coins bore the same names as before.
As a medium, other things remaining equal, their
purchasing-power was diminished more than six per
centum; and consequently, as a measure of other
values, the denominations of these coins varied simultaneously and equally with the coins themselves,
Secondly, coins are liable to change in their function
as a medium from changes in the general purchasing-power of the metals themselves.  If for any
reason an ounce of gold will buy less of other things
than formerly, the coins cut from that gold will buy
less than formerly, and this change in the medium
will be followed by a corresponding change in the
measure. Other tables of denominations have a
basis independent of the things which they measure,
and are not variable by the quality or quantity of
those measurable things. A French metre, for example, is an invariable unit of length the world
over; so is one of Troughton's inches; but this is
not true of the denominations of money at all




222     ELEMENTS OF POLITICAL ECONOMY.
Pounds, dollars, guilders, francs, and their subdivisions, are denominations of valzue, which is a variable relation, and as denominations they follow the
fortunes of the coins whose names they are. When
the current dollar, for instance, sinks to one half, or
rises to twice its previous purchasing-power, we call
it a dollar all the while, the denomination perpetually shifting with every variation of the thing. The
same name attaches to a shifting denomination.
The denominations of value, then, are not an independent standard to which values themselves can be
referred, as lengths are referred to the metre, but
vary with the varying purchasing-power of the coins,
so that money as a measure is only uniform when
money as a medium is uniform. So indispensable,
however, in all exchanges is some common measure
of value, that the denominations of money, notwithstanding their variable character, are universally employed in estimating and exchanging commodities,
even when no money as a medium is used.
Without reflection, it might be supposed, that,
since the measure rises and falls with the medium,
no practical error is liable to follow the confounding
of the two functions; but it is the very sympathetic
connection between the two that gives rise to the
possibility of error. If the units of money were,
like the linear units, inflexible, so that all variations
of the medium could be instantly detected by a reference to the standard of measure, there would be
no difficulty at all: I could loan a thousand dollars
for one year, or ten years, and, however much the
medium might vary in the interval, be sure that I
should receive back just as much purchasing-power
as I loaned, with the interest on the same; it might




ON MONEY.              223
be more or fewer pieces than the number I loaned,
which is a matter of indifference. As it is, no lender
can have any such assurance.  The borrower is
bound to pay back with interest the same number
of dollars as he received, although the dollar-medium,
and hence the dollar-measure, may meanwhile have
fallen or risen greatly. In the United States, for the
past nine years, the current money has exchanged
against gold from 110 to 285 of the one for 100 of
the other; and it is very obvious that all debts of old
standing, paid in this period, have been only legally,
and not actually, liquidated; and that debts contracted when the depreciation was more and paid
when it was less were more than actually liquidated.
This, of course, presupposes, what we are not yet in
a position to assume, that gold remained a proper
and uniform  standard.  The subtle error to be
avoided alike in discussion and in practice is, to
suppose that money, either as a medium or as a
measure, remains unchanged, simply because the
name remains unchanged by which we designate
its denominations.
It may be asked, why cannot this source of error
be obviated? I reply, that the error may be obviated, but the source of it cannot be obviated from
the nature of the case. It was shown in our chapter on Value that to find an invariable measure of
value is a natural impossibility. Money, as it is the
medium   of exchange, is also the best attainable
measure of value, and is used throughout the civilized world to compare with each other all values
except its own; but since value in general, and the
value of money as well, is a thing of relation, and




224      ELEMENTS OF POLITICAL ECONOMY.
varies with every change affecting either of tha
things exchanged, as much by changes affecting the
things it exchanges for as by changes affecting
itself, -the value of a hat, for instance, as estimated
in gloves, increasing by any cheapened process in
glove-making, though no change at all take place in
the cost of hat-making,-a perfect measure of value
is impossible.  Therefore the denominations of
money, which is the best attainable measure, can
never have a meaning absolutely fixed, but slide up
and down the scale along which the purchasingpower of money as a medium is moving, and they
are consequently useless as a standard to detect any
changes in the medium itself, while, the medium
remaining uniform, they instantly detect the changes
in all other purchasing-powers. This will always be
so. The same difficulty does not occur in having a
perfect measure of length or of capacity, -a perfect
inch or a perfect pint. The French have a perfect
system of measures and weights. Their mathematicians measured an arc of the earth's circumference,
and thus determined the absolute length of a degree
of latitude. Three hundred and sixty times this
length makes up the length of the earth's circumference,-an invariable measure recoverable again even
if it should be once lost. This measure divided by
40,000,000 gave the French nation their metre, which
is a perfect unit for the measure of length. A tenth
part of the metre cubed gave them their litre, which
is a perfect unit for the measure of capacity. The
weight of a hundredth part of a metre cubed of distilled water at the temperature of maximum density
is the gramme, an invariable unit of weight. A




ON MONEY.               225
linear length of ten metres squared gives the are, the
unit of surface. A perfect measure of anything demands for its starting-point something absolute and
invariable: in value there is nothing absolute; we
begin with a relation, and therefore an unchangeable
measure is not to be looked for. Still, it is vastly
important for the interest of exchange that the
accepted measure of value be as little liable to fluctuations as possible, especially in all cases in which
lapse of time is involved before the exchange is fully'consummated. For. precisely the same reason that
the bushel-measure should be of the same capacity
in sowing-time and in harvest, to sell by and buy by,
always a bushel, no more and no less; and the yardstick an inflexible measure of length, the same for
buyer and seller, always thirty-six of Troughton's
inches, no more and no less; so, as far as it is possible in the nature of things, ought the medium and
hence the rheasure of values to represent year in and
year out a uniform degree of purchasing-power. If
money had but one function, namely, to serve as a
present means of exchange; if there were no credit,
contracts, annuities, involving the element of time;
if the character of the medium did not also determine the signification of the measure; then the subject of money would be easily understood, and the
substance that should serve as money would be a
matter of comparative indifference.  As it is, the
second and more delicate function of money both
complicates the theme, and excludes from the category of good money all but one or two of the substances that have ever been used as money. We
have just now seen the radical reasons why no
15




226     ELEMENTS OF POLITICAL ECONOMY.
money can even tolerably perform its function as a
measure that is not tolerably uniform in its value as
a medium. This consideration brings us naturally
to our third specific proposition.
3. Gold and silver constitute the best money.
The purposes of money have been served in different countries and in different ages by a variety of
products, according to the taste and circumstances of
the people. Cattle have been employed as money
among pastoral people in almost all periods of the
world, and are still employed for this purpose in
Africa. Slaves among the Anglo-Saxons; wampum
among the American Indians; salt in Abyssinia;
codfish in Newfoundland; tobacco in Virginia;
wheat in Massachusetts; nails in Scotland; stamped
leather among the Carthaginians, and others; bark
stamped with the image of the sovereign in China;
platina in Russia; copper, simple or compounded
with other metals, among the ancient Romans, and
most other nations; iron among the Spartans; gold
and silver among all civilized nations sooner or
later; have been or still are used as money. Of all
these products, the two last have shown themselves
to be best adapted for the purposes of money, and
have come consequently into universal use in the
commercial world. Experience has not only demonstrated the superiority of these metals over all other
forms of money, as is shown by the fact of their
universal adoption, but reason also is able to tell us
why gold and silver are the best money.
(1.) On account of their comparatively steady
value. This is the main reason, and it must be




ON MONEY.               227
firmly grasped. There is no end to the confusion
which has crept over discussions on money from the
circumstance that the writers have not first of all
determined for themselves with fixed clearness what
value is. This must be done at the outset, if there
is to be the least hope of sound results. Some writers speak of money as destitute of intrinsic value,
because we cannot eat i;, drink it, wear it, or make
any other direct use of it. Mr. Macleod, the eminent English economist, to whom I shall acknowledge my obligations in the chapter on Credit, regards
money as required only to measure, record, and
transfer debts. Money is, according to him, a representative of debt. Now, I cannot agree with either
of these representations. Value is value, and there
is only one kind of it, and the epithet intrinsic is
only used to help out a lame theory, and no such
epithet is pertinent to the word value, and no one
can show anything different in the value of money,
either in respect to the way in which it arises, or
in the laws which control it, from the value of
any other commodity, excepting only the difference
already pointed out, that money by the usages of
society has a generalized instead of a specific purchasing-power. It is all false to speak of gold and
silver money as the representative of value.  It
represents nothing but itself.  It will buy other
things certainly, and so will a bushel of wheat.
Value is simple purchasing-power, and money has
value because we can purchase with it, exactly as
everything else has value for that very reason.
Society is so constituted that a want is felt in it of
some medium of purchase; this want cannot be




228     ELEMENTS OF POLITICAL ECONOMY.
supplied without an effort; whoever makes the effort
will demand a corresponding effort made for him;
when it comes to the exchange of the medium for
the wheat, for example, there stand face to face, as
in every other instance of exchange, two desires and
two efforts; there is then, as always, a reciprocal
estimation of the two services about to be exchanged, and the estimation agreed on is the value
of the medium expressed in wheat. If the want of
any medium of exchange is less felt in any community, or if the effort required to secure it be for any
reason less, other things remaining the same, the
value of the money will be less, that is to say, it
will purchase less of other things. If the demand
for money as an instrument of purchase be greater,
or the obstacles in the way of its supply be increased,
other things as before, the value of the money will
be more. It is the old circuit over again of wants,
efforts, estimations, satisfactions.  The value of
money arises under the same conditions as every
other value, and is variable by any change in any
one of the four elements which alone can vary the
value of anything.  Two desires and two efforts
invariably precede every exchange. A change in
any one of these, the rest unchanged, can vary value,
and nothing else can vary it; and, as it seems to me,
no person has ever shown or can show that the value
of money is in any respect, save the superficial one
already noticed, exceptional and peculiar. And it
also seems to me that nothing more is needed in
order to remove the last vestiges of the dark cloud
which has so long overhung this subject, than to
familiarize one's self first of all with the true doctrine




ON MONEY.              229
of value in general, and then hold fast the truth, exemplified on every side, that the value of money is
just like any other value.
Gold and silver, then, as money, have value in the
same sense and for the same reason as any other
productive instrument, and we must now attend to
the reasons why their value is so steady.
(a.) On account of the comparatively steady demand for these metals. Gold and silver are wanted
for two general purposes: first, to be used as money,
and second, to be used in the arts; and it has been
estimated that about two fifths of the aggregate
quantity in the world is in the form of money, and
the other three fifths in the form of plate, utensils, and
ornaments. Now, so far as the element of desire
controls value, the purpose for which any article is
desired is a matter of indifference. The aggregate
desire for it for all purposes, accompanied with the
offer of something with which to buy it, constitutes
the demand; and the more universal the desire, no
matter for what purpose, the steadier the demand,
and, so far forth, the steadier the value. It is worth
noticing, as a point still too little noticed, that it
is not.the demand for the precious metals as coin
alone that determines their general value, nor the
demand for them in the arts, but the combined demand for all purposes; just as the value of barley is
regulated, partly by the demand for it for food, and
partly by the demand for it for malting purposes.
Hence an ounce of bullion of the standard fineness,
destined for the smelting-pot of the artisan, is worth
within a very trifle as much as an ounce of coined
money.   By the law of the Bank of England an




230     ELEMENTS OF POLITICAL ECONOMY.
ounce of standard gold is coined into ~3 17s. 10-d.,
and the Bank is obliged to buy all bullion and foreign coins of the standard fineness offered to it at
-~3 17s. 9d. per ounce —a difference of three halfpennies. Now, gold and silver are so indispensable
in the form of money, so beautiful in the form of
ornaments, so well adapted to serve the purposes of
luxury and love of distinction, so really useful in the
arts, that the demand for them is constant and wellnigh universal; and if, in the progress of civilization,
a less quantity should be desired for personal ornamentation and purposes of luxury, a greater will
doubtless be required for the other uses; and so, as
the demand in the past has been steady, and perhaps
steadily increasing, there is every reason to expect
the same for the time to come. And it contributes
to the steadiness in value of the gold and silver coin,
that there is at hand in the form of plate a reservoir
from which a chance chasm in the coin may be
replenished, or an extra demand for it answered.
(b.) On account of their tolerably uniform cost of
production. Not desires alone, but efforts as well,
regulate value. Supply is the correlative of demand;
and when to a steady demand there answers a steady
supply, realized under conditions of pretty uniform
difficulty, there will be of course a pretty steady
value. Nature herself has indicated, in a manner not
to be mistaken, her intention that these metals
should be the money of the nations.   She has
scattered them all over the earth, and so scattered
them that the cost of their production has been wonderfully uniform ever since civilization and commerce
began. There have been but two marled changes




ON MONEY.                231
in the value of gold and silver throughout the comr
mercial world in the last thousand years; the first,
in the sixteenth century, in consequence of the occupation of Mexico and South America by Europeans,
when the value of the precious metals diminished,
silver a good deal, it is difficult to say how much,
and gold considerably less; the second, in consequence of the discovery of the gold-fields of California and Australia in the present century, which, it is
thought by most, has still further diminished the
value of gold. With these exceptions, and similar
ones are not likely to recur, these metals have
always maintained and are likely to maintain a
remarkable uniformity of value, on account of a
remarkably uniform cost of production. Even these
changes became only gradually perceptible, and did
but little injury to individuals, scarcely disturbing
the justice of exchange or the measure of value,
except in cases of long annuities and similar obligations. A universal rise of prices soon adjusted exchanges to the new state of things.
(c.) On account of their quantity. The amount
of gold and silver in circulation in the commercial
world, to say nothing of the quantity so easily
brought into circulation from the reservoir of plate,
is so vast, that it receives the annual contributions
from the mines much as the ocean receives the
waters of the rivers, without sensible increase of its
volume, and parts with the annual loss by detrition
and shipwreck, as the sea yields its waters to evaporation, without sensible diminution of volume. The
yearly supply and the yearly waste are small in comparison with the accumulations of ages; and therefore




232     ELEMENTS OF POLITICAL ECONOMY.
the relation of the whole mass to the uses of the
world, and the purchasing-power of any given portion, remain comparatively steady. It is probable
that production at the mines might cease altogether
for a considerable interval without very sensibly enhancing throughout the commercial world the value
of gold; as it is certain, from experience, that a
production very largely augmented only gradually,
and after a considerable interval, diminishes its value.
The mass of the precious metals has been aptly compared to the heavy balance-wheel in mechanics,
which preserves an equable and working condition
of the machinery under any sudden increase of the
power, and even when the power is for a moment
withdrawn. At this point a caution is needful. Because it is affirmed that the great amount of the
precious metals is a ground of their firm value, it
must not be supposed that we are going beyond our
general doctrine, and introducing another element,
namely, quantity, besides the four elements which,
as we have so often alleged, can alone vary the
value of any service; quantity, in itself, is not an
element capable of varying the value of anything,
but taken in connection with durability, it is an
element of what might, perhaps, with propriety be
called the inertia of value, and tends to keep the
purchasing-power of gold and silver where it is.
Value and steadiness of value are two distinct
ideas. The present value of an ounce of gold expressed in any other commodity is decided by foul
things alone; but other elements besides these may
help determine that that ounce of gold shall have
ten years from now a purchasing-power approxi




ON MONEY.              233
mately the same as now. It will depend, of course,
in the last analysis, upon the relation of the then demand to the then supply; yet the vast quantity of
the precious metals in existence, combined with
their durability, prevent those fluctuations in the
supply which are so destructive to a steady value.
It is not as with the fruits and the grains, whose
value varies perpetually with the seasons, and which
are so perishable that they must be sold soon or
never: gold and silver are almost indestructible, and
except by wear and accident, the existing mass is
not liable to be lessened, and in so far as the annual
production from the mines exceeds the yearly waste
there is a natural provision made for the natural increase of demand, to supply the wants of the world
for currency and for the arts, without much disturbing the relation of the demand and supply. The
quantity, in connection with the durability of the
precious metals, helps preserve to them a tolerably
steady value from generation to generation.
(d.) On account of their fluency. Gold and silver are in demand the world over. Having great
value in comparatively small bulk, they are easily
transported from continent to continent; and whenever, from any cause, they become relatively in
excess in any country, and thus lose there a portion of their previous purchasing-power, there is an
immediate motive to export them to other countries
where their power in exchange is greater, and thus
the equilibrium is restored. The value of gold and
silver throughout the commercial world is thus kept
pretty steady by the facility with which they are
carried from points where they are relatively in ex



234     ELEMENTS OF POLITICAL ECONOMY.
cess to points where they are relatively in deficiency,
There is a gain in carrying them to those countries
where their power of purchase is the greatest, because more commodities can be obtained for them
than at home; and private motives here coincide
with public welfare, since what the traders do in
transporting gold and silver, with an eye to their
own interest, helps maintain at home and abroad
the steady value of these commodities. This law of
the distribution of the precious metals by commerce,
and the equilibrium of value resulting therefrom, is
as natural and beautiful as the law which preserves
the level of the ocean, or that which balances the
bodies of the planetary system. This has come at
length to be recognized by the nations, and the laws
which used to forbid by heavy penalties the exportation of gold and silver are all swept away, and
these metals are now free to go, and do actually go,
where they can obtain the most in exchange. It is
absurd to suppose that their owners would carry
them out of a country, unless they were worth more
abroad than at home, and therefore the prejudice
which exists still in this country against the exportation of gold is a senseless prejudice. The gold is
not given away; it is sold, and sold for more than it
will buy at home; otherwise it would not be carried
abroad. There is the same kind of gain as in all
other exchanges, and this great incidental advantage
in addition, that, by means of free commerce in the
precious metals, their general value is kept pretty
uniform throughout the world, and a chance redundancy in one currency is drawn off to supply a corresponding deficiency in another. It may be laid




ON MONEY.              235
down as an axiom, that no country will export, for
the sake of getting other things, those things which
are more needful for its own welfare; and there
need not be the slightest fear that any nation which
cultivates its own advantages under freedom will
ever lack a sufficient quantum of the precious metals.
Under freedom, and so long as human nature continues what it is, these metals will go, and go in just
the right proportions, to and from those countries
which produce and offer in exchange those desirable
services which other countries want. The greater
the enterprise and skill, the keener the development
of all peculiar and presently available resources, the
more honorable and free the commercial system, the
surer is any nation, whether it be a gold-bearing
country or not, of securing the gold and silver which
it needs. This is so, because there will be a good
market to buy in, and they who have gold will
resort thither to buy. But such a nation will also
want to buy other things besides gold and silver, and
when enough of the latter are secured for the currency and for the arts, the residue will be exported,
perhaps to the very countries from which it originally came, in payment for some products which
those countries have an advantage in producing.
The United States is a gold-producing country, and
exported in the years 1850-1860, both inclusive,
$502,789,759, coin and bullion; and during the
same period we imported from other countries
$81,270,571, coin and bullion.1 Now, there was a
double advantage in that exportation. In the first
place, more and better commodities were secured to
the country than the gold could have bought in the
1 Report on the Finances, 1863.




236     ELEMENTS OF POLITICAL ECONOMY.
country, for otherwise it would not nave been carried
abroad; and, in the second place, this large sum carried abroad to various countries in exchange, not
only prevented the disturbing effect on our own currency of more than doubling in ten years' time our
stock of gold, thus inevitably depreciating the whole
mass, but also, by causing the new gold to impinge
on the whole world's stock instead of on the currency of a single nation, the shock of the new production on the measure of value, though perceptible,
was reduced and deadened. The world's mass of
the precious metals is comparatively torpid beneath
the action of an accretion which would break down
by its weight the currency of a single nation. Therefore, the fluency of gold and silver, by which they
pass easily in commerce to those places where their
present value in exchange is greatest, and return as
easily when the conditions are reversed, tends powerfully to make their general value unifcrm throughout the world, and consequently to make them the
best medium of exchange and the best measure of
value.
(e.) On account of this circumstance, that every
general rise or fall in the value of gold and silver
tends to check itself. This principle, indeed, is applicable to the value of all commodities, but owing
to their quantity and durability preeminently applicable to the value of the precious metals. The check
is double in either direction. First, let us suppose
that the purchasing-power of an ounce of gold or
silver be rising: then, production will be stimulated
at all the mines, and the more stimulated as the rise
is more, and the new and enlarged supply will tend




ON MONEY.              237
to check a farther rise, and, unless the permanent demand has been intensified, to bring back the value
to the old point; moreover, when there is a rise in
the value of the coin, there is a less quantity required
to do the same amount of business, and the demand
for gold which causes the rise tends to be checked
by the rise itself, because a less quantity is needed
in the currency in consequence of the rise. This
supposes, of course, that the exchanges mediated by
money are no greater than before. Thus a rise of
value in gold and silver checks itself by natural
laws in two ways. Just so of a fall in their value.
Production is thereby slackened at the mines, and
the lessened supply tends to enhance value; and, if
the same business is to be done as before, there is a
stronger demand for currency while the fall continues, and this demand tends also to restore the
value. All this is in the interest of a steady value.
(f.) On account, lastly, of this circumstance, that
a stronger demand for currency is met either by
increasing the stock of coin, or by an increased
rapidity of circulation of that on hand. A brisker
demand for money, especially if it be temporary,
does not necessarily enlarge the supply, or alter the
value, but only hurry round the existing circulation.
Oscillations in the demand are responded to by a
slower or more rapid circulation. This tends most
admirably to keep the value steady within certain
limits. When enterprises are multiplying and exchanges are being permanently increased in number
and variety, then there must be a larger amount of
money, and this larger amount is secured in the
ways already indicated, with perhaps slight disturb



238     ELEMENTS OF POLITICAL ECONOMY.
ances of value; but the temporary ebbs and flows
of business have no effect at all on the mass of
money, but only on its movement, and its value consequently is not disturbed at all.
These six grounds appear to be satisfactory and
sufficient to account for the superior steadiness of
the value of gold and silver, so far as their value is
determined by considerations relating to the metals
themselves. We now proceed to the reasons additional to this why gold and silver constitute the
best money.
(2.) Because they are self-regulating. These
metals came to be, and continue to be, money,
independent of the enactments of any government.
Government indeed coins them for the use of the
people; but coinage is nothing in the world but a
public attest to the quantity and quality of the metal
contained in the coin. For the trouble and expense
of assaying, stamping, and thus attesting the quan.
tity and quality of the metal in the coin, governments usually charge the depositors of bullion a
small seigniorage; England indeed does not; and
the United States did not till 1853; but at present,
France and the United States charge respectively
on gold coins,.216 per centur and.5 per centum;
so that a very insignificant part of the value of
coins is due to the process of coining. The value
of coined money regulates itself on just the same
principles as the value of wheat regulates itself, ano
governments are as powerless to alter the one as the
other. Indeed, the coining of either metal by itself
is a matter of quantity and quality alone, and not a
matter of value at all: the United States say by




ON MONEY.              239
law that a gold dollar shall consist of 251 grains
troy, of which nine parts shall be pure and one
part alloy, but of the value of this dollar thus
coined the law says nothing. It can say nothing.
The coin is publicly attested so heavy, so fine, and
thereafter it takes its. chance as to value. All governments have now learned, after oft-repeated and
always vain trials to regulate the value of their coins,
that all they can do is to regulate the amount and
fineness of the metals contained in them. When,
however, it is designed that both metals shall circulate in the same currency, then it becomes necessary
that government shall determine, as well as it can,
not the' absolute value of either, but the relative
value of each in each. And here too the value of
each, estimated in the other, regulates itself independently of edicts or enactments. If the legislators
can ascertain in what proportions they are exchanging for each other in a free market, they may mark
that as the legal relative value of the two, but they
must not suppose that their work will not require
revision from time to time.
The value of gold in silver has differed considerably in different periods and countries. Livy mentions that the relative value was 1 to 10 about 189
B. c.; Julius Caesar is said by Suetonius to have
exchanged the two on one occasion at 1 for 9; under
the early Roman emperors, it was 1 for 12; from
Constantine to Justinian, about 1 for 14. Herodo..
tus mentions it as 1 to 13 in Greece, in his day,
which was the fifth century before Christ; Plato, a
little later, calls it 1 to 12. In England, before the
discovery of America, it was about 1 to 10; in 1717,
the last legal rating of the two put them at 1 for




240     ELEMENTS OF POLITICAL ECONOMY.
15-, although Sir Isaac Newton, in his report to
Parliament that year as master of the mint, shows
the market rate was nearly 1 for 15~. At that time,
the rate in France and Holland was 1 to 14-, which
of course made it profitable to export silver from
England to the Continent. In China, Japan, and the
East Indies generally, gold has always been cheap
relatively to silver (in Japan, till 1860, as 1 to 4,
since then as 1 to 13k), which accounts for the
stream of silver perpetually flowing from Occident
to Orient. In 1792, when the mint of the United
States was established, the legal rate of exchange
for the two metals was fixed at 1 for 15, which
proved to be an undervaluation of gold, and tended
to drive the gold coins abroad. Mr. Elliott, of the
U. S. Bureau of Statistics, has shown that the average for the thirty years just prior to the discovery
of the new gold fields was 1 to 157; that after the
opening of these fields in 1848-50, gold gradually
fell, reaching its minimum of 1 to 15- in 1859; and
that since it has slowly advanced to 1 for 15-, the
point it now holds. This law of self-regulation,
maintaining itself in spite of all legal enactments,
led England in 1816, and the United States in 1853,
to abandon a double standard of value, and practically demonetize silver by degrading the coins in
weight, so that they pass current at more than six
per cent. above their real value. English silver coins
are degraded 6-2 per cent.; United States smaller
silver coins are 6}- per cent. less than silver dollars;
and consequently, they are only legal tender in the
two countries respectively for 40 shillings and $5.00.
The Bank of England is only allowed to hold silver
as the basis of circulation to the extent of one fourth




ON MONEY,               241
of the gold coin and bullion held at any one time;
yet silver maintains its own value in spite of these
disadvantages, and is thought to comprise about one
fifth of the whole metallic circulation of the realm.
Between 1853 and July 1, 1867, $53,189,216.32 in
silver coins have come from the United States mint
and its branches.1
It is convenient to have at least two metals in the
currency, notwithstanding the impossibility of maintaining a steady legal relative valuation between
them. Gold ought to be exclusively the standard;
it ought to be the only legal tender for large sums;
but silver coins are useful for the lesser exchanges,
and there is no present objection to their being debased in weight so as to allow a considerable change
in the market value of gold in silver without tending to export the silver coins. Another reason for
the use of both silver and gold in the coinage is the
increased stability in value thereby secured to the
whole currency. The immense quantity in the world
of both metals combined, and the opportunity of replenishing a chance deficiency of the one from the
stores of the other, give, in accordance with principles already explained, a superior stability to value.
Most currencies, our own included, have also a third
metal or mixture of metals, to serve the purposes of
the smallest exchanges, and the coins made of this
are usually largely overvalued - our nickel cents of
1857 cost the government about half a cent each -
and are not legal tender for debts except for very
small sums.
It is, then, a principal merit of metallic currencies,
1 Report, Director of the Mint, 1867.
I G




242     ELEMENTS OF POLITICAL ECONOMY.
that the gold and silver comprised in them determine
their own value by natural laws, both relatively to
each other and to all other purchasable things; and
hence the quantity required in each currency of the
world to do the business of that country is a matter
which natural laws are perfectly competent to regulate, without any direct action of government; and
governments may be relieved from the difficult or
rather impossible task of determining how much
money their country shall have. The distribution
of the precious metals over the earth by commerce,
according to the wants and circumstances of each
country, is not perfectly accomplished at present by
the natural laws which are competent thus to distribute them, because some of the nations use still
some form of credit-money as a part of their currency, and also because all the nations have not yet
come to an agreement as to the degree of fineness of
the metals used in their respective coinage. These
obstacles impede somewhat at present the action of
the comprehensive laws which will one day be
allowed to control this matter perfectly. Nature
herself has made the first grand provision for the
self-regulation of the money of the world, by making
pure gold and silver of exactly the same quality all
over the wide earth. No matter where it is mined,
or when, gold is gold and silver is silver. The gold
mined to-day in California differs in no essential
respect from the gold used by Solomon in the construction of the Temple. So that, if the commercial
nations would come to a common agreement as to
the amount of alloy they will put into their coins,
and then bring these coins, as might easily be done,




ON MONEY.               243
into decimal or other easy numerical relations with
each other, it would be a matter of indifference to
every nation whether the coins circulating therein
were exclusively national coins or not. Foreign
coins, to the extent to which commerce would naturally bring them there, would have just the same
circulation and credit as their own: there would not
be, as now, the trouble and expense of melting up
and recoinage; the balances of trade could be paid
indifferently in any coinage, and, as we shall soon
see, every nation would secure without friction or
legal enactment its due proportion of the money of
the world. We are not now so far removed from
this state of things as might at first sight be supposed.
Two plans of a universal coinage for commerce
are now awaiting the sanction of the world. The
first, or French plan, was developed at an international monetary conference held in Paris during the
great Exposition of 1867. This plan proposes, (1)
a single standard exclusively of gold; (2) coins of
equal weight and diameter; (3) of equal quality
nine tenths fine; (4) the weight of the five-franc gold
piece, 1(612.9 milligrams, to be the universal unit;
(5) the multiples of this unit to be decimal, or at
least divisible by 5; (6) the coins of each nation to
bear the names and emblems preferred by each, but
to be legal tender in all. France, Belgium, Switzerland, Italy, and Greece, numbering in all 72,000,000
souls, have now a common money based on the
French franc. Austria, too, numbering 40,000,000
of people, has agreed to mint a ten-florin piece




244     ELEMENTS OF POLITICAL ECONOMY.
equivalent in weight and fineness to the new 2~
franc piece, which, in accordance with the recommendation of the conference, France has promised
to issue, in order to facilitate the unification of the
money of Great Britain and the United States with
that of the European continent. This piece will only
differ four cents in value from the English sovereign,
and 171 cents from our half eagle. It is claimed
that no other plan will require so few changes and
so little expense to unify the money of the world.
While England would have to recoin its gold and
change its standard from the present Ad to -9 fine,
and the United States recoin and reduce the weight
of its coins, it is claimed that the nations already
using the French unit have $1,400,000,000 of coined
gold, while England has less than $500,000,000, and
the United States not over $300,000,000.1
The second, or American plan, has been developed
by Mr. E. B. Elliott of the U. S. Treasury Department. To avoid the ugly fraction in the metrical
weight of the French unit and its multiples, Mr.
Elliott proposes that all the coins of his international
system shall bear simple relations to the gramme.
The new union-crown (Vereins-Krone) of Germany
contains just ten grammes of fine gold, and the union
half-crown five grammes. These, like the gold coins
of France and the United States, are -% fine. Now,
these crowns and half-crowns, our gold dollar, the
gold franc of France and the other countries using
that unit, and the gold pound of Great Britain, can
1 Report of S. B. Ruggles to the Department of State. Mr. Ruggles
was a delegate to, and evidently a leading mind in, the conference.




ON MONEY.               245
be very easily brought into metrical harmony with
each other. By reducing the weight of fine gold in
our dollar from 1.5046+ grammes to 1.5 grammes, by
increasing the fine gold in the pound sterling from
7.3223+ to 7.5 grammes, and by increasing the
weight of the Napoleon (20 francs) from 5.8064+ to
6 grammes fine gold, their weights, both fine and
standard, would all be strictly metrical, and bear
sinple relations to each other, as well as to the
crown and half-crown. The following equivalents
would obtain, namely, 3 crowns - 20 dollars = 100
francs =4 pounds. Each of these would weigh 30
grammes fine gold, or 33. grammes standard gold.
Also, 1 metrical dollar  50 metrical pence = 5 metrical francs. These pieces would weigh 1- grammes
fine, or 12 grammes standard, each. Also, 5 dollars
- 1 pound, both containing 71 grammes fine, 81
grammes standard gold.
A bill to bring the coinage of the United States
into harmony with this metrical and international
system of Mr. Elliott, was reported to the House of
Representatives in July, 1868, and is still pending
in that body. It is understood that the parliament
of Great Britain is more favorable to this system
than to that of the Paris conference. If either system prevail, it will be a triumph of the metrical
system, and so far, a triumph of France.
Now, although the Bank of England circulates a
paper money partly based on government credit,
and though the United States has under the national banking law a similar paper money; yet every
pound or dollar of this paper money is or is to be
redeemable in gold and silver; and, as more than




246     ELEMENTS OF POLITICAL ECONOMY.
half the aggregate circulation of Great Britain is
in metallic money, and as a similar proportion is
perhaps likely to prevail in the United States, the
maintenance of a paper money based on credit for
the home circulation alone may or may not be sound
financial policy; but it is evident that it cannot, under these circumstances, substantially interfere with
the self-regulation of the metallic money of the
world. Nevertheless, that we may see with distinctness the scope and efficiency of the magnificent
natural law which distributes the precious metals
over the earth in accordance with the business-wants
of each nation, let us suppose that there were no
paper money; that all the nations minted their metals with a common proportion of alloy; and that
the real relative value of the two were ascertained
by law in the countries where both are legal tender,
and were well understood also in the other countries. In this case there would be no motive to
debase any part of the coinage to prevent its exportation, and all the money of all the nations would
be value-money purely. Now then, money is the
medium of exchange, and is wanted where the exchanges are, and not elsewhere, and goes of necessity under freedom whither it is relatively most
wanted, that is to say, whither the most can be
obtained for it in exchange. If the country be goldbearing, and its people at the same time be enter.
prising in the production of all sorts of services for
exchange among themselves, they will retain enough
of their own gold to mediate their own exchanges,
for the sinmple reason that they want it, and have
services to offer in exchange for it; and if they have




ON MONEY.               247
been allowed in freedom to develop their own peculiar advantages, no foreign nation can outbid them
in the offers they are able to make for a sufficient
quantity of this gold. If foreigners draw away the
gold from them, it shows that the home people have
less industry and less skill to produce those things
which the gold-producers want. The home people
have the advantage in one respect. They are on the
spot. There is less expense to them than to foreigners in transporting the services offered in exchange
for the gold, and also the gold received in return.
If, with this advantage, foreigners can still outbid
them in offers for the gold, it shows that they need
it most and deserve it most, since they have had the
industry and the skill to produce that which is preferred by the miners to the home services offered,
and have also overcome an additional obstacle. The
gold producer, like every other producer, has the
right to get the most he can for his service. Whoever can offer him that most has the best right to
the gold. Therefore the gold goes in the first instance into their hands, whether natives or foreigners, who offer the most for it in exchange. If the
people of the gold-bearing country have equal natural advantages with others to produce those things
which are wanted in exchange for their gold by
those who practically work the mines, and then fail
to get the gold they need, the blame lies nowhere
except on their lack of industry and skill. Let not
such people think to find any shelter behind natural
laws. Natural laws are justly and eternally against
them. If, however, they are naturally placed at a
disadvantage in respect to those specific products in




248     ELEMENTS OF POLITICAL ECONOMY.
demand by the first owners of the gold, they are
then brought into the same category with non-goldbearing countries. They will then get their gold at
second hand, and if they deserve it, will be just as
sure to get it as if they retained it in the first instance. Every nation has natural advantages in
some sorts of products. Just so soon as these are
properly developed, it has some things to offer to the
world at a better rate than anybody else can offer
them. Thither, and to buy those things, will gold
flow, if not directly from the gold-producing lands,
then indirectly but inevitably, from those lands
where the gold at present is. Under our supposition, it makes no difference where the gold came
from, or what nation minted it, it is drawn by a
natural force not to be resisted to that people,
which, by offering services in general demand, requires gold to mediate the exchange of those services. Thus, by a law as unerring as gravitation,
the precious metals make the circuit of the earth,
abiding certainly in large masses within all the commercial nations, because there is where they are constantly wanted and cannot be spared, but passing
off also perpetually in smaller masses from all the
great centres of business towards those points where
their purchasing-power for the time being is greater
than at home. The one only impulse that can stir
the precious metals from their usual haunts, is the
belief that elsewhere they are worth more in exchanges; and hence, just as soon as the demand
for a currency is fairly met in any country by the
presence of gold and silver, coin ceases to flow
thither as a permanent thing, but rather ebbs and




ON MONEY.              249
flows in obedience to the ever-shifting exigencies of
trade. The nation that does a large business will
require a large stock of coin, will be able to pay for
it, and will inevitably secure it; a nation with fewer
exchanges to make will less need the instrument
with which exchanges are made, will buy and keep
a less quantity; and if, in the chances of trade,
more comes than is needed, it flows off at once to
the places where the demand for it is stronger; and
thus the proportionate amount due to the commercial interests of every nation goes thither under a
natural law, and abides there under a natural law.
Hence the general purchasing-power of gold and
silver tends steadily to an equality the world over.
If it be appreciably higher in one nation than in
the others, the metals are drawn toward that nation
by an irresistible attraction till the equilibrium is restored. Add to this, that there is at all times a vast
reservoir of plate from which any sudden or steady
demand for currency can easily be supplied, and into which any fortuitous or steady superfluity can
as readily be drained, and the reasons are apparent
why gold and silver currencies are self-regulating in
value and amount. If, on the other hand, a currency is to be of paper, independent of gold and
silver, there is no self-regulation about it: we pass
at once from the region of natural laws into the
region of statute and enactment; somebody must
take upon themselves to decide how much of this
paper there shall be, - a power which could not be
lodged in more dangerous hands than in those which
thought themselves competent to exercise it.
(3.) Because they are conveniently portable, divise




250     ELEMENTS OF POLITICAL ECONOMY.
ible, and impressible. Our proposition is, that gold
and silver constitute the best money; and in proof
of this we have already demonstrated the steadiness
of their value, and their self-regulating power; incidental to these great advantages are the material
qualities of these metals, by which they are admirably fitted to be the money of the nations. Their
weight is little relatively to their value. A thousand
dollars in gold are not indeed carried so easily as a
bill of exchange or a bank-note; and expedients are
easily adopted, and always have been used, by
which the transfer in place of large masses of coin
is for the most part obviated; and our proposition
does not deprecate at all the use of the economizing expedients of commerce; but for the money of
the people, for the currency that passes from hand
to hand in ordinary exchanges, we maintain that
gold and silver are sufficiently portable. One troy
pound of English sovereigns, which one can put in
a glove-finger and carry in his vest-pocket, almost
without knowing it, is worth about $230; and the
experience of those countries, like France and Germany at present, where the money is mostly metallic,
has not pronounced it onerous on account of its
weight. At any rate, it is better to accept all the
other immense advantages of gold and silver money,
together with a little inconvenience as to weight, if
one chooses to insist on that, than to adopt substitutes every way inferior as money, except that they
are lighter in our purses.
Moreover, gold and silver differ from jewels, and
most other precious things, in that masses of them
are divisible, without any loss of value, into pieces




ON MONEY.                2 1
of any required size. The aggregate of pieces is
worth as much as the mass, and the mass as much
as the pieces. For currency purposes this is a great
advantage. For its utmost convenience, business
requires a considerable variety of coins, and if any
of these kinds be minted in quantity in excess of
the demand, nothing more is required than to remint
them in other denominations, and their whole value
is saved to the currency in the most convenient
form. It is this quality which enables coins to flow
into plate whenever the metal in them becomes
more valuable in the form of plate, and plate again
to flow back into coins whenever the metal in it is
more in demand as coin.
Lastly, these metals are capable of receiving and
retaining any stamp which government chooses to
impress upon them. A certain proportion of alloy,
say Xo, hardens them to such a degree that they exhibit with sharp distinctness the cut of the die, and
permanently retain its impress. This quality of the
metals, when they are skilfully coined by the improved machinery of modern times, makes the
pieces of money objects of beauty, and practically
in&estructible also, since the perfect circular form,
the device covering the whole piece, the milled and
fluted edges, make clipping without detection impossible, while the hardness of the pieces makes the
annual loss of weight by abrasion scarcely appre.
ciable. The Director of the United States Mint, in
his Report for 1862, gives the results of some careful and comprehensive experiments made at the
mint to ascertain the yearly loss of coins by the
ordinary wear and tear of circulation. These re



252      ELEMENTS OF POLITICAL ECONOMY.
suits are exceedingly interesting and important, and
throw to the winds the haphazard conjectures of a
host of writers on either side of the Atlantic. On
our silver coins, taken promiscuously, the average
annual loss from abrasion was ascertained to be
one part in 630; while the gold coins were tested
separately, with this satisfactory conclusion, that the
half-eagle averages a loss per annum of one part in
3550, the double-eagle one in 9000; and a cautious
estimate as to the proportions of the various sizes
of coin actually in circulation in the United States,
made of the two metals, leads consequently to the
conviction that the average yearly waste by wear on
all the coins does not exceed one part in 2400. The
cost, therefore, of maintaining a metallic circulation
is by no means so great as it has been usually represented. An instrument in constant use that requires
only ~ —o of its value for its yearly repair, and performs exceeding well the most delicate and important functions, is a cheap and durable instrument.
From these three main reasons, we conclude that
gold and silver are the best money.
4. An inferior money, so long as it circulates at all,
invariably drives a superior money out of the circulation.
This is a fundamental law of finance, and has
been illustrated over and over again in every age and
nation. It is as solid as the substance of truth can
make it, though it looks at first sight like a paradox.
We naturally think that what is excellent tends
rather to displace what is inferior, but with money
the exact reverse is the law, and the perfect coin of
full weight, instead of driving out the light and the




ON MONEY.               253
debased pieces, is always itself driven out of the
circulation by them. The reason is obvious from
the nature of money. Money is merely an instrument of exchange, and nobody wants it except to
buy with, and so long as the government and the
community treat light coin and full coin as of equal
value, receiving them indifferently in payment of
debts and of taxes, it is clear that nobody will give
in payment of debts and of taxes that which is really
worth more so long as that which is really worth less
will go just as far. The inferior pieces will abide in
a market where they will fetch just as much as the
superior pieces, while the superior pieces will take
on a form or migrate to a place in which some
advantage can be gained from their superiority.
Thrown into the crucible, or exported in commerce,
this superiority immediately manifests itself; and
therefore into the crucible or into the channels of
foreign trade it might be confidently predicted beforehand that such money would be thrown, and all experience testifies with one voice that exactly those
are the destinations of such money. Mr. Macaulay,
in the twenty-first chapter of his history, mentions
that Aristophanes, the Greek comic poet, in the fifth
century before Christ, was the first writer who has
noticed the fact that where good money and bad
money are thrown in together the bad money drives
out the good. The verses of the poet allude to the
tendency as well known, and refer it to the naturally
depraved taste of his fellow-citizens, like that which
led them to entrust state affairs to such men as
Cleon, whom he was satirizing; but, in truth, as we
have seen, the tendency results from the common




254     ELEMENTS OF POLITICAL ECONOMY.
sense of men, which revolts at the idea of using a
dearer instrument when a cheaper one will answer
just the same purpose.
Out of a crowd of good illustrations of this law, I
shall first select two which occurred in purely metallie currencies. The Dutch city of Amsterdam became in the seventeenth century a centre of trade
for all Europe.  The mercantile honor and solid
financial ability of its merchants was proverbial all
over the world; and yet it was noticed, about the
year 1609, that bills of exchange on Amsterdam
were always below par in other countries.  The
merchants had never failed to meet all the paper
drawn on them with the utmost promptness, and the
discount on this paper in other markets was a wonder to everybody. On search, however, it was found
that the cause of all this was in the currency of the
city. The extensive trade of Amsterdam brought
into it large quantities of clipt and worn foreign coin,
which circulated in the currency of the city, and
reduced its value about nine per cent. below that of
good money fresh from the mint. It was noticed,
that the good money of full weight which the mint
of Amsterdam poured into the circulation by wagon.
loads, did not stay in the circulation; that very few
of such pieces were told out in the daily exchanges;
it was ascertained that they were melted up, or
carried away to other countries, in either of which
cases their value corresponded to the value due to
their weight and fineness, while at home in the currency their value only corresponded to the average
value of the depreciated coins which constituted the
bulk of the circulation. Bills of exchange, conse



os MONEY.               255
quently, drawn on Amsterdam were liable to be
paid in this depreciated coin, and the exchange was
against the city even more than the coin was depreciated; because, the currency in such an uncertain
state was naturally valued abroad even below what
it was really worth. To meet this state of things,
and bring up its exchanges to par, the city of Amsterdam, in 1609, established its celebrated bank.
The bank received the clipt and worn coin which
was circulating in the city, at its true value according to present weight and fineness, and after deducting a small charge for expense of recoining, and
another small charge for management, gave a credit
on its books for the remainder. This credit was
called bank-money; it represented, guilder for guilder,
money actually in deposit, and money too exactly
according to the standard of the mint. The city
ordered that all bills drawn on Amsterdam of more
than six hundred guilders' value, should be paid in
bank-money; thus every considerable merchant was
obliged to open an account with the bank, and make
his deposit. This instantly took away all uncertainty
from bills of exchange drawn on Amsterdam. They
went up to par at once in every market in Europe.
This was the basis of the simple and beneficent
operations of the Bank of Amsterdam, an institution
which enjoyed unlimited credit in the commercial
world for nearly two hundred years. The convenience of this bank-money; its unvarying character; its
security from fire, robbery, and other accidents; the
fact that the city was bound for it; and the demand
for it occasioned by the fact that every merchant
must have some of it, that is must keep an account




256     ELEMENTS OF POLITICAL ECONOMY.
with the bank, in order to pay his foreign bills of
exchange, gave the certificate of deposit, or the bankmoney, a constant premium of about five per cent.
over the good coin of full weight which came into
circulation without difficulty as soon as the poorer
coins were drawn into the bank for recoinage.
At the close of the same century, a similar series
of events occurred on a much larger scale in England.' The old silver coinage of England was by a
rude process introduced into that country by artists
from Florence as early as the thirteenth century.
The pieces were shaped and stamped by the hammer.
They contained some a little less and some a little
more than the due amount of silver; few of them
were perfectly circular; the edges were neither milled
nor fluted; the image of the sovereign occupied the
centre of the pieces, and the superscription ran around
the edge, but not so near it as that the letters were
necessarily impaired by a little clipping.  Consequently it was easy to pare off a pennyworth or two
of silver from the crowns, half-crowns, and shillings,
and then pass them along. It became a profitable
branch of industry. It was in vain that Elizabeth
enacted that the clipper should be henceforth liable
to the penalties of high treason. About the time of
the Restoration, that is, about 1660, it was noticed
that a large proportion of the silver coin of the
realm had undergone some degree of mutilation.
At that time a new process of coinage was brought
in. A mill worked by horses fabricated the new
coins on better principles. They were exactly round,
and the edges were inscribed with a legend, and they
1 Macaulay's History, Chap. 21.




ON MONEY.               257
were all of just and equal weight.  They were
thrown out into the circulation to pass current with
the hammered money, and it seems to have been
expected that they would soon come to displace it.
But they did not. Both were received at first without distinction by the individual traders and by the
public tax-gatherers. But it was not long before the
milled money was noticed to be scarce. One hardly
saw a piece of it in a fortnight. The horses at the
mint were all the time tugging away, and the bags
of fresh money were carried continually from London
Tower to London town, but the new money nevertheless became scarcer every day. In the payments
made at the Treasury not one piece in two hundred
was milled silver, and a merchant complained that,
being paid a debt of thirty-five pounds, he only got
one half-crown of good money. Indeed, the money
was getting perpetually worse. False coiners multiplied, and clippers abounded more and more. The
penalties of an extreme law were utterly powerless
to restrain the mutilation of the coins; until, at length,
public opinion decidedly turned against the promiscuous hanging of clippers; officers were reluctant to
arrest, and juries reluctant to convict, and the people
sympathized with the sufferers as only guilty of a
moderate fault. Thus things went on till 1695.
The lighter the old coins became, the scarcer became
the new ones; for who would pay two ounces of
silver when-one ounce was legal tender? The new
money was melted, was exported, was hoarded, but
circulate it would not. At length the lightest pieces
began to be refused by some people, and other people demanded that their silver should be paid to them
17




258     ELEMENTS OF POLITICAL ECONOMY.
by weight and not by tale, and there was wrangling
over every counter, and a dispute at every settlement,
and the coin was really so diverse in. its value that
there was no longer any measure of value in the
kingdom; business was in utmost confusion, society
was by the ears, poor people were unmercifully
fleeced, and shrewd ones grew enormously rich;
and the Jacobites secretly exulted in the hope of
being able to avail themselves of the prevailing discontent to overthrow the scarcely established revolutionary government of William  and Mary; when,
by the joint counsels of two such philosophers as
Locke and Newton, and two such statesmen as
Somers and Montague, the government took the
bold resolution of recoining all the silver of the kingdom. An early day was fixed by Parliament, after
which no clipped money could pass except in payments to government, and a later day after which it
could not pass at all. It was wisely determined that
the loss on the clipped money should be borne by the
whole public, and not by the present holders of it;
and it was estimated that ~1,200,000 would be re.
quired to make up the currency to the old standard
of weight and fineness; and this sum the Bank of
England, just established, was willing to advance
on the security of some new and good tax; and the
window-tax was passed to raise the money; the old
coins were rapidly drawn in, melted up, and recoined, and thereafter there was no difficulty in
keeping the circulation full of milled pieces of full
weight.
In mixed currencies, the financial law we are now
treating has a similar, but if possible a more disas



ON MONEY.               259
trous operation. If the paper in circulation be not
nominally redeemable in gold and silver, then as
soon as it depreciates below the value of gold and
silver, as such paper has never yet failed to depreciate in a short time, it drives the metals completely
out of the circulation, and keeps them out just so
long as itself circulates, or until the quantity of such
paper is so reduced and its character so improved
that it rises again to a par value with the metals, in
which case, though it has never to my knowledge
actually occurred, the metals would come back into
the currency alongside of the paper. The suddenness and the thoroughness with which the gold and
silver will abandon a currency of which a depreciated, irredeemable paper forms a part, was illustrated
on a large scale in this country in 1862. A gigantic
civil war had been in progress in the nation for a
year; difficulties and disasters had thickened around
the path of the government; its financial embarrassments were of the most formidable kind; and yet,
until April of that year, 1862, the paper money of the
loyal States, which consisted of about $140,000,000
of bills of the various State banks, had not much
depreciated as compared with coin. In January,
indeed, when the national government had added to
this mass of paper about $30,000,000 of demandnotes gold was at a premium of five per cent.; but
as soon as the law authorizing the issue of national
legal-tender notes was passed, the government drew
in the demand-notes, and for a little interval the
paper currency was reduced to about $140,00,000,
and on the first day of April, when the legal-tenders
were ready for circulation but not yet issued, the




260     ELEMENTS OF POLITICAL ECONOMY.
coin bore a premium of about one per cent. It had
not yet in any sense abandoned the circulation. The
State banks had all suspended specie payments on
the last day of the preceding year, but had not yet
much expanded their usual circulation. And now
it is to be noticed that the steady depreciation of the
paper currency of the country, both state and national,
commenced at the very time when the national legaltender notes were thrown into the circulation. All
the paper was now irredeemable, and its volume was
now expanded, and the depreciation began; it was
liable to still further expansion, both from the absence
of restraint on the circulation of the State banks and
from the urgent necessities of government leading to
the issue of more legal-tenders, and the depreciation
continued. In May gold bore three per cent., June
nine per cent., July fifteen per cent., September twenty-one per cent., October twenty-nine per cent., and
December thirty-two per cent. Step by step, as the
volume of the currency increased, did its value decrease as compared with gold; and what is more to
the present purpose, no sooner did the depreciation
become sensible, than the scarcity of coin became
sensible also, and in a very few weeks' time the
currency was swept utterly bare of metallic money.
The gold went first, and then the silver; and a little
later even the copper cents followed the example;
and the government was obliged to authorize the
use of its postage and revenue stamps for small
change; and, until it was prohibited by law, cities,
corporations, and individuals issued shinplasters and
metal tokens of various kinds to take the place of




ON MONEY.              261
the small coins. This present writing is at the autumnal equinox of 1871, but with the exception of a
few of the cents, the coins have not yet returned to
the circulation, for the sufficient reason that the papermoney is still depreciated as compared with them.
The war is over, peace has returned, business is reviving, and a career of unprecedented prosperity is
opening up before the country, but the coins have
not come back, and, under the commonest principles
of human nature, cannot come back, until the paper
dollar of the country is equal in purchasing-power to
the gold dollar, and is redeemable in that. Since
April 1st, 1862, the paper money has varied from
less than one to sixty-five per cent. below par, and
is to-day thirteen per cent. below par.
So long as the paper money of a country is nominally redeemable in gold and silver, the operation of
the law we have in hand is somewhat peculiar. In
times of ordinary confidence and prosperity the paper
and the coin circulate indifferently together, and
an undue increase of the paper beyond the just demands of business does not indicate itself in a premium on the coin, but each part of the whole currency suffers a diminution in value, which is of course
indicated in a general rise of prices. There is nothing anomalous in this, for increase of supply, other
things as before, always lowers the value of anything; and the direct interest of the parties who
furnish the paper leads them to increase their circulation as much as they fairly, and sometimes as
much as they unfairly, can. But a market in which
prices are high and gold is still circulating is a good
market to sell in, and increased importations never




262     ELEMENTS OF POLITICAL ECONOMY.
fail to accompany a rise of prices caused by the de.
preciation of a mixed currency. In the home market
the paper is still as good as gold, but to pay the
balances in a foreign trade it is good for nothing.
The natural superiority of the gold to paper appears
as soon as a payment is to be made abroad. In
obedience to this impulse gold naturally and inevitably goes abroad; and it has repeatedly gone abroad
under these circumstances from the United States to
such an extent that the parties who furnished the
paper, that is to say, the banks, could no longer redeem their paper in coin, but were obliged to suspend
specie payments, which is a euphonious circumlocution to express going into temporary or permanent
bankruptcy. In this case also, though less directly,
the inferior money pushes the superior out of circulation. I have no hesitation in calling the paper the
inferior money, both for other potent reasons soon to
be specified, and because at any rate it is powerless
in international exchanges. There is believed to be
nothing in the monetary history of the United States,
as there is certainly nothing in the known principles
of human nature, which does not abundantly confirm as a universal truth the proposition in hand,
namely, that worse and better money being in the
currency together, the worse will expel the better
sooner or later; sometimes into hoards, sometimes
into the melting-pot, and sometimes out of the country.
5. A paper money is only tolerable when it is actu.
ally and instantly convertible on demand into gold and
silver.
I feel no hesitation in using the term paper-money




ON MONEY.               263
although many high authorities will not concede that
any form of paper can be money at all. They make
a distinction between currency and money. The
discussions in this chapter thus far have been purposely made so general as that the principles will apply to a money of paper as well as to a money of coin.
Any form of value that circulates generally among all
classes of people as a medium in their exchanges may
be allowed to be called money. The essential characteristic of money is its possession of a generalized
purchasing power. For a reason soon to be given,
gold and silver in any form have a more general purchasing power throughout the world than any form
of paper can have; and yet the paper that the
masses of the people accept as a medium in any
country, may be regarded as money in that country.
Checks, drafts, bills of exchange, and so on, are not
money under the definition. This is a distinction
recognized in common language, and science has no
motive to disturb it. The signification of the term
money merely marks the fact of a general circulation, and determines nothing in respect to the nature
or usefulness of a particular medium.  The word
money is derived from the Latin moneta, the mint or
place where money was coined. The mint of Rome
was a building on the Capitoline, and attached to
the temple of Juno Moneta, as the erarium was to
the temple of Saturn. The epithet of the goddess
passed over first to the mint, and then to that which
was coined there.
But while nothing seems to me to be gained by
refusing the courtesy of the term money to any form
of value which a people choose to employ as a me.




264     ELEMENTS OF POLITICAL ECONOMY.
dium, there is a distinction of the utmost importance
between coin money and paper money. Coin money
is the definite thing, which paper money promises to
pay to bearer. What is a dollar? A dollar is 254
grains of a metal compound, of which nine parts are
pure gold and one part is a hardening alloy. It is a
definite quantity of a definite thing. Government is
competent, if it pleases, to alter the quantity of gold
that shall constitute a dollar; but it is not practically
competent to make a dollar out of anything else
than gold. Our government gave up long ago the
attempt to make a dollar even out of silver. After
every change in the mint laws, a dollar is, and will
remain, a definite quantity of gold alloyed. What
is a dollar bill? It is a promise of the issuer to pay
to bearer this definite quantity of alloyed gold.
There is no mystery here. A dollar is a tangible
commodity. A dollar bill is a promise to give this
commodity to bearer. The subject of Credit will be
treated at length in the chapter following the next;
but it will be plain to every reader, without a technical definition, that a promise received involves the
element of credit.  In an exchange proper, two
services are reciprocally rendered by two persons,
and the transaction is then and there terminated;
but in simple credit, one service is rendered, and the
return service is delayed, and usually some paper
evidence that such service is due springs up in connection with the transaction. It is an exchange
begun, but not yet consummated, and no matter
through how many hands the paper evidence may
pass, it is nothing but an obligation resting on somebody to pay to somebody the return for a service




ON MONEY.              265
which has been actually rendered. Now the grand
distinction, and one of the utmost importance, between gold and silver money and paper money is,
that paper money always has in it the element of
credit, while the other has in it no element of credit
at all. A gold eagle is not a sign of anything, it is
not the representative of anything; it stands in its
own right, just as a bushel of wheat does; it is true
that its only use as money is to purchase other things,
but its purchasing-power is within a trifle as great
whether it be in the form of money or bullion; and
therefore a service that is paid for in specie closes
up the transaction completely, the exchange is consummated, there is no element of delay, of promise,
of credit in such an exchange. It is just as when
the miller renders a bushel of corn to his neighbor,
and that neighbor renders him a day's labor in re-;urn. In both cases, there is an end. But paper
money is credit-money. It may be more convenient
than coin money; its value, that is to say, its purchasing-power, may be equal to that of coin money;
it may even in some circumstances bear a premium
over coin money; but all this does not alter the fact
that there is in it an unlucky element, an unstable
element, an element which, as men are, is liable to
some suspicion, the element, namely, of a present
promise to be fulfilled in future. Paper money walks
by faith, and not by sight. It is the sign, and not the
thing signified. It is the representative of something,
and not that something itself. It is a promise to
pay, and not the pay itself. It is a credit, and not a
quittance. And what makes this very certain is, that
all paper money knows it to be true about itself. It




266     ELEMENTS OF POLITICAL ECONOMY.
bears this truth stamped on its very face. It does not
even profess to stand on its own bottom, but leans
consciously and conspicuously on some solid support.
The French assignats promised to redeem themselves
in land; the continental bills of the old American
Congress were all to be paid in Spanish milled dollars; the bills of the Bank of England profess to be
and are, redeemable in gold and silver; the present
irredeemable legal-tender notes of the United States
and the new national bank bills, are all in terms
promises to pay to bearer so many legal dollars of
the United States, that is, so many times 254 grains
of gold standard fine. These promises have been
long dishonored.
Since, then, the various forms of paper money
even the best of them, are mere promises to pay on
demand, it must be conceded that they are creditmoney; and the question is narrowed down to this,
whether the functions of money can be well performed by the evidences of an obligation to pay for
services already received. It is not denied that such
evidences frequently have value, that their value is
sometimes equal and sometimes superior to an equivalent sum in gold; the question is whether in their
nature they can constitute a good money. In resolving this question, it must be noticed, that the
fact of indebtedness is not of itself an evidence of
an ability to pay: individuals, corporations, and governments have often become bankrupt through the
disproportion of indebtedness to ability. It must be
noticed, also, that, in the light of human nature and
experience, men in all capacities are more or less
willing to accept the services of others without ren



ON MONEY.               267
dering the equivalent return, even when their obligation to render it be certified on paper; also that the
willingness of people to accept, in return for actual
services rendered, mere promises to pay in future, by
whomsoever issued, is quite different at different times
- in times of confidence and prosperity they may be
readily accepted, in times of disaster and peril all
men prefer payment to promise. The functions of
money are two: to serve as a medium of exchange,
and to serve as a measure of value. To fulfil the
first office well, money should be a commodity at all
times acceptable to all men in return for services rendered; to perform the second function well, money
should be as uniform as possible in quality, and vary
in quantity according to the shifting demands of exchange, and not otherwise; in short, vary in quantity
just as a good metallic currency does vary under
natural laws alone. But credit-money is unfitted
by its very nature to do well these two things; first,
because it never has been, and in the nature of things
never can be, acceptable to all men at all times in
exchange for services even within the country itself,
and in international exchanges it is not acceptable
at all; and second, because, as has been already
shown, a steady measure of value necessitates a
steady value of the money, and the value of credit
must certainly be as variable as the character of the
issuers for integrity and solvency. Add to this, that
the value of credit-money, like the value of everything else, depends in part on the supply, and the
supply will vary with the varying disposition of the
people to accept it, and thus the measure of value
will be varied. It is in vain to talk, as too many do




268     ELEMENTS OF POLITICAL ECONOMY.
in this connection, of the self-interest of the issuers,
and of their honor, and so on; self-inierest should
keep men from becoming bankrupts, yet men do
become bankrupt; honor forbids indeed the escaping
from a debt, yet debts are escaped from. On principles merely, it would be as certain beforehand as
any such truth can be, that credit-money, from the
nature of credit, could not properly perform the two
delicate and important functions of money.
We see, then, precisely, the nature of paper money.
It is made up of promises made by somebody to pay
to somebody else a definite weight of coined metal.
All civilized countries nowv make a certain weight of
gold or silver bullion their acknowledged standard
of value; and, accordingly, paper money can only
be based upon specie, since specie is the only thing
that can be meant, when the promise is to pay
pounds, dollars, gulden, francs. Specie is indeed a
commodity, like other commodities, but then it is
the only commodity that is the accepted medium of
exchange in civilized countries; and therefore, all
attempts to base a paper money upon land, wheat,
cotton, mercantile bills, or any other valuable thing,
involve a direct contradiction in terms. Our proposition is, that paper money is only tolerable when it
is instantly convertible into coin; which is the same
as to say, that a promise is only good when it is kept.
An inconvertible paper money is only another name
for a promise unfulfilled; and no intelligent person
will ever wonder that unfulfilled promises to pay invariably become less valuable than that which they
promise to pay. This is the simple secret of the
inevitable depreciation of all inconvertible money, as




ON MONEY.               269
soon as the amount of it passes a certain limit.
Even a convertible money, if, by any expedients, the
amount of it, together with the coin in circulation,
become greater than the volume of coin alone would
be then and there, will diminish in value, not indeed
as compared with specie, but as compared with cornmodities, that is, general prices will rise. All the
principles of this whole discussion hinge on the fundamental truth, that money is a medium of exchange.
Because it is a medium, only a certain amount of
it is ever needed at any time to do the healthy business of any country.  This limit of quantity not
being overpassed, paper promises to pay, provided
they are only kept, will constitute a tolerable money.
That this limit of quantity is apt to be overpassed,
whenever paper money is used, whether it be inconvertible or nominally convertible; and also, that a
paper money can never be successfully based on
anything but gold and silver, the subjoined historical examples will abundantly confirm.
John Law was born in Edinburgh, in 1671, and
died in Venice, in 1729. Son of a goldsmith, he
received an excellent education, and early manifested
an acute intellect and a talent for finance, but was
also notorious as a gambler and debauchee. He
was the first to give scientific form and color to the
theory (a theory that is still working in many minds)
that money represents commodities, and may be
based upon their value. He published this theory
in a tract, in 1705; but endeavored in vain to persuade the government of Scotland to found a bank
upon his principles. He then carried his scheme to
Paris, and was again repulsed; and after a residence




270     ELEMENTS OF POLITICAL ECONOMY.
in many cities, in which he gambled successfully,
and talked finance to princes and statesmen fascinatingly, he returned to Paris in 1715, with his ill.
gotten fortune, gained the ear of the Regent Duke
of Orleans, presented to him a memorial containing
many sound principles of monetary science combined
with the fundamental vice of his system, and was
allowed by him the next year to. found a bank embodying to a certain extent the new idea. The idea
may be well expressed in Law's own words:-"Any
goods that have the qualities necessary in money,
may be made money equal to their value. Five ounces
of gold is equal in value to ~20, and may be made
money to that value; an acre of land is equal to ~20,
and may be made money equal to that value,for it has
all the qualities necessary in money."  For a couple
of years, or so, Law's bank surpassed all hopes.
Based on specie and on state debts, it paid its notes
promptly in coin, and these for a time even bore a
premium over coin. Law had touched a spring till
then but little known in France, the potent spring of
Credit. But his whole thought, meditated on for
years, could not be expressed through a private bank.
The State should be a banker; it should collect all
its revenues into a central bank, and attract the
money of individuals to it as deposits; besides, the
State has public property of vast value, on the
strength of which paper money can be emitted and
made legal tender; and thus the State, instead of
borrowing, should lend to all on easy terms, and the
profits thus accruing would lessen or abolish taxes.
Nor was this all. The State should also be a merchant; the whole nation should form a commercial




ON MONEY.               271
company, a body of traders, whose common treasury
should be the State bank. Commerce by individuals
creates great wealth; why should not the organized
commerce of a State make everybody rich?  The
discounts of the bank, and the profits of the trade,
would surely provide for the public service without
taxation. These vast ideas were actually carried
out. Law's bank became the Royal Bank, issuing
a paper money guaranteed by the State and resting
back upon the value of all national property. The
money was receivable in taxes, nominally redeemable in coin, and made a legal tender. It actually
bore at one time five and ten per cent. premium over
gold and silver. People were anxious to exchange
their coin for notes. Meanwhile a commercial company was formed in connection with the bank, to
which the State ceded at first the monopoly of the
commerce of Louisiana and of the Canada beaver
trade for twenty-five years, and the soil of Louisiana
forever; under the auspices of which NEW ORLEANS
was founded, and named from the Regent, the patron
of the grand system; and in succession, the monopoly of tobaccos, the rights of the Senegal Company,
of the East India Company, of the China Company,
and of the Barbary Company; until, having almost
all the commerce of France outside of Europe in
its hands, it entitled itself the COMPANY OF THE
INDIES. Its shares rose from a par value of 500
francs, to 10,000 francs, more than forty times their
value in specie at their first emission. To support
such speculations, which completely turned the heads
of all classes of the people, the amount of paper
money reached at last the sum  of 3,071,000,000




272     ELEMENTS OF POLITICAL ECONOMY.
francs, 833,000,000 more than had been legally
authorized to be emitted. The collapse of this most
gigantic financial bubble of history was terrific. Before the close of 1720, the shares of the Company
could be bought for a louis d'or, and the paper
money became worthless.' Nevertheless, Law was
a great man. His accounts in all these immense
transactions were as clear as daylight. He believed
in his system till the day of his death, and referred
its failure to the caprices of a despotic government.
His mind too much loved unity, and his plan gave
too little scope to individual liberty. But the central
vice of all was a mistake as to the nature of money.
Money is a medium, and its amount cannot be increased beyond a certain limit without disaster.
Moreover money does not represent the commodities
which it helps to exchange, any more than ships
represent the cargoes which they carry.
Thus Law's paper money ran its course in about
four years. Again at the close of the century France
tested the merits of paper money, and the principle
that money may represent commodities, on a grand
scale. As the great revolution went forward, and a
scarcity of money was experienced, the National
Assembly, in the spring of 1790, issued, under the
name of "assignats," a paper money based on the
value of the lands of the Church which had been
confiscated to the State. The assignats were receivable in payment for these landed estates at any
public sale of the same. The first emission, but not
1 Martin's Decline of the Monarchy, chap. i.  Macleod's Theory and
Practice of Banking, chap. xi. Bancroft's United States, chap. xxiii. New
Am. Cyclo. Axt John Law.




ON MONEY.              273
the rest, bore interest. That issue was 400,000,000
francs -about one fifth the value of the confiscated
lands. In September, 800,000,000 more were authorized, Talleyrand opposing and Mirabeau strongly
urging these additional issues. " It is in vain," said
Mlirabeau, "to compare assignats, secured on the
solid basis of these domains, to an ordinary paper
currency possessing a forced circulation. They represent real property, the most secure of all possessions,
the land on which we tread." Nevertheless, and
though all assignats were legal-tender, they drooped.
The government in alarm, while issuing on the one
hand enormous quantities of the paper to meet the
vast expenses of the Revolution, which quantities
were swelled by skillful counterfeiters in the prisons
and elsewhere, took strong measures on the other to
prop up their market value; the use of coin was prohibited; a maximum price in assignats for everything
was established by law; heavy penalties and at last
death were decreed against those who refused to
receive them at par; but it was all in vain. " They
sink now," says Carlyle, " with an alacrity beyond
parallel." In June, 1793, the assignats had fallen to
33, and in August to 16 per cent. Renewed confiscations kept the estimated value of the public
domains far in advance of the par value of the assignats based upon them; but this had no tendency to
prevent the depreciation of the assignats, because
money is a medium of exchange, and its proper
amount has no relation to the estimated value of
any commodities at all. In February, 1796, the assignats legally issued had amounted to 45,500,000,000
fiancs, and had fallen to one two hundred and sixty
18




274     ELEMENTS OF POLITICAL ECONOMY.
fifth part of their nominal value, that is, to two fifths
of one per centum. The government then offered to
redeem them at 30 for 1 in " mandats," which entitled
the bearer to take immediate possession at their estimated value, of any of the lands pledged by the assignats. According to M. Thiers, who is my authority in this paragraph, the mandats sold first at 15, then
rose to 40, and in some places to 80, and soon sank
again to 5 per centum. A. decree of July 16, 1796
ended the matter by permitting any one to do business in any money he chose; and business, which
had practically ceased under the paper money, revived again at the sight of the coin, which, of course,
had been out of circulation. Thus the assignats had
a course of about six years. The distress and consternation into which a country falls when its measure of value is disturbed and destroyed, as it was by
the issue of the assignats, is past all powers of description. There can be no doubt that these assignats caused more suffering in the French Revolution,
a hundred fold, than the prisons and the guillotine.
It may be said that the government ought not to
have issued them in such quantities.  Perhaps it
ought not. But there never has been a government
yet, of the many which have issued irredeemable
paper, which had the wisdom and the firmness to
resist for any great length of time the temptation to
emit large quantities. There is no stopping when
once the issue is begun. The first batch of such
paper usually banishes the coin from the currency.
There is no way to entice it back except to call in and
burn up the paper. Revolutionary governments are
not generally in position to be able to do this. Ordi.




ON MONEY.               275
nary national expedients are denied them. They cannot borrow. Therefore they have recourse to creditmoney, which is really'borrowing without interest,
and when once the press is set at work it must work
on with livelier speed, because just in the ratio of
the depreciation is a greater amount required to
meet the ordinary payments. This example is significant, because it shows the powerlessness of even
the strongest and most unscrupulous governments
to regulate the value of anything.  The assignats
were depreciating during the very months in which
Robespierre and the Committe of Public Safety were
wielding the power of life and death in France with
terrific energy. They did their utmost to stop the
sinking of the revolutionary paper. But value knows
its own laws, and follows them, in spite of decrees
and penalties.
The bills of credit issued by the Continental Congress during the American Revolution had a course
and issue very similar to those of the French assignats. Unlike them, these were based simply upon
the good faith of the people whom the Congress
represented. Their vice was not, as in the previous
instances, the supposition that money may be
founded on the value of specific commodities; but
their emission ignored this fundamental law of
finance, namely, that the value of money arises as
all other value arises, and is amenable to the same
principle of supply and demand as other values; and
their vice, consequently, was, that there was no natural limitation of their supply. Money is either an
intermediate and equivalent merchandise, or promises to pay it; that is to say, gold or silver, or prom



276     ELEMENTS OF POLITICAL ECONOMY.
ises to pay them; and mere promises to pay them,
such as the continental bills were, unaccompanied
by any provision to pay them, have no natural limitation of supply. In June, 1775, $2,000,000 were
emitted; in November, $3,000,000 more; the next
February, $4,000,000 more; and in August, $5,000,000 more. The depreciation began before the next
issue of $5,000,000, May, 1777. But the bills kept
up to par for more than a year. As the emissions multiplied, the depreciation became rapid. In August,
1777, they exchanged with silver at 3 for 1; in February, 1779, at 10 for 1; and in November, 1779, the
date of the last emission, at about 40 for 1. Early
the next year they dropped out of circulation altogether. Thus their course was run in less than five
years. The Congress pledged itself not to emit over
$200,000,000 in all; but I suspect that that limit, as
is usual in such cases, was considerably overpassed,
either by design or fraud. Jefferson estimates that
the nation realized from the $200,000,000, $36,367,720 in specie value.1 Most of these bills were never
redeemed.
The United States legal-tender notes which began
to be issued in April, 1862, and of which $450,000,000
were put into circulation, are in their nature like the
continental bills, and have been more or less depreciated from the first, and at times very much depreciated. It may be questioned whether the making
these notes a legal tender has appreciated their value
at all; so far as the demand for them to pay debts
with has been thereby increased it has had such a
tendency, but so far as it indicated a lack of confi1 Jefferson's Works, vol. ix., page 259.




ON MONEY.               277
dence on the part of the government in the validity
of its own promises the tendency has been the reverse. The faith of the people in their money is
very properly more sensitive and more easily shaken
than their faith in anything else; and this is one of
several weighty reasons why the element of credit
should not enter into the money at all. Credit is
good in its place, but in the people's current money
it is out of place. Hence these notes, notwithstanding their legal-tender character, have been much
more depreciated than any form of the national
bonds. I cannot think that good financiering would
have found it necessary to issue such paper; and I
am quite sure that making it legal-tender has not on
the whole enhanced its value. In the Eastern and
Middle States, the legal-tenders had no more acceptance at first than the bills of their State banks, which
were equally irredeemable.
Between the years 1782 and 1865, there circulated
in the United States a paper money consisting of
bills issued by banks established under the authority
of the individual States. These bills were nominally convertible into coin at the will of the holders.
Some of the States required their banks to keep a
percentage of specie on hand for the redemption of
their bills; but most of them required only a deposit
of some kind of securities with an officer of the
State, on the strength of which securities the banks
were allowed to issue an equivalent value in bills;
and some of the States did not even require so much
as this. The fallacy of founding a paper money
upon public securities, will be fully exposed in the
following paragraphs; it is here only necessary to




278     ELEMENTS OF POLITICAL ECONOMY.
observe that our proposition, if correct, condemns
the money of these State banks. Some of it was
better than the rest, but none of it deserved the
praise of being a satisfactory money.  (1.) It was
liable to great and sudden contractions and expansions in volume. For instance, the volume in 1858
was $59,570,474 less than in 1857; and in 1863
$54,885,139 more than in 1862. (2.) The ratio of
paper to the specie reserved to redeem it was a high
ratio. The average for the whole country in January, 1863, was 4 to 1; in Rhode Island more than
12 to 1; and in Vermont more than 28 to 1.1 Such
a paper can only be called redeemable by stretch of
courtesy. (3.) As a matter of fact, so soon as there
began to be a financial pressure, especially whenever the exigencies of commerce withdrew gold for
foreign trade from reserves already so small, the
banks were compelled to confess, what everybody
knew before, that they were unable to redeem their
promises. Four or five times, during the continuance of the system, panics attacked the paper money,
and the banks suspended specie payments. In these
times of stress some of the banks did better than
others; the Bank of the State of Indiana, for example, under the management of the Hon. Hugh McCulloch and others, maintained specie payments in
the trying periods of 1857 and 1861.2 (4.) The instability of the general system tended towards a reckless
way of doing business, and led on to frequent bankruptcies, which became a just reproach to us in for.
eign countries. The banks contributed powerfully
1 Finance Report, 1863.
2 Letter of Mr. McCulloch, August 17, 1867.




ON MONEY.               279
in times of quiet by a system of generous loaning,
on which their profits depended, to induce a spirit
of speculation and a willingness to contract debts,
and experienced when the reaction came, how much
easier it is to loan paper promises than to fulfill them.
Their inability to continue in troublous times the
free loans which helped to bring them on, and their
repeated failures to make good the obligation to redeem their own notes, caused incalculable losses of
property. There can be no hesitation in affirming
that the expense of maintaining a gold and silver
money for all the wants of the whole country, might
have been met many times over from the losses
resulting from this bank-paper system. It is fortunate that the people concluded to abandon it.
We come now to the money of the present national banks organized under the law of February,
1863. This money is likely to be better than that
last considered, because the banks issuing it are
amenable to a central authority and to common regulations. They deposit with the national Comptroller of the Currency gold-bearing government bonds
to an amount somewhat greater than that of the
circulating notes which they receive back from him,
so that the redemption of the notes may be provided
for by the sale of the bonds, in case the banks do
not redeem the notes. The banks are also required
to hold in reserve a certain percentage of lawful
money of the United States. The notes are so expensively engraved by the national government that
the counterfeiting of them has proved to be very
difficult. The total amount of notes authorized at
present to be issued by all the banks is $354,000,000o




280     ELEMENTS OF POLITICAL ECONOMY.
It might seem as if this form of money would meet
our test; nevertheless, there is a vicious principle
that underlies the foundation of the present system.
It is just as bad in principle to base a paper money
upon government debt, as upon lands, or other commodities. The evidences of government debt are
usually salable in the market at some price, and so
are lands, mercantile bills, and all the articles of a
prices current. Perhaps the government debt is more
uniformly salable than any of them; but there is no
relation of a proper amount of money for any country to the amount of its national debt, any more than
to the value of its lands. The absurdity of the principle is only disguised by an arbitrary limitation of it.
If it is proper to base $300,000,000 of paper money
on $333,333,333 of government bonds, why is it not
proper to base $300,000,000 more of paper money on
$333,333,333 more of the government bonds, and
so on, till the amount of money shall approximate
the amount of the debt? Any limit placed is purely
artificial. One Congress may think that $300,000,000
of paper money is enough, another that $600,000,000
will not be too much, and the third enact a free
banking law, by which all the debt may become a
basis for paper money to rest on. The primary
function of money, it must be' repeated, is to serve
as a medium of exchange; and the quantity of such
a medium required to facilitate the exchanges in any
country is impossible to be determined by law. The
only safety, under our present system, is to make the
amount of paper decidedly less than what is known
to be the necessary amount of the whole circulating
medium, and then allow coin money to fill up the




ON MONEY.              281
deficiency in accordance with its own laws. If we
could have been assured that the first $300,000,000
of this money would not be increased, and that no
other paper money would be allowed, then a fair degree of confidence in it would have been reasonable;
then a part of the currency would soon have become
specie; and the paper might have been kept at par
all the while, and we should gain something by the
superior convenience of the paper, and not lose much
by its inferior steadiness. But the mischief of it is,
this money cannot regulate its own quantity; it is
not guarded, as gold and silver are, by a natural limitation of supply; a simple vote of Congress is sufficient to increase it, as the original limit has been already overpassed by the authorization of 18 per cent.
additional. After all that can be said in favor of it,
it is credit-money still, and exposed to the dangers
inseparable from credit-money, namely, the distrust
of the people, the undue enlargement and sudden
diminution of its volume, a consequent unsteadiness
of value, and inconvertibility. If we are to have a
national paper currency expanding and contracting
under the successive tinkerings of Congress, we shall
yet experience more of those evils of credit-money,
from which we have suffered in the past so extensively in property and reputation, and which nothing
but our exuberant and exulting strength has enabled
us to outlive and to forget.
Our last example of credit-money shall be the bills
of the Bank of England. This is an association of
individuals incorporated under the style of the'" Governor and Company of the Bank of England." The
bank was a child of the English Revolution, and




282     ELEMENTS OF POLITICAL ECONOMY.
was incorporated by Parliament in 1694, on condition that its stockholders should loan to government,
then pressed for funds, the sum of ~1,200,000, on
which they were promised eight per cent. as interest,
and ~4,000 for management, per annum. On the
strength of this capital stock, which was simply so
much of government debt, the bank was authorized
to issue bills to an equivalent amount, but which at
first could only pass from hand to hand by successive indorsements. The first charter was terminable
at the pleasure of the government any time after
August Ist, 1705, by giving a year's notice to the
bank, and by paying the debt due to it. The bills
at first were paid promptly in coin on demand; the
bank became the means of increasing the credit at
home and the strength abroad of the revolutionary
government of William  and Mary; and consequently the Whigs were the friends, and the Jacobites the foes, of the bank. The government was
strengthened in a sense by its own indebtedness;
for it was felt that if James II. should regain the
throne, no pound of the loan would ever be paid
back. " Soclosely," says Macaulay, "was the interest of the bank bound up with the interest of the
government, that the greater the public danger the
more ready was the bank to come to the rescue."
As already related under the last general proposition,
the silver coins of the realm were at this time much
worn and clipped; the bank had received them at
their nominal.value; but after the recoinage began
in 1696, it was obliged to redeem its bills in new
coin of full weight, that is, for perhaps 7 ounces of




ON MONEY.               283
silver received, it was now bound to pay 12.1 Consequently its enemies made a run upon the bank by
collecting its notes to a large amount and presenting
them for redemption. The bank was obliged to suspend specie payments, at first partially, and then
generally. In February, 1697, its notes were 24 per
cent. below par. A new charter, granted just at this
time, extended the term, and doubled the capital
stock of the bank, one fifth of the subscriptions to
which increase was receivable in bank notes. This
brought up the notes to par, and made the indebtedness of government to bank ~2,201,171. This second charter practically gave the monopoly of banking
in England to the Bank of England, and provided
that if the bank did not redeem its notes, they might
be presented at the Exchequer and redeemed out of
the annuity due to the bank. In 1709 the term was
again extended, the capital stock again doubled, and
the interest on the whole debt reduced from eight to
six per cent. Each increase of the debt due from
the government to the bank carried along with it the
privilege to the bank of increasing by so much the
issue of its notes. Here is the vicious principle in
the Bank of England. It assumes that a paper money
may be properly based on a government debt. But'
upon how much of. that debt?  A limit must be
placed somewhere; and the goodness of the money
will depend after all not on the debt, but upon the
coin on hand to convert the money. The bills of the
Bank of England have been and are a tolerable
money, not so much because there is a part of the
national debt behind them, as because there is gen1 Macleod's Banking, vol. i., page 357.




284     ELEMENTS OF POLITICAL ECONOMY.
erally a plenty of solid cash behind them. In 1716
the bank was exempted from the operation of all
usury laws: why the bank only, and not other people as well, the act of Parliament does not state. In
1720, and again in 1745 when the Young Pretender
made the last rally of the Jacobites, there were severe
runs upon the bank; on both occasions, in order to
gain time, notes were paid in shillings and sixpences.
Best friends were also accommodated first, who are
said to have returned the bags of money as fast as
they received them. The practice of indorsing the
notes became gradually disused, though the law at
first did not follow the innovation. In 1759 ~15
and ~10 notes began to be issued. Till then there
were none less than ~20. The bank kept advancing
various sums to government on various conditions,
mostly however at three per cent., till 1782,'when the
debt stood ~11,642,400. When England plunged
into the war of the French Revolution, the bank
came under the imperious will of William Pitt. His
constant demands for money could not be met, and
the bank at the same time give its usual accommodation to merchants.  Thus the merchants were
refused. The monopoly now bore its bitter fruit.
Private credit wavered, and there was a run upon the
bank for cash.  The bank suspended specie payments in February, 1797, and did not resume them
till 1821.  Government and the business men of
London did their best to hold up the credit of the
notes during the suspension, but they were not made
a legal tender for debts. Government received them
at par for taxes, and provided that business payments in notes would be held as payments in cash




ON MONEY.              285
if offered and accepted as such. Debtors, having
tendered bank notes, which the creditor refused, had
certain privileges before the law, which other debtors
had not. The notes therefore had a quasi legalization, but not a forced circulation. The bank was
also authorized at this time to issue ~5, ~2, and ~1
notes. Cautiously issued at first, bank paper continued at par for several years after the suspension,
which proves that when government possesses the
monopoly of issuing paper money, and carefully
limits its quantity, and both receives and pays it out
at par, it may keep an inconvertible paper at par, or
even by sufficiently limiting its quantity carry it
above par. But this truth does not make an inconvertible paper a good money, because it does not
make it a self-regulating money, and because government is not wise and firm enough to fix and
maintain a proper limit.  Though Parliament intended in successive acts to confirm to the Bank of
England the monopoly of banking by enacting that
no partnership of more than six persons should take
up money on its own bills, yet the common law
assured to private persons and smaller partnerships
the right to do this; and private bankers multiplied
after the suspension, since they were allowed to pay
their notes in Bank of England notes.  Thus the
quantity of paper money gradually increased till in
August, 1813, the Bank of England notes were at
thirty per cent. discount in gold. In the following
years, large numbers of country bankers failed, and
their notes were reduced to one half what they had
been, and Bank of England paper rose almost to par,
and a partial resumption of specie payments took




286     ELEMENTS OF POLITICAL ECONOMY.
place in 1816. In accordance with the principles of
the celebrated Bullion Report of 1810, which demon
strated that the market price of gold (in paper) and
the state of the foreign exchanges were the infallible
indices of the value of a paper money, Parliament,
in 1819, passed an act requiring full resumption of
specie payments at the bank in 1823. The resumption actually took place in May, 1821. In 1829, all
notes whatsoever for less than ~5 were forbidden to
be circulated in England. When the bank charter
was renewed for the ninth time in 1833, the bills of
the Bank of England were declared to be a legal
tender for debts, so long as the bank paid them on demand in legal coin; and the same act legalized the
issue of paper money by other banks (no matter
how many partners) outside of a radius of sixty-five
miles from London, and also legalized banks within
the radius, but they could not issue paper money.
From 1694 to 1711, the issues of the bank were
limited by law to the amount of the debt owed to it
by the nation; from 1711 to 1844 there was no limitation on the issues, only the bank was required (the
suspension excepted) to pay its notes in coin on demand; but in 1844, Sir Robert Peel gave the bank
through Parliament a new constitution, under which
it is still managed, and which restricts its issues to
~15,000,000 on the basis of securities, of which
something over ~11,000,000 consists of the government debt, and for all issues beyond this amount it
must have pound for pound of gold and silver in its
coffers. The average amount of notes in circulation
is about ~30,000,000, one half based on specie in
reserve and one half on securities. The bank is also




ON MONEY.               287
obliged to buy, and pay for in notes, all gold bullion
and foreign coins offered to it, at the rate of ~3 17s.
9d. per ounce standard fine; so that, if notes depreciate as compared with coin, they can be at once
changed into coin, or bullion and coin can be changed
into notes if the latter are preferred. The issue department of the bank is made quite distinct from
the loaning department, which latter, receiving its
notes only from the issue department, raises and
lowers its rate of discount according to the state of
the market, but usually keeps its rate a trifle higher
than the market rate, so as to be able to act as a
support to private bankers and others in case of
pressure. For many years the bank has conducted
its business upon the sound principle of raising its
rate of discount whenever the foreign exchanges become adverse and there is a consequent call for gold
for exportation, and also whenever the rate of discount in the neighboring commercial countries is a
good deal higher than its own. The due proportion
of the paper money to the specie in reserve is main
tained through a proper regulation of the rate o0
discount. The regulating act of 1844 restricted the
issue department, but it did not restrict the loaning
department. Gold can be drawn from the bank not
simply by the presentation of notes, but also by the
checks of depositors, that is, by those who have sold
bills of exchange to the bank. Hence the convertibility of the notes can be kept up only by careful
regulation of the rate of discount.  Thrice since
1844 the government has authorized the bank to violate its charter, and to issue more notes than that
allows on securities temporarily; in 1847, in 1857,




288      ELEMENTS OF POLITICAL ECONOMY.
and again in 1866.  The propriety of this restriction has been, and is still, vehemently debated in
England; and it is an open question also whether
England is any richer for the use of Bank of England bills. It shows that there is something factitious and unnatural about paper money, when so
rigid a system of restraint is considered needful to
prevent disastrous fluctuations in volume and value.
In my judgment, the most economical, and, taking
all things into consideration, every way the best
money, is the gold and silver which God has evidently designed for that purpose. This position does
not exclude the freest use of those convenient economizing commercial expedients, such as bills of
exchange, drafts, checks, money-orders through the
post-office, and so on, which are sufficient to prevent
for the most part all burdensome transfers of coin.
The public has not yet reflected sufficiently on the
peculiar functions of money, nor discriminated as it
should the proper sphere of credit from the proper
sphere of currency. Let the currency stand securely
in its own right as value-money, and then the various forms of paper credit will safely come in to
remove all the inconveniences and secure all the
advantages of a perfectly sound, and everywhere
acceptable, and a naturally self-regulating money.
6. Government ought to leave freely to the parties
concerned the rate of interest to be paid on money
loaned.
The law of Moses forbade to the Israelites the
taking from  one another any interest on money
loaned, but at the same time it- allowed them to
take such interest freely of strangers; the permis



ON MONEY.              289
sion in the one case going to show that there is
nothing in the taking of interest in itself unjust or
sinful, and the prohibition in the other being readily
explainable from the general purpose of the municipal regulations of Moses, which was to found an agricultural and not a trading commonwealth, in which
every family was to possess land that could not be
permanently alienated or sold, in which it was a
great object to maintain the personal independence
and equality of these families, in which the law for
the recovery of debts was very summary and effective, lessening the risk of losing the principal, and
which was to be and was sedulously separated in
its usages from the surrounding nations. It has
been well understood for a long time that the municipal code of Moses was local and peculiar, not
necessarily applicable at all to the circumstances of
other States, and in no sense binding on the conscience of legislators; and yet there doubtless sprung
from the prohibition referred to a prejudice against
interest, and this prejudice was perhaps deepened
in the Middle Ages and onwards by the conduct of
the Jews themselves, who, in addition to their sin
of persistently growing rich in spite of the endless
disabilities laid on them by the people of Europe,
always demanded, in accordance with the permission of their great lawgiver, a per cent. of interest
from those strangers to whom they became moneylenders. The Jews were everywhere hated, and consequently the usury which they practised was hated
also. The fundamental absurdity of forbidding in
trading communities the taking of interest on sums
loaned to a borrower which he was at liberty to use
19




290      ELEMENTS OF POLITICAL ECONOMY.
for his own profit, deterred the nations from going
to the length of prohibition, unless it might be ir.
the case of the hated Jews. There is a clause of
Magna Charta, interesting as showing how early the
children of Abraham became the money-lenders of
Europe, to the effect that, during the minority of
any baron, while his lands are in wardship, no debt
which he owes to the Jews shall bear any interest.
The prejudice against interest embodied itself in
what are called usury laws. These, without prohibiting the taking of interest, prescribe a maximum
rate per cent., which lenders may receive, and announce a penalty in case they take more. The penalty is sometimes the forfeiture of the entire interest,
and sometimes of the entire debt.
Usury laws, however, have not sprung wholly from
the old prejudice that to take interest was a great
moral wrong, and the greater the more was taken;
they sprung also from a false notion which used to
be pretty general, but which is now at length thoroughly exploded, that governments were competent
to determine the value of their own money; and
there has been, and is still, a curious and harmful
confusion in respect to this term, the value of money
In the only proper sense of the term, the value of
money means its power of purchasing services in
general, and the value of money is high when a
given sum of it will purchase much of general services, and low in the contrary case; but, unfortunately, the terms ".high and low value of money"
have also been used to denote a high or low rate
of interest on money loaned, which is a very differrnt signification, and a high or low rate of interest




ON MONEY.               291
depend on a very distinct set of causes from those
which determine a high or low value of money;
nevertheless, so long as governments supposed that
they could regulate the latter, it is perfectly natural
that they should also suppose that they could regu.
late the former; and although all intelligent govern.
ments have given over the idea of being able to
regulate the value of money, many of them still
adhere to the idea, equally false as the other, that
they are able to regulate the loanable value, or the
rate of interest, at least to prevent any more than
their prescribed maximum rate from being taken.
Are such laws needful? Are they beneficial? Are
they in accordance with sound principles, or do they
violate them? Has a government any right, after it
has stamped or engraved its money, and parted with
it to the people in return for value received, to say
that they into whose hands it has rightfully come
shall only have so much under any circumstances as
a reward for foregoing the use of it themselves that
somebody else may have the use of it?
Let us see precisely the nature of the transaction
when one man loans money to another. It is a clear
case of value.  The lender does a service to the
borrower, and for this service justly demands a compensation. - The service is this: The lender might
himself use the money to gratify his own desires. It
is his money; he may use it, as he pleases, for his
own gratification.  Or, he may himself employ it
productively, and, at the end of the period, receive
back his principal with the customary rate of profit.
If he surrenders this advantage to the borrower, if
he passes over to him the right to use this money,




292     ELEMENTS OF POLITICAL ECONOMY.
say, for a year, he practices what we call in Political
Economy abstinence. For this abstinence he has a
right to claim a reward, precisely as the man has a
right to claim a reward who foregoes working for
himself in order to work for me. This reward of
abstinence is interest.  The money-lender foregoes
an advantage. He performs a service for the borrower; and, therefore, the right to interest stands on
just as unassailable ground as the right to wages.
The loanable value of money varies under exactly
the same conditions as every other value varies. It
is determined, as every other value is, by the actual
exchanges between lenders and borrowers; or, rather,
by what would be the actual exchanges, if they were
left free. Now for any government to compel a borrower to pay six per cent. when he might otherwise
borrow for five, or a lender to take only seven per
cent. when his money is worth eight, is a direct violation of the rights of property. It is a forcible and
pernicious interference with the freedom of contracts.
It is based on the false premise that the loanable
value of money is uniform, and that government is
competent to determine what it is. No value is
uniform. And no government is competent to determine even the maximum price of money loaned, any
more than the maximum price of commodities.
On principle, then, these are the two considerations which condemn usury laws. First, it is invidious to allow other men, in every department of business, to exchange their services on the best terms
they can make, without any interference or control,
and then, without rendering any solid reason for it,
to deny this privilege to money-lenders, who offer




ON MONEY.               293
just as honorable and useful services to society as
any other class of men. Second, it is a false notion
altogether, that the loanable value of money is, or
can be made, uniform; and, therefore, a rate per
cent. fixed by the government constantly infringes
on the rights of property, - on the rights of the borrowers, if the rate is too high, on the rights of the
lender, if the rate is too low. But there are two
other considerations, each, if possible, better than
these, which condemn all legal rates of interest.
The first is, that such laws are rarely obeyed, and
can scarcely be enforced. Common sense is outraged
by a law which requires a man to part with his
property at less than the actual value; and when
common sense is against a law, it stands a slim
chance of observance. If the legal rate be six, and
the actual worth be eight, who lends at six?  Not
the banks. They require deposits of their custom1*rs, the use of whose money shall make up to them
the difference between the legal and the actual rate.
The modes of evasion are various, but they are adequate.
But usury laws, if they were not disregarded,
would be even worse in their tendency than they are
now. They aim, I suppose, to aid borrowers, and
make it easier for them to contract loans. But are
borrowers, as a class, any more deserving of the fostering care of government than are lenders? Even
if it could make its interference effective, as it can
not, is there any reason why government, leaving
these borrowers to make all other bargains, sales,
and transfers according to their best skill and judgment, should rush to their rescue only when they




294     ELEMENTS OF POLITICAL ECONOMY.
propose to borrow money? If they are competent
to do their other business for themselves, government pays their capacity a poor compliment in
undertaking to help them in the single matter of
making loans; and the borrowers in turn have reason to pray to be delivered from their friends, since
they, of all others, would be the men especially injured, if all the lenders obeyed the usury laws. Suppose that a borrower is in great need of a loan, and
that for some reason his credit is now a little weak.
Many men would be willing to loan him at nine per
cent., which affords a margin for the extra risk,
but at seven, which we will suppose the maximum
allowed by the law, he cannot borrow a dollar, because his credit is not quite equal to the best. If,
therefore, the lenders obey the law, he, and such as
he, must fail. And because it is unlawful to take
over seven per cent., he will be obliged to pay those
who are willing to violate the law ten or twelve, to
compensate them for the risk and odium of such
violation, while, under freedom, he could borrow at
nine. Moreover, if the loanable value of money at
the time be actually nine, while the law only allows
seven, many men will attempt to use their own capital productively, who would otherwise loan it, in
order to realize the high rate; and this action of
theirs still further restricts the loan-market and
makes it more difficult to borrow. If, then, the
purpose of government be to aid borrowers, no
means could be more unskilfully chosen for that
end than to pass usury laws, since such laws, so
far as they are obeyed, have necessarily the opposite tendency; and even when violated redound to




ON MONEY.              295
the disadvantage of borrowers, so long as the laws
themselves are popularly regarded as of any legal or
moral force.
Governments have shown a noteworthy inconsistency in this matter, which incidentally proves the
unsoundness of their whole action. While announcing pains and penalties to those who take or pay
more than a given rate, they are careful never to
bind themselves down to any given rate. Governments are always more or less borrowers, and if
usury laws are necessary in order to help borrowers
in a pinch, there ought to be a clause in the organic
law of every country, forbidding the government to
pay and its lenders to take any more than a certain
rate per cent. There is no such clause in any
organic law. Governments wisely follow the natural market, and borrow low when they can, and
pay high when they must. In the last months of
Mr. Buchanan's administration, the United States
paid twelve per cent. on a public loan, and could get
but little at that. Sauce for the goose is sauce for
the gander, and if usury laws are good for the citi.
zens, some solid reason ought to be rendered why
they are not good for the government. The truth is,
they are not good for either, since natural laws are
perfectly competent to regulate the rate of interest,
and do regulate it substantially in spite of a factitious, impertinent, and mischief-making interference.
The rate of interest has little to do with the value of
money, properly so called. It depends on the proportion between the sums of money ready to be loaned
in any market, and the amount wanted at that
time by good borrowers in that market. Every rise




296     ELEMENTS OF POLITICAL ECONOMYT.
in the rate tends to lessen the demand of borrowers,
and every fall to enhance that demand, and thus
every rise and fall of interest tends to check itself,
and while the daily and monthly variations of the
rate for first-class borrowers are very considerable,
the general average of the rate by years, especially
in England, where usury laws are mostly or wholly
swept away, is remarkably uniform.
In 1867, the State of Massachusetts repealed all
its usury laws, though six per cent. is to be understood
in the absence of special agreement, and the result
has been entirely satisfactory to all classes of tile
people. Rhode Island had done this previously, and
has experienced equal satisfaction in the result.
Other States will soon follow in their lead; and this
relic of ignorance and prejudice will pass away.
Adam Smith left the " Wealth of Nations " disfigured by the concession that governments might properly enough pass usury laws; but it is gratifying to
be able to add, that he was convinced of his error in
that by Bentham's book on usury, and fully acknowledged his conviction in the spirit of a genuine
lover of truth. We conclude, then, that usury laws
are needless, since interest, like all other prices, will
perfectly adjust itself. They are disregarded, since
lenders will loan or withhold their money according
to their own keen sense of interest. They are pernicious, since they infringe the rights of property,
and tend to prevent weak borrowers from having a
fair chance in the market.




ON CURRENCY IN THE UNITED STATES.  297
CHAPTER XI.
ON CURRENCY IN THE UNITED STATES.
I venture to offer to guide my readers in an attempt
to trace the steps, State and national, as well the
earlier as the more recent, which have been made in
this country to find the way to a healthy, safe, and
uniform currency. Paper money of almost every
conceivable variety has been tried at one time and
another; and the national government for itself,
between 1836 and 1862, made the experiment of discarding every kind of paper, both paying out and
demanding to receive gold and silver money only.
This money it has always minted, as it has a monopoly of the coinage; but otherwise, and except as now
taxing heavily State bank-bills, it has left the States
and the people to fabricate and circulate whatever
kinds of money they might choose.
From the first establishment of the English colonies in America, the matter of a suitable exchangemedium attracted public attention, and was found to
be attended with difficulties. The colonists drew all
their supplies from the mother country, and for a
long time had but few native products to export in
return, and consequently there was a constant tendency in the coin which reached them to flow off
again to England in payment of these debts. But




298     ELEMENTS OF POLITICAL ECONOMY.
something must be used for the purposes of domestic
exchange. Tobacco in the southern colonies, and
corn and wheat in the northern, were employed for a
long time as a local and legalized currency.
In 1690 Massachusetts set the first example, which
was soon imitated all bver the country, of issuing
bills of credit, a government paper made receivable in
taxes, and afterwards made legal tender in payment of
ordinary debts. At first these bills, or treasury-notes,
were issued, not to furnish a currency, but merely as
a convenient way of anticipating the taxes, that is,
to realize them at the beginning of the year, while
they would be gradually paid in in the course of the
year.  They were like the English exchequer-bills
except that they bore no interest.  Afterwards, a
scheme originating in South Carolina came into
general favor, namely, to open loan-offices for the
issue of colony-bills, which should furnish at once
capital for borrowers, and a currency for the people,
and the interest was to be a source of revenue to the
colony.
But in whatever way issued, whether in the way
of loan to borrowers, or in anticipation of the taxes,
the essential and inherent vice of such irredeemable
paper was soon everywhere apparent. There was a
constant tendency to over-issue, and consequently a
necessary depreciation. There never was a government yet, of all those which have attempted the issue
of inconvertible paper, which had prudence and firmness enough to resist for any great length of time the
temptation to issue such paper in excess. It always
has depreciated from that cause, and it probably
always will. So it was, at any rate, in these colonies




ON CURRENCY IN THE UNITED STATES.  299
thus early in our history. The bills of credit were
issued profusely, and depreciated indefinitely.  In
1749 Massachusetts had found paper money so
utterly wanting as a measure of value, that she determined to abandon it altogether. She redeemed all
her outstanding bills in cash at the current rate at
which they were then exchanging.
The demands of the old French war, and the various attempts to conquer Canada, led, on the part of
all the colonies except Massachusetts, to new and
large issues of bills of credit, which depreciated of
course.  Soon after the conquest of Canada the
British Parliament passed an act prohibiting to all
the colonies the issue of bills of credit; but from this
restraint the Revolution set them free; and, to provide means for the desperate struggle with the mothercountry, there was no resource but in paper money.
In April, 1775, Massachusetts, which had disused
paper money.for more than a quarter of a century
revived its use by authorizing the issue of colonial
bills to the amount of ~100,000, in sums small
enough to circulate as a currency; and on the 23d
of June following the Continental Congress began
its fiscal operations by voting to emit two millions
of dollars in continental bills of credit. Fourteen
months had elapsed, and fourteen millions of continental paper had been authorized, besides large local;ssues, especially in New England, before its depreciation excited any very considerable alarm. It soon,
however, became evident that the only way to stop
the depreciation would be to stop the issues; and
Congress made very persistent but ineffectual attempts to substitute for further issues a system of




800      ELEMENTS OF POLITICAL ECONOMY,
loans on paper bearing interest. At the same time
they sought to sustain their failing credit by a resolution that their bills " ought to pass current in all
payments, trade, and dealings, and be deemed equal
in value to the same nominal sums in Spanish dollars"; and that all persons refusing to take them
ought to be considered " enemies of the United
States," upon whom it was recommended to the
local authorities to inflict " forfeitures and other penalties." The States were also advised to make these
bills a legal tender, to make provision for the redemption of the first six millions, to avoid the further
emission of their own local bills, and to take measures to draw in those already out.' The loan system failing, Congress reluctantly had recourse to the
press which printed the paper money, and the next
ten millions increased the depreciation decidedly.
The paper -was still lawful tender in payment of
debts; and notwithstanding the confusion of contracts, the universal high prices, the sufferings of the
poor, and the gains of the artful and unscrupulous,
Congress felt obliged to give currency to the most
wretched sophistries, to refer the existing depreciation mainly to " want of confidence," and to laud
the paper as the only kind of money " which cannot
make to itself wings and fly away! It remains with
us, it will not forsake us, it is always ready at hand
for the purposes of commerce, and every industrious
man can find it!"  The rest of the story is soon
told. Before the end of the year 1779, the remainder of the two hundred millions, which, in the vain
hopes of stopping the depreciation, Congress had
1 Hildreth's United States, chap. 35.




ON CURRENCY IN THE UNITED STATES.   301
beforehand announced as the limit of the issues,
was put out, and the press was allowed to rest. The
value of the money was then about 38- for one.
The States were now advised to repeal all laws making the bills a legal-tender, and the scheme of the
" new tenor " was devised, by which the old bills were
to be drawn in at the rate of forty for one, and funded
in government bonds bearing interest. This was the
finishing blow, and the paper soon dropped out of
circulation altogether. Just before the Revolutionary
army in camp at Newburgh had combined to refuse
it, and its circulation was wholly stopped, it exchanged for cash at the rate of one thousand for one.
One thousand for one is 99-1 per cent. below par, and
the prices of commodities were as ridiculously high
as the value of the paper was pitifully low. A man
in New England or New York would pay five hundred dollars for his dinner, and never ask the landlord
to reduce the bill. I heard the story in my childhood
of a certain gentleman well known in those parts,
who stuffed his sulky-box with continental bills and
then sallied forth to purchase a cow!
At this juncture the rudiments of a better system
appeared. For nearly a hundred years the Bank of
England had been issuing paper payable on demand
in gold and silver. Alexander Hamilton had been
a close student of English history and of English
finance, and he conceived that the same thing might
be done with advantage in America. In 1780, when
he was only twenty-three years old, he wrote a letter
to Robert Morris, a wealthy and influential member
of the Continental Congress, and afterwards the
Continental financier, in which, after showing the




302     ELEMENTS OF POLITICAL ECONOMY.
causes of the depreciation of the currency, and the
necessity of a foreign loan, he furnished a matured
plan of a bank, by means of which the loan might
be so applied as to reestablish the public credit and
become the basis of a redeemable currency. This
was, as I believe, the first suggestion of a banking
institution for America. Hamilton's idea was briefly
this: Public credit there was none; an established
government there was none; the Continental Congress was exercising the unlimited functions of a
revolutionary government; under these circumstances
the only way to create public credit was to unite
with it the private interests of moneyed men. Establish then a bank which shall be the fiscal agent
of the government; obtain, if possible, a foreign
loan, and deposit it in cash in the bank; let half the
stock of the bank be subscribed by wealthy men,
who can reasonably look for a fair profit on their
investment; let government hold the other half and
have half the profits; then let the bank issue bills on
its cash basis, consisting of the loan, the private subscriptions, and the product of the Continental taxes
as they are gradually paid in. Thus the bank, and
all subscribers to its stock, and all holders of its bills
would be directly interested to uphold the government and its credit. Community would be equally
benefited, since it would have a relatively sound
paper for ordinary commercial purposes.
Mr. Morris found his duties as Continental financier sufficiently embarrassing; and in the fall of
1781 brought forward a scheme for a national bank,
partially embodying on a small scale the ideas of
Hamilton. Congress sanctioned the plan, and the




ON CURRENCY IN THE UNITED STATES.  303
Bank of North America, the first bank in this country, was established in Philadelphia. Mr. Morris, in
behalf of the general government, subscribed nearly
two thirds of the capital stock of $400,000, and naturally took the entire control of the institution. The
reason why individuals subscribed so little is to be
found in the distrust with which paper money of all
kinds had come to be regarded. Capitalists did not
believe there would be any dividends, and the people were afraid the paper would depreciate in their
hands. Under these unfavorable circumstances the
bank went into operation in January, 1782. Every
effort was made to produce a public sentiment favorable to the credit of the bank, and its bills were the
first paper handled by Americans which was convertible into coin at the pleasure of the holders.
Being made receivable at the Federal and State treasuries in payment of taxes and duties, and being
cautiously issued at first, the bills soon came into
such circulation that the bank was able to declare
dividends on its stock from twelve to sixteen per
cent. per annum. Who ever heard of capitalists
who could resist sixteen per cent?  The bank
opened its books for new subscriptions, and the
stock went up without difficulty from $400,000 to
$2,000,000.
We must here dismiss the Bank of North America, the parent of all our institutions of the kind,
with the remark that, although it was chartered by
the old Congress as a national institution, such
doubts were entertained of the competency of that
body to incorporate an institution within a State,
that a charter was soon after procured from the




804     ELEMENTS OF POLITICAL ECONOMY.
legislature of Pennsylvania; and also, that its connection with the Continental treasury ceased, on the
retirement of Mr. Morris from the office of financier.
It continued, however, as a State bank; and it flour.
ishes still in a green old age among the banking concerns of the Quaker City.
Till Mr. Morris's Bank of North America corninenced operations in January, 1782, all the paper
that had been issued in the country, whether by the
colonies as such or by the central authority represented at first by the revolutionary government and
afterwards by the confederation, was irredeemable
paper, and illustrated the universal financial law
that such paper, unless issued under very favorable
circumstances and strictly limited in quantity, will
depreciate in spite of everything. The bills of the
Bank of North America were convertible into gold
and silver at the pleasure of the holders, and they
mark, therefore, an epoch in the monetary history of
the country. Some silver coins had been issued in
Massachusetts as early as 1652, and continued to be
struck at the colonial mint for about thirty years, but
the pieces all bear the dates of 1652 or 1662; and
these pieces, now known and prized as the " old pinetree coinage," were the only public coins of any description minted in the country itself until after the
close of the Revolutionary war. They were shillings,
sixpences, threepences, and twopences. Both silver
and copper coins were, however, minted in England
for the use of the colonies; and in 1722 a patent
was issued by George I. to one William Wood to
make coins for colonial use out of pinchbeck, in pursuance of which he had the conscience to make thir



ON CURRENCY IN THE UNITED STATES.  305
teen bright shillings, or thereabouts, out of a pound
of brass. It is refreshing to add that the colonists
had the sense and spirit utterly to reject Wood's
money.   In 1786 actual coinage of copper coins
took place under State authority, in Vermont, in
Connecticut, and in New Jersey. The same year
witnessed the adoption in the old Congress of Jefferson's plan for a decimal currency, and the establishment of a mint under national authority, and
three hundred tons of Federal copper cents were contracted to be struck the following year.
When the government went into operation under
the present constitution, in 1789, besides the Bank
of North America, two others had been established,
the Bank of New York in New York, and the Bank
of Massachusetts in Boston. These three were all,
and their circulation was mostly confined to the
cities in which they were located. Except the copper cents just spoken of, there was no such thing as
a national currency, and the new government had
not sufficient credit to make it practicable to rely on
the aid of private lenders. Hamilton was now Secretary of the Treasury. In pursuance of the duty of
his office, he presented to Congress in December,
1790, his celebrated report, recommending the establishment of a Bank of the United States. In this
report, which at once gave Hamilton a European
reputation, two points were specially argued: first,
that such an institution would afford through its bills
great facilities to trade and to domestic exchanges;
and, second, would furnish the new government a
convenient paper medium for its monetary transactions, and be a resource for temporary loans  The
20




306     ELEMENTS OF POLITICAL ECONOMY.
first point respected the people, the second the government.
There can be no doubt, I think, that in the circumstances of that time a national bank was expedient
and beneficial. There was then no confidence, no
credit, no currency, and no commercial relations established with foreign nations by which gold and
silver could flow into the country. As an institution
of loan, the bank gave credit to the extent of its
means to all who had good security to offer. As an
institution of circulation, it furnished a convenient,
a convertible, and a national money. As a governmental fiscal agent, government could borrow of it
on an emergency, and pay at its leisure from the
proceeds of the imposts and taxes. The fullest acknowledgment, however, of the benefits of such an
institution at that time does not at all commit one
to the defence of any such institution now. Circumstances have utterly changed.  No well-established national government can afford to add to its
many and higher functions the delicate duty, so
much more appropriate toprivate bankers, of loaning money to the people on interest according to its
notion of their solvency; and, in a republic especially,
where hostile parties alternately administer the government, loans would be sure to be made for partisan purposes, and corruption find the bank a ready
tool.
The constitutionality of Hamilton's plan was
stoutly denied in Congress. The first-rate abilities
and growing reputation of that eminent statesman
had already awakened jealousies both in Congress
and in the cabinet. Nevertheless, a bill, in substan



ON CURRENCY IN THE UNITED STATES.  307
tial accordance with the views of the Secretary
passed both houses by large majorities. Washington, before signing it, required the written opinion
of his cabinet on the question of constitutionality.
Hamilton and Knox took the affirmative; Jefferson
and Randolph the negative; the President, as often,
sided with Hamilton, and signed the bill.
On New Year's day, 1853, I had the great personal pleasure of calling on the widow of Alexander Hamilton, who survived him just fifty years.
Turning the conversation on her husband's connection with the government, the old lady remarked
with enthusiasm, —" My husband gave you a bank.
Jefferson thought we ought not to have any bank.
and Washington rather thought so, too; but my husband said we must have a bank; and one day he
said to me,' My dear, you must sit up with me tonight, and write for me;' and I sat up all night, and
I wrote it out with my own hand, and the next
morning he carried it to Washington, and we had a
bank!"  This last was pronounced not without exultation. Fortunate old lady! The daughter of one
of the purest and most magnanimous of the Revolutionary patriots, Gen. Philip Schuyler, and the wife
of another, peerless among the statesmen of his time;
who herself lived to see the complete success of the
work to which her father and husband were among
the chief contributors.
With a charter that was to run twenty years, with
a capital stock of $10,000,000, $8,000,000 of which
was subscribed by individuals, and $2,000,000 by
the United States, and the whole of which was subscribed, with a surplus, within a few hours, the first




308     ELEMENTS OF POLITICAL ECONOMY.
United States Bank went into operation at Phila.
delphia, in July, 1791. Notice this feature of the
stock. Hamilton had just before persuaded Congress to assume the State debts incurred in the war
of the Revolution, and to fund them, together with
the certificates of the public debt, into one new and
compact debt. Three fourths of the subscription of
individuals to the bank stock must be in these new
government stocks which bore six per cent. The
demand for them, thus created, brought them instantly up to par; so that the bank was made a
means, incidentally, of establishing the credit of the
United States, - all its paper was now at par. This
splendid success of Hamilton's financial schemes,,
together with the unexpected income from the new
tariff, accounts in part for the immense popularity
of the man; and justifies the strong expression of
Daniel Webster, who said, on one occasion, that
Alexander Hamilton raised the public credit of the
United States from the dead.
During twenty years, the term of its charter, the
operation of the first United States Bank appears
to have been healthful and beneficent. It furnished
a paper money secured by government stocks and
by cash that was current at a uniform value all over
the country; its loans, under the circumstances of
the time, gave a sharp spur to industry and commerce; while its dividends to stockholders never fell
below eight, and frequently rose to ten per cent. It
is not to be wondered at, therefore, that as the time
approached for the charter to expire, the stockholders were anxious for a renewal. They applied for
such renewal, offering to pay the government a mill



ON CURRENCY IN THE UNITED STATES.  309
ion and a quarter for the privilege of continuance.
It was alleged against the bank, on the other hand,
that the stock was now largely owned by foreigners,
which was true; and that the directors had sometimes made, or withheld, loans, for party purposes,
which was doubtful. The real cause of the opposition to the renewal of the charter was this: Instead
of the three State banks in existence when the national institution was chartered, there were now
(1811) eighty-eight State banks, in some of which
the States as such held stock. These banks and
their friends supposed that it would be for their
interest that the national bank should go out of being; that, in that case, they should obtain the custody and management of the national funds, and
furnish the country the currency, which the national
institution had furnished. The charter was defeated,
in the House by one vote, and in the Senate by the
casting vote of the Vice-President, George Clinton.
The bank was obliged to wind up its affairs. It did
so speedily and honestly. This was in 1811.
Undoubtedly the paper of the first national bank
was very fair money, and certainly superior to the
bills of the new State banks, for the creation of
which there was a sort of mania in the country so
soon as it was ascertained that the national institution could not be rechartered. Many of these went
into operation on the strength of little or no bona
fide capital. They issued their notes freely, and
the chasm caused by the withdrawal of the national
circulation was soon filled up, and more too. As a
necessary consequence, the whole circulating medium became depreciated, and the currency came




810     ELEMENTS OF POLITICAL ECONOMY.
into dreadful disorder throughout the country. In
the fall of 1814, there was a general stoppage of aL
the banks in the United States, except those in New
England. The notes of the New York city banks
were ten per cent. below par; those of Philadelphia, eighteen; of Baltimore, twenty; of Pittsburg,
twenty-five. All this illustrates the simple financial
truth, that money is not a commodity of which an
unlimited quantity can be absorbed by business, but
is an instrument for a certain specific purpose, —
namely, to facilitate the exchange of existing commodities and of services all ready to be exchanged,
and only waiting for the presence of the medium
to consummate the transfer; and whenever more
than enough for this purpose is put out, whether it be
specie or paper, a diminution in value of every part
of it is inevitable; on the same principles precisely
as, when the market is permanently overstocked
with sewing-machines, there will be an inevitable
decline in their value. Money is good for the purpose for which it was invented, and useless for any
other.
In this state of things Mr. Dallas, then Secretary
of the Treasury, recommended to Congress the establishment of a new United States Bank, modelled
after the first, with a charter for twenty years, with a
capital stock of $35,000,000, the bank to pay the
government a bonus of a million and a half for the
privilege of coming into being. It was thought that
a strong central and national institution, on which
the State banks, now increased in number to two
hundred and forty-six, might lean for support, would
enable them shortly to resume specie payments, and




ON CURRENCY IN THE UNITED STATES.  311
to go on thereafter on better principles. The bill
organizing the bank was engineered through the
House by John C. Calhoun. It went into operation
in 1816, just after the close of the last war with
England, when the reviving enterprise and enlarged
business of peace seemed to open up before it a
prosperous career.
The new bank was not, however, at first, fortunate
in its management. It pushed its paper into circulation with reckless eagerness. In the course of one
month it increased its discounts from three to twenty
millions, and in nine months its discount line was
thirty-three millions. The results were what might
have been expected,-prices universally high, a spirit
of speculation everywhere rife, and gold leaving the
country by shiploads.  The bank soon fell into
difficulties, and public opinion turned more or less
against it.  Although under the abler and more
careful management, first of Langdon Cheves, and
then of Nicholas Biddle, the bank recovered its stability, it never enjoyed quite the same confidence
and credit as the first bank.
This was not wholly its own fault; for in 1829,
seven years before its charter was to expire, Andrew
Jackson commenced his famous contest with the
bank, which he kept up without intermission till the
charter expired in 1836. Under this presidential and
consequent congressional fire, the bank can hardly
be said to have had a fair chance. Andrew Jackson
had sworn its death by the'tarnal-his usual oathand Andrew Jackson was not a man to be thwarted.
In his annual message in 1829, he gave the directors
fair warning that there would be "constitutional




312     ELEMENTS OF POLITICAL ECONOMY.
difficulties" in the way of their securing any extension of their privileges, and in 1832 he vetoed the
bill to recharter the bank. The next step was to
remove from the custody and management of the
bank the public moneys. Three years before the
charter expired he requested Mr. McLane, the Secretary of the Treasury, to remove the national funds
from the custody of the bank, and to place them in
certain selected State banks. Mr. McLane declined
to order the removal. Whereupon Mr. Duane of
New York was appointed to the treasury. But Mr.
Duane, no more than his predecessor, could see his
way clear to remove the deposits. When made to
understand that it was the determination of the
President to have them removed at all hazards, he
explicitly refused to lend himself for the purpose.
The President removed Mr. Duane, and appointed
Roger B. Taney, the late Chief Justice, as Secretary
of the Treasury. He proved more flexible to the will
of power, and immediately gave the required order.
The consequences of this step in the circumstances
were immense and mischievous. The discount line
of the bank was at the moment over $60,000,000.
The public deposits were $10,000,000. The sudden
withdrawal of this sum affected credit and disarranged business to a remarkable degree, and caused
intense excitement all over the Union.
The next movement in the " great experiment," as
it was sarcastically called in the politics of the day,
was the issue of the famous specie-circular, which
directed the receivers of the public money to take
nothing but gold and silver in payment of the public
lands. Speculators and others had been making




ON CURRENCY IN THE UNITED STATES.  813
large purchases of western lands, expecting to pay
in paper money.  The specie-circular came upon
them like a clap of thunder. Their consternation
was vast, and the circular, coming as it did, shortly
after the removal of the deposits, made confusion
worse confounded.
General Jackson went out of office, and the second
bank went out of being the same year; but the
inaugurated movement was completed by Mr. Van
Buren, who effected the complete divorce of the
government from all banks and fiscal agents whatever, first, by directing the State banks which now
had the keeping of the public moneys, to distribute
them as surplus revenue among the States; and, by
the sub-treasury scheme, in pursuance of which the
United States received in payment of all dues, and
paid out in all disbursements, gold and silver only.
I believe in gold and silver money, or their equivalent in representative paper which can be instantly converted into them, and do not question the
patriotic aims of the administrations concerned, but
there was something headlong and violent in this
transition from the traditional policy of the government to the new system.
From 1836 to 1862 there was no national money
in the United States, except the coin; the paper
currency was furnished by a number, increased at
last to over fifteen hundred, of joint-stock banking
companies, under the sole authority of the States.
These, under various and often conflicting regulations, manufactured and issued money for the people. This money, as a whole, was never a safe, a
uniform, an economical currency. It was subject to




314     ELEMENTS OF POLITICAL ECONOMY.
alternate contractions and expansions which spoiled
it as a measure of value. It was never able to stand
the shock of the commercial crises which it powerfully contributed to bring on. Money is an implement, and a costly implement, and the functions it
has to perform cannot be performed by cheap, pennywise, pound - foolish substitutes.
Two kinds of paper and two kinds of coin had
preceded the issue of the bills of the first United
States Bank. The first kind of paper were bills of
credit issued first by the individual colonies, and then
by the confederated continent, always inconvertible,
and consequently always depreciating; the second
kind of paper were the bills of the three State banks
at Philadelphia, New York, and Boston, convertible,
and so far forth excellent; but circulating mainly in
their respective cities only. The first kind of coin
were the pine-tree silver-pieces of Massachusetts,
minted two hundred years ago, and the copper pieces
struck under State authority about the time of the
adoption of the constitution of the United States,
simultaneously in Vermont, Connecticut, New Jersey, and Massachusetts; the other kind of coin being
the copper cents nationalized by the old Congress,
and which carme into circulation while the convention was sitting which framed the constitution under
which we live.
As soon as the new government had got fairly
under way, the more pressing questions of the tariff,
the national bank, the organization of the departments, being disposed of, the national mint was put
into practical operation at Philadelphia. The laws
relating to the mint were enacted during the session




ON CURRENCY IN THE UNITED STATES.  315
of 1792, and the first Federal coins of silver issued
in 1794, of gold in 1795. It is to Jefferson that the
country is indebted for the decimal scale of currency, so superior in convenience to all other monetary subdivisions. He had proposed a matured plan
for the coinage, with the dollar for the unit, and the
decimal subdivisions of dimes, cents, and mills, and
the decimal multiple of the dollar, the eagle, while
he was a member of the old Congress in 1785; and
the Congress had adopted his plan the following
year, and, as has been said, some copper cents were
minted on the Federal standard; but nothing more
was done till 1792, when the new Congress reaffirmed
the resolutions of the old, readopted Jefferson's denominations, and put our existing mint into working
order. There was a curious debate in Congress at
the time as to the devices which the coins should
bear. As the bill came from the Senate, where it
originated, the gold and silver pieces were to have on
one side the figure of the eagle, which the Continental Congress long before had adopted as the national
emblem, and near this, the legend " United States
of America."  This was for the obverse of the coin,
and so far nobody had any objection. For the reverse, the bill proposed that, in accordance with the
usages of all nations from the time of the earliest
known coinage, the impression or representation of
the head of the President of the United States for
the time being, together with his nane, order of succession in the presidency, and the date of the coinage, should be stamped. This was strongly objected
to in the House, as savoring of monarchy. The
President's head on the coin was deemed by some a




316     ELEMENTS OF POLITICAL ECONOMY.
dangerous thing for the republic, and the proposal
led to a sarcastic and even acrimonious debate, and
was at length defeated in the House by a vote of
twenty-six to twenty-two, in which the Senate was
afterwards obliged to concur, and a proposition made
by Key of Maryland was carried, to substitute a figure of Liberty instead of the obnoxious head of the
President; but under precisely what sort of a figure
to represent Liberty was then the difficulty, and at the
next session Elias Boudinot of New Jersey, afterwards the director of the mint, endeavored to get
substituted for the emblematic figure of Liberty the
head of Columbus, but in vain; the Republican party
was bound that the figure of Liberty and no other
should go on the coins, and it went on, and we have
here the history of that benignant looking lady,
whose pretty face we used to see familiarly enough
before the war, and whose acquaintance we hope to
resume in the good time coming.
It may be asked how we came to have the dollar
as the unit of our monetary system. The word dollar is derived from a German word which means
valley, and was first applied to coins in consequence
of this circumstance: in the mining region of Bohemia, at a place called Joachimsthal, (Joachim's valley,) silver-pieces of one ounce weight were coined
and came into circulation about 1520 as Joachimsthaler, and then for shortness thaler; this became
dalera in Spanish, and in English dollar. The thaler
is still the German money of account, and the Spanish milled dollar became so famous in the world of
commerce, and so familiar to our fathers in their
dealings with the West Indies and the Spanish




ON CURRENCY IN THE UNITED STATES.  311
American colonies, that our Congress adopted it as
the best known and most convenient unit of money.
The word dime is a corruption of the Latin decem,
ten; cent a contraction of the Latin centum, hundred; and mill a contraction of the Latin mille, thousand; so that our denominations are philosophical
as well as convenient, each one in order being and
being designated a tenth part of the one above.
The mint of the United States is one of the most
interesting institutions in the country. It was established at Philadelphia in 1792. While it was still
doubtful where the ultimate seat of the national government would be placed, the citizens of that beautiful city were strongly in hopes of being able to
persuade Congress permanently to abide in their
town, in which the old continental body had first
met, in which independence had been declared, and
which, more than any other, was popularly regarded
as the headquarters of the national Union. A notable instance of log-rolling legislation, the first in
our history, transferred the capital of the country to
the banks of the Potomac, but the good people of the
Quaker City have nevertheless always retained the
mint, as a memorial of their earlier position in the
history of the government.
By the law establishing the mint, the chief officer
was to be styled a director; and the ingenious David
Rittenhouse, a self-taught mathematician, who had
run several years before, by the help of instruments
all of his own construction, the most difficult part of
Mason and Dixon's line, was shortly after appointed
to this post. The act stipulated that all bullion
brought to the mint should be coined gratuitously,




318     ELEMENTS OF POLITICAL ECONOMY.
but when coin was delivered in exchange for bullion
on the spot, one half of one per cent. was to be
charged as seigniorage. The coins were to be the
eagle, the half-eagle and the quarter-eagle in gold;
the dollar, half-dollar, quarter-dollar, dime, and halfdime in silver; the cent and half-cent in copper.
The weight of the eagle was to be 270 grains troy,
alloyed according to the English standard, one part
in twelve; and the dollar was to weigh 416 grains,
alloyed one part in nine and nine-tenths. The subdivisions of these coins, gold and silver, were to be
in all respects proportional to their units. At that
time, in France and in Europe generally, the current
relative value of gold and silver was considered one
to fifteen, and the act of Congress established that
as the ratio of the value of the two metals to be
maintained at the mint; but, from this clause of the
law, there followed important consequences, which
were not foreseen, since that was not, at least in
America, the true ratio of their value at that time,
and being a decided undervaluation of gold, the gold
coinage did not come into any circulation. It was
really worth by the ounce more than fifteen ounces
of silver; but, as the mint only reckoned it equal to
fifteen ounces of silver, it was more valuable out of
the circulation than in it, and it was therefore always
exported in preference to silver, in payment of foreign balances, especially after France and the rest of
Europe had changed the relative legal value to one
to fifteen and one half. After that, an ounce of gold,
estimated in silver, was worth three and one third per
cent. more abroad than at home, and, of course, under
the circumstances, it would not circulate in the home




ON CURRENCY IN THE UNITED STATES.  319
currency. The cheaper money will push out of circulation the dearer the world over. From the organization of the mint till 1817, over five millions and a
half dollars in gold-pieces were coined, and very little
indeed of it came into permanent circulation, for the
simple reason that it was really worth more than it
was counted to be worth by the regulations of the
currency. It would, therefore, pay to melt it up, because it was worth more as bullion than as coin.
This state of things continued, the silver circulating freely but the gold scarcely circulating at all, till
the attention of Congress was called to the subject,
and a law passed substantially rating gold in relation
to silver at one to sixteen. The weight of the eagle
was reduced to 258 grains from 270, and the alloy
increased to one part in ten from one part in twelve.
This increased at one jump- the legal valuation of
gold 68os per cent. as compared with silver, which
remained as before. As the former ratio was a decided undervaluation of gold, so the law of 1834 as
decidedly overvalued it; and the working of a beautiful natural law became immediately apparent, by
which the current of the metals was reversed, silver
now passing in preference to Europe to liquidate the
balances of trade, and gold coming from Europe to
the United States, where it was about three and one
quarter per cent. dearer than in Europe, while silver
was about three and one quarter per cent. dearer in
Europe than in the United States. The metals go
where they have the most consideration in exchange.
Dr. Robert M. Patterson, who was the director of
the mint from 1835 to 1851, under whose direction
the present admirably improved machinery of the




1.O0    ELEMENTS OF POLITICAL ECONOMY.
mints was introduced, and who thereby developed
their capacity from a coinage of $5,000,000 to $63,<
000,000 per annum, drew up a new code of mint.
laws, which was enacted by Congress in January,
1837, by which the previous complicated legislation
was all superseded, and on which the mint has been
substantially administered ever since. In the first
place, the French standard of fineness of nine tenths
for both gold and silver was adopted, that is to say,
one part alloy in a whole of ten parts. Since its
adoption by us from the French, this decimal standard of fineness has been adopted also by several other
nations for their new coins, and thus some important
steps have already been taken towards a most desirable end which is yet to be realized in the future,
a universal currency for commerce. This change in
the standard of fineness necessitated a change in the
weight of the silver coins, if the established relation
of one to sixteen was to be maintained. Accordingly
the weight of the silver dollar was reduced from 416
grains to 412~, without changing its weight in fine
silver. The weight of the dollar has remained at that
figure ever since, but the smaller silver coins have
been, as we shall see, still further reduced in weight,
and the refusal of the dollar-piece to circulate has
been another good illustration at our own very doors
of the universal law that the cheaper money drives
out the dearer.
At different times since 1837 new denominations
of coins have been added to our national series; of
gold, the double-eagle, the three-dollar, and the onedollar piece; of silver, only the three-cent piece, which
has never been popular, and will be superseded by




ON CURRENCY IN THE UNITED STATES.  821
the new three-cent copper piece. In 1853 very interesting alterations were made in the character of our
silver coins; up to that date the laws made both the
gold and silver money a legal tender to any amount;
and it was consequently optional with the debtor to
pay in the cheaper metal, which ever it might be;
and as experience was proving that the relative value
of the two was not constant but variable, and that
the legally established ratio of one to sixteen was depleting the currency of silver, it was then determined
to make gold alone the legal tender, except to the
extent of $5; to cease coining silver for individuals,
and only coin on government account such sums as
seemed to be in demand for purposes of change; and
to reduce the weight of the half-dollar and its subdivisions so that their nominal value should be considerably above their real value as compared with
the silver dollar, and thus their exportation be prevented. Accordingly the weight of the half-dollar
has been reduced from 2064 grains to 192 grains, and
of the smaller coins in proportion. A silver dollar
has always weighed 371~ grains fine, a dollar in parts
now weighs 345360 fine; and accordingly the dollar is
wvorth 7 4o2 per cent. more than a nominal dollar's
worth of the smaller pieces. The relative value of
gold in silver is now 1 to 15.6; a gold dollar, therefore,
weighing 23.22 grains pure, is worth 24o per cent.
less than a silver one, and 4-IO per cent. more than a
dollar in small silver. The result of these measures
has been to establish gold as the real standard of
the country, and to make silver entirely subsidiary
to that. The copper coinage of the country consists
now of four pieces; of which the one and two cent
21




322      ELEMENTS OF POLITICAL ECONOMY.
pieces are composed of 95 parts copper, 3 tin, and 2
zinc, and are respectively legal tender for debts not
over four cents; while the three and five-cent pieces
are composed of 75 parts copper and 25 parts nickel.
3 cent pieces are legal tender for 60, and 5 cent
for 100 cents. The five-cent piece is minted after
the French metric system, weighing precisely five
grammes, and five of them laid along in order measuring exactly a decimetre in length. The minting
of this piece is the first official recognition, embodied in act, on the part of the United States, of the
excellence of the metric system.
It now remains to characterize, so far as it circulates money, the national bank system, and also the
present condition of the entire currency.
When Secretary Chase assumed the Treasury Department in the spring of 1861, the state of the country, and, of consequence, the state of the finances,
were appalling. Mr. Buchanan's administration had
just been trying to borrow a few millions of dollars
of the people, and had only succeeded in securing a
very small sum, and that at the enormous rate of
twelve per cent. interest. The clouds of war which
had been gathering black and sullen all the winter,
soon broke in wrathful peals over the head of the
new administration. The country must be defended,
as well as the ordinary expenses of the government
met; an army must be raised, equipped, put into the
field, and paid. We do not propose to follow the
Secretary in his general financial embarrassments,
expedients, and resources; but it is needful to our
present purpose to say that, owing to the unexpected




ON CURRENCY IN THE UNITED STATES.  323
delays and disasters of the war, and to the consequent want of confidence in the public mind, he
found it extremely difficult to borrow the sums necessary to be had in order to meet the expenditures
of the government; and that in his first annual
report to Congress, in December, 1861, he recommended, principally for the sake of facilitating the
negotiation of loans, the organization of banking
associations, whose circulation should consist only
of notes, uniform in character, furnished by the government, and secured as to convertibility into coin
by United States bonds deposited in the treasury.
It is clear that if such associations should be formed,
it would make a market for the national bonds to
the extent in which they should invest their capital
stock in them as security for their circulation. Above
all things, at that time the United States wanted to
borrow money. It must borrow or perish; and
therefore a national banking system, based for security on the national debt, would open a market for
some hundreds of millions of the evidences of that
debt, and put a corresponding sum of immediately
available funds into the hands of the government.
This proposal of the Secretary, involving, as it did,
the winding up of the State banks as such, found at
first but little favor in Congress or among the people.
The banking interests of the eastern and middle
States, particularly of the State of New York, from
whose State bank system the idea was mainly and
by acknowledgment borrowed, were especially hostile
to the scheme.  In his second annual report, in
December, 1862, the Secretary iterated his recom.
mendation, and enforced it at length by arguments




324     ELEMENTS OF POLITICAL ECONOMY.
drawn from the necessity of effecting immediately
more extensive loans, from the character of the currency for soundness and uniformity thus furnished to
the people, from the convenient agencies which such
banks would furnish for the deposit of public moneys,
and from the firm anchorage which such a system
would give to the union of the States. These argu.
ments, which found a response especially emphatic
from the Western States, coupled with the assurance
of the Secretary, that, if Congress should concur in
his views, though conscious of the great difficulty
which vast, sudden, and protracted expenditures imposed on him, he thought he should still be able to
maintain the public credit ahd provide for the public
wants, induced Congress to frame and pass " An act
to provide a national currency secured by a pledge
of United States stocks, and to provide for the circulation and redemption thereof." The act was approved by the President February 25, 1863.
Every bank organized under it invests its own
capital stock in the bonds of the United States,
bearing interest. These bonds are transferred to
an officer of the treasury, called the comptroller, at
Washington, who holds them  as security for the
redemption of the bills of such bank, but who pays
the interest on them to the bank itself, so long as
the bank redeems its bills promptly and violates no
provisions of the organic banking law. Ninety per
cent. of the amount of such bonds thus deposited
with the comptroller, provided the bonds be estimated at par value and bear interest at a rate not
less than five per cent., is then furnished by the
treasurer to the bank in circulating notes, engraved




ON CURRENCY IN THE UNITED STATES.  325
and registered by the United States; unless the capital stock of the bank be more than $500,000 and
less than $1,000,000, in which case only eighty per
cent. of the capital is furnished in notes; and if the
capital be between $1,000,000 and $3,000,000, only
seventy-five per cent.; and over $3,000,000, sixty per
cent. These notes thus received by the banks, they
issue to the people in ordinary loans and payments,
and they are required by the law to keep on hand
at all times twenty-five per cent. of their aggregate
average circulation and deposits in lawful money of
the United States, with which to redeem their notes
on presentation.  Thus the convertibility of the
notes is dependent first on the solvency of the association, and, if that fails to redeem them, they
are speedily redeemable, after certain formalities are
gone through with, at the treasury of the United
States; and so many of the bonds belonging to
such bank, deposited with the comptroller of the
currency as security for the redemption of the notes,
are then to be sold as shall reimburse the United
States for such redemption; so that it is almost impossible under the law that the bill-holders of any
national bank can ever suffer any loss. The United
States holds the capital of the bank in its own
hands, and is thus enabled to guarantee the convertibility of the bills. At the same time the system
secures the manifold advantages of private capital,
private enterprise, and personal sagacity and integrity, in the matter of loaning money, securing deposits, and general management of the banks.
The superiority in eveiy respect of this scheme of
banking to the fast and loose system which has pre



326     ELEMENTS OF POLITICAL ECONOMY.
vailed in this country so long, is very apparent. In
the first place, perfect publicity of the affairs of
every bank is provided for in the organic law, and
cannot be evaded. Every bank in the principal
cities must publish a statement, under oath, at the
beginning of every month, of its exact condition,
and forward it to the comptroller; and the other
banks must do the same every quarter, and the
comptroller is to publish abstracts of these reports
every quarter; so that everybody can know the state
of each bank in particular, as well as the state of
the whole circulation.  In the second place, the
whole amount of the circulation cannot be increased
at the will of the banks or the will of the comptroller, or in any other way except by an act of
Congress authorizing such increase; so that the system is not so liable to those sudden contractions
and expansions which have been the bane of our
paper money hitherto. In the third place, the government pledges itself to receive these bills for taxes,
excises, and all other dues, except customs' duties;
and makes them legal tender in all payments which
itself has occasion to make, except the interest and
principal of the public debt. If, to these provisions,
there be added another, requiring all the banks to
redeem their bills in New York, as well as at their
own counters, the bills will be undoubtedly uniform
in value all over the country, and debts can be paid
by them through the post-office, or otherwise, without the mediation of any bank or the payment of
exchanges. In the fourth place, it is to be noticed.
that the United States absolutely guarantees the
full payment of these notes, not simply as a trustee




ON CURRENCY IN TlE UNIT'rED STATES.  327
holding securities for the purpose, but as a principal
pledging the public faith.1 In the fifth place, besides
the absolute security of ultimate redemption, the
ratio of lawful money required to the aggregate circulation and deposits is much higher than has hitherto prevailed in practice throughout the country.
The ratio required of all the banks in seventeen of
the principal cities of the Union is twenty-five per
cent., and of the banks elsewhere fifteen per cent.
This fifth point is subject to a material deduction to
be made shortly. Add to these reasons this other,
that the homogeneousness of the money circulating
among them, in connection with a common creditorship towards the United States Government, is an
additional bond binding the States and the people
together, and tending powerfully to neutralize the
centrifugal forces which are always at work in large
societies and governments.
But we shall get an idea too favorable to the new
national banking system, unless we Look also at its
dangers. The money which these banks are to circulate is, after all, nothing but credit money, and will be
liable in some degree to the disorders which are inseparable from every form of credit. Credit is not payment, but a promise to pay. The promise may be
good, it may be sure'to be fulfilled; but it is not, and
never can be made, the same thing as fulfilment.
These bills bear upon their face the acknowledgment
that they are promises to pay, and not the pay itself;
and men are so constituted, and society is so delicately organized, that times are liable to come when
men shall have a general distrust of mere promises,
1 Walker's Science of Wealth. Page 233.




328     ELEMENTS OF POLITICAL ECONOMY.
and shall desire to see them changed into fulfilment.
If a panic should ever arise in regard to these notes,
and a general desire be manifested on the part of
the holders to convert them into cash, it is evident
hat many of the banks would be obliged to suspend
specie payments, since they are only required to
hold twenty-five per cent. of their circulation and
deposits in cash, and this ratio, as a general thing,
is not likely to be exceeded. It is true that their
notes cannot all come back at once for redemption,
nor indeed any very considerable proportion of them,
since, unlike the circulation of the State banks, they
will pass freely beyond the boundaries of States and
sections, and become necessarily very widely diffused; yet general confidence is a thing so sensitive,
and credit money is in its nature such, that an absolute freedom from panics and from supensions cannot rationally be predicted. They are liable to
come: it will be strange if they do not come.
In the second place, the legally required ratio of
lawful money to liabilities is largely weakened, as
the law now stands, by the provision that " bank balances and clearing-house certificates shall be deemed
to be lawful money." As far as the immediate convertibility of the notes is concerned, it is evident that
this clause neutralizes to a large extent the natural
effect of the required ratio. Bank balances are not
cash. If real, and not fictitiously created, they are a
part of the assets of the bank, but their virtue is too
remote, in most cases, to help any bank sustain a
"run."  What is wanted in order to convert notes
and to allay a panic is not assets, however good they
may be, but specie itself.  While, therefore, this




ON CURRENCY IN THE UNITED STATES.  329
clause was a concession to the banking interests, it
clearly jeopardizes those of the people. In fact, the
framers of the law were so anxious to make it acceptable to the interests arrayed against it, that large
dividends can be much more safely predicted from it
for the banks than prosperity and security for the
people. Thus far in their history the redemption of
these notes has been a mere mockery. They have
been redeemed, if any one has desired it, in United
States legal-tender notes; that is to say, one credit
has been redeemed by another credit no better than
itself.
But the most imminent danger that threatens this
system is the facility with which Congress may expand the circulation. This danger, always impending, has already struck once. By the law of July 8,
1870, the original limit of $300,000,000 of circulation
is overpassed, and $54,000,000 additional authorized.
When the war broke out, the paper money of the
whole country, North and South, was only $202,000,000;1 the maximum   ever reached was only
$214,000,000 in 1856, and at the same time a maximum of $138,000,000 in coin; 2 it would be difficult
to give a solid reason why the country needs more
money now than then; but this law of 1870 not
only allows 18 per cent. addition to the national
bank-bills, and  authorizes the  transference of
$25,000,000 more from old banks to new,- an expansion while the process lasts, - but also authorizes a new kind of banks called coin-banks, not
limiting their number or the capital to be invested in
1 Report of Secretary Chase.
2 Hunt's Me'chant's Miagazine Year-Book, 1870.




330     ELEMENTS OF POLITICAL ECONOMY.
them, virtually pledging the government to redeem,
if necessary, their notes in gold, and only requiring
them to keep 25 per cent.' of their outstanding
circulation in gold coin of the United States." This
legislation in every part of it is unfortunate. It in
creases a bulk of currency already much too great;
it puts in hazard the new banking system before it
has fairly become settled; it puts off indefinitely the
day of specie payments; and it adds an entirely new
kind of money to kinds quite too numerous before.
Probably no other nation ever had so many sorts of
money at one time as are legal now in the United
States. Let us see how many kinds of money we
have.
1. Coin money. But even here there is great confusion, and dissimilarity in value. The silver dollar,
although no longer the standard of account, is still
coined at the mint, is still legal tender for debts to
all amounts, and is worth much more than the gold
dollar, and more still than a nominal dollar's worth of
smaller silver; while the baser coinage is of two va,
rieties, copper-nickel, and copper-tin-zinc, of differing
intrinsic and legal tender value.
2. Coin certificates. Persons may deposit gold
coin and bullion in sums not less than $20 with
any treasurer of the United States, and receive
therefor certificates, which are redeemable at sight
and receivable for duties on imports. Government
may also issue certificates in payment of interest on
the public debt; but the amount issued to depositors
and as interest must not be more than 20 per cent.
of the gold then in the treasury.
3. Bills of coin banks. These are much like the




ON CURRENCY IN THE UNITED STATES.  331
old State bank-bills, except that they have the indorsement of the United States. The Comptroller
of the Currency may issue to any association making
a deposit of bonds, as security, notes of different denominations not less than five dollars, to an extent
not exceeding 80 per cent. of the par value of,
the bonds deposited. These notes rest back for redemption on one quarter of their own amount in
coin. One dollar presented for payment in coin will
practically withdraw four dollars from circulation,
thus introducing an element of hazardous fluctuations.
4. Legal tender notes. These were issued in 1862
and 1863 to the amount of $450,000,000, of which
$356,000,000 are still outstanding. They are the
largest element in our present currency, they bear no
interest, they are irredeemable, and have always been
much depreciated as compared with coin.
5. Fractional currency  $50,000,000 in denominations less than a dollar are authorized by law, and
about $40,000,000 are now in circulation. They are
redeemable in legal tenders in sums not less than $3,
and receivable in sums less than $5 for debts due
the United States, except for duties on imports.
6. National bank bills. About $311,000,000 of
these are now in the hands of the people. As they
are redeemable in legal tenders, their value is equal
to those and equally depreciated as compared with
coin.
Thus the present currency of the country is made
up of six different kinds of money, embraces three
distinct dollars of differing value, each of which is
legal tender for debts in all sums, and amounts in all




832     ELEMENTS OF POLITICAL ECONOMY.
to $900,000,000 more or less. It is too much in quantity, and most of it inferior in quality. The demand
for more currency, which has not even yet spent its
force in some parts of the country, is as senseless a
demand as ever was raised. It proceeds from the
old misapprehension of the nature of money. Money
is only a tool, -a value tool, whose sole work is to
help exchange other values, - and men confound the
tool with the values, and think there is a lack of the
former when what is really lacking is the latter.
"The cry that currency is deficient is for me pure
moonshine. I do not know when currency is ever
deficient, except when people who have wages to
pay on Saturday night are short of silver coin. I
know of no other instance of deficient currency.
What is the test of insufficiency? That a man who
can pay for coin or a bank-note cannot get one; but
when did such a thing happen? Not in panics even.
There is always a plenty of currency in every panic;
for in every panic those who require coin or notes,
and can pay for them, can invariably procure them.
No one, in any panic, ever is prevented from buying
a railway ticket, because he cannot procure a sovereign, which he has means to pay for; no one, who
needed gold for exportation, failed to get it, if not
at the bank, still at the gold dealers, if he has the
means of purchasing. A man may hold consols and
be determined to sell them at any price rather than
go without gold, but consols are never sold because
gold is deficient, but because a debt must be paid,
and it will not be paid in gold. An invasion of England would no doubt make gold scarce, because people
would prefer gold to the notes of a bank, which the




ON CURRENCY IN THE UNITED STATES.  333
enemy might seize. But that event would fall within
my formula. The use of gold would be actually increased by the invasion. But the use of gold is not
increased by the lending and borrowing, the repaying
or the settling up of the money market. Currency is
not the tool of lending in the market. Theoretically
every creditor might call on his banker to-morrow
morning at ten o'clock to pay his debt in gold, - then
of course gold would be insufficient for the work:
but such an event is morally impossible. The rule
is always the same. The quantity of tools needed
depends on the work; and the grand fact to realize
is, that borrowing, lending, investments, discounting
of bills, and the like, are not worked by currency,
and that currency has nothing to do with them,
except to an extent utterly insignificant."'
But there are those, who, admitting that the present volume of currency is excessive, nevertheless think
that business will soon grow up to it, that prospective transactions will healthfully absorb the whole of
it, and that the simple force of national development,
without contraction of its volume, will bring our depreciated currency to par with gold. This position
mistakes the method in which business is practically
done. Increase of business does not necessarily
imply increase of currency at all. The business of
the whole world is largely done, increasingly done,
by the use of a commercial expedient called SET-OFF,
by which one debt is made to pay another debt, and
so the mass of debts liquidate themselves, and little
currency is needed. It is the principle of the clearing-house. London has become the clearing-house
1 Manuscript letter of Bonamy Price to General Garfield.




334     ELEMENTS OF POLITICAL ECONOMY.
of the whole world, the place where international
debts are exchanged against each other, and in the
quarter ending March 31, 1870, ~1,006,932,000 of
checks and bills passed that clearing. British business has increased threefold at least in the iast quarter of a century, but British currency has increased
but little, even if it has increased at all. The banknote circulation of the two islands is just about
~40,000,000, and there is doubtless something more
than that of coin in bank and private store. Money,
though vastly important as determining the denominations of value, does after all but the driblets of
business, the bulk of transactions being done by
set-off. Even bank-notes, when truly convertible,
have usually a short interval between issue and redemption. The average life of a Bank of England
note is reckoned to be less than three days. Let us
hear another word from Bonamy Price: " Goods are
very little exchanged by currency, - I mean coin and
notes. Setting off of debts against each other does the
work. Just analyze an investment. Take this case.
I make a profit of ~1000 by selling iron to America.
I wish to invest it. I am paid by a bill which implies
that some Englishman is a debtor to some American.
I send the bill to my banker. He gets it paid, — not
in currency, but by a setting off of debts at the clearing house. I buy a railway share, or a lot of American cotton. I pay for it by a check on my banker,
who now owes me ~1000. He pays that check
again, not in currency, but at the clearing house.
The result is that I made ~1000 by selling iron, and
I have the proceeds in a railway share or cotton, and
currency has not done one iota of the operation."




ON CURRENCY IN THE UNITED STATES.  335
In opposition to the complexities, uncertainties,
and endless losses of our present currency, my friend,
Mr. Amasa Walker, advocates what he calls a mercantile currency, that is, a paper money issued by
banks, and based dollar for dollar on specie actually
in reserve. He would have but one kind of money,
and that kind this. As he admits, such a money would
be local and conventional, but it would also be as invariable in value as specie, and more convenient. But
as this plan requires the minting and maintaining of
as much or more specie than would be required if
specie were the only money, as it would always be
difficult to secure that all the banks should always
have as much of coin in reserve as of paper circulating, and as the element of credit enters into the
nature of such paper money, I cannot think his
scheme is preferable to my own.
Considering the state of public opinion, and the
usage of the more enlightened commercial nations,
one should speak on this subject with caution, but
for myself I do not believe that paper money, in
any variety of it, ever made a nation, on the whole,
richer or happier. Let the money of the nations be
gold and silver coins; let these be minted on some
universal scheme for commercial convenience; let
nothing be used as a measure of values but the denominations of these coins; then, in connection with
such money as a basis, money which will hold its
units, whether pound, dollar, or franc, as invariable
as such measures can be kept, let there come in the
various expedients of paper credit, such as certificates of deposit, bills of exchange, checks, drafts, or
what name soever they may bear, and most, if not




336     ELEMENTS OF POLITICAL ECONOMY.
all, the conveniences of paper money will be secured,
and none of its fluctuations and disasters experienced. These forms of paper would not be money,
although they might be made to perform much more
than they do now one of the functions of money,
that is to say, they would serve in large and distant
transactions as a medium of exchange, but they
never could disturb, as paper money usually does,
the measure of value. Under this system banks
would still be necessary for the purpose of loaning
money, buying and selling credits, making collections,
and so on, but they would not manufacture and issue
money. Thus the two legitimate spheres of money
and of credit will be kept entirely distinct.




ON CREDIT.              337
CHAPTER XII.
ON CREDIT.
POLITICAL ECONOMY is the science of exchanges
but there are certain exchanges which have this peculiarity, that the transaction is not then and there
ultimately closed, but one (or both) of the persons
exchanging relies on the good faith of somebody to
fulfill in-the future a promise expressly or impliedly
made in the exchange. This peculiarity is very important to be considered, and gives rise to all those
phenomena which pass under the general name of
Credit.  Debt and Credit are correlative terms.
There is no debt without credit, and there is no
credit without debt. The whole subject of credit is
best unfolded by considering what is involved in the
relation of debtor and creditor. This is wholly a
personal relation; it always involves the element of
future time, and is founded on the belief of one of
the parties in a virtual promise made by the other.
Hence the term credit from CREDO, I believe, and the
corresponding term debt from DEBEO, I owe. Two
other terms sometimes used in this connection are
so ambiguous as to require explanation, namely, the
terms loan and borrow.1 If I loan a book to my
friend, I expect him to return to me that particular
1 For this point and some others in this chapter, not contained in my
previous editions, I am indebted to Mr. Macleod's " Banking," passim.
22




338      ELEMENTS OF POLITICAL ECONOMY.
book, and I do not alienate to him my ownership in
it at all; but if I loan him ten dollars, I alienate to
him completely my property in that money, and only
expect him to return me an equivalent at some future time. In the last case there is credit and debt,
but not in the former case. So of the word borrow.
I may reclaim from a neighbor a borrowed tool, even
without his permission; but I may not take back ten
dollars he has borrowed from me, because I happen
to find his purse. I have a claim on him for ten
dollars, but he must pay me voluntarily, or be compelled by legal process. This illustrates what is said
above, that the relation of debtor and creditor is a
personal relation.  It has nothing to do with any
specific commodity. It is substantially a claim of
one person on another person, and is based on good
faith only.
This claim, however, of the creditor on the debtor
is just as much property as anything else is property.
The right to demand from the debtor at some future
time an equivalent for what the creditor renders is
the service which the creditor receives from the debtor
at the time of the exchange. It is a clear case of
value. Each renders to the other satisfactory equivalents. The right to demand a future equivalent is
the present equivalent for the sake of which something else is rendered. All our definitions apply
here perfectly. Considered as a mere case of value,
the transaction is ended; but, considered as to the
nature and basis of the exchange, the transaction is
not yet closed.  It follows, then, that Credits or
Debts are Rights not yet realized; but which are,
nevertheless, constantly bought and sold.  What




ON CREDIT.              339
lies between creditors and debtors may be called in
differently debts or credits: it is of vital consequence
to persons, whether they owe or are owed by others;
but the rights alone become the subject of exchange,
and the terms merely relative to persons become indifferent. The amount of transactions in credits is
immense in every commercial country, and is becoming constantly greater. Not only are the exchanges
very common in which the right to demand future
payment is one of the services rendered, but the exclusive traffic in debts - exchanges of one form of
debt for another -has already reached gigantic proportions in all parts of the world. In order that this
form of exchanges may take place, it is of course
needful that there should be a general confidence in
the public mind; in other words, a general expectation that such debts will be promptly paid. As indicating a common honor and financial ability among
business men, and as facilitating the production of
services of all sorts, this state of general confidence
is so desirable in the sphere of exchange, that great
pains should be taken that nothing occur to destroy
it. Credit-exchanges are naturally more sensitive
than any other, since they walk by faith and not by
sight. For reasons to be adduced shortly, they are
more liable to be unduly multiplied than other exchanges are. The credit system is a great blessing
to mankind, but, like all other great blessings, is very
likely to be abused.
The right to demand a future payment of something from somebody is a species of incorporeal
property well guarded by law; and, though itself
intangible, is commonly, but not necessarily, re




340     ELEMENTS OF POLITI~CAL ECONOMY.
corded on paper. The paper is the evidence of the
right, and not the right itself. These paper documents
are termed Instruments of Credit, and are of two
kinds: first, Promises to pay, and second, Orders to
pay. We will first look at these principal forms of
Credit, and then at its advantages and disadvantages.
(1.) Book Accounts. A charge in a trader's
books is both a current and a legal evidence that
the person charged has received a certain service,
and has virtually promised to render the sum charged
as a return service. This is the most common of
the forms of credit; and if the person charged fails
of his own accord to complete the exchange thus
commenced, tfie law, in the absence of any proof to
make the charge suspicious, collects it, if possible,
and forcibly completes the exchange. The convenience of this form of credit is so great that it is not
likely ever to be disused; and as between people
who deal much with each other is very useful, inasmuch as their respective book accounts are set
against each other in settlement, and only balances
are required to be cancelled in money. It is for the
benefit of both creditor and debtor, however, that
such credits should be short in time, and such settlements frequent, since thus only does the creditor
realize the gains of the exchange, and the debtor
keep fair his mercantile name. If it be difficult or
impossible to follow strictly the excellent financial
maxim, "Pay as you go," the next best thing to
that is, "Go and pay."  The gains of an exchange
are lessened, or its terms become more onerous, just
in proportion as delay in its completion is experienced or expected. Book accounts are subject also




ON CREDIT.              341
to this disadvantage as compared with other forms
of credit, that their number and amount as against
any person are less likely to become publicly known,
and therefore he is more likely to be trusted in this
form by others beyond the point of his solvency
and their safety.
(2.) Promissory notes. These are issued by individuals, corporations, and nations. They are usually
on interest; and in this case, if the principal be considered secure, and the interest be promptly paid,
the element of time is comparatively a matter of
indifference, because the interest is compensation for
delay, and is frequently the motive on the part of
the holder of the note for rendering that service of
which the note is evidence.  When such promissory note, or other form of credit, is payable to
bearer, it may run a devious round, may play a part
in many a transaction; but it is in reality nothing
but a general warrant entitling the holder, in view of
some original service of the claim for the return of
which he has become in some manner possessed,
to take his satisfaction for that service whenever he
will. It is like the land warrants, given by the
United States, entitling the holder, in return for military service rendered, to locate his acres on any unoccupied national land within the national boundaries.
As a warrant, its function ceases so soon as the acres
have been chosen.  Credit passes into payment.
The private notes of individuals and corporations
are payable in money, and if in credit-money, this
itself ends in something that is not credit, and thus
the circuit of exchange is completed.
When the United States borrows money, it gives




342     ELEMENTS OF POLITICAL ECONOMY.
the lender a promissory note on interest at a certain
rate, both principal and interest being payable at
certain specified times. These notes are called indifferently bonds, stocks, or funds. The government issued in 1862-1865, both inclusive, about $2,500,000,000 worth of them, in'return for money loaned to it
by the people, and they bore interest at rates varying
fiom 5 to 7-1 per cent., and were payable at periods
varying from three to forty years. The bonds designated as "( five-twenties," bear gold interest at six
per cent., and the government reserves the right to
pay the principal in five years, and pledges itself to
pay it twenty years from date. So of the "tenforties."  The " seven-thirties" were so named, not
from the time of payment, but from the rate of interest, which was 7T3-o per cent., payable in legal tenders
for three years, when the principal was payable-in the
same, or fundable in six per cent. gold-bearing
bonds, at the option of the holders. So ready have
the American people been to loan money to their
government for the past few years, and take these
bonds as security, that the treasury has experienced
very little embarrassment from the want of money,
although the expenditures have been at times over
$3,000,000 a day. In the course of one week in the
spring of 1865, ninety and odd millions of dollars
were subscribed to a national loan. It is believed
that the history of national borrowing presents no
parallel with the late success of the United States
in realizing money in the way of loans. The largest
English loans ever made were made in 1812 and
1813, during the wars with Napoleon and the United
States. In these two years the British exchequer




ON CREDIT.              343
borrowed $534,000,000, being an average of $22,250,000 a month, and pronounced that a wonderful
financial achievement, as it was; but, from an aggregate of national wealth not larger than Eng.
land's then was, though from a larger population,
the United States realized in four years from loans
three times as much at least in gold value, and at
an average rate of interest but little higher than
England then paid, which was five per cent. and
a fraction.1  The treasury notes commonly called
greenbacks are promissory notes not on interest.
They were made a legal tender for all debts public
and private except duties on imports and interest on
the public debt.
(3.) Bank-bills. Bank-bills are a form of promissory notes not on interest, and thus differ from the
notes of ordinary corporations; but the bank offers,
as a sort of compensation for the privilege of circulating notes not on interest, to convert them into coin
on demand of any holder. It is this proffered convertibility into coin that enables the promissory notesof a bank to circulate as money, while the notes of
other corporations and individuals equally solid and
solvent do not circulate as money. It must be borne
in mind, however, that the offer to convert thsm into
cash does not essentially alter the nature of banknotes; they are a form of credit; and although they
are commonly issued against another form of credit,
namely, against the interest-bearing notes of individuals who resort to the bank for discount, this only
complicates the exchange without changing its nature. It is an instance of exchanging one form of
credit for another which happens to have a greater
1 Appleton's Annual Cyclopoedia, 1863.  Article  " Finl;'.l, "



344     ELEMENTS OF POLITICAL ECONOMY.
currency or validity than the first, and for this superiority of the bank credit the individual credit pays
an interest, in other words, is discounted; and such
exchanges of one form of paper credit for another,
with or without a premium, may go on indefinitely;
as credit money, such paper may serve as a medium
in many exchanges; but ultimately, and before the
entire series of transactions is closed, such paper is
to be exchanged for something that is not paper; it
is redeemed in cash, or gives a claim to something
no longer credit which is in reality the return service
for the original service rendered.
(4.) Bank Deposits. Mr. Macleod gives the following definition of a banker "ankerA bnker is a trader
who buys money, or money and debts, by creating other
debts."  A merchant is a dealer in commodities; a
banker is a dealer in credits. The word bank meant
originally a mass, an accumulation; as we still say,
a sand-bank, and the banks of a river. When first
applied to commercial transactions, as it was in Venice as early as 1171, it meant a common contribution
of money then made by the citizens to the state;
and also the place where commissioners paid the interest on this loan, and the shares in it were transferred. Both of these meanings inhere in the modern word bank. A bank is a place to which the
money of other people is brought, as well as the
banker's own; and hence we speak of banks of deposit: it is a place in which one form of credit is
exchanged for another formn; and hence we speak of
banks of discount: it is frequently a place where
promissory notes, designed to circulate as money, are
issued; and hence we speak of banks of circulation




ON CREDIT.              345
These three are the main functions of banks; and
of these, the two former are, while the third is not,
essential to banking. The central idea in banking
is this: the banker receives his customers' money,
and renders to them in return a credit, that is, a right
to demand from him an equal sum at a future time.
The evidence of this right is entered upon the banker's books, and thus becomes a DEPOSIT. The ownership of the money passes completely from the customer to the banker. The latter has the right to do
just what he pleases with it; but he must be ready
to respond to his customer's call, when the latter demands, not his own money, but so much of his banker's money. A deposit, therefore, is not the thing
deposited, but a credit. The banker buys money
with credit.
The motive that leads the customer to intrust his
funds to the banker is the desire, not to have those
specific funds kept safely, (for, the moment they have
passed into the banker's hands, they are his absolutely,) but to have the right to call on the banker
for such sums (not to exceed the deposit in the aggregate) and at such times as may suit his own convenience. He has such confidence in the integrity
and solvency of the banker, and finds it so practically convenient to have dealings with him, that he
prefers a credit on him for the amount to the possession of the money itself. The motive of the banker
to receive his customers' funds on these terms is the
fact that he can safely use a large portion of these
funds in other operations in credit profitable to himself, and at the same time be sure of being able to
meet his customers' calls for money  He finds by




346      ELEMENTS OF POLITICAL ECONOMY.
experience that many of his customers wish always
to have a balance in his hands; that while some of
them are constantly drawing on him for cash, others
of them are as constantly depositing with him in
cash, and that consequently he can use with safety a
part of the money he has purchased with his credit
to purchase other credits with.
(5.) Discounted Notes. This brings us to the
second essential function of banking, the discounting
of paper. The banker uses his cash to buy credit,
as well as his credit to buy cash. The credits that
he buys are either notes of hand or bills of exchange,
the former are promises to pay and the latter orders
to pay. The form makes but little difference to the
banker. His chief concern is with the genuineness
and financial solidity of the names upon the paper
to be discounted.  Manufacturers and wholesale
merchants usually sell goods on time, as it is called,
say three months. A debt is thus created. The
manufacturer or wholesaler is creditor and the jobber
or retailer is debtor. But a debt is property; and
the creditor in this case wishes to avail himself of
his property at once for further production; so he
either takes a note from his debtor, or draws a bill
upon him, and this piece of property is ready for
sale. The banker buys it, that is to say, the creditor passes over to him the right to demand payment
of the debtor at the end of three months, and receives
from the banker either money or so much of the
banker's credit, that is, a deposit in the creditor's
favor on the banker's books. For furnishing this
creditor either with ready money or a more available credit in lieu of his mercantile paper, the banker




ON CREDIT.               347
charges a percentage. This is DISCOUNT. Discount
is the difference between the face and the price of
the paper. This is the chief source of profit in
ordinary banking. When the paper matures, the
banker realizes from the debtor its full face. The
following is the form of a bankable note:$1000.          NORTH ADAMS, Mass., Nov. 10, 1871.
Three months after date I promise to pay to the order
of Joshua Swan, one thousand dollars, payable at the Adams
National Bank, value received.
Due Feb. 113.               LEANDER ALLEN.
Joshua Swan's name on the back of this paper,
and the requisite government stamp, make it, if the
parties are " good," a legal and acceptable note for
discount. Two names are usually, not always, requisite; but paper is discounted on the strength of
all the names that are upon it.
It is thus in part through the purchase of discountable notes for money that banks derive their
character as money-lenders. Also, such reserve
sums as they do not wish to invest in negotiable
paper, on account of the time involved before such
paper matures, banks frequently loan on call to
those who have salable collateral securities to
pledge. So far forth they become direct moneylenders. The following is the form of such
pledge: -




348      ELEMENTS OF POLITICAL ECONOMY.
$5000.                 TROY, N. Y., Nov. 10, 1871.
On demand we promise to pay to the Bank of Troy, or
order, five thousand dollars, for value received, with interest at
the rate of six per cent. per annum, having deposited with said
bank, as collateral security, with authority to sell the same, at
the Brokers' Board, or at public or private sale, or otherwise
at said bank's option, on the non-performance of this promise,
and without notice, 
10 shares N. Y. Central,
55 do. Mich. Southern.      JOHN SMITH & Co.
The buying of paper for money is mainly done in
England by another class of dealers called bill-discounters, and is coming to be done somewhat in this
country by retired merchants and others; though
most of our banks continue to do it in connection
with their function of issue. It is more in accordance
with genuine banking to buy paper with credit, that
is, by passing the price of the paper to the seller's
credit in the form. of a deposit.  These deposits are
promises to pay on demand. They are the customer's property, and the banker's promise.
We now come to two other forms of credit, which
are virtually orders to pay.
(6.) Bills of exchange. A bill of exchange is a
written instrument designed to secure the payment
of a distant debt without the transmission of money,
being in effect a setting off or exchange of one debt
against another.  Thus, suppose A in Boston owes
B in New   York $1000, and another party, C il
Neiw York, owes A in Boston a like sum; it is not
liecessary that A should send the money to B to
cancel his debt, and C send the money to A for a
like purpose; the two debts, by means of a bill of ex.




ON CREDIT.              349
change, are set off against each other, and both transactions are closed without sending any money from
one city to the other. A draws a bill upon C, directing him to pay B $1000, and sends this bill to B,
who, if the bill be drawn on sight, presents it to C
for payment; if on time, presents it to C for acceptance, who then pays it at maturity. An acceptance
is written upon the face of a bill, as an endorsement
is upon its back. A is called the drawer of the bill,
C the drawee until he has accepted, and then the
acceptor, and B is the payee. It is not often that
the same person, as A, happens to owe another person in a distant place, as B, exactly the same sum
as is owed him in that place by a third person as C;
but by two bills of exchange, one drawn by each
creditor on his own debtor, and then set off against
the other, substantially the same advantage is reached
as if it always happened so. Nearly all these bills
come into banks in the way of ordinary business,
either for discount or collection, and are adjusted
through bank balances. The following is the form
of an inland bill of exchange:$3000.             PITTSFIELD, Mass., Oct. 1, 1871.
Four months after date pay to the order of John Kent
three thousand dollars, value received, and charge the same to
account of                  DAN STORRS & Co.
To ELI TRIPP, Boston, Mass.
Kent endorses, Tripp accepts, the stamp is affixed,
and the bill is negotiable.  Sometimes bills are




350      ELEMENTS OF POLITICAL ECONOMY.
drawn to the order of " ourselves," in which case the
drawers also endorse. Not infrequently a bill passes
through several hands, which may either be by successive endorsements, specifying to whom payment is to
be made, or by what is called an endorsement in blank,
by which is meant that the payee or subsequent holder, to whom the bill has been endorsed, merely writes
his own name upon the bill, which is equivalent to
making it payable to bearer. The remarkable convenience of bills of exchange in adjusting debts between
distant places has already brought them into very
general use wherever the necessary basis for them
in commercial integrity is supposed to exist; and
every year is witnessing an extension of their use
in all commercial countries. Bills of exchange are
either payable at sight, or after an interval fixed in
the bill itself; and are either inland or foreign bills.
Bills which have some time to run before maturity
-are frequently discounted by bankers or other money
lenders, that is to say, the payee transfers the bill to
them, receiving the amount, minus interest for the
time it has still to run; and the bill thus serves the
important function of enabling a debt due from one
person to be made available for obtaining credit
from another. It is a principal part of the business
of banks to buy in this manner bills of exchange,
either real bills, or accommodation bills, so called,
which only differ from the others in that there is no
real debt between the drawer and drawee, and collect them at maturity, thus securing bank interest
on all money paid in purchasing such bills. The
bills are discounted on the joint credit of the drawer
and acceptor. It is evident that the use of bills of




ON CREDIT.              351
exchange, especially those which pass from hand to
hand by endorsement, dispenses with the use and
transmission of large amounts of money, and, as
between distant places especially, is one of those
economizing expedients of credit which are the
birth of modern civilization and a sound mercantile
honor.
Very similar are foreign bills of exchange in their
functions and usefulness. Commercial relations be.
tween two countries, say for example, France and
England, always give rise to a mutual indebtedness
of their merchants, and if these debts were all to be
paid by the actual sending of money to and from,
there would have to be a constant and expensive
outward and inward flow of the precious metals in
respect to each country, which necessity is neatly
obviated by the use of bills of exchange, and coin
is only transmitted to settle the balances on whichever side there is an excess of debt. French dealers
are always sending goods to England, and English
dealers goods to France; and for what they send to
England the French merchants draw bills onl the
parties to whom the goods are consigned, and the
English merchants draw similar bills on their debt.
ors in France; these bills are bought up by bankers
or brokers in either country, and exposed again for
>ale to any parties who may have debts to pay in
the other country. Thus bills on London, in other
words, on English debtors, are always for sale in
France; and bills on France, that is, on French
debtors, are always for sale in London; the mutual
debtors of the two countries, therefore, instead of
sending coin to cancel their debts, buy and trans



352     ELEMENTS OF POLITICAL ECONOMY.
mit these bills. As I wish to make the course and
par of international exchange very plain to my readers, I will give a particular illustration. Suppose
Pierre & Co., of Paris, send a cargo of wine to Barclay & Co., of London, worth ~5000; the London
firm thereby becomes indebted to the Paris firm to
that amount, and Pierre & Co. draw a bill on Barclay & Co. for ~5000; if they themselves have no
debt to pay in London, they sell this bill to a Paris
broker (if the exchange be then at par) for its face,
minus interest for the time it has to run; and this
broker is now ready to sell the bill again to anybody
in Paris who has a debt to pay in London; and the
person in London who receives it in liquidation of a
French debt to him, presents it at maturity to Barclay & Co. for payment. A bill drawn in London
for a cargo of hardware sent to Paris, is similarly
negotiated with a London broker, and finds its way
similarly to France, in payment of some English
debt, and ends its career when it reaches the French
firm on which it was originally drawn. We are
now in position to understand clearly what is meant
by the par of exchange. The merchants in Paris,
who have debts due to them in London, draw bills
of exchange for the amount of these debts, and,
through the agency of middlemen or brokers, go
into the market to sell these bills to other Paris merchants who have debts to pay in London. If the
former set have a larger amount to sell than the
latter have occasion to buy, in other words, if there
be a larger amount of debts due from London to
Paris, than from Paris to London, then the competition of the sellers of bills on London will lower




ON CREDIT.              353
their price somewhat in the market, in order, as
usual, that the supply and demand may be equalized. In this case the par of exchange is disturbed,
a bill on London for ~100 may not sell for over
~99, and the exchange is then said to be one per
cent. against London, or, which is the same thing,
one per cent. in favor of Paris. The par of exchange, therefore, between two countries, depends
upon the substantial equality of their mutual debts;
and if an exchange unfavorable to either continues
long, and especially if the discount on its bills be
sufficient to cover the charges of the transmission of
specie, gold will begin to flow from the country
against which the exchange has turned, and the
equilibrium of payments, and hence the par of exchange will be restored. Also, the par tends to
restore itself, without the sending of specie, in this
way: if bills on London are at a discount in Paris,
for the same reason that they are so will bills on
Paris be at a premium in London, and therefore
there will be a direct encouragement to the extent
of the peemium for exportations from England to
France, because on every cargo sent bills can be
drawn and sold in London for a premium; but the
more bills on Paris thus offered, the more the premium disappears, and the par of exchange is restored
so soon as the debts thus contracted by France are
equal to the debts due her from Englarnd. At the
same time, and so long as the discount on London
bills continues, there is a discouragement to further
exportations from France to England, because the
bills drawn in virtue of such cargoes can only be
sold below par. Here is another instance of a mag.
23




354     ELEMENTS OF POLITICAL ECONOMY.
nificently comprehensive law by which Nature vindicates her right to reign in the domain of exchange.
It is through this law, stimulating exportations on
the one side, and slackening them on the other, that
most of the casual disturbances of the par of exchange are rectified; but if, notwithstanding this,
the disturbance continues obstinate, it indicates one
of two things as true of the country against which
the exchange has turned: it has either made overpurchases of the other country beyond the power of
its ordinary exports to cancel, or the money in which
the bills drawn on it are liable to be paid is an
inferior money. In the first case, the only proper
remedy is an export of gold to pay off the old scores,
and a more prudent method of purchasing in the
future; in the second case, which is well exemplified
in the instance of Amsterdam, cited in a preceding
chapter, the remedy is to raise the currency to a
good specie standard. When the rates of exchange
were first established between England and the
Colonies, the Mexican dollar of commerce was equal
in value to 4s. 6d. English, 1 - 4.44 dollars, and the
par of exchange was established at that rate. U. S.
lollars have always been less valuable than that
lexican dollar, and while the old par has remained
the standard, the real par has been changed by each
change in our coins. Our present dollar contains
23.22 grains of pure gold; the English pound con.
tains 113.001 grains, consequently the true par of
exchange is $4.8665 to the ~, and is expressed by
109- instead of the old 100. The par of exchange
between France and the United States is 5 francs




ON CREDIT.              355
17 centimes for $1; and between France and England, is 25 francs 20 centimes for ~1.
(7.) Checks. Formerly, in England, and in other
countries as well, every considerable dealer kept his
strong box, and when he had occasion to make payments, told down the solid cash upon his own
counter. Afterwards, the goldsmiths of London
solicited the honor of keeping in their vaults the
spare cash of the merchants, who in their payments
among one another came to employ checks drawn
on the goldsmiths, and at the shops of the latter
the principal payments in coin were effected. The
later introduction of banks brought along with it
the custom, now continually widening in commercial
countries among all classes of people, of keeping
one's funds with a banker, and making payments
by orders, or checks, upon him. When the person
making the payment and the person receiving it
keep their money with the same banker, there is no
need of any money passing at all in the premises,
the sum being merely transferred in the banker's
books from the credit of the payer to that of the
receiver. The banker is quite willing to do this
business for nothing, and even to allow the depositors a low rate of interest on all balances remaining
in his hands, in consideration of the privilege he enjoys of loaning such proportion of the sums as he
deems safe to other parties at a higher rate of interest. In the large cities, by an arrangement called
"the clearing-house," substantially the same benefits are secured as if all the people of the city
kept their cash at the same bank; inasmuch as all
the checks drawn on each of the different banks,




356     ELEMENTS OF POLITICAL ECONOMY.
and passing in the course of the business day into
other banks, are assorted before evening at the clearing-house, and set off as far as possible against each
other, leaving only balances to be adjusted in money.
The London clearing-house was established in 1775;
lately, the clearing-house itself, and the bankers and
firms dealing with it, all have accounts at the Bank
of England, and balances formerly settled by money
are now settled by simple bank transfers. Checks
may pass from hand to hand by endorsement; but
in business towns it is more usual for each man to
draw his own check to make payments, and pass in
the'checks he receives to his banker. Checks are
bills of exchange with some differing legal incidents.
So are drafts. A bill of exchange drawn by one
banker on another has usually in this country been
termed a draft. So far of the instruments of credit.
Some of the advantages of credit have been already
anticipated in the discussion of its principal forms;
but we will now instance more specifically a few of
these advantages.
1. There are some men, and particularly young
men, who have integrity and industry and skill, but
no capital; and when such men are enabled to borrow
money to start themselves in business, or to enlarge
a business already in successful operation, the general interests of production, as well as their personal
interests, are subserved by such credit, because in all
probability capital thus passes from hands which are
less to hands which are more able to use it productively. Those who are best able to make capital tell
are generally those who are most-desirous to obtain
it, and frequently those who can offer the best secu



ON CREDIT.              357
rity for its replacement. Nothing is to be said against,
but everything in favor, of such a loaning of capital
as shall bring it, under safe conditions, from the hands
of the idle, the aged, those indisposed, or those incompetent to use it productively, into hands at once
competent and honest. Such credit is a benefit, and
only a benefit, to all the parties concerned, and to
society at large. The operators retain something of
profit after replacing the capital with interest; the
lenders receive more than if their capital remained
idle, or they employed it themselves; and society is
benefited by a more complete development and rapid
circulation of services. Despite all the instances of
broken faith, it is still an honor to human nature that
men do so gain by good character the confidence of
their fellows that they are, and ought to be, trusted
with capital on their simple word or note; and it is
the glory of free political institutions, that under their
influence, more than elsewhere, young men with no
other dower than integrity and purpose do rise, by
the help of so slight a stepping-stone as this, in
crowds, to the high places of opulence. In the point
of view, that thus all the available capital of the community is brought out into productive activity, too
much can scarcely be said in favor of joint-stock
companies, whose managers are known to be men
of probity, which gather up the driblets of unoccu.
pied capital here and there, and, combining them,
Enter upon paths of profitable production, which
individual enterprise cannot tread. Too much cannot be said in favor of savings-banks, which take the
surplus earnings of the poor, and not only keep them
safely, but pay a fair interest on each deposit, and




358     ELEMENTS OF POLITICAL ECONOMY.
loan the aggregate at a higher rate on choice securities, thus stimulatiig frugality in a wide circle of
depositors, and at the same time aiding production
by opportune loans to the best class of borrowers.
Here too come in life-insurance companies, which
illustrate the advantages of credit in a most gratify.
ing light, and whose action I hope to see extended
to larger and larger classes of men, since it tends to
transmute low and selfish cares into a noble care for
those who are to come after, who might otherwise
be left penniless dependants, and by elevating and
enlarging the views of men, to make them better producers and better citizens. In this category of the
advantages of credit come also the ordinary bank dis.
counts, made for short periods only, holding the debtor to the strictest rules of payment, only professing
and only enabled to help customers over the transient
hard places in their business, and not to furnish the
funds on which the business is mainly conducted.
Sums drawn from the banks on credit should only
form a part of the circulating capital of a business,
and never be put into the form of fixed capital. The
passing necessities of a business having an independent basis of its own can be safely and conveniently
met by bank discounts. So far as the capital stock
of a bank is made up of small subscriptions, it has
the advantage just spoken of, of calling otherwise
idle sums into activity; and so far as no undue priyileges are accorded to it by law, there is no branch
of industry more legitimate and beneficial than bank
ing. It is no essential part of the functions of a
bank, that it manufacture and issue money; the
money it loans should be the national money; and




ON CREDIT.              o59
if that, unfortunately, be credit money, the element
of credit in the money should be sharply discriminated in the public mind from that element of credit
by which the bank loans it to its customers. Bank
credits are good, but that does not prove that credit
money is good; and it was one ground of the
viciousness of the late banking system of the United
States, that the different kinds of credit involved in
it were inextricably interwoven with each other in
the common apprehensions, and when the money
failed utterly, as it did repeatedly, to answer the purposes of money, people could not exactly tell whose
fault it was.
2. There is another class of advantages in credit,
which do not depend so much on the transfer of
capital from less to more productive hands, as on the
facilities which credit affords in economizing the general operations of exchange. Here the advantages
are derived from the convenience of settling accounts
arising out of exchanges, rather than from the character of the exchanges themselves. Look, for example, at bills of exchange. They serve to settle up
the accounts arising from the commerce of two continents, with but little transmission of money from
either, and with but little loss of time. Bills drawn
in New York on London are usually payable aI
sixty days' Bight; and the merchant dispatching a
ship is able to realize at once the value of her cargo,
minus interest for the time his bill has to run; he is
indeed still liable in part to see that his bill is ultimately paid by his drawee; but the commercial integrity of the leading houses in all countries is with
justice so firmly believed in and acted on, that on the




360     ELEMENTS OF POLITICAL ECONOMY.
whole but little anxiety springs from this source. It
is one of the noble things in international commerce
that men trust each other across the oceans, and lay
millions of value on the faith of a single firm. Inland
bills of exchange equally facilitate settlements within
the country itself; and checks contribute to the same
end even more simply, passing readily in payments
wherever the parties are known, and, though credit,
doing the work of money more conveniently, and
within certain limits as safely as money itself could
do it. The face of a check drawn to the amount of
his deposit in favor of another depositor is transferred in the banker's books from the credit of the
drawer to that of the payee. The banker is released
from one debt by creating another of equal amount.
The drawer is released from a debt by causing another debt to be transferred to the payee. The payee
is paid by the drawer by the receipt of another debt.
Thus we see that a release from a debt is the same
thing as a payment in money; and we saw in the
paragraph on bills of exchange that the mutual release from debts is the same thing as a reciprocal
payment of debts.
3. It is not strange that some thinkers and writers,
seeing these unquestionable benefits of credit eveiy
within the peculiar sphere of money itself, have
come, like Herbert Spencer and many others, to
think and teach that credit might answer all the purposes of money. It is certain that it answers some
of the purposes of money. Suppose A has bought
of B $100 worth of goods, and B has bought of A
$125 worth of another kind of goods. Three ways
are open to close up these transactions. A may pay




ON CREDIT.              361
B and B may pay A in money. This would take
$225. A may pay B in money, and B may send it
back with $25 more. This would take $125. Or
A and B may mutually balance books, and B pay
the difference in account. This would take $25. It
is clear, that, as one or other of these methods prevails in practice, the quantity of money required to
do the business of a country is very different. So in
international trade. Foreign bills of exchange lessen
enormously the quantity of money that would otherwise have to be transported. Credit does take the
place of money in part. Can it take the place of
money entirely? I think not.
We have defined credit as a right not yet realized.
The denominations of money are certainly needful
in order to measure this right; and I do not see how
the denominations of money can be maintained at
all separately from the use of money itself as a medium. Moreover, great as is the undoubted power
of credit, it waits for something beyond itself; it
waits for realization. I do not see how realization
can come without the use of money, at least to settle balances. Further, there always have been hitherto in all commercial countries longer or shorter
periods during which there was a general reluctance
to accept the ordinary instruments of credit in exchange. Money, and much of it, was then found to
be indispensable. The very advantages of credit itself, which have now been explained, are dependent
on this, that there be underneath it, to support and
limit it, a solid basis of value-money, in whose denominations value can be reckoned, in whose coins
the balances of credit can be struck, and whose pres



362     ELEMENTS OF POLITICAL ECONOMIY.
ence secured everywhere by natural laws alone can
enable fulfillment to join hand in hand with promise
If ever credit should usurp the whole domain of
money, a tolerable standard of value would be no
longer possible, credit itself would lose its foothold,
and the vast balloon of promise, sailing for a while
through the blue, the joy of projectors and the wonder of credulous spectators, would descend on a
sudden collapsed and ruined to the earth.
This is the place to notice the much mooted question whether deposits are a part of the currency. It
will have been observed that I have not used the
word currency in these discussions in any technical
sense. I do not accept the common distinction
made between money and currency, namely, that
the former is coin, and the latter the aggregate of the
current forms of credit. Current usage of language
in this country recognizes bank-notes as money
equally with coins; and regards the possession of a
generalized purchasing-power, by means of which
something circulates among all classes of the people
as a medium in their exchanges, as the sole characteristic of money. I think in this case language hits
the mark. If so, deposits, though they may be currency if one cares for the word, are not money. A
deposit is as much the banker's promise to pay as
the bank-note is, but the two promises are quite
diverse in their action. The note passes from hand
to hand indefinitely in payments, legally liquidates
debts at once, and is likely enough not to return to
the banker for years. A cheek, on the other hand,
drawn on a deposit, though it may pass by indorsement through a number of hands, yet in practice




ON CREDIT.              363
rarely makes but one payment, is legally discriminated from the bank-note, and comes back to the
banker almost immediately. Checks are a useful
form of credit, much less liable to abuse than banknotes, but they lack that peculiar quality that constitutes anything to be money. Besides the two essential functions of banks, receiving deposits and
discounting bills, they perform a variety of other
legitimate operations in credit. They buy and sell
debts of all sorts. They sell their own drafts on distant places. Our new national banks have done an
immense business in the national bonds. They have
been instrumental in diffusing these bonds among
the people. They collect for their customers the
coupons at maturity. They are the factors of the
government in exchanging, for those who desire it,
one species of bond for another. For the most part,
all these dealings of bankers in debts, -and their
aggregate amount is enormous,-must be enumerated among the advantages of credit.
There are some natural disadvantages in credit.
The first is, that when it is much given by dealers to
consumers, the reverse results take place from those
already characterized, and capital passes out from the
hands of productive operators and becomes tempo.
rarily unavailable as capital. When an industrious
artisan or merchant has trusted out $1000 to dilatory
customers for six months or a year, it is so much
withdrawn for so long from his active capital, and to
make up the consequent loss of profit there must be
an addition to the prices of his wares, and besides
some bad debts belong to such a system, and there
mnust be an additional price to compensate this, and




364     ELEMENTS OF POLITICAL 1EC;ONOMY.
thus the customers who pay promptly bear a part of
the proper burden of the delinquents, who at least
do not wholly escape, inasmuch as they ultimately
(if they pay at all) pay a price enhanced by their
own delay. If the current profit of capital be ten
per cent., and the merchant sells and gets returns
five times a year, something less than two per cent.
profit may be charged to each article, but if he only
gets returns at the end of the year, ten per cent.
must be put upon everything. Hence the excellent
maxim," Quick sales and small profits."
But the principal disadvantage of credit is seen in
its action on prices through increased demand, and
in its consequent tendency to produce commercial
crises; and this chanter will be concluded by a presentation of this subject, together with a brief discussion of the proper method of dealing with the
national debt of the United States.
The cause of commercial crises is, in general, an
undue expansion of credit; or, to use an equivalent
expression, a disproportion between the amount of
debts and the available capital in the loan-market,
or elsewhere, to meet those debts.
A man's whole purchasing-power is made up of
three things: first, the property in his possession;
secondly, the value that is owed to him; thirdly, his
credit. He can buy value with these three things;
and his power to buy is exactly measured by the sum
of these three things. But while the first two are
limited and ascertainable, the third, credit, is in a
certain sense unlimited. Being based upon confiden&e, which is itself a variable quantity, a man's
credit at one time may be vastly greater than at




ON CREDIT.;65
another, compared with his real property; and, if he
have the reputation of doing a safe and regular
business, and is favored by circumstances, he will
find himself sometimes able to buy on credit to an
extent out of all proper proportion to his capital.
Instances are given of dealers, who, in times of
speculation, have effected purchases to an extent
seventy or even one hundred times greater than their
capital. And on the other hand, in times of panic,
men of known character and of financial solidity
find it impossible to borrow a dollar.
Now money acts upon prices only by being offered
in exchange for commodities; but we have seen that
commodities may be purchased by credit as well as
by money; when, therefore, credit is offered and re.
ceived for commodities, it has the same influence
upon prices, as when money is offered and received
for them. The form which the credit assumes to
effect the purchase is a matter of indifference, whether
bank-notes, checks, bills of exchange, or book-credits,
what acts upon prices is the credit, in whatever shape
given, or whether it gives rise to transferable paper
or not.
It follows from this, that whenever there is an extension of credit for the purpose of purchasing, there
will be a corresponding rise of prices. He who employs both his cash and his credit in purchasing,
creates a demand for the article to the full amount
of his money and credit taken together, and raises
the price proportionally to both.
There might be a simultaneous rise of price in
several commodities, and a considerable spirit of
speculation manifested in these, if there were no such




~63.IELEMIENTS OF POLITICAL ECONOMY.
thing as credit and all business were done by ready
money; but there could not be a general rise of
prices as to all commodities; for, while men spent
more money on the few commodities, and they rose
in price, they would have less money to spend on
other commodities, and these would not rise, but
rather fall. It is only when credit can be used freely,
and increased purchases can go on in all departments
at once, that there can be a rise of prices as to all
commodities, and a universal spirit of speculation.
At such times, and while prices are still rising,
men seem to be making great gains; those that sell
while the fever is on do make great gains; and they
not only use their credit freely, but they really have
more credit to use, from the very fact they seem to
be prosperous.  Everybody wishes to extend his
operations to the utmost limit, in order to realize the
greatest possible gains. Everybody wishes to use
not only all his money, but all his credit. Everybody desires accommodation, and accordingly everybody gives accommodation. All forms of indebtedness are greatly increased. Promissory-notes, bills
of exchange, book-credits, are indefinitely multiplied
in all directions.
It begins now to be perceived in certain quarters,
that the thing has been overdone; speculative purchases cease; prices begin to fall; holders of commodities are anxious to sell; this very anxiety makes
the price decline still further; holders rush into the
market to avoid a still greater loss; and, as nobody
wishes to buy when a market is falling, prices go
down, down, down. Their inflated wealth collapses
in the hands of the holders; a panic often sets in,




ON CREDIT.              367
more unreasonable, if possible, than the previous overconfidence. Men must realize something from their
property; they sell it therefore, frequently, at almost
any sacrifice; but the small amounts of money thus
realized, and all the loans which can be extorted for
unusual rate of interest, now when credit is almost
destroyed, are totally inadequate to meet the immense
mass of debts contracted when confidence was high.
Property for which a man gave his note for $10,000
is now worth but $1000, but that fact does not annihilate his debt, or erase his name from the unlucky
paper; he is still bound for the $10,000. And as
the mass of paper, greatly augmented during the
period of excitement, comes to maturity, how can it
be met? It cannot be met. There is not disposable
capital enough in the loan-market to meet it, even if
it could be made available. But those who have
capital hold on to it. They do not know whom to
trust. Everybody seems to be losing, and many are
failing all around them, and they will not loan.
Those men therefore who have these debts to meet
have no resource. They could borrow indefinitely a
few months before, but now they cannot borrow a
dollar. They besiege the banks with which they
deal, sometimes piteously, and sometimes bitterly,
for accommodation.  But the banks cannot help
them. These men must fail. There is no help for
it. Thousands do fail in every revulsion. Distress,
more or less extensive, is the invariable consequent
of the series of events called a commercial crisis.
That series is constituted somewhat in this manner:
first, business a little brisk; second, confidence and
credit enlarging; third, a spirit of speculation; fourth,




C633    ELEM'iENTS OF POLITICAL ECONOMY.
a vast increase of all forms of debt; fifth, the revulsion, or what may be called the cascade of discredit;
sixth, stagnation and distress.
A national debt is a mortgage upon the national
property and income. It is sometimes considered as
a blessing, but is more generally and truthfully regarded as a burden. It is not denied that incidental
advantages may spring up in connection with it.
The bonds, which are the evidences of the debt, open
a convenient form of investment for presently inactive capital and for trust-funds of all kinds. There
can be no doubt, I think, that certain classes of persons holding these national obligations are won to a
stronger loyalty and become firmer friends to stability in government; but this consideration applies
mainly to new governments, and to those temporarily endangered. Both England and the United
States now make a portion of their public debt the
basis of a national system of banking; but it is very
questionable whether this can be mentioned among
the incidental benefits of the debt. Again, "a moderate debt adds to the credit of a nation, and its ability to raise money in an emergency, for bankers and
capitalists are more ready to take such securities as
they are in the habit of dealing in." 1
The burdens of a national debt are very apparent.
During the fiscal year closing June 30, 1867, the
United States paid out in interest $143,781,592;
and between the 1st September, 1865, and the 1st
November, 1867, it paid towards the principal of
the debt $266,185,121. These vast sums came out
1 Communication from Sidney Homer.




ON CREDIT.              369
of the industry and income of individuals.  They
came through taxation of individual proprietors of
value; and taxation to any such degree as this is a
great disturbance to industry, and gives rise to an
army of officials who consume a considerable percentage of all they collect.  The collection of the
internal revenue for the fiscal year 1867 cost $7,712,089. Moreover, the various expedients of taxation,
which are always practically unequal in their operation, give rise to irritation and political agitation, and
even sometimes to threats of repudiation, especially
when the occasion has gone by under which the debt
was contracted, and a generation is called upon to
liquidate a debt which it had no agency in creating.
And here the vexed question arises, how far one
generation has a right to throw upon succeeding
ones the burdens of a national debt? I answer, that
it has a very limited right indeed.  The opposite
doctrine tacitly implies that succeeding generations
will have no occasion for extraordinary expenses
of their own, and therefore may rightfully be made
to contribute to the extraordinary expenses of this
generation. But it is pure assumption to take for
granted that the next generations will not have, of
some kind or other, as much occasion for an extraordinary effort in the way of defence or of improvement as the present generation has had. It is an
illusion to estimate what has now to be done as of
much more importance than what will have to be
done.  Therefore to throw our burden forward on
another generation that may have its own peculiar
effort to make, just as great and just as imperatively
called for, is an unwarrantable procedure. The view;i4




370     ELEMENTS OF POLITICAL ECONOMY.
that has prevailed in practice, that a great war-debt
for example, might be cast with facility upon posterity, has given rise to needless and expensive wars;
and they have been called upon to pay who perceive
the utter inutility of the expenditure. Thus bitterness has been added to burden. Besides, it will be
found to have been commonly true, that each generation has been able of itself to meet the cost of whatever the providence of God has fairly called upon it
to do. Sufficient unto the day is the evil thereof:
conversely, the day thereof is sufficient for its own
evil. The present generation of American citizens
has been called on to do a great and necessary thing
in suppressing a civil war, and in eradicating a social
institution that was thoroughly bad. The expense
of doing this has been enhanced by timid counsels
in the field, by class-legislation in Congress, and by
bad financiering in the Cabinet; but the debt, vast
as it is, and unnecessarily incurred as a portion of it
was, can all be paid off, must all be paid off, by the
generation that incurred it.
How can this desirable result be best reached?
First of all ought the United States legal-tender
notes to be called in and cancelled. They are a portion of the unfunded debt, and no interest accrues
upon them, but they have been mischievous and
wasteful in their effects upon industry and business.
Their introduction would not have been so harmful,
if, contemporaneously with it, Congress had forbidden the further circulation of State bank bills. These
latter were largely increased along with large issues
of the national notes. The currency became thoroughly debauched. The measure of value became




ON CREDIT.               371
as variable as the drift of the winds. Prices became
universally and abnormally high. Business became
feverish, and speculation rife. When, after a long
interval, the State bank bills were retired under a
heavy tax, the national bank bills were ready to take
their place, and these, together with the legal-tender
notes and fractional money, now swell the volume
of the currency to above seven hundred millions
($700,000,000) of paper money, every dollar of it practically irredeemable, and every dollar of it depreciated
(September 30, 1871) thirteen per centum. The
country is suffering in every one of its leading interests, domestic and foreign, from the influence of this
inferior money. Trade is languishing; and the poor
especially are experiencing the truth of the oft-quoted
remark of Mr. Webster, that the most successful expedient ever devised to cheat the laboring classes of
mankind is irredeemable paper money. Let, then,
the national legal-tender notes be steadily withdrawn. They have cheated creditors, and relieved
debtors of their just obligations. They have made
it impossible for other forms of value-money to come
into circulation. Their presence in the currency depreciates the value of the national bank bills, and
puts off the day of specie payments. Let their career
of mischief be concluded.
In respect to the funded debt, we are paying the
interest promptly, and somewhat reducing the principal. Some of the six per cent. bonds have been refunded in five per cents, and thus the burden of interest has been lessened; but, after all, the vital question now is, not How shall we pay off or refund the
bonds? but, How shall we pay off the greenbacks?




87      ELEMENTS OF POLITICAL ECONOMY.
The bonds are not due yet for many years, but the
legal tenders have already been due many years, and
the government still dishonors its own promises to
pay. Greenbacks are promises to pay gold dollars,
and have no other possible meaning, and government
is every day culpable while it does not take efficient
measures to redeem these promises. Once in position to do this, the question late agitating the country about paying off a part of the bonds in greenbacks
answers itself. How can a promise to pay be the
same thing as the pay itself? And how can a nation
pretend to fulfill one set of promises by compelling its
holders to accept another set of promises? The only
proper basis of a promise is the free trust of the receiver in the good faith of the promisor. To compel
men to accept a promise is a monstrous incongruity.
To make the greenbacks a legal tender was bad
enough; to pay off the bonds with them would be
enough worse. No! The greenbacks must first be
paid in gold to every man who demands gold on them;
this is absolutely necessary to national good faith;
and then the bonds, if the principal be paid at all,
which is,-i absolutely necessary to national good
faith, since the terminable bonds may be changed
into Consols with the consent of the holders, must
be paid in gold to the last farthing.
The price of the bonds, since they bear gold interest, has always been higher than the price of the
greenbacks, in gold. Still, the bonds have not been,
till very recently, at par. The average cost in gold
of all government purchases of six per cents between
May, 1869, and March 15, 1871, was exactly $92.18
for each $100 bond.] All the different issues of six
1 Hunt's Merchant's Year-Book, 1871.




ON CREDIT,              373
per cents are now at or above par, and the ten-forty
five per cents are worth about 97 cents on the dollar.
The government itself realized from the original sale
of most of these bonds much lower figures ir- gold
value than even these. On the whole, the value of
the evidences of the public debt is appreciating.
The debt itself is now  about $2,300,000,000.
The English debt is a trifle less than $4,000,000,000,
much of it in the form of Consols, whose peculiarity
is, that they never fall due, so as to be a claim for
the principal against the government; but are, after
a day fixed, always redeemable at the will of government at par. The ordinary price of Consols, which
bear three per cent. interest, is about 94. The advantages, to a government, of a debt always redeemable, but never payable, are obvious at first sight.
All our funded debt issued before 1865 is made payable on a day certain. The so-called Consols of
1865, 1867, and 1868, are payable not more than
forty years from date; while the new bonds of 1870
are Consols proper, redeemable, the five per cents
after ten, the four and a half per cents after fifteen,
and the four per cents after thirty ye  That they
may be paid in gold will require an economical
administration of government; an avoidance of
intervention in the affairs of our neighbors, and of
entangling alliances with foreigners; a free commercial system, under which duties shall be adjusted
only for the most productive revenue; and a constant and onerous home taxation.




o4 -lr  ELEMENTS OF POLITICAL ECONOMY.
CHAPTER XIII.
ON FOREIGN TRADE.
THE principles which determine the question of
foreign trade have been already unfolded in these
pages. It is only because their application to the
wider field of international exchanges has been contested by some persons, while conceding their validity within the boundaries of the individual nations,
that it is now needful to bestow upon the subject a
separate treatment, to demonstrate that the laws
of exchange are universal and not partial, and to
attempt to answer with candor and thoroughness the
objections that have been raised to the conclusions
established by the almost unbroken unanimity of
political economists who have written during the last
hundred years. Here, as everywhere else within the
science, the safe appeal lies to the common sense of
men. A writer whose simple object is to reach the
truth, and who has no interest, real or supposed, in
defending or overthrowing a dogma, will not confuse
the understanding of his readers, and his own, by
leaping at once into the most complicated phenomena which the domain of exchange exposes to the
observation of al intelligent science. He will take
the simplest cases first, will display familiarly the
principles applicable to them, and then with the clue
well in hand, will pass on, and can be followed




ON FOREIGN TRADE.           375
through the most intricate portions of the subject. It
is not owing so much to any inherent difficulties of
the subject-matter, that the question of foreign trade
has been the vexed question of the late centuries, as
it has been owing to a false method pursued in discussing it; a method which, however favorable to
the apparent establishment of current maxims, and
however approved by men of interested views, can
never be made useful in the investigation of truth.
It may be considered as a point already well settled
by experience, that no man's sagacity is sufficient to
guide himself or others to any sound conclusions on
this field, who takes his stand at the outset amid the
whirl of interlocking phenomena, and then endeavors
to work himself out through the entangling meshes
which surround him at every step. Happily, there is
no need of any such procedure. Man is man, motive
is motive, and exchange is exchange; and the apparent chaos of commerce can be resolved through
these alone into harmony and order.
In our fourth chapter it was put, I believe, beyond
the reach of controversy or cavil, that the only reason
why men ever exchange services at all, is on the
ground of a relative superiority at different points.
This relative superiority at different points was
shown to depend in individuals partly on natural
gifts, partly on concentration of mind, or muscle, or
both, on a single class of efforts, and partly on the
use and familiarity in the use of the gratuitous helps
of Nature aiding that class of efforts. The tailor
makes the blacksmith's coat, and the blacksmith
shoes the tailor's horse, for no other reason in the
world, except that each has a relative advantage of




876     ELEMENTS OF POLITICAL ECONOMY.
the other in his own work, and therefore there is a
mutual gain in their exchanging works. To pretend
that there would be any exchange between them, in
case the blacksmith could make coats as well as the
tailor, and the tailor shoe horses as well as the blacksmith, would be to assert that man acts without a
motive, and that exchanges take place without a
gain. It was also shown in the same connection,
that the greater the difference of relative advantage,
the greater the gain of an exchange, because each
purchases the service of the other at the rate of his
own highest efficiency. To recur to the same example, while the efficiency of the tailor and the
blacksmith each in his own trade remained at 6, the
efficiency of each in the trade of the other being at
5, there was only a gain of 2 to be divided between
them; but when by concentration and application
the efficiency of each in his own trade rose to 15, his
efficiency in the other remaining at 5, there was a
gain of 20 to be divided between them. When the
relative superiority of each over the other in his own
trade was low, the gain, though sufficient to justify
the exchange, was small; but when the difference of
relative advantage increased, just in that ratio did the
exchange become more profitable to both. The obvious inference from this, then drawn, and now repeated, is, that every person who exchanges with
others is directly interested in the highest efficiency
and success of their efforts as well as his own. The
diversity of relative advantage at different points
exhibited by different nations, and consequently the
gains of international exchange, were expressly reserved at that point to a later stage of our inquiry
That stage is now reached.




ON FOREIGN TRADE.           377
The various countries of the earth have received
from the hands of God a diversity of original gifts,
in climate, soil, natural productions, position, and
opportunity.  This diversity exists for a good design, and can never be substantially reduced by man,
even if there were, as there is not, any good reason
for desiring to reduce it. Besides original diversity
in these respects, there has been developed in the
history of the inhabitants of these countries, a diversity of tastes, aptitudes, habits, strength, intelligence,
and skill to avail themselves of the forces of Nature
around them. These differences are somewhat less
inherent and more flexible than the others, but they
exist, and always have existed, and in a greater or
less degree always will exist; and it is on these diversities, original, traditional, and acquired, that international commerce depends; it never would have
come into existence without them, and it would
cease instantly and completely were they to fade
out. Men do not engage in foreign trade for fun;
they engage in it for the sake of the mutual gain
derivable to both parties; they desist from it so soon
as that mutual gain disappears; and there is no
mutual gain in any series of exchanges, unless each
party has a superior power in producing that which
is rendered, compared with his power in producing
that which is received.  We will suppose a trade
between England and France in cottons and silks,
England sending cottons to France, and France
sending silks in return. When and how long will
this be a profitable trade? Then, when efforts bestowed in France upon silks will procure, through
exchange with England, more of cottons than the




378     ELEMIENTS OF POLITICAL ECONOMY.
same amount of efforts bestowed in France upon
cottons will produce of cottons directly; and then,
when efforts bestowed upon cottons in England will
procure more of silks, through exchange with France,
than the same amount of efforts bestowed in England upon silks will produce of silks directly. So
long as there is a difference of relative efficiency in
the production of the two commodities in the two
countries, so long, setting cost of carriage aside, may
there be a profitable exchange of the two. To make
such an exchange profitable to both parties, it is not
at all needful that the cottons exchanged for the silks
shall have cost the English as many days' labor as
the silks may have cost the French; or that the silks
shall cost the French as much as the cottons cost the
English; it is not a question of the absolute cost of
either commodity to the parties producing it; but a
question of the relative cost of that produced in
either country compared with what would be the
cost of the other commodity were it to be produced
in that country. The question for the Frenchman
is, Can I get more cottons by working on silks
for a month, and then trading with England, than I
can get by a month's work on cottons at home? And
the question for the Englishman is, Can I get more
silks by making cottons, and then trading with
France, than I can get by trying to make silks at
home?   As this point is fundamental, and determines the whole matter of foreign trade, it shall be
illustrated arithmetically.  Suppose that cottons
costing $100 in England exchange for silks costing
$80 in France: is that a losing trade for England?
Not necessarily.  Is it a remunerative trade for




ON FOREIGN TRADE.           379
France?  Not necessarily. It depends simply upon
this: whether $100 expended in England in the
manufacture of silks will produce as many and as
good silks as can be obtained for $100 by exchange
with France?   If it will, depend on it, that $100
will never go to France to buy silks. If it will not,
and silks are in demand in England, then, clearly,
the trade is advantageous to the Englishman. If
the cottons costing $100 in England, and obtained in
exchange for silks which cost but $80 in France, can
there and then be made for $75, France makes a
losing trade (but only by supposition), though she
gets what cost $100 for what cost but $80. My
readers will perceive, that it is not the absolute cost
of commodities to the countries producing them that
determines their value in foreign trade, but that cost
relatively to what would be the cost of the return
commodities were they to be grown or manufactured
there. A demand in each country for the product
of the other is of course presupposed in the illustration.
If this general representation be just, and I think
every thoughtful person will concede it, then it follows, that, setting aside a greater cost of carriage,
foreign trade presents no elements peculiar to itself,
but only the same elements which domestic trade
presents; and consequently, that the same laws and
limitations applicable to domestic exchanges are applicable also to foreign exchanges. As in every other
exchange, so here, there are two efforts, represented
in this case by the cost of the respective commodities, -the cottons $100, and the silks $80; there are
two desires, —the desire of the Englishman for silks,




380     ELEMENTS OF POLITICAL ECONOMY.
and of the Frenchman for cottons; there are two
estimations, — the estimation of the Frenchman of
the effort in silks required to obtain the cottons by
exchange compared with the effort required to obtain
them directly, and the Englishman's estimation of
his effort in cottons necessary to procure the silks in
exchange, compared with what would be the effort
needed to manufacture the silks in England; and,
finally, as always, two satisfactions.
Now let us further suppose that while the cottons
cost $100 in England, it would cost $120 to manufacture there as good silks as can be made in France
for $80; and that while the silks cost but $80 in
France, it would cost $96 to make cottons there as
good as the English can make for $100. On this
supposition, France can make both silks and cottons
at a cheaper absolute cost than England can. But
does that destroy the motive and the gain of an; exchange betweef the countries in these two articles?
Let us see. By exchange with England, France
gets for $80 in silks, cottons which would otherwise
cost her $96,  a handsome gain of 20 per cent.;
England gets for cottons costing her $100 silks
which would otherwise have cost her $120,- another
handsome gain of 20 per cent. Though France can
make each commodity for less absolute money than
England can make either, there is a diversity of relative advantage, and therefore there might be in this
case, as there is actually in many such cases, a profitable trade.  The efficiency of France in making
silks, relatively to that of England in making silks,
is in the ratio of 80 to 120,- a difference of 50 per
cent.; while the efficiency of France in making




ON FOREIGN TRADE.         381
cottons, relatively to that of England in making the
same, is only in the ratio of 96 to 100,- a difference
of 4|- per cent. In the majority of cases, doubtless,
foreign trade takes place in articles, in the production
of one of which each of the respective countries has
an absolute advantage over the other, but an every
way advantageous trade may be carried on in articles
in the production of both of which one nation shall
have an absolute superiority over the other, provided
only that this superiority be relatively diverse in the
two articles, as has just been shown.  This is an
effectual answer, as I take it, to the clamor of some,
who object to importing articles which might be
made at home for the same sum of money as foreigners expend in making them; admitted, that they
might be so made; does it follow that the country
importing them would get them as cheaply by
making them itself? By no means does that follow.
By the supposition, the importing country has an
efficiency in making those articles equal to that of
the foreign country; but it may also have a superiority absolute or relative over that country in the
production of other articles which that country wants
in exchange; if so, the exchange complained of may
go on to the manifest profit of both parties. Our
general supposition a little changed will put this case
in its true light: France can make cottons for $100
which it costs England also $100 to make; shall she
give up her trade with England in silks and cottons,
because she can make cottons as cheap as England
can? She had better not. Let the exchange go on;
for $80 in silks she gets cottons which would otherwise cost her $100, - a gain of 25 per cent.; Eng



882     ELEMENTS OF POLITICAL ECONOMY.
land gets silks for $100 which would otherwise cost
her $120, - a gain of 20 per cent. as before. Let no
nation be in haste then to drop a trade, because it
thinks it can make the article received in exchange
as cheaply as the other nation makes it, so long as it
has an advantage over the other, absolute or relative,
in making the article rendered in exchange; and when
tha't advantage ceases, the trade will drop of itself.
What will be the extreme limits of the value of
cottons and silks in a trade between England and
France under the conditions supposed? And when
will a third nation be able to undersell either in
the ports of the other?  The extreme value of
French silks in English cottons, will be 80 and 96;
they cannot fall below 80, because they cost the
French' that to produce them; they cannot rise
above 96, because at that rate the French can make
cottons, and there would be no gain in exchanging.
Nations, no more than individuals, will get themselves served at a greater effort than that at which
they can serve themselves. If a given effort does
not realize more through exchange than it would
directly, then the exchange ceases of necessity, as
fire goes out for lack of fuel. The extreme limits of
the value of English cottons in French silks, will be
100 and 120, for reasons precisely similar. Therefore the highest profits possible to both nations,
under the conditions of the trade, are 20 per cent.
each. France would be glad to take the cottons at
a return of 80, at which rate her gain would be 20
per cent.; and she cannot under any circumstances
offer quite 96, at which rate her gain would disappear No third nation, therefore, in a trade of silks




ON FOREIGN TRADE.           o83
for cottons, call expel the French frotm the English
ports, until it is prepared to offer nearly 96, or
more, in silks in return for English cottons; that
is to say, until its efficiency in making silks relatively to that of England in making them, presents
a greater difference than the difference of efficiency
between France and England in making silks, that
is, greater than fifty per cent. A greater difference
of relative advantage, and nothing else, will enable
a third nation to undersell France in such a trade.
England would be glad to take the silks at a return
of 100, at which rate her gain is 20 per cent.; and
she cannot possibly offer quite 120, because at that
rate her gain would wholly vanish. She could be
undersold in the French ports, under similar conditions, and not otherwise, as the French in her own
ports, as just now indicated. We have seen that
the diversity of relative advantage in the production
of the two articles in the two countries is in the
ratio of 50 to 4L; France has an absolute advantage
in the production of both commodities; the trade
proceeds simply on the basis of this relative diversity; and no nation can take away the silks of
France from England, or the cottons of England
from the French, either with other cottons and silks,
or any other commodity, except on the basis of a diversity, absolute or relative, greater than this. Here
is the whole doctrine of one nation's underselling another in the ports of a third. It can do so under conditions of greater relative efficiency, and not otherwise.
So far we have considered only their relative cost
of production as determining the value of articles in
foreign trade. But we know that the element of




384     ELEMENTS OF POLITICAL ECONOMY.
desires also helps to determine all value. We come
now to illustrate what is sometimes and properly
called " the Equation of International Demand."
If the demand for French silks in England just
answers to the demand for English cottons in France,
so that the silks offered by France just pay for the
cottons offered by England, then, cost of carriage
aside, the gains of the trade will be equally divided
between the two nations, each will realize 20 per
cent. profit, because neither will have any motive to
lower the value of its commodity below its highest
value; France, from its point of view, will offer 80 in
silks and get 96 in cottons; England, from her point,
will offer 100 in cottons and get 120 in silks. Demand
and supply are equalized at a point of value most
favorable to both parties, and really determined by
the relative cost of production. This case of equalization, though possible, is likely rarely to occur in
practice. On any terms of exchange first offered,
there is likely to be a stronger demand in one country
for the product of the other than in this country for
the product of that. This will lead to a change of
value, and a new division of profits. The product
for which the demand is less will find its market
sluggish, and in order to tempt further and brisker
exchanges, will be compelled to offer more favorable
conditions. He who enters a market in quest of
what is more in demand with a service in return
which is less in demand, will have to lower his
terms, or not trade. The equalization of supply and
demand will only be reached in this case, by quickening the demand for the commodity now less in
demand, through an offer of better terms in trade.




ON FOREIGN TRADE.           385
Thus, if the demand for French silks in the English
ports be slack, in comparison with the demand for
English cottons in France, at the rate of exchange
first established- 80 for 96, the French merchant has
no resource, if he wishes to continue the trade, but to
offer more silks for the same amount of cottons, say,
85 for 96.  If this reduction prove sufficient to cancel the account in cottons with the account in silks,
then the trade will go on on this new basis for a
while, the equalization of supply and demand has
been reached through a new valuation of the commodities, and there is now a different division of the
profits. France gains now only 13 per cent. by her
trade with England, while England gains 271 per
cent. in her trade with France. Under these new
terms of exchange, it is possible that silks may again
become heavy in reference to cottons, and a new decline take place in their relative value. If the French
are obliged to offer 90 for 96, in order to obtain the
cottons they want, their profits will sink to 52 per
cent., while the English profits will rise to 35 per
cent. If, in any contingency, the French were compelled to offer in the neighborhood of 96 in silks for
96 in cottons, the trade would cease of course, just
as every other transaction ceases when the motive
for it ceases. Of course, the cottons are just as likely
to become dull in reference to silks, as the silks to
cottons, and in this case England must lower her
demands, and thus surrender a larger share of the
profits to France. By the play of supply and
demand, within the outermost limits drawn by the
relative cost of production, is the value of articles
determined in foreign trade; and no degree of com25




386     ELEMENTS OF VPLITICAL ECONOMY.
plication in the variety of articles, or in circuitous ex,
changes, affects, for substance, these fundamental
principles. For example, if, instead of one article,
as cottons, England sends two articles, or ten, to
France in payment for silks, she will send in preference that article in which her labor is relatively most
efficient, so long as the French demand will receive
it; then, when obliged to lower on that down to the
point at which her next most available article stands,
she will send that in quantities regulated by the
demand for it; and so on to the end. No matter
whether the articles be one or many; no matter
whether the trade be a direct, or an indirect, trade;
the profits in all cases will depend, first upon the
ratio of the cost of what is rendered to what would
otherwise be the cost of that received; and secondly,
upon the relative intensity of the two demands. The
greater the relative efficiency of any nation in producing an article of export, and the stronger the
demand for that article in foreign ports, the more
profitable does the trade become to that nation.
The precious metals, whether produced at home, or
obtained from other nations by another series of exchanges, stand here in the same relations as other
commodities, and are frequently the most profitable
articles that a nation can export. The terms of international exchanges, then, between any two nations, are so adjusted, as to equalize the demand for
their respective products, and cancel the debts mutually incurred.
It follows from all this by a necessary inference,
that what a nation purchases by its exports, it pur.
chases by its most efficient labor, and consequently




ON FOREIGN TRADE.          387
at the cheapest possible rate to itself. Only those
things, for the procuring of which a nation possesses
decided advantages relatively to other nations, and
relatively to its own advantages in producing directly
what is received in return, are ever exported; and
hence, the return cargoes, no matter what they have
cost their original producers, are purchased by this
nation as cheaply as if they had been produced by its
own most advantageous labor. This is a wholly impregnable position, and the advocates of restricting
foreign trade are challenged to try their hand a little
at its defences.
We see also, at this point, what to think of those
people who deem it needful that each nation should
be able to "compete" with other nations in everything. Why are not these people consistent enough
to apply their favorite doctrine of " competing" to
domestic exchanges also, and demand that the clergyman shall have facilities for "competing" with the
lawyer, the tailor with the blacksmith, the farmer
with the manufacturer, the publisher with the author?
Will these people never learn that all exchanges, domestic as well as foreign, depend on relative superiority at different points, and that a nation which
should try to make its success in production equal at
all points, would be as foolish as an artisan trying to
learn and practise all trades at once? Suppose the
nation to succeed, what then? It would supply its
wants at a certain average efficiency of effort; whereas,
by a thorough development of all its own peculiar
resources, it could command by exchange the products of the world at a cost not exceeding that of its
own most productive and efficient exertion. In one




888     ELEMENTS OF POLITICAL ECONOMY.
word, whatever justifies individuals in selecting diverse paths of production according to their capacities and opportunity, the same justifies the nations
in fully drawing out their own best capabilities under
the conditions in which God has placed them, and
then, exchanging what costs them little for what
would otherwise cost them much, in enjoying all that
the world offers at the least expenditure of irksome
effort. Such action promotes the common good of
all the nations, and makes the best of all accessible
to all, and arms each with the power of all; while
the opposite action, by lessening the diversities of
relative advantage, so far forth incapacitates all for
exchanges which are at once profitable and stimulating.
Closely connected with the one just cited, is another narrow and superficial notion, happily less
prevalent now than formerly, namely, that new improvements in machinery, or other enhanced facilities of production, realized in any nation, are a disadvantage to other nations in their trade with that
nation. Let us examine this point. Suppose France,
by new methods of silk culture, to become able to
make the silk which before cost $80 for $50, cottons
in France, and silk and cottons in England, remaining in natural cost as before, does France alone gain
the entire advantage of the increased cheapness of
silk? We will see. The production of silk in
France is greatly quickened by the cheaper methods, more is produced, more is carried to England to
buy cottons with, but at the old rate of 80 for 96
the English will not take any more silks, and the
French, who can now abundantly afford it, since




ON FOREIGN TRADE.          39
their nominal 80 is really 50, will offer more silks
for 96 in cottons, in order to tempt a brisker and
broader sale. They offer, say, 96 in silks for 96
in cottons, and if that reduction of value of silks in
cottons be enough for the equalization of the respective demands, the trade will go on on that basis,
at least for a time; and as there is now a larger dif.
ference of relative advantage than before, there will
be, as always in such cases, larger profits to be
divided between the two parties.  The 96 now
offered in silks to the English is really only 60 in
cost to the French, so that the French gain in the
trade is largely increased; they now get for what
costs them 60 what would otherwise cost them 96,
a clear gain of 60 per cent. Before the new methods of silk culture were introduced they gained
only 20 per cent. But the English have also gained
largely by the ingenuity and diligence of their neighbors. Before, they gained only 20 per cent. in the
trade at best; now they get for what costs them
$100 that which otherwise would cost them $144,
a clear gain of 44 per cent. Indeed, it might easily
happen, through the changes in international demand, that even a larger share of the benefit of
the French improvements should accrue to the
English than to the French themselves; the share of
the French all the while being large, and much larger, than if, greedily endeavoring to keep all the benefit, they refused to trade at all. Thus we reach
again, from another outlook, a grand doctrine of
exchange, that each party is benefited by the progress and prosperity of the other. The only way in
which all nations can share in the benefits of the




890     ELEMENTS OF POLITICAL ECONOMY.
thrift and enterprise of each other, is through mutual
international exchanges; and when each nation sees
to it that it has a few commodities at least for which
there is a strong demand among foreigners, and in
the production of which themselves have a strong
superiority, it may rest assured that it buys all it
buys from abroad, gold included, at the cheapest rate
to itself, and shares a part of the prosperity of every
nation with which it trades.
It is now time to look at the cost of carriage, thus
far allowed to sink out of sight for the sake of greater
simplicity of view. This is an important element in
international exchanges, and one which must not be
neglected, although Mr. Carey unduly enlarges upon
it with a view to prejudice a free exchange. Certainly, it costs something to carry any goods abroad,
and to bring back a return, and we may be assured
that if such return goods could be procured as cheaply
without incurring such expense, the expense would
never be incurred. The fact that all expenses connected with carriage are gladly borne by the merchants who carry on the trade, shows that the gains
of the trade are so great as not only to pay freights
and insurance, but also to leave a good margin for
profits. Mr. Carey does not get around this stubborn
fact. What use is it to pile up calculations to show
that the expenses incurred in carriage, if applied to
production at home, would secure as good goods and
more of them?  If they would, why do they not?
Have not men common sense? Is not self interest a
tolerably strong motive-power? Is it needful to invoke the mighty arm of law to compel men to act in
accordance with their pecuniary interests?  Mr.




ON FOREIGN TRADE.           S91
Carey would restrict foreign trade, because it costs
so much to carry it on. Is that wise, in case the gains
after all largely overbalance the cost? If they did
not overbalance it, would the trade go forward? If
the cost be large, as it is, that is a good reason to
desire its reduction, if possible; to labor for increased
facilities of transportation, for cheaper freights, and
better rates of insurance; but to argue for forcibly
stopping a trade by legal enactment, because it costs
those so much who freely undertake to carry it on,
does not strike me, and, I believe, will not strike my
readers, as a sound argument.
Which nation, a party in foreign trade, pays the
costs of carriage? Or does each pay them in equal
proportion? The aggregate cost of transportation to
the foreign market is so much added to the cost of production, and is a deduction of so much from what
would otherwise be the whole gain of the exchange;
but it is not true that each party necessarily pays the
whole of his own freights, and therefore, that the party
carrying bulky articles is at a disadvantage compared
with the other. He may or may not be at a disadvantage. That will depend on the effect of the new
expense, however divided, on the demand in the
respective countries. Suppose, that in the outset
England pays the whole cost of carrying cottons to
France, and France the whole cost of sending the
silks to England; but as cottons are many times
more bulky than silks proportionably to value, a
larger bill of freights would fall to England; and
cottons would therefore fall relatively to silks; but
cottons and silks both have risen absolutely, that is,
with reference to a given effort, or with reference




[ 92    ELEMENTS OF POLITICAL ECONOMY.
to a money standard.  Suppose that France, instead of 80 for 96, now has to give 82 for 96, and
England, instead of 100 for 120 now has to give
105 for 120. The French gain in the trade is reduced by cost of carriage from 20 per cent. to nearly
18, and the English gain from 20 per cent. to nearly
14; but it is by no means certain that the trade
would go on on these terms; the enhanced price of
silks might well deaden the demand for them in
England, more than the relatively less enhanced
price of cottons in France would affect the demand
for them. Silks have risen in England 5 per cent.,
but cottons have risen in France only 21 per cent.;
it is therefore every way likely that thereafter the
demand for cottons will be stronger than the demand for silks, and if so, the French will have to
offer better terms, or, what is the same thing, be
obliged to pay a part of the English freights; so
that there is nothing in the true state of the case
to justify the conclusion jumped at by some people
that they who carry heavy goods are at a disadvantage compared with those who carry light goods.
That will depend on the equation of international
demand. Nothing in the nature of things hinders,
that each party shall in effect pay the freights of
the other, or one even really pay the freights of
both.
These, then, are the essential principles of foreign
trade, brought out, it is hoped, as clearly and consecutively as the relative and complicated nature
of the transactions will allow; and in the light of
these principles it is very clear that foreign trade is
Just as legitimate as domestic trade; that it rests on




ON FOREIGN TRADE.           393
the same ultimate principles in the constitution of
man and in the providential arrangements of Nature;
that the profit of it is mutual to both parties, or it
would never come into being, or, coming into being,
would cease of itself; that to prohibit it, or restrict
it, otherwise than in the interest of morals, health, or
revenue, must find a justification, if at all, outside the
pale of Political Economy; that to say to any body
of men who wish to render purely commercial services to foreigners, to receive back similar services in
return, that such services shall neither be rendered
nor received, is not only to destroy a certain gain,
but also to interfere with a natural and inalienable
right.
Unfortunately, the old mercantile system, which
was so wise as to believe that gold and silver were
the only objects of real value, taught also, in coincidence. with its fundamental belief, that foreign trade
ought to be so regulated and restricted as to bring
in the largest possible quantity of the precious metals; that each nation ought to sell much and buy
little in order to grow rich; that bounties ought to be
given to exporters to encourage them to sell, ahd
prohibitions laid upon importers to prevent their buying; and that the introduction, through exchange
with foreigners, of articles which might be produced
at home, should be by all means prevented by law,
no matter what advantages for producing them foreigners might have, or what advantages the nation
itself might have in producing that which the foreigners would be glad to take in exchange. The mercantile system as such, is long ago dead and buried,
but it has left one of its progeny behind it, of no




394     ELEMENTS OF POLITICAL ECONOMY.
better birth than its parent, which has not yet found
its predestined death and burial. This is the doctrine sometimes euphoniously and courteously de.
nominated Protection to Native Industry, a designation however not in the least indicative of its real
nature. This doctrine, now fairly expelled fronr
England and Germany, still lingers feebly in some
other parts of Europe, and, though steadily declining
in the United States, is still strong enough here to
control the present national legislation. It has been
reinforced, of late years, by the very respectable
authority of Mr. Carey, some of whose points will be
considered in the sequel; and by one or two other
persons whose opinions are entitled to a respectful
consideration; and the prevalence of the doctrine in
the popular mind, particularly in New England, is
still such that I deem it useful to examine the topic
at some length, preferring to do so in the way of
replying to the main objections urged against the
opposite doctrine of a free commerce, especially as
Protection so called acts at present wholly on the
defensive. Some of the objections are of a popular
character, and I shall feel at liberty to subject them
to a popular refutation; while such as profess to be
scientific, will, it is hoped, be met by a scientific
method at least equal to their own.
Let us see precisely what a tariff is. The origin
of the word will throw light upon the thing. The
southernmost point of the Peninsula of Spain, which
juts down into the narrowest part of the Straits of
Gibraltar, holds a town named Tarifa. Here, during the Moorish domination, a castle was built, and
all vessels passing through the Straits were stopped




ON FOREIGN TRADE.           395
and compelled to pay duties at fixed rates; whence
the word tariff in English and other languages. It
will be perceived at a glance that a tariff is only another name for a tax. It is the special form of tax
which governmen s levy on goods brought in from
other countries. It may be legitimately imposed for
the sake of a revenue to support government; it may
be a species of robbery, or black-mail, as in the historical instance just cited; or it may be levied for the
sake of Protection, so called; but for whatever purpose imposed, it is always and simply a tax on the
exchange of goods. How anybody can intelligently
suppose that a system of taxes can be so cunningly
adjusted as to become a positive productive agent, a
spur to the progress of society, they must explain
who suppose so. I myself once supposed so; but it
was when I was in ignorance of the real nature and
operation of such taxes. A careful study of the
principles of this science, with a noting of the records
of experience in this matter, has convinced me, as it
has thousands of others, that Protective duties, so
called, are nothing in the world but burdensome
taxes laid- upon industry; that they always have
been, and always will be, deeply detrimental to the
true interests of society. The word " Protective," as
applied to a tariff, is full of deception. A tariff in
its very nature is restrictive, obstructive, prohibitive.
The first main distinction to which I call attention, is that between a protective tariff and a revenue tariff.  Upon this point a great confusion
exists in the common mind. A revenue tariff is a




396      ELEMENTS OF POLITICAL ECONOMY.
schedule of taxes levied on imported goods with an
eye to equitable taxation only. If such taxes are to
be productive, they must not interfere essentially
with the bringing in of the goods, that is to say, they
must be levied at a low rate, so as not much to discourage importations, or encourage smuggling at all.
Also, experience has shown that it is not needful, in
order to derive a large revenue, to lay even low rates
upon all goods imported, but only on certain classes
of them, so as to burden at as few points as possible
the ongoing of international exchanges. The prosperity induced by commercial freedom enables a
country to import vast quantities of the articles subjected to the tax, so that large revenues come from
low rates levied at few points. Also, these taxes
ought to be laid on articles, if possible wholly, at
any rate mainly, procured from abroad and which
are not produced also at home; otherwise, the incidence of the tax on the portion imported will raise
the price also of the portion produced at home, and
the people will pay more in consequence of the tax,
than the government gets in revenue. A proper
revenue tariff, then, lays low duties on comparatively
few articles, which are wholly or mainly procured
from abroad. The most advanced nations of Europe
now lay their tariff-taxes in accordance with these
three principles.
But the purpose of a protective tariff is totally distinct from this. A protective tariff is a schedule of
taxes levied on imported goods with a design to raise
the price of certain home commodities. To reach
this end, the duties are laid by preference on goods




ON FOREIGN TRADE.          397
which are both imported and also produced at home,
thus violating one of the fundamental principles of
a revenue tariff. Also, to be protective, the duties
must either be so high as to exclude the foreign
goods altogether, and thus give the domestic manufacturer the complete monopoly of the home market,
which is the perfection of Protection, or at least high
enough to raise the price of the foreign goods to the
point at which the home manufacturer is desirous of
selling his own. These high duties, certainly for a
time, discourage importations, and thus violate another of the fundamental principles of a revenue
tariff. But the effect on revenue is not the worst
effect. The main effect designed, and that actually
follows, is to raise the price to all consumers, in order
that a factitious advantage may accrue to certain
home manufacturers. When most successful, the
effect is to transfer money from the pockets of the
many to the pockets of a few. I do not stop at this
point to demonstrate the economical folly of this,
my object being now to show the idea that always
underlies protective duties. Also, since if one home
producer receives an artificial advantage under the
tariff, many others may lay an equal claim to it,
tariff-taxes for Protection come to be levied upon a
great many articles, thus violating the third fundamental principle of a revenue tariff, by interfering
with exchanges at many points instead of a few.
Now, can these two systems of revenue and protection, which are so distinct and apparently incompatible, be combined together? Can there be a
revenue tariff with incidental protection? One thing




398      ELEMENTS OF POLITICAL ECONOMY.
seems to be certain: Protection fully carried out
would annihilate revenue, since the foreign goods
would then be prohibited; and a system looking
only to revenue, making the people pay only what
government gets, would have no protection in it.
If this be so, is there any reason to suppose that less
degrees of protection would not be only less hostile
to revenue? Is it not of necessity, looking at the
nature of the two systems, that the point at which
protection begins is also the point at which revenue
begins to diminish?  It is not denied that a tariff
with protective features in it may be made to yield
much revenue; but can it do this without making
the people pay much more than the revenue? It is
the interest of revenue that government shall get all
that the people are made to pay in consequence of a
tariff-tax. It is the interest of protection that the
people shall pay much more in consequence of a
tariff-tax than the government gets.  Revenue is
only received on the foreign goods that come in.
Protection is only secured as the foreign goods are
kept out; or are so raised in price as also to raise
in price the corresponding domestic goods; which
makes the people pay more, while the Treasury receives less. Therefore, the conclusion is unavoidable, that a revenue tariff with incidental protection
is a solecism.
The fundamental reason why low duties on imports produce a larger aggregate revenue than high
duties is found in the condition of society, which is
like a pyramid standing on its broadest base, each
of whose horizontal sections is more extended than




ON FOREIGN TRADE.          399
the one above it. Those persons able to purchase
an article at five dollars are more than twice as numerous as those able to purchase it at ten dollars;
and those able to buy it at one dollar are probably
ten times as many as those who would buy it at five
dollars. An official list of taxable incomes in the
Tenth District of Massachusetts lies before me, and
selecting one town at random, I find one income
over $40,000, three over $30,000, seven over $20,000,
nine over $10,000, thirteen over $5,000, twenty-nine
over 2,000, and seventy-eight over $1,000. A lower
duty, therefore, on any article is likely to bring it
within the reach of a wider circle of consumers; and
for many to pay a low duty is better for the revenue
than for a few to pay a high duty. Of course the
exact limitations must be found out by experience.
Alexander Hamilton long ago, in one of the papers
of the Federalist, called attention to the fact that
high duties will not make large revenues, any more
than a large multiplier will make a large product.
The multiplicand is an important factor in both cases.
A subordinate reason why low duties are favorable
to revenue is, that they destroy smuggling.
Free Trade is the opposite of Protection so called,
and not of Customs duties properly levied for revenue.
All taxes are paid out of the gains of exchanges;
and there is no objection, on principle, to international exchanges paying their share of the taxes.
Provided it be economical for the government to
collect, and equitable for the people to pay, taxes
in this form, it is just as legitimate to tax foreign
as domestic exchanges. Some free-traders think it
would be wise to abolish custom-houses altogether,




400      ELEMENTS OF POLITICAL ECONOMY.
and tax domestic exchanges only: the most, of whom
I am one, see no objection in tariff-taxes levied at
low rates on comparatively few articles of general
consumption, which are wholly or mainly procured
from abroad. This is the common and acknowledged meaning of the term Free Trade.
(1.) I shall now attempt to answer some objections. One of the most common of these has been,
that Free Trade is a theory: " It is all very well
in theory, but it will not work well in practice"; as
if there can be a good theory that works ill in practice! A theory that does not work well in practice
is a bad theory. The way to tell whether a theory
is good or bad is to test it by practice. Everything that is done at all, unless by mere chance,
is done on some theory; and it is certainly better
that things should be done on a good theory
than on a bad one. What makes a theory good?
Simply because it corresponds with and explains
the facts. Newton's theory of gravitation is a good
theory on this ground, and no other. If a man objects to any theory, let him bring facts, principles,
any truth whatever, to disprove it, and he shall be
welcome; but do not let him delude himself and
others by supposing that he can concede the theory
to be good, and then safely denounce the practice.
A theory is good because it is good in practice, and
for no other reason.
There have been so many unfounded theories
broached on all subjects, that the term has fallen
into some reproach, and it is for this reason that
the charge is brought against Free Trade, of being a
theory: but there is nothing in the world more




ON FOREIGN TRADE.           401
respectable than a good theory proved by solid arguments and verified by facts. I am prepared to show,
however, that the charge of being a theory falls with
far greater force against the doctrine cf protection
than against the doctrine of freedom. Free Trade
can hardly be said to be a theory at all. It is the
natural state of things. If you and I wish to exchange commodities for our mutual benefit, there is
no theory or doctrine in the premises; we exchange,
and that is the whole of it. If a Massachusetts
fisherman wishes to exchange his dried cod with a
West India sugar planter, and the trade is mutually
beneficial, what theory is involved? They exchange,
each is richer than before, and that is the whole
of it.
If now some one steps in between you and me,
or between the fisherman and the planter, and says,' You shall not trade!" he is bound to tell the
reason why. The burden lies upon him. Let him
bring forward his theory of restriction, and justify
it. Let us hear the arguments and see the grounds
that justify the prohibition of an advantageous
trade! You see the burden of proof lies upon the
advocates of restriction. It is the advocates of restriction that drag in a theory which interrupts the
play of natural laws,-which says to men who wish
to trade, " You shall not trade!"  Commerce is no
game of strife, of fraud, of overreaching. Its benefits are reciprocal and mutual; otherwise there
would be no commerce. The freights of the navigating interest, and the gains of the merchants, are
but a very small part of the benefits of commerce;
the variety of commodities and of comforts which
26




402     ELEMENTS OF POLITICAL ECONOMY.
every commercial nation enjoys, by exchanging its
own surplus products for the surplus products of its
neighbors, is the substantial advantage of trade.
When now this beneficial interchange is going forward, or, if the artificial barriers were thrown down,
would be going forward, who is he that takes upon
him to curtail and to prohibit it?  Who is he that
thinks himself competent to manipulate the unchanging laws of trade?
It is conceded by everybody that a free exchange
of commodities within the same country is highly
beneficial: what makes it suddenly cease to be beneficial as between foreign countries? Does the mutual benefit of an exchange depend upon the accident
that the parties to it are citizens or subjects of the
same government?   The south end of Vermont
trades freely and advantageously with its neighbors
across the line in Massachusetts; is there any good
season why the north end of Vermont should not
trade just as frely and advantageously with its
neighbors across the line in Canada? These are
questions which the theory of protection, in my
opinion, cannot satisfactorily answer.
(2.) I pass to a second current objection, namely,
that if we admit foreign goods freely, we thereby
employ the labor of foreigners, and so far diminish
the wages of our own laborers. Let us see if this
is so. Foreign articles are certainly wrought by foreign labor; do we, then, by buying them  employ
foreign labor, to the prejudice of our own laborers?
We are obliged to pay for everything we buy,are we not? In what do we pay? Clearly, in the
products of our ownr. labor. We employ our own




ON FOREIGN TRADE.          403
laborers to produce the articles which we exchange
for foreign articles. We pay for our imports by our
exports. Our exports are created by home labor,
and the only possible way for us to obtain the
results of foreign toil, is to offer in exchange the
results of domestic toil. A commercial nation, therefore, not only does not, but it cannot employ foreign
labor. The more it buys of foreigners, the more
home labor it must employ to create the articles
with which it pays for what it buys. We must
remember that the exports, taking the years together,
must and do balance the imports. Free Trade,
therefore, can by no possibility discourage home
labor, or diminish the wages of laborers; and, as a
matter of fact, labor is best rewarded, other things
being equal, in the freest commercial countries.
I deem it important thoroughly to demolish this
objection, for it has been considered the stronghold
of the advocates of Protection. I admit that a protective tariff may stimulate a certain branch of manufacture, may concentrate capital in it, may call
laborers into it, and even for a time increase the
wages of those laborers. But competition will very
speedily reduce wages in that department to the
average level in other departments, and unless it
can be shown that restriction increases the general
wages-fund of a country, —that fund that is designed for the payment of labor, -it is in vain to
claim that it can increase the general wages of labor.
Capital and laborers may indeed be withdrawn from
one employment to another by artificial stimulus,
but is there'any general gain in that?  While the
oane is stimulated, is not the other depressed? I




404     ELEMENTS OF POLITICAL ECONOMY.
have seen upon the ocean the wind blow up a wave,
but I always noticed a depression behind it. The
general level of the ocean is not raised, however
high the waves rise.
Now how can the free interchange of commodities
lessen the demand for labor or the rewards of labor?
You are employing a hundred men. You wish to
obtain a certain quantity of cutlery. Does it make
any difference to you or to the wages of your men,
whether you employ them directly in making the
cutlery, or in making buttons with which you can
purchase the cutlery from abroad? If, by employing them in making buttons you can purchase more
and better cutlery, (and if you cannot, there is no
temptation to an exchange,) is it not plain to reason
that it is better for you, and that you can afford to
pay them better wages, than if you employed their
labor less effectively directly upon cutlery? This is
but an instance, but it involves the principle. There
is, there can be no discouragement to domestic labor
in the freest international exchanges. Every foreign
purchase necessitates the employment of domestic
labor to create that with which the purchase is
made, thereby enlarging the demand for laborers,
and thus tending to increase their wages. The tendency of Free Trade is directly the reverse of that
alleged in the objection; because the varied objects
of use and elegance offered to our desires by interuational commerce, stimulate labor to create that
with which to buy them.
We know now how to answer those who say, that
if we should trade freely, with England, for exam.
ple, we should bring down wages in this country to




ON FOREIGN TRADE.          405
the English standard. This is too hollow a bugbear to frighten sensible people any longer. To say
nothing of the principles just explained, and others
equally conclusive, that combine to scout it, the
facts in the case would seem to settle the whole
question. We have traded with England for eighty
years, largely, increasingly, and from 1846 to 1861,
almost freely, and yet wages have not constantly declined in America, and never stood at a higher figure
than when the Morrill Tariff was passed in 1861.
(3.) Bat if the doctrine of Protection be so false,
and have no single solid argument in its support, why
have so many nations acted on it, so many great
men, among others, Daniel Webster, believed in it?
This objection I am bound to notice, for it has had
no small influence. To estimate its force rightly,
two things must be remembered: first, that the doctrine of protection is an inheritance from the remote
past, an outgrowth from a confessedly false dogma,
which, being then universally received and acted on
by the nations, has given this, one of its corollaries,
whatever validity custom and prescription can give;
and, secondly, that there has always been a rich and
influential class of men in the commercial countries
who have supposed that their interests were subserved
by the practical application of the doctrine. In respect
to Daniel Webster, the first great speeches which he
made in Congress, speeches that foreshadowed his
great fame, were delivered in 1814. These indicate,
as any one may read in Benton's Debates, Vol. V., a
strong hostility to commercial restrictions of all kinds.
He opposed, and New England with him, the protective tariff of 1816.  His speech of 1824, in opposi



406     ELEMENTS OF POLITICAL ECONOMY.
tion to the higher rates proposed in the tariff of that
year, is in reality one of the best free-trade argu
ments ever made. If he left, four years afterwards,
this high ground of truth and principle, to occupy
the lower ground of what he deemed expedient, it
was owing to political stress of weather, to a change
of policy on the part of Mr. Calhoun and other southern statesmen, to a supposed necessity of fostering
manufactures on which New England under factitious inducements had embarked on a large scale.
Mr. Webster never justified restriction as a principle;
his commercial instincts were too strong for that; he
always attempted to justify his course by peculiar
and factitious circumstances; almost half of his
congressional life had passed away, before he could
be brought to vote for levying high duties; and although he afterwards brought forward, in defence of
the position thus assumed, arguments which Political Economy pronounces unsound, and although
there doubtless mingled in with his motives a desire
to gratify powerful constituents and friends who
were directly interested in high duties, there is abundant reason to believe that his defection from sound
principles was never so radical as has been commonly supposed.
It is not difficult to see why there have always
been so many advocates of the system of restriction.
It is an old system. It is a system some of the arguments for which are superficially plausible. Above
all, it is a system which many enterprising and prosperous men have considered as essential to their
pecuniary interests; and when such men demand a




ON FOREIGN TRADE.          407
champion, eloquence and arguments are never long
wanting.  As a matter of fact, the legislation of
the world has been largely controlled by such men,
and that too, not always in the interest of the
masses. It is more than doubtful whether manufacturers as a whole class have ever been permanently benefited by protective duties, or rather, it is
certain that they have not been; but they have supposed that they were, and some of them have been,
prodigiously benefited; and they have acted, and are
acting, on that supposition, and the power of such
men over public opinion is very considerable. As a
class, they are intelligent and rich, and can easily
combine to influence opinion and legislation. But
even if they were benefited, as a whole, by protective
duties, what sort of justice is it to take money out
of my pocket and put it into theirs? I object to that.
My mickle, and your mickle, and our neighbor's
mickle will make a very pretty muckle, - a small
tax on all consumers of protected goods will reach a
very handsome sum; but what valid claim can the
manufacturers lay to it? They are a very deserving
class, and consequently prosperous; but it may be
respectfully submitted that they do not need unequal
legislation in their behalf. They are not a needy generation, but are well to do. The list of incomes on
which a United States tax is paid, late annually published throughout the country, puts this fact beyond
the shadow of question. In most sections of New
England, they are the only men of large incomes.
Now, it is no objection to these excellent men that
they are rich, and getting richer; they are rather
deserving of all honor for their enterprise and vigor




408      ELEMENTS OF POLITICAL ECONOMY.
and success; but it is conclusive on this point, that
they no longer need, even if they ever needed, any
special protection from the government. Let them
stand on the same level of advantage with other men,
let them enjoy no unequal privileges, and everybody
will rejoice in their prosperity. At present, they
occupy a false position, fatal to their own genuine
self-respect, and to the hearty congratulations of their
fellow-citizens. By far the larger part of the industrial interests of the country have no special protection at the hands of government; and is it possible
that these shrewd and able men who own and run
mills and foundries, are willing to acknowledge that
they alone of all the citizens are unable to render
valuable and remunerative services to society without an artificial and governmental prop at their
back?
(4.) This brings us to another objection, namely,
that, were it not for protective duties, our manufactures would collapse, or as it is sometimes phrased,
other nations would take all our manufacturing away
from us. The first thing to be said about this is,
that we do not manufacture for the sake of manufacturing, but for the sake of the product, -it is not
the process that we care about, but the product;
and even if it could be shown, as it cannot, that free
trade would lessen the manufacturing, that would
not be so deplorable, provided we obtained by it for
the satisfaction of our wants as many or more manufactured products. Satisfactions, and not efforts,
are ultimate in the field of exchange. In the second
place, it is needful to look at the meaning of the
word, manufactures. So far, I have used it in the




ON FOREIGN TRADE.          409
loose popular way by which it has come to mean
practically in this country the processes by which
cotton, wool, and iron, are rendered available for
various human uses. These more prominent interests are currently meant under the terms manufactures and manufacturers; but of course the terms
properly include a wide range of efforts beyond these,
indeed almost all forms of industry not agricultural,
and not primarily mental. Now to say, in the broad
sense, that protective duties are necessary in order
that manufactures may succeed, is to make a statement which can be shown to be false. What is the
magic of a protective duty? This, that it says to
men who would otherwise come to our shores to
trade, " You shall not bring those commodities you
were about to bring, nor take away those commodities you were about to take in exchange."  People
commonly look only at the first part of what is said,
and console themselves by thinking, if foreigners are
not allowed to bring those goods, somebody will make
them at home for us. But this is only half of it.
Those branches of manufacture, or of agriculture, as
the case may be, which were furnishing the goods
wherewith to pay for those commodities about to be
imported but now prohibited, lose their market. If
we will not buy, of course we cannot sell. If we
prohibit importations, we thereby necessarily prevent
exportations; that is to say, we take away their market from those who manufacture or grow the goods
which would be exported. We depress a profitable
branch of manufacture by taking away its market,
for the sake of introducing or fostering a branch
which is by supposition and confession unprofitable,




410     ELEMENTS OF POLITICAL ECONOMY.
The advocates of protection do not claim that branches
of business which would otherwise be profitable and.self-supporting should be protected, but only the weak
and' less profitable kinds; and so to bolster up these,
protective duties virtually destroy other branches of
industry, which only ask that their natural market
shall be let alone, to maintain an independent and
profitable existence. It is impossible to characterize
in terms of respect so short-sighted and miserable a
policy. How can a free commerce depress manufactures, when every nation must manufacture or
grow a dollar's worth at home for every dollar's worth
imported from abroad? How can high duties foster
manufactures as a whole, when their very first effect
is to cut off from their market all those manufactures which would otherwise have gone abroad with
a profit, and their second effect merely to stimulate
up to the general level of profit those which it is
claimed will not otherwise yield a profit?
The French manufacturers in 1861 were afraid
that if the barriers of restriction were thrown down,
as proposed in Mr. Cobden's treaty, their business
would suffer from English competition. The result
has shown how futile were their fears. A large part
of the manufactures of either country are admitted
into the other with perfect freedom, and the duties
on most of the rest very materially reduced; and the
French manufacturers have found, as' the American
at no distant day will find, that there is nothing
which stimulates manufactures so much as a broad
market,-not merely a home-market, but a worldmarket. The French sent to England, in 1863, 1,076,000,000 francs worth of goods and received back




ON FOREIGN TRADE.           411
within a trifle as much in return, which was almost
a quarter of what they sent and received to and from
the rest of the world. It is as the friends and not the
enemies of manufactures that we demand the abrogation of restrictive duties.  Manufactures as a
whole can never reach their point of just expansion,
until this professedly discriminating, really repressing,
and only at a few favorite points stimulating, system
shall be abolished.
But it is said, that England can work up cottons,
and Germany wools, and the North of Europe irons,
cheaper than we can. Those who have followed me
thus far through this chapter, now know that absolute cost of production has little to do directly in foreign trade. But if it be true that these commodities,
or any others whatsoever, can really be obtained by
us by a less expense of effort through exchange than
directly, is there a decent reason why we should
prefer to get them by the hardest when the easiest
way is open? We may be assured that we shall not
get them without being obliged to pay for them, and
to pay for them will require a fair expenditure of
effort and skill. If foreigners have the advantage
over us in some things, we have the advantage over
them in many things, and all exchange and the
profits of it depend on relative superiority at different points.
(5.) I pass to an objection much urged by Mr.
Carey, and others, namely, that the United States,
without the aid of protective duties, will be confined
to agricultural pursuits, and no diversity of employments, so essential to full social life, will come into
play. But the truth is, diversity of employments is




41 2     ELEMENTS OF POLITICAL ECONOMY.
rooted in human nature, and in the circumstances
amid which God has placed men, and so far is it
from law being necessary to foster this diversity, that
law is powerless to prevent it! While we were colonies of Great Britain, the laws were very strict
against domestic manufacturing of almost all kinds,
and yet long before the Revolution, the various
branches of manufacture were introduced and prosecuted in spite of the laws: clothiers' mills went up
along the mountain streams; wool and woollens were
exported; in 1721 "New England had already six
furnaces and nineteen forges. The product of iron
was still more active in Pennsylvania, whence a
supply was furnished to the other colonies." 1 The
manufacture of steel was also attempted. Parliament
felt itself called on to pass laws again and again prohibiting under severe penalties these incipient manufactures, sometimes making them liable to summary
destruction as "nuisances."  As soon as a branch
of industry becomes profitable, and suitable to the
conditions in which a community is placed, nothing
but extreme vigilance can prevent its springing into
being.  Men naturally, spontaneously, under the
pressure of necessity render to each other such services as are in demand, and as are possible to be
rendered in the state in which they are placed. Foster manufactures artificially?  They will come in
naturally and inevitably just so fast and so far as
they ought to come in. They are as natural to men
as agriculture. They require capital indeed, and on
a large -scale, a large capital. So does agriculture.
Capital is the growth of time and of frugality. No
1 Hildreth's United States, vol. ii. p. 297.




ON FOREIGN TRADE.          413
new society can come at once into all the forms of
industry which adorn an old established State; there
must be a gradual growth of capital and of skill, and
as these increase, one branch of industry after another
comes in, and finds a stable foothold; and as capital
further increases, and the rate per cent. of capital
goes down, it becomes profitable to do many things
which it would be sheer folly to do at an earlier
period. When every dollar of the capital of a country can realize a clear gain of ten per cent., is there
any sense or reason in withdrawing a part of it into
occupations which can only yield six per cent.?
L But we must have diversity," says Mr. Carey.
Certainly, we want diversity, but only a natural
diversity, in which each branch can stand on its own
legs, and not find it necessary to tax all its neighbors
in order that its own profits may equal the average
of theirs. The theory of a protective tariff is this:
that certain unprofitable branches of business shall
be cared for by the State, that is to say, the citizens
shall be taxed to bring up the profits of these to the
general standard of profits.  Is a diversity, thus
secured, a profitable diversity? Would it not be
better for all concerned not to enter at present upon
forms of industry that by confession do not pay?
" But," urges the advocate of protection, " if they do
not now pay, they will pay by-and-by." How do
you know that they will? The fact that they dc
not now pay, is not of itself good proof that they ever
will; and at any rate, it strikes a good many people
that it would be better to wait till that time comes,
and to enter upon branches of industry just as fast
as they become profitable, and no faster.




414      ELEMENTS OF POLITICAL ECONOMY.
It seems strange to me, that Mr. Carey, whose
general confidence in man and in nature is so justly
strong, should find his confidence desert him just at
this point; should show so much impatience with a
natural progress of diversity and association; and
sliould vehemently invoke the assistance of law to
help on diversity within a sphere for whose general
freedom he is a distinguished champion. He is less
consistent than the famous charioteer, who, when his
horses ran away down the hill, trusted in Providence
until the breeching broke, and then gave all up for
lost. Mr. Carey trusts in Providence, and does well;
but all at once, when to other passengers as clearsighted as himself there are no signs of anything
giving way, he shrieks out that the breeching is
breaking, Providence is inadequate, we must have
recourse to Protection.
The idea that the United States, with a greater
variety and abundance of natural resources than any
other country on the globe; with an industrious, and
enterprising, and skilful people; with mountain
streams which leap to the wheels of industry with a
song; with forests and coal-fields, and mines; with
marts and markets, and navigable lakes and rivers;
with a genius for traffic, and a keen eye to profit, —
the idea that the United States is to be reduced to a
mere farming country, unless government can be
coaxed to tax foreigners and citizens in behalf of
some branches of manufacture which are asserted to
be otherwise unprofitable,- is too ridiculous for
serious refutation. Why, no nation of the earth has
such facilities for manufacturing: the raw materials
are here; the food is here in abounding measure; the




ON FOREIGN TRADE.           415
instruments are here in water, wood, and coal; cattle and horses and pastures are here; everything is
here which a nation can ask for with which to produce either directly that which is wanted, or directly
that with which to purchase at the cheapest rates
what is wanted from abroad; and if God shall give
us grace to mind our own business, to avoid entangling alliances and wars, to get and keep a sound
money, and to rise above the silly jealousies which
have hitherto restricted trade, we shall yet be the
beehive of the nations, the chosen home of the industrial and civilizing arts.
(6.) But Mr. Carey endeavors to discover a distinction between commerce and trade. He says:
"The words commerce and trade are commonly regarded as convertible terms, yet are the ideas they
express so widely different, as to render it essential
that their difference be clearly understood. All men
are prompted to associate and combine with each
other, -to exchange ideas and services with each
other,-and thus to maintain commerce. Some men
seek to perform exchanges for other men, and thus to
maintain trade."1 This attempted distinction plays
a very important part in Mr. Carey's system; he is
returning to it perpetually; and according to it, commerce increases as trade declines, the trader is a foe
alike to commerce and society, and lives "by appropriation," and restrictions ought to be laid on trade
in order "to establish perfect freedom of commerce
throughout the world." He complains that hitherto
" commerce has been sacrificed at the shrine of trade."
Now, I have no hesitation in affirming that this for1 Social Science, Vol. I. p. 210.




416     ELEMENTS OF POLITICAL ECONO3IY.
midable looking distinction is for the most part desti.
tute of any basis of difference. Let us examine it.
They who exchange services with each other, says
the distinction, practise commerce, while they who
perform exchanges for other men are mere traders.
The distinction is made to turn on the ownership of
tie services exchanged: if the principals exchange
for themselves, that is commerce; if they employ
agents to do it for them, that is trade; if a merchant
freights his own ship with his own goods and takes
them to a foreign port, and takes care to exchange
there with real owners only for what he wants in
return, that is commerce; but if he employs a supercargo to manage his sales and returns, then it is trade.
If a middle-man buys the cargo outright, and sells to
another middle-man on the other side who is real
owner of the return services, that is commerce under
the definition; while in domestic exchanges all bargains mediated by employees is trade under the definition. This, to say the least of it, is putting a fine
point on commercial transactions; and, so far as I
can see, is totally irrelevant in a general doctrine of
exchanges. Exchange is exchange, and the laws of
exchange and the profits of exchange remain unaffected by any such distinction.  Qui facit per alium
facit per se. If I employ an agent to do any portion
of my business for me, it is because I think it profitable to do so, and there is an exchange of services
between him and me for that purpose, but the exchanges which he effects in my name as principal
are in nature the same as if I effected them myself.
If Mr. Carey wants to say that exchanges would be
more profitable if there were no costs of carriage, no




ON FOREIGN TRADE.           417
clerk hire, no intermediate services of any sort, there is
nobody to dispute with him; but since exchanges cannot be carried on to any extent without these agencies, what is the use of quarrelling with Nature and
Providence? The transporter is just as much of a
producer as the grower or transformer,-he renders a
valuable service, and must be paid for it of course.
As soon as his services can be dispensed with, and no
loss accrue, they will most assuredly be dispensed
with; but to say that people shall not employ such
an agent if they think their interests subserved by
employing him, can hardly be reconciled with any
adequate notions of freedom or of exchange. All
sorts of services are in order in exchange. All sorts
of talent are available. If a man has not capital to
do business for himself, let him begin by doing business for others. If a man can furnish a ship, but
cannot freight her, there is no serious objection to his
furnishing a ship. Let the merchant freight her, and
let them divide profits on the return. i If a distinction
between commerce and trade be allowed, for which
I see no ground whatever, each, at any rate, is swallowed up in the higher unity of exchange, and becomes amenable to the principles already unfolded.
It is in this connection, that Mr. Carey exalts the
policy of Colbert, the famous finance minister of
Louis XIV., who certainly did much for the prosperity of France, and well deserves the fame which posterity is so ready to accord. But to refer the immense
industrial impulse which France received at that time
in any considerable degree to the restrictive duties
laid by Colbert on foreign trade, is an instance, by
no means single in Mr. Carey's books, of a fallacy
27




418     ELEMENTS OF POLITICAL ECONOMY.
called by the logicians post hoc ergo propter hoc. It
is most unsatisfactory and illogical to be told that
one thing came after another and therefore was
caused by it. Colbert did many things much better
worth the doing than to lay prohibitory duties. He
swept away, so far as lay in his power, all the obstacles to the freest interchange of commodities within
the realm of France. He abolished the interminable
internal tolls and duties. He simplified and reduced
the taxes. Says Henri Martin, -" We are struck
with admiration to see Colbert begin by reducing an
impost thirty-three per cent., on the increased product
of which he founded in great part his hopes. Trampling on the routine of the exchequer, he had comprehended that consumption increases in equal or
even greater proportion to the abasement of duties
that weigh on consumable objects, and that the pub.
lie treasury does not lose what the well-being of the
people gains." 1 He abolished superfluous offices, and
introduced economy, and, as far as possible, honesty
into every department of the State. He emancipated
the Communes from their old burdens, and forbade
their incurring new debts. He renovated the whole
industrial and financial system; and France began
mightily to prosper. But he was also in part, unfortunately, a disciple of the mercantile system. He
laid heavy duties on foreign goods, which of course
provoked foreigners to lay similar duties on the prod.
ucts of French industry. Martin himself, with whom
Colbert is a hero, acknowledges this consequence.
It has never been proved, and never can be, that the
high duties contributed to the then prosperity of the
1 History of France.




ON FOREIGN TRADE.          419
French; the weight of bare authority is about evenly
balanced on the question; but he who follows reason
and science in the premises will not hesitate in his
decision.
(7.) It has been often urged, that we must have a
restrictive tariff because other nations have a lower
rate of interest and profits, and more abundant capital than we have. It is fair to presume that they
who say so know that foreign trade depends only
very remotely on the absolute cost of the articles
exchanged. If they do not know this, they are ignorant of the one fundamental proposition of commerce, and their reasonings as a matter of course
cannot reach correct conclusions. If familiar with
this proposition, they should see that any reference
either to lower interest of money or to lower wages
is, in this connection, entirely irrelevant. It is a
matter of indifference to us what the goods we buy
from abroad cost their producers, whether they paid
high wages or low wages, high interest or low interest; we do not care about the absolute cost of production of anything we buy; thequestion of interest
for us is how much of the home commodity must
we give for it, and what does the home commodity
cost us. The simple question that determines foreign
trade is this,-would the commodity, if produced here,
cost more than that commodity with which we buy
it? If it would, then we profitably import it; and
this, without any reference to its cost to the foreign
producer.  Whether he pays high wages or low
wages high interest or low interest, whether capital
is abundant there or scarce, has little to do with this
question of a profitable exchange of cpmmodities,




420     ELEMENTS OF POLITICAL ECONOMY.
anc justifies, in no conceivable manner, the restrictive system. California has much higher wages and
a much higher interest than New England; does she
need, therefore, to prohibit New-England ships from
entering the Golden Gate? Is it for her interest to
put restrictions on New-England goods? Does New
England, because wages are lower here, get more than
her share of advantage in the California trade? If
not, no more would England or India in a trade with
us. We trade with all the world: some parts have
a higher rate of wages and interest than we; some
parts have a lower rate; so far as that matter is concerned our trade may be equally advantageous with
them all.
To this law of foreign trade there is, however,
a single not unimportant exception. When two
nations go into the market of the world with the
same commodity, to buy gold and silver, then the
absolute money-cost of that commodity is, as
between the two, an important question. That one
of the two nations whose wages are lower, and
whose rate of interest is less, in the manufacture of
the common commodity will, in a trade for gold,
under-sell the other -that is, can afford to give more
of its commodity for an ounce of gold, because its
commodity has cost less in gold. This is clear, and
it is the only case where foreign trade is determined
by the absolute cost of production. But our objectors get no crumb of comfort here; for in the first place,
the commerce of the world is not a commerce for
gold and silver, but a commerce of commodities, in the
exchange of which relative cost is the only principle.
And in the second place, when two nations go intc




ON FOREIGN TRADE.          421
the market of the world for gold, they rarely carry
the same commodity, but carry, each its own peculiar commodities, in the production of which it has
the greatest advantage. They have a strong motive
to do this always, for that which they have the
greatest advantage in producing will bu3 all other
commodities, gold included, at the cheapest rate.
Here too the relative cost decides. And in the third
place, if two nations do carry the same commodity
into the same market to buy the same gold, and the
nation whose wages and profits are higher is thereby
at a disadvantage in the trade, how is a restrictive
tariff at home to help that matter? The true remedy
is to cultivate our own peculiar advantages to the
highest point, and carry those commodities abroad
to buy our gold, and not endeavor to compete with
our neighbor in the same commodity. High wages
and high profits are a vast national advantage; restrictive systems tend certainly to reduce them; but
shall we throw away a great advantage enjoyed by
all laborers and all capital in all departments, in order
to compete with less fortunate nations in a single
trade with a single commodity? The folly of this is
patent; especially as the United States is a goldproducing country, and not only supplies herself with
gold, but half the world besides, The United States
produced in the twenty years from 1848 to 1868,
$1,255,000,000 of the precious metals.1 Besides, is
it not a little strange to hear the doctrine seriously
propounded that we are put at a disadvantage in
foreign trade, and that restrictions are made necessary, because on the whole we are making so much
1 J. Ross Browne's Report, 1868.




422     ELEMENTS OF POLITICAL ECONOMY.
money? If the current rate of interest and profits
is so high with us, it shows that we are doing well
on every hundred invested! One would suppose
that capitalists might be content with such high
profits! At any rate, one would think that the disadvantage in trade would rest with those who get
the less returns on their investments, rather than
with those who get the larger returns!
If there be a lack of capital, or a lack of skill in
any country, what is the remedy?  A protective
tariff? If all the capital of the country is now taken
up by branches of industry already existing, of what
advantage is it to introduce a new branch which can
only come into being at the expense of the old by
withdrawing capital from the old? The capital is
already taken up. Let it abide in its freely chosen
channels. If the capital of the country is not all
taken up, then certainly new branches of industry
will come in, will come in of their own accord; you
cannot keep them  out. Every kind of business,
which, under present circumstances, is profitable,
will be carried on, and those that are not profitable
we do not want.
If the restrictive system could increase the capital
of a country, then it might with some show of reason
be defended, but it would be a difficult task, I think,
to show how the capital of a country can be increased
by stopping a profitable commerce.
And just so of skill. If the new branch of manufacture for which skilled labor is wanted is carried on
abroad, the laborers can be easily imported.  An
assurance of higher wages and constant employment
has brought and will bring again skilled laborers from




ON iOREIGN TRADE.           423
every country in Europe. Restriction cannot give
us skill, since all experience has shown, and common
sense testifies to the same point, that skill will be
best developed under the freest competition - under
circumstances where everything depends on relative
skill, rather than where very little depends on it;
where a high price, artificially created, is sure, whether
skill be exercised or not. The sharp spur of emulation added to the keen impulse of interest, will most
assuredly carry skill to its highest point. Nor is
there any danger that our enterprise and skill will be
overwhelmed by foreigners flooding our markets with
cheap goods for the sake of strangling that branch
of business on which our enterprise and skill are
occupied. Commerce is an exchange of cormodities for commodities for the mutual advantage of the
parties. Exchange is always a reciprocal act; when
a man sells he buys, and when he buys he sells. If
a foreigner brings goods to our shores he always carries away in effect a corresponding value from our
shores. The only motive he has to bring anything
hither is that he may carry something hence. He
sells to us, and in the very act buys from us; we
buy from him, and in the very act sell to him. The
commercial use of bills of exchange only disguises
without altering this fact. Now to allege, as is often
done, that foreigners will flood our markets at a loss
to themselves, in order to discourage our manufacture of that article, is to ignore the motive from
which commerce springs.   Certainly they whose
alleged profits are so much less than ours can ill
afford such an operation as this; and until some
well-authenticated case is given of foreigners willing




424     ELEMENTS OF POLITICAL ECONOMY.
to submit to a present loss in the hope of a future
and problematical gain; until some well-authenti.
cated case is given of a rising manufacture, adapted
to our circumstances, and profitable in itself, being
ruined in this way; until the case is given of magnanimous dealers sacrificing present gains for uncertain benefits to accrue in part to their fellow-dealers,
freighting ships to America to bring nothing back;
I shall beg leave to think that a thing so contrary to
the interests of capital, to the laws of trade, and
even to the principles of human nature, has not
occurred in the past, and is not likely to in the
future.
(8.) A further objection to free trade remains to
be briefly considered.  It is this, and it has been
urged with some plausibility and much pertinacity,
namely, that every nation ought to be independent
of others in all the more essential articles of life;
and therefore protective duties ought to be laid in
order to compel the nations to make or grow all the
articles of prime necessity for themselves. The objection divides itself into two parts, the postulate
and the inference, and it shall be considered in that
order and relation. First, every nation ought to be
independent of others in respect to the supply of its
more necessary wants, such as food, clothing, means
of defence and offence, and so on. But what is it
to be independent? I suppose it means, in this
connection, to be sure of getting what is wanted
under all contingencies. But is an individual man
to be regarded as "dependent," and as likely to
lose his bread, unless he devote himself to the growing of food directly?  If he only has wherewithal




ON FOREIGN TRADE.          425
to buy food, I take it that he is just as "independ.
ent," just as likely to get it, as if he produced it
himself; and so a nation which has products to
offer which are in demand in the world without, is
very sure of getting whatever it wants, provided it
is anywhere to be bought, and is, in my apprehension of it, in a very "independent" position. Protectionists have degraded language and degraded
exchange by trying to make it appear that a man
and a nation are reduced to conditions of dependence whenever they find it for their interest to buy;
but the truth is that there is nothing dependent in
buying and selling; the parties stand on a footing
of perfect equality towards each other; each is at
the same moment buyer and seller; one is as independent as the other, and nobody can be more so
than either, except the savage and the hermit, who
live in a state of isolation. Moreover, every nation
does of course devote itself directly to the supply of
its principal wants, and always continues to do so,
unless it appears that it can supply those wants
more cheaply through exchange. If it can supply
them more cheaply through exchange, it becomes,
in my judgment, more " independent " by doing so;
more independent of irksome effort, and more sure
of getting its wants supplied, since now it draws its
supplies from a wider surface, from any point in the
wide world where such supplies are to be had and
where its own products are in demand. So far as
food is concerned, this objection sounds but poorly
in the mouths of protectionists, who are the men
perpetually bemoaning the prospect that every nation, unless it follow their advice and lay protective
duties, will be exclusively agricultural.




4126    ELEMENTS OF POLITICAL ECONOMY.
But the inference is even less defensible than the
postulate. Let it be admitted, for argument's sake,
that to buy is to be dependent, and that every nation
loses a part of its independence by every act of foreign exchange by which it obtains its necessary
supplies; does it follow that protective duties are
the true remedy? No. Prohibition is the barrier to
hold up before the waning independence of the nation. Why allow a thing to go forward under more
onerous conditions, which under less onerous was
proving fatal to independence? If for the citizens
to import freely be so disadvantageous to their independence, how disastrous must it be to have the
importations still go forward under a tax in addition, which the citizens must pay!
The late insurgent States of this country furnish
a capital illustration of the fact that war and a
stringent blockade cannot prevent exchanges from
going forward, when there is wherewithal at home
to pay for goods, and goods abroad which are
wanted at home. The United States maintained
a thousand vessels, more or less, along the coast
of the insurgent region, to intercept all trade; but
there was cotton within which the English wanted,
and goods without which the insurgents wanted,
and the exchanges went on, with great hazards and
frequent losses indeed, but went on for four years, to
an immense amount of transactions.
(9.) The last objection to a free commerce that
will be noticed here is the one that has been so pertinaciously urged in the "New York Tribune," namely,
that the higher paid labor of this country makes it
impossible for us to trade freely with those nations




ON FOREIGN TRADE.           427
in which a lower rate of wages prevails. This objection has more than once been impliedly answered in
these pages; but it requires, and can be given, a specific refutation.  There is a fallacy that pervades
every article on the subject in the newspaper referred
to that has fallen under my notice. It is one of the
many fallacies that have their llrking-place around
the word " wages."  It is admitted that the rate of
wages rules higher in this country than in European
countries, and all good citizens, I believe, iejoice that
the reward of laborers is high here, and desire it to
become higher rather than lower in the time to come.
But a high rate of wages does not necessarily import a high cost of labor. This was demonstrated at
length in our chapter on Cost of Production. The
cost of labor to the capitalist is made up of three
elements: first, the nominal rate of wages; second,
the efficiency of the labor; and third, the dearness
of the commodity in which the laborer is paid. It
would seem to be a patent fallacy to confound one
component with a resultant of three components;
and yet the writer in question invariably proceeds in
his discussions as if a high rate of wages means a
high cost of labor. He uses the former term as if it
were synonymous with the latter. The arguments
proceed, and the conclusions are reached, on the assumption that the cost of labor is higher in this
country than in Europe, while all that is asserted in
the premise, and all that is true, is, that the nominal
rate of wages is higher. The logical force of the process and the security of the conclusion are destroyed
the moment it is perceived that rate of wages and
cost of labor are two very distinct things. It is for



428      ELEMENTS OF POLITICAL ECONOMY.
tunate for the United States that the two things are
distinct; for while the rate of general wages is higher
here than in Europe, the cost of general labor is lower
here than in Europe. The unmixed evils of a debauched currency are perhaps disguising this truth
at the present moment, but it is a truth nevertheless
that cannot be questioned when the light of the following considerations is cast upon it. (1.) The cost
of labor must be lower in this country than in Europe because the rate per cent. of capital is higher.
Labor and capital alone conspire in production.
Profits are the leavings of the cost of labor. If, therefore, on every hundred invested the rate of profit is
higher, the conclusion is unavoidable that the cost
of labor is lower. (2.) To account for this lower
cost of labor, we have (a) The fact of the greater
efficiency of labor. The greater the efficiency of
labor, other elements as before, the less its cost to
the employer. Labor is more efficient here, because
the motives to labor are stronger and higher, because
the general tone of things is more energetic, and because labor, all departments being considered, is more
generally armed with labor-saving appliances. We
have (b) The usually cheaper cost of that in which
labor is paid.  Abroad the laborer is paid in gold
and silver. Here he is usually paid in a depreciated
currency. Besides this, the price of general commodities even on a gold standard is usually higher
here than abroad. Therefore the cost of even gold
to pay his men is less to the employer here. We
have (c) The fact that fewer persons are employed, in
establishments that do equal work, here than there.
There there are more supernamniirarxe, more persona




ON FOREIGN TRADE.           429
more or less pensioned by the establishment, more
gradations in authority, more wages of superintendence. Here, the fewest possible number of persons
is employed, there is comparatively little superintendence, and each person is put upon his or her full
power of work.  These three considerations, (and
others might be mentioned,) sufficiently account for
the lower cost of labor here, since they more than
overbalance the excess in the rate of wages paid;
which excess, other things being equal, would enhance the cost of labor. The balance is decidedly
on our side, as is shown by the current rates of profit
and interest. Indeed, the excess in nominal wages
paid is not so great as is commonly supposed, allowance being made for the different currencies.  A
skilled artisan in England earns eight shillings sterling per day, that is, two dollars in gold. Our own
skilled artisans earn not much more. " The English
agricultural laborer who earns fifty cents or two shillings sterling per day, earns say three pounds per
month, and pays about this sum for the annual rent
of his cottage. Now the laborer in this country seldom pays his annual rent by a month's wages." 1
Our Bureau of Statistics gives the wages of 14
classes of operatives in woollen mills in England,
and the corresponding wages here reduced to gold.
Our average is only 21.89 per cent. higher than theirs.
Edward Harris, a great woollen and cotton manufacturer of Rhode Island, says that only 20 per cent.
of the cost of his fabrics is labor: 80 per cent. is
materials and machinery. If so, England's advantage over us in woollen wages, conceding to her la1 Sidney Homer.




430      ELEMENTS OF POLITICAL ECONOMY.
borers equal efficiency, is only 21.89 per cent. of 20
per cent., or 4~ per cent. in the whole cost. But
pauper-labor is notoriously very poor labor to those
who employ it. It is one of our grand advantages
that our labor is not pauper-labor, but the opposite
of it. Low-wages countries are always afraid of
the competition of high-wages countries, and justly
so. It is the competition of England that is most
feared on the Continent of Europe, though English
wages are the highest in Europe. With our still
higher wages we have wrested many an industrial
triumph from England herself; and if we had as
good a money and as free a commerce as she has,
our competition would be more feared by her than
that of any other country.
I have now answered, with what success the reader
must judge, every considerable argument that I am
aware of as urged in this country against the policy
of a free commerce. I have a few brief objections
to add to the opposite doctrine of Protection.
(1.) It is no part of the proper province of government to undertake to redistribute the rewards of industry. Government has a right to take a part of
the fruits of every man's industry for its own maintenance; but when it goes beyond this, and forcibly
takes a portion of the fruits of one man's industry to
reward another man's industry, it steps out of its
true sphere. Every man has a right to all the re.
wards of his own industry, except as to that part
which government takes in legitimate taxation. No
government is wise enough, or ever will be, to say
how much of the results of my labor I shall contribute to my neighbor to remunerate his labor




ON FOREIGN TRADE.           431
Congress has nothing to say about that. Congress
is bound to give us both the benefit of equal laws,
and then to leave us both to take care of ourselves.
It is no part of the duty of Congress to see that any
set of men whatever are making money. When,
therefore, any branch of industry, in the exigencies
of business, is depressed, for the leading men in it to
go to Congress with their tale of woe, to induce that
body to lay a tax for their relief on their neighbors,
to empower them to pass round the hat in the community, like mendicants, and compel other men to
drop their contributions into it, is as pitiful on the
one side as it is extra-governmental on the other.
The American people are patient, but they have
borne with this sort of thing about as long, as they
will bear with it.
(2.) It is a second objection allied to the first, that
the protective scheme is wholly a matter of finesse.
If all interests were "protected" and " protected"
alike, the issue of all the distributions and redistributions would be that all would stand relatively as
before, but worse off by the losses of the process.
Therefore it becomes a struggle of interests; and
each interest, or combination of interests, endeavors
both to get itself "protected" and that the rest
shall not get "protected."  The woollen men, for
example, are anxious for high duties on foreign
woollens, but are much less anxious for high duties
on foreign wools. The wool-growers, however, do
not see why they are not as much entitled to "protection," that is to say, to rob the public, as the
woollen manufacturers.  It would be difficult for
anybody to- see why they are not as much entitled




t32     ELEMENTS OF POLITICAL ECONOMY.
to it. Which, then, shall get the better of the Coninittee of Ways and Means? That is the question.
It is a question of lobbies, of influence, of indirect
or direct bribery. So of other interests. The fact
is, that the leading interests protected have been
obliged to yield so much to the pressure of other interests with equal claims to protection, that, with a
few exceptions, no classes would be benefited so
much by the abolition of all protection as would
they. They have purchased the right to pluck the
community at one point by conceding to other parties the right to pluck them at a dozen different
points.  The woollen manufacturers, for example,
have to pay a considerable duty on foreign wools,
a high duty on foreign machinery, and an enormous tax for protection on every pound of iron
they use.  If now the principle of protection were
abandoned, they would be relieved of all the contributions levied on them by others, and the public
would be relieved of the contribution levied on it
by them.  It would be a relief all round.  The
interests of the manufacturers are coincident with
the interests of the public. The product cheapened
by the abolition of all these high duties, as well
those which the manufacturers have to pay as those
which specially protect them, would find a vastly extended market, not at home only, but also abroad;
and such depressions in business as the woollen men
are now suffering from would become rare indeed.
Those branches of business, and they are numerous
and important, which have never had a syllable
of protection in the United States, have been the
most prosperous and are now the strongest. They




ON FOREIGN TRADE.          433
have to send no delegations to Washington. They
expend the ingenuity and the money which protected
interests spend in artifices, in the development of
their business; and they have found, what the others
at no distant day will find, that honest industry and
skill are better in the long run than the highest
strategy of the lobby.
(3.) Protection is a wasteful way to reach the end
ostensibly proposed by it. It is claimed to be needful to encourage weak branches of business. Let us
suppose for argument's sake, what would be folly to
concede in reality, that it is desirable for the public
to encourage a presently unprofitable business. How
can it most cheaply and most certainly do this?
Clearly enough, by offering a direct bounty on all
that is actually produced.  Let the public know
what it gets for what it gives. Suppose the article
wanted be hats.  It is unprofitable at present to
manufacture hats, but the public thinks it desirable
to introduce the manufacture at the expense of the
people. Very well. Let the government offer to
pay outright from the public chest, say $2, for all
hats of a certain quality made in the country. The
bounty would be paid only so far as the manufacture was actually carried on. This stimulus would
be explicit. All would be open and above-board.
Everybody could see what was done, and what it
was done for. This would be demonstrably the
cheapest and most certain way to encourage hatmaking. For suppose, on the other hand, the protective method be adopted, and a duty of $2 apiece
be laid on foreign hats to encourage the home manufacture. Every consumer now pays an extra $2 for
28




434     ELEMENTS OF POLITICAL ECONOMY.
his hat, but there is no assurance that anybody will
go into hat-making. Nobody is pledged to do it.
It will depend upon the comparative prospect of
making money in that, or other business, whether
that business is continued and developed under the
duty. Suppose, however, that the home market is
one half supplied by the home production, and one
half by the foreign article enhanced $2 in price by
the duty. Suppose the market takes 2,000,000 hats,
Then $4,000,000 are paid by consumers to encourage hat-making, when $2,000,000 in bounties would
encourage it to the same extent. Unless the duty be
so high as to keep out the foreign article altogether,
there is a good deal of money paid by the people for
hats that does not encourage hat-making. The system is wasteful. Why then is it preferred? It is
preferred for the same reason that the fisherman prefers water a little muddy to fish in. The destined
prey cannot see the operation of things so well!
Protection is a cover under which the people are
cheated. Is it strange, then, that the people grow
indignant?
(4.) Protection makes a promise at the outset
which it rarely fulfils. Special interests ask for protection to enable them to "start," holding out the
promise that they will soon be able to walk off alone.
Unluckily, the facts all show that that time, in their
judgment, never comes. The interests which are the
most highly protected in the United States at this
moment, "started? in Massachusetts more than two
centuries ago! The manufacture of linen, woollen,
and cotton cloth was begun in Massachusetts in
1638, in Rowley, by some families from Yorkshire;




ON FOREIGN TRADE.          435
and became so remunerative in less than three years
that several acts of the General Court designed to
stimulate it were repealed.1  The manufacture of
woollens began in Massachusetts 232 years ago,
and yet in the year of our Lord 1870, under an
enormous protective duty, higher than was ever before levied in this country on that class of goods,
we are told constantly that " this immense industrial
interest is in immediate danger of being destroyed by
foreign importations! "  Do not these facts, and
they might be multiplied indefinitely, throw a little
discredit on the promises of protection? " We shall
soon be able to go alone."  Yes: but when?  The
duty on foreign iron is unprecedentedly high at this
moment, and yet we read out of an unquestionable
authority that, in 1676,'" as good iron was made as
any in Spain " in Massachusetts, and that there were
" six forges for the making of iron in the colony." 2
The absurdity of this strong point of protection is
apparent the moment its principle is attempted to be
applied in domestic trade.  If a new Boston dry
goods' house should set up in Franklin Street alongside the old established houses there, and modestly
charge its customers fifty per cent. additional on all
goods, so as to enable it to " start " and to " compete "
with its neighbors, it requires no prophet to predict
that the "run" of its trade would be in the wrong
direction. Young men, sometimes with little capital,
are starting every year in all branches of business, by
the side of old firms in settled business, and they
succeed by dint of tact, skill, and industry.  The
1 Palfrey's History ofl i  ew lLv land, Vol. 1I. page 53.
2 Palfrey, V ol. I I. page 299.




436     ELEMENTS OF POLITICAL ECONOMY.
United States will succeed by dint of the same
and not otherwise. Let us hear no more, then, of
this deceptive talk about " starting."  Credat Judceus
Apella.
(5.) Protection always gives birth to smuggling,
and other frauds upon the revenue.    Secretary
McCulloch, in his Report for 1866, estimates these
for that year at $92,000,000. The country will do
well to ponder over this instructive official commentary on the principle of high duties. "Gentlemen,"
said Sir Robert Peel to the House of Commons in
1842, " what is the use of fixing our rates so high as
to allow the smuggler to underbid us? " Smuggling
has always accompanied high protective duties, and
always will. Laws and vigilance have been unable
to prevent it.- Laws and vigilance are unable to prevent it now. To evade honest taxation is a high
crime against society. To evade laws passed, not
for revenue, but to foster class interests at the expense of the many, is a much less crime. It is a
rude attempt to right a wrong. Government is the
first and main offender. Let it yield to all men their
just rights, including the right of free exchange subject only to fair taxation, and it will have no occasion to harry smugglers, and spend millions of the
people's money in useless vigilance. To levy such
high duties as either to prevent importations or to
encourage the smuggler is a gross mistake. The
country loses its revenue, the honest importer his
business, the public morality becomes corrupted, and
the manufacturer is not ultimately protected.
(6.) Protection defeats itself. Tariff-taxes, like
other taxes, reappear in higher prices of commodi



ON FOREIGN TRADE.           437
ties. If these taxes be high, and many, as they must
under a system of protection, nothing can hindei
high ranges of general prices. But such is a good
market to sell in. As soon, therefore, as high tarifftaxes have had time to work out in high prices,
foreigners can pay the high duties and still sell
and undersell in such an artificial market. With
this principle all facts agree. It accounts for the
constant clamor for more protection. It accounts
for this, that importations are never permanently
stopped by high duties. Such duties make prices
artificial, business precarious, losses inevitable, and
"protection" self-destructive.
It is always pleasant to be able to confirm one's
reasonings with facts, to clench the nail driven home
by a logical process, with a blow or two from the
hammer of actual experience. It is fortunately possible to do this in regard to free trade. The Greeks
and Romans, though the latter at times stopped the
exportation of specie, never dreamed of putting obstacles in the path of ordinary traffic. At Athens, all
exports and imports were subject to a duty of two per
centzum. In the ports of her subject allies, Athens
laid a duty of five per centum, in lieu of tribute.
When, in a few exceptional cases, she laid ten per
centum, it was denounced as downright extortion.
The ports of Rome and Italy sometimes enjoyed a
perfectly free trade; but generally, in them, and in
the ports of the provinces, a revenue tax of five per
centum was levied under the Republic, and two and
a half per centurn under the Empire.
England in the year 1842 abandoned for substance
the doctrine of protection, and seven years later




438     ELEMENTS OF POLITICAL ECONOMY.:abolished a main feature of the system  in the
discrimination till then maintained in favor of her
own ships over those of foreigners in her own ports.
There is nothing now to hinder American ships
from competing on equal terms with English vessels in the coastwise carrying-trade of England
itself. The English tariffs are adjusted with a view
to revenue merely; and in the late special commercial treaty with France, the duties were thrown off
entirely from a portion of French manufactures, and
materially reduced on most of the rest. England
claims, through the mouth of her responsible ministers and statesmen, to set before the nations an
honest example of free trade; and invites them, as I
believe, in good faith, to follow her in the path which
she has opened up for herself. The force of this example is frequently sought to be parried by alleging
that England reached through protection a point of
prosperity at which she was well able to dispense
with protection. This is neither ingenuous nor true;
since the men who have persuaded the English government to abandon the principle of protection, are
the men who have demonstrated the economical
folly of the principle under all circumstances; and
have shown that England maintained the policy so
long at a loss to herself as well as her neighbors.
Other nations can say, if they please, " We will
maintain protection as long as England did, and
then follow her example in giving it up." But if
they do this, they will -do it at a loss, as England
did, and too late bemoan their folly, as England
does. Said Mr. Gladstone, Chancellor of the English Exchequer, in 1856, -" There is one domestic




ON FOREIGN TRADE.          439
feature which I wish it were in our power effectually
to exhibit to the governments and inhabitants of for
eign countries. They know by statistics, which are
open to the world, the immense extension which our
commerce has attained under and by virtue of freedom of trade, and the great advancement that has happily been achieved in the condition of the people; but
they do not know what it has cost us to achieve this
beneficial, nay, blessed change; what time, what
struggles, what interruptions to the general work of
legislation; what animosities and divisions among
the great classes which make up the nation; what
shocks to our established mode of conducting the
government of the country; what fears and risk, at
some periods, of public convulsion. These were the
fine and penalty we paid for long adherence to folly.
We paid this fine and penalty upon returning to the
path of wisdom, which too late we wished we had
never left. It is not easy to calculate its amount,
but if it could be exactly reckoned, and fully exposed to the eyes of other nations, our juniors in
trade, it might supply them with a timely warning
against imitating our former errors, and with the
best encouragement to the adoption, before they
become entangled in the creation of artificial interests, of our recent and better example."
But it is said, as if that were sufficient to condemn free trade, that England adopted it out of
pure selfishness. Of course she did; and other nations will also adopt it from the same motive. No
other motive is appropriate in the premises. The
idea, disseminated by protectionists, that it requires
a millenium for free trade to work in, is wholly fallas




440     ELEMIENTS OF POLITICAL ECONOMlY.
cious; it requires an enlightened selfishness, and
nothing more; and it is one of the grand wonders
of Providence, that the elements of society are so
wisely prearranged, that, within the sphere of exchange, the welfare of all is promoted through the
enlightened selfishness of each. Trade is always selfish, just as much so under freedom as under protection; it is a sphere all whose operations are subject to
the legitimate control of conscience, but it is not, and
never was designed to be, a sphere of sympathy and
benevolence: these have a sphere of their own, above
and beyond the sphere of exchange. When a man
gives, let him give, and enjoy the luxury of doing
good; when a man buys and sells, let him honestly,
but with an eye to self-interest only, buy and sell
and get gain.
The number of tariff-taxes in England in 1842
was 1150; in 1870 it is only 33. The customs
revenue has kept very steady under the successive
remissions of these taxes, and is about the same now
as then, namely, ~22,500,000. Of these 33 articles
taxed, 5 yield over 92 per cent. of the revenue, and
10 more most of the rest, showing that a large revenue may come from few articles of exclusively foreign production, as sugar, tea, coffee, tobacco, wines,
fruits, and liquors. Under this remission of tarifftaxes and repeal of the navigation laws, the exports
and imports of Great Britain, which in 1842 were
but little in excess of their average of the previous
forty years, have now increased threefold; British
tonnage entered with cargo more than threefold;
foreign tonnage, fourfold; shipbuilding, -threefold;
exports per capita between 1854 and 1868, from




ON FOREIGN TRADE.          441
~3 10s. 2d. to ~6 Os. 9d.; imports per capita in
same interval, from ~5 10s. 2d. to ~9 2s. 6d.; exports of cotton, nearly threefold; of linen, fourfold;
of iron and steel, fivefold; of leather, sixfold; of
haberdashery, nearly sevenfold; of woollen yarn,
eightfold; of woollen manufactures, fourfold; of
machinery, tenfold. Wages have increased at least
25 per cent. in all skilled employments, while hours
of labor have been abridged and staple articles of
food reduced in price. Paupers have decreased from
1 in 11 per capita to 1 in 20.1
The year 1860 is memorable in the history of England for the negotiation and ratification of the French
Commercial Treaty, and also as the year in which
the remaining duties, avowedly of a protective character, were repealed. The results to France of thb
relaxation of her own duties are only less brilliant
than those to England, as she has less fully embraced the system  of freedom. Comparing 1860
with 1868, the volume of French commerce increased
from  562,825,000 francs to 1,435,000,000 francs;
French exports to England from 331,775,000 to
847,200,000 francs; the export of butter to England
from 2,500,000 to 52,000,000 francs; of eggs, from
7,000,000 to 38,000,000 francs; the whole export of
wines from 800,000 to 4,000,000 gallons; the whole
manufacture of silks, woollens, and cottons, from
92,800,000 to 265,139,000 francs. French manufacturers were afraid of the competition of England,
which they professed to be unable to withstand.
The result has shown, however, that, in the eight
years, France has sent to England four francs in
manufactures to one franc received from England in
)'brarian Board of Trade,.Charles K  ~;': g'- Tgax -,d, t  al.




442      ELEMENTS OF POLITICAL ECONOMY.
manufactures. The explanation of this is partly
due to the fact that the French have learned better
than any other people the money value of elegance.
They have learned that Beauty is a source of Wealth,
and so they not only adorn their capital, and have
made it by far the finest city in Europe, attractive
as a resort to all the world, but also they contrive to
make all their handiwork beautiful, and thus control
in many things the markets, as they do also the
fashions.of the world.1
The Zoll-Verein, or Revenue-Union of the German States, presents a splendid example of the prosperity which follows in the train of free exchange.
The rate of imposts on foreign goods is varied from
time to time by the Zoll-Verein Congress, but ten
per cent. is the maximum, and the interests of the
revenue are consulted in adjusting the rates below
that: since 1851 the raw materials coming from
abroad are admitted free, or nearly so. The proceeds of these duties go into a common treasury,
and are then distributed among the various members
of the Union on the basis of their population.
Every member without exception now receives a
larger revenue than it. did before it joined the ZollVerein. The city of Hamburg, a chief distributing
point for the imports, is a sort of bonded warehouse
under the system. The dutiable articles are arranged
in thirty-seven classes; and the simplicity of the
rates, the lowness of the rates, and the fewness of
the articles charged with rates, stand in striking contrast to these points in the present tariff of the United
1 This thought was suggested to me by my late lamented friend, Sidney
Homer, of Boston.




ON FOREIGN TRADE.            443
States. The revenue under the Zoll-Verein in 1868
was 27,347,156 thalers, which was 13 per cent. more
than in 1867. Of this, 31.11 per cent. was from
coffee, 11.66 per cent. from leaf tobacco, and 6.92
per cent. from salt. Thus 49.69 per cent. was from
three articles: 9 other articles yielded 26.92 per
cent.; and 25 articles yielded 91.24 per cent. of the
whole. Iron, steel, and their manufactures, are admitted on easy terms, pig iron at 6 cents, and loop,
rolled, and hammered iron, iron and steel wire, and
cast steel, at 42 cents per cwt., but the home production of iron within the Zoll-Verein has increased
steadily with the increase of the importation of foreign iron; so of other staples; an interesting proof
that the relatively free introduction of foreign articles
does not depress, but rather stimulate the production
of similar articles at home, provided there be fair
natural advantages.' Only 152 articles are taxed.
Our last example shall be Belgium. The perfect
free trade which Belgium enjoyed in the sixteenth
century gave an impetus to her industry and to her
commerce which placed her at that period at the
highest pitch of commercial prosperity. From 1792
to 1814, that country was controlled by the French.
who applied to it the protective system with extreme
rigidity. From 1814 to 1830, Belgium was united
with Holland, and the two had in common a customs' tariff based on a maximum duty of 3 per cent.
on raw materials, and 6 per cent. on manufactured
goods. It was during this period that the modern
manufactures of Belgium were brought into exist1 Zolltarif des Deutschen Zoll-Vereins. I am indebted for a copy of this
to the kindness of our minister at Berlin, Hon. GeQrge Bancroft.




444     ELEMEi:ILNTS OF POLITICAL ECONOMY.
ence, and made that astonishing progress which was
demonstrated by an exhibition of national industry
in 1830. A violent revolution, based on a difference
in race, language, religion and traditions, then separated the Belgians from the Dutch, and the former
reimposed upon themselves a protective system with
such results in revenue and trade and industry, that
M. Frere Orban. then and now Minister of Finance,
came forward in 1851, and declared his intention
gradually to remove from the tariff every duty that
could be called' protective."  With this view, a new
tariff went into operation in 1855; and another,
actually fulfilling that intention, in 1866; so that
now, a tariff is maintained solely for revenue; and
an almost universal public opinion finds fault with
it, not that it is so free, but that it exists at all. The
chambers of commerce in Belgium have unanimously
passed resolutions advising the government to raise
the revenue now raised by duties in some other way,
and thus introduce a PERFECT FREE TRADE.1
I have dwelt the longer on this question of free
trade, because it is a practical one now in this country, for whose right solution every citizen should be
anxious. Some additional light will be thrown upon
the subject in each of the three remaining chapters.
1 Ietter of M. Vander MIaeren, of Brussels, April 10, 1868. M. Vander
Maeren is a manufacturer, member of the government, and well known as
a writer on economic subjects.




ON THE MERCANTILE SYSTEM.      445
CHAPTER XIV.
ON THE MERCANTILE SYSTEM.
THERE have been three epochs in the progress of
the science of Exchange. Each of these has been
marked by a theory of its own, of which the two
earlier were radically incorrect, yet prepared the way
for the third and true system. We have already
sufficiently considered the first of these theories,
which assumed that gold and silver are the only
wealth, and, consequently, that the only way for a
nation to grow rich was to foster the importation
and prohibit the exportation of the precious metals.
The second commercial theory was more refined
and complicated; we have already spoken of it as
the Mercantile System, and partially explained its
fundamental principle. The principle was to preserve the balance of trade, to' make the exports
greater than the imports, so that the balance should
come back in gold and silver. The whole system is
based on the absurd supposition that a merchant
will carry abroad goods worth at home a certain
sum, merely that he may bring back goods and
money worth as much. Why, on that principle,
should he carry forth goods at all?
The nature of trade, as mutually advantageous,
was not understood.  After every fair mercantile
transaction, both parties are richer than before. The




44(6    ELEMENTS OF POLITICAL ECONOMY.
more genuine exchanges there are between two
countries the better, because the motive for an exchange is always and everywhere the mutual interest of the parties. The benefit of the exchange is
shared by both, otherwise there would be no exchange.
But the Mercantile System led each nation to
suppose, that, by manoeuvre and finesse, it could
obtain more than its natural share of advantage.
England, for example, in her trade with France,
found that, by natural tendency, she bought as much
of French wines and silks as she sold France of
hardware and woollens. Instead of being satisfied
with a legitimate and mutually advantageous trade,
the English, under the promptings of the Mercantile
System, say, " This will never do. This will never
do. There is no balance in our favor. We must
sell to France more than we buy of her, or else we
get no balance of trade." Accordingly restrictions
are laid on some French goods. Their introduction
is either prohibited, or heavy duties are levied on
them, in order to lessen the quantity imported. This
is done in the hope of selling to the French as much
as before, but of buying less, this is, less French
goods; so that the difference must be paid in gold
and. silver.
All that was mighty well! But unfortunately the
gold and silver, even if they should get it, was no
whit better than the French goods, and would probably go right back to France in the purchase of such
goods. And unfortunately also the French were
adepts in the Mercantile System; they wanted a
favorable balance too. They must sell more than




ON THE IMERCANT'ILE SYSTEM.    447
they buy. Their exports must exceed their imports.
Why not?   And accordingly they prohibit some
species of English goods, or burden them with a
heavy duty; the English retaliate by new restrictions on the products of French industry, and are
again in turn retaliated upon.  Thus they go on
tinkering and tormenting trade in the vain hope of
some imaginary balance!
Because England and France are adjacent, and
because their natural productions and acquired industry are so very diverse, they are naturally to an
immense extent mutual buyers and sellers. France
is gifted, perhaps as much as any country upon
earth, in point of soil, climate, and natural productious. She produces with the greatest facility, and
in the greatest abundance, wines and the cereal
grains; and has unusual advantages also for the
culture of the mulberry and the manufacture of
silk.
England is not thus blessed by Nature; but she
has freedom, and industry, and energy, and skill;
these have made her for centuries the greatest manufacturing and commercial country in the world.
She has always had those things to sell which
France wanted to buy, and has always wanted to
buy those things which France has had to sell. Exchanges between two such countries are natural and
inevitable. If the governments undertake to forbid
them, then the business will be done by smugglers,
though with hazard and loss.
Now, the Mercantile System disturbed and wellnigh destroyed this natural and profitable trade.
To be sure England could buy her wines of France




448      ELEMENTS OF POLITICAL ECONOMY.
much cheaper and of better quality than of Portugal; but then it was thought that the balance of
trade with Portugal could be made more favorable
than that with France; and accordingly, in 1703,
the wines of Portugal were admitted upon the payment of a duty 33~ per cent. less than the duty paid
upon French wines; and the woollen cloths of England, which had been prohibited in Portugal for
twenty years, were to be admitted upon terms of
proportionate advantage. Up to that time the light
claret of France had been the beverage of the winedrinkers of England. Thereafter the more intoxicating port became what Daniel Defoe calls "our
general draught." It was a point of patriotism for
the Englishman to hold firm to his port.1 An economic blunder was followed, as usual, by moral disadvantage. Five generations of English gentry-for
the preferential duty was not abolished till 1831 -
paid tribute in increased drunkenness to the balance
of trade. The habit of taking strong stimulants
was established; coarser tastes became the fashion;
and even now sherry must be mixed with brandy to
be acceptable to English palates. To drink worse
wines at a higher price, to incur a habit which is a
national disgrace, were not the only consequences;
for the French, to retaliate and to restore the balance,
prohibited English woollens. Thus the French lost
the best market for their wines, and the English the
best market for their woollen goods, which the French
must now purchase elsewhere at an enhanced cost.
It was a dead loss all round, -a gratuitous loss
without any compensation whatever.
1 Khight's History of England, v. 267.




ON THE MERCANTILE SYSTEM.     449
Some very instructive laws -instructive in their
folly - were passed in England to foster the woollen
trade, with an eye to an ultimate balance. A law
of 1666 required all shrouds to be made of wool.1
Another law to the same effect but more stringent
issued in 1677. This was amended three years later
by an enactment, that all corpses, except those of
persons dying of the plague, should be buried in
shrouds made of pure wool, under a penalty of ~5.
This law was repealed in 1814.
To encourage wool involved discouragement to
flax and cotton. A table-linen, called huckaback,
began to be extensively made in England about
1700. It encountered great opposition. It was held,
that Providence had appointed the woollen manufacture as the special employment of the island, and
that the most acceptable sacrifice was that of the
flock. Ireland might grow flax and make linen, as
some compensation for the injustice that had been
committed towards her in absolutely prohibiting the
importation of her cattle. Cotton was also coming
in. As early as 1719, printed calicoes of English
production had become not only fashionable but
common. Clamor alleged that the manufacture of
light woollen stuffs would be ruined; and so an Act
was passed in 1721, to preserve and encourage the
woollen and silk manufactures, by prohibiting the
use and wear of all printed, painted, stained, or dyed.alicoes, in apparel, household stuff, or furniture.
Of course such legislation was nugatory, but here
is the evidence, among many other proofs, of the
supreme ignorance and folly of law-makers, who,
1 18th Charles II. chap. 4.
29




450     ELEMENTS OF POLITICAL ECONOMY.
from the earliest days of the loom and the plough in
England, have struggled to regiment all industryto encourage or to prohibit-to determine what
wages laborers should be paid, and what should be
the profit of capitalists — to crush rising industries
by taxation- to compel the people to eat dear food
for the supposed benefit of the landowner —and,
finally, to find out that the nation was never so universally prosperous as when its industry was wholly
left to the care of itself, under the guidance of God's
natural laws.1
So far was this regulating mania carried at times
that almost all legitimate commerce ceased between
England and France. So reluctant was the one to
buy of the other, so fully were the statesmen of each
under the influence of the prejudice that the prosperity of their neighbors was incompatible with their
own, that Parliament, in William and Mary's reign,
decreed that the French trade was a nuisance; and
Adam Smith tells us that, in his time, that is, less
than a hundred years ago, smugglers were the.principal importers of British goods into France and of
French goods into Britain.
(1.) The laying extraordinary restraints on the
importation of goods from those countries with which
the balance was supposed to be unfavorable, was
one device of the Mercantile System to increase the
quantity of gold and silver in that country. It was
unfortunately not the only nor the worst one.
(2.) An obvious second expedient was to prohibit
altogether, or to burden with very high duties, the introduction of all such goods as could be produced at
1 Knight's England, v. 26.




ON THE MERCANTILE SYSTEM.      451
home. If we can produce the articles at home, then
we shall not have to import them, and that will help
the balance. Under the influence of this feeling,
England, damp and cold, in the very teeth of Nature's protests, undertook to rival France in the
culture of silk. Heavy restraints were laid on foreign silks, and the monopoly of supplying the hdme
market was given to her own manufacturers. Certainly, silk can be made in England, of a somewhat
inferior quality and at a somewhat greater cost than
in sunnier climes. To overcome these disadvantages, what was needed was the healthy stimulus of
competition. If things had been left to take their
natural course, and foreign silks had been admitted
freely, the home manufacturers would have been put
upon their mettle to discover improved processes, to
invent machinery, to make up the disadvantages of
Nature by expedients of Art. The plant never becomes hardy and strong that does not root itself
amid the breezes of heaven; so neither does a
branch of business grow up into self-sustaining and
vigorous life without the stimulating breezes of
competition. Of this the case in hand affords an
excellent illustration. For more than a century the
silk manufacture of England, fenced round and
protected, as it was called, by these restrictive and
prohibitory duties, languished, pined, and at times
almost expired; for the simple reason that the manl
ufacturers, instead of relying upon their own invention, skill, and energy, looked to the government for
support, and to an artificial monopoly; and it would
have remained till this day inferior in design and in
every other good quality, had not a great statesman,




452     ELEMENTS OF POLITICAL ECONOMY.
Mr. Huskisson, who was denounced as " a hardhearted political economist," made a partial beginning, in 1826, of that system of free trade which has
raised this particular manufacture, as so many others, to an eminence which utterly disregards every
danger of foreign competition. The duty on foreign
thrown silk was then reduced from nearly fifteen to
five shillings per pound; and on raw silk from nearly
six shillings to three pence per pound. The consequence was that then first the English silk culture
began to thrive; it has thriven from that day to this;
the duties have been successively lowered, until, in
1860, the duties on foreign silks of every kind were
abolished by Mr. Gladstone; and that England,
which was to be ruined in 1826 by the importation
of foreign silks, has been exporting for years silk of
native manufacture to the extent of about $10,000,000 annually.1
As an illustration of the mischiefs which the Mercantile System everywhere introduced into the realm
of industry, let us look at this instance a little more
closely. During the continuance of the monopoly,
the English consumers of silk were obliged to pay
a very high price for an inferior article. To whose
benefit did this high price accrue? It was designed
to accrue to the benefit of the home manufacturer.
The sole object in laying the prohibitory duties
was to prevent importations, and to leave the home
market entire to the home manufacturer. Precisely
at this point we see how the whole doctrine of Protection grew out of the Mercantile System. The
Mercantile System wished to repress importations
for the sake of the balance of trade; but if needful
1 McCulloch's Dictionary, ed. 1869; Knight, v. 21.




ON THE MERCAN'ILE SYSTEM.      453
articles cannot be imported, they must be made or
grown at home; and in order to be made or grown
at home, the makers or growers must be encouraged.
The monopoly of the home market was precisely
this encouragement; and it is owing to this single
circumstance that influential classes in every mercantile community have supposed themselves benefited by this monopoly, that the doctrine of Protec.
tion has lingered so long in the general mind. It is
easy, however, to see that this benefit is in most
eases wholly imaginary; and that the high prices
paid by the consumers do not, on the whole,
strengthen the manufacture, as has been supposed.
If the government had gone further, and given
those who had already commenced the culture of
silk the monopoly against their own countrymen as
well as against foreigners, so that nobody could
engage in the manufacture except those already
engaged in it, then, indeed, these would grow rich
at the expense of their countrymen. Government
would take money out of the pocket of every consumer of silk, and put it into their pocket, and the
whole benefit of the high prices would accrue to
the manufacturers alone. But governments have
rarely gone so far as this. They have excluded foreign competition, but not prohibited home competition; and the result has been, that the high duties
which excluded the foreign goods, and the consequent high prices of the domestic product, have
drawn many men and much capital into that business, in the hope of an extraordinary Drofit. The
business has been artificially stimulated, and capital
has been thrust into it which would not have gone




454      ELEMENTS OF POLITICAL ECONOMY.
of its own accord. The thing has been overdone,
and the feverish home competition, in its anxiety to
reap monopoly prices, has brought down prices far
below the paying figure. The business has collapsed from its very inflation; and thus alternate
chills and fever have shaken the life out of it.
But the Mercantile System, and the restrictive
policy that sprung from it, obtained universal currency. The statute-books of every nation in Europe
are defaced by the absurdest laws and regulations
respecting  manufactures and  commerce.   Also,
the artisans in the cities and towns were formed
into guilds, that is, incorporated societies, and to
each guild was given the monopoly of the market,
in its branch of industry. No man could practise
the art of a shoemaker in Antwerp or London without the consent of the guild of St. Crispin; and the
guild itself determined the number of apprentices to
each artisan, the years he should serve, the conditions under which he might become a master; in
short, determined everything respecting the trade by
constitution and bye-laws. The governments, justly
regarding these artisans as the most industrious and
deserving of their subjects, granted them many privileges, which, however, were no less contrary to
sound principles than the rest of the system. That
they might obtain cheap provisions, the export of
corn was forbidden; and thus agriculture was prevented from selling its products in the best market,
wherever that market might be found. That they
might obtain the raw materials of their manufactures cheap, the export of these was strictly for.
bidden. The tanner and currier, for example, must




ON THE MERCANTILE SYSTEM.       455
sell his product to the "gentle Craft of Leather,"
and had no other market.
The general doctrine of fostering exportation was
infringed on in these instances, because it was
thought that there would be a greater ultimate export of manufactured products, if the raw materials
of these were forbidden to be exported, and cheap
provisions were secured to the artisans.
In order to encourage agriculture, most European
countries, in accordance with the doctrines of the
Mercantile System, passed corn-laws forbidding the
importation of foreign grain, each nation wishing to
raise its own subsistence from its own soil. The
consequence of this was that the landholders secured
the monopoly of supplying the home market with
food; which of course greatly enhanced the price to
all consumers, especially in times of scarcity. The
increased price of bread, which rich and poor must
pay alike, was but a part of the evil consequences.
No nation is so sure of its subsistence, when it en.
deavors to raise the whole of that subsistence at
home, as when it leaves the channels of importation
open for foreign supplies. When the trade in corn
is free, the dearth in one country is instantly supplied by the superabundance of another, and that
by natural laws as beautiful and invariable in their
operation as the laws that govern the heavenly
bodies. Interference with natural law in no direction is so mischievous and culpable as in this. Is it
not plain to common sense that that nation is most
likely to obtain its food with regularity and in plenty
which draws its supplies from the widest surface?
Massachusetts, for example, does not begin to feed




456     ELEMENTS OF POLITICAL ECONOMY.
her own population; but does any one suppose her
people are any more likely to starve on that account?
She can buy food with the products of her industry.
Her calicoes and cassimeres, her hardware and cutlery, her nick-nacks and notions, will buy wheat not
only in the marts of the West, but in Poland and
Russia as well. She is sure to be fed, because she
has wherewithal to buy food; more sure to be fed
than if she compelled the industry of her people to
abandon the more profitable mill-stream and factory,
shop, and foundry, to extort from these rocky hill-sides
the reluctant grains.
England, too, in 1849, removed the last vestige of
corn-laws from her statute-book, and now imports
flour freely from the Black Sea and from the Baltic,
from France and from the United States. Who
supposes that, if England did not raise a kernel of
wheat, she would not be as certain of her daily
bread as the people of Poland or of Michigan?
But one may say, in case of war, she had better
raise her food at home. But it is absurd to suppose
that any nation would be at war with all the world
at once; and we may be assured that the portion
not belligerent would be eager to furnish the supplies. And besides, plenty of wheat would enter
England if the English only wanted it, though all
the navies of the world should blockade the fastanchored isle. Every creek and headland would be
alive with the silent and secret but busy agents of a
clandestine trade.
The simple consideration that condemns this second expedient of the Mercantile System, namely,
the prohibiting the importation of such commod



ON THE MERCANTILE SYSTEM.      457
ities as can be produced at home, and the Protective
policy inseparably connected with it, is, that it involves a dead loss to the productive powers of the
world. There is in the world a certain amount of
capital and a certain amount of industry. These,
if left to their own keen sense of interest, will make
the aggregate amount of production in the world as
great as that amount of capital and industry can
make it. If, then, a free commerce distribute this
aggregate production over the earth in accordance
with the simple law of supply and demand, we shall
have not only the greatest production, but the most
perfect distribution.
But if now government steps in, and withdraws
capital and industry from their freely chosen posts
of activity, prohibits exchanges that would otherwise
be made, and commands commodities to be manufactured or grown in localities where they would not
naturally be manufactured or grown, then certainly
the aggregate production of the world is lessened,
and its distribution is less perfect.
(3.) The Mercantile System had two other expedients which were frequently employed to subserve
the ends of its grand principle. For the sake of
increasing the exports, and thus improving the balance of trade, bounties were given to encourage
the export and sale of native fabrics in foreign
markets.  A bounty, we understand, is a sum of
money paid outright by the government to the exporters of native fabrics, in order to enable them
to sell their goods as cheap or cheaper than their
rivals in the foreign market. England, for example,
was so anxious to sell her goods to foreigners, that




458     ELEMENTS OF POLITICAL ECONOMY.
she regularly paid her merchants for selling the
goods at a loss. " The price of these goods in that
market," says the merchant, "will not reward my
capital with the ordinary profit." " Never mind,"
says England, " sell away, and I will make up your
loss by a bounty!"  Was not that a rare and brilliant way of enriching the country?  By natural
laws, a branch of industry ceases as soon as it be.
comes unprofitable; but by the system of bounties
a trade was perpetuated of which the expense was
greater than the returns, of which every operation destroyed a portion of the capital employed in it. The
loss was made up to the operators by government;
in other words, the people were taxed to pay it.
(4.) The fourth and last expedient of the Mercantile System was to help the balance of trade by
founding colonies, that the mother country might
enjoy the monopoly of their trade, and force them
to resort exclusively to her markets. All the English
colonies on this continent were bound by the rigid
fetters of this colonial system. Up to the date of
American Independence, Virginia and Massachusetts must buy most they wished to buy in English
markets, and carry most they had to sell to English
ports.  Spain and France extended the same colonial monopoly, with even more of inflexibility, over
their American and West India settlements; and it
was considerations growing out of this colonial
policy which gave birth to the American Revolution; and that war was waged not more for the
interests of humanity than for the freedom of trade.




ON AMERICAN TARIFFS.       459
CHAPTER XV.
ON AMERICAN TARIFFS.
So long as the United States were colonies of
Great Britain, their commerce was bound in the rigid
fetters of the Mercantile System. We have already
seen in the last chapter that colonies were one of the
devices of the Mercantile System to secure a favor.
able "balance of trade." If the maxim be to sell as
much as possible and buy as little as possible, then
colonies, which could be compelled to receive the
goods of the mother country, must be commercially
valuable., Accordingly, all the commercial countries
of Europe, and particularly Spain and England,
adopted a colonial policy that sprung directly from
this fundamental maxim. They valued their colonies
as affording broad markets for the sale of products,
and also because they could monopolize the articles
produced by the colonists themselves. In general,
the colonists were compelled to sell all they had to
sell to the mother country, and to buy all they had
to buy of the mother country; even though the arti.
cles thus bought were not the produce of the mother
country, but must first be imported there and then
exported thence to the colonies. Until the Revolution, a Boston ship, for example, could not sail directly to China for teas, but the teas must first be




460     ELEMENTS OF] POLITICAL ECONOMY.
brought to England in British ships, must pay a
duty there, and then be reexported to the colonies.
As early as 1650 this monopoly system was entered upon by the then republican Parliament of
England. The colonies had already overcome the
difficulties incident to their first settlement, had
begun to increase rapidly in wealth, and their commerce had become so considerable as to afford a
temptation to restrict its freedom and to endeavor
to make it peculiarly advantageous to the mother
country. In the year 1651, the Republican Parliament passed the famous Act of Navigation. It had
a double object, - to promote the interests of English
shipping, and to strike a decisive blow at the carrying trade of the Dutch. It prohibited all nations
from importing into England in their bottoms any
commodity that was not the growth and manufacture of their own country. In 1660, by a memorable statute, the ordinance was reenacted, with additional clauses, substantially excluding foreign ships
from American harbors, and sacrificing to English
monopoly the natural rights of the colonists.
This Navigation Act is of great interest to Americans, because the American Revolution grew directly
out of it. Says Bancroft, " American Independence,
like the great rivers of the country, had many sources;
but the head spring which colored all the stream was
the Navigation Act." It was enacted that certain
enumerated artic]es, which included all the principal
productions of the colonies, could not be exported
directly to any foreign country, but must first be
sent to Great Britain, and there unladen, before they
could be forwarded to their final destination. It
amounted to the same thing as prohibiting all exports




ON AMERICAN TARIFFS.        461
except to the mother country. The chief products
of their industry the colonists could not export to
any place but Great Britain, not even to Ireland;
neither sugar, nor tobacco, nor cotton, nor wool, nor
indigo, nor ginger, nor dye-woods, nor molasses, nor
rice, nor peltry, nor ore, nor pitch, nor tar, nor turpentine, nor masts, nor yards, nor bowsprits, nor coffee,
aor cocoa-nuts, nor whale-fins, nor hides, nor ashes.
Nor was this all. England constituted herself not
only the sole market for American products, but also
the sole storehouse for American supplies.  The
colonies must not only sell exclusively in British
markets, but they must also buy exclusively in British markets. It was enacted, that " no commodity
of the growth, production, or manufacture of Europe,
shall be imported into the British plantations, but
such as are laden and put on board in England,
Wales, or Berwick-upon-Tweed, and in Englishbuilt shipping, whereof the master and three fourths
of the crew are English."
The preamble to this statute, which was supplemental to the Navigation Act, is curious, and assigns
as the motive of the restriction, " the maintaining a
greater correspondence and kindness between the
subjectsat home and those in the plantations; keeping the colonies in a firmer dependence on the
mother country; making them yet more beneficial
to it in the further employment and increase of English shipping and in the vent of English manufactures and commodities; rendering the navigation to
them more safe and cheap; and making this kingdom
a staple, not only of the commodities of the plantations, but also of the commodities of other countries




462     ELEMENTS OF POLITICAL ECONOMY.
and places for their supply; it being the usage of
other nations to keep their plantation-trade exclusively to themselves."
In close connection with these commercial restrictions, it was a leading point in the colonial policy to
discourage all attempts of the colonists to manufacture for themselves. " That the country which was
the home of the beaver might not manufacture its
own hats, no man in the colonies could be a hatter
or a journeyman at that trade, unless he had served
an apprenticeship of seven years. No hatter might
employ more than two apprentices. No American
hat might be sent from one plantation to another.
America abounded in iron ores of the best quality,
as well as in wood and coal; slitting-mills, steelfurnaces, and plating-forges, to work with a tilthammer, were prohibited in the colonies as nuisances." Similar restrictions existed in respect to
wool and weaving; no wool, or any manufacture of
it, could be carried across the line of one province to
another; and a British sailor, wanting clothes in a
colonial harbor, was forbidden to buy there more
than forty shillings' worth. The liberty of free traffic
between the northern and southern colonies was
grudged to the colonists; and any of the enumerated articles exported from one colony to another,
were subjected to a duty equivalent to the duty on
the consumption of the commodities in England.
So fully were British statesmen trammelled by the
ideas of this colonial system, that Lord Chatham
himself, the best friend the colonies had in England,
did not hesitate to say from his place in Parliament
that in a certain probable contingency, he would pro



ON AMERICAN TARIFFS.         463
hibit the colonists from manufacturing even a hob.
nail or a horseshoe. And Lord Sheffield, at a later
period, said, " The only use of American colonies is
the monopoly of their consumption, and the carriage
of their produce."
From this degrading commercial vassalage the
Revolution set us free. One will have observed that
the economical consideration that condemns the colonial policy is, that it violates this sound commercial doctrine, namely, that men should buy in the
cheapest market and sell in the dearest, wherever
those markets are to be found. If the mother country
finds it necessary to employ prohibitions to draw the
colony-trade to herself, it proves that that trade, if
left to itself, would have found other and more profitable channels. If Great Britain could have furnished us with all commodities as cheaply as we
could procure them elsewhere, then there was no
need of prohibitions and penalties- we should have
gone to her of our own accord, as unerringly as the
needle points to the pole. If she could not furnish
us as cheaply as others, we were wronged-it was a
tribute and a tax. She made us buy in a dearer
market, when a cheaper one was open.
So, if she could pay as much for our commodities
as we could get for them elsewhere, there was no
need of compelling us to sell to her; we should, in
that case, sell to her inevitably. If she would not
give what we could get elsewhere, then we were
wronged; she made us sell in a cheaper market,
when a dearer one was open. Her prohibitions then
were either needless, or they were pernicious.
But it may be said that our loss was her gain,




464     ELEMENTS OF POLITICAL ECONOMY.
that what we paid extra as consumers, was to them
extra profit as manufacturers and merchants. But
where is the justice of taxing one set of subjects or
citizens for the benefit of another set of subjects or
citizens? And how is the wealth of the whole to be
promoted by a transfer of gains from one part to
another part?
A deeper consideration condemns the colonial
policy.  Every country has certain advantages,
which, if properly improved, enable that country to
defy the competition of the world in certain branches
of industry. If England could not sell as cheaply
as others in the colonial ports, then she was employing her capital and labor at home less profitably than
she might have employed them; for if she had employed them upon those branches of production for
which she had natural and acquired advantages, no
nation could have undersold her; and therefore, if a
forced market in the colonies encouraged her to continue branches of industry that would otherwise have
been abandoned, it was a permanent loss to her own
productive power.
I do not believe that colonial monopolies ever
enriched a mother country, on the whole. So perfect
and compensating are economic laws, that the losses
of one country can never contribute to the permanent
gains of another. The highest commercial prosperity
of one country implies and demands a corresponding
prosperity in other countries.  Commerce is exchange. The richer your neighbors are in all prodncts, the richer you will become by your dealings
with them. England's hereditary jealousy of the
prosperity of France has been as economically fool



ON AMERICAN TARIFFS          465
ish as it has been bitter and persistent. It is true of
the family of Commerce, as it is of the family of
Christ, "If one member suffer, all the members suffer
with it."
A good commercial system was not one of the
immediate fruits of the American Revolution. The
first government established in this country, the government of the Confederation, which lasted from
1781 to 1789, was not gifted by the people with the
power "to regulate commerce."  This was one of
the reserved rights of the States, which immediately
began to use it in accordance with their own views
of their own interests.  Each State laid its owp
tariff, and undertook to regulate its own trade. The
results were most disastrous. Great Britain, seeing
that, as a nation, we were helpless commercially,
not only refused to negotiate a commercial treaty
with us, but by an Order in Council, peremptorily
excluded our ships from her West India possessions,
between which and the United States there had
grown up, partly through some relaxations in the
Act of Navigation, and partly in violation of that
Act, a large and most profitable trade. We were in
no position to retaliate. As a nation, we had no
power to exclude her ships, and thus force her to a
position of reciprocity. The States passed various
and conflicting laws. If Massachusetts, for example,
laid a duty on certain goods, and Rhode Island did
not, very little revenue would Massachusetts draw
from that source; the goods were imported into
Rhode Island, and then smuggled across the border.
Thirteen independent States regulating the commerce of our seaboard, induced endless confusion, and
30




466     ELEMENTS OF POLITICAL ECONOMY.
there was no power to remedy it. Our commerce,
such as it was, was ruined.
To consult upon a remedy for this state of things
was the specific purpose of the meeting at Annapolis, in 1786. Alexander Hamilton was there as a
delegate from New York. He persuaded the dele.
gates to decline entering upon the subject of commerce, inasmuch as it was connected with other
great defects of the Confederation, to which their
powers did not reach; and drew up an Address to
Congress to call another Convention, with ample
powers to go over the whole ground, and to devise a
system adequate to the exigences of the country.
Thus was summoned the Federal Convention of
1787, which framed the Constitution under which we
live, and which gave to Congress, that is, the nation,
the needful power "to regulate commerce."
The new House of Representatives, under the
Constitution, commenced at once to discuss and
frame a uniform national tariff. It passed in 1789;
and, with some modifications and additions passed
in subsequent years, constituted what I shall call, for
convenience, the Hamilton tariff. I name it so, because Hamilton, as Secretary of the Treasury, made
an elaborate Report to Congress on the subject, and
the tariff, as finally adjusted, bore in almost every
part the impress of his moulding hand. This tariff
lasted for twenty-five years. It was very successful.
It admitted the principle of protection, indeed, but
mainly as subordinate to revenue, and rarely for its
own sake, and the general rate of duties laid was
very low. For instance, in the original bill as passed,
cotton goods were charged 5 per cent., iron goode




ON AMERICAN TARIIFIS.       467
71 per cent., and woollens 5 per cent. These duties were afterwards somewhat, but not largely, increased.l Pig iron bore no duty at all.
Now under this low tariff the revenue steadly increased, year by year. There was almost no fluctuation, but a steady annual growth of income from
1790 to 1808, when the Embargo was laid, which, of
course, interrupted everything. During these eighteen
years, the revenue gradually rose from $4,000,000 in
1791 to over $16,000,000 in 1808; and, what is of
greater consequence, the ratio of income to population is still more striking. The revenue began at the
rate of about $1,000,000 to 1,000,000 of people, and
steadily rose during the eighteen years to about
$2,500,000 to 1,000,000 of people.
If now we compare these eighteen years of a low
revenue tariff with any eighteen years in our after
history when we have had an avowedly protective
system, we shall see that in the point of steadiness,
and especially in the point of a steady increase, those
eighteen years cannot be matched. They cannot
be matched even by a comparison with the years
1846-61, during which we had ostensibly revenue
tariffs; because although these fifteen years present
fewer fluctuations than any fifteen years after the
first, they were undoubtedly less steady in increased
revenue on account of a scale of duties too high to
be most productive, and also on account of the increase of the free list in 1857. Still, a fair comparison of those eighteen years, and these fifteen years,
with the years intervening, and with the years subsequent to 1861, will yield all that is claimed in respect
1 Hildreth's United States.




468     ELEMENTS OF POLITICAL ECONOMY.
to the superiority of low revenue over protective
tariffs in point of a steady and increasing customs'
income. Till 1808 duties averaged 11~- per cent.
But while I praise the Hamilton tariff, in comparison with those that came after it, I do not forget
its defects. It borrowed from the old Navigation
Act of England, and made unwise discriminations
between foreign bottoms and American ships. Duties were 10 per cent. higher on goods imported in
foreign ships. Tonnage was 6 cents per ton on
American ships; 30 cents per ton on ships American-built but owned by foreigners; and 50 cents per
ton on all others. These discriminations were designed to encourage the building of American ships,
and to keep the carrying trade both coastwise and
oceanwise to American bottoms. But it cannot be
wise to put obstacles in the way of foreigners coming
to our ports to trade. Neither do sound principles approve even the moderate margin yielded in this tariff
to protection. The duties indeed were low,- they
were scarcely a burden upon industry,- but neither
on the other hand did they aid it. All above the best
revenue figure was needless. If, with the great advantage of being able to escape the costs of transportation, together with the abundance of raw material,
and the endless resources of agriculture, any branch
of industry could not live without artificial help, then
the proof is complete that it ought not to have been
entered upon, and could not have been prosecuted,
except at a permanent loss.
Our second tariff, passed in 1816, I shall designate
as the Calhoun tariff. Then first we entered upon
the protective system as such; and it is a curious




ON AMERICAN TARIFFS.        469
instance of how times change and men change with
them, that Mr. Calhoun, who afterwards became the
champion of Free Trade, strenuously advocated this
tariff, while Mr. Webster as strenuously opposed it.
Till then the tariff question formed no element in
our politics; if I may say so, nobody knew that we
had any tariff unless he chanced to read the statutebook; and it was an evil day for this country when
a purely scientific question became mixed up in
passions and politics, and adhesion, on one side or
the other, to what not one voter in a thousand ever
began to comprehend, was made a test of party.
From that day to this, no tariff question has ever
been decided on its merits.  Interests, sections,
passions, have influenced every bill; and it is a part
of the punishment, I believe, for prosecuting an artificial and false system in any department, that it is
hard work to get out of it. New England generally
opposed the Calhoun tariff, and the principle of protection embodied in it; so did a majority of the
Southern members; but South Carolina, seeing the
growing value of cotton, and anxious for a home
market for the raw material, united with Pennsylvania and the Middle States in securing the high
duties, especially upon cottons and iron. The duties
were increased, on an average, 42 per cent. above
the old rates preceding the war. Imported articles
were divided into three classes: 1st, Those of which
a full domestic supply could be produced; 2d,
Those of which only a partial domestic supply could
be afforded; and 3d, Those produced at home
very slightly, or not at all. On the first class, the
duties were fixed substantially at 35 per cent. ad




470      ELEMENTS OF POLITICAL ECONOMY.
valorem. On the second class, including cottons and
woollens, the duties were 25 per cent., to be reduced
after three years to 20 per cent. On the third class
the rates were mostly fixed with a view to revenue
only. Pig iron was now taxed $9 per ton.
In connection with the tariff, we copied again, and
more largely, from the English Navigation Act. Importations by foreign ships were limited to the pioduce of their respective countries; and the coastingtrade, hitherto open to foreign vessels, was now restricted to those American owned and built. In one
word, we entered fairly and squarely upon the career
of restriction. Average duties 1816-245 24, per cent.
Our third tariff, that of 1824, we may call, if we
please, the Clay tariff.  That gentleman, though
Speaker of the House at the time, took an earnest
part in the debates, and was regarded as the most
prominent advocate of what then first began to be
called the "American System," that is, the system
of high protective duties. Mr. Webster still opposed
this system, made an elaborate speech in reply to
Mr. Clay, and voted against the bill.
The bill increased the duties on protected articles
very considerably; and is an excellent proof that
interests that are petted, and legislatively protected,
do not long remain satisfied with what they receive,
but are soon clamorous for more protection. The
Calhoun tariff gave these interests large protection,
eight years run on, and they call for more; they get
it. Are they satisfied? Why should they be?  Instead of being taught to rely upon themselves, they
have been taught to lean upon the government.
The average of duties 1824-28 was 32- per cent.




ON AMERICAN TARIFFS.         471
Four years after the Clay tariff, that is in 1828, was
passed the " Tariff of Abominations," so called, in
the politics of the time. The manufacturers of
course had asked for more protection; but the opposition to the system was now strong; it could not
prevent the passage of the bill, but it loaded it down
with all manner of objectionable features, to make it
as distasteful as possible to its advocates. A political
design to make the protective system unpopular
appeared, and was indeed avowed; but the friends
of protection, in view of the higher duties on many
articles, came to the conclusion to support the bill
notwithstanding its odious features.  They swallowed the whole with the best grace they could.
Daniel Webster, after strenuous but fruitless efforts
to reduce its " abominations," for the first time in his
life voted for a bill involving the principle of high protective duties. In 1828-32, duties averaged 361 pei
cent., and on dutiable goods only, 43~ per cent.
Four years later Mr. Clay went into the Presidential canvass against General Jackson upon the
avowed platform  of protective duties.  He was
beaten. The country seemed to indicate its preference for another system; and accordingly in 1833 our
fifth tariff, called the "Compromise tariff," became
a law. It adopted a sliding scale in reference to all
duties that were over 20 per cent., providing for their
gradual reduction on each alternate year, till 1842,
when and thereafter the uniform  rate on all these
goods should be 20 per cent. on the home valuation.
Mr. Clay himself brought forward this bill as a " compromise;" and it was also approved by Mr. Calhoun.
Average duties 1833-42, 16 per cent., on dutiable 32,




472      ELEMENTS OF POLITICAL ECONOMY.
During the next nine years the attention of the
country was occupied by the great questions of a
National Bank and the currency. On these and other
questions the administration of Van Buren became
unpopular and broke down; and the Whig party,
coming into power, passed what I shall call the
" Whig tariff" of 1842. It was a high protective
tariff. Extravagant expectations were entertained in
regard to it in the high political excitements of the
time. Under it, millions of capital were seduced into
manufactures, particularly of iron; and when the high
duties were abolished, as they were a few years later,
hundreds and thousands of persons were pecuniarily
ruined. It is impossible to speak in terms sufficiently
deprecatory of an artificial system that inveigles
capital and laborers into branches of industry in
which they never would have embarked of their own
accord. Our whole course of legislation on this subject cannot be properly characterized in terms of
respect. Congress has alternately inflated, and then
punctured, the bubble. The average annual duties
between 1842 and 1846 on the aggregate of imports
was 22- per cent., and the average on the dutiable
goods alone, 32- per cent. These averages are all
carefully calculated from the official table presented
in Mr. Commissioner Wells' Annual Report of 1869.
In 1846 was passed what we will call the " Walker
tariff," from Robert J. Walker, then Secretary of the
Treasury.' It reduced the duties on imports down to
about the standard of the " Compromise " of 1833.
It discriminated however, as the Compromise did not,
between goods that could be produced at home and
those that could not. It approached, in short, more




ON AMERICAN TARIFFS.         473
nearly than any other, in its principles and details, to
the Hamilton tariff, although the general rate of
duties was higher. From that time up to 1857, there
was a regular and large increase in the amount of
dutiable goods imported, bringing in a larger revenue
to the government. The surplus in the treasury
accumulated, and large sums were expended by the
government in buying up its own bonds at a high
premium, for the sake of emptying the treasury.
Under these circumstances the' tariff of 1857 " was
passed, decidedly lowering the rates of duties, and
largely increasing the free list. The financial crisis
of that year diminished the imports, and the revenue fell off $22,000,000. Duties on the whole imports for the fifteen years 1846-61 averaged 17- per
cent., and on those goods subjected to duty averaged
224 per cent.
It only remains to speak of the " Morrill tariff"
of 1861. I include under that designation, as previously under the designation of the Hamilton tariff,
the various supplements and modifications passed in
accordance with the leading idea of the original act.
So reckoned, the Morrill tariff is the ninth in order.
The difficulties growing out of the war ostensibly
united all parties in the view of obtaining, if possible, more revenue to the government; but there was
no agreement as to the means by which more revenue could be obtained; and the protectionists in
Congress seized the opportunity of the withdrawment of the Southern members for discriminating in
favor of the articles in which they were interested
even to the extent of diminishing the revenue by
very high duties which lessened importations. They
did this too without any general popular call for such




474     ELEMENTS OF POLITICAL ECONOMY.
a step. The people had deliberately and repeatedly
indicated their preference for the system of low duties. The policy of the country was supposed to be
settled in that direction. There was indeed a mildly
drawn resolution in the political platform of the party
that triumphed in 1860 in favor of what is called protection; but very little, or nothing, was said upon
that subject in the canvass; the people pronounced
in their verdict upon a totally different set of questions from those involved in a protective tariff.
When, therefore, the congressional protectionists,
availing themselves of the absorption of the popular
mind in the war questions, availing themselves also
of the indignation against England on account of
the supposed haste with which she had recognized
the insurgents as belligerents, sprung a highly restrictive tariff upon the country, they did it ill obedience to no general call, and with little reference to
the general welfare. In view of such a war as that
then impending, the relevant questions were, How
can we get the most revenue with the least interference with the industries of the people? and, How
can we distribute the tariff-taxes so as to burden the
whole people as equally as possible? If these questions alone had influenced the representatives of the
people, the Morrill tariff would never have been
heard of. The instincts of a people, on the breaking
out of a great war, are always favorable to commercial freedom. On the 6th of April, 1776, the Continental Congress opened the ports of this country to
all the world not subject to the king of Great Britain.
They abolished by that act British custom houses,
and established no others in their stead.  Absolute




ON AMERICAN TARIFFS.        475
free trade took the place of hoary restrictions; the
products of the world could be imported from any
place in any friendly bottom, and the products of
American industry in like manner exported, without
a tax." 1 Many nations have acted similarly in
similar circumstances; but no nation, to my knowledge, on the eve of a great war, ever did as the
United States did 1861, make it of set purpose more
difficult to obtain supplies from abroad, and more
difficult to sell abroad the products of native industry. It was a clouded thought, hovering in many
patriotic minds, that what they knew would be immediately and immensely beneficial to some of their
constituents would not after all be very harmful to
the country at large, that carried through the tariff
of 1861. But it was harmful to the country at
large in a high degree. Enlightened public opinion
abroad turned more or less against the country in
consequence; the people were obliged to pay nearly
or quite double on some of the necessaries of life
what the goods were worth in a free market; some
of them lost also their best chance of selling a part
of the products of their industry; unusual inequality
of fortune soon appeared among the citizens; while
the duties were put so high that nothing like the
revenue was received from them that might have
been received. With a much larger revenue in gold,
a people obtaining their cloths and iron and similar
goods at something near European or Canadian
prices, and general industry going forward under its
natural conditions, the credit of the government
awould not have sunk so low as unfortunately it did
1 Bancroft, 8th vol., p. 323.




476     ELEMENTS OF POLITICAL ECONOMY.
sink. The new tariff was not honestly adjusted for
purposes of revenue, and while it seemed to concede
something in its free list to the demand for free
trade, the concession was largely delusive, since
many of the articles thus admitted free of duty went
into manufactures protected by higher duties than
have ever before been levied in this country. To
put articles on a free list is of itself no boon to free
trade; it depends upon the purpose for which they
are put there; whether to benefit the whole people
or only a few persons at the expense of the whole
people. In all our recent tariff-legislation there is
many a snare for the unwary.
The average range of duties on the entire imports
from 1862 to 1869, was 34- per cent., more than three
times as much as the average under the Hamilton
tariff when we were a young nation; and the average on dutiable goods during the same interval was
414 per cent., a higher average than the history of
the country elsewhere presents, except for the brief
period covered by the tariff of Abominations.
I find on an actual count of them in an official
copy of the present tariff that the number of distinct
articles subjected to duty is 2317. Taking, for example, the year 1868, the following articles actually
paid the following rates of duty per centum of the
value of the articles:- common window glass, 49;
pig iron, 55; bar iron, 66-; cast iron pipe and stoves,
109; wood screws, 66; carpenter squares, 82; sheet
lead and pipe, 54; lead pencils, 59-; plain unbleached cottons, 584; spool cotton, 65-; cheap
gunny cloth, 814; white marble, 57; veined marble, 784; salt in bags, 804; salt in bulk. 1084; rice




ON AMERICAN TARIFFS.        477
cleaned, 82k; rice uncleaned, 1651; scoured wool,
94; washed wool, 121; blankets, (average all
kinds) 81-; one kind of carpets, 80; another kind,
91; another kind, 156{-; Paris white, 285; white
chalk, 8331.1 The average duty on dutiable goods
for 1868 was 47.86 per centum.
But it is said that our present tariff is productive.
Of course, if the people trade at all, such a tariff will
be productive; about one half of the value of the
dutiable goods imported goes direct to government!
To say that it is productive is only to say that it is
hard work to destroy the commerce of a great people. The question is, would not a reasonable system
be even more productive? At present, the government indeed gets much; but the people pay a great
deal more; inasmuch as the ground-thought of the
whole system is to raise the price of favored domestic products through the tariff-taxes on corresponding
foreign products. Some of these taxes exclude the
foreign product entirely: in this case, the people pay
much, and government gets nothing. In other cases,
the people are made to pay five, and even ten, times
as much in consequence of a tariff-tax as the government receives from it. Can such a system properly
be called productive? In round millions of dollars
the tariff produced in 1863 and onwards to 1871, as
follows: - 49, 69, 102, 85, 179, 176, 164, 180, 194,
206; the average for the ten years is $140,000,000.
This is per capita, calling the population 38,000,000,
$32. The exact annual average of British customs
revenue for the first eight years of this period was
1 Report U. S. Bureau of Statistics, No. 29.




478     ELEMENTS OF POLITICAL ECONOMY.
$114,167,402. The figures for 1870 are not at this
moment accessible to me, and the tariff-income for
the year ending March 31,1871, was only $107,840,970, but if we may call the average for the ten years
$114,000,000, and the population 30,000,000, this
will be per capita $3a, showing that a simple tariff
on 33 articles or less is more productive per head
of population than ours is. A single specimen of
the inequalities of which our present tariff is full,
may be given here by way of illustration. Ex uno
disce omnes. A supplemental act that went into
operation on the 10th of August, 1866, provides, for
the sake of increasing the duties, that the costs of
transportation, shipment, commission, brokerage, and
all similar charges, be added to the invoice value of
imports to make up the value on which the duties
shall be levied. This applies to all dutiable imports,
except to long-combing or carpet wools costing twelve
cents or less per pound. Why are they excepted?
Cannot the carpet manufacturers pay duties as well
as other people? They have a very high protective
duty on their own completed product. They compel, through Congress, everybody to pay this duty
on foreign carpets, and carry up the price of their
own in proportion; and yet this tariff exempts their
raw material from an increase of duty applied to all
other dutiable goods whatsoever! Ten days before
this clause went into effect, the Hartford Carpet
Company declared a semi-annual dividend of 20 per
cent.; and its shares were announced as worth $275
each, with the dividend off.
A new tariff went into effect Jan. 1, 1871. It




ON AMERICAN TARIFFS.           479
is, however, in principle and in details, nothing more
than a continuation of the Morrill tariff of 1861. It
does indeed throw off some of the present tariff-taxes,
but it throws them off mainly from the revenue parts,
and not from the protective parts of the tariff. It releases taxes as compared with 1869 to the extent of
$26,054,748;1 but the people would have been relieved vastly more if this amount of taxation had
been removed rather from articles protected than
from articles now taxed simply for revenue. For example, 77 per cent. of all this reduction of tariff-taxes
is from tea, coffee, cocoa, sugar, and molasses; articles, all the taxes on which go direct to govern.
ment, and raise the price of nothing else. Precisely
those articles, therefore, are the ones to bear a heavy
tax. The average decrease on 40 articles in the new
tariff is 40 per centum; and the average increase on
10 articles (all protected articles) is 47a per centurn.
In reference to our present tariff, and all such
tariffs, I wish, in conclusion, to make a few general
observations.
1. Such duties as these, laid for protection, are
always laid at the instance, and under the pressure,
of the special interests protected. No legislator, on
general principles, and without solicitation from individuals, ever framed, or would ever have thought
of framing, such a tariff as ours. This is true even
of the very moderate protection accorded in the
Hamilton tariff. It is overwhelmingly true, and at
every point, of the immoderate protection of the
Morrill tariff. Distinguished members of the Committee of Ways and Means have related to me at
1 Report Bureau of Statistics, No. 10, Series 1869-70.




480      ELEMENTS OF POLITICAL ECONOMY.
length the methods pursued to gain the sanction of
that committee, and thus the ear and the votes of
Congress. Those methods are scandalous. If they
were generally understood by the people, there would
be a speedy end of all such legislation.
2. The condition of ship-building and ship-owning
in this country is the best practical commentary on
the influence of protection in general. The system
is here reduced to its lowest terms. The perfection
of protection is prohibition. Our navigation laws
prohibit the buying of foreign ships for the sole purpose of encouraging the building of domestic ships.
Notwithstanding their absolute monopoly of the
market under this law, such are the duties levied for
protection on the materials that go into ship-building,
that our ship-builders cannot build ships at a profit.
It is illegal to buy them, and it is next to impossible
to build them; and consequently our foreign merchant marine has fallen off about one half since
1860; and of 133 steamers regularly plying between
the ports of the United States and Europe not one
wears the American flag.1 In 1860, our own ships
brought in nearly two thirds of our imports; in 1870,
less than one third. One half of the commerce of
the world is now done on British ships: only one
fifth on American ships.2
3. It is foolishly claimed by some that protective
duties always shortly lower the prices of protected
articles. If they do, where does the protection come
in? Or, what is the motive for levying such duties?
Or, why has the Onondaga Salt Company been
selling salt for years in Canada at forty per cent. less
1 Hunt's Year-Book for 1870, page 127.  2 Ibid.




ON AMERICAN TARIFFS.         481
than in Syracuse itself? Why did the same company offer salt to the fishermen duty off, and only
sell it to landsmen duty on? Is pig-iron, is marble,
is rubber-webbing, is salt, are wood-screws, are carpenters' squares, are coarse blankets, cheaper than in
1860? In a natural course of things they would be
cheaper: according to the price-lists they are dearer;
and it is an unnatural and iniquitous force that
makes them so.
4. The proper way to deal with protective duties
is to abolish them instantaneously and simultaneously. The abolition of a tax on industry can do no
harm to industry. If every tax of every name in all
the earth could be abolished to-morrow, what harm
would ensue? Taxes are indeed necessary for the
support of government, but even when wisely laid
for that end they are a necessary evil. They take
just so much out of what would otherwise be the
gains of exchanges. But protective taxes are the
worst possible form of taxes, and the only thing to
do with them is to abolish them. When protective
duties become numerous, as with us, they become a
universal burden; and there are only a few protected
interests themselves which would not be instantly
relieved by their universal abolition. To taper off
in protection is much like a drunkard tapering off in
his cups. It would indeed be unjust to abolish a
part of these duties, and leave the rest in forceto strike out, for example, the duty on woollens and
leave the duty on wools, -they should all go by the
board together. Science and experience alike demonstrate that this is the best way to do it. Protection cannot complain of it, for when did itself ever
31




482      ELEMENTS. OF POLITICAL ECONOMY.
give previous notice to the people that its taxes were
coming? Edward Harris paid $58,000 in gold duties on wool bought, paid for, and on its way to this
country, when the wool tariff of 1867 came in. If,
however, ignorance and prejudice hedge the way to
this simultaneous abolition, let the worst duties go
first: those on coal (we have more coal in this country than all the world besides), on pig-iron, on lumber, on salt, on wool, on materials generally.
5. The changing tone of New England on protection is very noticeable. Many of her prominent
manufacturers are earnest for free trade, and very
few of the rest have much zeal for the opposite.
They have found out that they have to pay more
protection than they get. Exclusive protection of
one interest is a very different thing from general
protection of many interests. New England, accordingly, is swinging back to her old position. Unjust
discriminations in duties are helping this forward.
The duty on coal is an abomination in New England; so is the duty of about 110 per cent. on fine
wools, while carpet wools come in for about 15
per cent.; and so is the fact, that of the whole cost
of producing a yard of the finer woollens 76 per
cent. has been paid out in duties. The English
manufacturer, for example, is wholly relieved of
these duties, and his advantage of four per cent. in
labor, if it exists, is a mere nothing in comparison
with his advantage of 76 per cent. in cost of materials. No wonder our woollen manufacturers are
going forward under discouragement. The tariff is
their foe, and they are becoming a foe to it. The
shoemakers-the largest single interest in the United




ON AMERICAN TARIFFS.         483
States next to the farmers —are indignant at the
tariff taxes on their lastings, webbings, and other
materials. Much of the present dissatisfaction of
labor in New England is derivable from causes which
have their seat in the tariff, and that will ultimately
feel the force of their opposition. Moreover, Boston
is anxious to regain its ocean traffic, and an obstacle to this is the tariff.
6. The progress that public opinion generally
throughout the country is making in this matter of
duties is very cheering. Light is breaking in. The
people are understanding better than ever before the
nature of these taxes that are laid, not to produce
revenue, but to prevent it. They are even asking
whether Congress has any constitutional right to lay
taxes for any other purpose than to get money with
which "to pay the debts, and provide for the common defence and general welfare of the United
States."  The issue of present discussions both on
the constitutionality and the expediency of "protective" taxes, is sure to be favorable to commercial
freedom. The present tariff rests on false principles
throughout, and cannot, therefore, be permanent.
To relax commercial systems, and not to restrict
them, is alone in accordance with the spirit of this
age.




4i34     ELEMENTS OF POLITICAL ECONOMY.
CHAPTER XVI.
ON TAXATION,
IF the general views maintained throughout this
book are conceded to be correct, we shall now reach
with very little difficulty the true principles of taxation. Value resides in services exchanged; and since
government is an essential prerequisite to aly general
and satisfactory exchanges, since it contributes by
direct effort to the security of person and property,
it justly claims from every citizen in return a compensation for the service thus rendered to him. I
do not mean to say that government exists solely for
the protection of person and property, or that all the
operations of government are to be brought down
within the sphere of exchange; government exists
as well for the improvement as for the protection of
society, and many of its high functions are moral, to
be performed under a lofty sense of responsibility to
God and to future ages; but the matter of taxation,
by which government is outwardly supported, and
by which it takes to itself a part of the gains of every
man's industry, seems to me to find a ready and
solid justification in the common principles of exchange. A tax paid is a reward for a service rendered; and because the service may have respected
another generation as well as the present, it is pos



ON TAXATION.             485
sibly proper that the tax also shall be passed over
in part to another generation to pay. The services
which government renders to production by its laws,
courts, and officers, by the force which it is at all
times ready to exert in behalf of any citizen or the
whole society when threatened with evil, are rendered
somewhat on the principle of division of labor, one
set of agents devoting themselves to that work; and,
notwithstanding some crying abuses of authority
which no constitution or public virtue have yet been
found adequate wholly to avert, are rendered on the
whole economically and satisfactorily. Taxes, therefore, demanded of citizens by a lawful government
which tolerably performs its functions, are legitimate
and just on principles of exchange alone.
The questions now arise, in what proportions shall
the citizens contribute to the fund necessary to be
raised by taxation? And in what manner shall these
contributions be paid?
The common notion has been that, since every
man's person is supposed to be equally protected by
the government, a uniform poll-tax assessed on all
citizens alike is right, and that for the rest, a man
should be taxed according to his property. But what
is property? No word has received a greater variety
of definitions, or is less settled in definite meaning
in the minds of men. The lawyers make a distinction between real property and personal property;
and the law at present, though a man have neither
real estate nor movables, yet taxes him on his income,
on the rewards of his daily industry, regarding that
as a species of property. And this too is just; because, as I think, the ultimate idea of property is the




486      ELEMENTS OF POLITICAL ECONOMY.
power and right to render services in exchange.
Robinson Crusoe, while solitary upon his island, did
not and could not have property, in the true sense
of that word. It is not the fact of appropriation that
makes anything property; it is not the fact that a
man has made it or transformed it, that makes anything property; it is not the fact that a man may
rightfully give it away, that makes anything property; but it is the fact that a man has something, no
matter what it is, for which something else may be
obtained in exchange, that makes that something
property, and gives government the right to tax it.
In other words, property consists in values, in a purchasing-power, and not in possession, or in appropriation, or in the esteem in which a man holds anything he has as long as it is his own. The test of
property is a sale; that which will bring something
when exposed for exchange is property; that which
will bring nothing, either never was, or has now
ceased to be, distinctively property. This view may
not seem to be as novel as it is, or it may be prejudiced by its very novelty, but at any rate it carries
along with it that strongest of the criteria of truth,
that it simplifies and illumines a confused section of
the field of human thinking; and at the same time
justifies a practice which governments have reached,
as it were through instinct, but which is continually
a subject of cavil and complaint, the practice, namely, of taxing men who have neither real estate nor
chattels, on their incomes from industry. Within a
month an intelligent man was heard to inveigh
against the injustice of the law which taxes the industrious man who works and gains an income, but




ON TAXATION.             487
takes little or nothing from the man unable or too
lazy to work. Nevertheless the law is right in its
action, and my neighbor was wrong in his strictures.
To the general question, then, in what proportions
shall the citizens contribute in taxes to the support
of government, the general answer comes, that they
ought to contribute in accordance with the value of
the services which they either do or might render to
their fellow-citizens. Under the expression " might
render" is not included any personal services not
actually rendered, but only those forms of material
property which might be exchanged for other forms
if the owner saw fit to exchange them, but which he
prefers for the present to keep in his own possession.
It would not be fair, for example, to tax a professional man on services which his neighbors, or any
other authority, think he might render, were he less
indolent or more capable; but it is fair to tax any
man on those forms of material property in his possession with which he may at any time he chooses
render services in exchange. The right to tax on the
part of the government is connected with the right to
exchange on the part of the citizens, grows out of
this, and is limited by it. This consideration, though
it may exclude the propriety of a poll-tax, is consistent with all other forms of taxation, and gives unity
to them.
I do not think that the common sense of mankind
falls in with the opinion ably advocated by Mr. Mill
and others, that persons of a large property or of a
large income should pay taxes higher than the due
proportion of their properties or incomes to more
moderate properties or incomes. The transaction




488     ELEMENTS OF POLITICAL ECONOMY.
between the government and a tax-payer is itself a
kind of exchange, and if the ground of it be, as I
think it is, that government facilitates by way of protection all his other exchanges, then ought he to pay
taxes proportionably to the amount of his exchanges
actual or possible; and a man should pay on an
income of $10,000 ten times as much, and no more,
as a man with an income of $1000. Mr. Mill regards equality of burden as the true general principle of taxation; and as a rich man can pay more
than his proportional share with perhaps less sacrifice
than the poor man, therefore he ought to pay more
than his proportional share. This principle, formerly
embodied in the United States income law, has now
been discarded from it; and a uniform tax of 2}
per centum is laid on the excess of incomes over
$2000. The present law seems fairer than the previous law in this respect. The prejudice, however,
against the tax led Congress to reenact it for two
years only. Certainly taxes ought to be laid on
equal and equitable principles, but the difficulty
of determining for different classes of citizens what
would be an equality of burden is so insuperably
great, that one hesitates before accepting it as the
true principle of taxation. On the whole, I am
clear that the best available guide in practical taxation are these simple principles, that property is
essentially a power to render services, and that taxation should be as nearly as possible proportionate
to the degree of this power.
If, then, taxes are to be laid on services, thus subtracting a portion from the gains which accompany
them, the question now arises in what way are they




ON TAXATION.            489
to be laid? They are commonly divided into two
classes, direct and indirect. A direct tax is levied
on the very persons who are. expected themselves to
pay it; an indirect tax is demanded from one person
in the expectation that he will pay it provisionally,
but will indemnify himself in the higher price which
he will receive from the ultimate consumer. Thus
an income tax is direct, while duties laid on imported
goods are indirect. There has been a great amount
of discussion on the point whether direct or indirect
taxation be the more eligible form; but the reader
of penetration will perceive that there is not at bottom any very radical difference between them; each
is alike a tax on actual or possible exchanges, with
this main difference, that men pay indirect taxes as
a part of the price of the goods they buy, without
thinking perhaps that it is a tax they are paying, and
consequently without any of the repugnance that is
sometimes felt towards a tax-gatherer who comes
with an unwelcome demand. Thus indirect taxes
are conveniently and economically collected. Espe.
cially is this true of impost duties; since one set of
custom-house officers collect easily and at once the
government tax which is ultimately paid by consumers all over the country. The taxes, by stamps,
on banks and bankers, on gas companies, and very
many others levied by the present United States
internal revenue law, are indirect taxes, whereby the
government gets in a lump what is afterwards distributed over many subordinate exchanges. The
countervailing disadvantage of indirect taxation,
however, is, that the price of the commodity is usually
enhanced to an extent much beyond the amount of




490      ELEMENTS OF POLITICAL ECONOMY.
the tax, partly because it is a cover under which
dealers may put an unreasonable demand, and partly
because the tax, having to be advanced over and
over again by the intermediate dealers, profits rapidly
accumulate as an element of the price.
Direct taxes are laid either on income or expenditure. An income tax, if the exact amount of income
could in all cases be ascertained, would be a perfectly
unexceptionable form of taxation. The only sources
of income are three: wages, profits, rents. I do not
think that gifts are legitimately taxable; they lie outside the field of exchange; they spring from sympathy, from benevolence, from duty; and while exchange must claim all that fairly belongs to it, it
must be careful not to throw discouragements into
the adjacent but distinct field of morals. Hence, it
may well be questioned whether legacies, bequeathments, gifts to charitable and educational institutions, and gifts to individuals proceeding from friendship, gratitude, or other such impulse, are properly
subject to taxation. The property is taxable in the
hands of the donor, and may be in the hands of the
recipient, but the passage from one to the other ought
to be unobstructed by a tax. Gifts then excepted,
and plunder, which is out of the question, the sources
of income are few and simple, and there is no great
difficulty in every man's ascertaining about what his
annual income is.  Fraudulent returns should be
promptly punished by an additional assessment and
collection. The income law at present in force in
the United States has perhaps been subject to less
complaint than the manufacturers' tax, and other
forms of indirect taxation; and it might become more




ON TAXATION.             491
and more productive every year, as the forms were
perfected, and as the memory and conscience of the
payers were quickened by the action of a healthful
public opinion brought to bear through the annual publication (now prohibited) of the list of their returns.
Other direct taxes are on expenditure of some
special kinds, such as those on horses, carriages,
watches, plate, and so on, kept for personal use. As
the difficulty of a tax on a person's whole expenditure
is much greater than one on his whole income, inasmuch as the items are more numerous and more
diffused, it is only attempted to lay a few taxes on
some peculiar items of expenditure, such as those
above mentioned; but as these do not reach all persons with any degree of equality, they are so far
forth objectionable.  A house-tax, levied on the
occupier, and not on the owner unless he be at the
same time the occupier, would be a direct tax on
expenditure every way unobjectionable.l  Taking
society at large, the house a man lives in and its
furniture are probably the most accurate index attainable of the size of his general expenditures. They
are open to observation and current remark; they are
that on which persons rely more perhaps than on
anything else external for their consideration and
station in life; the tax could be assessed with very
little trouble on the part of the assessor; and it is
well worthy the attention of our national legislature,
whether such a tax, if more taxes should be needed,
would not be more equal and more easy of collection
than any others now open; or whether it might not
with advantage take the place of some of the coml Mill, Chap. III., Book.5




492        ELEMENTS OF POLITICAL ECONOMY.
plicated and objectionable taxes now laid. Direct
taxes have this general advantage over indirect, that
they bring the people into more immediate contact
with the government that lays the taxes, and subject
it to a quicker supervision and more effectual curb,
whenever its expenditures grow larger than the people think it desirable to incur; they have this general
disadvantage over indirect taxes, especially over imposts, that the number of officials required to assess
and collect them is much larger, thus swallowing up
a part of the proceeds of the taxes, with this liability also of bringing the people into an attitude of
hostility to the government and to its contemplated
expenditures. But whether the taxes be direct or
indirect, or whatever be their form, except it be a polltax, which is questionable at best, they are laid upon
exchanges, and are designed to withdraw for the use
of the government a part of the gains of exchanges.
From this point of view, which gives unity to the
whole field of taxation, some practical hints may
usefully conclude this discussion and this volume.
(1.) Under the principle, it is very clear that credits
are a legitimate subject of taxation. Whatever is
bought and sold is properly enough taxed, if the
needs of the government require it, and if such taxation would be productive and not too unequal. As
values always spring from the action of individuals,
so the incidence of taxes is upon persons rather than
upon things; and the question is what can a man
sell, or what has he already sold, on the gains of
which sale the government may lay some claim?
If I have a mortgage on my neighbor's farm, I can
sell it at any time to a third party; it pays me in



ON TAXATION.              493
terest ad interim, and I can collect it at maturity.
Government therefore properly taxes me for that
credit in my possession. It is a part of my property.
The holders of the government bonds occupy an
economical position exactly similar. They have a
lien on the national property and income.  The
credits they hold are vendible commodities. They
are a paper bearing interest. They can be collected
at maturity. They are indeed exempted by law from
municipal and State taxation. That was a legitimate
inducement held out to everybody alike to invest in
the bonds. But there is no reason why the nation,
having withdrawn them from town and State taxation, should not itself all the more subject them to
their fair share of the national burdens. The income
derived from them should be taxed as highly as any
other income. It is no longer any ground of merit,
even if it ever has been, for persons to buy the government debt. It is a mercantile transaction, and
should be so considered in relation to taxes. So of
other mercantile credits. They are taxable.
(2.) A man's annual income, exactly ascertained,
exactly measures the aggregate of the gains of his
exchanges for that year; and, therefore, under the
principle, On income tax is the fairest of all forms of
taxation, and may perhaps, in time, be made to supersede all others. An income tax is new in this
country, and it has become strangely unpopular, and
will be probably discontinued; but the English have
found it for twenty-nine years to be the most uniform, unfailing, expansive, and responsive to control
of all their fiscal expedients. The rate has varied
from four to sixteen pence to the pound of income.




494     ELEMENTS OF POLITICAL ECONOMY.
In 1857 it realized $80,255,000. In 1866, ours also
realized $60,894,135.1 The Germans, too, are now
applying an income tax. The publicity resulting is
no objection at all; inasmuch as every man has a
right to know that his neighbors are contributing to
support the government pro rata with himself. In
bearing up the burden of government all citizens are
copartners, and in this view each has a right to demand a look into the books of the others.
(3.) Taxes in general, in order to be most pioductive in the long run, as well as discourage as little
as possible the exchanges which would otherwise go
forward, ought to be low relatively to the amount of
values exchangeable. A high tax not infrequently
stops exchanges in the taxed articles altogether, and
of course the tax then realizes nothing to the government.  As the only motive to an exchange is the
gain of it, the exchange ceases whenever the government cuts so deeply into the gain as to leave little
margin to the exchangers. The greater the gain left
to the parties, after the tax is abstracted, the more
numerous will the exchanges become, and the greater
the number of times will the tax fall into the coffers
of the government. In almost all articles, consumption increases from a lowered price in even a greater
ratio than the diminution of the rate of tax; so that
the interests of consumers and of the revenue are
not antagonistic but harmonious. On articles of
luxury and ostentation, and on those, such as liquors
and tobaccos, whose moral effects are clearly questionable, very high taxes may properly enough be
laid, because their incidence will hardly tend to di1 Report Commissioner Internal Revenue, Dec. 1866.




ON TAXATION.              495
minish consumption, and it would scarcely be to be regretted if it did; but with this exception, duties and
taxes should be levied at a low rate per cent., as well
for the interest of revenue as of consumers. It is to
be added, however, that the taxes even on these articles may be too high to meet either a revenue or a
moral purpose. The internal tax of two dollars a
gallon upon distilled spirits was of this character.
Experience has demonstrated that a less tax will produce more revenue, and the drinking of whiskey, bad
as that is, is less culpable than the endless frauds on
the government provoked by the high tax.
(4.) Duties and taxes should be simple, and their
amount easily calculable by the payer beforehand.
The complication of specific with ad valorem duties is
a decided objection to the present tariff.  The latter
is a duty of so much per cent. on the invoiced or appraised value of the goods: the former is a duty of so
many cents or dollars on the pound, yard, gallon, or
other quantity. There are too many practical difficulties connected with either form of duty to make
it proper to combine the two upon the same article.
To combine them thus is one of the devices of protection. On the whole, specific duties are preferable
to ad valorem because they give less chance to frauds,
and because importers, and others, can make their
calculations easier on the basis of them. To be sure,
this involves that high-priced grades of an article pay
no higher tax than low-priced grades of the same;
but this consideration is largely overbalanced by those
of convenience and productiveness. Teas are taxed
in this way both in England and the United States,
in the former Is. 5d. per pound, and in the latter 15




496     ELEMENTS OF POLITICAL ECONOMY.
cents per pound. By the U. S. tariff, late gone into
operation, tea is reduced from 25 to 15 cents. It
will be interesting to notethe influence of this reduction on consumption, and consequently on revenue. A similar reduction was made at the same
time on coffee, cocoa, sugar, and molasses; and will
be watched also with interest. The tax on cigars
at present in this country is a good instance in point
of the superior efficacy of simple taxation. Under
the sliding scale of 1864, the receipts were small and
the frauds gigantic: under the uniform rate of ten
dollars a thousand the receipts increased; and good
results have followed later changes. So far as is possible, taxes should be levied upon commodities once
for all, and then an end. The opposite principle of
taxing commodities every time they change hands
throws an indefinite burden on exchange, whose
weight cannot well be calculated beforehand, either by
the consumer or by the government, through uncertainty as to the number of transfers. Exchanges indeed are the only legitimate subject of taxation, but
not every specific ahd subordinate exchange. An attempt to tax all sales whatever was followed in Spain,
and will be followed everywhere, by a sluggish indisposition to trade at all. Let the amount of the tax be
definite, and let everybody be sure that when it is once
paid government will produce no further claim, and
industry will go along under heavy taxes better than
under those nominally lighter to which uncertainty
as to time or amount attaches. All the more advanced
governments have been simplifying of late years
their systems of taxation, and collecting their revenue
at fewer points, and under more tangible conditions,




ON TAXATION.               497
in order to interfere as little as possible with a free
industry and free exchange. England, for instance,
has given up a great variety of taxes, and now collects her revenue about as follows: - (customs for
1871, on eighteen articles, all others admitted free,
yielded ~21,568,194),Customs, 32 per cent.  Stamps, 12 per cent.
Excise, 30 per cent.  Post-office, 6 per cent.
Taxes, 16 per cent.   Miscellaneous, 4 per cent.
(5.) Our internal revenue system has been greatly
simplified and improved by recent legislation. If the
tariff could be readjusted on the same principle, little
would be left to be desired in our tax-system. The
principle is, relatively low taxes on comparatively
few things.  The principle is simple: the problem is
difficult; but wonderfully less so, the moment all
attempts are given up to foster any branch of industry whatever. Our legislators are not called upon
to foster any industries. They cannot permanently
do it, if they try; and they do immense harm, while
they try. Their dutie\s would be easier, and better
performed, if they looked solely to the best methods
of raising money in such a way as shall least interfere with what would otherwise be the ongoing of
exchanges in all directions.  Duties that prevent
importations, and the consequent exportation of
domestic products in return; and duties whose direct
effect is to raise the price of other articles than those
on which they are levied; are objectionable, and, for
the most part, can be dispensed with. In case duties
a"e laid on articles, as spirits, which are also produced
at home, there should be an excise on the home product equivalent to the tariff-tax on the foreign, otherwise the people will pay more in consequence of the




498      ELEMENTS OF POLITICAL ECONOMY.
tax than government will get. This subsidiary principle is important. Our internal revenue for 1871
was above 144 millions of dollars, bearing a much
lower ratio to customs' revenue than the two sustain
to each other in Great Britain.
(6.) Taxes and duties should be collected by the
government in as economical a manner as possible,
that is to say, the money should be kept out of the
pockets of the people as short a time as possible,
disbursement following quick upon collection. It is
poor policy to gather taxes at the beginning of the
year which will not be disbursed till the end of the
year. Let the people use their funds till they are
wanted at the treasury; and if the taxes do not then
come in as fast as wanted, it is better to issue what
are called in England exchequer-bills, and in the
United States certificates of indebtedness, to be redeemed at the end of the year from the proceeds of
the taxes, than to let the people's money lie idle in
the treasury.
(7.) If the necessities of the State require it, government has the right to demand from all persons
who are capable of making exchanges, and who do
make them, something in the form of taxes. But it
is every way better, when possible, that people of
very moderate means should be exempted altogether
from direct taxes; and the payment of indirect taxes
is a matter more in their own option, since they are
at liberty to buy much or little of those commodities
subjected to an indirect tax. In this country at present, incomes not exceeding $2000 are exempted by
the law. If a house-tax should be levied, all houses




ELEMENTS OF POLITICAL ECONOMY.  499
below a certain grade of style and comfort should be
exempted, and the tax pass up by easy gradations
from those just taxed to the palatial residences of
the rich. In the present age of the world, the well-todo citizens of every country are able to bear without
too great difficulty the burdens of the government,
and nothing tests better the degree of civilization
which a nation has reached than the care and solicitude it displays for the welfare of its poorer citizens.
(8.) Who pays the indirect tax? Can the producer throw it wholly upon the consumer? Can the
banks, for example, throw their taxes wholly upon
their customers? Producers and dealers and bankers and companies add the tax demanded from them,
and sometimes more than the tax under color of it,
to the price of their wares. But it is not true that
they can always realize the whole of this enhanced
price. Generally they can, sometimes they cannot.
If the article be one of necessity, or a luxury that
has become equivalent to a necessity, and there be
no other source of supply than the taxed one, then,
as a rule, the tax falls wholly on the consumer, and
is a matter of indifference to the producer or dealer.
But the usual effect of an enhanced price is to lessen
demand, and if the article is dispensable, or its consumption can be lessened, or it can be obtained elsewhere, the market will be sluggish under the tax,
and producers or dealers will be likely to tempt it by
lowering prices, in other words, by sharing the tax
with consumers, and paying that share out of profits.
This is the principle. Producers and dealers would
rather the tax were off. Consumers generally, but
do not always, pay the whole of it.




500     ELEMENTS OF POLITICAL ECONOMY.
(9.) I append a scheme of national taxation, embracing both internal and tariff taxes, prepared and
published by Mr. Edward Atkinson of Boston. I
approve of it strongly in its principle, and in its
main details. Experience, after its enactment, would
doubtless suggest improvements: I should be glad
to see it, with minor exceptions, enacted.




T-.
REVENUE.
Internal.    Customs.      Total.
From taxes upon spirits and wines, as collected in 1870..                                  $54,286,371   $8,071,699  $62,358,070
"  " (  tobacco, cigars, and snuff, as collected in 1870...                         32,348,707   4,227,707   36,576,414
"     fermented liquors, as collected in 1870......                  6,910,757     347,687     7,28,444
"     manufactures of silk, as collected in 1870.15,410,770                                        15,410,770
by stamps (other than those on beer and tobacco), as collected in 1870..            15,071,783               15 071,783
"     "  upon banks and bankers, as collected in 1870.......           3,342,104                 3,342,104
~ "           " "    national banks, as collected in 1871.....                                  6,003,584                 6,003.584
~E-i~        " ~sugar and molasses, as collected in 1870                                                     33,000,000    3,00,000
c<  "  " s ugr tea, as collected in 1870            I Allowance made for reductions in the                83,000,00    33,000,000
tea, as collected in 1870                          Act of 1870.                             8,000,000    8,000,000
~Xq "   "8 ",0coffee, as collected in 1870  8,000,000  8,000,000
~ "  "     "   fruits, nuts, spices, laces, embroideries, fans, toys, kid gloves, and other articles
EH                       of luxury, as collected in 1870........                      11,000,000   11,000,000;      Miscellaneous receipts, as collected in 1870....                                        4,731,650                4,731,650
S      From taxes upon gas, and other small receipts, as collected in 1870                             3,000,000                3,000,000
"duties proposed to be collected upon textile fabrics, china and glass ware, as far as possible
in the form of specific duties, but at rates averaging twenty per cent. ad valorem; say on
common or coarse goods, ten per cent.; on medium goods, twenty per cent.; on fine and
fancy cotton, woollen, worsted, and linen goods, cut-glass, and fancy china-ware, thirty
to thirty-five per cent. The present rate of importation of the fabrics named being now at
the rate of over $110,000,000 in value per annum, the proposed average rate of twenty
per cent. would yield (tariff)..........                         22,000,000   22,000,000
Total revenue694,956 $110,057,863$235,752,819
$125,694,9561-$110,057,863 $235,752,819