UNIVERSITY OF CALIFORNIA AT LOS ANGELES BY MRS. FAWCETT. POLITICAL ECONOMY FOR BEGINNERS. Ninth Edition. Fcap. 8vo. 2s. 6d. LIFE OF Sir WILLIAM MOLESWORTH, Bart. Extra cr. 8vo. Sj-. 6d. net. AN EXPLANATORY DIGEST OF PROFESSOR FAWCETT'S "MANUAL OF POLITICAL ECONOMY." By C. A. Waters, B.A. Cr. 8vo. 25. 6d. MACMILLAN & CO., Ltd., LONDON. MANUAL OF POLITICAL ECONOMY MANUAL OF POLITICAL ECONOMY BY THE LATE Et._^Hon. HENEY FAWCETT, M.P., D.C.L., F.R.S. FELLOW OF TRINITY HALL, AND PROFESSOR OF POLITICAL ECONOMY IN THE UNIVERSITY OF CAMBRIDGE EIGHTH EDITION |£ontiou MACMILLAN AND CO., Limited NEW YORK : THE MACMILLAN COMPANY 1907 All ridhts reserved First Edition 231'intcd 1863. Nexo Editions printed 1864, 1869, 1874, 1876, 1883, 1888, 1907 Gt.ASGOw: PRINTED AT THE UNIVERSITY PRESS HV ROBERT MACLEHOSE AND CO. I.TD. ^ PREFACE TO THE EIGHTH EDITION. I N preparing this new edition of my husband's Manual, I have been guided by the principles described in the preface to the seventh edition. I have relied on the statistics to be found in the States- M man's Year Book and in the Statistical Abstract. I ^ have also to acknowledge with gratitude assistance o\^ and information most courteously extended to me by Lord Monteagle, Mr. Alfred Booth of Liverpool, and by the Secretaries of Rochdale Equitable Pioneers' Society, the Wholesale Cooperative Society, and the United Kingdom Alliance. All new matter contained either in the text or in the notes of the editions, 1888 and 1907, have been enclosed in square brackets. ! v:> MILLICENT GARRETT FAWCETT. London, 1907. 203704 PKEFACE TO THE SEVENTH EDITION. TN this edition, the tirst that has been required since -^ my husband's death, I have endeavoured within certain limits, to adopt the methods which he taught me in the preparation of previous editions. That is to say, while I have altered nothing on which a difference of opinion could exist, I have brought all the facts and figures up to date, have discarded such illustrations as seemed to be obsolete, and have verified the facts on which the arguments are based, by refer- ence to leading authorities on the various topics touched upon. In this connection I am greatly indebted for information most kindly supplied by Mr. James Howard, late M.P. for Bedfordshire, Mr. Godfrey Garrett Smith of Magdeburg, Prussia, Professor and Mrs. Marshall of Cambridge, The Hon. C. W, Fremantle, Deputy Master of the Mint, Mr. G. Ramsay, of the Army Clothing Department, The Rev. Wilson Brown, Vicar of Assington, Suffolk, Mr. J. M. Ludlow, Registrar of Friendly Societies, Mr. H. Hill of the India Office, Mr. Farrant, Managing Director of the Artisans' and Labourers' Dwellings Company, Mr. Stewart Pixley, Mr. H. W. Birks, Mr. G. H. Murray, Secretary to the Gold and Silver Connnission, Mr. Prideaux, Secretary to the Goldsmiths' Company, Major Craigie, Secretary Preface to the Seventh Edition. to the Central Chamber of Agriculture, Mr. Beard, Secretary to the Rochdale Equitable Pioneers, and Mr. J. C. Gray, Secretary to the Central Cooperative Board. All of these have most kindly and readily supplied me with information on the various points on which I consulted them ; and I wish to take this opportunity of thanking them and of expressing my indebtedness to them, especially to Mr. James Howard, who prepared a very careful and elaborate estimate of the present annual value of the agricultural pro- duce of the United Kingdom, which he placed at my disposal. My special thanks are also due to Mr. F. J. Dryhurst, who was for thirteen years my husband's secretary; he has revised all the proofs and helped me by a variety of valuable comments and suggestions. MILLICENT GARRETT FAWCETT. July, 1888. PEEFACE TO THE SIXTH EDITION. XN preparing this edition I have not thought it ^ necessary to alter in any material respect the general arrangement of the book. Care, however, has been taken to adapt the illustrations, as far as possible, to the circumstances of the present time. I cannot place too high a value upon the assistance which I have derived from my wife. In the course of revising the book, she has made many most valuable suggestions, and she has also prepared an Index which I believe will be found very useful by the reader. I also desire to thank my private secretary, Mr. F. J. Dryhurst, for having carefully revised the proofs as they passed through the press. August, 18S3. PREFACE TO THE FIRST EDITION. XT has been often remarked that PoHtical Econom}^ -■- is more frequently talked about than any other science, and that its principles are more frequently appealed to in the discussions of ordinary life. No science, however, is perhaps more imperfectly understood. Profound mathematicians, or accomplished geologists and botanists, are far more numerous than real masters of the principles of Political Economy. Such a fact is somewhat surprising, when it is remembered that Political Economy must be appealed to, in order properly to discuss almost any political, financial, or social question. Sometimes it has no doubt happened, that people have not become generally familiarised with a science, because its principles have not been clearly explained. But Political Economy has never wanted able expounders. Adam Smith wrote the first systematic treatise on the subject, and his work will long continue to be read as a masterpiece of clear exposition. Mr. John Stuart Mill's treatise on ' The Principles of Political Economy ' is perhaps the most remarkable work of that great author, and the book will be remembered as amongst the most enduring literary productions of the nineteenth century. It is, therefore, necessary for me to explain the object I have had in view in writing the present work. Preface to the First Edition. The end I hope to attain, I may briefly state to be this. I think that all who take an interest in political and social questions, must desire to possess some know- ledge of Political Economy. Mr. Mill's treatise is so complete and so exhaustive, that many are afraid to encounter the labour and thought which are requisite to master it; perhaps, therefore, these may be induced to read an easier and much shorter work. I so well remember the great advantage which I derived from reading Mr. Mill's book, that I would not publish my own work if I thought that it would withdraw students from the perusal of a more complete treatise. I am, however, convinced that those who become acquainted with the first principles of Political Economy, will be so much struck with the attractiveness and importance of the science, that they will not relinquish its study. I have not attempted to discuss all the principles of Political Economy in full detail ; but I believe no im- portant branch of the subject has been omitted; and I, therefore, think that the principles which are explained in the present work will enable the reader to obtain a tolerably complete view of the whole science. In order to show how intimately Political Economy is connected with the practical questions of life, I have devoted a separate chapter to some subjects of great present interest ; such, for instance, as Cooperative Societies — Strikes and Trades'-Unions — and The Effects of the Gold Discoveries. For the convenience of the ordinary reader, and especially for those who may use the book to prepare themselves for examinations, I have prefixed a very detailed summary of Contents, which may be regarded as an analysis of the work. Preface to the First Edition. xi I cannot conclude these prefatory remarks without acknowledging the kind assistance which I have derived from those who have verified my statistical facts ; but I have especially to thank my friend, Mr. Leslie Stephen, Fellow of Trinity Hall. He has given me many most important suggestions, and has carefully re\T[sed the work : the accurate and complete knowledge which he possesses of the science makes his revision peculiarly valuable. The labour of wi'iting these pages would have been much greater, if I had not been fortunate enough to have a most patient and excellent amanuensis in the youth who is to me so faithful an attendant. Trinity Hall, Cambridge, Feb. 1863. CONTENTS. BOOK I. PRODUCTION OF WEALTH. Chapter I. Introductory remarks In au introductory chapter it is better to give a general description of Political Economy, rather than to attempt an accurate definition of the science — ^Political Economy investigates tlie laws which regulate the production, the distribution and the exchange of wealth — Popular prejudice considers that Political Economy is hard-hearted and selfisli — This fallacy explained and refuted — Any commodity which has an exchangeable value is wealth — The civilisation of a country determines to what extent its natural resources can be classed as wealth — Fallacies now known as the Mercantile System explained. PAGES 3—9 Chapter II. The Requisites of Production. The production of wealtli has three requisites : land, labour, and capital — Capital defined to be wealth which is saved, and applied to the future production of wealth 10 — 1 1 Chapter III. Labour as an Agent of Production. The simplest commodity cannot be made available for consumption without the application of many different kinds of labour — All labour does not contribute to the production of wealth — Hence labour is classed as productive and unproductive — Labour is productive when it either directly or indirectly embodies utilities in material objects — The most useful labour may be sometimes unproductive — As an example, a railway may be partly made and never opened — Labour which is unproductive may yet be very useful — Mr. Mill's definition of productive labour would make the labour of the schoolmaster to be unproductive, and this maj' be obviated by a wider definition— ^Con- sumption also may be either productive or unproductive 12 — 16 Chapter IV. Of Capital. It is sometimes fallaciously supposed that capital consists of money, to the exclusion of any other kind of wealth— The entire capital of the country can never be simultaneously employed — A most useful com- modity, such as wheat, need not necessarily be employed as capital — xiv Contents. An individual does not increase the capital of the country by spending wealth upon his own enjoyments — hence, the man who saves, and not the spendthrift, is the labourer's best friend — This consideration is expressed in too paradoxical a form when it is asserted that a demand for commodities is not a demand for labour — Tlie Science of Political Economy often only atiirnis tendencies, and therefore the results deduced from its principles do not always come into immediate opera- tion — It is fallacious to suppose that there can be a glut of capital, and that consequently, without the unproductive expenditure of the rich, the poor could not be adequately employed — Wealth can only perform the functions of capital by being wholly or partially con- sumed — Foregoing principles illustrated by examples — The rapidity with which a country recovers from a devastating war explained — The consequences of raising revenue by loans investigated — The effects of loans and taxation compared, with especial reference to India — The distinction betMeen circulating and fixed capital — The former is consumed by a single use, the latter may continue to perform its functions for a long period ; food consumed by labourers is circu- lating capital ; whereas fixed capit. 1 consists of machinery, buildings, railroads, &c. — The conversion of circulating into fixed capital may temporarily injure the labourers, and may in certain cases per- manently injure some classes of labourers pages 17 — 44 Chapter V. On the Productive Power of the Three Requisites of Production. Political Economy would embrace a great number of sciences, if it investigated all the causes upon which depend the productiveness of land, labour, and capital. Hence a definition of Political Economy is required in order that some limit may be placed upon the scope of the science — The most fertile land may be unproductive of wealth — The chief causes which determine the proly less pauperism in proportion to the population than in England and Scotland— The Union Chargeability Act— The Metropolitan Poor Act discourages out-door i-elief in London, and has been most useful in diminishing pauperism — The amount of pauperism in the various unions of Eng- land varies largely, and is in the main controlled by tlie degree of skill with which the existing law is administered— Proportion of pauperism to population in the unions of Whitechapel, Linton (Cambs. ), Preston, Atcham, Oxford and Cambridge (1883)— Nearly all the motives for economical administration of the poor law would disappear if there were a national poor-rate — The dangers associated with the poor law do not lead us to advocate its abolition — It is valuable in aS'ording some control over unorganised and indiscrimi- nate private charity : it also protects the poorest classes from the desperation caused by the prospect of absolute destitution — Hence, though socialistic in its character, the poor law affortls a safeguard against the extremes of revolutionary socialism — The influence of education, cooperation and thrift in preventing pauperism — Hind- rances to the employment of women encourage pauperism — Every occupation which is closed to women drives them, in additional numbers, into those occupations which remain open, and hence a tendency is exerted to depress wages already sufficiently low — The principle of the Factory Acts is just as applied to children, but is indefensible when applied to adult women ..pages 598 — 617 Chapter VI. Local Taxation. In this country a great contrast exists between local and imperial finance — The imperial revenue has been of late years so prosperous that although the expenditure has been maintained at a very liigh rate, there have been repeated surpluses and constant remissions of taxation — In local finance the expenditure invariably exceeds the Contents. XXXVll revenue, and the deficiency is made up by loans — Statement of the local finance of London in 1868 — Local expenditure is increasing much more rapidly than the national wealth — Defects of administration arising from confused areas of rating and from multifarious rating bodies — The creation of many new rates — The demand for new rates is encouraged by the idea that an increase of local expenditure is of little consequence in a country so rapidly increasing in wealth as England — Fallacy of this exjilained — Arguments against meeting local expenditure by gi-ants from the Consolidated Fund. ...pages 618 — 626 Chapter VII. The Incidence of Local Taxcdion. Local taxation consists almost entirely of i-ates on real property — Figures quoted to prove that rates in towns are generally much higher than in country districts — Land is contributing a constantly decreasing amount to local taxation in comparison with other kinds of property — \n the case of cultivated land, although the rates are usually paid by the occupier, their real incidence is upon the owner of the land — In the case of houses, the incidence of by far the larger portion of the rates is upon the occupier ; a small portion only falling upon the owner of the land on which tlie house is built — If, however, the house possesses such exceptional advantages of situation tliat the rent is only in a small degree determined by the cost of building, then the incidence of the rates is almost entirely upon the owner of the ground — When a uniform and general rate is imposed on business premises the rate really falls on the consumer — When rates are exceptionally high in a particular district they are a special tax on the profits of trade in that district— Rates imposed on railways and the railway passenger duty are a charge upou the profits of the shareholders and are not paid by railway passengers — The rates imposed upon water-works and gas-works are, except in certain exceptional cases, paid by the shareliolders — The injustice explained of carrying out works of iniprovemeut by loans, the interest and capital of which are paid off in a fixed number of yeyrs, in the form of additional rates by the leasehold occupier, as distinguished from the owner of houses, land, and other rateable property 627 — 645 Index, 646 POLITICAL ECONOMY. BOOK I. PRODUCTION OF WEALTH. CHAPTER I. INTRODUCTORY REMARKS. ALL who have studied an exact science must have experienced the formidable difficulties which elementary chapters invariably present. The young mathematician may well be staggered at the discussions usually annexed to the enunciations of the laws of motion; the axioms in his Euclid, which he is told to believe are self-evident propositions, offer philosophic questions of such complexity, that they continue to form an arena upon which the subtlest intellects contend. A definition of political economy, and an inquiry into the method of investigation that ought to be pursued in this science, involve considerations which are sure to perplex the beginner ; but the young mathematician need not be driven away from his Euclid because philo- sophy has not decided whether axioms are intuitive truths, or truths learnt from experience ; in a similar way, the student in political economy ought not to have his faith shaken in the truths of this science, because he has learnt beforehand that political economists still dispute upon questions of philosophic method. We ask such a student to accompany us with an unbiassed mind ; we will promise to lay before him truths of great interest and great importance ; we will endeavour to render them intelligible, and when such a body of truths has been accumulated in the student's mind, he will be in a position to understand the exact nature and scope of the science to which they belong. Although it is not advisable in this place to attempt a precise definition of political economy, yet it is necessary to give a general idea of the class of phenomena which BOOK I. CH. I. Difficulty of the first elements of political economy. Prejudices against political economy. Manual of Political Economy. BOOK I. CH. I. Political economy is primarily concerned with loecdth. this science investigates; it is all the more important to do tliis, because the vagueness of popular conceptions has generated a vast amount of prejudice towards political economy. Hardhearted and selfish are the stereotyped epithets applied to this science. Ill -defined antipathy is sure not to rest long suspended upon a mere abstract idea ; it seeks some concrete object, and therefore the epithets applied to the science are speedily transferred to those who study it, and a political economist exists vaguely in the haze of popular ignorance as a hardhearted, selfish being, who wishes to see everyone rich, but who has no sympathy with those higher qualities which ennoble the character oi man. The error of this ignorant prejudice will be abundantly exposed in these pages ; but we will make a few preliminary remarks upon it, in order to convince the student that the political economist is not the harsh being generally portrayed, but that he possesses that information which tells him how to improve the lot of his fellow-men. He may therefore be the most useful of all philanthropists; because a mere desire to do good without any principles of guidance is ever liable to lead to futile and misdirected effort. Political economy is concerned with those principles which regulate the production, the distribution, and the exchange of wealth. The first great work on political economy was called by Adam Smith ' The Wealth of Nations ; ' but political economy is concerned alike with individual and national wealth. Those who share the popular error above alluded to make this inquiry, Has a nation no other mission to fulfil than to become rich ? and should wealth be to the individual the one absorbing aim of life ? But political economy never even gives colour to the suspicion that the creation and accumulation of wealth ought to be the great object either of a nation's or of an individual's exi.stence. The springs of life's action are numerous; society is held together by a vast aggregation of motives and sympathies. Wealth is necessary to man's existence; a great portion of human exertion is stimulated by the necessity to labour, in order to procure the commodities which maintain life. When, therefore, we endeavour to consider tlie phenomena connected with the production Introductory Remarks. and distribution of wealth, we do not wish, in a feeling of opposition, to ignore the other phenomena of man's social existence ; we isolate this class of phenomena, because the necessities of scientific investigation demand it. Every social question, either directly or indirectly, involves some considerations of wealth, and therefore has an aspect from which it must be considered by political economy. Thus, when it was proposed to extend to the whole nation the system of compulsory education, introduced by the Factory Acts, political economy pointed out how production in this country, and how the wages of the labouring classes, would be affected, by compelling every child under thirteen years of age, who might be employed in any kind of labour, to attend school a fixed number of hours per week. This was an aspect of the question which it was neces- sary to consider, but even if the political economist had proved that the production of commodities would be rendered more expensive, he might have been the first to admit that such a loss of national wealth would be abundantly compensated by the increased intelligence of the labouring population. Numerous other examples might be given which would still further prove the complete fallacy of the accusation which is so constantly brought against political economy, that it is a science which encourages selfishness and de- grades the best feelings of human nature. If a political economist considers that the only aim and end of life is the accumulation of wealth, then the individual ought to be blamed, and not the science which he studies. Poli- tical economy, if kept within its proper limits, does not provide a code of social ethics which will enable us to decide what is right or wrong, and what is just or unjust. It is the business of political economy to explain the effect which any circumstance, such as the imposition of a tax, or the enforcement of a particular land-tenure, will exert upon the production, the distribution, and the exchange of wealth ; and it is therefore manifest that political economy cannot take account of various other consequences which may be independent of any con- siderations concerning wealth. Thus, to revert to our original illustration, the principles of political economy BOOK I. CH. I. hut dots not ignore other mo- tives than the desire for wealth. Manual of Political Economy. Meaning of the ivord 'wealth.' enable us to ascertain in what manner the wages of labourers and the production of wealth are affected by a compulsory system of national education. Hence the department of this question which belongs to political economy is, as it were, separated from those other departments of the question which investigate whether or not the morality and the social happiness of the people are increased by a system of national education. It is therefore a fundamental error to suppose that political economy ever asserts that the higher motives which actuate human beings ought to be discarded in favour of wealth. Some writers on this science when discussing social questions may coiisider only that part of a subject with which political economy is concerned, and thus the error may be committed of drawing general conclusions from an incomplete investigation. Hence political econo- mists have sometimes appeared to be harsh and narrow- minded, but it is as idle upon these grounds to accuse political economy of being selfish and hardhearted, as it would be to blame geology because an injudicious and enthusiastic geologist ignored and despised other branches of physical science. It must moreover be borne in mind that although sentimental people may profess to sneer at wealth as one of the idle vanities of this world, yet there can be no doubt that, even in England, the great besetting evil of the nation is the poverty of the humbler classes, and that these people cannot make any great social advance until a decided improvement has taken place in their material condition. We have described political economy as a science which is concerned with the production, the distribution, and the exchange of wealth. But the meaning of wealth, though a word of every-day use, will not probably be adequately understood without some elucidation. \yealth may be defined to consist of every commodity which has an exchange value. The necessity of the limitations introduced into this definition may be readily shown. The air we breathe is of course not only a want, but a necessity of life; yet it cannot be regarded as wealth, because it can be obtained without labour and its supply is unlimited, ^ Introductory Remarks. ^ and it therefore has no exchange value. Water very generally can be obtained in an unlimited quantity, and therefore it is not wealth ; but the population of a large town would soon absorb all the water which nature spontaneously provides, and therefore water must be supplied by artificial means. It then at once possesses an exchange value, and is justly considered to be wealth. Wealth, therefore, is not determined by the nature and quality of a commodity, but rather by the circumstances in which that commodity may be placed. A gallon of the water which flows from the springs at Am well is not, there, wealth ; it would be as valueless to sell as a cubic foot of air, because, there, a supply of water can be as easily obtained as a supply of air ; but that same water conveyed a few miles, to the metropolis, produces the large annual revenues of the New River Company. The character of wealth may be also given to a commodity by the shifting caprice, or by the changing wants of man. It thus becomes evident that exchange value is the characteristic which stamps a commodity with the attribute of wealth. The most striking variations in wealth are exhibited by the same nation in different ages, and by different nations in the same age. There was a time when England was as poor as any country which is now consigned to the wandering savage, and yet she possessed then those same natural resources which now so materially contribute not only to form but to sustain her present wealth. The richest seams of coal were unworked, but in those remote times her population was in a condition in which they could have no demand for coal, and therefore this article had no exchange value ; and that commodity which is now so valuable, could not then be legitimately classed as wealth. Hence it is manifest that the social condition of a nation and the state of its civilisation determine to what extent natural resources may be classed as wealth. Each stage through which progressive nations have advanced from barbarism to civilisation is preserved at the present time in some parts of the globe. The savage still exists who lives by hunting and fishing ; the wandering Arabs are true types of the ancient nomad tribes whose flocks and herds were grazed on natural BOOK I. CH. I. Various amounts of ivealth in diferent ages and countries. Maniial of Political Economy. BOOK I. CH. I. Erroneous view of wealth. The mer- cantile system. pastures without the aid of the large supply of food which would be yielded even to the rudest agriculture. The village communities of the East remain instructive examples of the patriarchal type of life ; the stereotyped condition of China exhibits the features of a remote civilisation. These great difFerences in wealth are partly due to physical causes, but they mainly depend upon social circumstances, and as far as they do so, form the appropriate topics of political economy. The mind of an Englishman so habitually contemplates progress, that it is difficult to keep in view how large a portion of the habitable globe is in an absolutely stationary condition. It is the duty of the political economist to explain not only the conditions which determine progress in national wealth, but also the causes which tend to make the material state of a country either stationary or retro- gressive. It is even at the present day important to direct careful attention to an erroneous conception of wealth, which was universal until the appearance of Adam Smith's great work in 1775. The error when once exposed may appear incapable of misleading a child ; yet no error was ever more tenaciously clung to. It not only corrupted speculative science, but it infected the whole commercial policy of every European nation. These errors are associated with the policy which has received the name of the mercantile system. The essence of the mercantile system was to identify wealth with money. Now the use of money is one of the first signs which marks a nation's progress from barbarism towards civili- sation. Societies even comparatively rude must be impressed with the necessity of adopting some medium of exchange. This will be readily understood by a cursory glance at the general functions which money fulfils. In the first place, money provides a measure by which to record the value of each commodity. If, for instance, it is known that a sack of wheat is worth twenty shillings, the value of the sack of wheat, compared with any other article, can be at once ascertained when the price of this last article is known. Money, moreover, is not only a universal measure of value, but is also a universal medium of exchange. A man may possess a store of wheat which Introductory Remarks. he requires to exchange for various other commodities ; money provides him with the machinery by which this can be readily eifected. The wheat has simply to be sold for so much money, and with this money a certain amount of the other commodities required can be purchased. But if the use of money dicl not provide a general medium of exchange, the whole transaction must be conducted by barter ; thus, if the individual possessing the wheat required a coat, he would have to discover some one who was Avilling to exchange the coat he wanted for wheat. Every transaction would under these circum- stances be conducted by barter. Commerce thus impeded could never develop, and society never advance beyond its primitive rudeness. But these important functions which money performs, engendered in men's minds the fallacies of the mercantile system. For the value of every commodity being estimated in money, and every commodity also when bought or sold being exchanged for money, men soon began to mistake the sj^mbol for the reality, and nothing was regarded as wealth except money. A nation consequently tested the utility of its commercial transactions with other nations, by ascertain- ing whether the commerce caused money to flow into the country. The whole commercial policy of a nation was framed with a specific object of encouraging the greatest possible accumulation of the precious metals. No one would now profess adherence to the errors of the mer- cantile system, but we shall have abundant opportunities of showing that they are still the secret prompters of many a wide-spread fallacy. The consequences of the mercantile system will be further discussed in those chapters which treat of money. These general remarks upon wealth will enable us at once to proceed to the consideration of the production of wealth, the first great division of political economy. CHAPTER 11. THE REQUISITES OF PRODUCTION. BOOK I. CH. II. Bequisites ofprodnc- tion. Lahour, natural agenta. THE production of every species of wealth requires the apphcation of man's labour. The forces of nature, acting upon the materials of which the earth is composed, have created products from which wealth is immediately derived. The seams of coal were deposited without any human agency; but the coal is not available to satisfy any of the wants of life until man's labour has dug this coal from the mine, and placed it in those situa- tions in which it is required. But labour, in order to produce anything, must have some materials upon which to work. These are supplied by nature, and may be termed natural agents. The steam-engine, for example, is fashioned out of metals, deposited as the result of certain forces acting in remote geological ages. Production, therefore, has manifestly two requisites — labour, and appropriate natural agents upon which this labour may work. But there is a third requisite, the necessity of which will, perhaps, not appear so self- evident. The casual observer might be very possibly satisfied to accept as sufficient the two requisites of production we have mentioned; for it might be said, Does not properly trained labour, acting upon suitable materials, suffice to produce the required commodity ? But there is something which is requisite to this labour itself. The labourer must be fed. How can he be fed but by food which has been previously accumulated ? This food also required the application of labour ; there- fore, since the labourer must be fed by previously accumu- lated food, a third requisite of production is suggested, for some of the results of past labour are required to be The Requisites of Production. II set aside to sustain the labourer whilst labouring. The third requisite of production, therefore, is a fund reserved from consumption, and devoted to sustain those engaged in future production. This fund is termed capital. The early steps of a student in almost every science are met by certain obstacles ; if he succeeds in surmounting tliese obstacles, his future progress seems to be insured. The young mathematician who obtains a firm grasp of the physical conceptions involved in the laws of motion, will comprehend with facility problems of apparently great mathematical complexity. The questions involved in considering the functions of capital, will test a man's capacity to master the principles of political economy. Success in the study of this science may be regarded as guaranteed to all who obtain a clear insight into the nature of capital. There are certain fundamental propositions concerning capital which should be kept steadily and constantly in view. One of these is as follows : — Capital is the result of saving. This saving may not be primarily prompted with a view of assisting future production. The results of labour, however, are not rendered immediately avail- able for consumption : the ploughman who ploughs the soil must wait for months before the wheat which his labour contributes to produce will be ready for human food ; but the ploughman must be fed, and he is fed with food previously accumulated. The labourers, too, who have constructed his plough, must be fed on food which has been saved from previous consumption ; for a considerable time must elapse before the harvest can be gathered from the soil which the plough has assisted in tilling. Capital, therefore, represents all that has been set aside from the results of past labour to assist present or future production. It will now be perceived that capital is as indispensable a requisite of production as either labour or appropriate natural agents. BOOK I. CH. II. and capi- tal. Capital is the rentdt of saving. CHAPTER III. LABOUR AS AN AGENT OF PRODUCTION. IT is manifest, from the remarks which have been made in the previous chapter, that labour is indispensable to the production of wealth. As we proceed to describe the purposes to which labour is directed, it will be found, as observed by J. S. Mill, that labour creates utilities fixed and embodied in material objects. Nature supplies the materials, but labour fashions these materials, arranges them, places them in those situations in which they are required, and in fact renders them in every respect suited to satisfy the wants of life. The greater number of commodities, before they become serviceable for man, pass through many complicated pro- cesses, each of which necessitates much complex labour. Trace the cotton seed, first sown in the swamps of Georgia, then supplying material to the looms of Manchester. Watch the woven cloth transported to the far East, there destined to clothe the inhabitants of some remote valley of Scinde. Attempt such an examination, and we at once become almost overwhelmed with the endless series of labourers who have ministered to the production of so simple a commodity as a piece of cotton cloth. There are those who cultivate the cotton plant in Georgia, and prepare it for exportation. The cotton has to be brought to the port. Shipwrights must have constructed the ships which carry the cotton from America to England ; sailors must navigate these ships; dock labourers are required to unload the cotton; the railway on which the cotton is carried from Liverpool to Manchester has been constructed by the industry of numerous classes of labourers ; and the cotton, before it is woven into cloth Labour as an Agent of Production. 13 passes through the hands of a succession of workmen whose skill is assisted by machinery — to the creation of which almost every class of labourers has contributed, from the collier to the skilled and thinking mechanician. Every one may also be regarded as an important partici- pator in the work, who has, by his saving, contributed to the accumulation of the capital by which the industry of the labourers has to be sustained. We are quickly carried into endless ramifications if we attempt to ascer- tain the labour which has, either directly or indirectly, assisted in the production of an apparently simple commodity. Although no wealth whatever can be produced without labour, j^et there is much labour which does not contribute to the creation of wealth. Hence, labour is divided into two great classes, productive and unproductive labour. This is a distinction which, in name, is familiar to those who have not studied political economy. Before the characteristics which distinguish productive from unproductive labour are explained, it will be neces- sary to revert to our primary conception of wealth. Nature, as has been before remarked, supplies the materials. Man is powerless to create any material object; he combines substances together which would never be combined without his interposition, and thus creates a product which nature could never construct without his aid. Man takes the wheat and puts it in that situation where it will be ground ; with the flour he mixes a certain quantity of water and yeast, and when he has brought the mixture within the influence of the requisite heat, a loaf of bread will have been made. It is through the agency of man's labour that these utilities are embodied in material objects which give them their exchange value. For instance, the utility which man confers upon coal is to place it in those situations in which it may be required. There can be no doubt, therefore, that all that labour is productive which confers utility upon material objects. Such is the labour of all ordinary workmen. Agricul- tural labourers, manufacturing operatives, bricklayers, &c., must all be manifestly ranked as productive labourers. All those, too, who are employed in transporting BOOK I. CH. III. Productive and un- productive labour. Functions of labour in confer- ring ulility directly, 14 Manual of Political Economy. merchandise from one place to another, are productive labourers, for they confer upon commodities the utility of being in the place where they are required. The labour of policemen and others who are engaged in protecting industry is productive, because they confer upon com- modities the important utility of security. But even the labour of productive labourers is not unfrequently unproductive. Public works have been commenced and abandoned ; the labour which was bestowed upon these is of course wasted. A railway was constructed from Chesterford to Newmarket ; it was closed almost from the first ; there is now no chance of its being reopened, for the company has commenced xcselling the land to its original proprietors ; and thus the labour of even the most useful workmen may be unproductive. There is also labour which is eminently useful, but does not, however, directly contribute to the production of wealth. As an example of this, it may be mentioned that, not many years since, the uneducated labourer was couvsidered as efficient as the educated labourer, and employers were heard to regret those days when there were no schools to corrupt the industrial virtues of the workmen. When such opinions were current the labour of the schoolmaster must have been considered entirely unproductive, because it would have been supposed that, even if he did not impede, he certainly did not promote, the efficiency of the labourers, regarded as mere machines for the production of wealth. But now facts are every day coming to light which must impress us with the conviction that the schoolmaster occupies a most im- portant position in the material economy of the nation.^ ^ [A comparison of the years 1875 and 1904 shows that the average number of children in attendance at primary schools in the United Kingdom increased from 2,565,400 to 6,308,440. During the same period, the total number of paupers, notwithstanding an increase in Ireland, declined by more than a hundred thousand in the whole United Kingdom. The number of persons convicted of crime declined from 15,000 to 13,000. The consumption of alcohol per head decreased from 2-33 gallons to 2-08 gallons. The national drink bill was £168,987,165 in 1904 and £164,167,941 in 1905, and the movement in the direction of greater temperance has been very marked for several years. During the period between 1875 and 1904 the money due to depositors in Savings Banks increased from 67 to 200 millions, and the money in mutual benefit societies from 20 to 164 millions. See article entitled Labour as an Agent of Production. 15 Even to manual labourers a properly developed mind is as essential as a well-developed body ; and there can be no doubt that he who contributes in any manner to improve either the physical or intellectual condition of the people takes no unimportant part in assisting the nation's wealth. Much labour, therefore, which at first sight may seem unproductive, will appear, on further consideration, to exert an indirect influence upon the production of wealth. Popular notions attach a certain stigma to unproductive labour. No doubt, waste of any kind is to be deplored ; but we should not be too prone to regret that so much labour is devoted to provide the pleasures of life, for the happiness of a nation may be in some degree estimated by the time and labour which can be spared for enjoyment : even the labour of those who provide these enjoyments is not altogether unproductive: a man will work with more vigour and efficiency if his mind can be diverted from the routine toil of life. From these remarks we are able to deduce a precise definition of productive labour. The definition which is now usually accepted, is as follows : — ' Productive labour is that which produces utilities fixed and embodied in material objects.' According to this definition, the labour of the teacher is unproductive from whose instruction a mechanic acquires his skill. And yet the skill of our workmen ought to be classed as wealth, because the loss of this skill would diminish the wealth of the nation, as much as if she were deprived of a great amount of material wealth. If, however, the skill of the labourer is classified as wealth, we strain the use of the word ' wealth ' beyond its usual acceptation ; because wealth is always popularly conceived to be something material. We will therefore adopt the following definition : — Pro- ductive labour is that which either directly or indirectly produces utilities fixed and embodied in material objects. According to this definition, the labour of the teacher who imparts skill to the mechanic is productive, for by this skill wealth is created — or, in other words, utilities are embodied in material objects, and therefore the labour Ten Years of National Growth, by Mr. M. G. Mulhall, Contemporary Review, Dec. 1886 ; Statistical Abstract 1905 and publications of the United Kingdom Alliance.] BOOK I. CH. III. Definition of pro- ductive labour. i6 Manual of Political Economy. BOOK I. CH. III. Productive and unpro- ductive consump- tion. of the teacher indirectly produces these utilities, and his labour must consequently be classified as productive. The definition, moreover, obviates the necessity of running counter to popular language, for this is undoubtedly done if we denominate as wealth such an immaterial object as the skill of a mechanic. For the purposes of political economy, there is another distinction, as important as that between productive and unproductive labour. Much of that which is produced is destined to be wasted, or to be consumed unproductively. The wants of those who never contribute, either directly or indirectly, to the wealth of the nation must be supplied by the results of productive labour ; and hence a portion only of the results of productive labour assists in the formation of new wealth. Consumption, therefore, as well as labour, may be either productive or unproductive. Although the entire consumption of unproductive labourers must be unproductive, yet it does not follow that commodities are always consumed productively by productive labourers. For instance, even the poorest labourers in this country purchase some luxuries which thej^ could abstain from, without in the slightest degree diminishing the efficiency of their labour. All such purchases, therefore, even if made by the most produc- tive labourers, denote unproductive consumption. The distinction between productive and unproductive consumption will assume considerable importance in the remarks we are about to make upon capital. CHAPTER IV. OF CAPITAL. WE have already explained that capital is as indis- pensable a requisite of production as either labour or appropriate natural agents. A very little considera- tion will render it evident that labourers, whilst engasfed m any particular industry, cannot live upon the com- modity which their labour is assisting to produce. The ploughman who tills the soil from which, in the following autumn, the harvest will be gathered, is fed with the wealth which his master has saved ; or, in other words, the master pays his labourer's wages from the wealth which he has previously saved. The production of wealth, therefore, cannot proceed unless some of the wealth previously produced has been set aside from immediate consumption. The wealth which has been accumulated with the object of assisting production, is termed capital ; and, therefore, the capital of the country is the wealth which is not immediately consumed unpro- ductively, and which may, consequently, be devoted to assist the further production of wealth. This is a wide definition, but it is correct and sufficiently definite until the subject has been more fully elucidated. In the general introductory remarks upon wealth, particular attention was directed to that current fallacy which confounds money with wealth. The student, in obtaining his primary conceptions of capital, is not unfrequently confused by a similar fallacy. Capital, like other wealth, is estimated and expressed in money. Hence the idea is encouraged that capital consists of money, to the exclusion of any other commodity. Although, perhaps, adhesion would not often be professed B Definition of capital. Fallacy oj confound- in-iven to labour, when the distinct operations of any industry are performed by separate sets of workmen. In this case, workmen who are difierently employed combine to assist each other in the production of the same commodity, and hence division of labour is an instance of tlie complex cooperation of labour. We have therefore departed from scientific accuracy in our arrangement of this chapter, and, partly in deference to popular opinion, have given precedence in our remarks to a discussion of the advantages of division of labour. Political economists following in the steps of Adam Smith have restricted the subject of the division of labour to its narrow sense. The reason of this may perhaps be, that the illustrations used by Adam Smith have made the division of labour one of the most popular parts of political economy ; and thus its importance, compared with other portions of the subject, has been greatly exaggerated. CHAPTER VI. PRODUCTION ON A LARGE AND A SMALL SCALE. IF we had not feared that the last chapter was becoming too long, we should not have placed the subject we here propose to discuss in a separate chapter, because the carrying out of production on a large and a small scale exerts a very powerful effect upon the productive powers both of land, labour, and capital. The comparative advantages of production on a large, and production on a small scale, depend upon conditions which may vary greatly at different times, and in different employments. Every extension of machinery no doubt tends to give an advantage to production on a large scale. In the days of hand-loom weavers, little would have been gained by gathering them together into large buildings, such as the mills of Manchester. Each hand-loom weaver worked for himself; he needed not the assistance of others, and therefore there was no reason why he should not work in his own cottage. But the introduction of machinery has divided the work which was previously done by the hand-loom weaver, into a great number of distinct operations ; and in this way machinery renders production on a large scale absolutely necessary. But to what extent it is advan- tageous to increase the scale of production, whether it is more profitable to erect a mill containing 10,000 spindles, or two mills containing 5,000 each, will be most correctly determined by those engaged in the trade. The com- parative economy of working large and small mills is sure to be quickly ascertained by the manufacturers them- selves ; there can, however, be no doubt that a small manufactory will have little chance of competing with a E BOOK I. CH. VI. Compara- tive advan- tages of production on a large and small scale. 66 Manual of Political Economy. large one, if the small manufactory is not large enough for the efficient working of the most complete machinery used in the trade. Again, a small manufactory cannot compete with a large one, if in the one there is a less complete division of labour than in the other. A pin factory which employed ten men would produce pins at a much smaller cost than a factory in which only five men were employed. The labour of superintendence generally forms a comparatively larger item in small concerns than in large ones ; for instance, each room in a cotton mill may require an overlooker, whether a hundred men are working in the room, or two hundred. A steam-engine must be constantly watched by an engineer, whether the engine is fifty-horse power, or a hundred-horse power ; but all such questions concerning the greater or less economy of business arrangements will ultimately be decided by practical experience. There is at the present time a very decided tendency to increase the scale of production, and this tendency is particularly shoAATi in those vast manufactories and warehouses which exemplifj^ the wealth and energy of Lancashire and Yorkshire ; hence we must conclude, that production on a large scale, especially in the manufacturing districts, is rapidly becoming more advantageous. In fact, we have ascertained that a cotton mill containing 10,000 throstle spindles can be worked with a capital of 20,000/.. whereas a mill with 5,000 spindles requires a capital of not less than 11,000?. It was remarked in the last chapter that the extent of the demand places a limit upon the division of labour. But the extent of the demand influences in a much more decided manner the scale on which the production of any commodity can be carried on. A very serious loss would be incurred if the demand for anj^ commodity was not sufficient to take off all that might be produced by the machinery and plant erected for its manufacture. Machinery when unemployed is capital lying idle, and the workmen when thrown out of employment could only be kept together by paying them some portion of their wages. This would represent an unproductive employment of capital, but if the labourers were not thus kept together, when work was resumed new and Production on a Large and a Small Scale. 67 untrained hands would have to be employed. Machinery also, if kept idle, frequently suffers great injury. The fluctuation in the demand, when it is small, is compara- tively much greater than when the demand is large. Even if production on a large scale is very advan- tageous, production on a small scale may still be very much practised. Let us again use our previous example, and suppose that a cotton mill containing 20,000 spindles can be worked at a much cheaper rate than one con- taining 5,000 ; but a capital of nearly 40,000Z. may perhaps be required to work a mill with 20,000 spindles, whereas a capital not much exceeding 11,000/. would probably suffice for a mill with 5,000 spindles. The number of individuals who possess a capital of 40,000/., and who are willing to invest it in a cotton mill, is very limited, and therefore there can only be a limited number of mills with 20,000 spindles. These mills may not suffice to spin all the cotton for which there is a demand, and therefore other and smaller mills must be worked. It is true that the small mills could not remain open if they had to compete with an unlimited number of large mills ; but as the number of these is virtually restricted, the small mills may be still worked at an advantage, although the profits obtained by these mills may fall far short of the profits obtained by the larger ones. Large capitals thus obtain an advantage, and possess as it were a monopoly ; we shall treat this subject at considerable length in our chapters on profits. It may naturally be supposed that, in a wealthy country like England, production on a large scale when advantageous will never be restricted by the causes to which we have just alluded, for it may be said that if the individuals who have sufficient capital to work large mills are limited in number, there will be no difficulty in gathering together the requisite capital by means of joint-stock companies, and that such companies will avail themselves of the advantages of a large production, and thus drive the small producers out of the market. But joint-stock companies labour under many difficulties: and although they secure the advantages of producing on a large scale, yet in many industrial occupations, joint-stock companies cannot compete with the energy BOOK I. CH. VI. Production on a small scale may maintain itself, though at a disad- vantar/e. The advan- tages of production on a large scale only partly at- tainable by joint-stock companies, 68 Manual of Political Economy. BOOK I. rii. VI. owiiif/ to (he leant of interest on the part of the managers. of the individual trader or manufacturer. With one or two exceptions there are no individuals who have capital enough for the construction and maintenance of such works as railways, docks and canals; and therefore such undertakings must be carried out by joint-stock companies. But if a joint-stock company conducts some ordinary business, it is often placed in a comparatively disadvantageous position, because the energy and watch- fulness are wanting which an individual exercises w^hen a business is his own. If competition is active, a business cannot be successful unless all its operations are conducted with energy, and unless economy is secured by constant vigilance. In a joint-stock com- pany all depends upon the manager or agent. The individual shareholders are not sufficiently interested to take any part in the management of the concern. Men can very rarely be found who are as careful with other people's property as they would be with their own. The manager of a company may do nothing which is in the slightest degree dishonest ; it may be impossible to single out any particular instance in which he has neglected to do his duty, yet the position in which he is placed will not probably call forth those qualities which not only distinguish the good man of business, but which also cause the success of commercial under- takings. If however the manager is partly remunerated by a share of the profits realised, he will no doubt be stimulated to much greater exertion ; in fact he will be made to feel the same kind of interest in the success of the business as if it were his own, and many of the disadvantages to which we have just referred as impeding the success of joint-stock companies will be removed. Joint-stock trading companies have frequently failed, because those concerned in their management have not a sufficiently strong pecuniary interest in their success. There can be no doubt that individual em- ployers suffer most serious losses from the listlessness and apathy of their workmen, although such employers have the strongest motives to prevent neglect of work by their labourers; the losses how^ever which are thus incurred will be still more serious in the case of a trading company, when the labourers are only watched Production on a Large and a Small Scale. 69 by a manager, who is comparatively uninterested. A joint-stock trading company would even be more bene- fited than the individual trader, by adopting some course, if it were practicable, which would give the labourers a pecuniary interest in their work, for in this manner the energy and skill of the workmen might with greater certainty be secured. Joint-stock com- panies have always experienced the greatest obstacles in retail trades, where the transactions are numerous and small. The petty details of such businesses seem particularly to require the energy of individual manage- ment. The cooperative stores, however, which have assumed so much prominence all over the country, especially in London and in the north of England, are joint-stock companies ; the capital is supplied by a large number of shareholders. Yet these societies have engaged with the most remarkable success in the ordinary retail trades, conducted by grocers, drapers, chemists, wine- merchants, coal-merchants, bakers, butchers, &c. The success of these societies not only proves that the disadvantages of the joint-stock system have been much exaggerated, but also indicates how the most prominent of these disadvantages may be overcome. The prosperity of the cooperative stores is probably mainly due to the ready-money system which they invariably adopt ; the smallest sum is consequently never lost in bad debts. It is in every respect advantageous to a country, that the joint-stock system should be encouraged ; it greatly promotes the production of wealth. JSmall capitals which, if separately applied, would do little towards the production of wealth, are brought together by joint-stock companies, and accomplish industrial works of the utmost importance. A thousand individuals who have saved 100^. each, may not have the time, capacity, or inclination themselves to employ the money in any business. If each of these individuals subscribed his 1001. to one common fund, a capital would be created sufficient to work a large Manchester manufactory; they would become proprietors and promoters of a great commercial concern, annually producing a large amount of wealtli, and annually employing many hundreds of labourers. BOOK I. CH. VI. Special ad- vantage of coopera- tive stores. The exten- ■sion of the joint-stock system de- sirable. 70 Manual of Political Economy. BOOK I. CM. VI. Lan/e and small farm in//. Advanta- ges of large farming. Aijricid- hiral ma- chinery more hvail- able. The relative advantages of large and small farming have long been one of the most controverted points con- nected with the subject of this chapter. In England, agriculture has no doubt, within the last few years, been conducted on a much larger scale than formerly. In the best cultivated districts of England, each farmer gene- rally rents not less than three or four hundred acres. In many parishes the land which is now cultivated by one or two farmers was, within the memory of those who are still living, parcelled into twenty or thirty distinct holdings. We will first point out some of the obvious advantao^es which arise from large farming. The ex- tended use of agricultural machinery has been a promi- nent feature of that great improvement in the cultivation of the soil which has taken place during the present century. Forty or fifty years since the greater portion of the corn grown in this country was thrashed by the fiail ; now steam-thrashing machines are used in every district, and the flail has been almost banished ; even agricultural labourers rejoice in the change, and confess that they would most reluctantly resume the use of the flail ; the young men of the present day would probably not submit to such monotonous work. Steam cultivation is each year rapidly extending. A much greater propor- tion of the farmer's capital is consequently now invested in machinery than formerly. A good steam-thrashing- machine costs nearly 400^.; small farmers cannot afford to avail themselves of all this improved and expensive machinery. Not only can they not afford it, but a steam- thrashing machine requires for its working something more than the resources which a small farm can supply ; its working must be attended to by eight or ten men ; the corn is taken from the stack by two men, another man has to feed the machine with corn; the engine must have an engineer; the straw must be carried away by one man, and stacked by another; another man must take the grain from the machine, and another again will have to carry water to the engine. It is true that a great many even of the large farmers do not now own, but hire, the steam -thrashing machines which they use ; such a plan, however, is extremely uneconomical. A farmer Mho hires such a machine cannot always obtain Production on a Large and a Small Scale. 71 it at the exact time he may require it ; those who let the machine must make a profit from those who hire it, and for several reasons a high charge must be paid for the use of the machine. There is the expense of taking it from one farm to another; it is earning nothing when being so moved, and the wear and tear caused by drag- ging it along the roads is very considerable. But a small farmer who hires such a machine is under still greater disadvantages, for he not only has to hire the machine, but must also hire the men to work it, since he has not enough men in his own employment. Men who are hired in this irregular way must be paid more than the ordinary labourer, whose employment is constant, for they have to sacrifice much time in- moving from place to place in quest of this irregular employment. Such a farmer will not be able to thrash his corn at the time most convenient to him ; he must thrash it when he can get the engine and hire the men. Small farming generally involves small fields ; these fields will be surrounded by hedges, and must be ap- proached by roads, and thus a great deal of land is wasted ; the disadvantage of small fields will be greatly increased when steam cultivation is introduced. The steam plough requires considerable breadth of land upon which to work ; at every turn that the plough makes, time is lost; after the centre of the field has been ploughed, the headlands will remain to be ploughed separately ; the labour of moving the engine from field to field is considerable ; much time may be thus wasted, and in fact it has been calculated that a steam cultivator would plough a square field of ten acres in half the time occupied in ploughing two fields of five acres each, and at two-thirds of the expense. Many kinds of labour on a small farm are less pro- ductive than on a large one. Thus a flock of 400 sheep requires nearly as many shepherds as a flock of 800. Each farm has a carter, whether the farm is 300 acres, or 600 acres. Again, much of the time and energy of a small farmer is frequently wasted, for he would often be able to superintend his farm quite as well if it were larger. These and many other considerations show that large farming now possesses advantages over small farming. BOOK I. CH. VI. Fields are larger, and labour frequently more pro- ductive. 72 Manual of Political Economy. BOOK I. CH. VI. Adianta- (jes of small farmiiKj. and that these advantages are destined to become more decided as tlie use of agricultural machinery is extended. Under large farming, labour can be made to work with greater efficiency; capital can be applied with greater effect, the most complete machinery can be used, less land will be wasted in useless hedges, and thus large farming tends to make labour and capital more efficient. The advantages which have been here attributed to large farming mainly refer to the cultivation of corn and the breeding of sheep. In the growth of various other products, and especially in dairy farming, many most important advantages are associated with small farming. A traveller on the continent must have remarked that the vine, and other such products which require great care, it may be almost said tenderness, in their cultivation, are most frequently grown by small farmers ; the reason of this is, that the cultivation of products requiring such watchfulness and skill could not be trusted to the care- less apathy which so frequently characterizes the hired labourer. It is seldom that anyone but a mother will bestow the tender care an infant needs, and the vine will be seldom properly cultivated except by one who has that interest in it which can alone be derived from the feeling of ownership. Even in England there is a similar advantage associated with small farming ; for all the operations of a small farm may be attended by the interested watchfulness of the farmer himself, and this advantage is more prominently shown in those farming operations which require great care. A dairy, for instance, needs a constant attention which the large farmers of the present day have not time or inclination to bestow ; hence, if there is a dairy attached to a corn or sheep farm, the large farmer will generally underlet his dairy ; the farmer supplies all the food for his cows, and the person to whom the dairy is let has every motive to give his whole and undivided attention to those minute details upon which the success of a dairy depends. Again, English farmers seldom are willing to give the time and attention which the profitable rearing of poultry for the market requires. In France, Kussia, Denmark and other European countries, however, the farmer depends upon his poultry for no inconsiderable Production on a Large and a Stnall Scale. n portion of his profits ; and the extent to which this branch of industry is cultivated is proved by the fact that England annually purchases from abroad eggs to the value, in 1904, of nearly 7,000,000/. The question of large and small farming is often incorrectly confused with the consideration of small landed properties. This subject will be discussed in some of the succeeding chapters of this work. BOOK I. CH. VI. CHAPTER VII. UN THE LAWS WHICH DETERMINE THE INCREASE OF PRODUCTION. Conditions of an in- creased ]>ro(lvc(ion of wealth. WE have in the two previous chapters discussed some of the causes which determine the productiveness of land, labour, and capital ; w-e have shown, for instance, how tlie productiveness of land may be increased by good systems of farming, and how the efficiency of labour and capital may be promoted by machinery and by a proper combination of labour. But if the land, labour, and capital of a country are in the most efficient state of productiveness, the production of wealth can only be increased by increasing either the land, labour, or capital; for if, when the land in cultivation is in the highest state of tillage, more produce from the land is required, it must be obtained by bringing a greater area of land under cultivation. Again, if all the labour which is employed is in the highest state of efficiency, a greater quantity of wealth cannot be produced unless the labour of the country is in some way increased; similarly, if the capital existing in a countrj^ is applied to the greatest advantage, and if it supports the greatest number of labourers it is capable of doing, more labour cannot be employed, and as a consequence more wealth cannot be produced, unless the capital of the country is in some way increased. Hence the laws wdiich separately regulate the increase of land, labour, and capital, are the laws which combine to determine the increased production of wealth. We therefore intend in this chapter to discuss the laws on which depend the increase of land and labour; the next chapter will be devoted to a consideration of the laws wdiich determine the increase of capital ; and there- On the Increase of Production. 75 fore the two chapters will complete our investigations concerning the laws which combine to regulate the increased production of wealth. The area of each country is limited, but, nevertheless, each country possesses much land which is not cultivated. It would, therefore, seem that, as far as the production of wealth is concerned, each country has the power of increasing the area of its cultivated land. But land sometimes remains uncultivated because it will not pay the expense of cultivation ; if this is so, it would appear that the area of cultivation cannot be extended, because no individual would be willing to cultivate land at a loss. In explaining what will take place under such circum- stances, we shall introduce to our readers some of the considerations upon which depends the theory of rent, a theory perhaps the most important in the whole range of economic science. As a general rule, that land which is uncultivated remains in this condition because it will not pay to be cultivated. Whenever, therefore, fresh land is brought into cultivation we must suppose that something has occurred which will cause the land to pay for cultivation better than it did before. Agricultural improvements have frequently enabled land which was before unpro- ductive to pay a considerable rent. Thus, the present fertility of Norfolk is in a great measure due to the introduction of the turnip ; this root enabled large flocks of sheep to be kept, which have fertilised what was before a poor soil. M uch of the rich fen land of the Isle of Ely, which now yields a high rent, was a hundred years since a worthless marsh. In these cases the productiveness of the land has been increased by special improvements. Cases, however, have frequently occurred, where more land is brought under cultivation, not in consequence of agricultural improvements, but because there is a greater demand for the produce which is raised from the land. If the population of a country increases, its people will require a greater quantity of food ; and this food must, in the absence of foreign importation, be obtained either by making the land which is already in cultivation more productive, or by extending the area of cultivation. If at the time this increased demand for food arises there BOOK I. CH. VII. Fresh land may be cul- tivated, oiving to agricul- tural im- prove- ments, or in- creased de- mand for food and increased value of produce. 1^ Manual of Political Economy. As the value of produce rises, less productive soils are cultivated. are no particular agricultural improvements to be sug- gested, the enlarged demand must be supplied by- cultivating more land; but as this land did not pre- viously pay for cultivation, and as it would not now be cultivated if it did not pay for cultivation, it follows that the value of agricultural produce must rise in order that the farmer may realise an adequate amount of profit. Since land previously untilled is now supposed to be cultivated, the production of wealth, as we have before remarked, is increased in consequence of the greater demand w^hich has taken place for food. It is not alone the land thus brought into cultivation which is made more productive, but all the land of the country becomes more productive of wealth ; for although there is not a greater quantity of produce raised from it, yet the value of the produce is enhanced by the increased demand for food. All the effects here attributed to an increase of population are strikingly exemplified in the progress of a prosperous colony. No one can doubt that many of the great natural pastures of Australia, which now pay scarcely any rent, will in the course of time be cultivated and rented as valuable agricultural land. Within the last few years the area of cultivation in Australia has rapidly extended. From 1851 to 1861 the population of Victoria increased from 80,000 to 500,000 ; in 1886 it was more than 1,000,000.^ The increased quantity of food consumed in Victoria caused more land to be brought into cultivation ; the value of agricultural produce must consequently have risen, because land which is in cultivation now would not have repaid its cultivators when the population of Victoria was so very much smaller. Although it has thus been show^n that the value of agricultural produce must rise when the demand of a larger population causes more land to be brought under cultivation, yet it will assist tlie reader, if the primary causes are explained upon which this rise in value depends. Every country possesses land w^hich varies greatly in productiveness. In estimating the productive- ness of any particular land it is necessary not only to ^ [Since 1886 the population of Victoria has been practically stationary ; on March 31, 1901, it was 1, '201, 341.] On the Increase of Production. 77 consider the fertility of its soil but also its accessibility, or, in other words, its convenience of situation. Some of the most fertile land in the world is so remote from any population which requires its produce, that its cultivation would prove unremunerative, and therefore it may be regarded as unproductive of wealth. Confusion frequently arises because a productive soil and a fertile soil are regarded as synonymous expressions. In an economic treatise, however, it must be always carefully remembered that not only fertility but also convenience of situation are included when the term ' productive ' is applied to land. Bearing these remarks in mind, it is evident that the productiveness of land varies inversely with the quantity of labour and capital required not only to raise a certain amount of produce, but also to bring the produce to the situation where it is required. The most fertile land, if extremely remote from the population which is willing to purchase its produce, is frequently unproductive, because of the great expense which cost of carriage would involve. As population increases, unless the additional food required can be obtained either by foreign importation or by improved agriculture, the area of cultivation is extended, and less productive soils must be resorted to ; or, in other words, land is gradually brought into cultiva- tion which does not return so much for the labour and capital expended upon it, as land which was previously cultivated. Hence the production of wealth cannot be indefinitely increased, because the returns to labour and capital diminish, as it becomes necessary to resort to less productive land. This principle forms the basis of Ricardo's theory of Rent, or as it is sometimes called, the theory of diminishing productiveness. The proposition just enunciated suggests an obstacle which more or less impedes the continual increase in the production of wealth. The reader, for several reasons, finds it difiicult adequately to appreciate the magnitude of the impediment which in many countries is thus placed upon the production of wealth. It will be neces- sary frequently to recur to this subject ; a few more remarks may, however, be here made upon it with advantage. It may be thought that although less BOOK I. CH. VII. The mean- ing of the word ^pro- ductive ' as applied to land. An in- creased de- mand for food tends to increase the value of agricid- tural pro- duce. 78 Manual of Political Economy. productive land requires more labour and capital, yet the general value of agricultural produce will be but slightly affected. For it may be urged that the productiveness of the land which was previously cultivated will not in any way be diminished, on account of the more expensive culture required by the less productive land, which is now resorted to. A portion only of the produce which is raised from the land will require a greater outlay of labour and capital, the productiveness of all the remain- ing land will be unchanged, and hence it may be argued that no serious impediment can be caused to the pro- duction of wealth. We must repeat, that when an increased demand for food brings less productive land into cultivation, this food is obtained at a greater cost of labour and capital, and therefore food becomes more expensive. But the value of wheat of the same quality does not vary, when brought to market, because one sack of wheat has been produced at a greater cost than another ; of course this is a matter of no consideration to the purchaser, but simply to the growers of wheat. If, therefore, it is necessary that the price of wheat should rise, in order to make the cultivation of inferior land remunerative, the price of all the wheat grown must rise in a similar manner, and food consequently becomes more expensive. If by these causes the price of wheat is raised, it is manifest that the farmers who cultivate the more productive land must derive a great advan- tage, because the produce which they obtain does not require more labour and capital, and j^et its price is materially increased. The farmers, however, cannot in the long run appropriate this advantage to themselves, as the landlords secure it in the form of increased rent. A further discussion on this branch of the subject would involve an explanation of the theoiy of rent : and this theory does not properly belong to the production, but to the distribution of wealth. The important proposition we wish to establish con- cerning the production of wealth is that an increased demand for food has a tendency to make food more expensive, and as such an increased demand is almost always caused by an increased population, we may enunciate the principle thus : that as population advances On the Increase of Production. food has a tendency to become more expensive. In the enunciation of this principle, we have employed tlie word tendency. We believe that an example may be thus afforded, which will illustrate the great importance of enunciating almost all the principles of political economy, as exerting tendencies, rather than as produc- ing immediate results. This has not been sufficiently recognised, and consequently the progress of political economy has been greatly retarded, and much prejudice and incredulity have been raised in the minds of practical men towards the conclusions of this science. In mathe- matics a force is measured by the effects which it has a tendency to produce, i.e. which it would produce if not counteracted by other forces. The force of gravity is estimated by the space through which the body would fall in a second of time, if it was acted upon by no other force ; this space is sixteen feet ; all bodies, how- ever, do not so move, although every particle of matter is acted on by the same force of gravity. A feather floating in the air is attracted by the force of gravity, and yet it does not fall through sixteen feet in a second of time ; the feather does not fall through this space, because its downward motion is retarded by the resist- ance of the air. Although the force of gravity is thus partly counteracted, it is not either destroyed or rendered nugatory ; its effects may appear to be different, but the force of gravity always exerts a tendency, whether the tendency be counteracted or not, to make a body move through sixteen feet in a second of time. It would be very unreasonable to assert that the theory of mechanics was erroneous, because other forces intervene and modify the effects attributed to the action of a certain force. The distrust which is sometimes shown towards the principles of political economy is equally unreasonable ; these principles attribute certain effects to certain causes, but the effects will be altered, if the causes are modified ; these causes, like the forces in mechanics, are often affected in their operation by many disturbing agencies. For instance, the principle has been enunciated that the tendency of the increased demand of an advancing population is to make food more expensive. Political economy however is not in error, because circum- 79 BOOK I. CH. VII. Political economy explains (he tenden- cy of cer- tain events ratlicr than their ac- tual imme- diate re- sults. 8o Manual of Political Economy. BOOK I. CII. VII. Why the price of wheat has not risen in England. stances may occur which will counteract this tendency ; we are all aware that this tendency towards higher prices has been and may be again counteracted; that agricultural improvements, for instance, have often been introduced, which have enabled the increased wants of a larger population to be supplied without any rise in the price of food. The population of the United King- dom increased 8,000,000 between 1841 and 1881, and yet the price of wheat was lower in 1881 than in 1841 ; but this fact does not falsify the principle above enunciated. The circumstances which have prevented a rise in the price of wheat are patent to all. Before 1848, we were in a great degree restricted to our own soil for our sup- plies of corn. Now we are freely permitted to purchase wheat from any country which offers it for sale. As many as fifteen million^ quarters of wheat are often imported in one year; and as the means of communica- tion improve, the area from which we draw our supplies is constantly extended ; thus wheat is now sent in considerable quantities to England from California and Australia, and even such a remote region as the Punjab exports wheat to us. The influence therefore of free trade and improved means of transit has been analogous to that which would have been exerted if a tract of fertile land had been added to the cultivable area of this island. Suppose that, in consequence of the great abun- dance of fertile land in the valley of the Mississippi, wheat grown there could be sold in our markets at a less price than would adequately remunerate the English agriculturist if he grew wheat on many of the less pro- ductive soils in England. Under these circumstances the valley of the Mississippi would, as far as the supply of wheat is concerned, serve England the same purpose as if a tract of fertile land could be added to her shores. We are quite ready to admit, that the effects attributed by political economy to one particular cause, seldom occur with strict exactness ; such perfect conformity could not take place unless the cause acted alone, and this is very rarely the case ; the practical utility of political economy however is not for this reason lessened, for the science ^[In 1905 22,809,054 quarters of wheat were imported into the United Kingdom.] On the Increase of Production. 8i demonstrates that certain results must ensue, if a coun- teracting influence does not come into action. We will illustrate our meaning by referring to an argument, which we believe is unanswerable when urged in support of free trade. The population of England is advancing ; if we are restricted to our own soil for supplies, then food will be obtained at a greater cost of labour and capital, and food must ultimatel}^ become much dearer. It therefore becomes most important that the fertile soil of the whole world should, as far as possible, be made available to supply us with the produce we may require. We must next consider how the production of wealth is affected by an increase in the amount of labour, or, in other words, by an increase in the number of the labouring population. Labour is increased when it is made more efficient. If a machine is introduced which enables one labourer to do the work of six, of course the amount of labour in the country is augmented, but this increase is due to improvement in the efficiency of labour, a subject which was considered in the last chapter. We must here, therefore, restrict ourselves to a discussion of the consequences which result, when an increase in the number of the labouring population causes more wealth to be produced. If a greater quantity of any commodity is required, a greater number of labourers must be employed, unless some industrial improvements are introduced. Suppose, for instance, there suddenly arose a very active demand for English cottons in China ; a much greater number of labourers would soon be engaged in cotton manufactories. It may be asked. How is the increased number of labourers to be obtained ? Surplus hands will be drawn from other employments, and emigration will be checked, if there is a great demand for labour. If the demand for additional labour con- tinues, an increase of population will be powerfully stimulated, and the labour required will ultimately be supplied principally from this source. It is important to point out in what manner an increase of population is promoted by an active demand for labour. Labour is in demand when trade is good ; then wages are high, and the labourers are prosperous. It is found that the number of marriages amongst the poorer classes BOOK I. CH. VII. Increase in the lahonr- ing popu- lation. Influence of a demand for labour 82 Manual of Political Economy. BOOK I. CH. VII. ripon the amount of poptdation. lielation betiveen in- crease of popidation and in- creased production from land. is greater when the labourers are prosperous. There is no surer test of the prosperity of the labouring class than the low price of bread, and there are few statisti- cal facts better substantiated than that the marriages amongst the labouring class increase with the fall in the price of bread. It may be reasonably assumed that wages are high when trade is good. But from what source are these higher wages supplied ? It must be from the capi- tal of the country, because this is the fund from which the labourers' wages are provided ; the circulating capital employed in any trade or manufacture must be increased if the labourers engaged in it receive higher wages. It may be here remarked, that when a trade is active, the profits are high, and thus a great inducement is offered to those engaged as employers in the trade, not only to save more, but to apply a greater amount of capital to their business ; this additional capital is either borrowed or is withdrawn from other investments. But now, having pointed out some of the sources from which an increased number of labourers will be obtained, we have next to consider how this increased population will be fed. Reference has just been made to some of the sources from which the additional wages paid to the labourers will be supplied when an active trade causes a greater demand for labour. Let us suppose, therefore, that when the labouring population has increased, the circulating capital of the country has been proportionally augmented; but if there is a larger population, more food will be required, and the important question arises : Under what conditions is this food to be obtained ? In answering this question we avail ourselves of that principle which has been stated in the first part of this chapter, namely, that there is a tendency for food to become more expensive as the demand for it increases, because less productive land may have to be resorted to, the returns from wliich are not so large in proportion to the labour and capital expended upon it. The production of an increased quantity of wealth requires a greater number of labourers, and when the labouring population is thus augmented, food will become more expensive, unless the additional food required can be obtained either by agricultural improvements, or can On the Increase of Production. 83 be imported at a comparatively cheap rate from otlier countries. All that we have here stated is strikingly exemplified by the events which have occurred within the last few years. The trade of the country, althougli it has been sometimes checked by periods of depression, has advanced with striking rapidity, and the number of labourers now engaged in the manufacturing industry of this country greatly exceeds the number employed twenty years since. The capital invested in our manu- factures has even advanced more rapidly than the increase of population. Not only are there more labourers, but the wages of these labourers have risen very decidedly within the last few years. Two causes, therefore, have combined to increase the demand for food, namely, a larger population and a better paid labouring class. But it may be said, political economy would predict that, in consequence of such a demand, all food will become more expensive ; and yet bread is cheaper. But as previously remarked, we have now the whole world from which to obtain our supplies of wheat, and the cost of carrying wheat from one country to another is comparatively small. There has, however, been a most decided rise in the value of those articles of food which we cannot with such facility obtain from other countries. For instance, it is so much more difficult and expensive to import meat than corn that, although wheat is at the present time cheap and meat dear, more than one half of the wheat we consume is imported, whereas only about 20 per cent, of the fresh meat we consume is imported.^ The rise in the price of meat which has taken place during the last few years must continue with the increase of population, unless by the conversion of corn land into pasture more meat is produced in England, or unless some means are discovered of improving the present methods of importing fresh meat.' ^In 1876, the late Mr. James Howard, M.P., in a paper read at the Fanners' Club, estimated our aggregate meat supply from abroad at 17 per cent. ; [he estimated it (March, 18S8) at 23 per cent., or 26 lbs. per head each year for the whole population]. 2 [The importation of fresh meat from abroad is a branch of trade that is rapidly increasing. The importation of the tinned preserved meats is failing off, but the importation of fresh beef, mutton, pork and other meats, exclusive of bacon and ham, increased from 1,184,289 cwts. BOOK I. CH. VII. ExemjiUf- catioii of these prill- cip/.ex in late years. 84 Manual of Political Economy. BOOK I. CH. vn. The cost at which an increased Hwpply oj food can be obtained rcill mainly determirie the con- dition of om- labour- ing popu- lation. Since, therefore, we are to a much greater extent restricted to our own soil for meat and dairy produce, importation has not been able to counteract that rise in the price of these articles, which according to political economy must accompany the increased consumption of a more numerous and better paid labouring class; the result lias been that meat and dairy produce have become fifty or sixty per cent, more expensive within the last thirty or forty years. In all probability the labouring population will for many years continue to increase; every year therefore a greater quantity of food will be consumed in this country ; the mode in which this increased supply of food will be obtained must mainly determine what will be the future condition of our labouring population. If the opening of new sources of foreign supply and the introduction of agricultural improvements should enable an increased quantity of food to be procured without any advance in its value, then a larger population may be maintained in an improved material condition. If on the other hand foreign importations and agricultural improvements should not exert a sufficiently powerful influence to check a rise in the value of food, as the demand for it increases, (or, in other words, if resort must be had to less productive soils in order to supply the wants of an increasing population), then the condition of the labouring pojDulation will gradually but steadily deteriorate. in 1882 to 2,064,261 cwts. in 1886, and 8,699,140 cwts. in 1904. Good fresh Australian mutton can be bought in most large towns at prices varying, according to the joint selected, from 5d to l^d. a lb. ; American beef ranges from 5d. to Q^d. a lb. Although home grown fresh meat still maintains a higher price, yet there is no doubt that the importation just referred to has prevented the price of home grown meat advancing as rapidly as it otherwise would have done.] CHAPTER VIII. ON THE INCREASE OF CAPITAL. IN the preceding chapter we have remarked upon some of the more prominent conditions which cletermine the increased production of wealth, as far as it depends upon an increase of the cultivated land, and upon an increase in the number of the labouring population. But larger production also requires an increase of capital. It must be evident from the remarks we have made upon capital, that an increase of capital is as essential to a larger production of wealth as an increase of land and labour. If land, for instance, is more highly cultivated, additional capital must be applied to it : and new land cannot be brought under cultivation without the applica- tion of capital to it. If more labourers are employed, a larger fund, in the form of circulating capital, must be devoted to pay their wages. Improvements in the various processes of industry cannot be introduced without the expenditure of capital. Machinery, warehouses, manufactories, railroads, ships, all such industrial ap- pliances as these, exhibit the various modes in which the fixed capital of a nation assists her industry. It has been previously asserted as a fundamental proposition, that capital, whether fixed or circulating, is the result of saving. Increased capital, therefore, implies increased saving ; and hence the laws may be determined which regulate the increase of capital by considering the causes upon which depends the increased saving or accumulation of wealth. There are two principal motives which induce men to save ; and these are, first, a prudent foresight with regard to the future; and, secondly, a desire to make wealth by an advantageous investment. BOOK I. CH. VIII. Increased production of wealth implies an increase of capital. and, there- fore, in- creased sai-ing. 86 Manual of Political Economy. BOOK I. CH. VIII. ichich may he due. to two motires — fore>>i(/ht and denire for profit. Import- ance of the desire to accumulate ivealth. The first motive is by far the more powerful. To its action has been due the greater part of all wealth which has been saved. But the second motive is the chief cause of fluctuations in the amount of a nation's capital. Whether the amount of capital at any time existing in the country is above or below the average is almost entirely determined by the profit which it may be thought capital will realise. This profit may be estimated by the current rate of interest. But in political economy, as in many other sciences, the causes which produce the disturbing fluctuations require a more careful investigation than those causes whose action is more constant and more undeviating. The earth when revolving in its orbit is acted on by a great number of forces. It is attracted by every body in the planetary system, yet these forces combined are almost innneasurably inferior to the force of attraction which is exerted by the sun. Most important mathematical in- vestigations, however, depend upon the action of these disturbing forces. Similarly, in political economy, the effects of the more constant causes can be readily estimated ; but causes more varying in their action introduce fluctuations and disturbances which must be investigated and classified by the scientific principles of political economy. As civilisation advances the desire to accumulate wealth increases, and foresight for the future becomes more general. The more men's intellectual and moral faculties are developed, the more careful will they be to make a reasonable provision for the future. The Jesuit missionaries, who in the eighteenth century formed a settlement in Paraguay, found the great difficulty they had to contend with was the utter recklessness of the people. The missionaries gave them seed. They knew that this seed would, if sown, in a few months yield them a plentiful supply of food, yet they could not be restrained from eating the seed instead of sowing it ; the smallest present enjoyment was by them preferred to the greatest prospective advantage. People in such a condition can be very little superior to the more intelligent animals, whose hereditary instincts induce them to provide against danger which they may have to On the Increase of Capital. 87 encounter. Birds build nests which are most perfectly- adapted to protect their young; beavers construct tlieir habitations on a plan so adn\irable that it seems almost to rival the skill of man ; and even dogs collect a store of food to which they will resort when pressed by hunger. In England the desire to accumulate wealth acts with great force amongst certain classes. It is impossible accurately to define the causes which regulate the amount saved by any individual, but it may be stated generally that in England each class of society has a recognised standard of living which involves a certain expenditure, and the whole of an individual's income which is in excess of this expenditure is usually saved and invested. The amount which is saved is, therefore, partly dependent at any particular time upon the material prosperity of the country. If activity of trade or any other such circumstance should increase the incomes of any par- ticular class, there would be a larger fund from which savings might be made, and more would be saved. Habit has such a powerful influence in determining- expenditure, that it often happens that a man does not spend more, although his income may be greatly increased. Any circumstance, therefore, which tends to augment the wealth of the nation, will induce increased saving. It may also be remarked that the amount of an individual's expenditure is to some extent determined by the cost of the commodities which he consumes. The consumption of some articles diminishes in proportion to the rise which may take place in their price. In Madras, for instance, when the salt duties were several years ago raised 18 per cent., the result was an increase in the revenue of only 12 per cent. This proved that the consumption of salt was diminished by the increase in its price. It was found that when the sugar duties were raised beyond a certain amount, they did not produce a larger revenue. When the price of sugar was high, it was much more sparingly used. Such articles, however, as tea and bread, are, in this country, almost universally regarded as necessaries of life ; and the quantity of tea and bread which is consumed by those classes who accumulate the capital of the country, is not materially BOOK I. CH. VIII. Its sli-enyth in Enq- land. The amount of savhuj is partly de- termined by the cost of the articles consiimed. Manual of Political Econorny. BOOK I. CH. VIII. Causes of fluctua- tions in the amount of ■saving. affected by a variation in the price of these commodities. If, therefore, bread and tea decline in price, the household expenses of the middle and upper classes will be diminished, and a larger portion of their income will remain to be saved as capital. We mention this as applying particularly to the middle and upper classes, because there is no doubt that our labouring population would gladly consume a greater quantity, even of the ordinary necessaries of life, had they the means of purchasing them. If the price of tea is reduced one- half, the labourers will probably continue to spend upon this article as much as ihey had previously done ; they would spend less upon bread if its price was reduced, but the amount which they thus saved would not, as a general rule, be invested by the labourers as capital, but would be applied to satisfy some of the many wants and desires of life, which tiiey had not previously the means of gratifying. The labourers therefore are benefited in two distinct ways, by the cheapening of any article of ordinary consumption. They have, in the first place, to pay less for it when they purchase it, and, secondly, the cheapening of such a product has a tendency to augment the capital of the country, by enabling the middle and upper classes to increase their savings, and the labourers will receive higher wages if capital is increased. We have, however, before remarked, that the fluc- tuations in the amount of capital which is saved, depend upon the nature of the opportunities which present themselves for investment. If the profits which can be realised upon capital increase, a greater inducement is offered to save, and a larger amount is sure to be saved. From such a source, either directly or indirectly, any large increase of capital which may be required is mainly supplied. At any particular time there is a certain interest upon capital which people expect, and with less they will not be satisfied. But it will perhaps be said, what does a capitalist do with his capital ? If he wants 3^ per cent, interest and can only obtain 3 per cent., he will not squander it because he is not satisfied with so low a rate of interest ; will, therefore, less wealth be saved ? Less, no doubt, will be saved, because a low rate of interest offers less inducement to save ; the most On the Increase of Capital. 89 important point, however, to be borne in mind is that a much smaller portion of the wealth which is saved will be invested as capital in our own country, when the rate of interest is low. England, far more than any other country, offers a striking example of the vast amount of capital which the people are ready to invest, if a favourable opportunity presents itself. When the gov- ernment requires a loan, many millions are at once subscribed, without encroaching in the slightest degree upon either the circulating or fixed capital of the country. The loan is not altogether supplied from capital which was previously unemployed, but England has vast sums invested in almost every civilised country. Magnificent as are the tokens of England's wealth which surround us on every side, yet our manufactories, our railroads, our mercantile marine will not give us an adequate idea of England's riches, unless we remember that there are few countries either in the new or the old world that are not our debtors. Russia, Turkey, India, Australia, Canada, the United States, the Republics of South America, all have satisfied their state necessities, by loans supplied from English capital. But it is not only foreign governments who borrow from us ; a vast number of foreign speculations have been supported by English capital. A considerable number of railroads throughout the world have been made by English capital ; the Grand Trunk Railway of Canada has absorbed 15,000,000/. of English capital. The railways, irrigation works, and roads of India have been con- structed by English capital, and some of the richest mines in South America have been worked by English companies. Consequently only a portion of the wealth which is annually accumulated in England is retained to be invested in this country. If, therefore, England requires a greater amount of capital to extend any branch of trade or to carry out any public work, she can supply an amount which is practically unlimited. If, for instance, there were such an expansion in our cotton manufacture, that 100,000,000/. of additional capital was required, it would be readily obtained, by placing a check upon the investments of English capital abroad. The amount of capital, therefore, which is applied to the BOOK I. Cll. VIII. Foreign in- veHtmentH. 90 Manual of Political Economy. BOOK I. CH. VIII. Economi- cal coiidi- tion of foreign countries as to the re- quisites of production. India has abundance of land and labour, but little ca- pital. production of wealth in this country, does not depend so much upon the amount which is saved, as upon the proportion retained by the country itself of all the wealth which is saved. The relative amount of English capital which is invested at home and abroad is regulated by many considerations, the chief of which is the rate of interest which can be obtained at home compared to that which can be obtained in foreign countries. We have explained that the English government may raise large loans without diminishing the capital invested in English industry, the loans being chiefly derived from capital which would otherwise have been embarked in foreign investments. Yet it must be borne in mind that this remark does not apply to countries from which little capital is exported. France was congi-atulated at the close of her war with Germany upon the ease with which she raised successive loans, amounting to many hundred millions of pounds, to defray the expenses of the war and to pay the German indemnity. A portion of these vast loans was probably supplied from money which had been hoarded ; but a great portion of them was no doubt obtained from capital which would otherwise have been re-employed in the production of wealth. The war had caused, over a great part of France, an almost entire cessation of production. Hence, as the war proceeded and as trade declined, there was a large amount of capital which had previously been employed in productive industry ready at hand to be lent to the government to be consumed in war. Even after the war was concluded, the indemnity of 200,000,000/. which she had to pay to Germany withdrew a large amount of capital from France which might have been employed in reviving the various branches of industry which had suffered so much during the war. It is important to bear in mind that, with regard to the conditions on which depend the increased production of wealth, England, in many respects, offers a direct antithesis to other countries; thus, she possesses an almost unlimited capital, but has very little fertile land at the present time uncultivated. In India the chief requisite for the increased production of wealth is increase of capital; whereas in newly settled countries On the Increase of Capital. 91 which possess an abundant supply of unoccupied fertile land, a larger production of wealth chiefly depends upon an increase of labour and capital. It will be readily perceived that, contrasting England and India, the increased production of wealth will take place under very diflerent conditions in the two countries. In England capital is readily supplied to assist an increased production of wealth. The labourers' wages will probably rise when the industry of the country is active. There may, liowever, be one drawback to the benefit which they thus derive. As the area of new soil which England can bring under cultivation is so limited, the price of many articles of food will rise, in consequence of the larger consumption of a more numerous and better paid labouring class. India, in her present condition, has a most abundant supply of labour, and the produc- tiveness of her land might be greatly increased if more capital were applied to its cultivation ; but at the present time there seems little chance of this increased application of capital taking place unless more capital is obtained from other countries. It is evident, from the previous remarks, that in England the great requisite for the increased production of wealth is a large supply of cheap food. This cheap food may be obtained either by importation, by agri- cultural improvements, or by extending the area of land cultivated in England. Industry cannot be for any length of time impeded in this country by any want of labour and capital, but in India an increase of capital, both fixed and circulating, is most essential to a larger production of wealth. Ages of anarchy have produced a wide-spread feeling of insecurity throughout India. Individuals have been afraid to exhibit their wealth, because it would tempt the rapacity of those who had the power to pillage their weaker neighbours. A great part of the wealth saved was hoarded, and it consequently performed none of the functions of capital. The owners of property felt that it was only secure when it could be concealed. If they employed labourers, they could not feel certain that they would be able to retain the results of the labourers' industry. Hence we can reasonably anticipate one most beneficent result from England's BOOK 1. CH. VIII. Thvs Eng- land ivantH cheap food, and India capital. Manual of Political Economy. rule in India ; for her power, in course of time, may make every class in India feel that the rights of property are respected. Nothing will more tend to increase the capital, and hence the wealth of the country ; for when security is given to property there is a great inducement to save, and the wealth which is saved, instead of being hoarded, will be usefully applied as capital to assist the further production of wealth. India is at the present time, in some degree, deriving this advantage from England's rule. But admitting this advantage, it cannot be too carefully borne in mind by those who are re- sponsible for the government of India, that the Indian people ought not to be compelled to pay too high a price for it. Our administration being necessarily expensive, in consequence of the high remuneration which Europeans receive in order to induce them to reside in the country, every care ought to be taken to prevent its being more costly than it need be. Although there are so many points of diversity between England and India, yet, as previously remarked, there are other countries whose economic condition differs most essentially from either that of England or India. The main requisite for the increased production of wealth is, in India, an increase of capital, and in England, an increase of land, or, in other words, an increased supply of cheap food. In the West India islands, however, there is an abundance of land and capital, but a great scarcity of labour. The decline in the prosperity of these islands is, in an economic sense, most instructive. Previous to the emancipation of the slaves, the West Indies possessed all the three requisites of production ; their soil was fertile, it was owned by English proprietors, who readily supplied all the capital that was required, and labour was, of course, never deficient when slaves could be freely imported, and when there was an abundance of money with which to purchase them. But the abolition of slavery not only freed the slave, but efiectually checked the importation of labour. Property in man was declared to be illegal, and therefore no one would resort to the expense of importing labour when he had not the power to retain the services of the labourers he imported. On the Increase of Capital. The emancipated negroes of the West Indies are un- willing to do as much work as when labour was extorted from them. Degraded by their bondage, their wants are few, and easily satisfied; the rich fertility of the tropics supplies them with almost all the food they require, with the exertion of very little labour. Why should they, therefore, constantly toil ? They have few tastes to gratify, and few wants to satisfy. No one will labour for labour's sake ; the emancipated negroes are well fed almost by the spontaneous bounty of nature, and they are therefore perfectly contented to live a lazy life of repose. The consequence of this is that the production of wealth has almost ceased in many parts of the West Indies. The land is as fertile as it was before ; English proprietors would only be too glad to supply capital if they could find the labourers; but this labour is not forthcoming; the emancipated negroes are unwilling to work and the climate is unsuited to European labourers ; the production of wealth cannot proceed, and estates, which before 1833 were worth 10,000L a year, are now little more than a useless burden to their owners. It is thus quite evident that it is impossible for the West Indies to become more prosperous without a larger supply of labour. How is such a supply of labour to be obtained ? In the first place, labourers may be imported ; secondly, the population of the islands may increase, and the people may become more desirous to labour, as their wants become gi'adually enlarged. Let us first consider the importation of labour. Labourers may pass from one country to another entirely of their own accord. Large numbers of Chinese have emigrated to Australia because they could earn higher wages in Australia than in China. They have also emigrated in large numbers to the United States. Australia never took any steps to encourage their coming; their presence is, in fact, so much objected to, that an extreme measure has been passed, and a poll-tax of 10^. has been imposed on every Chinaman who lands; and, moreover, in New South Wales and Victoria the owners of vessels are subject to heavy penalties if they bring more than one Chinese to every hundred tons of ship burden. If the Chinese Manual of Political Economy. felt that equal advantages were to be secured in the West Indies, no doubt great numbers would emigrate to those islands, and thus supply the labour which is so nuich needed. It is, however, a singular fact, that the English, the Germans, the Scandinavians and the Chinese are the only people who freely emigrate at the present day.^ Now it is quite impossible for Europeans to work in a sugar plantation under a tropical sun ; if, therefore, the Chinese will not resort in the same way to the West Indies as they have to California and Australia, the West Indies cannot depend upon a supply of labour from voluntary emigration, buch emigration as that of the coolies cannot be regarded as voluntary. A government votes a certain sum of money to fit out ships which sail to the Malay Archipelago. The natives are canvassed to emigrate, their expenses are paid, and they are promised work when they arrive at their destination. Large numbers of coolies have in this manner been imported to the Mauritius and the West Indies, but the traffic is liable to be abused, and the coolies have occasionally endured on their voyage suflferings which seem to revive some of the horrors of the slave-trade. The coolie-traffic can never be carried on by private enterprise, because, if an individual imported coolies, he would have no power to compel them to work for him in preference to another person. If such a power were permitted, there would cease to be any real distinc- tion between the coolie-traffic and slavery. The negroes of the West Indies are, as we before remarked, unwilling to work ; and the only hope of making the people more industrious, is to stimulate in them new desires and new wants; they will not, of course, work as long as they are content to obtain little else than the food which the islands supply in abundance. If they become more anxious to have expensive clothing or expensive food, which may perhaps have to be im- ported from other countries, they will at once have a motive to work, and the West Indies will cease to suffer from the present great scarcity of labour. England, therefore, offers a striking contrast in every respect to ' The word English is here used, as iu other places in this volume, to describe the inhabitants of the United Kingdom generally. On the Increase of Capital. 95 the West Indies; nothing can exceed the ceaseless industrial activity of the English people. We all of us labour, because there is some desire which we wish to gratify. Our labourers are pressed on to continuous labour by the necessity of procuring a livelihood. Our climate is rigorous, and the bounty of nature will not supply us with the means of supporting life unless we work with energy and with constancy. The middle classes are urged on to industrial activity by the desire to improve their social and material condition. The economic condition of America, as far as the pro- duction of wealth is concerned, differs in some respects from that of each of the three countries we have considered. In America, labour is comparatively more scarce than either land or capital. We say comparatively more scarce, because in the West Indies the scarcity of labour is so great that the production of wealth is almost entirely prevented ; but this is not the case in America, for in no country has the production of wealth advanced with greater rapidity. If, however, we compare America with England, we know that land is much cheaper in America and labour much dearer; and one of the consequences of this difference is strikingly exemplified by a circumstance which has been noticed by almost every traveller in America. America is ill cultivated compared with England, and her agriculture appears to be most slovenly ; there must be some cause for this difference ; it cannot be explained by a common- place remark on difference of race. An agriculturist, who may in England have cultivated his farm like a garden, will, if he emigrates to America, find it greatly to his interest to adopt a very different system of tillage. The reason of this maybe best shown by an example. An English farmer, let us suppose, cultivates a hundred acres of land, for which he pays 200Z. a year rent. 200^. a year expended in wages on his farm will return the farmer a fair profit for his capital and his exertion ; but he may think that it will answer his purpose to farm more highly, to employ twice as much labour as before. He will be remunerated for the additional 200/. which he expends on wages, if the increased produce from the farm sufficiently exceeds the cost of this extra labour to BOOK I. CH. VIII. In America land and capital are plentifid, but labour dear : effects of this upon agricul- ture. 96 Manual of Political Economy. BOOK I. CH. VIII. Compari- son of the different results obtained. leave the farmer a fair profit on the additional capital he has expended. If this is the case, the additional labour will be as profitable to the farmer as that which he first employed, but it will not be so productive. When only 200^. was expended on wages, the produce of this labour must have been sufficient not only to return a fair profit upon the amount expended in wages, but must also have been sufficient to cover the rent. If the additional labour employed diminishes in productiveness, it may be said why not apply it to other land ? It cannot, however, be applied to equally good land without having to pay a rent for the use of the land ; hence, up to a certain point, it is more remunerative to apply additional labour to the same land, although the labour diminishes in productive- ness, rather than to apply the labour to other land for which rent will have to be paid. But if good land were extremely plentiful, or if, in other words, rents were extremely low as in America, it would manifestly be far more profitable to cultivate fresh land rather than apply additional labour upon land already under tillage in order to cultivate it more highly. Hence, in America much less labour is employed in the cultivation of a certain area of land than would be employed upon the same area in England, and farming is consequently more slovenly in the former than in the latter country, because in the one country land is cheaper than in the other, and labour dearer. In this and the preceding chapter, we have investi- gated the laws which regulate the increase of labour, and capital, and cultivable land. These laws combined, furnish the conditions upon which depends an increase in the production of wealth. We have attempted to illustrate the manner in which these laws may be combined, by considering four countries, England, India, the West Indies, and the United States ; and in each of these countries the requisites for an increased production of wealth assume, relatively, different degrees of im- portance. In England, an abundant supply of cheap food is required ; in India, an increase of capital is most essential ; and in the West Indies, an increase of labour. In America the production of wealth meets with no serious impediment, and it advances with the most On the Increase of Capital. extraordinary rapidity. Yet, in America, there is a comparative scarcity of labour, and an ample supply of productive land. America and England have conferred upon each other the most important mutual benefits. Cheap food is essential to England's progress, and our greatest supplier are obtained from America. Cheap labour is the most valuable gift to America, and our surplus population, which would become burdensome to us if there had been no emigration, is providing America with the labour she so much needs. All the more important propositions which concern the production of wealth have now been considered ; this portion of our subject will be frequently recurred to, in order that the reader may obtain a firmer grasp of many of the principles here discussed. We now pass on to the next branch of our subject, which is the distribution of wealth. 97 BOOK I. CH. VIII. BOOK II. DISTRIBUTION. CHAPTER I. PRIVATE PROPERTY AND SOCIALISM. HAVING considered the production of wealth in the last book, we now pass, by a natural sequence, to expound the principles which regulate the distribution of wealth. In some of the remarks on the production of wealth, it was necessary to anticipate the fact that the wealth produced is distributed amongst different classes. The wages of the labourers, the profits of the capitalist, and the rent of the landlord, have been spoken of. Allusion has also been made to some of the sources which supply the wealth thus distributed ; for instance, the nature of capital could not be explained, without showing that the capital of the country is the fund from which the wages of the labourers are supplied, and, therefore, if the capital increases, the wages paid must increase. Although in this manner, the subject of the distribution of wealth has been slightly encroached upon, yet nothing has hitherto been said in reference to the principles wdiich determine the relative amounts of the shares into which wealth is distributed. It, there- fore, remains to explain why wages are high or low, w^hy profits rise or fall, and why rents in one country vary so greatly in amount at difierent times and in difFei'ent places. This book, therefore, will probably be more interesting than the last, because in it questions will be discussed of the greatest practical importance ; we shall have occasion to show how wages and profits are affected by such combinations as strikes, and how industry is influenced by the difierent tenures of land which exist in different countries; the subjects discussed will, in fact, have equal interest for the philanthropist and the I02 Manual of Political Economy. trader; for remedies will be suggested for alleviating the poverty of the poor; and the causes upon which depend the prosperity of trade will be explained. Distribution of wealth implies the idea of property. If there were no property, or, in other words, if no individual possessed anything which he could claim as his own, there could of course be no distribution of wealth. Every one would then obtain, either by chance or by force, the food and other necessaries which minister to the wants of life. It is impossible for property to exist until society is organised, for the fundamental idea involved in property is this ; that those who own the property possess in it a right, which will be enforced by law ; but the existence of law implies that a people composing a state or a nation will exercise a combined power to make individuals regulate their conduct accord- ing to certain rules termed laws. Such combined action constitutes the power of government, and the government ceases to exist if it is not able to exercise its power and enforce obedience to its laws. A great portion of the laws of every nation concern property ; such laws vary greatly in diti'erent countries and at different times, and property has rights in one age of a nation's existence which it has not in another. Before the passing of the Act of Emancipation, a negro, if purchased by an English colonist, became as much his property as an article of domestic furniture. In feudal times, a baron could enforce various personal services from those who occupied his land ; they were bound to furnish him, if he waged war, with a certain number of men, horses, and coats of armour. There is, again, the greatest difference in the control which can be exercised over the disposal of property ; for, in England, land can be entailed, and devised by will, to an unborn child. In France, the owner of land has no power to prevent his children from sharing it equally upon his death. Then again, property is held in different ways ; a great number of individuals forming a company or society may be the joint owners of property. Property may be held on lease. In Europe, the land is chieii}^ the property of private individuals ; whereas, in India, the bulk of the land is owned by the government. It would be impossible to describe the Private Property and Socialism. origin of all the different kinds of property, and the rights connected therewith, without writing the history of each country; but although it does not pertain to political economy to discuss the origin of the laws of inheritance, or of land tenure, yet tlie production and distribution of wealth are most materially influenced by particular laws of inheritance, and by different systems of land-tenure : therefore, all such influences must be most carefully considered in a treatise on political economy. It has been remarked that the principles which regu- late the production of wealth have the character of physical laws. The distribution of wealth is much more liable to be controlled by the human will. As an instance, nature supplies the materials out of which all wealth must be created ; and the kind and amount of the labour which must be bestowed upon the raw material when it is converted into some manufactured commodity depends upon the properties of the material. Again, the world has been so constituted, that every country possesses land of various degrees of fertility ; from this circumstance we deduced that important law which was explained in the last book, and which affirms that the cost of agricul- tural produce has a tendency to increase as the demand for it advances. The production of wealth is, therefore, influenced by various physical conditions which are independent of human agency ; but the distribution of wealth is, of course, entirely subject to human control. Men may regulate the distribution of wealth bj' any rules or principles of their own creation ; and it is the purpose of political economy to explain the consequences which must follow from the rules which may be adopted, or from the principles which may be brought into action. It is, for instance, quite optional with men whether they allow custom or competition to regulate the distribution of wealth, but it is not optional with them to control the effects which follow when a particular custom has been adopted, or when competition has regulated a transaction. In England competition is far more active than in alinost any other country, and therefore many of the practical conclusions of political economy must be somewhat modified before they are applied to other countries, 103 nooK 11. CH. I. The dixtri- hution of wealth is affected by custom and rompeti- tion. Manual of Political Economy. where, perhaps, custom is far more powerful than competition. In England competition regulates the rent of land; but in many parts of Italy, according to an invariable custom, metayer rents are paid, that is, a fixed proportion, originally one half, of the produce is given for the use of the land. In England, again, the produce of the land is shared amongst three classes — landlords, farmers, and labourers; but throughout the greater part of the world the produce is shared only amongst two classes, the landlords and farmers being combined in one, like the ancient freeholders of England; or the farmers and labourers are merged into one class, like the small farmers of Ireland. On the continent of Europe peasant proprietors are very numerous, and in these cases the individual owns the land, cultivates it himself, and likewise provides the capital. It will be necessary to trace the consequences which arise from these various arrangements. The greatest inequalities of wealth are sure to follow the institution of private property ; and the wealthier a country is, the more striking is the contrast between the wealth and the poverty which have throughout the history of the world accompanied each other. Various schemes have been propounded with the view of causing the wealth whicli is produced to be distributed more equitably ; but if the State confiscated the property of every individual in England to-morrow, accumulated the whole wealth of the country in one great fund, and divided all the land equally amongst the inhabitants, there would gradually arise the same inequalities of wealth which exist at the present time. The industrious would soon obtain those portions of wealth which were allotted in this national distribution to those who were indolent and deficient in industrial capacity. Men are differently endowed by nature, and those who possessed strength and ability would soon become wealthy, and those who were less strong and less able would quickly return to comparative poverty. If, therefore, private property is permitted, and if men can indisputably claim as their own the wealth whicli is distributed to them as the reward of their labour, there must result great inequalities of wealth. And these inequalities will be Private Property and Socialism. 105 increased if a person is allowed to devise his property by- will; for a man who has already a great deal of property of his own, may have left to him the property possessed by four or five other wealthy individuals. Benevolent men, deeply impressed with the widespread poverty which prevails even in the most wealthy countries, have rightly perceived that such great inequalities of wealth must always exist if the privileges of private property are freely permitted ; consequently, philan- thropists have been frequently prompted to advocate schemes of social life in which private property shall not exist, but all the wealth of the community shall be enjoyed in common. This is the fundamental idea which has suggested socialism or, as it is often termed, communism. No philanthropists have ever been more unpopular than the socialists ; but much of this antipathy is no doubt due to the popular error that they are anxious to limit the rights of private property by means of wholesale confiscation. Such a charge, however, is extremely unjust. When socialism has been attempted, the property upon which the experiment has been made has been fairly and legitimately obtained. The socialists may have been mistaken theorists, but let us not deal harshly with them. They have often made noble sacrifices in order to battle against great defects in the state of society ; they have sometimes effected great practical good, and the experiments they made, even when they have been unsuccessful, are always worthy of attentive reflection. Socialism, as propounded by St. Simon, Owen and Fourier, proposed that a society living together should share all the wealth that was produced. A number of families would, according to this scheme, live together . on the same terms as the individual members of a single family. When a family settles in the backwoods of Canada, each member of the family labours on that work to which he or she may be best suited. In such a case the labour of each renders some assistance to all the rest, and then the results of the labour of the whole family are shared in common. Such a society, however, can only be kept together by the strong ties of family affection ; and it is manifestly impracticable, in the BOOK II. CII. I. Socialistic schemes seek to avoid this inequality. Schemes proposed by St. Si- 7)1011, Owen and Fou- io6 Manual of Political Economy. BOOK II. CH. I. Difficulties in these schemes. St Simon's plan for avoidinr/ these diffi- cidties. present state of society, to maintain a similar union between several distinct families. Although the diffi- culties which oppose socialism may be patent to all, yet it is well to consider some of the evils which it seeks to remedy. In a state of society like our own, established on the basis of private property, everything tends to heighten the disadvantages which result from comparative defects in natural endowments. The strong and able are permitted through life to appropriate to themselves all the fruits of their own labour, and the weak and less able are constantly, as it were, borne down in the struggle. But in order to remedy these evils by any form of socialism, an amount of virtue is required which is rarely possessed at the present time. The utmost self-denial and the widest charity will also be needed ; in fact, men must become a higher order of beings, before they will work through life, not for the benefit of themselves, but for the purpose of con- tributing their labour to the advantage of the community to which they belong. Some of the practical difficulties, however, here suggested were partly obviated in two systems of modified socialism which were propounded witli great ability by St. Simon and Fourier, who both proposed that the enjoyment of private property should not be altogether forbidden. St. Simon's scheme Avas specially intended to provide some machinery for the arrangement of the labour in a socialistic society, for without some such arrangement all would be in confusion ; there would be no security that individuals would be employed on the labour for which they were best adapted, and every one would be anxious to avoid all disagreeable work. St. Simon, therefore, proposed that chiefs of the community should be appointed, wlio should equitably distribute the labour _ which had to be performed, and should also determine who were to be ordinary labourers, and who were to be skilled artisans. These chiefs not only distributed the labour, but also distributed the results of the labour ; they allotted to each individual the share of the wealth to which they considered he was fairly entitled; and the share which an individual thus obtained he was permitted to enjoy as his own private property. But Private Property and Socialism. 107 nothing can be more impracticable than this scheme, unless there should happen to be such a marked distinc- tion between the individual members of the communit}' and its chiefs that the right of the chiefs to dictate and to govern could not be disputed. The Jesuit missionaries established such a community with great success in Paraguay ; but between these missionaries and the community they controlled, there was the difference which distinguishes civilisation from barbarism. But no body of men would ever consent to delegate to any of their fellow-countrymen powers which would entirely subjugate their own individuality ; and St. Simonism, even if it alleviated poverty, would introduce greater evils ; for men and women are in a pitiable state of subjection if they are not free to choose the labour upon which they should employ their energy. The scheme proposed by Fourier was much more skilfully designed ; he intended that each separate com- munity should consist of about 2,000 persons, who should be settled on a square league of ground; he not only permitted private property, but allowed property to be obtained by inheritance. Every member of this com- munity would receive a certain remuneration, even if he were not able to work. Fourier also recognised the claim of capital to be rewarded ; the community were combined like a trading company to produce wealth, and after a certain competence, considered necessary to support life, had been allotted to every individual, the remaining produce was divided as a reward for labour, capital, and talent. The administration of this division of the produce was arranged by the heads of the community according to the following plan : — The labourers were divided into three distinct grades, which marked different standards of skill and talent, and the remuneration received by each of these grades varied according to a fixed proportion. The particular grade to which a work- man was admitted, was determined by the vote of his fellow-workmen ; there was community of labour, but not community of living ; it was also proposed, for the sake of economy, that each family should have its separate apartments in the same block of buildings. The fir.st objection that will probably be made to this scheme is BOOK n. CH. I. Fourier's scheme. io8 Manual of Political Economy. BOOK II. CH. I. Its chief difficulties. the following: that very soon the industry of a com- munity would be destroyed by its members regarding exertion as unnecessary, if a livelihood were always ensured to those who did not work. Exactly the same objection may be brought against our Poor-Law system, and yet England has obtained a great commercial position in spite of this impediment to her industrial progress. Internal dissensions would be the greatest difficulty against which the scheme of Fourier would have to contend ; men would be dissatisfied with the grade in which they were placed, and the chiefs of a community would occupy a position most difficult to maintain, for a man is most jealous of any interference with the details of his daily life. Again, if such a community were prosperous, and if wealth were more equally distributed than in the present state of society, all the members of the community would be sufficiently well off to marry at an early age ; the result would be a rapid increase of population ; the land possessed by the community would soon become not sufficient to supply the increased population with food; food would become much more expensive, and there would soon arise poverty and distress. We believe that all such schemes of socialism must entirely fail, if, in a country like our own, they attempt to displace a state of .societj^ based on a private property. It is, however, advisable to allude to the principal socialistic schemes, because, at different times, they have excited great interest, and the speculations of the authors of these schemes are deserving of much careful attention. The difficulties which we beUeve will oppose the success of socialism have not been pointed out in a spirit of antagonism. A socialistic experiment may be made without inflicting the slightest loss or injury upon any but those who voluntarily take part in it. It is quite possible that such an experiment would dispel many of those objections which beforehand appear most formidable. Such an experiment ought then to be welcomed and not opposed, for socialism has always been mainly prompted by a desire to alleviate the poverty which presses so heavily upon a large portion of mankind. We have been careful to point out that the socialistic Private Propeiiy and Socialism. 109 schemes to which the attention of the reader has been directed were voluntary organizations. This constitutes one of their chief claims to favourable consideration. If the property upon which a socialistic experiment is made is fairly acquired, and if all those who join in the experi- ment do so entirely of their own free will, no injustice is inflicted on any one, and althouoh the scheme may fail, yet it may be fruitful of good by suggesting the adoption of new social and economic arrangements. For instance, in our own country, various socialistic experiments were made by Robert Owen. None of these obtained any permanent success ; but the co-operative movement, which has attained such great importance, undoubtedly had its origin in the ideas propounded by Owen and his followers. The essential characteristic of co-operation is a union of capital and labour. A certain number of labourers form themselves into a society to work for a common object, and they supply the capital which their labour requires. Co-operation may thus be regarded as a modified form of socialism ; but as in a co-operative society each member's share of the aggregate wealth produced is apportioned to the amount of capital he subscribes to the common fund, as well as the quantity and quality of the labour he supplies, it is evident that an influence is thus brought into operation to stimulate each individual's energy. This constitutes the fundamental difference between co-operation and the socialistic schemes of St. Simon and Fourier ; for it has been pointed out that the chief obstacle which would prevent their achieving any practical success was the improbability that men would be found to work with sufficient energy if the reward they received for their labour was guaranteed to them, and did not depend either on their own abstinence, or upon the amount of their labour. Although the socialistic schemes here described were voluntary organizations, yet it is important to bear in mind that the influence of the State may be used to enforce some form of socialism upon a country. It is almost needless to say that whenever such an attempt is made, it should be most narrowly watched. Probably the best definition that can be given of socialism is, that it enables a man to rely upon a society or community for BOOK 11. CH. I. Voluntary socialitm contrasted ivith com- jnilsory ■socialism. no Manual of Political Economy. maintenance instead of upon his own individual efforts. In the schemes of Fourier and St. Simon, a certain number of persons formed themselves into an association or company, and guaranteed to give maintenance to each other. No one can deny the right of a number of individuals to enter into such an arrangement as this. It may however happen that people, instead of promising maintenance to others as a voluntary act, may be com- pelled to do so by law. A notable example of such compulsion is afforded by our Poor-Law system, for it confers upon every individual a legal claim for maintenance. If a man is in a state of destitution he can claim parochial relief, even if the destitution is entirely caused by his own indolence or imprudence ; he can thus compel other people to keep him whether they wish to do so or not. We shall in a subsequent chapter discuss the general effects produced by the Poor-Law. We have referred to the subject here, because it affords an example of a practical adoption of the socialistic principle by the State. Not only has a powerful en- couragement already been given to socialism by the State, but many who would be foremost in their denunciations of socialism are constantly bringing forward proposals which would extend the influence of socialism in its most mischievous form. Thus it is not unfrequently said, that parochial relief ought to be granted on more easy and liberal terms. But if such a suggestion were carried out, it is evident that an increased inducement would be offered to people to depend upon society rather than upon their own efforts for maintenance, and thus the socialistic influence exercised by the Poor-Law would be greatly extended. As another illustration, it may be mentioned that an increasing number of people are now urging the adoption of a general system of free primary education. It is, however, obvious that a new and important recognition would be given to socialism, if the entire expense of educating children were transferred from the parent to the State.^ If such a transfer were ^[This prophecy has been fulfilled. The entire cost of primary education was thrown on the rates and taxes in 1891, and since that date an agitation of considerable importance has grown up to provide school children with food at the public expense.] Private Property and Socialism. in sanctioned, it miglit afford a precedent for transferrino- the entire burden of maintaining children from their parents to the State. Nothing seems to be a more marked tendency of the present day than the growing incHnation there is to seek the intervention of the State in matters which before were left to individual effort. This reliance upon the State may be regarded as an essential characteristic of socialism in its present phase, and we shall have occasion to describe the important economic influence which may be exercised by such an application of the socialistic principle. Thus in discussing the subject of the nation- alization of the land, it will be shown that this is just such an application of the socialistic principle as that to which we are now referring. Nationalization of the land means that all the land in the country should be bought by the State, and distributed at what is termed a fair price among the entire people. The advocates of the scheme hope that in this way, through the intervention of the State, all those who wish to possess land would not have to wait until they could purchase it in the open market, but would be able to obtain it from the State whenever they wanted it, on reasonable terms. We have here only referred to the scheme as affording an example of what we wish to signify by modern socialism. We will postpone any further discussion of it to a subsequent chapter. The growth of socialis- tic princi- ples at the present time. BOOK II. CH. II. The classes amongst irhom wealth is distribut- ed. Their shares are termed rent, ivarjes and profits. CHAPTER 11. THE CLASSES AMONGST WHOM WEALTH IS DISTRIBUTED. IT has been shown that the three requisites of the pro- duction of wealth are land, labour and capital. Since, therefore, land, labour and capital are essential to the production of wealth, it is natural to suppose that the wealth which is produced ought to be possessed by those who own the land, labour and capital which have respectively contributed to its production. The share of wealth which is thus allotted to the possessor of the land is termed rent ; the portion allotted to the labourer is termed wages, and the remuneration of the capitalist is termed profit. The remuneration therefore received in the form of rent, wages and profits, represents the three distinct claims which individuals have upon any wealth which is produced. Having pointed out that wealth is distributed between rent, Avages and profits, we must proceed to enunciate the laws which regulate the comparative amounts of rent, wages and profits. In different countries these relative amounts vary greatly ; for instance, rents are much higher in England than in Australia, and wages are much lower in the one country than in the other. The rate of profit is also much greater in Australia than in England. In Australia, ten per cent, may be obtained on the security of a freehold mortgage, whereas in England a similar investment will not yield more than four or four-and-a-half per cent. Without, therefore, inquiring whether Australia is more productive of wealth than England, it is very important to.establish principles which will explain why wealth is so very differently distributed in the two countries. Other countries present equally striking points of difference. Classes amongst whom Wealth is distributed. 113 It has been shown that wealth is distributed in tliree shares, namely, rent, wages and prohts : because land, labour and capital are essential to the production of wealth ; and rent, wages and profits represent the service which has been rendered by each of tliese agents of production. It must not be supposed that rent, wao-es and profits are always received by distinct individuals. In England, as a general rule, there are these three distinct classes of recipients, who are respectively named landlords, labourers and employers. The landlord seldom supplies either capital or labour ; the capital is advanced by the employer ; and the labourer has very rarely any capital invested in the industry upon which he is em- ploj^ed. But the economic condition of England differs, in this respect, more widely from that of otJfier countries than is usually supposed ; in fact, it is rather the excep- tion than the rule, that wealth should be distributed in the form of rent, wages and profits, amongst distinct and separate classes of individuals. In the south of France, in Italy, in Flanders and in other parts of the continent, peasant proprietors occupy a great portion of the land. It is intended to signify by a peasant proprietor, a man who cultivates a small quantity of land which is his own property ; he himself supplying all the labour and capital which are required. In such a case, the produce is not distributed into rent, wages and profits, for one individual is entitled to all the produce which is raised, since he owns the land, and has also contributed the labour and capital. Although the whole produce is, as it were, heaped together, without being divided into three por- tions corresponding to rent, w^ages and profits, yet the remuneration obtained by the peasant proprietor is composed of three distinct parts. These are combined, but they may be separately estimated in the following manner. If the land cultivated by the peasant proprietor were not his own property, he would be obliged to pay a certain rent for its use. A portion of the produce, therefore, equal in value to the amount which would be thus paid, represents the rent. Again, if the capital employed by the peasant proprietor were borrowed from some one else, a payment must be made for the loan, and therefore a portion of the produce, equal in value H BOOK II. CH. II. These shares art not always payable to different individu- als. The peas- ant pro- prietor re- ceives all the three shares of the pro- duce of his land. 114 Manual of Political Economy. BOOK II. CH. 11. Cases of India and of slave- owning countries. to such a payment, indicates the profit, which is a fair remuneration for the capital which the peasant proprietor employs. Again, the portion of the produce which represents wages may be ascertained by estimating the wages which would have to be paid if the peasant proprietor, instead of working himself, cultivated his land with hired labour. Such an estimate as that we have just indicated is often of great practical importance. The comparative advantages and disadvantages of farming by peasant proprietors have long been keenly disputed. In order to decide this important question, we must pursue the following method. From the whole produce which is raised upon the land cultivated by a peasant proprietor, there must in the first place be deducted an amount which represents the rent this land would pay ; there must also be deducted a certain amount for labour and capital, and if a surplus remains, it will represent the advantage of farming by peasant proprietors. We shall, in another chapter, have occasion to enlarge on this subject. A great portion of the land of India is occupied, not by peasant proprietors, but by peasant cultivators. 'J"he land is generally owned by the government. The peasant cultivators often rent from the government a small portion of land, which they can cultivate with their own labour and capital. Sometimes the government grants the land at a fixed rental to individuals who occupy the position of middle-men, and who re-let the land to peasant cultivators. Land which is cultivated by slaves is in an anomalous position, for in this case it would appear that the whole produce is shared between rent and capital, since the slaves must be regarded as a portion of the slave-owner's capital, just in the same manner as the horses which plough our own soil are a portion of an English farmer's capital. The slaves do not receive any wages; they cannot accumulate wealth ; they have none of the rights of property. The slaves are fed, it is true ; but so are the horses fed. The economic condition of a slave country differs so much from other countries that it is proposed to discuss some of the economic aspects of slavery in a separate chapter. Classes amongst whom Wealth is distributed. 115 The reader may remark that in the general observa- tions made in this chapter on the distribution of wealth we have only considered agricultural produce. This has been done because similar although somewhat more complicated laws regulate the distribution of the wealth which is created by manufacturing industry. All the materials upon which manufacturing industry is em- ployed are products obtained from the land. Thus, wool is an article of agricultural produce. When wool is woven into cloth, it is rendered much more valuable. How, then, is this wealth distributed which is added to the wool by manufacturing it into cloth ? Wool, and such other raw materials of manufacturing industry, are purchased by the manufacturer, and become a portion of his capital, and the wealth produced by manufacturing industry is finally distributed between capital and labour ; in fact, there are two distributions. The raw produce, or, more correctly, the money with which the manufacturer purchases this raw produce, is distributed in a similar manner to other agricultural produce ; after this raw material has been manufactured, another distribution takes place between the labour and the capital which have been employed in the production of the manufactured commodities. When it is stated that wealth is distributed in the form of rent, wages and profits, it must not be supposed that the labour which has directly contributed to the production of the wealth is alone remunerated. Before agricultural produce is brought to the market, the industry of many other labourers has been called in besides those who are actually working on the farm, all of whom will receive a certain share of the produce in the form of wages. A farmer may employ bargemen to take his wheat by canal to a particular market, but these bargemen must be paid wages, just in the same way as labourers who are employed on the farm. Again a farmer may join with others to pay labourers for keeping the roads in a proper state of repair; from him, also, are levied rates which maintain a police establish- ment, considered necessary to make property secure. We shall hereafter inquire on whom these burdens fall. BOOK II. CH. II. Mami- factiiring industry. Remunera- tion due to labour when in- directly produc- tive. ii6 Manual of Political Economy. BOOK II. CH. 11. Relative importance of compe- tition and custom. Beneficial effects of competi- tion upon the labourinrj classes. The amount which in any particular case the landlord, capitalist, or labourer receives is regulated either by com- petition or by custom. In almost every case competition and custom exercise a joint influence; but competition not unfrequently acts so much more powerfully than custom, that it may be virtually regarded as the sole determining cause. It is impossible to enumerate all the important customs which influence varioiis trades, but it will be necessary to trace the effect of customs more wide and constant in their operation, such, for instance, as those which regulate the rent of land. The metayer rents which exist in many continental countries may be quoted as an example of one of these customs ; for where this tenure prevails the rent paid for the use of the land is always equivalent to a fixed portion of the produce. This portion is generally one-half. It may, however, be remarked that as a nation advances in industrial enterprise all her commercial transactions are more completely regulated by competi- tion. There cannot be activity of trade without a keen desire for gain ; but such a feeling indicates the spirit of competition, for in business men compete with each other with the view of securing the greatest possible gain. It is, however, important to present competition in a somewhat different aspect ; for the manner in which it has been here described may very possibly encourage the widespread error that with it there is associated something almost criminal. Many who profess to be social philosophers attach to competition the stigma of selfish greed. The poverty of the poor is often attributed to it ; but we shall have reason to show that it is no enemy to the working-classes. Without it, their poverty would be rendered doubly severe ; for it is an active spirit of competition which maintains the capital from which the wages of the labourers are paid. Competition befriends the working-classes in other respects ; it cheapens commodities, and ensures that the maximum of wages shall always be paid. Competition is not confined to one class ; it may be as rife among buyers as among sellers, or among the employers as among the employed. Individuals who have goods to sell are anxious to realise as large profits as possible ; but when Classes amongst whom Wealth is distributed. 117 there is competition, a trader cannot be paid more than what is termed a fair price for his goods, because if lie attempts to obtain more than tlie ordinary price he will be undersold by other traders. When buyers compete with each other they are anxious to secure the greatest gains, or in other words, to buy upon the best possible terms ; and thus, when buyers are each intent on pur- chasing on the most favourable terms, a commodity is sure to realise what it is worth. It therefore follows that if on the one hand competition prevents a trader obtaining exceptionally high profits ; on the other hand, it ensures to him a fair price for his goods. Some, perhaps, may think it unfortunate that employers, stimulated by a desire to realise the largest gains, should seek to engage their labourers on the lowest possible terms. But such conduct upon the part of the employers inflicts no injury upon the labourers ; for whenever there is activity of competition, an individual manu- facturer or trader is as powerless to get labourers to work for him at less than the ordinary wages as he would be to buy cotton at a cheaper rate than his fellow-manufacturers. The price of cotton is maintained because there are those who are anxious to purchase it ; the rate of wages is also maintained by those who are anxious to purchase labour. Competition, consequently, exerts no tendency to reduce profits or wages ; the tendency is rather one of equalisation. Competition acts with far greater force in some coun- tries than in others. In England the commercial spirit is so active that we are liable to forget that in some countries various transactions, such as the renting of land, the hiring of labour, and the sale of commodities, are regulated by custom to a far greater extent than by competition. It has been often remarked that all men are more or less the slaves of habit. Every nation has some customs which become, as it were, engrafted on its existence; customs, which in their origin were perhaps purely social, have in many cases, after a certain lapse of time, produced effects of great pecuniary consequence. In this way the results which would ensue if competition freely operated are often interfered with ; for men not BOOK II. CII. II. Competi- tion varies in intensity in different countries. ii8 Manual of Political Economy. BOOK II. CH. II. Effects of this in the ca.se of 7-ent. unfrequently pay the most implicit obedience to a custom, even when they are not bound to do so by law. It has already been stated that, in parts of the continent, the landlord uniformly receives as a rent one-half the produce of the land ; he never thinks of asking more or less, although his land might very likely yield him a larger income if it were let to the tenant who consented to pay the highest rent for it. In many professions the charges made are absolutely fixed by custom. Lawyers and physicians do not adjust their charges like ordinary traders ; the charges are regulated by the custom of the profession. Equally rigid customs affect many classes of labourers ; artisans in particular trades must serve a fixed term of apprenticeship, and the wages received are often determined by customs which, though perhaps not so rigidly observed as some others, yet are frequently not easily modified. Having, therefore, shown that the distribution of wealth may be primarily classified into rent, wages, and profits, we shall, in the first place, explain how the amount which is received in the form of rent, wages, and profits is determined when regulated by competition; and we shall then, secondly, proceed to explain the different results which follow, when the distribution of wealth is affected by such customs as those which have just been indicated. CHAPTER III. RENTS AS DETERMINED BY COMPETITION. A COMPREHENSIVE history would have to be written, if it were attempted fully to describe the origin of property in land. Every country has probably been subjugated, and grants of the vanquished territory were the ordinary rewards which the conquering chief bestowed upon his more distinguished followers. Some families in this country still retain the lands which their ancestors received from William the Conqueror. Lands obtained by force had to be defended by force ; and before law had asserted her supremacy and property was made secure, no baron was able to retain his possessions unless those who lived on his estates were prepared to defend them. There thus arose almost universally some personal relations between landlord and tenant, and the personal services which such a feudal tenure required formed a considerable part of the rent which was paid for the land. As property became secure, and landlords felt that the power of the State would protect them in all the rights of property, every vestige of these feudal tenures was abolished, and the relation between landlord and tenant has thus become purely commercial. A landlord offers his land to any one who is willing to take it ; he is anxious to receive the highest rent he can obtain. What are the principles which regulate the rent which may thus be paid ? We all know that the more fertile land is, the higher will be its rent. We are also aware that the rent which land yields not only depends upon fertility of soil, but also upon convenience of situation. Land which is remote from towns does not pay so high a rent as land BOOK II. CH. III. Historical origin of rent. Hoio is the rent of a given tract of land de- termined ? Manual of Political Economy. of equal fertility situated at a short distance from some large centre of population. The relative rents, therefore, which are paid for different farms are determined by fertility of soil and by convenience of situation. It will be generally admitted that the value of land depends upon the two causes we have just mentioned, but the important question to answer is this : Can we obtain an index to the amount of rent which land can afford to pay at any particular time ? The object of the present chapter' is to supply an answer to this question. In every country thei-^ is the greatest variety in the productiveness of the land ;^ high rents are paid for the use of some land, whereas other land not far distant may be too poor to be cultivated. Let it be supposed that there are two farms which are rented at different rates ; the one farm is rented more highly than the other because its soil is more fertile or its situation more convenient, and the difference in the rents paid by these two farms would indicate the pecuniary value of the superior productiveness of the one farm over the other. There may be another tract of land so poor that, if cultivated at all, it could only bear a nominal rent ; for land will only pay a nominal rent when the produce raised from it is no more than sufficient to return the average rate of profit upon the capital spent in its cultivation. If we compare such barren land with land which pays a considerable rent, then, as we have just remarked, the difference in the pecuniary value of the superior produc- tiveness of this better land may be measured by the difference in the rents paid by the good and barren land respectively. But this difference is denoted by the whole rent paid by the good land, since the rent of the poor land is assumed to be merely nominal ; or, expressing this in other words, it may be stated, that the rent of land represents the pecuniary value of the advantages which such land possesses over the worst land in cultivation, the rent which this worst land yields being merely nominal in amount. The proposition which has just been enunciated, and ^The value which land receives from these two causes, viz., fertility of the soil and convenience of situation, will throughout be designated by the word "productive." Vide pages 47 and 48. Rents as determined by Competition. 121 the simple reasoning by which it has been established, may be regarded as a statement and a proof of Rieardo's celebrated theory of rent. The theory, as here expounded, may appear so simple, nay, perhaps, so obvious, that our readers will not readilj^ appreciate its importance, nor will they perhaps believe that the theory itself has been warmly controverted by eminent men. It will be advisable to consider the ordinary objections urged against the theory, for we shall be able thus still farther to elucidate it, and these objections will afford an appropriate example of the popular prejudice which so frequently attempts to discredit the conclusions of science. One of the attacks on Rieardo's theory may be found in some prefatory remarks by the late Dr. Whewell, prefixed to a ' Collection of Some Fragmentary Tracts on Political Economy, by Mr. Jones.' ^ Dr. Whe- well objects to Rieardo's theory because the rent of land is, over the greater portion of the world, controlled by custom ; and even in England, where land is let by competition, Dr. Whewell maintains that this theory is never employed to settle the rents that are paid ; he therefore made two specific allegations : his first position is, that the theory is of comparatively little value because of its limited application, and, secondly, that it can be of no practical importance even in the exceptional cases where it may be regarded as capable of a practical application. In this chapter we shall confine our atten- tion to the last of these allegations; the modifications which the theory requires, when rents are fixed by custom and not by competition, will be considered in another chapter. No one can reasonably suppose that Ricardo, or any of those who adopt this theory, imagine that a land-steward avails himself of it when he is fixing the rent of any particular land. No farmer when about to rent a farm asks himself. What is the value of this farm above the worst land in cultivation ? But these considerations do not afibrd any valid objections against the theory ; it might as well be said that the laws of digestion and respiration are not worth explaining, because no one thinks of these laws when he eats or ' Mr. Jones was Professor of Political Economy at the late East India Company's College at Haileybury. BOOK II. CH. III. Dr. Whe- weWs ob- jections to this theory ; that it is rarely ap- plicable, and that when ap- plicable it is unim- portant. The last objection answered. 122 Manual of Political Economy. BOOK II. CH. III. Restate- ment of the theory. Illustra- tion of the theory by an exam- ple. breathes. Although men of business do not use a theory of rent, and may have never heard the name of such a theoiy, yet unconsciously they follow the theory ; and the theory will explain the practical consequences con- nected with the renting of land, as completely as if all who were engaged in such business transactions were political economists of the Ricardian type. The point, therefore, to be determined is, not whether the theory is used, but whether the theory is universally true when rents are determined by competition. Let us again expound the theory ; and we think it will be admitted that each of the positions which it assumes is incontro- vertible. It cannot be denied that the land of each country varies so greatly in productiveness, that there always exists some land which is either so barren or so disadvantageously situated that it is just on the margin of cultivation, and can only pay a nominal rent. Land which is more productive will pay a rent, and such rent must represent the difference in the value between this better land and that land which is so barren that it can only pay a nominal rent. But this value is represented by the difference in the net produce obtained from the two lands in question, and hence the rent of any particular land may be estimated as the difference between the amount which it produces and the amount of produce raised from the worst land in cultivation. This is the ordinary enunciation of Ricardo's theory ; the terms however, in which this enunciation is expressed require some explanation. In the first place, it should be remarked that net produce, not gross produce, is meant. The necessity of making this distinction may be illus- trated by an example. Let us, for instance, suppose tliat there are two farmers, A and B, and that one of these. A, occupies a much more productive farm than the other, B. Now the gross produce of a farm is the whole produce which is raised from it, without deducting the expenses of cultivation. But the surplus produce which remains to the farmer cannot be ascertained until from this gross produce are deducted all the expenses connected with the farm. A certain sum must also be deducted as interest for the capital invested in the farm, Rents as determined by Competition. and the farmer should also estimate his own labour of superintendence at a certain pecuniary amount. All these deductions may be regarded as forming in the aggregate the cost of cultivation ; and when such deduc- tions have been made, the produce which remains is the net produce ; or, in other words, the net produce is obtained by deducting the cost of raising the produce from the pecuniary value of this produce. If, therefore, it were ascertained that the net produce of A's farm exceeded by 1,000^. the net produce of B's farm, it is manifest that A would be able to pay 1,000Z. more rent than B. If B's farm was so poor that he obtained it at a merely nominal rent, the amount of its net produce would be also nominal. But it may be said. If such were the case, B would not continue to cultivate the farm ; this, however, need not be so, because it has been supposed that the net produce is that which remains, after every expense connected with the farm has been paid, and after an adequate remuneration has been given to the farmer for his own labour and for the use of his capital ; therefore, it would answer B's purpose to cultivate his farm, although the net produce was merely nominal, if he could obtain the farm at a nominal rent. But, since we have supposed that the net produce of A's farm exceeds by 1,000^. the net produce of B's farm, A would be able to pay this 1,000^. as rent, and, therefore, the rent of any land is the difference between its net produce and the net produce of land which pays a merely nominal rent. Moreover, we shall proceed to show that this amount of rent, namely 1,000^., which from theoretical considerations we have proved that A is able to pay, will be approximately the rent which is actually paid if land is let by open competition. Experience proves that men are satisfied to continue in business if they can realise the current rate of profit upon their capital, and also obtain a certain remuneration for their own risk and trouble. Let it be supposed that when A's landlord demands from him a rent of 1,000/. — this sum represent- ing in value the net produce of the farm — the profits he obtained upon his farm would still be sufficient to induce him to continue his business. If, however, he were called upon to pay a greater rent than this, say. Manual of Political Economy. 1,500^., a year, his profits would be so diminished that he would not be able to obtain the same return for his capital as if it were invested in some other business. He would virtually lose by farming because he could make more of his money if otherwise invested ; and no class of traders will continue a business when it becomes comparatively unremunerative. The landlord would therefore be powerless to obtain from A a rent much exceeding 1,000?. But there is a further question: What would prevent the farmer from paying a less rent than 1,000?., say a rent o^ 700/. ? This would certainly be prevented by the competition of others anxious to engage in farming operations. Those who had a practical knowledge of farming would be able to calculate with considerable exactness what w^ould be the net produce on A's farm, and they would thus know, if A was only paying a rent of 700?. a year, that he was paying 300?. a year less than might be paid, with a realisation of a fair profit to the farmer. Others would come forward and ofl'er a higher rent for the farm, and A would con- sequently be obliged to leave the farm or else pay a higher rent. It is, therefore, no exaggeration to say that, when land is freely competed for, rents are approximately adjusted according to Ricardo's theory. We say " approxi- mately," because there is a certain margin of variation for which allowance ought always to be made. Thus, two land-agents may differently value the net produce of a farm. A landlord, rather than lose an old tenant, may often continue to receive less rent from him than a new tenant would be willing to pay; but in such a case competition is to a certain extent interfered with by the feelings which arise from affection and old association. Ricardo's theory is strictly true upon the supposition that there is free competition, and in practical life the results which may be deduced from the theory really occur in proportion to the extent to which com- petition acts without interference from other disturbing agencies. It is no uncommon thing to say that the sun causes the earth to revolve in an ellipse, and yet the earth never does so move, it oscillates from one side to the other of this ellipse in consequence of the disturbing Rents as determined by Competition. 125 force of each planet's attraction. For many of the practical purposes of astronomy, it may be stated with sufficient exactness that the orbit of the earth is a true ellipse ; and just in a similar way, in a country such as England, competition is so much more powerful than any of the other motives which influence the adjustment of rents, that it will be sufficiently exact to affirm that the rents which are actually paid are those which would be deduced from Ricardo's theory. In some cases, how- ever, other motives, which may be regarded as antagon- istic to free competition, assume so much importance that they must be specially considered. It will much assist clearness of conception, if we employ some technical language to describe the terms of Ricardo's theory. This theory implies that in any given condition of a country there is some land which will just pay for cultivation if it is let at a nominal rent. Thus, as it were, a margin of ctdtivation is marked, below which the cultivation of land cannot descend, unless some circumstances should occur which should either induce men to be satisfied with smaller profits, or should increase the productiveness of land ; it must be borne in mind that there are two ways in which the productiveness of land may be increased; in the first place, a larger demand for agricultural produce may raise its value, and, in the second place, agricultural improvements may cause a greater amount of produce to be obtained from the soil. In the example which we have employed, it has been supposed that this margin of cultivation has been denoted by the farm occupied by B ; for the produce which is raised from this farm only suffices to pay the expenses of cultivation, and to return B a fair remuneration for his capital and for his personal exertions. Under these conditions the land will pay no rent. Various circumstances, however, may occur which will enable rent to be obtained from this land, or, in other words, would cause the margin of cultivation to descend. Let us, therefore, inquire into some of these circumstances. It has already been remarked that the current rate of profit which prevails in different countries varies greatly. In Australia ten per cent, can readily be obtained on the 126 Manual of Political Economy. security of a freehold mortgage, and a merchant in that country would not think of incurring the risk and trouble of investing his capital in trade, unless he could make a much larger profit than ten per cent., because he could secure this profit without risk or trouble upon a freehold mortgage; therefore, traders in that country would not continue their business unless their profits were very much more than ten per cent. But in England five per cent, can scarcely be obtained on a freehold mortgage, and a trader would be perfectly satisfied with his business if a profit of ten per cent, were realised on the capital invested in it. We shall hereafter inquire into the causes which produce these great variations in the rate of profit in difierent countries. In Holland a still lower rate of profit prevails than in England. Let it be assumed that in this respect England became like Holland, and that the English would be satisfied with a rate of profit so reduced that they would lend money to their government, as the Dutch have done, at the small interest of two per cent. If such a change occurred, men of business in England would be satisfied with a smaller profit than they are now, and would be ready to invest their capital in businesses which would produce them a lower rate of profit. But such a change would at once afiect the margin of cultivation. Before the change occurred, no worse land is brought under tillage than that which is cultivated by B, because, although he pays only a nominal rent for his land, yet he cannot do more than realise a certain profit upon his capital, say a profit of ten per cent. ; and it is assumed that with a less profit than this, men of business will not be satisfied. But when the change we have supposed has taken place, a lower rate of profit will prevail throughout the country, and men will now be satisfied with a smaller profit. Hence worse land than that which was before cultivated by B, would return sufficient to give that lower rate of profit with which men are now supposed to be satisfied. The margin of cultivation would therefore descend, the land occupied by B would cease to be the worst under culti- vation ; and this land, instead of paying a nominal rent, would now yield a rent which might be estimated Rents as determined by Competition. 127 by the difference between its net produce and the net produce of the inferior land which has been brought under cultivation in consequence of the reduction in the general rate of profit. It is, therefore, manifest that such a reduction in the general rate of profit would cause the rent of all land to rise. Australia will one day offer a striking example of a rise in the rent of land, caused in the manner we have just described. The great inequality in the rates of profit current in England and Australia cannot permanently continue ; and when profits in Australia are reduced to what they are in England, a vastly increased area of land will be brought under cultivation in Australia ; the margin of cultivation will rapidly descend, and the rent of land will be greatly increased. We will now discuss some of the other causes which may affect the rent of land. The productiveness of land has already been much increased, and is perhaps destined still farther to be increased, by improved implements. Confident predictions have been made by competent persons that steam cultivation will materially diminish the cost of tillage. If this be the case, the net produce of every farm, as we have defined it, will be greatly increased, and, therefore, rents will as a consequence rise from this diminution in the expense of cultivation. But when rents rise, the margin of cultivation will descend ; for if the cost of cultivation is diminished by steam machinery, land may be profitably cultivated which before would not pay the expenses of tillage. The farmers, therefore, will ultimately receive no special advantage from the introduction of improvements in the method of cultivation. Temporarily they may be benefited ; for those who first avail themselves of the improved machinery may for a long time continue to derive an important advantage, because, until the machinery has been generally introduced, rents will not be raised. Ultimately, however, the whole of the advantage will be absorbed by the landlords ; for if the expenses of cultivation are diminished, the farmers will be able to pay a higher rent, and the competition of capital will render it impossible to resist the increase of rent. We have purposely said that the landlords, BOOK II. CH. III. Case of Aristrcdia. Rent is affected by improved methodti of cultiva- tion. 128 Manual of Political Economy. BOOK II. CH. III. These con- clusions will re- quire fur- ther con- sideration ivhen we come to speak of value. and not the farmers, will derive a special advantage, because, in one sense, the farmers, conjointly with every other class in the community, will be benehted, since, if the expenses of cultivation are diminished, the cost of production is diminished, and, therefore, food will be cheapened. The effect which may be thus produced by cheapening food, at once suggests questions of the greatest importance. These, however, we must reserve until we treat of exchange, in the next division of the subject. We will here take the opportunity of remarking that we have as yet said nothing about the value of those shares into which any wealth which is produced may be distributed. All such questions with regard to value cannot be appropriately considered until we treat of exchange. When, therefore, in this chapter we have alluded to particular circumstances which will increase rents, we attribute the increase not to any rise in the price of agricultural produce, but we refer the increased rent entirely to a different distribution of the produce of the land, more advantageous to the landlord. Thus the distribution will be chang-ed in the following manner, when the use of improved implements diminishes the expense of cultivation : the profits of the farmer and the wages of his labourers will remain as they were before ; but the landlord will receive, in addition to the rent which is previously paid to him, all that is saved in the expense of cultivation. It is very important to bear this in mind, because a confusion may arise very embarrassing to the reader ; for in popular phraseology rents are often said to rise without any alteration in the relative amounts received by those classes amongst whom the produce of the land may be distributed. If, for example, a landlord's rent is a certain portion of the produce of the land, then his rent is said to rise if anything should occur to increase the value of this produce. Before the Tithe Commutation Act was passed, the tithe was a rent-charge amounting to one-tenth of the produce. If it had not been for this commutation, tithes for many years would have been increased by two distinct causes ; for, in the first place, since more produce was obtained from the land, the tithe would be increased in quantity ; and, secondly, even if the tithe were not increased in quantity, Bents as deterinined by Competition. 129 its amount would be increased so long as there was an augmentation in the value of agricultural produce. But we must postpone considering an increase of rent which is represented, not by a larger amount of produce, but by a rise in the price of this produce ; for when discussing the distribution of wealth we must suppose that rent, profits, and wages are received in kind. Distribution is concerned with the laws which regulate the absolute and relative magnitude of those portions into which wealth is distributed ; and it belongs to the subject of exchange to examine the causes which determine the value of an individual's share of the profits derived from some indus- trial source, such as a farm or manufactory. Returning, now, to those causes which affect rents in the sense just described, it becomes obvious, after what has been stated with regard to improved machinery, that rents must be increased by any circumstance which diminishes the expense of cultivation ; and, conversely, rents must be diminished, if the expenses of cultivation should be augmented. Such an augmentation has during the last few years been caused by a rise in the wages of agricultural labourers ; and this is one of the chief circumstances which has contributed to the very general reduction in the rent of land in England that has recently occurred. Agricultural labourers in this country have long been worse paid than any other labourers. Each year, however, many influences are brought more powerfully into operation, which will tend to remove such inequalities in the remuneration of different classes of labourers. Increased education will make those em- ployed in agriculture more keenly desirous to sell their labour on the best possible terms. The rapid extension of our railway system enables labourers to pass easily from one district to another. Emigration has already materially raised the general rate of wages throughout the country ; and the influence thus produced by emi- gration is probably destined to be much more strikingly exhibited. But if labourers receive higher wages, or, in other words, an increased share of the aggregate produce, there is a smaller remainder left to be distributed between rent and profits. It is of course here assumed that the productiveness of land, labour, and capital BOOK II. CH. III. Causes tending to raixe or lower rents. Rise of ivages of agricul- tiiral la- bourers. I30 Manual of Political Economy. BOOK II. CIl. III. In tvhat sense the interests of the labour- er and landlord are oppos- ed to each other. remains IS accom- „ unchanged. If the rise m wages paniecl with no reduction in the general rate of profit throughout the country, tlien rents must suffer. This is sure to be the case if the rise in wages is not general, but is confined to agricultural labourers, because, under such a supposition, nothing would have occurred to afiect the general rate of profit in other businesses, and, therefore, the profits made by farmers cannot continue to be exceptionally lower than the profits realised in other trades. But the theory of Ricardo supplies a test which will indicate how rents are affected by any change • in the economic condition of the country. This theory defines the rent of any particular land to be the differ- ence between its produce and the produce of the worst land in cultivation which pays no rent. Therefore, the important thing to ascertain is, whether the margin of cultivation has or has not descended. If, for instance, the wages of agricultural labourers were materially to increase, without any alteration in the value of agricul- tural produce, and without the introduction of improved methods of tillage, much of the land which is now cultivated w^ould cease to return any profit ; the margin of cultivation would ascend, and there would be a general fall in rents. In this sense, therefore, the interest of the landlord is opposed to that of the labourer. Again, if the general rate of profit throughout the country were to rise, the profit realised by farmers would also rise. The poorest land in cultivation would not yield to the farmer this increased rate of profit. This worst land, therefore, would cease to be cultivated, the margin of cultivation would ascend, and in this case, also, the rent of land would be reduced. A rise, therefore, in the rate of profit, or in the rate of wages, unless accom- . panied by some counteracting circumstances, will cause rents to decline. Hence, it would appear that the interest of the landlord is opposed to that of the labourer and the capitalist. This conclusion has been the source of much of the opposition expressed towards Ricardo's theory. But it is difficult to understand why such a conclusion should be regarded as so very objectionable. If the produce of the land is distributed amongst rents, wages, and profits, it is obvious that the more there is Rents as determined hy Competition. 131 allotted to labour the less there will remain to be appro- priated as rent. The opposition of interest intended to be expressed by Ricardo does not imply that the interests of any one class are opposed to the general welfare of the comitry, for all the three classes may participate in any general improvement. Thus, if an increased quantity of produce is obtained from the land, there will be more to be distributed, and rents, wages, and profits may be simultaneously increased. The opposi- tion of interest which has been spoken of only refers to variations in the relative magnitude of those portions or shares into which wealth is distributed. The rent of land, however, may be far more powerfully affected by an increase or decrease of population than by any other circumstance. Within a comparatively short period the population of Great Britain has increased 25 per cent.^ This implies that at least 25 per cent, more food is required. Let us for a moment consider what would occur if this increased supply of food had been obtained from our own soil. In the first place, more land must have been brought under cultivation ; the farmer would be remunerated for cultivating this worse la.nd by a rise in the price of food. The margin of cultivation would thus be greatly lowered, the rent of all land would therefore be greatly increased ; the farmers would be able to pay these higher rents, because the price of agricultural produce had risen. It therefore appears that a very considerable rise, both in the rent of land and in the price of food, must have inevitably accompanied this increase in our population. The rise in the rent of land would, under such circumstances, be assisted by two distinct causes : in the first place, rents if received in kind would be increased, because the margin of cultivation has descended ; and, in the second place, produce thus received as rent would have been rendered more valuable in consequence of the rise in the price of food. Although for many years, with this increase of population in England, there was an almost ^[In 1870 the population of England, Wales and Scotland was 25,792,784 ; in 1887 it was 32,238,650 ; an increase in seventeen years of almost exactly 25 per cent. In 1905 it was 38,829,580, an increase in 35 years of more than 50 per cent.] BOOK II. CH. III. How the increase of population affects rents. 132 Manual of Political Economy. BOOK II. CM. III. Part of the actual rent paid may be consi- dered as profit on capital. continuous rise in rent, yet the rise, which might other- wise have taken place, was checked by the increased demand for food being to a great extent supplied by foreign importation. During the last few years the rise in rents has not only been arrested, but there has been a very general reduction of rents. This is partly due, as previously explained, to a rise in agricultural wages, and is also partly due to the fact that as foreign importation prevented a rise in prices to compensate the farmer for bad crops, he had to submit to serious losses which in numerous instances havt been only very partially com- pensated even by a considerable reduction of rent. As a corroboration of the truth of- Ricardo's theory it may be mentioned that the reduction of rents to which refer- ence has just been made has been shown by an upward movement of the margin of cultivation ; for within the last few years of agricultural depression, especially in tli^ heavy clay soil of such a county as Essex, considerable tracts of land have been thrown out of cultivation. The remarks which have been made in this chapter on the subject of rent would seem to indicate that the rent of any particular soil depends upon its natural productive- ness. But the value of land is rarely due entirely to its natural productiveness ; little of the land which is now cultivated would be as productive as it is, unless capital had been spent upon it. The fens of Lincolnshire and Cambridgeshire were once worthless swamps, but drain- age has now converted these fens into valuable arable land. In such a case, it would appear that the rent which is paid is almost entirely due to the capital which has been spent on these improvements. Hence this important question is suggested : Ought we to consider as rent the additional price which is paid for the use of land when its productiveness is increased by an outlay of capital on drainage and other such improvements ? The rent of land the productiveness of which has been artificially created, differs in no single respect from the rent of land the productiveness of which has been chiefly derived from unassisted nature ; and the amount of rent which is paid in these two cases is determined by the same causes. The farmer who cultivates a reclaimed fen, can afford to pay in rent just so much produce as is left to him, Rents as determined hy Competition. 133 after all the expenses of his farm have been paid, and he has himself been reimbursed for his own labour and capital. He pays rent because he is allowed to cultivate a productive soil, and it is a matter of no concern to him whether the productiveness of the soil is due to natural or artificial causes. A portion of rent, therefore, may generally be considered to represent a return to capital which has been spent in improving the land. And thus rent, though generally paid in one sum to the same individual, is almost invariably made up of two distinct components which represent different claims, or, perhaps, more properly, different kinds of ownership in the soil. This may be readily shown by an example of frequent occurrence. The owner of a life interest in landed property is enabled by Act of Parliament to borrow money to be spent in drainage or other permanent improvements, such as the construction of better farm- buildings. The company or society which lends the money is guaranteed repayment by a rent-charge upon the land for a certain number of years. This rent-charge at the present time is usually six per cent, on the money lent, to be annually paid for twenty-two years. The tenants, who receive the first immediate advantages of these improvements, gladly allow this rent-charge to be added to the rents which they previously paid; and, in this manner, their rents are composed of two portions one of which is paid for the use of the land, and the other is paid as a return to the capital which has been expended in improvements. A nobleman, whose family have been long embarrassed, and whose estates have been consequently much neglected, has, in this manner, within the last few years spent £70,000 in improving his estates. The whole of this sum has been borrowed upon the conditions above described. The advantages which have resulted from this expenditure have been so great and so immediate that the tenants can afford to have their rents increased by a much greater amount than the rent-charge of 6 per cent., guaranteed to the company which has lent the money. The landlord there- fore does not, even in the first instance, incur any pecuniary sacrifice for these improvements, but, on the contrary, he at once obtains an increase of rent, and after BOOK II. CH. III. Money bor- rowed for permanent improve- ments. 134 Manual of Political Economy. BOOK II. CH. III. Bent w vol an element of the price of agrkul- tural pro- duce. Simple proof of this pro- poiidon. the twenty-two years have elapsed he is able to appro- priate to himself the entire benefits which arise from this improvement in his land. It seems difficult to explain why landlords who have not capital of their own do not more largely avail themselves of the great facilities which are offered to them for obtaining the requisite capital to improve their estates. Although in many instances the land of England has been greatly improved in recent j^ears, yet in every count}^ many important agricultural improvements, such as drainage and the construction of better farm-buildings, still re- quire the expenditure of a considerable amount of capital, to which not only a large prospective but even a large immediate profit would be returned. From Ricardo's theory of rent there can be deduced the very important proposition, that rent is not an element of the cost of obtaining agricultural produce. A no less eminent writer than Mr. Buckle has assured his readers that the proposition just stated can only be grasped by a comprehensive thinker; we, however, believe that it may be made very intelligible by a simple exposition. If rent is not an element of cost of pro- duction, food would be no cheaper if all land were arbitrarily made rent free. Let us, therefore, inquire if this would be the case. It has been frequently stated in this chapter that there is always some land in cul- tivation so poor that it can only afford to pay a nominal rent, the produce it yields being no more than sufficient to reimburse the expenses of cultivation. Let us now suppose that all land is made rent free by an arbitrary edict of the Government. Such an act of spoliation, although it would unjustly interfere with property, would not cause any diminution in the con- sumption of food; the same quantity of agricultural produce would be required as before ; the same area of land would therefore have to be cultivated. That land would consequently still require to be tilled which previously only paid a nominal rent; but if food was rendered cheaper, by making land rent free, this land, \yhich before only paid a nominal rent, would be cul- tivated at a loss. No person, however, will continue to apply his labour and capital if he does not obtain in Rents as determined by Competition. 135 return the ordinary rate of profit, and, therefore, if food became cheaper, such land as we have just described would cease to be cultivated ; but this cannot be, because the demand of the country for food is such that the produce which this land yields cannot be dispensed with. It is therefore manifest that food would not become cheaper, even if land were made rent free. Rent con- sequently is not an element in the cost of production. The value of food is, ccvteris paribus, determined by the demand for it, because the demand for food regulates the margin of cultivation. Although the payment of rent does not influence the cost of producing food, yet the amount of rent paid indicates the position of the margin of cultivation, and the value of food must rise as this margin of cultivation descends. It has already been remarked that Ricardo's theory implies activity of competition. In many countries, however, this activity of competition does not exist, but is interfered with by various customs. In succeeding chapters many of the various land-tenures which exist in different countries will be described, and we shall be thus led to consider whether the conclusions deduced from Ricardo's theory apply to those countries, such as India, where the tenure and the rent of land are influ- enced by various causes besides activity of competition. Activity of co7)ipeti- tion is im- plied in the above. CHAPTER IV. ON WAGES. Wa'/es depend upon the relative rates of in- creor'ie of capital and popu- lation. IT has been impossible to expound the general laws of rent without mentioning the other two portions into which wealth is distributed ; namely, wages and profits. But, as yet, we have not examined the laws which regu- late wages and profits ; it will therefore be convenient in the first place to devote a chapter to the subject of wages; we shall then consider profits; and when we have thus completed an examination of the laws con- cerning rent, wages and profits, we shall be in a position more clearly to understand some special but important questions concerning the distribution of wealth. In previous chapters it has been shown that capital is the fund from which labour is remunerated, and it has been customary in most treatises on political economy to describe that portion of the capital of a country which is devoted to the payment of wages as the wages-fund. Within the last few years there has been a considerable amount of discussion on what is termed the wages-fund theory. The late Mr. W. T. Thornton in his book On Labour denied the existence of a wages-fund, and Mr. Tliornton's remarks on the subject attracted the more attention because they induced Mr. J. S. Mill to announce himself a convert to Mr. Thornton's views in opposition to the opinions expressed in his ' Principles of Political Economy.' ^ We cannot help thinking, however, in spite of the high authority deservedly attributed to Mr. Mill and Mr. Thornton, that far too much importance has been given to the controversy, and that Mr. Thornton's ^ See Essays and Dissertations by J. S. Mill, vol. 4, p. 43, in a review of Thornton On Labour, Oil Wages. objections mainly rest upon a misconception of the wages-fund theoiy. In order to give the reader an idea of the nature of the controversy, we think we cannot do better than make a brief statement of Mr. Thornton's argument and of the rejoinder it elicited from the late Professor Cairnes, who from his eminence as an economist may be justly regarded as the leading advocate of the wages-fund theory. Mr. Thornton contended^ that there was really no such thing as a wages-fund, because no individual employer possessed a fund which must necessarily be expended in wages and in no other way, and he argued that the national wages-fund, if it existed at all, could only be made up of an aggregate of similar funds owned by capitalists. He maintained that so far from such funds existing in the hands of individual employers it was a mere mockery or childishness to suggest it. This line of criticism however betrays a fundamental misunder- standing of the wages-fund theory. No one ever imagined that there was a sum of money set apart for the payment of wages over which its owners had no real control, which must of necessity be devoted to paying wages and to nothing else. The theory, as originally propounded by Mr. Mill and as understood by Cairnes and others, is this: — the character of the national industries being given, a certain proportion of the capital seeking remunerative employment in these industries must be devoted to the payment of wages. ' Assuming,' says Prof. Cairnes,^ 'a certain field for investment and the prospect of profit in this such as to attract a certain aggregate capital, and assuming the national industries to be of a certain kind, the proportion of this aggregate capital which shall be invested in wages is not a matter within the discretion of capitalists, always supposing they desire to obtain the largest practical return upon their outlay. To accomplish this, the instruments of production, labour, fixed capital and raw material, must be brought together in certain proportions — a condition which requires as I have shown, — the supply of labour ^ On Labour, pp. 84, 85. ^Leading Principles of Political Economy, pp. 218, 219. 137 BOOK II. CH. IV. The con- troversy on the ivages- fund theory. 138 Manual of Political Economy. BOOK 11. CH. IV. Meaning of the expression ' ' wages de- pend upon demand and sup- ply." being given,— a distribution of the aggregate capital m certain proportions among those instruments. Supposing, now, capitalists to succeed in forcing down the rate of wages below the point at which, having regard to the number of the labouring population, the amount which the fulfilment of this condition would assign to the pay- ment of wages, was absorbed — either the capital thus withdrawn from the wages-fund must remain uninvested, or if invested and not invested in wages, it would take the form of fixed capital or raw material. But by hypo- thesis, the fixed capital and raw material were already in due proportion to the labour force and they would consequently now be in excess of it. A competition amongst capitalists for labour would consequently ensue; and what could this end in but a restoration to the wages-fund of the amount withdrawn from it ?' If, as we believe to be the case, the view expressed in the foregoing passage is correct, it becomes obvious that wages in the aggregate depend upon a ratio between capital and population.^ If the number of the labouring population remains stationary, wages cannot rise, unless the capital of the country is increased ; but if, on the other hand, there is an increase in the number of the labouring population unaccompanied by any augmenta- tion in the capital of the country, then wages must decline. The truths which have been just stated are in popular language expressed somewhat difierently, for ^ Prof. Henry Sidgwick in his work, Principles of Political Economy (1883), discusses at some length (Chap. viii. , Book 2) the "wages-fund" theory, which he joins Thornton in condemning. He points out that in the present chapter sufficient distinction is not made between what he designates "wages-capital" and "non-wages-capital," and that general wages can only be affected by an increase or a decrease in the former. We do not pause here to consider whether "wages-capital" does not bear a strong resemblance to the wages-fund which has lately been the subject of so much criticism : but it may be said in reply to the objection just quoted that in stating broadly that wages depend upon the ratio between capital and population, we think it is sufficiently clear that — the nature of the national industries being given — every increase of capital means an increase in certain tolerably definite pro- portions both to " wages capital " and to " non- wages-capital." At the end of Chap, iv., Book 3, of the present volume, in endeavouring to show the effect which niay be exerted on the labourers by the conversion of circulating into fixed capital, the distinction which Prof. Sidgwick points out between " wages-capital" and " non-wages-capital " has been fully recognised, although these expressions have not been used. On Wages. wages are commonly said to be regulated by supply and demand. We shall be able to show that this means the same thing ; but ' supply and demand ' is a hackneyed phrase not unfrequently employed without an accurate knowledge of its real import. Let us, in the first place, inquire what is the meaning of the expressions ' demand for labour ' and ' supply of labour.' A demand for labour can only be caused by those who have the means of remunerating the labourer. But the remuneration which is intended to be given to the labourer is capital ; there- fore those only can exert a demand for labour who can apply capital for the remuneration of labour, and the greater the amount of capital to be applied in this manner, the greater will be the demand for labour ; it therefore appears that the expression 'demand for labour' may be replaced by some such phrase as ' capital seeking to be devoted to the employment of labour.' Again, supply of labour may be estimated by the number of those who are anxious to labour ; consequently an in- crease in the supply of labour is equivalent in its meaning to an increase in the number of the labouring population. When, therefore, we say that wages depend on the ratio between capital and population, we state the same principle as those who affirm that wages are regulated by demand and supply. This latter mode of expressing the principle is not incorrect, but the words demand and supply convey no definite meaning, whereas every law concerning wages must be deduced from the fundamental conception of a ratio between capital and population. The law just stated goes no farther than to indicate the source from which wages are supplied ; this law affirms that wages cannot generally rise or fall, unless the capital or population of the country is either in- creased or decreased. No question in economic science can be of more practical importance than the attempt to ascertain the causes which regulate the rate of wages. In no country has capital increased more rapidly than it has in England during recent years ; the extension of our commerce and the increase of our national wealth have been quite unprecedented. Numberless statistics may be quoted, each of which would prove a wondrous development of our commerce and trade. In twelve 139 BOOK II. CH. IV. Efect of this upon the condi- tion of the labouring classes. I40 Manual of Political Economy. BOOK II. CIl. IV. Hem the increase of ivealth improved their con- dition ? years, from 1849 to 1861, our exports advanced from 60 000 000/.. to the value of 120,000,000/.; they were m 1881 297 000,000/.; there has been a corresponding in- crease in our imports; for they have steadily advanced until in the year 1881 they reached the value ot 397,000,000/.! The opinion is not unfrequently ex- pressed 'that this remarkable growth of wealth has not been accompanied by any corresponding improvement in the condition of the labourers, and it has been con- tended by, amongst others, Mr. George, in his Poverty and Progress, that there has been no improvement at all When the fifth edition of the present volume was published, England had lately (1873-4) passed through a period of exceptional trade activity, which had been accompanied by a marked rise in general prices. This rise in prices materially added to the cost of living of the working classes. Some idea may be formed of the influence thus exerted from the fact that, owing to a rapid increase in the demand for coal, produced to a great extent by the additional quantity of coal required for the smelting of iron, coal advanced in price about 13.S. a ton. It is estimated that the annual consumption of coal for household purposes in England is about 20,000,000 tons, and in consequence the rise in the price of coal entailed upon the general body of householders a charge of 13,000,000/. a year, an amount equivalent to about one-half the interest of the national debt. There can be no doubt that the increase in the cost of living in this period of industrial activity was severely felt by various sections of the working classes. Lord Brassey has shown in his book entitled Work and Wages that taking the period between 1854 and 1869 the rise in wages had varied greatly in different employments. In some industries the rise had certainly not been sufficient to provide an adequate compensation for the increase in the cost of living to which reference has just been made. Taking, however, a review of a longer period, it can, we believe, be conclusively established that there has been a marked improvement in the general condition of the industrial classes since the adoption of free trade, the ^ [In 1904 the total value of imports into the United Kingdom was £551,038,628.] On Wages. extension of the railway system and the introduction of other improvements in the means of communication. At the time (1842) when Sir Robert Peel began his series of great financial reforms which ultimately led to the com- plete abolition of protection, there was scarcely a single article of foreign produce imported which was not heavily taxed. At that time our tariff" contained nearly 1,200 import duties: nearly the whole of these have been repealed, and at the present time almost the entire amount of the revenue levied on commodities either of home or foreign growth is obtained from six articles — spirits, wine, beer, tobacco, tea, and coffee.^ The remis- sion and reduction of duties and the removal of all protective imposts upon foreign products have materially cheapened almost every article of general consumption except meat and dairy produce, and this reduction in price is particularly felt in unfavourable seasons. For- merly, when there was a falling oft' in the supply of home produce the restrictions that were imposed upon foreign importation often caused the necessaries of life to advance to almost a famine price, and wide-spread misery resulted which is now happily never witnessed. Miss Martineau, in her admirable History of tJie Thirty Years' Peace, gives a most vivid description of the state of the country in 1841 : — " The distress had now so deepened in the manufacturing districts as to render it clearly inevitable that many must die, and a multitude be lowered to a state of sickness and irritability from want of food.... In Carlisle the Committee of Inquiry reported that a fourth of the population was in a state bordering on starvation — actually certain to die of famine unless relieved by extraordinary exertions.... In Stockport more than half the master spinners had failed before the close of 1842 : dwelling-houses to the number of 3,000, were shut up ; and the occupiers of many hun- dreds were unable to pay rates at all. Five thousand persons were walking the streets in compulsory idleness." It is almost impossible now to form a conception of the abject misery in which many of the agricultural labourers lived in those days. We can well remember '[During the South African war, 1899-1902, the tax on sugar was reimposed. ] 141 142 Manual of Political Economy. BOOK II. CH. IV. Improve- ment effected in the con- dition of the poor by free im- portation of food and other produce. when the ordinary wages of agricultural labourers in Wiltshire and Dorsetshire were not more than Is. or 8s. a week. Some striking examples of the abject wretched- ness of many of the rural population are to be found in Mr. John Morley's Life of Gobden. " In Somersetshire the budget of a labourer, his wife and five children under ten years of age, was as follows : — Half a bushel of wheat cost four shillings; for grinding, baking and barm, sixpence; firing, sixpence; rent, eighteen pence; leaving out of the total earnings of seven shillings a balance of sixpence to provide the family with clothing, potatoes, and all the other necessaries and luxuries of human existence." In Devonshire the anti-corn law lecturers found that the labourers "seldom saw meat or tasted milk ; and that their chief food was a compost of ground barley and potatoes" (Life of Gobden, Vol. i., p. 156). Although there may now be fluctuations from year to year in the condition of the industrial classes, nothing can more conclusively show the marked improvement which has been secured than the fact that although we have lately had to contend with a series of unfavourable seasons, and many branches of industry have ' been seriously depressed, yet there has been no approximation to any such wide-spread suffering as that which has been just described. Severe losses have within the seven years, from 1876 to 1883, had to be borne by those engaged in agriculture and other branches of trade, but it cannot be doubted that these losses have in numerous instances fallen more upon the employer than the employed ; for far from there having been any scarcity of food, the price of all articles, except meat and dairy produce, has been exceptionally low ; and this diminution in the cost of living has not only provided the labourers with a compensation in those cases where wages have been reduced, but has enabled a period of trade depression to be tided over without that wide- spread misery which had so often to be endured in the past. Although we have thus endeavoured to show that there has been a decided advance, yet it cannot be denied that the general condition of the people admits On Wages. of almost indefinite further improvement. There is still much poverty in our midst, and we shall in a subsequent chapter have occasion to lay special stress on the wretched dwellings in which so large a proportion of our population live. If, therefore, the mass of the people have not benefited to so large an extent as they might have done by the remarkable increase in wealth which has occurred in recent years, it becomes of the first importance to inquire what are the agencies which have acted prejudicially upon the general condition of the people. Reference has been already made to the fact which was established after most careful investigation by Lord Brassey, that the rise in wages has been so unequally distributed that in some trades wages have remained almost stationary. In these instances, in accordance with the principle already established, it may be con- cluded that an increase in the demand for labour must have been accompanied by a nearly corresponding in- crease in the supply. It is important to bear in mind that the supply of labour can be increased in two different ways. In the first place, the number of the labouring population may be augmented ; secondly, the invention of new machines and other industrial improve- ments may, by economizing labour and rendering it more efficient, produce just the same eflfect in increasing its supply as if an addition were made to the number of the labouring population. If some machine is invented, or some new method of carrying on industry is introduced, which enables 20 men to do as much work as before was done by 100 men, it is obvious that the supply of labour, so far as a particular trade is concerned, is augments 1 five-fold. Innumerable instances might be given in which labour has been thus economized to a most remarkable extent. In fact, the extraordinary increase in the production of wealth, which has characterized the last 50 years, would have been impossible if industry had been carried on with its old appliances. Again, quoting Lord Brassey, it appears that Mr Nasmyth, in his evidence before the Trades' Union Commission, stated that by the introduction into his workshops of self-acting tools, he was able to 143 BOOK II. CH. IV. A con- sideration of the reasons why the lahoiiring population has not received a larger share of the recent increase of wealth. The influ- ence of ma- chinery in reducing the de- mand for labour. The man- ner in which the invention of labour- saving machinery acts on ivages. 144 Manual of Political Economy. dispense with all that class of men who depended upon mere dexterity, and he reduced the number of men in his employment by fully one half. Numerous instances may also be given of the extent to which employers are induced to economize labour by the introduction of improved industrial processes, when trade is unfavourably affected by any such circumstances as a deficiency of raw material or a scarcity of labour. Thus it is said : " In their gallant struggles in the difficult times following the war in America, our manu- facturers developed the resources of machinery to a greater extent than had ever been attempted before, and they succeeded in making a considerable reduction in the amount of labour employed." In consequence of the extremely high wages which are prevalent in the United States, the Americans are far more interested than we are in England in applying machinery with the view of saving labour. Machinery is not only far more largely used in agriculture in the United States than it is in England, but many of the improvements which we have introduced into agricultural implements have been obtained from America. We find it stated that, " In the United States the application of labour-saving machinery to agricultural operations is increasing every year. The number of patents issued for agricultural implements was in 1847, 43 ; in 1863, 390 ; in 1864, 563 ; in 1866, 1778; and in 1867, 1800." It can scarcely be doubted that even the comparatively small rise of 2s. or Ss. a week which has taken place in the wages of English agricultural labourers since the formation of agricultural unions, has already acted as a stimulus to many farmers to adopt various means of economizing labour, such as the employment of more machinery. If the supply of agricultural labour in this country should be diminished, as seems not improbable, by a large emigration of agricultural labourers, it cannot be doubted that the farmers would be prompted to make still greater eflforts to economize labour ; and thus the rise in wages which would naturally result from a diminution in the supply of labour would be to a considerable extent counteracted. It is made sufficiently clear from such instances as On Wages. those just enumerated, that increased production of wealth does not necessarily cause a proportionate increase in the demand for labour, but, on the contrary, it may very possibly happen that the discovery of some machine or some new industrial process may so economize the use of labour, as to cause the demand for labour to diminish at the very time when there is an increase in the production of wealth. It is important to bear this in mind, because we are too prone to conclude that every class in the community must immediately participate in the greater prosperity which is supposed necessarily to accompany an increased production of wealth. No doubt the community is ultimately benefited by the invention of improved machinery, but we must remember that the advantage thus secured is often accompanied by a severe loss to certain classes of labourers. The invention of new machinery, as we have seen in the case of Mr. Nasmyth's works, may, by economizing labour, so much diminish the demand for labour in a particular trade as to throw many out of employment. As pre- viously pointed out, the invention of a new machine generally enables some industrial process to be mechani- cally performed which before needed manual skill. A class of labourers may thus find that they are suddenly deprived of the pecuniary advantage which they are able to secure from the possession of some particular skill. A serious loss may thus be inflicted on certain classes of workmen ; they may have to seek some new employment in which the skill which they possess, acquired after a long and expensive training, is no longer of any use to them. As an example of the loss which workmen may thus suffer, we have seen that Mr. Nasmyth was able, through the introduction of improved machinery, to dispense with the labour of all that class of men who depended upon mere dexterity, and to reduce the number of his men by one half. The men who were thus dismissed were of course those who were in receipt of the highest wages. The considerations here adduced are, we believe, sufficient partly to account for the fact that the increase in the remuneration of labour has not been at all pro- portionate to the increase in national wealth, and that K 145 146 Manual of Political Economy. many workmen have scarcely participated at all in what is so constantly described as a remarkable growth of national prosperity. The comparatively small extent to which it appears that the labourers have benefited by a great increase in the production of wealth is doubtless in part due to the fact, that only a portion of the wealth annually saved or accumulated in England is invested in our own industry. Our national capital may be regarded as divided into two portions, one of which is retained for the main- tenance of home industry ; the other portion is exported, being lent to foreign governments, or embarked in various foreign investments, such as railways, mines, irrigation works, etc. All that portion of our national capital which is thus exported exercises no immediate influence in raising the wages of our own labourers. It is for the time, so far as our own labour market is con- cerned, non-existent. Too little consideration is generally given to the vast amount of capital which is thus annually drawn away from England. It would be impossible to state the exact amount of this drain, but some idea may be formed of its magnitude by considering the vast amounts which are annually lent by Engli.sh capitalists to foreign governments. Almost every country in Europe spends more than its revenue, and the defi- ciency is to a considerable extent supplied by loans raised in England. This excessive expenditure was caused by the example of the imperial government in France, for with the establishment of the Second Empire commenced that system of rivalry in military armaments which is mainly responsible for the great increase in the national debts of almost all European countries. It is perfectly well known that England has supplied a very considerable proportion of the loans which have been raised by Russia, Italy, Turkey, and Egypt. This being the case, we are able to form some idea of the extent to which, during the last 30 years, English capital has been exported, instead of being reproductively employed in home industry, when it is found that between the years 1848 and 1906 the national debt of Russia increased from 100,000,000/. to 700,000,000/., and that of Italy On Wages. from 30,000,()0()Z. to 498,000,000^.1 A great amount of English capital was invested in the loans which were raised by America during the Civil War. Again, various industrial enterprises, such as railways, which have done so much to stimulate the production of wealth in England, have also exercised a powerful influence in causing capital to be exported from England. Thus, in a few years no less a sum than 90,000,000L of English capital was invested in Indian railways. We therefore think that the small increase which there has been in the remuneration of labour in this country, when com- pared with the increase in her aggregate wealth, may be partly accounted for by the fact that only a portion of the wealth possessed by England is invested as capital in her own industry, and it is this portion which can alone produce any immediate effect in raising the wages of her labourers. Probably, however, the cir- cumstance that has had the greatest effect in retarding an increase in the remuneration of labour is the fact that hitherto, whenever there has been an advance in wages consequent on an increased demand for labour, two powerful influences have been brought into opera- tion again to reduce wages ; for additional wages not only stimulate an increase of population, but also cause the adoption of various means for economizing labour. As almost every question concerning wages is inti- mately connected with the laws of population, it will be desirable here to make some reference to these laws, and to the distinguished economist by whom they were first expounded. Malthus enunciated these laws in his cele- brated Essay on Population , published in 1798, a work which gave a new aspect to the speculations of political economists. In this essay the restraints upon population are classified as positive and preventive. Positive checks ou population are, according to Malthus, causes over which an individual has no direct control, such as the mortality arising from famine, disease, or the ravages of war. In all civilised countries a certain number of people are restrained from early marriages by feelings of prudence, and then the population is kept down by ^ [These figures are obtained from the late Mr. Dudley Baxter's work on National Debts, and from the State-Oman's Tear Book, 1887 and 1906.] 147 BOOK II. CH. IV. The three circum- stances to ivhich we attribute the small advance in ivages are : 1. The in- crease of popula- tion. 2. The ex- tended use of labour- saving ma- chinery. 3. Theex- port of capital. Malthus's Essay on Popula- tion. 148 Manual of Political Economy. BOOK 11. CH. IV. Some checks to population invariably exiM. what Malthus called a preventive check. Malthus examines the social condition of each country, with the view of ascertaining whether preventive or positive checks are the more efficient in restraining their popu- lation. The description which from this point ot view he gives of the most important countries may be stili read with great interest. His entire essay is most sug- gestive, and the time which has elapsed since its hrst appearance at the commencement of the present century, has detracted little from its value or importance. It is quite evident that population must be restrained by some check, for if ail married when they arrived at maturity, this earth would not merely fail to feed, but would scarcely even offer standing-room for the countless millions that would be born. This may be exemplified by an illustration from natural history: 'the elephant is reckoned the slowest breeder of all known animals, and I have taken some pains to estimate its probable minimum rate of increase. It will be under the mark to assume that it breeds when thirty years old, and goes on breeding until ninety years old, bringing forth three pairs of young in this interval. If this be so, at the end of the fifth century there would be alive fifteen million elephants, descended from the first pair.' ^ It is .stated in the late Prof. Cairnes's Essays that the popu- lation of Ireland more than doubled itself in thirty- eight years between 1767 and 1805.'^ The population of a country, under favourable circumstances, has been known to double in a period of twenty years, and so great is the power of man's multiplication, that the world might soon be far more densely populated than it is now, by the progeny of a .single pair, if none of these positive or preventive checks which act in various countries were brought into operation. It is the opinion of Malthus, that throughout the East, and formerly in most European countries, the population has been restrained hy such positive checks as famines, destructive wars, negligent rearing of children, and the unskilful treatment of ter- rible diseases, not unfrequently caused by an insufficiency 'Darwin, Origin of Species. " Political Essays, by Prof. .J. E. Cairnes. On Wages. of food, which often appeai'ed in the form of periodic plagues. It is estimated that the plague known as the Black Death, which swept over Europe in 1347-8, destroyed in England alone the lives of more than one half of the population. In almost every country these positive checks still operate, but with much less powerful effect. In England, for instance, there is a great mor- tality amongst the children of the poor, which is no doubt chiefly due to the unfavourable circumstances in which they live. In many districts one half of the children belonging to the poorer classes die before they are five years old. In some European countries, popu- lation is restrained by law. In Norway, no couple is allowed to marry until it can be proved that the man and wife possess jointly a certain amount of money. In other countries, prudential feelings, which almost amount to a general custom, prevent early marriages, and in this manner restrain population. In some of the Swiss cantons, a man rarely marries before he is thirty, nor does a woman marry before she is five-and- twenty. In some exceptional cases the condition of the labour- ing classes may for a time suffer no deterioration, although neither positive nor preventive checks on population are in very active operation. In a new colony with a healthy climate, and a great breadth of fertile and unoccupied land, population may for a time continue to expand with scarcely any let or hindrance ; but in a country like England, if the population were not restrained by some checks, the labour-market would soon become so redundant that the labourers would be reduced to abject poverty and misery. The middle and upper classes display, as a general rule, considerable prudence : they do not often marry unless they have a reasonable prospect of being able to bring up a family in a state of social comfort, similar to that to which they themselves have been accustomed. But the labourers, who form the majority of the population, are but slightly influenced by such cautious foresight. Prudence is in a great degree replaced by other restraints upon population, which indicate a state of society deeply to be deplored. Of 149 ISO Manual of Political Economy. the children belonging to the upper and middle classes, only twenty per cent, die before the age of five. This proportion is more than doubled in the case of children belonging to the labouring classes. This great mortality amongst poor children is caused by neglect, by want of proper food, and by unwholesome dwellings; some- times the parents are too poor to rear their children properly, but too frequently the premature death of children is due to drunkenness and other excesses of which their parents are guilty. If, therefore, the children of the poor had during the last ten years been treated with proper care, there would be in this country, at the present time, above a million more children than are now living. In this manner the supply of labour may be vastly increased. And yet, if any faith is placed in the progressive improvement of the people, it must be believed that the check upon population just noticed, so replete with misery, and associated with so much human depravity, will be gradually weakened. But if this be so, then it becomes of paramount importance that the labouring classes should, with regard to marriage, exhibit prudence; for if increased prudence is not exercised, when these positive checks upon population are removed, the labour market will be so over-supplied, that the material condition of the labourer must rapidly deteriorate. One check upon population, which has not yet been referred to, has relieved this country of much surplus labour and has been peculiarly beneficial in all its other consequences. For many years past, there has been a large emigration from the United Kingdom to the United States, and to our various colonies. Between the years 1848 and 1864 the total number of emigrants from the United Kingdom was 3,863,000 : and although of late years there have been fluctuations in the amount of emigration, at present there appears to be no likeli- hood of a permanent reduction in its average amount: in 1881 no fewer than 243,000 emigrants of British origin left this country: [the average for the six years ending 1904 was 203,000]. Had there not been this emigration, all these persons would have remained at home; the. supply of labour would thus have been greatly increased and a depressing influence would have On Wages. been brought to bear upon wages. But this consideration suggests only a very small portion of the advantage which has resulted from emigration. Our emigrants leave an over-supplied labour market and settle in countries where great natural resources are undeveloped, and where vast tracts of fertile land are untilled, because no adequate supply of labour has been forthcoming. The returns to labour applied under such favourable conditions are of course very great : wealth is quickly created, and tracts of land thus peopled by our emigrants rapidly become prosperous commercial communities. Many of the nations which have been, as it were, created by our emigration, afford the mother-country a supply of cheap food, and thus confer upon her a most important benefit. This naturally leads us to consider other causes which produce a deterioration in the condition of the poor, and which also impede prosperity, when, in a thickly peopled country like our own, population is not either restrained, or else relieved by some such agency as emigration. It has been frequently stated that agricultural produce must rise in price if it becomes necessary to resort to less productive land in order to obtain food for an increasing population. Rent, as already demonstrated, does not form a part of the cost of producing food, for the price of food is regulated by the expense of obtaining produce from land which is so poor that it can only pay a nominal rent. If, therefore, the population of this country rapidly advanced, and the demand for food became so great as to render the resort to less productive land necessary, then food would become much more expensive. It must be always borne in mind that food must rise in price as population increases, unless supplies of cheap food are imported from other countries, or agricultural improve- ments render our own soil more productive. If, there- fore, emigration does not relieve the labour-market of its surplus population, the condition of the labourer will be injuriously affected in two distinct ways : in the first place, his money-wages will diminish, owing to the over- crowding of the labour-market;- and secondly, the neces- saries of life will rise in value, because there will be a greater demand for food. If our constantly-increasing I5t BOOK If. CH. IV. The ten- dency of food to he- come dearer as population advances, injures the labourer. 152 Manual of Political Economy. BOOK 11. CH. IV. 77i/s cril is ijreatly ob- viated by emigra- tion. population had to be supplied with food entirely from our own soil, it is doubtful whether a sufficient quantity of even the necessaries of life could be obtained ; but it there were not an absolute dearth of provisions, food would under such circumstances enormously rise m value, and the greatest distress amongst the labouring classes would be sure to ensue. The remarks just made upon the tendency of food to become dearer as population advances, indicate another most beneficial influence resulting from emigration; for not only is the home labour market relieved by emigra- tion, but it also promotes the development of countries to which England must chiefly look for supplies of cheap food. Emigration, therefore, is not only a check upon population, but it is in every respect most beneficial in its results ; it causes wages to rise, or rather prevents their fall in those countries from which emigration takes place; and by providing supplies of cheap food, it in- directly confers upon the labouring classes another most important advantage. It must, however, be remembered that emigration will, after a time, cease to be a remedy for over-population. Some of the facts already men- tioned show that population has, under favourable con- ditions, such a high rate of geometrical increase, that our colonies might, before a long period has elapsed, become as thickly peopled as the mother- country. Emigration would then no longer afford relief. It has now been pointed out that the average rate of wages received throughout the country depends upon a ratio between capital and the number of the labouring population. The capacity of increase is so great, that if some powerful checks are not placed upon population, the condition of the labourer must rapidly deteriorate ; for the greatest accumulation of capital that has ever occurred would entirely fail to create a demand for labour in any way proportionate to the supply of labour which would be forthcoming, if man's power of multi- plying his species were not restrained by some very efficient causes. When indicating the various ways in which population may be restrained, particular impor- tance has been attributed to emigration, in the case of a thickly peopled country such as England. The future On Wages. progress of such a country depends to a great extent upon her capacity to obtain supplies of cheap food ; it has been shown that emigration not only relieves her from the burden of a surplus population, but also power- fully promotes the development of those new countries from which cheap food is mainly imported. Many important questions connected with wages still remain to be explained; such, for instance, as the different rates of remuneration received in different employments. For not only are higher wages paid in some trades than in others, but it may be frequently observed that the wages of one particular class of workmen may rise or fall to a very considerable extent without any variation at the same time taking place in the wages of other employments. Special circumstances are connected with A^arious employments, which must have the effect of producing permanent variations in the wages paid in different trades. Adam Smith divides the causes which produce different rates of wages into the five following classes : 1st. The agreeableness or disagreeableness of the employments themselves. 2nd. The easiness and cheapness or the difficulty and expense of learning them. 3rd. The constancy or inconstancy of employment in them. 4th. The small or great trust which must be reposed in those who exercise them. 5th. The probability or improbability of success in them. Examples of the effects which may be attributed to each of these different kinds of causes will readily suggest themselves. A collier proverbially earns higher wages than even many skilled workmen in his own district. A collier, not working so many hours in a day, earns more wages than a carpenter. But coal mining is not only a very laborious, but a very dangerous occupa- tion. The work is dirty : a man has to labour in the dark, and often in very bad air. When all these circum- stances are considered, it is easy to understand that men would not work in coal mines unless they were induced to do so by very high wages. 153 154 Manual of Political Economy. BOOK ir. CH. IV. Dijfkidty oflearnimj it. Constancy of the em- ployment. The second circumstance mentioned by Adam Smith probably produces a greater influence on wages. It a trade is difficult to learn, an apprenticeship fee has otten to be paid as a premium for the necessary instruction. This in the first place, greatly limits the number of those who 'can be brought up to the trade, for comparatively few labourers, even if they were inclined to do so, have the means to pay such a fee for any of their children : but the apprenticeship premium represents only a very small portion of the cost a parent must bear if he brings a child up to a skilled trade. An apprentice not un- frequently works four or five years without receiving any wages at all, and therefore such a youth, until per- haps he is twenty years of age, must be kept by his parents. If, however, he had entered upon some ordinary unskilled employment, he would have been receiving increasing wages from the time he first began to work. Every skilled workman has had a certain amount of capital spent in gaining the skill his trade requires, and this capital would of course not be spent unless an ample future return was given to it in the form of higher wages. The difference in the wages of skilled and un- skilled labour represents a large return to the capital which has been spent in the skilled workman's education. This must be so, whilst so few of our workmen have either the foresight or the means to bring their children up to some skilled employment. Skilled workmen there- fore possess, as it were, the advantages of a monopoly. In some skilled employments a monopoly is created by nature, for the skill needed is so great that few have the natural capacity ever to acquire it. Thus, as previously mentioned, there is a very limited number, amongst all the watchmakers in England, who can ever acquire that delicate accuracy of workmanship which is needed in the construction of a chronometer. Such workmen, there- fore, are endowed with a natural monopoly, and they can, within certain limits, obtain almost as high wages as they choose to demand. The third circumstance mentioned by Adam Smith — namely, the constancy or inconstancy of employment — he very aptly exemplifies by the case of builders' operatives. ' In the greater part of manufactures a journeyman may On Wages. be pretty sure of employment almost every day in the year that he is able to work. A mason or bricklayer, on the contrary, can work neither in hard frost nor in foul weather, and his employment at all other times depends upon the occasional calls of his customers. He is liable, in consequence, to be frequently without any work. What he earns, therefore, while he is employed, must not only maintain him when he is idle, but make him some compensation for those anxious and desponding moments which the thought of so precarious a situation must sometimes occasion. When the computed earn- ings of the greater part of manufacturing operatives accordingly, are nearly upon a level with the day wages of common labourers, those of masons and brick- layers are generally from one half more to double those wages.' With regard to the fourth cause mentioned by Adam Smith, it may be remarked that, when a great amount of trust is requisite to be reposed in a labourer, his wages are of course higher. A labourer, when he has demonstrated that he possesses such qualities as will cause his employer to place confidence in him, can claim higher wages, and the employer who gives these higher wages is abundantly recompensed. A jeweller has to intrust valuable property to his workmen, and if confidence could not be reposed in these workmen, their employer w^ould be at a considerable outlay in order to have them constantly watched, and he would be likewise subjected to various other losses and annoyances. A considerable portion of the cost of any commodity does not arise from the labour employed in actually producing it, but is caused by the expense of superintending and watching this labour. An employer might dispense with such an outlay if he felt assured that his workmen could be trusted ; and such an employer would readily devote a part of the expense thus saved to raise the wages of those he employed. The following is the fifth &nd last cause enumerated by Adam Smith. ' The wages of labour in difierent employments vary according to the probability or improbability of success in them.' The circumstance but very slightly affects those who are usually considered to 155 BOOK II. CH. IV. Amount of trust re- posed in the labourers. Proba- bility oj success. 156 Manual of Political Economy. BOOK II. CH. IV. Effect of this in the liberal pro- fessions. belong to the wage-receiving class. If a youth is brought up as a shoe-maker, it is almost certain that he will acquire the art of shoemaking. In some of the liberal professions, however, such as the law and medicine, the large remuneration received by a few may perhaps be con- sidered to be partly counterbalanced by the number of those who fail to earn a competency in any degree proportioned to the expense which their professional education has involved. But we think Adam Smith, even in the case of the liberal professions, has attributed too much influence to ^he cause above mentioned. The uncertainty of success in such a profession as the bar is not due to a difliculty in ascertaining beforehand whether an individual possesses those talents which will fit him for such a profession. Success is uncertain, because it depends on extraneous conditions which an individual cannot control. A barrister may have brilliant abilities, but unless he happens to be acquainted with solicitors he may wait for years without a brief. In many professions, too, although the fees paid appear to be high, yet the average earnings are extremely small. Moreover, in the choice of a profession other motives act more powerfully than a prospect of gain : a profession gives position in society, and men of property often join one of the learned professions in order to give them an occupation : hence the competition for employment is artifically increased. When therefore any question is considered relating to wages, or to the profits of trade, a distinction ought to be made between the liberal professions and other occupations which are resorted to almost entirely for the purpose of gain. A clergyman who is only obtaining 100^. a year, may feel assured that if he were engaged in some other occupation his income would be far larger; but such a man may be prompted by a high sense of duty to enter the Church, or he may be influenced by the social position he obtains from being in it, and therefore he chooses his profession independently of pecuniary considerations. With regard to trade, no such feeHngs can exercise any practical influence ; no one can feel that it is his duty to be a grocer rather than a baker ; a man usually chooses the trade or employment to which he has been brought up, or the one in which he On Wages. thinks he can earn the most money with the most pleasure, or rather the least inconvenience to himself. The five classes of circumstances to which Adam Smith attributes the different wages paid in different employments have now been enumerated. Considerable influence is no doubt produced by each of these classes of circumstances ; but wages are perhaps more affected by other causes which are much less frequently considered. For instance, a fact with regard to wages must have been noticed by even the most casual observer, that not only do the wages of different employments vary, but there are great variations in the wages obtained in the same employment in different parts of the country ; it may, moreover, be remarked that variations of this kind are particularly striking with regard to many unskilled employments. During the winter months an ordinary agricultural labourer in Yorkshire earns sixteen or seventeen shillings a week. The wages of a Wiltshire or Dorsetshire labourer doing the same kind of work, and working a similar number of hours, are only eleven or twelve shillings a week. This great difference in wages is not counterbalanced by other considerations ; living is not more expensive in Yorkshire than in Dorsetshire, and the Dorsetshire labourer does not enjoy any particular advantages or privileges which are denied to the Yorkshire labourer. This inequalit}^ in wages is not merely a temporary difference, and the question naturally arises. How can such a great variation in the wages of the same employment be permanently pre- served ? Why does not the Dorsetshire labourer remove to Yorkshire, where he would be able to obtain forty per cent, more for his labour ? The obstacles, however, to such a migration are too formidable to be overcome even by such a premium as is offered by this difference in wages. In the first place, a Dorsetshire labourer of the old school can seldom either read or write ; he there- fore has little or no information with regard to the wages paid in other districts. His ignorance magnifies the difficulties of removing to a distant part of the country, and makes him disinclined to leave the locality to which he has been accustomed. Again, if he has a family, he is far too poor to pay the expense of 157 BOOK II. CH. IV. Other cir- cumstances produce a variation of wages. They vary in different districts. 158 Manual of Political Economy. nooK II. CH. IV. These fads are consist- ent with the princi- ples stated above. Mean.1 of improving the la- bouri'r's condition. conveyinoj them to a comparatively distant place : for it is a fact that in those counties where wages are lowest, an agricultural labourer has rarely saved even a few shillings. The combined influence of the causes just enumerated prevents labourers readily migrating from one district to another in order to avail themselves of the advantages which the}^ would secure from a greater demand for their labour. A more accurate conception is therefore obtained of many of the phenomena connected with wages, if a country like our own is considered to be composed, so far as certain classes of labourers are concerned, of distinct provinces between which there is little migration of labour and in which within certain limits different rates of wages jjrevail, or, in other words, different relations exist between population and capital, or between the demand for, and the supply of, labour. It is important to bear this in mind when we practically apply those general laws of wages described at the com- mencement of this chapter. But let it not for one moment be supposed that these laws are less true because it is necessary to place some limitation upon their general application. The wages of the Dorsetshire labourers depend as absolutely on a ratio between capital and population as if these labourers readily passed from one part of the country to another; but their wages are far more affected by an increase or decrease of capital and population in their own district than by any change in the capital or population of the whole country. It is also evident that if Dorsetshire labourers will not go to Yorkshire, the wages of the Yorkshire labourers are not affected by an increase in the population of Dorsetshire. But wages in Yorkshire will inevitably be affected if there is any alteration in the amount of the capital invested in the district, or if there is any increase or decrease in the number of those who are seeking employment in the locality. If, there- fore, the wages in any particular district are too low, there IS only one way in which they can possibly be raised. Mere sympathy can do little in advancing the wages of the Dorsetshire labourer: his condition can only be improved either by employing more capital On Wages. in agriculture in Dorsetshire, or by restricting the supply of labour. This may be effected either by foreign emigration, or by some of the able-bodied labourers removing from these ill-paid districts to localities where wages are higher. Ever}^ year various causes are in operation which act with increasing effect to lessen these inequalities in wages which we have just been noticing. A few years since the greatest differences in the price of commodities prevailed in different parts of the country. Communi- cation was so difficult, that some article of food which was often an expensive luxury in one part of the country could be had in abundance in another part. Poultry was four times as dear in London as in many country districts. Railways have changed all this, and now provisions are almost as cheap in London as they are at a distant place like Aberdeen; and as people gradually avail themselves of the easy means of communication between one district and another, wages in the same employment will throughout the country approximate to one uniform rate. The more intelligent of our work- men freely leave the place in which they are employed if they think that by doing so their prospects are improved. As our agricultural labourers gradually become more intelligent, they will show an equal readiness to avail themselves of any advantage offered to them by a more favourable state of the labour-market in some other locality.^ Although it has been stated that a higher average rate of wages prevails in Yorkshire than in Dorsetshire, yet the causes which produce this difference in wages have not yet been fully explained. We must inquire why does the capital invested in agriculture in York- shire bear a different relation to the number of the agricultural population from that which it bears in Dorsetshire ? Yorkshire, unlike Dorsetshire, is not merely an agricultural county : it has many most thriving manufacturing industries ; therefore in the former county a great many other employments besides ^[Since this was written the migration of labour from the agricultural districts to towns has become a marked feature of industrial life in England and many other European countries.] 159 BOOK II. CH. IV. The dif- ference be- tween rates of wages in different districts tends to diminish. Causes which make ivages higher in Yorkshire than in Dorset- shire. i6o Manual of Political Economy. BOOK II. CH. IV. Influence exerted on wages by good trade; agriculture compete for the labour of the agricultural population. It is true that an agricultural labourer is not suddenly converted into a cloth-weaver. Such a transition rarely takes place, but if there is a manu- factory close at hand, many of the children of the agricultural labourers will be employed in it. There is always connected with an active manufacturing industry much subsidiary work which can be performed by an ordinary labourer. Thus in the Dowlais iron works in South Wales, there are no less than 500 horses, which of course require a great number of men to super- intend them. Such work, consequently, draws off many labourers from agriculture, and thus the higher wages paid to agricultural labourers in the manufacturing districts may be entirely explained by those general laws which regulate all wages : for in this, as in every other case, it is a question between population and capital ; the agricultural population of the manu- facturing districts being diminished by the frequent employment of the labourers themselves in other work, and by the engagement of their children in the manu- factories. Before concluding this chapter it will be important to explain the influence which is exerted on wages by what is called good or bad trade. In England, where capital is accumulated with such rapidity, the amount of capital invested in any particular industry could be immediately increased beyond almost any assignable limits. Suppose the prospects of the cotton trade were so good, that the Lancashire manufacturers thought they could profitably invest an additional 10,000,0001 in their trade. Many of them would withdraw capital for this purpose from other investments, and there would be no difficulty whatever in making up the whole 10,000,000/. required by obtaining advances from bankers and others on the credit of the individual manufacturers. It would not, however, be possible with equal rapidity to make such an mcrease in the labour employed in any particular mdustry. One who is accustomed to other work cannot without considerable practice acquire the skill of a cotton operative. Many of the processes of cotton- spmning could not probably be learnt by an adult, for On Wagefi. their manipulation requires fingers trained from child- hood. New capital in various forms, such as larger quantities of raw material, may be at once brought into any particular industry ; but when those who have been accustomed to the industry are once fully employed, an increased supply of labour can then be only gradually obtained. Hence it appears that the labourers of each separate trade possess, so far as the supply of labour is concerned, a monopoly for a limited period. This will explain the benefit which is observed to result to any class of labourers when their special trade happens to be prosperous. Reverting for an illustration to the manufacture of cotton, let us consider what takes place when this ti'ade is unusually active, as it was during the years 1872-73. Throughout this period cotton manu- facturers realized such large profits, that they were anxious to spin as much yarn and weave as much cloth as they possibly could. They therefore had every in- ducement to apply to their business the greatest possible amount of capital that was practicable ; so far as depended upon the supply of capital, the cotton trade might have been at once indefinitely extended ; but new mills and machinery require time for their erection. It was no use therefore for a manufacturer to buy more raw material, or employ more labour than was suited to the mills and machinery at his command. But every manufacturer during such times does as much trade as possible ; he therefore competes for labour ; every cotton operative is thus certain to be fully employed at very high wages, and consequently the prosperity of any particular branch of trade confers a great temporary benefit upon the labourers who are engaged in it. We say temporary benefit, because if the good trade continued, and wages remained exceptionally high, an additional supply of labour would at length be forthcoming. People would be gradually attracted from other worse-paid employments, because the high wages would offer them a temptation to learn the trade which was exceptionally prosperous. Every parent in the district would have a great inducement to bring his children up to this trade; and this accession of juvenile labour would be the chief source from which would be gradually supplied i6i BOOK II. CH. IV. by attract- ing capital to parti- cular em- ployments. The benefit thti-s con- ferred on the la- bourers is temporary. l62 Manual of Political Economy. BOOK II. CH. IV. an additional quantity of labour, sufficient to meet the increased demands of the trade. If the skill which any industry requires is particularly great, the labourers of the trade possess a more complete monopoly, because under such circumstances it would be more difficult and take a longer time to import labour from other employ- ments. The labourers fully understand the advantages of a trade monopoly, and they constantly strive to main- tain such a monopoly by various restrictions as to the number of apprentices admitted into any trade. In order to effect these purposes, Trades' Unions have been established. It will oe better, however, to defer our remarks upon these societies, and the various other means which have been often resorted to, in order to secure higher wages, until the subject of profits has been discussed ; for a complete investigation will then have been made into the general laws which regulate the distribution of wealth into the three primary divisions of rent, wages, and profits. CHAPTER V. PROFITS. RENT, wages, and profits, the three portions into which wealth is distributed, denote the remuner- ation received by different classes of individuals for the assistance which they render towards the production of wealth. Those who own land receive a remuneration in the form of rent when they permit others to use the land. Those who apply their labour to the production of wealth receive wages as a remuneration for this physical exertion ; and profits denote the remuneration which those receive who supply the remaining requisite of production, namely capital. As capital is the result of saving, the owner of capital exercises forbearance when he saves his wealth instead of spending it ; profits there- fore are the reward of abstinence, in the same manner that wages are the reward of physical exertion. If an individual invests a certain sum in any productive em- ployment, his profits will consist of the entire surplus which remains after the capital has been replaced. Suppose an agriculturist cultivates his farm with a capital of 5,000l. ; this capital will be composed of many different elements, such as stock, implements, and a fund from which he is able to advance the wages of his labourers. The profits of the farmer will consist of the surplus which remains, when from the whole produce of the farm .sufficient has been deducted to replace the original 5,U0U^., the value of the capital which the farmer possesses. But in such a case these profits of the farmer will not simply represent a return to his capital, or, in popular language, interest for his money ; the farmer has probably given his own time and labour in watching BOOK II. CH. V. Profits are the remu- neration paid to the capitalist, 164 Manual of Political Economy. BOOK 11. CH. V. and may be divided into three parts. Reward for savinrj. those whom he employs, and in superintending the various operations of his farm: he has of course to be remunerated for his time and trouble, and therefore part of his profits represents the wages properly due to this labour of superintendence. Again, every business is attended with more or less risk. If a man invests his capital in the funds, he may regard it as perfectly secure, but capital invested in business can never be made equally secure against loss. There may be revulsions in trade, or bad debts; and property invested in any commercial undertaking is subject to depredations of the dishonest, and in some countries to the rapine of internal war. A capitalist therefore must receive some compensation for the increased risk of loss which is incurred when his capital is invested in trade ; a portion of his aggregate profits represents this compensation. The profits therefore which a man obtains from his business are composed of the three following elements. 1st. A reward for saving, or, more properly, a reward for abstinence. 2nd. A compensation for the risk of loss. 3rd. Wages for the labour of superintendence. It is very easy to ascertain the portion of profits which ought in any particular instance to be allotted as the reward of saving. In every commercial country there are investments the security of which is regarded as perfect. In our own country, for instance, the funds, and stock guaranteed by our own Government, are securities which are regarded as free from risk. The interest which is obtained from capital invested in these securities may be considered as entirely the remuneration for saving. He who so invests his capital cannot receive any remuneration for risk, when there is none, and the investment entails no labour upon him. The interest which is obtained from such securities is termed the current rate of interest; and therefore the first element of which profits are composed may be always estimated in amount by the current rate of interest. If the current rate of interest is four per cent., a capital of 5,000^. would secure a profit of 200^. without the slightest risk or trouble. A person therefore who has 5,000Z. invested in his business might consider that 200^. of his annual Profits. profits represents interest on capital, or, in other words, is the remuneration which he receives for his abstinence. In many cases it is more difficult to estimate the amount of the second of the three elements of which profits are composed — namely, remuneration for risk. Sometimes, however, a man of business pays to others a certain portion of his profits to compensate him for any particular loss or risk to which his business may be exposed. Such a payment is termed an insurance. In this country it is almost an universal practice to insure against fire. Merchants insure their vessels against shipwreck ; farmers not infrequently insure their crops against the loss which may be incurred by severe hail- storms ; farmers may also now insure their live-stock. The sum which is spent upon any of these insurances has of course to be deducted from the gross profits ; but such insurances cannot cover the whole risk to which an individual's capital is exposed when invested in business. Thus the whole of a farmer's profits may be destroyed by unpropitious weather. For a succession of years between 1875 and 1882, crops were so bad owing to unpropitious seasons that many farmers obtained no profit whatever; but although it is very difficult to apportion the exact amount of profits which might, in any particular business, be considered as a fair remun- eration for risk of loss, yet it can be readily ascertained that some businesses and trades are subject to far greater risk than others ; and therefore we should expect to find that the profits would be greatest in those trades which are most hazardous, so that the increased risk may be thus compensated. If an individual embarks his capital in some undertaking which he does not himself superintend, but which returns him a large interest, the excess of the interest so obtained above the current rate of interest represents the increased risk. Shares could at one time be purchased in English copper mines which paid an interest of 10 per cent., but it is impossible to foresee how long a copper mine will continue productive ; every indication may be most promising, but a slight alteration in the strata may at once destroy the value of the lode. If, therefore, an individual obtained ten per cent, from a copper mine when the current rate of 165 BOOK II. CH. V. Compensa- tion/or risk, i66 Manual of Political Economy. interest was only four per cent., six per cent, might have been regarded as a return for the hazardous nature of the speculation. The amount of the remaining element of which profits are composed- — namely, the remuneration for the labour of superintendence — may be estimated by deducting from the gross profits the amount due to the first and second elements of profit which have just been mentioned. The remuneration, which is obtained for this labour of super- intendence, is influenced by many of the same causes which affect the wages of ordinary labour. Some employ- ments require for their superintendence greater skill and greater patience than others ; some are more disagreeable to superintend than others. If this be so, then the remuneration of the labour of superintendence will be greater in one case than in the other. The caprice of society often gives to some employments a social dignity, which is refused to others; and this consideration enables us to explain the proverbially low profits obtained in this country from farming compared Math the profits of many retail trades. Society now considers that a man of high family may with propriety occupy himself with farming ; agricultural pursuits are extremely healthy and thoroughly congenial to English tastes. It is not usually supposed that a person requires a tedious appren- ticeship, or an expensive special education, to qualify himself to be a farmer. Many men, therefore, consider that they are almost sufficiently remunerated for the labour of superintending the cultivation of their farm by the health and pleasure derived from the occupation. They therefore do not expect to receive any considerable return for their labour of superintendence. The gross profits of farming are consequently smaller than the profits of many retail trades. A grocer not only expects to receive as much interest upon the capital invested in his business as does the farmer, but, in addition to this, must also receive an adequate remuneration for super- intending the details of his business. A man is induced to carry on the grocery trade, by no other object than to obtain profit from it ; he is not attracted to the occupation by the prospect of securing health and pleasure. Profits. Interest on capital, insurance for risk, and remunera- tion for labour of superintendence, are therefore the three elements of which profits are composed. The first, interest on capital, is represented by the current rate of interest, and therefore may be regarded as a constant quantity for all occupations at the same time, and in the same country. We say at the same time, and in the same country, because not only is the current rate of interest much higher in one age than in another, but very different rates of interest prevail at the same time in different countries. Thus the current rate of interest in England is now rather less than 3 per cent., whereas, two centuries since, it was at least eight per cent.; although, at the present time, the current rate of interest is under 3 per cent, in England, it is about eight per cent, in Australia. The cause which produces these variations in the rate of interest will be explained in a future chapter. In considering the profits of different trades, the amount to be allotted to interest on capital is the same for all trades in the same country ; the difierent rates of profit which prevail in difierent occupations must, therefore, be attributed to variations in the remaining components of profits, namely, insurance for risk, and remuneration for labour of superintendence. If larger profits are obtained in one trade than in another, we must be sure that, in the one trade, capital is subject to greater risk than in the other, or the labour of super- intending the one trade requires a higher remuneration than in the case of the other ; if, therefore, in any trade a permanently higher rate of profit prevails than in other trades, it must be due either to the operation of these causes, acting singly, or combined. Agriculture has been quoted as an example, to show that the profits in a particular branch of industry may be extremely small, because various circumstances connected with the trade cause a slight remuneration to be given to the labour of superintendence. Consequently, the various trades and occupations of which the industry of the country is composed, will each have a scale of profits peculiar to itself, the appropriate amount of profits which belong to each trade being determined by various 167 BOOK II. CH. V. Interest on capital re- mains con- stant at the same time and place. Hence pro- Jits vary ivhen com- pensation for risk and wages of superin- tendence vary. Each trade has a cer- tain scale of profit. 1 68 Manual of Political Economy. BOOK II. CH. V. which may he called the natural rate of profit. Profits of different trades do not tend to become equal, causes, just in the same way as the wages of difterent employments are regulated by particular circumstances, described in the last chapter. Such an assertion may, at first sight, seem to contradict a principle of political economy, perhaps more frequently quoted than any other ; namely, that the profits of difterent trades have a constant tendency to become equalised. The principle, when properly understood, is true ; the apparent con- tradiction admits of ready explanation. When the profits realised in any business are just sufficient to give an adequate compensation for interest on capital, for risk against loss, and for labour of superintendence, then it is said that the natural rate of profit is obtained; and hence it would appear that each separate trade has a natural rate of profit peculiar to itself, because this rate of profit must give a proper remuneration for the three elements of which profits are composed ; and two of these, namely, tlie insurance against risk, and the wages of super- intendence, vary in difterent industrial occupations. If the current rate of interest permanently rises, an efiect is produced upon the profits of all businesses, and the natural rate of profit in every business rises. But if any circumstances should occur which should increase the chance of loss in a particular trade, without aflfecting others, then the natural rate of profit belonging to this particular business would be increased. The natural profits of farming are low, because English tastes are such as to make farming a pleasurable occupation. If the definition which has been given to the term ' natural profits ' is borne in mind, there will be no difficulty in explaining what is meant by the popular expression, that the profits in different trades have a tendency to become equalised. The circumstances of various trades are intrinsically different — one business, as we have before remarked, may be a more hazardous speculation than another, and the trader who incurs this greater risk must be compensated by permanently higher profits; these higher profits, therefore, denote a real compensation, not a casual or temporary disturbance, and there is no tendency what- ever to abolish the compensation by equalising the profits of the more hazardous trade with those "of the less Profits. hazardous one. But if, by some disturbing cause, the profits of a business rise or fall below that point which has been described to be their natural amount, a tendency at once is brought into operation to restore the equi- librium, and to make the profits return to their natural amount; this is the equalising tendency which affects profits; but there is no tendency to cause an uniform rate of profit to prevail in different trades. It will be important to explain the mode in which this equalising tendency acts, both when the profits of trade rise above their natural amount and when they fall below it. First, let us consider an example of a rise. During the years 1859 and 1860, the cotton trade was in a most flourishing condition ; cotton-spinners realised far larger profits than other manufacturers. The cause of this active trade was an abundant cotton crop in America, and an unusually large demand for cotton goods in the East. The American civil war quickly destroyed this sudden prosperity ; a deficiency in the supply of raw cotton threw a gloom over the manufacturing industry of Lancashire ; but if the American difficulties had not occurred, the profits of the cotton trade could not have continued to be what they were during the years 1859 and 1860. Profits were then suddenly raised greatly above their natural amount ; they would, in the course of time, have inevitably been restored to their proper level by the comjDetition of capital. In the first place, the large profits realised by the manufacturers would induce them to extend their trade as much as they possibly could ; for they would know that, as long as the manufacture continued so thriving, their capital would not realise such large returns in any other investment. They would, therefore, be naturally anxious to with- draw capital from other investments, for the purpose of employing it in their own business. In a country where capital is so rapidly accumulated as it is in England, large amounts of capital are always available, if an eligible investment is offered. The transactions connected with the borrowing and lending of capital are carried on by bankers, stock-brokers, and bill-discounters ; all these are men of great acuteness and practical ability, who are ever ready to avail themselves of the slightest advantage 169 BOOK II. CH. V. btU to reach this natural rate of profit. Example. The profits of the cotton trade when unusiLolly raised tend to sink. The manu- facturers would borrow more capital, 170 Mmiual of Political Economy. BOOK 11. CH. V. irhich ivould lower the profits in two ivays, which any particular investment may offer ^ When the profits of a manufacturer are extremely large, he con- siders that it will repay him to extend his business to its utmost possible limits, by applying to a banker, or discount-broker, for loans. In such prosperous times he can offer favourable terms for these loans, and they are readily granted to him ; and thus there is scarcely any practical limit to the amount of capital which may be suddenly brought into a trade, when it is in an exceptionally prosperous condition, and when its profits consequently rise above their natural amount. Such a sudden accession of capital may operate, in two distinct ways, to reduce profits. In the first place, there will be an increased demand for the raw material, and the raw material will consequently rise in price. Now it is a well-known fact, that a manufacturer is not immediately compensated for an increase in the price of the raw material by a corresponding rise in the price of his manufactured goods ; consequently, the profits of the trade will be reduced if the anxiety to extend a par- ticular manufacture, when trade is good, causes such an increased demand for the raw material that its price is raised. But as the manufacture is thus extended, the supply of goods would be largely increased, and will soon become perhaps more than sufficient to meet the demand. The cause which has mainly produced the prosperity and large profits of the trade will then cease to exist; for if the supply exceeds the demand, high prices will be replaced by low ones, and the profits of the trade will be quickly reduced. We cannot discuss at greater length the efi'ect which is produced on prices by such an alteration in the supply of, or demand for, a commodity such as that just noticed, without anticipating ^ One of the late Mr. Walter Bagehot's essays on The Postulates of Political Economy deals from the practical point of view with the rapid transfer of capital to those trades which are exceptionally prosperous. He says: — "The whole loan-fund of the country lying in the hands of bankers and bill brokers, moves in an instant towards a trade that is unusually profitable, if only that trade can produce securities which come within banking rules. Supposing the corn trade to become par- ticularly good, there are immediately twice the usual number of corn bills in the bill brokers' cases ; and if the iron trade, then of iron bills. You could almost see the change of capital, if you could look into the bill cases at different times," Economic Studies, p. 45. Profits. the subject of ' value,' which will be considered in the next division of this work. There is, however, another equalising influence which will be brought into operation if the profits of any par- ticular business continue long to exceed their natural amount. Not only will those already engaged in the business bring more capital into it when its profits exceed the natural rate ; but other traders will be induced to embark their capital in an industry which is exceptionally prosperous. A similar influence to that above described, to reduce profits, will be thus brought into operation. But it would be very erroneous to conclude that these equalising tendencies are instan- taneous in their effects. Augmented supplies of capital may be quickly brought into any particular trade, but the trade cannot suddenly be extended beyond certain limits. During 1859 and 1860 every cotton mill in Lancashire was probably producing as large a quantity of manufactured goods as it possibly could ; the existing machinery was worked to its utmost, and however large might have been the supply of capital, the quantity of goods manufactured could be increased in no other way than by erecting new mills. But the construction of new mills and new machinery requires time, and during this time those engaged in the manufacture can take full advantage of the high profits. These considerations, however, suggest another circumstance which very materially reduces the high profits that prevail in times of active trade. In the case just described it is evident that as manufacturers will be anxious to extend their business as much as possible, not only will all their mills and machinery be in full work, but they will actively compete for labour. A considerable portion of the new capital which is attracted to the industry will conse- quently, in the first instance, be employed as circulating capital, or, in other words, will be paid away in wages. It has, however, been pointed out, in the last chapter, that the skilled labour which a particular industry requires cannot be suddenly increased by engaging labourers who had been accustomed to other occupations; consequently the additional amount of circulating capital which is attracted to a trade by high profits is chiefly 171 BOOK II. CH. V. and more capital would be. attracted from other trades. These changes would take place slowly, and ivoidd at first raise the rate of wages in the trade, and depress profits. 172 Manual of Political Economy. BOOK II. CH. V. The con- trary case. Profits depressed below the natural rate tend to rise. employed, not in obtaining labourers from other branches of industry, but in raising the wages of those who are already engaged in the trade. Such a rise of wages must exert a direct influence to reduce profits. It has therefore been shown that a rise in the price of raw material, a constantly increasing supply of goods, and an advance in wages, are three circumstances which are sure to reduce the profits of a particular trade, when they are exceptionally high. These reducing tendencies not un- frequently continue so long, that the profits of a trade are ultimately reduced below their natural amount ; in fact, it may be often observed, that activity of trade is regularly succeeded by a corresponding depression. When, however, a trade is so depressed that its profits fall below their natural rate, then equalising tendencies are brought into operation, which raise the rate of profit ; these tendencies we will now proceed to describe. Let it be supposed that a trade has been aflfected by adverse circumstances, and that its profits are reduced below the natural rate. In the autumn of 1862 the cotton trade was in an extremely depressed state. The price of raw cotton had risen so much, in consequence of the American civil war, that it was almost impossible, without incurring loss, to manufacture cotton goods at the prices they then realised. In fact, it would perhaps have been advisable for manufacturers to have closed their mills, had it not been for the suflferings which would have been entailed upon the operatives. Under such circumstances it was the interest of the manu- facturers to contract their business ; some mills were consequently closed, and great numbers worked short time. The supply of cotton goods was thus for many years considerably diminished. In this way a tendency was brought into operation to raise prices, and profits were gradually restored to such an amount as again to make the manufacture remunerative. When trade is thriving, everything is done to increase the capital applied in the business ; but when trade is depressed, a directly opposite course is pursued ; operations are restricted, capital is withdrawn, less is paid in wages, and new mills are not erected. The circumstances, however, which threw the cotton Profits. manufacture into a state of stagnation, are so excep- tional, that it will perhaps be more advisable to illustrate our remarks by considering the condition of the silk trade in this country. It is supposed, by some, that the French possess natural advantages for the manufacture of silk, greatly superior to those of our own country. It is, for instance, said that, owing to the clear atmo- sphere of France, the silks assume a finer colour than those which can be produced in England, and the French have greater skill in producing to order a dye of any particular shade. The result is that, at the present time, French silks are considered to be su])erior to English silks. The consequence has been, that since 1860, when the duty on French silks was removed, the English silk trade has been greatly depressed, and its profits have been reduced below the natural rate. Let us inquire what will occur if the supposed superioritj^ of French silks is permanently maintained. The English silk trade will continue to be depressed ; but the question arises. Will the profits of this trade remain, therefore, constantly below their natural rate ? It is impossible that such should be the case, for manufacturers will not permanently continue an industry from which they realise less profit than that in any other branch of trade. Silk manufacturers would, therefore, under the circumstances assumed, remove their capital as quickly as possible from this trade, and employ it in some other more remunerative way. The transfer cannot be made suddenly ; it will require a considerable time, and must cause great loss to the manufacturers. All the fixed capital employed in the silk manufacture, such as machinery and buildings, cannot be adapted to other industrial purposes without involving a large outlay. The manufacturers, too, will not readily submit to the change ; they will struggle with the adverse circum- stances for a considerable time. No man, even inde- pendently of the pecuniary sacrifices involved, would willingly change a business to which he has been accustomed, and in which he has acquired skill, for one to which he would be a stranger. A trade there- fore, if its profits were permanently reduced below their natural amount, would, after a certain time, be entirely 173 BOOK II. CH. V. Ca.se of the silk trade. 174 Manual of Political Economy. BOOK II. CH. V. The effect produced hy the de- jjression of a trade upon the wages oj the labour- ers em- ployed in it. The case of the Lanca- shire cotton operatives described. relinquished, and individuals engaged in the trade would be severe losers. It is scarcely necessary to observe, that under these supposed circumstances the operatives in the silk trade would suffer even more severely than their employers. Each year as the depression continued the demand for labour would steadily diminish. Wages would become lower and lower, and a greater number of operatives would be thrown out of employment. There are always those who cling to hope, after all hope is gone. Many, consequently, would remain in the locality, eking out a miserable existence upon alms and parochial relief ; and would thus become permanently pauperised. Those who are more sagacious or more enterprising would recognise the true state of the case, and would meet with prompti- tude the misfortune which had befallen their trade. Before their savings were exhausted they would emi- grate to some foreign country, or migrate to some locality where the demand for labour was active. It not unfrequently happens when a trade is depressed that a great injury is done to the operatives by charity and by parochial relief. Labourers are thus induced to remain in the locality in which trade is slack; whereas, if affairs were allowed to take their natural course, or, if the money subscribed by the charitable were devoted to the promotion of the emigration and migration of labour, it would greatly diminish the loss which the labourers suffer in consequence of depressed trade. During the four or five years of the American civil war, when the cotton trade of Lancashire was almost paralysed, vast sums obtained by private subscriptions and by parochial relief were distributed amongst the Lancashire operatives. When this enormous almsgiving was taking place, too little attention was paid to a most significant fact. At the time when the trade of Lancashire was depressed, other branches of industry were so flourishing that there was no diminu- tion, but an augmentation in the aggregate trade of the country. It was, therefore, clearly indicated that there was no falling off in the general demand for labour, but simply a transfer of a portion of the demand from one locality to another. The natural remedy was ProjiU. consequently to assist a certain number of the Lanca- shire operatives to migrate to those localities where a new demand for labour had arisen. A contrary course was adopted. These operatives were virtually bribed to remain in their own county, and the result was in many ways unfortunate. For several years after the cessation of the war the cotton trade continued to be depressed. Many mills worked only half-time, and there was in many localities a considerable amount of unem- ployed labour. It is evident that there would not have been this excess in the supply of labour, and the severity of the subsequent depression would have been greatly diminished, if a portion of the funds, which were spent in charity, had been expended in assisting some of the operatives to seek employment in localities where the demand for labour was active. Having remarked upon the equalising tendencies which preserve the profits of each department of industry at a certain relative amount, designated the natural rate of profit, we shall next proceed to consider the causes which regulate the general rate of profit prevailing throughout the country at any particular time. It has been previously stated that the general rate of profit is higher at one time than at another, and that very different rates of profit prevail in different countries. If any manufacture is taken as an example, it is mani- fest that the produce is shared between the employer and the employed ; or, in other words, between profits and wages. In any given case, the more the employer receives, the less will be left for the employed ; or, in other words, the more is taken in the form of profits, the less will be given in wages. If wages take a larger share of the produce, profits must take a smaller share. Suppose, however, that industry, by the introduction of new machinery, is rendered more productive, there will then be a greater quantity of produce to be distributed, and more may be apportioned to profits, without the slightest reduction in wages. But, although the amount of wages received might remain the same, yet it has been customary for political economists to say, that under such circumstances the rate of wages is altered ; 175 BOOK II. CH. V. Causes which re- gulate the general rate of profit. Statement that the rate of profit de- pjends upon icages ex- amined. 176 Manual of PolHical Economy. for they conceive that the rate of wages is determined by the ratio which wages bear to profits. Ricardo employed the expressions, ' rate of wages,' and ' rate of profit,' to explain merely the terms of a ratio ; and he would have said, that even if wages were reduced one half in amount, the rate of wages and the rate of profit would remain unaltered, supposing that the reduction in wages was accompanied by a corresponding reduction in profits. Although this proposition as explained by Ricardo is strictly accurate, yet the language emploj^ed in enunciating it, makes the statement appear unneces- sarily in conflict with popular opinions with regard to wages. In order to understand what is meant when it is stated by Ricardo and others that profits depend upon wages, it is necessary to bear in mind that profits may be defined to be the surplus which remains after the capital has been replaced which has, directly or indirectly, contributed to the production of wealth. The proportion this surplus bears to the capital which has been so expended determines the rate of profit. If the expenditure of a certain quantity of capital produces an amount of wealth equal to three times its value, then the surplus which remains, after the capital expended has been replaced, will equal twice the value of this capital ; and, therefore, the rate of profit will, in this case, be two hundred per cent. But when it is said that capital is expended in the production of wealth, it is important to understand what this expression signifies. A great portion of this capital is paid away directly in wages ; the remainder is spent in purchasing materials or machinery ; but even when such a material as coal is bought, the money with which it is purchased may be regarded as indirectly devoted to paying wages ; for the money for which coal is sold pays the wages of all those who have contributed to raise it. The capital, therefore, which is applied to the production of any commodity is expended, either directly or indirectly in wages. The rate of profit, as we have just remarked, depends upon the ratio which the whole produce raised bears to tlie capital expended in raising this produce ; and, since this capital is expended in paying wages, Ricardo and others Projits. have stated that the rate of profit depends upon wages. This principle, however, is comparatively useless, and is moreover not strictly correct unless a particular signifi- cation is given to the terms employed in its enunciation. For if labour is rendered greatly more efficient, either by better education, by superior management, or by improved machinery, more produce will be raised by the application of the same quantity of labour. The same capital may be expended, or, in other words, the same amount may be paid away in wages ; but, in consequence of the superior efficiency of labour, more will be produced. A greater amount, therefore, will be left to be apportioned to profits ; thus the rate of profit will be increased, whilst wages remain unaltered. This is in direct contradiction to Ricardo's principle, that the rate of profit depends on wages ; and, therefore, this principle is not correct, unless it is assumed that the efficiency of labour is a constant quantity. Mr. Mill has shown that the correct way of stating the principle is, that the rate of profit depends on the cost of labour. The cost of labour is determined by comparing the wages the labourer receives with the amount of wealth which is produced b}^ his labour. If, therefore, labour is rendered more efficient, the cost of labour is manifestly diminished, because either more produce is raised by the payment of the same amount of wages, or an equal amount of produce results from the expenditure of a smaller sum in wages. When labour is rendered more efficient, it has been shown that the rate of profit will rise, although the same amount is paid in wages. Hence, if whilst each individual labourer receives the same remuneration, his labour produces more, the cost of labour is diminished. The rate of profit therefore varies inversel}^ with the cost of labour. From this principle some most important conclusions may be deduced. If anything occurs to render labour more efficient, profits will be increased, assuming that the labourers receive the same wages as before. It also follows that, when labour becomes more efficient, the rate of profit, and wages, may both be increased : for profits must be increased if the rise in wages is not so great as to make the cost of labour more than it was M 177 BOOK II. CH. V. Correct statement oj the prill- ci/ile, viz. that the rate of pro- fit depends upon the cost of la- bour. 178 Manual of Political Economy. BOOK II. CH. V. Cost of labour in Australia and Emj- land. before the improvement in the efficiency of labour took place. With regard to agriculture, it has been frequently- stated, that as land diminishes in fertility, the labour which is applied to it will diminish in productiveness. Twenty labourers working on poor land may not cause as much produce to be raised as ten labourers working on more fertile soil. Unless, therefore, the agricultural labourers receive less w^ages, the cost of agricultural labour must increase; or, in other words, the rate of profit obtained from farming must decline as it gradually becomes necessary to rtsort to less fertile land. Let us apply these conclusions to explain some of those points in which the economical condition of Australia contrasts so strongly with that of England. In enunciating Ricardo's theory of Rent, it has been shown that, in each country, the poorest land cultivated can only pay a nominal rent. The present population of Australia is comparatively small, and her tracts of uncultivated fertile land are almost of boundless extent. The worst land which is cultivated in Australia is far more fertile than the worst land cultivated in England. Hence, agricultural labour, being applied to a more productive soil, is far more efficient in Australia than in England. The same amount of labour which is employed upon the poorest farms in England would, if applied to any land which is cultivated in Australia, cause a great deal more produce to be raised. Hence, in consequence of the increased efficiency which is thus given to agricultural labour in Australia, the wages of agricultural labourers may be much higher in Australia than in England, and yet the cost of this labour in Australia may be less than it is in England. But if the cost of labour is diminished, the principle just enunciated shows that the rate of profit must be increased ; and such a conclusion is amply verified in the case of Australia. Wages are far higher there than in England, and profits are also higher. There may appear to be a difficulty connected with the explanation just given ; for it may be said, the agri- cultural labour which is applied to some of England's most productive soils, yields more than the same quantity of labour applied to even the best land in Australia. It may, therefore, be thought incorrect to say that Profits. agricultural labour is less productive in England than in Australia, since it would seem that only that portion of our agricultural labour is less productive which is employed upon our least fertile soils. It must, however, be remembered that the cost of agricultural labour is determined by the cost of that labour which is employed upon the least productive land in cultivation. Rent may be regarded as a sum which the farmer pays for the permission to employ labour upon productive land. The more productive the land, the higher, of course, is the rent ; or, in other words, the more favour- able the circumstances under which agricultural labour is applied, the greater is the sum which has to be paid as rent. Although agricultural labour employed on a fertile soil is more efficient, yet the farmer obtains no advantage from the cost of this labour being diminished; for what he would thus gain he has to pay away in rent. His prolits, therefore, would not be diminished by an increase in the cost of labour, provided that there was a corresponding I'eduction in his rent. The profits which are derived from agriculture approximate to an equality ; it is still correct to say, even with regard to agriculture, that the rate of profit is determined by the cost of labour, if it is remembered that in this case the cost of labour is not entirel}'' composed of wages, but also consists of rent, since rent may be regarded as a premium paid when agricultural labour is assisted by a fertile soil. Considered in this light, therefore, the cost of agricultural labour may be regarded as uniform throughout the same country. But in the case in which the worst land cultivated is so poor that only a nominal rent is paid, then rent can no longer be regarded as an element of the cost of agricultural labour. Hence the proposition above enunciated is proved : namely, that the general cost of agricultural labour is determined by the cost of that labour which is employed upon the least productive land in cultivation. If, therefore, food cannot be supplied to an advancing population without continually resorting to less productive land, then one of two consequences must inevitably ensue : either the cost of agricultural labour will increase, and then a decline in the rate of profit will follow ; or, if the cost of this 179 BOOK II. CH. V. The cost of agricultu- ral labour is measured hy its cost when ap- plied to the least fertile soil in cul- tivation. i8o Manual of Political Economy. BOOK II. OH. V. Variation in the cost of labour in different countries. Cost of labour not to be con- founded with tvages. labour does not increase, the labourers must receive lower wages ; for when labour is applied to less productive land, an increase in the cost of this labour can alone be prevented by paying the labourers lower wages. Enough has now been said to establish the proposition, that the rate of profit depends upon the cost of labour. If, therefore, the rate of profit is higher in one country than in another, it must be because the cost of labour is greater in one country than in the other. Let us inquire into the causes which regulate the cost of labour. If capital increases, withont any increase in the number of the labouring population, it is manifest that there is a larger sum to be distributed amongst them ; wages will rise, and consequently the cost of labour will increase, and the rate of profit will diminish. If population increases, and capital remains stationary, wages will fall, the cost of labour will be diminished, and the rate of profit will advance. Hence it appears that not only the average remuneration of the labourers, but also the rate of profit, is primarily determined by the ratio between the capital of the country and the number of its labouring population. This, however, is not a complete explanation, for it would seem to indicate that the rate of profit is higher when wages are low ; facts contradict this, for in Australia wages and profits are both higher than they are in England. But the difficulty arises from confusing wages with cost of labour ; wages may be very low, and yet the labour be so inefficient, from causes previously explained, that the cost of labour may be extremely high. The English contractors who made the French railwaj^s could have engaged any number of French labourers at considerably lower wages than were paid to English navvies ; but so superior is the physical strength of an Englishman, that it was proved that one English navvy would do as much work as two French labourers. In this case, therefore, the cost of French labour would be greater than the cost of English labour, although the wages of the English labourer were very much higher than those paid to the French labourer. Again ; high wages do not always denote that a large remuneration is received by the labourer. Wages may be high, and food so dear, that a labourer is far better oflT in a country Profits. where wages may not be so high, but where food is cheaper. Hence labourers may be comparatively speak- ing impoverished, in consequence of the dearness of food, although their wages are high ; in such a case the cost of labour would be great, and the result would be a low rate of profit, accompanied by the impoverishment of the labouring class. Such is the result which has to be feared in a country whose increasing population makes food dearer. The supplies of cheap food which have been imported into England since the introduction of free trade have exerted an important influence in sustain- ing the rate of profit. After the remarks which have now been made in reference to cost of labour, the reader will be able to appreciate the admirable analysis of Mr. Mill, when he says that ' Cost of labour, and therefore the rate of profit, is a function of three variables : ' 1. ' The efficiency of labour.' 2. ' The wages of labour ' (meaning thereby the real reward of the labourer). 3. ' The greater or less cost at which the articles com- posing that real reward can be produced or purchased.' If labour becomes more efficient, whilst the wages of the labourers and the price of food remain unaltered, the cost of labour will be diminished. If the wages of the labourers are reduced, whilst there is no change in the efficiency of labour and the price of food, the cost of labour will again be diminished. The cost of labour will also be diminished if the price of food is reduced, and the amount of the labourer's wages, estimated by the commodities they will purchase for him, remains unchanged. If, tlierefore, the cost of labour, or, in other words, the rate of profit, varies in different countries from time to time, the variations must be due to the influence of one or more of the three circumstances above enumerated. The current rate of interest atfords a sufficiently sure evidence of the rate of profit. It would be a most useful exei'cise for the student to trace to which of the three variables is due a high or a low rate of profit, prevailing in any particular country. In order to assist him in such an examination, we will indicate some of the leading causes upon which depend i8i BOOK II. CH. V. Cost of labour and rate of profit a function of three variables : im l82 Manual of Political Economy. BOOK II. CH. V. first, the efficiency o/labou); which especially depends upon the supply of fertile land : secondly, the wages of labour, which de- pend upon the relative increase of population and capi- tal. The in- crease of capital itself de- jjends upon the rate of proft. the efficiency of labour, the real wages of the labourer and the price of food. In previous chapters the causes have been described in detail which determine the productiveness of labour. It need only here be added that nothing more powerfully promotes the efficiency of labour than an abundance of productive land. But an abundant supply of productive land causes food to be cheap, and under such circum- stances, two out of the three causes are brought into operation upon which depend a high rate of profit and a small cost of labour; the influence which is thus produced in increasing the rate of profit, is so great, that in a country like Australia, where there is a large supply of fertile land, profits are high, although a labourer at the same time receives a very large remunera- tion for his labour. The second variable, upon which depends the cost of labour — namely, the remuneration received by the labourer — is determined by the ratio which population bears to capital. It would be foreign to our purpose to attempt to describe why some countries are more populous than others. Our colonies and the American continent have not yet had time to be thickly peopled with an European population. In the last chapter allusion M^as made to the power of man's multiplication, and it was stated that Malthus's ' Essay on Population ' gives a most detailed and interesting analysis of the checks by which, in various countries, population is restrained. The causes which influence the accumulation of capital are extremely various. Much depends upon national character ; one nation may be far more prudent, and may possess much more foresight than another; the inhabi- tants of one country may consume, in their own personal enjoyment, almost all the wealth they can obtain, whilst in another country saving is promoted by the most rigid economy. No nation will ever accumulate a large amount of capital for the purpose of applying it to productive purposes, until there is sufficient social order to render property secure. But independently of any effects produced upon the accumulation of capital by differences in the character and condition of various Profiis. nations, it may be observed that the accumulation of capital is always influenced by the rate of profit. If, for instance, the current rate of interest should be greatly increased in England, an additional inducement would be offered to every one to save ; the result would be strikingly exhibited by a greatly increased accumulation of capital. The amount of wealth, therefore, which is saved in a country is kept, as it were, contined between certain limits by a self-acting agency. For if in any particular year there should be some irregularity which should cause a much larger capital to be saved than is customary, the labourers would, in consequence of this augmentation of capital, receive higher wages ; the cost of their labour would thus be increased, the rate of protit would diminish, and the current rate of interest would fall. In this manner less inducement would be held out for individuals to save, and a force would be created to restore capital to its former amount. Sufficient capital might soon be accumulated in England to reduce the current rate of interest to two per cent. This was the current rate of interest in Holland at the end of the eighteenth century ; the Dutch at that time were there- fore content with two per cent., but the English are not satisfied unless nearly three per cent, can be obtained. The current rate of interest, therefore, to a great extent, depends upon national character ; for if the English, as a nation, became more prudent, and more anxious to save, the current rate of interest might rapidly decline to two per cent. The effect which is produced upon the rate of protit by the last of the three variables, upon which the cost of labour depends, has not generally been sufficiently con- sidered. Suppose an employer pays 1000?. in wages, and that his labourers spend the greater portion of these wages in purchasing food. We have ascertained that an agricultural labourer with a family consumes forty per cent, of his wages in purchasing bread ; 400?. therefore, out of 1000?. paid in agricultural wages, is devoted to the purchase of bread.^ Suppose, by some cause, such as the ^This calculation was made on the supposition that the labourer's family consisted of a wife and two children who were too young to be employed, and that the wages of the labourer were 10s. a week. At the 183 BOOK II. CH. V. and the national character. Thirdly, the cost of prodaciwj the real xoages. 184 BOOK II. CH. V. A diminu- tion of this cost will he beneficial both to the employer and la- bourer. Manual of Political Economy. introduction of free trade, that the price of bread is reduced one-fourth ; a loaf before sold for Is. now only costs 9d; 300^. will purchase as much bread as 400/-. did before the price of bread was reduced. The labourers therefore, who amongst them received 1000?-. in wages, will now be quite as well oft' if they only receive 900/. Their real wages will remain unchanged, although their nominal wages have been reduced one-tenth. The cost of labour might thus, in consequence of bread being cheapened, be reduced one-tenth, without the condition of the labourer being ir the slightest degree deteriorated. But the question may very reasonably be asked, Will the employer be able to appropriate to himself the whole ad- vantage ? Is cheap food only instrumental in increasing the rate of profit ? We shall be able to explain why this seldom or never takes place ; the advantage is in- variably shared in the first instance between the employer and the labourer. When the cost of labour is diminished, the capital previously existing can support an increased amount of industry. In the example we have above given, a farmer, in consequence of bread being cheapened, pays only 900/. in wages instead of a 1000/, He, there- fore, has 100/. to spare. This he may apply in employing more labourers on his farm, or he may invest it as capital in some other undertaking. In either case, the labourers as a class are benefited by a proceeding which virtually increases the capital of the country, and therefore the demand for labour ; but if this be so, their wages will be raised, and they will share with their employers the advantage of cheap food. One case may be supposed in which the labourers would not be benefited, even in the first instance, by cheap food. If the 100/. which, in the above example, the employer saves by the cost of labour being diminished, is not saved as capital, but is spent upon the employer's own enjoyment, the labourer's wages will not be increased ; for the capital of the country will be decreased in proportion to the diminution in the cost time when this book was written, lOs. represented more than the ordinary wages of the agricultural labourer in those districts of England where wages were lowest. In numerous instances not more than 8s. or 9.S. were paid. Happily, however, within the last few years there has been a marked rise in agricultural wages, and 12s. a week are paid where formerly His. were paid. Projlts. of labour. The case last supposed would rarely occur, for an increased rate of profit seldom makes men more extravagant; it in fact produces an opposite influence, for it most powerfully stimulates the accumulation of capital. In describing the advantage which cheap food confers upon the employer and the employed, it should be re- membered that the benefit enjoyed by the labourer may only be a temporary one. If a population is in so low a condition, both socially and morally, that even a slight addition to their means of livelihood immediately causes an increase in the number of marriages, in a few years there will be an increase in the supply of labour, which will probably more than absorb the advantage the labourers might have derived, either from the cheap- ening of food, or from any other circumstance calculated to improve their material condition. This afibrds an explanation of the comparatively small effect which free trade has produced upon the condition of our worst paid labourers. It was supposed that when the corn laws were repealed, pauperism would become almost extinct. The country has enjoyed free trade for 60 years, and pauperism, although considerably reduced, still assumes serious proportions.^ It will be shown, in a subsequent chapter on the poor law, that this sad and disappointing fact is a striking illustration of the important principle that an improvement in the material condition of the labourer cannot be permanent, unless it is accompanied by a corresponding social and moral advancement. Before concluding this chapter, it is important to direct attention to the great influence exerted upon pro- fits and wages by the export of capital. It has already been shown that the current rate of profit may be regarded partly as the cause and partly as the effect of the amount of capital accumulated. An increase in capital tends aeteris paribus to lower the rate of profit ; whereas an advance in the rate of profit promotes the accumulation of capital. It is, however, essential to bear in mind that only a portion of the aggregate wealth ^[The number of paupers in proportion to population in England and Wales averaged 4 '7 per cent, in the five years ending 1859. It averaged 2"5 in the five years ending 1905.] iSS BOOK II. CH. V. 7'/ie benefit to the la- bourer will only be temporary if it stimu- lates a large in- crease of popula- tion. The influ- ence exert- ed on pro- fits and rvages by the export of capital. 1 86 Manual of Political Economy. BOOK II. CH. V. which is annually saved in any country is invested in its own industry ; the remainder is exported to be employed as capital in other countries. Hence the capital annually saved in such a country as England is divided into two portions; that portion which is exported produces no immediate effect upon the current rate of wages and profit prevailing in England. Consequently, in all dis- cussions relating to wages and profits, it is important not only to consider the whole amount of capital annually saved, but particular attention must be directed to the portion of this aggregate capital which is retained for home investment. It is evident that the relative magni- tude of the two portions into which a nation's capital is thus divided will be regulated by the profits which are respectively realised by home and foreign investments. If a rise in the rate of profit abroad should be unaccom- panied by any advance in the rate of profit at home, an influence is at once brought into operation to increase the relative amount of the capital which is exported, and consequently to diminish the amount retained for home investment. Although, therefore, there is no diminution in the national capital, yet as a smaller amount is employed in home industry, the effects that ensue will, in many respects, be analogous to those which would occur if the amount of wealth annually saved were diminished. This is particularly the case, as shown in the previous chapter, with regard to wages, which, depending upon the amount of circulating capital, must evidently be regulated, not so much by the whole amount of capital annually saved, as by the amount which is retained for home investment. It will be very necessary to bear this in mind when considering the various expedients which are resorted to for raising wages. It may here be generally said that an advance in wages, unaccompanied by any increase in the efficiency or productiveness of labour, can seldom confer a per- manent benefit upon the labourer. Such an advance in wages will lower the rate of profit at home ; a greater proportion of the national capital will, therefore, be invested abroad and the amount spent in wages will be decreased. CHAPTER VI. PEASANT PROPRIETORS. THE reader has already been warned against the conclusion that the present system of land tenure in England is to be regarded as the type of that which prevails throughout Europe and the other civilized parts of the world. A very considerable portion of the land in England belongs to the large estates of the aristocracy; land is rarely cultivated by its owner. The farms in England are generally large, and are becoming larger ; they are almost entirely cultivated by hired labour ; and, consequently, the produce of the land has to be distributed amongst landlords, farmers, and labourers. But the condition of England in this respect was, a few centuries since, very ditierent. No class of men in our early annals occupied a more prominent or honourable position than the yeomanry. Their praises have been sung by our greatest poets ; their sturdy independence on many occasions preserved the liberty and proved the courage of the English race. The tenant farmers of the present day ditfer essentially from the old yeomen of England, who were freeholders, cultivating the land which they owned. Their holdings were generally much smaller than those of the present day. In many con- tinental countries, such as France, Norway, Switzerland, Italy, Belgium, Prussia, and some of the German states, much of the land is still possessed by small proprietors, termed peasant proprietors, who own the land which they cultivate. A peasant proprietor frequently culti- vates his farm entirely by the labour of himself and his family. In this case, land, labour and capital are all supplied by the same individual ; he therefore claims BOOK II. CH. VI. Different kinds q/ land tenure. i88 Manual of Political Economy. the whole produce of the land ; and rent, wages, and profits are merged together. The question as to the comparative advantages and disadvantages of cultivating the land by peasant proprietors has been, perhaps, more keenly discussed by political economists than any other subject. On the continent, not only political economists, but practical farmers, are decidedly favourable to peasant proprietorships ; they can of course watch the system in actual working, and are therefore in a much better position to judge of its efiects than we who have now no opportunity of observing any considerable tract of land in England cultivated by peasant proprietors. English opinion is so strongly in favour of large farming, that we may naturally expect to find that our countrymen almost invariably express themselves antagonistic to a system of peasant properties, which implies small farming. Amongst EngHsli political economists the two most prominent champions of peasant properties have been Mr. Mill and Mr. W. T. Thornton. Both of these writers have collected a great mass of facts bearing upon the subject, and have dis- cussed these facts with the most perfect impartiality. Much of the opposition which has been expressed by English writers towards peasant proprietors is un- doubtedly due to a radical misconception. Peasant proprietorships imply small farms, but a small farm cultivated by its owner differs essentially from a small farm either occupied by a tenant at will or rented upon a lease ; we believe that the whole advantage which can be attributed to peasant properties is almost entirely due to the fact that the cultivator owns the soil which he tills. The well-known Arthur Young, whose pre- ference in favour of large farming was most decided, has very happily said, ' Give a man the secure possession of a bleak rock, and he will turn it into a garden ; give him a nine years' lease of a garden, and he will convert it into a desert.' In a previous chapter, various reasons have been stated which lead to the conclusion, that large farms are more productive than small farms, when land is cultivated not by its owner, but by a tenant. ^ This 1 See Book I., Chap. VI. Peasant Proprietors. 189 opinion is corroborated by the facts of every-day experience ; for there can be no doubt that the size of farms in England is increasing rather than diminishing ; and the advantage of large farms is sure to be more prominently shown, as machinery of an expensive char- acter becomes extensively used in agriculture. It cannot be supposed that small farms are being absorbed into larger ones, simply in consequence of the caprice of landlords ; the absorption takes place, because tenants and landlords have alike learnt that a higher rent can be paid for a farm of six hundred acres, than for the same land divided into two farms of three hundred But, although it can be proved that large acres. farming is more productive than small farming, yet such a conclusion does not definitely decide whether or not a nation is benefited by a class of peasant proprietors ; for it has been already stated, that there is a fundamental distinction between a peasant pro- prietor and a small tenant farmer. Now w^e believe that very great social advantages are derived from peasant proprietorships ; but before enquiring into this particular ])ranch of the subject, the economical effects resulting from the cultivation of land by peasant pro- prietors will be described. The question is in fact reduced to this — To wdiat extent are the disadvantages which are associated with small farming compensated by the advantages which arise from the cultivator feeling that the land is his own ? We will first make some general remarks on the subject, and then sub- stantiate our opinions by well-authenticated facts. Many of the inconveniences wdiich belong to farming on a small scale, exert a similar influence when an equally small farm is cultivated by a peasant pro- prietor. The want of proper machinery and implements is the most formidable difficulty with w^hich small farming has to contend ; and it may be observed, in England, that the implements and stock of small farms are generally of an inferior kind. A small farmer has not sufficient capital promptly to take advantage of improved implements, and it often would not answer his purpose to make a considerable outlay in purchasing a new machine, considering the little work it w^ould 190 Manual of Political Economy. BOOK II. CH. VI. How these incon- veniences are com- pensated in the last case. The magi oj pro- perty. have to do on a small farm. The expenses of a small farm are comparatively much greater than those of a large one ; a flock of six hundred sheep would probably require only one shepherd, but six separate flocks of a hundred sheep would each require a shepherd. A similar consideration applies to much of the other labour which is employed upon a farm ; a farmer is obliged to spend the same time in going to a fair or market, whether he has bOl. worth of stock or corn, or whether he has 500L worth to dispose of. Farmers appreciate this, for it is proverbially said that small farms cannot compete with large ones, because the profits of a small farm are eaten up by expenses. A small farmer in England is generally occupied, partly in labouring him- self, and partly in superintending the labour of others. Frequently he is efficient neither as a labourer nor as an overlooker of labour, and the want of industry in our small farmers has been often remarked. It must, how- ever, be borne in mind, that both the large and small tenant farmers have no adequate interest in improving the land ; for if capital is spent by a tenant farmer in improvements, the landlord, at the expiration of the lease, may appropriate the whole advantage to himself by raising the rent.^ There are, moreover, improvements of a more difficult and delicate kind, which, it appears, will rarely be carried out unless the cultivator is stimulated to the most watchful and untiring industry, by the feeling that the land which he improves is his own property. The testimony of Arthur ^"oung on this point is very valuable : — ' Leaving Sauve,' says he, ' I was much struck with a large tract of land, seemingly nothing but huge rocks, yet most of it enclosed and planted with the most industrious attention. Every man has an olive, a mulberry, an almond, or a peach- tree, and vines scattered among them ; so that the whole ground is covered with the oddest mixture of these plants and bulging rocks that can be conceived. The inhabitants of this village deserve encouragement for their industry, and if I were a French minister they should have it. They would soon turn all the deserts 1 [This state of things was modified, though not in a manner wholly satisfactory, by the Tenants' Improvements Act, 1883.] Peasant Proprietors. 191 around them into gardens. Such a knot of active husbandmen, who turn their rocks into scenes of fertility {because, I suppose, their own), would do the same by the wastes, if animated by the same omnipotent principle.' Again, 'Walk to Rosendal (near Dunkirk), where M. le Brun has an improvement on the Dunes, which he very obligingly showed me. Between the town and that place is a great number of neat little houses, built each with its garden and one or two fields enclosed, of most wretched blowing dune sand, naturally as white as snow, but improved by industry. The magic of property turns sand into gold.' Flanders affords the most striking example of the influence produced by what Arthur Young so aptly terms 'the magic of property.' The farming both in East and West Flanders has long been celebrated ; it is unsurpassed in Europe ; for, as Mr. M'Culloch says, ' Its natural soil consists almost wholly of barren sand, and its great fertility^ is entirely the result of very skilful management and judicious application of various manures.' Sucli a tract of land, if owned by a landed aristocracy, would have remained a barren waste. It would be worthless to be rented by a tenant, and no labour which a landlord could have hired would have bestowed that unwearied and intelligent industry which has converted barrenness into luxurious fertility. This will become evident when we know the agency by which these improvements have been effected. It has been frequently remarked by those who have travelled through Flanders, that the Flemish agriculturists want nothing but space to work upon. Whatever the quality of the soil may be, in time they will make it produce something. The sand in Campine is like the sands on the seashore, of which it originally was a part; and here you see a cottage and rude cowshed erected on a most unpromising spot. The loose sand is held together in little mounds by the roots of the heath. A small spot being selected, it is surrounded by a ditch and levelled ; it is then planted partly with broom and potatoes, and perhaps a small patch of diminutive clover, and manures both solid and liquid are collected. This is the nucleus from which, in a few years, a little farm will spread BOOK II. CH. VI. Evidence in favour of small properties derived from the state of Flanders. Cultiva- tion of sand- dunes. 192 Manual of Political Economy. BOOK II. CH. VI. Excellence of Flemish farming. Evidence to the same effect from Zurich, around. The only thing that will grow on this sand without manure is broom, and this will be sown if no manure can be got, and will in three years be fit to cut, when it is sold to bakers or brickmakers. The leaves falling enrich the soil, and the roots give it a compact- ness; it may now be sown with buckwheat or rye without manure. When this is reaped, some manure may have been obtained, and a course of cropping may begin. With the aid of clover and potatoes, a farmer may keep cows and make manure : the improvement will be so rapid, that in a few years the soil will become as mellow, retentive of moisture, and enriched by manure and the decomposition of vegetable matter, as soil which was originally good ; and the crops produced by both soils will be more nearly alike at harvest, than is the case in soils of different qualities in other countries. The people who have achieved these great results in agriculture are principally peasant proprietors, and they labour so earnestly and so intelligently because the ground they till is their own. The Flemings, at a time when English agriculture was in a most backward con- dition, followed a most approved system of rotation of crops. The English farmer is generally a better educated man than these small Flemisli proprietors. He has money at his command, a far larger capital than they have, and therefore he is able to purchase superior implements; but a competent authority has observed, 'that in the minute attention to the qualities of the soil, in the management and application of manures of different kinds, in the judicious succession of crops, and especially in the economy of land, so that every part of it shall be in a constant state of production, we have still something to learn from the Flemings, and not from an instructed and enterprising Fleming here and there, but from the general practice.' ^ Authorities seem unanimously to agree upon the great industry evinced by peasant proprietors, and thus peasant proprietors would appear essentially to differ from small farmers who rent the land they cultivate ; for indolence is generally assigned as the fault of this latter class. ^ 1 See an article on Flemish Husbandry iu the Farmers' Series of tiie society for the diffusion of Useful Knowledge. Peasant Proprietors. 193 Mr. Ingliss was forcibly impressed with the wonderful industry of the peasant proprietors of Ziirich. Mr. Laing, a traveller, who, with singular acuteness, observed the economy of various European countries, remarks, when speaking of Norway, the country where peasant proprietors are most numerous and of longest standing in proportion to the population, ' if small proprietors are not good farmers, it is not from the same cause here which we are told makes them so in Scotland — indolence and want of exertion. The extent to which irrigation is carried on, in these glens and valleys, shows a spirit of exertion and cooperation to which the latter can show nothing similar.' Once more we will quote Arthur Young, who has most happily expressed the effect which the feeling of property exerts in stimulating industry. Although Arthur Young often found great fault with the agriculture which he observed on some of the small properties in France, yet he remarks that what he saw in France ' proved that property in land is, of all others, the most active instigator to severe and incessant labour. And this truth is of such force and extent, that I know of no way so sure of carrying tillage to a mountain-top, as by permitting the adjoining villagers to acquire it in property ; in fact, we see that in the mountains of Languedoc they have conveyed earth in baskets on their backs, to form a soil where nature had denied it.' It has been often urged as an objection against small properties in land, that there are man}^ important improvements which can only be carried out by a cooperation of labour and b}^ a combination of resources, which, it is supposed, would not exist among small proprietors. For instance, it may be impossible to drain one isolated field, if those around it remained undrained ; an outlet must be found for the water, and in this way the interests of an adjoining property might be affected. Again in many countries the fertility, and consequently the value, of the land depends on irrigation. Any one who is acquainted with those works of irrigation which, for instance, in Wiltshire and Hampshire, have con- verted many of our English valleys from almost useless swamps into the richest meadow-land, will no doubt have observed, that the most expensive of these works are not N BOOK II. CH. VI. Norway, and France, Certain objections to peasant proprietor- ship are oh dated by the co- operation of labour, (IS -shoivn by the Nor- loeg'ian peasants. 194 Manual of Political Economy. BOOK n. CH. VI. Is the net produce greater on small pro- perties, as loell as the gross ? Evidence of A. Thaer, Mr. Kay, and M. Reichens- perger. constructed for any particular field, but serve a large tract of country. Therefore it might be supposed that irrigation would never be attempted, if it were necessary to consult tlie conflicting interests of a great number of small proprietors. Such a supposition is completely met by the testimony of Mr. Laing with regard to Norway, who assures us that in many districts entirely occupied by peasant proprietors, irrigation is carried out to its fullest possible extent. Mr. Laing emphatically speaks, not only of the industry, but also of the cooperation of labour, shown by the Norwegian peasant proprietors in irrigating their land. English writers, whilst allowing that a small proprietor may cultivate his land with great care, have almost in- variably assumed that this kind of cultivation is more suited to a garden than a farm, and hence it is frequently stated that farming by peasant proprietors is much more expensive than farming on a large scale. The gross produce from small properties may be greater, but the net produce, it is said, cannot be. Some continental agriculturists have, however, enquired into this subject with great care, and their conclusions are worthy of attentive consideration. Amongst a great number of German writers whose opinions upon this subject coincide, we select Albrecht Thaer, a writer on the different systems of agriculture, and who had, in some of his earlier works, expressed himself very decidedly in favour of large properties divided into large farms. He says he is convinced ' that the net produce of land is greater, when farmed by small proprietors, than when farmed by. great proprietors or their tenants.' Mr. Kay, a most intelligent English writer, expresses the same opinion, and says : — ' The peasant farming of Prussia, Saxony, Holland, and Switzerland, is the most perfect and econ- omical farming I have ever witnessed in any country.' But if the net produce of land is increased when occupied by small proprietors, a large estate ought, of course, to be more valuable if it were divided among several small proprietors. Upon this point M. Reichensperger has given some most valuable information, based upon personal observation, and upon statistical facts. He expresses a very decided opinion, not only that the gross Peasant Proprietors. 195 produce of any given number of acres held and cultivated by small or peasant proprietors, is greater than the gross produce of an equal number of acres held by a few great proprietors, and cultivated by tenant farmers ; but that the net produce of the former, after deducting all the expenses of cultivation, is also greater than the net produce of the latter. He mentions facts which seem to prove that the fertility of the land, in countries where properties are small, must be rapidly increasing, and substantiates this opinion by proving that the price of the land which is divided into small properties in the Prussian Rhine provinces is much higher, and has been rising much more rapidly, than the price of land on the great estates. This is the most conclusive testimony which can be given in favour of small landed properties ; it is in fact a practical and complete solution of the question, for upon this subject abstract reasoning will have little effect in convincing the great bulk of man- kind. Opinions quite as favourable to the system of peasant proprietors as those just quoted have been expressed by more recent writers. No one has taken more pains to observe the actual working of the system in France, the Channel Islands and other places than the late Rev. F. Barham Zincke. His testimony is the more valuable because his position as incumbent of a rural parish in Suffolk enabled him to become thoroughly acquainted with the condition of our own agricultural population. In the description^ of a week spent with the family of a small cultivating proprietor in the Limagne he makes special reference to the frugality and other social virtues developed by the system. But even when a very strong case can be made out in favour of small properties, it will not convince a people like the English, who are accustomed to a different system ; they will naturally say — If small properties are more advantageous, an estate, if divided, would realise a larger price ; and therefore a large estate, whenever it was sold, would inevitably be partitioned into a great number of small ^See Fortnightly Revieto, November, 1878, "The Peasants of the Limagiie " by the Rev. F. Barham Zincke. See also an article by the same author on "Landowning cultivators," Fortnightly Review, January, 1882. BOOK II. CH. VI. Rapid in- crease of the value of small properties. 196 Manual of Political Economy. BOOK II. CH. VI. Experi- ence of England. The prin- cipal legal obstacles to the in- troduction of peasant prop7-ietors into Eng- land are the law of primogeni- ture., properties. The reverse of this, however, has taken place in England ; estates have not been more subdivided, for it is well known that within the last few years, in almost every district, a great number of small properties have gradually been absorbed, and combined into large estates; this apparently affords very strong evidence that small properties are not in England economically advantageous. It is often erroneously imagined, that if a political economist describes the advantages which are conferred upon a nation by the existence of a class of peasant pro- prietors, he must therefore be anxious to introduce small properties into a country like our own by some com- pulsory measures. But many of the advocates of peasant properties desire no more than that legislation should not foster one system of land tenure more than another. If the law of a country gave no artificial encouragement to any particular form of land tenure, then the develop- ment of any system would be spontaneous, and would prove its economic advantage. In England, many cir- cumstances combine, not only to prevent the partition of large into small properties, but also to encourage the rapid absorption of the small properties, which were so numerous in former times. The influence thus exerted to encourage the aggregation of land is partly due to our law of real property ; partly to customs which this law fosters; and also partly to causes which may be described as natural, and whose operations cannot therefore be directly controlled. Taking these three different classes of circumstances in order, it may be sufficient here to state that the legal influence referred to arises from the law of primogeniture, from the power of entail, and from a system of conveying landed property which is costly and cumbrous. It is, no doubt, often truly said that in England primogeniture is maintained much more by custom than by law. No one is compelled to leave his land to his eldest son ; and the only occasion in which the eldest son is necessarily preferred to the younger children is in the case of intestacy. When it is re- membered that few people die without a will, it is often argued that the law of intestacy, with regard to real property, produces but a very slight ettect. It is, how- Peasant Proprietors. 197 ever, impossible to say to what an extent the custom of primogeniture, which so generally prevails in England, is encouraged b}'^ this law. When a man dies without a will, it is only fair to conclude that such a disposition is made of his property as the State deems to be most strictly just. The law of England, therefore, virtually affirms that in the case of personal property all the children of a family shall be treated alike ; but with regard to real property the extraordinary doctrine is laid down, that it is just that the eldest son, to the exclusion of his mother and brothers and sisters, should inherit all the land possessed by his father. To prefer one child before all the rest is so contrary to the instincts of human nature that tlie custom of primogeniture could not be maintained unless it were supposed that some collateral advantages were associated with it, or unless the custom derived some such sanction as is given to it by the law of this country. In feudal times there were collateral advantages associated with primogeniture, because it was necessary to keep landed estates intact for purposes of protecting them against hostile attack. But now that property is secure, the unnatural institution of primo- geniture has no defence except that which it derives from the sanction conferred upon it by our law of intestacy. But great as is the influence which is exerted upon the aggregation of land in England by the law and custom of primogeniture, the effect produced by the law of entail and the practice of settlement is probabl}^ still greater. Our law enables land to be settled upon any number of lives in being, and upon the unborn child of the survivor. Until the Settled Land Act (1882) was passed it was seldom possible to sell any part of an entailed estate unless the money was reinvested in land. The eflect of this power of entail was to prevent by far the larger part of the land of the country being a marketable commodity. It may be anticipated that the eflect of entail will be to some extent raodifled by the Settled Land Act, to which reference has already been made. This act authorizes the sale of settled land, but the many conditions associated with the sale will no doubt prevent as much land being brought into the market as would be the case if the law BOOK II. CH. VI. the power of entail, 198 Manual of Political Economy. BOOK II. CH. VI. and our cumbrous system of convey- ancing. There are also social and politi- cal ob- stacles to the intro- duction of peasant proprietors into Eng- land. were so changed that every person became the owner in fee of the land in his possession. It is obvious that the direct effect of maintaining any system which restricts the quantity of land that may be brought into the market, is to artificially diminish its supply. The acquisition of small properties in land is also impeded by our cumbrous system of conveyancing. It usually happens that the cost of conveying a small plot of land is out of all proportion to its value. It is there- fore manifest that a heavy penalty is imposed upon the subdivision of land. Besides these causes which are connected with laws that can be repealed or modified, the aggregation of land is promoted by other circumstances which cannot be so directly controlled. Thus in a country which is advancing in wealth and population the number of people who are able and anxious to purchase land is constantly increasing. The possession of land confers social position and political influence. If a man owns a large estate he is certain to be made a deputy lieutenant and probably high sherifi' of his county ; these social distinctions are highly valued. The possession of land also enables a man to enjoy the pleasures of a country life. There are consequently many collateral advantages associated with the ownership of land ; which, in a country such as our own, are each year increasing in value. The price which is paid for landed property is therefore composed of two elements. The one represents the agricultural value of the land and may be estimated by the rent annually yielded. The other element represents the pecuniary value of those collateral advantages associated with land, which have just been alluded to. It is manifest that if this last element constitutes any considerable portion of the whole value of the land, a man cannot afibrd to become the purchaser of land who desires to cultivate it for profit. It has been previously stated that in a thickly peopled country such as England, the difference between the market value and the agricultural value of land steadily increases ; hence each year a smaller area of our land will be cultivated by those who own it. This tendency to separate the cultivation from the ownership of the Peasant Proprietors. 199 soil is, as previously explained, greatly intensified by various laws, siicli as the law of primogeniture and entail. It therefore becomes of particular importance as far as possible to remove all the encouragement, thus artificially given, to promote the aggregation of land. The opinions of the highest authorities on Agri- culture, such as Arthur Young and others, have been quoted to show that the feeling of ownership exerts by far the most powerful influence that can be brought into operation to secure the most efiicient cultivation of land. The same opinion lias been strongly expressed by Adam Smith and by almost every other distinguished political economist who has written since his time. After having pointed out some of the economic dis- advantages associated with the aggregation of land, it will be important to enquire whether there are any counterbalancing advantages resulting from our existing system of land tenure. Even those who are most decided in their opinions as to the productiveness of England's industry, must feel that the condition of those who are employed in agriculture is most unsatisfactory ; for there are few classes of workmen who, in many respects, are so thoroughly wretched as the English agricultural labourers. They are in many districts so miserably poor, that if they were converted into slaves to-morrow, it would be for the interest of their owners to feed them far better than they are fed at the present time. In some localities which are at a considerable distance from the manufacturing districts, twelve shillings a week may be regarded as the maximum of agricultural wages during the winter months. A few years since much lower wages prevailed ; eight or nine shillings a week were then frequently paid. A moment's consideration will show that such wages are barely svifficient to supply the first necessaries of life. Meat cannot be tasted more than once a week, and those who have to exist on this scanty fare are more exposed than any others to the inclemency of our trying climate. Such wages will not permit the slightest provision to be made either for sickness or the feebleness of old age. Throughout large agricultural districts not a single agricultural labourer will be found who has saved as much as a week's wages. A life of BOOK II. CH. VI. Social effects of the, Eng- lish sys- tem. Extreme poverty of English labourers. 200 Manual of Political Economy. toiling and incessant industry offers no other prospect than a miserable old age ; for when these labourers are too old to work they will either be paupers in the workhouse, or they must come, as suppliant mendicants, for parish relief. Rut even the physical suffering which is associated with their poverty is not the worst feature of their condition ; their ignorance is as complete as it is distressing. Improved schools, enormous educational grants, and a general zeal for instructing the poor, have failed to educate the agricultural labourers. The reason of the failure is obvious. When children leave school at eight or nine years of age, to become ploughboys, the little that has been learnt is sure to be forgotten ; and the consequence is, that in many large agricultural villages there is not one young man who can read sufficiently well to understand a newspaper. Parents may be accused of neglecting their children's welfare ; but how can we expect those who are so miserably poor, who are ignorant themselves and know not the value of knowledge, to sacrifice the two shillings a week that a child of eight or nine years of age may readily earn ? Other countries, no doubt, possess labourers who are equally poor and equally ignorant ; but the poverty and the ignorance are heightened, when contrasted with the accumulated wealth and the vaunted civilization with which they are surrounded. We make these remarks in order to show, that even if the system of land tenure in this country is productive of wealth, yet that the distribution of this wealth is so unsatisfactory, that those whose labour is instrumental in producing it are miserably poor, and their life in every respect most unenviable. They have, in fact, to work with the regularity of machines, without hope that their con- dition will be improved ^. ^[The foregoing description of the condition of the agricultural labourer in England was true when it was written in 1863. It is fortunately no longer true now (1906). The lot of the agricultural laboui'er has been imnienselj' improved by many causes, among the chief of which may be mentioned :— (1) Education, which has enabled him to improve his own condition partly by combination and partly by moving to other localities where better wages prevail. (2) Improved means of transit, which has reduced the cost of nearly all the neces- saries of life. (3) The increased productiveness of labour resulting from the extended use of machinery. (4) The extension of householil suffrage Peasant Proprietors. 201 Let us now inquire whether the condition of an agricultural community is more desirable when the land is owned and cultivated by peasant proprietors. Before quoting any special instances, it may be mentioned that the condition of a man who can enjoy the entire fruits of his own labour is in every respect superior to the condition of one who is simply a hired labourer, and who, consequently, has no direct interest in the work upon which he is employed. The faculties of the latter are not fully stimulated, his hopes are not excited by success, his energies are not called forth to contend with the difficulties and disasters to which every employment is liable ; his life is, in fact, one of dull routine. It may be said that he is spared many anxieties, with which the labourer who is his own master has to contend. But it is almost a truism to assert, that these cares and anxieties are valuable instruments of education, and that without them the human faculties can never be ade- quately developed. These general observations may be corroborated by actual experience, at least in the case of an agricultural community. All writers on peasant proprietors bear the most decided testimony to their incessant and intelligent industry. In Switzerland, France, Flanders, the Rhineland, and Denmark, we are told that the small proprietors, who cultivate their own land, economise their time with the most scrupulous care ; they earnestly strive to turn every half hour to the utmost possible advantage ; they work early and late, and their labour exhibits a watchfulness, and a fostering attention, which is never acquired by hired labourers ; magical is the influence which the feeling of property exerts, and truly indeed has it been said by Arthur Young, that it is potent enough to turn sand into gold, and convert a desert into a garden. So great is the industry of peasant proprietors, that some writers have alleged, that they are too industrious ; that they are, in fact, too much engrossed in the business of life. But it is with reference to the prudential virtues, that they ofl'er the most striking contrast to our hired labourers. Many of the worst paid workmen in this to counties, which has interested parliament in the condition of the agricultural population.] BOOK II. CH. VI. Social effects of peasant proprietor- ship. Industry of labour- ers. Their prudential virtues. 202 Manual of Political Economy. even m excess are preferable to English reckless- country are so reckless, that they seldom show any foresight for the future ; and some persons, consequently, who are impressed with this fact, have maintained, that higher wages effect no permanent improvement in the condition of the poor ; that they do not save their increased earnings, but they either marry with increased recklessness and improvidence, or spend more money in drink. Improved education would no doubt powerfully tend to correct these faults, for an almost entire absence of prudence is one of the most certain effects of ignor- ance. Even with regard to the higher classes of English workmen one of the most depressing influences with which they have had to contend is the difficulty of employing any savings which they may accumulate to raise themselves from the position of mere hired labourers. It may be shown that it is not so much the want of means as the want of opportunity which pre- vents the working classes employing their savings as capital ; for the aggregate deposits in the Trustee Savings Banks and in the Post Office Savings Banks exceed (1904) 200,000,000^.; [while in addition, a sum of £17,357,950 has been invested through the agency of these Banks in Government Stock.] Although a portion of this amount is deposited b}' those who do not belong to the working classes, yet there can be no doubt that a considerable proportion of this large sum belongs to the working classes and might be employed by them as capital. In referring to the subject of co-operation in a subsequent chapter, it will be shown that there are grounds for hoping that with an advance in the general condition of the labourers they will be able by com- bining to employ their savings as capital in undertakings which to be successful require to be conducted upon a large scale. With regard to agriculture, so far as it can be successfully carried on by peasant proprietors, experience amply proves that no more powerful motive can be brought into operation to encourage prudence than the prospect of a labourer acquiring a plot of land which he can cultivate as his own property. The value of such an acquisition to the labourer is not to be estimated by the amount of wealth with which it enriches him. It makes him in fact a different man ; Peasant Proprietors. 203 it raises him from the position of a labourer, and calls forth all those active qualities of mind which are sure to be exerted when a man has the consciousness that he is working on his own account. These remarks are corroborated by the unanimous testimony of competent authorities ; for it has been repeatedly affirmed that peasant proprietors are invari- ably a most thrifty class, and so anxious are they to accumulate capital, that the style of their living has often been erroneously supposed to denote poverty, when it is simply a result of great economy. The advantage to be derived from saving is brought most distinctly home to them. A small proprietor knows, that if he can save a few pounds, he will be able to have another horse or cow, or perhaps some new imple- ment, and he is able clearly to foresee the profit which he will derive from such a purchase. Let a man once feel how efficient the wealth which he saves may become in producing more wealth, and he is sure in future to exert himself actively to accumulate capital. Mr. Browne, who was some years since the English consul at Copenhagen, has made some most interesting obser- vations with reference to the peasant proprietors of Denmark. He bears decided testimony to their thrift, and also to the superior comfort in which they live. Thus, he says, ' The first thing a Dane does with his savings is to purchase a clock, then a horse and cow, which he hires out, and which pay a good interest. Then his ambition is to become a petty proprietor, and this class of persons is better off' than any in Denmark. Indeed, I know of no people, in any country, who have more easily within their reach all that is really necessary for life, than this class, which is very large in comparison with that of labourers ' ^. ^[The development of dairy farming in Denmark in the forty years between 1866 and 1906 has atti'acted much attention and efforts at imitation. From having been one of the poorest, Denmark is now one of the most prosperous of agricultural communities. In 1904, she exported to the United Kingdom alone nearly £16,000,000 worth of butter, eggs, bacon, and other meat. Her agricultural system is based on peasant proprietorship and co-operation. See Devdoj)m<'nt of A{/ri- culture in Denmark, by K. J. Thompson, Journal of the Royal Statistical Society, June, 1906, and Ireland and the New Century, by the Rt. Hon. Sir Horace Plunkett.] BOOK II. CH. VI. Evidence to j]rove the thrifti- ness of peasant proprie- tors. Denmark. 204 Manual of Political Economy. BOOK II. CH. VI. Mr. Jones'n assertion that pea- sant pro- prietorship over-stimu- lates popu- lation. Improba- b'tlity of this state- ment. Analoqy of our upper classes. A system of small landed properties has sometimes been condemned, because it is supposed to encourage a reckless increase of population. Thus the late Mr. Richard Jones, in some lectures which he gave as Professor of Political Economy at the East India College formerly existing at Haileybury, says that the peasant proprietors are 'exactly in the condition in which the animal disposition to increase their numbers is checked by the fewest of those balancing motives and desires which regulate the increase of superior ranks, or more civilized people.' He however entirely fails to support this opinion by specific facts. Many other writers besides Mr. Jones have maintained that small landed proprietors must become gradually impoverished, in consequence of the continued division of the land amongst the children of each generation. It is not unfrequently assumed, that a man will marry directly he acquires a small landed property, a large family will have to be maintained, and that the father will be able, at his death, to make little or no provision for his numerous children, unless he either divides the land which he owns amongst them, or else leaves the land to one of his children heavily encumbered with annuities, to be paid to the rest. In order to disprove such sup- positions, we will in the first place show that all d pricn'i reasons would lead us to conclude that the acquisition of propert}^ will act more powerfully than any other circumstance to make a class prudent with regard to marriage ; we shall, in the second place, adduce specific facts bearing upon the slow rate of the increase of population amongst peasant proprietors. The most casual observer must have remarked that the poorest classes in this country show the greatest imprudence with regard to marriage. As a general rule, a man does not marry, in tlie middle and upper classes, unless he believes that he shall, at any rate, be able to give his children as good an education as he has him- self received, and be also able to place them in a social position similar to that which he himself occupies. The majority of men are accustomed to some particular style of living, and they generally refrain from marriage, if the increased expenses of married life would compel them Peasant Proprietors. 205 to live in a manner which would not give them, what has been aptly termed, 'their habitual standard of com- fort.' But the very poor are not influenced by any such considerations — they are not restrained from marriage by a desire to preserve a certain standard of comfort. Those who are accustomed to poverty do not attempt to exercise any restraint with regard to marriage ; and amongst such persons, population is only restrained by the great mortality which prevails amongst the very poor, and more especially amongst their children. But when a labourer becomes a small landed proprietor he is at once influenced by the same motives which render the middle and upper classes prudent with regard to marriage. A person in the middle classes appreciates the value of the position he occupies ; and he will not marry, if marriage will so impoverish him as to render it necessary for him to resign his position. A small landed proprietor must be quite as forcibly convinced of the superiority of his own position compared with that of a hired labourer ; and he will be equally careful not to marry, if he considers that the expenses of a family would force him to give up this position, and would compel him to sell his land, and return to the ranks of the ordinary labourer. There is, moreover, abundant evidence to prove that peasant proprietors are acted upon by these motives. Sismondi, perhaps more than any other writer, has been impressed with the evils which result to the poor from over-population, consequent on imprudent marriages ; and his strong- advocacy of peasant properties is principally based upon the conviction that the system acts powerfully to restrain population. His testimony with regard to France is extremely important, because in France the system of peasant proprietorship is put to the most severe test, by the operation of the law which enforces the equal division of landed property. Sismondi says, ' There is no danger lest the proprietor should bring up his children to make beggars of them. He knows exactly what inheritance he has to leave them ; he knows that the law will divide it equally amongst them ; he sees the limit beyond which this division would make them descend from the rank which he has himself filled, and 206 Manual of Political Economy. Mr. Kay's account, of Switzer- land. a just family pride, common to the peasant and to the nobleman, makes him abstain from summoning into life children for whom he cannot properly provide,' Mr. Kay, who may always be relied upon as a most accurate observer, shows that the prospect of acquiring landed property makes not only those who are engaged in agriculture prudent with regard to marriage, but also exerts the same influence upon the labourers who are employed in the adjacent towns. Speaking of Switzer- land, he says, ' In some parts, as in the canton of Argovie, for instance, a peasant never marries before he attains the age of twenty-five years, and generally much later in life ; and in that canton the women very seldom marry before they have attained the age of thirty. Nor do the division of land, and the cheapness of the mode of conveying it from one man to another, encourage the providence of the labourers of the rural districts only. They act in the same manner, though perhaps in a less degree, upon the labourers of the smaller towns. In the smaller provincial towns, it is customary for a labourer to own a small plot of ground, outside the town. This plot he cultivates in the evenings, as his kitchen-garden. He raises in it vegetables and fruit for the use of his family during the winter. After his day's work is over, he and his family repair to the garden for a short time, which they spend in planting, sowing, weeding, or preparing for sowing a harvest, according to the season. The desire to become possessed of one of these gardens operates very strongly in strengtliening prudential habits, and in restraining improvident marriages. Some of the manufacturers in the canton of Argovie told me that a townsman was seldom contented until he had bought a garden, or a garden and house, and that the town labourers generally deferred their marriages for some years, in order to save enough to purchase either one or both of these luxuries.' Mr. Kay also proves, by precise statistical facts, that the peasant proprietors of the Prussian Rhine-land are extremely provident with regard to marriage, the ordinary age at which people there marry varying between twenty-five and thirty years. Numerous other facts might be adduced, to prove that a system of cultivation by peasant proprietors Peasant Proprietors. 207 is in every respect most satisfactory in its social con- sequences. In contrast with these results, the effects of our own system of land tenure may be correctly characterised in the following manner. The land is owned by comparatively few great landlords ; it is occupied by tenants who have suflScient capital to cultivate large farms, and the labour is supplied by hired labourers, whose poverty is proverbial and whose industrial status is altogether unsatisfactory. When the soil of a country is owned and cultivated by peasant proprietors, the efficiency of production is not interfered with ; and we believe it has been shown that the social and material condition of peasant proprietors is most satisfactory. Our own history, at least, proves that this class, formerly represented in this country by the ancient yeomanry has ever been distinguished for its independence and its patriotism. Whenever the system of peasant properties is advocated, it is important to state, in the most explicit manner, that it is not desirable to give artificial encouragement to the creation of small landed properties either by compulsory legislation or by grants of public money. Some people are never tired of repeating the misrepresentation that all who are dissatisfied with the English system of land tenure, are anxious to substitute for it the French law of compulsory subdivision of land. Neither the aggregation of land nor its subdivision ought to be enforced by legislation. If things were allowed to take their natural course, experience would soon prove which system of land tenure was the most beneficial to different countries. The objections to the creation of peasant properties by advances of public money will be dealt with in a future chapter^. It has already been stated that in gi-owing corn and some other products, large farming will become comparatively more advantageous than small farming, as machinery is more extensively used in agriculture. In order, therefore, to combine the peculiar advantages associated with large farming with those resulting from peasant properties, it may be anticipated that, in future, ^ See Chapter xi. Book II. BOOK II. CH. VI. Effects of our oivn syatem contrasted tvith that of peasant proprie- tors. It is not desirable to give artificial encourage- ment to the creation of small pro- perties in land. The ad- vantages of large and small farming may he combined. 208 Manual of Political Economy. BOOK II. CH. VI. The p7-e- sent and former condition of the Run sian serfs described. land will often be owned and cultivated by associations of labourers. The desirability of forming such associa- tions will be shown in the chapter which describes the progress of co-operative societies. [An attempt to extend the system of small properties in land in Russia has failed mainly in consequence of the imperfect means taken to carry it out. In 1861 the late emperor Alexander II. declared all the serfs of Russia to be free.] They were then supposed to number about 22,000,000 ; their condition had for ages been that of semi-slavery. Each serf generally occupied a small portion of land; and instead of paying the proprietor of the soil any rent, the serf was bound to give him a certain proportion of his labour, and to render him various other services. As long as the serf fuliilled his obligations, he had a claim to the plot of ground which he was accustomed to cultivate. The landed proprietor was, however, permitted to exercise upon the serfs much of the tyranny with which, in feudal times, the lord oppressed his villeins. A Russian serf could not marry whom he pleased ; labour was ruthlessly extorted from him by the stick and by other means of corporal punish- ment ; and a trivial offence, perhaps never properly investigated, would often consign a serf to perpetual Siberian exile. [When the serfs were proclaimed free the State bought of the serf owners tlie lands on which the serfs were settled and then resold these lands to the serfs in consideration of 49 annual payments. The price thus payable by the emancipated peasants was in most cases fixed either by the Government, or by special commissions^ in which the peasants took no part. The revolution now (1906) in progress in Russia tiirns very much on the claim of the peasants to the land, and their contention that the price charged to them was excessive.] Nothing probably has so powerfully contributed to promote the progress of Prussia as the reforms winch were carried out in her system of land tenure, at the commencement of the present century, by Stein and Hardenberg. A feudal tenantry was transformed int( cultivating proprietors, who have probably more thar ' Statesman's Year Book, 1906. Peasant Proprietors. 209 any other class contributed to the social and material advancement of Prussia. But the extraordinary manner in which France recovered her prosperity since the conclusion of her disastrous war with Germany, affords the most striking illustration of the wealth diffused among the agricultural classes by a system of peasant properties. Although the cost of the war to France including the indemnity to Germany was not less than 400,000,000^., and although many extensive tracts of land were laid waste, yet a great portion of the money required for this enormous outlay was readily supplied from the accumulated savings of the French peasantry. English writers not unfrequently assert that French agriculture is inferior to .that of our own country. It should however be remembered that whereas English farmers often cultivate the land with very inadequate capital, and English agricultural labourers have no capital at all, it has been shown that the French peasantry possessed great reserves of capital even after their country had been desolated by a destructive war. It has been well said that the French ' would save money out of wages that would scarcely suffice to keep English labourers off the pauper roll ' ; and there seems to be every reason to conclude that these habits of thrift which have been so deeply implanted in the French character have been powerfully stimulated by a system of land tenure which causes so large a proportion of the nation to have proprietary rights in the soil. As offering a striking contrast to the description which has just been given of the French peasantry, we shall in the next chapter have occasion to refer to the deplorable effects which were produced in Ireland by a bad system of land tenure. Formerly almost every motive which could prompt the exercise of prudence and other industrial virtues was absent from the life of the Irish peasant. A reckless increase of population was encouraged, and in many districts the normal condition of the people was one of distressing poverty. [By successive Land Acts from 1870 to 1903], the Irish cultivators have had conferred upon them proprietary rights which they never previously enjoyed. If the productiveness of the land is increased through the application of their capital and o 2IO Manual of Political Economy. BOOK II. CH. VI. skill, the advantage is now legally secured to them, and will no longer be taken from them in the form of increased rent. It may be reasonably anticipated that under the influence of this legislation, the Irish character will be gradually modified ; for there can be no reason to suppose that the feeling of ownership will not produce upon the Irish much of the same kind of influence which it has been shown has been exerted upon the French and other people who enjoy proprietary rights in the soil. CHAPTER VII. METAYERS, COTTIERS, AND THE ECONOMIC ASPECTS OF TENANT-RIGHT. AVERY considerable portion of the land of Europe is cultivated by metayers, and nearly the whole of the soil of Ireland before the famine in 1848 was occu- pied by cottier tenants. A metayer originally occupied the land on the condition that the landowner should receive one half the produce as his rent. The name is still preserved, although the terms of this tenancy have been much modified. Almost the whole of Tuscany is cultivated by metayers, who pay the landlord two thirds of the produce as rent ; a metayer tenancy therefore now signifies, that a certain fixed portion of the produce should be paid as rent. Whether this portion should be one half, two thirds, or any other amount, seems chiefly to be regulated by the customs of different countries. Those who are only acquainted with English agriculture find it difficult to imagine the great extent of land which is cultivated by metayers. Before the revolution of 1790, nearly the whole of the land of France was rented by metayers, and even at the present time scarcely any other system of land tenure is known in Umbria, Tuscany, and other parts of the Italian peninsula^. ^[Cottier tenancy in Ireland has been for many years extinct. It prevailed when the peasantry were virtually tied to the soil on which they were born and had no other means of livelihood than agriculture. Under these circumstances the competition of a prolific population drove up rents to an excessive amount, in some instances to more than the whole value of the produce yielded by the land. The series of land acts from 1870-1903 has completely put an end to this state of things. The Act of 1881 established land courts with the power of lixiug a BOOK ir. CH. VII. The metayer system. 212 Manual of Political Econorny. BOOK II. CH. VII. The cottier system. Compari- son of cottier and metayer systems. The me- tayer sys- tem exhi- bits the control of competi- tion by custom. The cottier tenure was so anomalous that it is not easy to characterise it in a brief description. It may however be said generally, that a landlord took from a cottier in the form of rent the utmost possible amount. The cottier only had left to him the means of bare subsistence. Cottier rents were nominal in pecuniary amount ; because these rents were fixed so high, that it was impossible for the cottiers ever to pay them. The nominal amount of the rent often exceeded the whole produce which the land would yield. These tenants, therefore, were perpetually in arrear, and this gave the landlord the means of appropriating to himself the whole advantage of any unusually good crops. We have classed metayers and cottiers together, because the same disadvantages in part belong to these two systems of land tenure ; but the results arising from them offer in many other respects a striking contrast. The metayer tenancy illustrates in a very remarkable manner the control which custom exerts over com- petition ; for the fact that metayer tenure prevails throughout a country plainly indicates that many land- lords sacrifice their own interests, in order to obey a custom ; since it can be readily shown, that the rent of land, if regulated by competition, would in the majority of cases greatly exceed the metayer rents which are paid. And this will be true whatever may be the portion of the produce at which the metayer rents are fixed ; for instance, in Tuscany two thirds of the whole produce are apportioned to the landlord. This is pro- bably the highest metayer rent which is paid. The judicial rent. Tenants aie therefore effectually protected from paying excessive rents. The Act of 1903 enables the tenant to become the purchaser of his holding on terms rendered easy by using the credit of the State. Moreover the continual stream of emigration from Ireland has relieved the pressure of population, and consequently the com- petition for farms is very much less than it was. In Ireland young men and women go to America as readily and almost as cheaply as the Yorkshireman goes to London. The succeeding chapter therefore, so far as it deals with cottier tenancy, no longer describes wliat actually exists. It has been thought desirable however to let it stand because of its historical interest and because it serves to show some of the circumstances u hich rendered the land question in Ireland such an acute social and political problem.] Metayers, Cottiers, and economic aspects of Tenant-right. 213 fertility of the soil of Tuscany must be such, that one third of the produce which is yielded by any land which is cultivated suffices to pay the expenses of cultivation, and also remunerate the tenant for his labour. If one third of the produce was not sufficient to do this, the land would be cultivated at a loss ; since it is supposed that two thirds are allotted to rent. But if one third of the produce yielded by inferior land is sufficient for the purposes just mentioned, then it is manifest that one third of the produce yielded by more fertile land would more than suffice, according to the rates of profit and wages current in the country, to remunerate the tenant for the capital he expends, and for his labour of super- intendence. But when rents are regulated entirely by competition, a farmer cannot hope to obtain more than the average rate of profit, and, in such a case, the farmer who cultivates productive land is not in a better position than a farmer who occupies land of inferior productive- ness. The landlord is able to appropriate to himself the whole advantage of the increased fertility ; since, when rents are regulated by competition, they are adjusted in proportion to the fertility and other advantages which a particular farm may possess. When, therefore, metayer rents are paid, the tenants who happen to occupy the most productive l^nd possess a benehcial interest, the value of which is proportioned to the productiveness of the soil. We will illustrate our meaning by an example. Let it be supposed that there are two farms wdiich vary greatly in productiveness, but in the cultivation of which the same amount of capital is invested ; this amount being 2000^. Let it be further assumed that the ordinary rate of agricultural profit is ten per cent., and that therefore these farmers will be satisfied with a profit of 200^. The annual expense of cultivation, including wages, seed, wear-and-tear of implements, &c., may be assumed to be in each farm 800^. Let the annual amount of the produce of the two farms be respectively 1800?. and 1500/. If, therefore, the two farms paid rents of 800?. and 500/. respectively, there would in each case be 1000/. left to the farmers; this would replace their capital, and leave them 200/., or a profit of ten per cent.,, as a remuneration for their own BOOK II. CH. VII. Diffei'ent profits of farmer H under the rack-rent and me- tayer sys- tems. 214 Manual of Political Economy. labour and capital. These farms therefore, if the rents were regulated by competition, would pay rents of 800^. and 500^. respectively. We will now examine what would occur if these two same farms, cultivated by the same amount of capital as before, paid a metayer rent of one third the produce ; the produce from the two farms above supposed being 1800^. and 1500^., the metayer rents would consequently be 600?. and 5001. respectively. The worse farm of the two therefore pays the same rent as before, but the better farm pays a rent of 200?. less ; therefore the metayer tenant who occupies the more fertile farm would have a beneficial interest which might be estimated at 200?. per annum. In any special case the amount of this beneficial interest depends upon the productiveness of the land. The purport of this example has not been to prejudge the question, whether or not, under a metayer tenure, the landlords receive smaller rents, and the tenants are better off than if they occupied the land upon a rack- rent. Such a question can only be determined by considerations upon which we will proceed to remark. But the object of the above example is to show, that when rents are regulated by a custom which fixes them at a certain definite proportion of the produce, then the rent paid by the most productive soils is less in excess of that paid by the less productive than it would be if both were let on rack-rent. The arrangements connected with the metayer tenure vary greatly in dififerent countries. The landlord almost always supplies a portion of the capital. Sometimes he provides the stock, the tenant buying the seed and implements. In Piedmont, the landlord pays the taxes and repairs the buildings, and the tenant provides stock, implements, and seed. According to Arthur Young, the conditions of the metayer tenure in France before the revolution, were far more complicated and variable than at the present time. In Champagne, the landlords commonly find half the cattle and half the seed, and the metayer, labour, implements and taxes : but in some districts the landlord bears a share of these. In Rous- sillon, the landlord pays half the taxes ; and in Guienne, from Auch to Fleuerne, many landlords pay all. Near Metaye7's, Cottiers, and economic aspects of Tenant-right. 215 Aguillon, on the Garonne, the metayers furnish half the cattle. But the metayer tenures of all countries are controlled by the principle, that the conditions of the tenure are arranged according to an undeviating usage. Thus, if it is Customary in Piedmont that the landlord should pay the taxes, repair the buildings, and receive two thirds of the produce as rent, it would be an unheard-of thing for a metayer tenant to have his rent raised to three fourths of the produce, or to be displaced from his occuj)ation, because some other person offered the landowner a higher price for the use of the land. The whole tone of public feeling would prevent the landlord accepting such an offer ; in fact, persons would be restrained from making the offer by feelings similar to those which prevent a barrister publicly announcing that he will hold briefs at one half the customary fees. Land is often retained for many generations in the same family, by metayer tenants ; they almost regard the land as a patrimonial possession, because they believe that they will not be displaced from its occupation, and that the conditions on which they hold it will remain unchanged. Metayer tenants there- fore may justly, in a modified sense, regard the land as their own property, and consequently to this tenure belong, in part, those advantages which, as shown in the last chapter, result from small properties when cultivated by their owners. We say these advantages only belong in part to the metayers, because many of those motives upon which depend the advantages of peasant properties only act with limited effect in the case of a metayer tenure. For instance, a metayer feels that he has a claim to only a portion of the fruits of his labour ; if he is more industrious, and his land is made more productive, the landlord takes a portion of this increased produce, therefore the feeling of self-interest which stimulates the active and intelligent industry of the peasant proprietor cannot act with equal force upon the metayer. But a more serious objection than that just noticed is that the metayer system often discourages the application of capital, both by the landlord and by his tenant. For instance, if the land is drained at the expense of a metayer landlord, whose rent is one third of the produce. BOOK II. CH. VII. Difference hetiveen metayers and pea- sant pro- prietors. 2l6 Manual of Political Economy. BOOK II. CH. VII. Ineffici- ency of metayer system generally due to want of capital. the land is of course made more productive, but the landlord only secures one third of the increased produce ; the remaining two thirds are gratuitously given to the tenant, who has borne none of the expense. If, on the other hand, the land is drained at the sole cost of the tenant, he, in a similar manner, will only obtain two thirds of the advantage ; the remaining one third would be gratuitously presented to the landlord. Whenever the metayer system is inefficient, it is no doubt principally due to this cause ; in fact, the strongest opponents of metayer cultivation most strenuously insist on the great want of capital which it exhibits. This objection may be, and is, no doubt, overcome in those countries where the metayer farming is most satisfactory ; for when the application of capital is required, there is no reason whatever why the metayer landlord and his tenants should not equitably arrange between themselves trhe particular amount which each party should respectively spend. If the metayer rents were one third of the produce, then it might be equitably arranged that one third of the cost of such a useful improvement as drainage should be borne by the landlord, and the remaining two thirds by the tenant. The terms of the contract might be varied under different circumstances ; the tenant ought not to pay so much, if there was any chance that his term of occupation would be limited. Arrangements similar to these are frequently made between English landlords and their tenants, when money is borrowed from the Land Improvement Companies, for the purpose of carrying out works of permanent utility. Although it has been pointed out that a metayer might not have the same motive as a peasant proprietor to improve the land b}^ incessant industry, and by judicious application of capital, yet on the other hand, it must be remembered that the labour of the metayer will be, in all probability, much more efficient than that of our own agricultural labourers, who simply work for hire ; they have no interest in the work in which they are employed, they have no motive but to labour with just sufficient skill and regularity to avoid being dismissed. To them it is a matter of little moment whether their employer's profits are large or small. The indolence and carelessness which Metayers, Cottiers, and economic aspects of Tenant-right. 217 are thus engendered cause a loss to an employer of hired labour which is rarely adequately appreciated. In metayer cultivation, little hired labour is employed. A meta3^er generally occupies no more land than he can himself cultivate with the assistance of his family. He therefore, far more than the hired labourer, is stimulated to be industrious, because the profits which his exertions produce are at any rate in part his own. The most contradictory opinions with regard to the results of metayer farming have been expressed by those who have observed it in various countries. These differ- ent results may, no doubt, be attributed to the particular customs which prevail with regard to the metayer tenures in different countries. Some of these customs have already been noticed. We believe that the efficiency of the metayer tenure depends on the extent to which the customs of a country facilitate the application of capital to the land. The efficiency of the metayer culti- vation also, in a great degree, depends upon the security which the tenant has that he shall not be disturbed in the possession of his holding. It is hopeless to expect that there ever can be good farming when the cultivator is a mere tenant at will, who is ever liable to have his rent raised in proportion to the improvement produced on the land by either his skill or his capital. The evil has been partly remedied in England by the leasing of farms at a rackrent for a period of years which varies from seven to twenty-one ; but, even under this system, enterprise on the part of the farmer is much discouraged; for it too frequently happens that his rent will be raised at the expiration of his lease if he has made his farm more productive. This evil is remedied by the metayer tenure ; for, as we have before remarked, a metayer tenant is seldom displaced, and a rent, which is fixed at a certain definite portion of the produce, gives the tenant a beneficial interest in the increased productiveness of the soil. We will now proceed to consider how far these general a priori remarks upon metayers are corroborated by the facts which have been derived from experience and obser- vation. Most English writers on this subject, including Arthur Young, Mr. McCulloch, and Mr. Jones, have been BOOK II. CH. VII. Contradic- tory opi- nions on the meta- yer system due to va- riety of customs in different countries. Unsatis- factory nature of metayer tenure in France. 2l8 Manual of Political Economy. unsparing in their denunciations of the metayer system ; they assure us that it causes the land to be wretchedly cultivated, that it deprives the landlords of half the rent they might obtain under a dift'erent tenure, and that it makes the metayers themselves more impoverished and more wretched than ordinary labourers. But these writers formed their opinions principally by observing the condition of the French metayers. French agri- culture does not, however, afford a fair test of the effects of metayer farming ; for it labours under man}^ disad- vantages which do not operate in other countries. Mr. Jones, for instance, supports his opinion by quoting Turgot ; but Turgot spoke of the country before the French revolution. Then the exclusive privileges of the French nobility exempted them from direct taxation, and the most burdensome imposts were thrown entirely upon the metayer tenants. But in Piedmont it is an essential condition of the metayer tenure that taxes should be paid by the landowner. In fact, one passage in Arthur Young's own work is sufficient to explain all the defects of the French metayer agriculture. He says that in Limousin and Angoumois (the provinces which Turgot administered, and from which he formed his impression of the metayer system) ' the metayers have no virtual fixity of tenure : whereas the metayers of Italy claim fixity of tenure as an essential condition of their con- tract.' 'Again, in Limousin,' Arthur Young tells us, 'the metayers are considered as little better than menial servants, removeable at pleasure, and obliged to conform in all things to the will of the landlord.' Under such circumstances the system must in eveiy respect work badly, and the metayers themselves must inevitably be poor and wretched. The metayer tenure of Italy strikingly contrasts with that of France, both in its results and in the nature of the contract. Almost the entire land of Lombardy and Piedmont is cultivated by metayers. The excellence of the agriculture in those countries is proverbial ; in fact it is not surpassed in any country in the world. This excellence is not due to any peculiar natural advantages. The soil of Piedmont is scarcely of average fertility, and Lombardy was for years exposed to intolerable oppres- Metayers, Cottiers, and economic aspects of Tenant-right. 219 sion by its Austrian rulers. Bad government is usually supposed to cause the impoverishment of a country. The Lombard system of agriculture must, therefore, have been singularly efficient ; for Lonibardy continued one of the best cultivated and most productive countries during the whole period through which it was oppressed by Austrian tyranny. In Lombardy and Piedmont the land is not so much subdivided as in France ; a metayer farm seldom exceeds sixty, but is never less than ten acres. The farm buildings are models of convenience and comfort. Competent observers affirm that nothing can exceed the skill and economy displayed in the manage- ment of the land. Chateauvieux, who is an excellent authority, says — 'In Piedmont and Lombardy the rotation of crops is excellent. I should think no country can bring so large a portion of its produce to market as Piedmont. Though the soil is not naturally fertile, the number of cities is prodigiously great. The agriculture must therefore be eminently favourable to the net, as well as the gross produce of the land.' Again, he remarks — ' In no part of the world are the economy and management of the land better understood than in Pied- mont, and this explains the phenomenon of its great population and immense export of provisions.' In the valley of the Arno, the metayer farms are much smaller than in Piedmont and Lombardy, their size varying from three to ten acres ; and yet, in spite of this great subdivision, numerous travellers have described the valley of the Arno as cultivated with singular care and skill, and as presenting a most prosperous appearance. The holdings are so small that the homesteads of the metayers are situated at a short distance from each other. We are assured that these homesteads appear to be most neatly kept and have a thoroughly comfortable aspect, and the metayer peasants in this valley are w^ell and tastefully dressed. It is true that English writers have said. If you enter the house of a metayer he does not seem to live as much at his ease and to possess the same luxury as the farmers of other countries ; but it is most unreasonable to make such a comparison. A metayer in the valley of the Arno, who cultivates his five or six acres of land, ought not to be contrasted with BOOK II. CH. VII. and ill the valleij of the Arno. Manual of Political Economy. our own farmers who possess large capital ; such a metayer is essentially a labourer, he cultivates the land without the assistance of hired labour ; if therefore we wish fairly to compare the condition of an agricultural population in a metayer country with its condition under a different system of land tenure, we ought to contrast the metayer not with capitalist farmers, but with agricultural labourers, working for hire. If this comparison is made, there certainly can be no doubt that the metayers of Italy in their social and economic condition are in every respect greatly superior to our own agricultural labourers. Chateauvieux bears important testimony to the bene- ficial influence exerted upon the landlords by a metayer tenure. Nothing, in fact, seems to enforce with so much practical effect the important maxim, that property has duties as well as rights. The following very intelligent remarks are made by Chateauvieux : ' The metayer system constantly occupies and interests the proprietors, which is never the case with great proprietors, who lease their estates at fixed rents. It establishes a connnunity of interests, and relations of kindness between the pro- prietors and the metayers — a kindness which I have often witnessed and from which result great advantages in the moral condition of society. The proprietor under this system, always interested in the success of the crop, never refuses to make an advance upon it, which the land promises to repay with interest. It is by these advances and by the hope thus inspired, that the rich proprietors of land gradually perfect the whole rural economy of Italy. It is to them that it owes the numerous systems of irrigation which water its soil, as also the establishment of terrace culture on the hills — gradual but permanent improvements which connnon peasants, for want of means, could never have effected, and which could never have been accomplished by the farmers, nor by the great proprietors who let their estates at flxed rents. The metayer system therefore forms of itself that alliance between the rich proprietor, whose means provide for the improvement of the culture, and the metayer, whose care and labours are directed, by a common interest, to make the most of these advantages.' Metayers, Cottiers, and economic aspects of Tenant-right. Sismondi, who was a resident metayer landlord, speaks in warm approval of the system. He proves by the most definite facts that under the metayer tenure the land is well cultivated, and that the condition of the metayer tenants is in every respect most satisfactory. The object we have had in view in making these remarks upon the metayer tenure has not been to propose its introduction into England ; this, even if desirable, we well know is impossible, for it is the fundamental principle of this tenure, that the rent of land should be regulated by custom and not by competition. But custom is gradually exercising less influence upon the commercial arrangements of our own country; and rents, profits, and wages are each year apportioned more completely in accordance wdth competition. We have, however, been chiefly induced to make these remarks, because the prejudice of English writers against every system of land tenure different from our own has been so great, that it is commonly assumed that the metayer tenure produces unmixed evils in the countries where it exists, and that these countries can never be greatly improved until it is replaced by a sj^stem of cultivation resembling our own. The facts just mentioned are sufficient to disprove such an opinion, for we believe the following propositions have been established : — that the metayer system of cultivation is in many instances extremely efficient ; — that the metayer tenants are gene- rally in a condition greatly superior to that of our own day-labourers ; — and, that the metayer landlords are often induced to perform those duties pertaining to landed property which are too frequently neglected by the landowners of our own country. Without wishing, therefore, to advocate any Utopian scheme for the introduction of this tenure into England, we still think it very important that its merits as well as its defects should be known. It has already been stated that the cottier and metayer tenure will be described in the same chapter, because the former system of cultivation exhibits none of the advan- tages which belong to the latter, while it possesses all its defects in an aggravated form. The cottier tenure has existed on a far more extended scale in Ireland than in Manual of Political Economy. any other country, for before the famine of 1 848 nearly the whole of the land in Ireland was cultivated by- cottiers. The cottiers of Ireland were peasant culti- vators; for they rented the land directly from the landowner, and cultivated it by their own labour. The produce of the land was, therefore, as in the case of the metayer tenure, entirely divided between the landlord and the cultivator ; but there was a fundamental differ- ence between the metayer and the cottier tenure. The rent which the metayer pays is definitely fixed by custom ; on the other hand, the rent which the cottier paid was entirely regulated by competition. Custom also generally gives to the metayer fixity of tenure, but no such fixity of tenure could be claimed by cottiers ; they competed against each other for the possession of a plot of land, and the landlord was only anxious to obtain those tenants who would promise him the highest rents. Now the rack-rents, which are paid by the large capitalist farmers in England, are regulated by competition ; and it may therefore be asked — Can there be any essential difference between rack-rents and cottier-rents ? There is this essential and very important difference ; a rack- rent is determined by the competition of capitalists, whereas a cottier-rent was determined by the compe- tition of labourers. The consequences of this distinction we will proceed to explain. When farmers apply large capitals, as in England, to cultivate their farms, they expect to obtain the ordinary rate of profit for their capital, and a reasonable remuneration for their labour of superintendence ; it is, therefore, quite impossible that the rent paid by English farmers could long continue so high as to prevent this ordinary rate of profit being received, for if this were so, capital would not continue to be invested in farming, but would inevitably be applied in other employments, where the ordinary rate of profit could be secured. Rack-rents, therefore, are kept, as it were, in a position of stable equilibrium by the competition of capital; for competition of capital signifies that men are eagerly anxious to invest their capital to the greatest possible advantage ; and conse- quently, a rack-rent is in this manner so adjusted, that farming is, on the average of years, neither much more Metayers, Cottiers, and economic aspects of Tenant-right. 223 nor much less profitable than other occupations. In the case, however, of a cottier tenancy, it was population, and not capital, which competed for the land. The Irish cottiers were miserably poor peasants, who possessed no capital, except one or two tools and the scanty furniture of their wretched hovels. When, therefore, they com- peted for a plot of land, it would have been absurd to suppose that they calculated the rent which they w^ere willing to pay, by considering wdiether their capital would secure a higher rate of profit in some other invest- ment ; they were themselves fit for no other employment, and all the capital they possessed would scarcely realise more than a nominal sum. To a cottier, the possession of a plot of land was not a question of profit, but of subsistence ; and consequently, in any district, the more numerous the peasantry, the more actively was the land competed for. The peasantry of Ireland were so long accustomed to poverty, that they were satisfied if they could occupy a plot of ground, and obtain from it just sufficient food to provide a bare subsistence ; their habitual standard of comfort was almost inconceivably low ; every adult peasant married, and a want of food, with its consequent diseases, was the only check upon population. Such being the con- dition of the Irish peasantry, the cottier rents were forced up to their highest possible point ; the cottier retained just sufficient to live upon and the whole remaining produce was paid to the landlord as rent. The pecuniary amount of these cottier rents was often merely nominal ; a peasant was so anxious to obtain a plot of ground, that he cared not what rent he offered for it ; he well knew that the landlord, whatever was the nominal amount of rent, must leave him sufficient to live upon. And thus w^e learn, from the evidence taken before Lord Devon's Commission, (1845) that the nominal amount of many of these cottier rents exceeded the whole produce which the land yielded, even in the most favour- able season. The cottier was consequently in constant arrear to his landlord ; the landlord had of course a legal right to distrain for the rent, but such a remedy was of no value, for the whole property of the cottier was scarcely worth seizing. Neither could the landlord gain BOOK II. CH. VII. Disastrous effects of the cottier system upon Irish labourers. 224 Manual of Political Economy. BOOK II. CH. vn. Assassina- tion. The direct tejidency of the cot- tier systpin was to impo- verish the people and loiver the cultiva- tion. Conacre. A feudal tenure. much by resorting to eviction, for the evicted tenant would only be replaced by another tenant of the same character, whose arrears of rent would accumulate with similar rapidity. Although eviction was a legal right of the landlord, yet he was restrained from exercising this right by the powerful motive of personal safety. Assassination was the retribution with which the cottiers of Ireland not unfrequently punished an evicting land- lord. The economic condition of no other country has ever been so unsatisfactory as was the condition of Ireland under the cottier tenancy ; for the cottiers, having taken the land at a rent which it was impossible for them to pay, had no motive to be industrious ; if by skill and labour the land was rendered more productive, the increased produce was absorbed in the rent of the land- lord. The rents were, in fact, fixed so high, that whether the seasons were favourable or not, whether the land was well or badly cultivated, the cottier tenants could never expect to obtain for themselves any more than a bare subsistence ; hence it has been aptly remarked, that the Irish cottiers were the only people in the world whose condition was so deplorable that they gained nothing by being industrious. No scheme could possibly be devised which would act more effectually to impoverish the people, and throw the land into the most wretched state of cultivation. The progress of Ireland cannot be marked by a surer sign than by the abolition of the cottier tenure. In Ireland there was also a subsidiary kind of tenure, termed conacre. If a landlord required any labour to be done on his estate, it was a frequent practice for him to pay the labourers he employed, not by money, but by giving them a plot of manured ground rent free; the plot thus held, on the condition that the tenant should give the landlord so much labour, was termed conacre. This tenure was feudal in its character ; for during the middle ages, a great portion of the cultivated land was granted to tenants on the condition that they should be bound to perform certain personal services for the landowner, or, as he was then termed, the lord. These personal services consisted either in providing the lord with mere ordinary manual labour, or else with men and weapons for warlike purposes. In Ulster a peculiar kind of land tenure prevails, in Metayers, Cottiers, and economic aspects of Tenant-right. 225 consequence of the existence of a particular form of tenant-right. It is ordinarily supposed that tenant-right represents the compensation which is paid to the tenant by the landowner for improvements carried on by the tenant's capital and skill, and the effects of which are not exhausted at the time when the tenant relinquishes his occupation. The Ulster tenant-right is something very different, for it represents a sum sometimes amounting to as much as the value of the fee-simple of the land ; this sum is paid for the goodwill of the farm, by the incoming to the outgoing tenant. Side by side with this tenant-right there also exists in Ulster the tenant-right first described. For if an Ulster tenant relinquishes his occupation to his landlord he obtains from the land- lord compensation for unexhausted improvements. The Ulster tenant-right previous to 1870, when the Irish Land Act was passed, had no legal sanction; it simply existed as a custom, which was, however, in almost every instance, implicitly obeyed. This may be regarded as a remarkable example of the extent to which custom may control commercial transactions. The large sum which is paid by the incoming to the outgoing tenant represents partly a premium for goodwill, and partly compensation for unexhausted improvements. The disadvantage associated with the Ulster custom is that it deprives the incoming tenant of a portion of his capital at a time when he most needs it for his farm. But on the other hand it has this important advantage, that it practically gives security of tenure, and therefore encourages the tenant to develop the resources of his farm to the utmost. It is obvious that the financial result of the arrangement is that the tenant pays a smaller rent in consequence of the sum he has paid as goodwill upon entering the farm. The Irish Land Act of 1870, besides giving legal sanction to the Ulster tenant-right, secured to small tenants compensation upon arbitrary eviction and conferred upon all tenants com- pensation for unexhausted improvements. Soon after this Act was passed it was found that although it secured to the tenant, on eviction from his holding, compensation for unexhausted improvements, he might be deprived of a large portion of the advantage p BOOK II. CH. VII. The Ulster tenant- rif/ht. The Irish Land Act of 1870. Shortcom- ings of the Act of 1870. 226 Manual of Political Economy. of these improvements, which are ahnost invariably in Ireland carried out by his own capital and skill, by the rent being raised in proportion to the extent to which the land had been improved. The strong hereditary attachment of the Irishman to his holding and the limited extent to which other industries than agriculture exist in Ireland, rendered compensation, which could only be claimed on cessation of the tenancy, of compara- tively little value to the great body of Irish tenants. The Irish Land Act of 1881 was passed chiefly with the object of remedying this defect. This Act is based upon a principle which probably nothing but the exceptional condition of Ireland and the peculiar nature of the tenure which had always obtained there, could justify. It gives the tenant the power to appeal to a Land Court to fix the rent ; the rent so fixed cannot be changed for fifteen years, at the end of which time it may be readjusted by the same agency for a similar period. The interest of the tenant in his holding which is thus created can be freely sold, subject to a right of pre- emption conferred upon the landlord. It is obvious that the tenants thus possess permanence of tenure subject to a revision of rents every fifteen years. Soon after the Irish Land Act of 1870 was passed, it was proposed to extend some of its provisions to England and Scotland. In 1875 the Agricultural Holdings Act was passed. This measure is based upon the principle that capital which is invested by the tenant in the improvement of the land is his own property, and that when he leaves his farm he is entitled to claim from his landlord compensation for any unexhausted improvements which have been effected by the tenant's capital. The measure also recognizes the right of the landlord to claim from the tenant compensation, if the land has been injured by bad farming. Although, however, these claims for compen- sation respectively possessed by the tenant and landlord have thus received a legal recognition, yet the very unusual course was adopted of allowing the measure to be made inoperative in any instance where either the landlord or the tenant should declare his wish not to come under its jirovisions. This power to contract Metayers, Cottiers, and economic aspects of Tenant-right. 227 themselves out of the Act has been so largely used as to render the measure almost inoperative. The chief reason put forward in favour of the permissive character of the Act was the importance of maintaining freedom of contract. If the question is regarded as one which only concerns landowners and tenants, it no doubt may be fairly urged that a tenant ought to be freely permitted to make whatever terms he likes with the landowners. If he agrees to rent a farm on terms unfavourable to himself, he has no more right to look to the State to protect him against the consequences of his own imprudence than has the occupier of a house if he agrees to pay an excessive rent for it, or a trader if he purchases commodities at a price so excessive as to be ruinous to himself. The chief justification, however, for imposing legal regulations upon the letting of land, which would be indefensible in the case of other mercantile transactions, arises from the fact that the whole community is vitally interested in making the land as productive as possible. If the buyer of a commodity pays an extravagant price for it, the loss which he suffers represents so much gain to the seller. It is simply a transfer of wealth from one person to another in which the general public are not interested. But if the cultivators of land agree to rent it on conditions which can be proved to cause a great diminution in its productiveness, then the entire community is injured, because all that is raised from the land becomes dearer, if inferior cultivation lessens its productiveness. Nothing is more certain than that the investment of capital in the improvement of the land must be most seriously impeded as long as the cultivator has no security that the advantage resulting from the expenditure of his capital will not be appro- priated by another. A tenant virtually spends his money not for his own advantage but for the advantage of the landowner, if he can be arbitrarily evicted without receiving adequate compensation for improve- ments. From such considerations it inevitably follows that land will not, as a general rule, be properly cultivated if, as is the case in our own country, those who rent it seldom possess any security that they will BOOK II. CH. VII. The Agri- cultural Holdings Act 1875. Manual of Political Economy. be able to claim compensation for unexhausted improve- ments. The correctness of this conclusion is repeatedly confirmed by those who are intimately acquainted with agriculture. Lord Leicester, a large landed proprietor and a well known agriculturist, has said that after having travelled through a considerable portion of England and Scotland, and having carefully observed the farming, he has arrived at a very positive conclusion, that the produce of the land might be nearly doubled if our present system of agriculture were improved by the application of a greater amount of capital to the cultiva- tion of the land. A similar opinion has been expressed by Lord Derby.^ The correctness of these conclusions receives an important confirmation from the excellent farming which prevails in parts of Lincolnshire, where a system of tenant-right is maintained by custom. The prohibition b}^ law of the letting of land upon conditions which efiectually prevent the investment of an adequate amount of capital in agriculture, is to be defended on the ground, not that it will give protection to a special class, but that it will powerfully promote the general well-being of the nation. It can in fact be easily proved by a simple example that farmers are not more interested than are the labourers and the general public in obtaining for the cultivator greater security for the capital which he invests in the improvement of the land. Suppose, for instance, that a farmer has a capital of 6000/. employed in his business, and that he would be willing to increase this capital by 4000Z. if a measure of tenant-right gave him adequate security for the capital so invested. Considering the great amount of English capital which is embarked in foreign investments, it may be fairly assumed that the whole of this additional capital, or at any rate a considerable portion of it, is withdrawn from some foreign investment, and con- sequently so much more capital is employed in English farming without in any way diminishing the capital employed in other branches of English industry. The 4000Z. might, for instance, have been lent to the Russian 1 Much valuable information bearing on this and other points con- nected with English farming, is contained in the evidence given before the Koyal Commission on Agriculture which reported in 1882. Metayers, Cottiers, and economic aspects of Tenant-right. 229 government to construct a military railway ; and upon such an investment an interest of 5 per cent, would be yielded. It is usually supposed that a profit of 8 per cent, is a fair return upon capital employed in English farming. It is, therefore, evident that the gain to the farmer, from employing this 4000/. in his own business, would be represented by the difference between 5 per cent, and 8 per cent., which on 4000/. is 120/. a year. This, however is only a small portion of the whole advantage resulting from the change. The chief part of it will in reality be gained by the labourers and the general public. We have ascertained, after inquiry from practical farmers, that at least 600/. out of every 4000/. of additional capital employed in the manner described would be used in paying additional labourers ; the demand for labour would therefore pro tanto increase, and the wages of agricultural labourers would advance. We have also ascertained that the application of this additional capital would probably increase the produce of the land by at least 800/. a j^ear. This additional produce would be so much added to the food supplies of the country. Hence it follows that whereas the farmer gains 120/. a year, the labourers would have 600/. a year more distributed amongst them in wages, and the land would yield annually for the community 800/. worth of additional food. It is, moreover, to be borne in mind that a part of the additional capital would be employed in the purchase of implements, in the erection of new buildings, etc., and an important stimulus would thus be given to various branches of industry besides agriculture. In the example just given, it has been supposed that the additional capital employed in the cultivation of the land had been previously invested in a high class foreign security ; in order, however, to obtain an adequate idea of the economic gain which might result to the nation if greater security were given to capital invested in the cultivation of the land, it is necessary to bear in mind that at the very time when English land may be said to thirst for more capital as much as a dry soil thirsts for rain, vast sums of English capital are annually wasted in a countless number of worthless and fraudulent foreign investments, such as the loans of bankrupt and repudiating states. BOOK II. CH. VII. Benefits may ht conferred on entire community by remov- ing the dis- courage- ments now existing to the ex- tended apjdica- tion of capital to agricul- ture. Manual of Political Economy. [The considerations adduced in the foregoing pages, and the general consensus of opinion that the Agri- cultural Holdings Act of 1875 gave no adequate security to the tenants of agricultural land for the capital in- vested by them in their farms, led Parliament, in 1883, to pass another Act, which it was hoped, would give security to tenants for their capital and consequently lead to great agricultural improvements. This Act, known as the Tenants' Improvements Act, 1883, pro- vided that a tenant should, on leaving his farm, have a claim on his landlord for the value of unexhausted improvements. Although the Act in the opinion of so well known and skilful an agriculturalist as Mr. James Howard, then M.P. for Bedfordshire, contained important flaws, it was not foreseen that owing to a different set of causes, it would prove almost as inoperative as the Agricultural Holdings Act of 1875. Tenants have not been compensated for their improvements since the passing of the Act of 1883, because the severity of the agricultural depression owing to low prices and bad harvests, has checked the embarkation of new capital in agriculture far more powerfully than the Act of Parlia- ment could promote it. To show the severity and extent of this agricultural depression, it may be mentioned that a very careful estimate was made in 1883 of the annual value of the whole agricultural produce of the United Kingdom during that year. It amounted to £260,000,000, A similar calculation made by Mr. Howard for 1887, and calculated on the average of the three years 1885-6 and 7, shows a reduction to £200,000,000. This calculation includes not only farm products and live stock, but also the produce of market gardens, orchards and fruit grounds. In almost every department of agriculture, including the production of meat, the farmer is now met by foreign competition which has had the effect of very materially reducing prices. However greatly the country at large may have benefited by the consequent diminution in the cost of the necessaries of life, low prices have caused a great stagnation in agricultural industry, and are quite sufficient to account for the Act of 1883 having proved almost a dead letter.] CHAPTER YIII. NATIONAL EDUCATION AND OTHER REMEDIES FOR LOW WAGES. THE great mass of the labouring population, in even the most prosperous and civilized countries, is so poor, that a philanthropic sympathy is excited, and remedies are constantly being proposed with the object of improving the condition of the poor. The practical utility of Political Economy cannot be better illustrated than by applying its principles to test these remedies. When this is done many of them will prove to be im- practicable or illusory ; it will be shown that they not unfrequently cause the opposite effects to those which they are intended to produce, and increase the poverty they seek to alleviate. Strikes, trades'-unions, and co- operation are the remedies for low wages in which at the present time different sections of the labouring class place most faith. We shall therefore devote a separate chapter to the influence which may be produced by strikes, trades'-unions, and cooperative societies. There is also a growing tendency to rely, for the amelioration of the condition of the poor, upon various schemes which involve State aid and State machinery. Many of these assume the character of State socialism, and it will be desirable also to devote a separate chapter to this subject. The scheme known as the Nationalization of the land, has at times received a great deal of popular support. But before discussing these subjects, it will be well to consider some other remedies, in the efficacy of which many people have at different times expressed great confidence. Manual of Political Economy. Our own statute-book proves that the attempt has frequently been made to regulate wages by law. The most famous of these acts, which almost invariably were framed in the supposed interest of employers, is the Statute of Labourers passed in 1350. This act w^as in- tended to prevent the great rise in wages which had taken place in consequence of the scarcity of labour resulting from the devastations of the plague known as the Black Death. Not only did it fix the rate of wages but it also forbade the labourer to leave the parish where he lived in search of better paid employment. Laws which attempt to regulate wages are always either futile or mischievous. It will be necessary to examine several cases in order fully to elucidate the effects of legislative interference with wages. In the first place, suppose a general law were passed enacting that wages in every employment should be raised 20 per cent. If employers were unable to repay themselves for the higher wages they were compelled to give, by a rise in the price of commodities, it is evident that this advance in wages would simply represent so much taken away from profits. The immediate consequence of this would be a contraction of business. Capitalists would find it less profitable than heretofore to invest money in home industry. A larger portion of the national capital would be exported; a great advantage would be given to our foreign competitors in every branch of industry. They would undersell us even in our own markets ; our foreign and our home trade would be most seriously crippled. The result therefore of any attempt to secure a general advance in wages by law would be mischievous to the whole nation and especially disastrous to the labourers themselves. It is also to be borne in mind that if any temporary advantage which the labourers might gain by such an enforced rise in wages, should stimulate an increase of population, there would after a few years be an additional number of labourers competing for employment, and thus the condition of the working classes might ultimately be made considerably worse than it was before. It may be thought that these evil consequences would not ensue if a law to regulate wages only affected some National Education and other Remedies for Low Wages. 233 special trades, in which all are ready to admit that wages are too low. In order to examine a case which seems to be the most favourable for Government interference, let it be assumed that a law is passed declaring that no able-bodied agricultural labourer shall receive less than fifteen shillings a week. It can be urged that no man ought to receive less than this amount ; and that in fact, fifteen shillings a week is the minimum upon which a man with a family can maintain himself in full health and vigour. It is probable that employers would be benefited if the wages of the worst-paid labourers were raised. An opinion has in fact been already expressed, that farmers who only pay their labourers eleven or twelve shillings a week act as unwisely as if they were to give an insufficiency of food to their horses. Facts indisputably demonstrate that the labour which receives the lowest remuneration is often not the least costly. It would therefore seem that a law fixing the minimum of agricultural wages at fifteen shillings a week would not only confer a boon upon the labourers, but would inflict no loss upon their employers. Such might be the im- mediate effect of this legislation ; but unless this advance in wages were accompanied by a corresponding elevation in the social and moral condition of the labourer, earlier and more improvident marriages would indubitably ensue. An increase of population would thus be artificially stimulated ; a legislative discouragement would more- over be given to emigration ; in a few years the supply of labour would be unnaturally increased ; nothing would at the same time have occurred to augment the demand for labour. Hence the ultimate effect of legislative interference with wages, even in the most favourable case that can be supposed, would be to produce an excess in the supply of labour when compared with the demand for it ; or, in other words, there would soon be a large class unable to obtain employment who would have to be supported by parochial relief. It may be said that no one at the present time seriously proposes to ask Parliament to regulate wages. Such a request is now never directly made ; but demands are constantly put forward which plainly show that many still continue to be influenced by the same fallacies which BOOK II. CH. VIII. The conse- quences of Govern- ment inter- ference examined. Other forms oj legislative inter- ference loith wages. Manual of Political Economy. formerly misled those who considered it to be the duty of Governments to regulate wages. In some of the states of the American Union laws have been passed fixing a day's work at eight hours. Such a law would certainly find favour with some very intelligent workmen in England. A programme was put forward in 1882 by an influential section of French workmen, advocating a universal reduction of a day's work to eight hours,, and also that the State should fix the minimum of wages, varying this minimum each year with the cost of pro- visions.^ With regard to the proposal to place a legal limit upon the length of the day's work, it is with much plausibility argued that if this eight hours' law were passed, labourers would probably receive as much for eight hours' work as they do now for ten hours' work ; for it is said that the supply of labour would be diminished, and therefore its remuneration would be proportionately increased, if men were forbidden to work more than eight hours a day. In order to show the fallacy of this reasoning, it will only be necessary briefly to allude to some of the consequences which we have above shown would ensue if a law were passed to raise wages. Employers would find their profits diminish if they had to pay as much for eight hours' as for ten hours' work. This diminution of profits would cause capital to be withdrawn from business, and our industry would be crippled. It may, however, be argued, that employers could recompense themselves by charging a higher price for their commodities. It must not, however, be forgotten that each country has to carry on a keen contest with foreign competitors. England, therefore, would have to succumb to her foreign rivals, if the price of her products Avere thus artificially raised, and her trade would consequently be paralysed. But even supposing that she had nothing to fear from foreign competitors, and that a rise in general prices sufiicient to compensate employers for increased wages could be maintained, the additional remuneration received by the labourer would be nominal and not real ; if he obtained a greater number of shillings for a certain number of 1 See articles by M. de Laveleye in Fortnightly Revitto, April, 1883, and Contemporary Review, April, 1883. National Education and other Remedies for Low Wages. 235 hours' work, these shillings would be of less value to him than before ; for since general prices have risen they would possess less purchasing power. Many, no doubt, are induced to advocate legislative restrictions on the hours of labour, from a conviction that at the present time men are often over-worked, and that as much would be done if the hours of labour were shortened. If this opinion be correct, employers could of course afford to pay the same wages for a shorter day's work. Every one would rejoice if such a change were brought about ; for it is most desirable that the hours of toil should be as far as possible diminished, so that men may have more leisure for physical and mental enjoyment. Nothing is a greater reproach upon our vaunted material progress, and nothing more surely indicates the grave defects in our existing economic arrangements, than the fact that a vast augmentation of national wealth has hitherto done so little to make the labourer feel that his struggle for existence is less severe. But if it is true that as much work can be done in eight hours as in ten, employers should be made to recognise the circumstance, not by legislation, but by experience. It is not difficult to foresee the inconvenience and the countless anomalies that would arise if a law were passed on such a subject. Different kinds of labour vary greatly in severity. It can scarcely be seriously argued that when work is light as much can be done in eight liours as in ten. Some labour is so exhausting that, at the present, eight hours is considered a full day's work. For instance, in the Cornish copper mines, the men who work underground never work more than eight hours in a day ; whereas those who are employed in lighter work upon the surface labour foi- ten hours. It may be hoped that in future, workmen will have increased opportunities of showing what is the best time for a man to continue working in different employments. If co-operative institutions and industrial associations should extend, a larger number of labourers will be carrying on various kinds of business on their own account ; they could therefore ascertain from their own experience what, in each special case, is the proper length of a day's work. BOOK II. CH. VIII. The conse- quences of an eight hours' bill. It is possi- ble that in so7ne em- ployments labourers could do as much in eight hours as in ten. 236 Manual of Political Economy. No discovery would be more valuable in its social and economic aspects than if they could demonstrate that many of our labourers would be able to do more work if they received higher wages, or if they were employed for a smaller number of hours during each day. To provide work for the unemployed is a service which many think they have a much greater right to demand from the Government than the regulation of wages by law. We will trace some of the consequences that would ensue, if every applicant had a right, not only to demand work from the Govermnent, but to receive the ordinary wages. When such a privilege was first granted, it might prove very beneficial to the labouring classes, and would not probably be injurious to the general community; but if the privilege were continued, its ultimate effects would be most disastrous to the nation. If the Government were compelled to find work for the unemployed, it would be necessary to provide the money, either by loan, or by increased taxation. If the money were supplied by loan it would still be necessary to resort to increased taxation in order to provide the interest. So far as the money expended by the Govern- ment in giving work to the unemployed was obtained from capital previously invested in home industry, an influence would be brought into operation to lower general wages. In such a country as England however the experiment might continue for some time without leading to such a diminution of capital, because there might be a considerable increase of taxation without lessening the capital employed in home industry. There would be, therefore, in the first instance, a real gain for the working classes, if the wages paid to labourers by the Government were obtained, not from capital, but from a reduction in the personal expenditure of the tax- payers, or from a diminution in the amount of capital invested abroad. This benefit would not necessarily be confined to the labourers; for a Government may frequently increase the wealth of a country by applying a loan, or increased taxation, to public works, which would not be carried out by private enterprise. It therefore appears that, if a great number of labourers were thrown out of work by some sudden and National Education and other Remedies for Low Wages. 237 1 unavoidable cause, a Government may be justitied in promising, as a temporary expedient, to find work for the unemployed. Such a policy need not in any way cripple the productive resources of the country, because the money which is paid away by the Government in wages will not, in the first instance, be provided out of the capital of the nation. The most disastrous consequences, however, would ensue if the Government continued to give employment to all applicants ; for population has an indefinite power to increase ; and, therefore, no limit could be assigned to the numbers which Government would be compelled to employ, if it engaged to give work to all those who applied for it. If Government offered such assistance to the working classes, there can be no doubt that, in the present state of society, an increase in population would be so powerfully stimulated, that the number of those seeking employment would be constantly augmented ; at last the resources of the nation would be strained to the utmost to provide the wages which the Government would be called upon to pay. This is no imaginary supposition, for statistics have demonstrated that many among the lower classes of society marry with utter recklessness. If they can live when they first marry, they are perfectly contented; the additional expenses which a family entails are not thought of. If, therefore. Government found work for all applicants, marriages amongst the labouring classes would be so encouraged, that increase of popula- tion amongst them would no longer be restrained by any prudential checks. The State, therefore, could not continue to find work for the unemployed, unless a law were passed imposing severe checks upon the increase of population. The absolute necessity of this precaution is shown in our own system of Poor Laws. Every parish is bound to provide all those who are charged upon it with food and clothing sufficient to protect them against physical want. But those who claim this relief can be compelled to reside- in the workhouse, where they are subjected to certain restraints ; man and wife, for instance, unless they are very aged, are not permitted to live together; if this were allowed, union workhouses would become establishments for breeding hereditary BOOK II. CH. VIII. and micjlit justify such a measwe in case of temporary emergen- cies ; hut must he disastrous if the mea- sure luere permanent, hecause there wou/d be no check on popula- tion. 238 Manual of Political Economy. BOOK II. CH. VIII. Schemes of philan- thropy must be sufficient to raise the loiver classes to a different stage of comfort. paupers, and the poor-rate would soon absorb the whole wealth of a parish. It therefore appears that there is a fundamental difficulty connected with all attempts to improve the material condition of the poor by any permanent system of relief; for population is encouraged by granting pecuniary assistance to the poor, and conse- quently the money required for such a scheme of general relief would constantly absorb an increasing amount of wealth. This difficulty can only be met by placing some check upon population ; and it would be impossible for our present Poor-Law system to continue, if man and wife were permitted to live together in the union work- house. It is not here necessary to pursue this subject further ; as the influence exerted by the Poor Law upon the condition of the labourers will be considered in a separate chapter. In considering any scheme for improving the condition of the poor, one of the chief points to keep in view is to endeavour if possible to effect so marked an advance in their condition that they will not willingly sacrifice the higher standard of comfort which they have reached. If the improvement effected is only slight there is a danger that it will not be sufficiently valued to prevent its being- lost through some form of improvidence. Any scheme of general philanthropy cannot, therefore, be really efficient, unless it so decidedly improves the condition of the working classes, that they are lifted into a different stage of social and material comfort. Some of the lower classes marry recklessly, because they do not feel that they have any social position to maintain ; and they often live so miserably that they cannot be said to have an habitual standard of comfort, such as they will not willingly resign. Men in the middle and in the upper classes will not, as a general rule, marry, if they expect to be obliged to live in an inferior state of comfort, and to bring their children up in a lower social position. Similar prudential motives would control the labouring classes if their material condition could be once greatly improved. They would then possess, as the middle and upper classes do now, an habitual standard of comfort, which they would not willingly sacrifice by improvident marriages. The natural conclusion to be drawn from these remarks National Education and other Remedies for Low Wages. 239 is that no remedy for low wages can be really effectual, unless it increases the efficiency of labour and secures a social and moral improvement in the condition of the labourers themselves. This being the case it will not be difficult to show that national education will be the most powerful agency in effecting a real advance in the con- dition of the poor. It is most essential that this agency should be brought into operation, for many remedies for low wages, such as emigration, will produce no great or permanent effect, unless our people become better educated. If a large portion of the nation is permitted to remain in a state of ignorance, emigration and every other remedial measure will be powerless to remove the poverty of the very poor. Little need be said in reference to the increased effi- ciency which is given to labour by education. There is scarcely an industrial process which does not require a mental as well as a physical effort. It has until recently been generally assumed that agricultural operations vary so little from year to year, and that the implements with which the land is cultivated are so simple, that education is of little importance either to a farmer or to his labourers. But gradually the truth is beginning to dawn even upon farmers themselves, that agriculture, as much as any other industry, requires skill and intelligence; that in order to realise satisfactory profits costly and complicated implements must be used, and that these cannot with safety or advantage be entrusted to rude and ignorant workmen. Employers in every part of the country now complain that each year it is becoming more doubtful whether England will be able to main- tain the commercial supremacy she once possessed : the countries which are becoming her most formidable com- petitors are those which like Prussia and the United States have long since established a system of national education. Increased dexterity ; greater power of con- centration ; superior trustworthiness ; quickness in dis- covering a new industrial process and in learning how to use a new machine, are some of the many industrial advantages which the labourer whose mind has been trained generally possesses over one who has grown up in ignorance. 240 Manual of Political Economy. BOOK II. CH. VIII. indirect benefits of education. England cannot mainta in her com- mercial supremacy unless her labourers are edu- cated. The bur- dens of local taxa- tion icould be lighten- ed by edu- cation. A not less important influence is however indirectly exerted by education upon the efficiency of labour and upon the prosperity of industry. Ignorance almost in- variably implies premature employment. Millions in this country are unable to read and write, not because there were no schools within their reach when they were young ; but because their parents, either through ignorance, poverty, or selfishness, sent them to work at too early an age. Frequent allusion has been made to the deplorable ignorance of our rural labourers ; yet it is well known that there are few of them who were not at school when very young. A child, however, who is taken from school when eight or nine years old rapidly forgets almost the whole of the little he has learned.^ Widespread ignorance therefore is a sure indication that a considerable proportion of the population has had inflicted upon it the manifold evils which result from premature employment. Health is sacrificed, physical vigour is diminished, and strength often becomes ex- hausted at an age when men ought still to be in the prime of life. The mischief which thus results is not confined to the labourers themselves ; the whole com- munity suffers a severe pecuniary loss if the industrial efficiencjT^ of those by whom wealth is primarily produced is impaired. Many who are thus made prematurely old have to be maintained by parochial relief, at a time of life when they ought still to be productive labourers. In this way the burden of local taxation is seriously increased. Each year facts are coming to light which show that the competition which England has to carry on with foreign countries is more keen and more closely contested ; and the balance of advantage may not improbably ultimately turn in favour of the country which has the most intelligent and best educated workmen. Again, the complaint most frequently heard from English employers is, that industry is impeded by the heavy burdens of local taxation ; and that trades' -unions enforce upon employers regulations antagonistic to the principles of Political Economy. The importance to be attributed to 1 [Since this chapter was written the age at which children are allowed to leave school has been gradually raised to 12 years.] National Education and other Remedies for Low Wages. 241 this latter allegation will be considered in a subsequent chapter upon strikes and trades'-unions. It is here sufficient to observe, that if a child is allowed to grow up in ignorance, it can scarcely be expected that when he becomes a man he will possess the requisite knowledge to enable him to guide his actions in strict accordance with the principles of economic science. With regard however to the pecuniary burdens which the industry of this country has to bear, no one can doubt that this is an evil of great and increasing significance. It is almost needless to state that to crime and pauperism are in a great degree due the onerous charges which our industry is compelled to bear. Statistics indisputably prove that ignorance is the fruitful source of crime. The vast majority of convicted offenders are unable to read and write with facility.^ It may be said that drunken- ness is the most powerful promoter both of crime and pauperism ; but there is manifestly an intimate con- nection between intemperance and ignorance. Men will frequent the public-house if they are unable to derive enjoyment from rational pleasures ; for leisure, instead of being a blessing to them, hangs heavily on their hands. England has only enjoyed a system of national educa- tion since 1870, when the Elementary Education Act was passed ; and evidence is beginning to be afforded of a very gratifying diminution in crime, drunkenness and pauperism. [The number of persons convicted of crime, especially their proportion when compared with popu- lation, has diminished ; the consumption of spirits per head of the population, though still far larger than it need be, has been considerably reduced (see note on p. 14) ; pauperism, which averaged 4*7 per cent, of the population of England and Wales in the five years ending 1859, only averaged 2"5 in the five years ending ^[In a book published in 1887, "Jottings from Jail," by the Rev. J. Horsley, late chaplain of Clerkenwell Prison, the following passage occurs, p. 50. " I wish the school net were more diligently and success- fully cast. Of 78,416 persons apprehended in London in 1882, there were 8,426 males and 4,677 females who could neither read nor write, while 45,021 males and 17,665 females are described as being able to read only or read and write imperfectly." That is to say, out of 78,416 persons apprehended, 75,789 were either altogether uneducated, or very imperfectly educated.] BOOK II. CH. viir. Crime and pauperism vjould decrease. Since the passing of the Ele- mentary Act(\S70) there has already been a very marked improve- ment in the condition of the lahouriiuj classes. 242 Manual of Political Economy. 1905.] Although we should not be warranted in attri- buting the whole of this improvement to the introduction of national education, yet the facts just quoted afford strong ground for the hope that the diffusion of education over the whole of Great Britain is beginning to produce a marked influence upon its social and economic condition. In attempting to trace some of the economic conse- quences which are likely to result from an extension of education, particular importance ought we think to be attributed to the influence that may be exerted in increasing the efiiciency of labour. It is almost a truism to assert that an intelligent labourer is, as a general rule, a more productive workman than one who is unintelligent ; for instance, a man of active intelligence can adapt himself much more readily to changes in industrial processes which may be rendered necessary by improvements in machinery, than one who is sunk in stolid ignorance. It is also important to bear in mind the effect that may be exerted upon industrial efficiency by any improvement in the moral condition of the labourers. As an example, reference may be made to the fact that with each advance in the trust- worthiness of workmen a smaller amount has to be expended in the mere labour of superintendence ; and when work is done with greater activity and intelligence an improvement takes place in its quantity and quality. When this is the case the expenditure of a certain amount of capital and labour yields a larger return, and consequently there is an additional fund from which capital and labour can both obtain an extra reward. We shall have frequent occasion to point out how different are the consequences which ensue according to whether any additional remuneration labour may receive is taken from the employer's profits or is obtained from increased efficiency. In the former case the advan- tage to the labourer can, as a general rule, be only temporary, because with a diminution in profits the inducement to employ labour diminishes and the demand for it consequently declines. W^hen, however, higher wages result from the increased efficiency of labour, the advance in wages will be generally accompanied by a corresponding increase in profits, and consequently in this National Education and other Remedies Jor Loiv Wages. H3 case, instead of higher wages calling into existence a force to reduce wages, there will be an increased demand for labour consequent on the rise in the rate of profit. Although our remarks would lead to the conclusion that greater reliance is to be placed upon improved education than upon any other circumstance to secure a permanent advance in the labourer's condition, yet it would not be desirable to underrate the importance of many other agencies that may be brought into operation. A most beneficial influence, for instance, may be exerted, not only upon the working classes but upon the general industry of the country, by any improvement in the means of communication which leads to increased facilities being given for the migration or emigration of labour. Relief is thus not only given in those cases where the supply of labour is in excess of the demand, but the labour which is drafted away is often of inestimable value in developing the resources of those places where labour may be scarce. The United States, as well as Canada, Australia, and other colonies, owe much of their rapid increase in wealth and prosperity to the supply of labour they have received from Europe. These new countries not only aftbrd many advantages to labourers, but the supplies of cheap food which they furnish to a thickly-peopled country like England are of incalculable importance. In return for the supplies of food we receive from them, they take from us manufactured goods, and thus an exchange mutually beneficial takes place. In the chapter on cooperation, other agencies, such as building societies, will be referred to, as calculated to exert an important influence in improving the condition of the labouring classes. It is we think essential to avoid the mistake of placing too great reliance upon any single agency for effecting social improvement. What is required is simultaneously to bring into operation every available means by which the condition of the poor is likely to be ameliorated. If a marked advance can be secured in the condition of one generation, it is far less likely that there will be a relapse into the former state of things. It is perhaps not unnatural that the advocates of any particular scheme of social 244 Manual of Political Economy. improvement are apt to place too high an estimate upon the effects produced by its operation; and many instances might be quoted of the reaction of disappointment which ensues when it is found that the expectations first indulged in are not realised. As an example, it may be mentioned that some forty or fifty years ago extravagant hopes were formed of the benefits to be conferred on labourers by the system of allotment gardens. There can be no doubt that these allotments exert a most beneficial influence. They are not, how^ever, in them- selves, suflficient to raise the condition of a class. Too much was in fact expected from them. People became disappointed, and many high authorities on economic subjects have subsequently underrated their advantages. It has, for instance, been maintained that, in the case of our worst-paid labourers, an allotment only acts as a rate in aid of wages ; that these labourers obtain from their wages and their allotments only just sufficient to live upon ; and that, consequently, tlieir wages would have to be advanced if they were deprived of their allotments. In some cases tliere is a certain amount of truth in these allegations ; but as the labourers gradually improve, the produce obtained from an allotment must represent a real addition to wages. When allotments can be provided for town labourers, they not only supply much produce which w^ould be expensive to purchase, but they furnish a healthy and most desirable occupation for leisure time. The greatest care should therefore be taken to secure land for allotments. The enclosure act of 1845 specially provided that w^hen land was enclosed, some portion of it should be reserved, as allotments for the labouring poor. These provisions have been most shamefully ignored. In the year 1869 a bill w^as introduced into Parliament by the Government to enclose in difi'erent parts of the country 6,900 acres of land, and the whole amount reserved as allotments for the labouring poor was 6 acres. Sometimes it is urged, with the supposed object of benefiting the poor, that our remaining waste lands should be brought under cultivation. Those who make such a demand should remember that since the com- mencement of the eighteenth century nearly 5,000,000 acres of land have been enclosed. Evidence w^hich has National Education and other Remedies for Low Wages. 245 been repeatedly given before Parliamentary Committees, indisputably proves that in the case of almost all these enclosures the interests of the poor were systematically neglected. The land thus enclosed was sooner or later added to the large estates of neighbouring proprietors. Land over which the public could exercise many most valuable rights and privileges is, when enclosed, con- verted into private property. The opportunities for recreation and for enjoyment are not only greatly curtailed, but labourers who have been accustomed to graze a cow or feed poultry upon a common, never again have a similar opportunity when the common is enclosed. 'J'hose who possess rights of common are no doubt, in the tirst instance, compensated ; but the benefits of this compensation rarely extend beyond those who receive it. The small plot of land which is allotted to some poor commoner is almost certain to be sold ; whereas his rights of common constituted a property which could not be alienated. Formerly it was advantageous to bring unenclosed land under cultivation, but enclosures have now in almost every locality gone far enough. Every new proposal for destroying a common should be watched with the utmost jealousy. Such public lands as commons must each year become of more value and importance to the whole community, in a country where land is so scarce, and so eagerly sought after as it is in England. Many other remedies for improving the condition of the poor have from time to time excited public attention. The efficiency of these may be tested by considerations similar to those which have been mentioned in this chapter. The question of primary importance is this. Will the agency proposed exert an influence to make the poor rely upon self-help ? It will be shown in the chapter on State Socialism that there never was a time when it was more necessary to apply this test ; for in our own and other countries various proposals are receiving increasing support for carrying out social and economic schemes by funds supplied by the general body of the tax-payers. We believe that if the working classes are encouraged to seek this form of State assistance a most disastrous effect will be exerted in weakening the influence of self-help and self-reliance. BOOK II. CH. VIII. Labourers often niiffer severely through the en- closure of waste lands. No agency loill effect a lasting improve- ment in the condition of the poor, unless it makes them rely on self- helj). CHAPTER IX. TRADES'-UNJONS AND STRIKES. BOOK II. CU. IX. Trades'- unions have two objects ; that of ordinary friendly societies, and that of organisa- tions to influence wages. THE frequency of strikes has for a considerable period been a prominent feature in the social condition of England. The labouring classes would not be always ready to make such great sacrifices to support a strike, unless they believed that it was an efficient remedy for low wages. The subject demands a careful and dis- passionate consideration, for the prejudices of each party in the dispute are so strong, and the feelings excited so angry, that little is heai'd but useless recrimination and unreasoning partizanship. According to popular ideas, strikes are inseparably connected with trades'-unions, and it will therefore be necessary, in the first place, to settle the much-disputed question as to the purposes which trades'-unions are intended to fulfil. A royal commission, after an elaborate investigation, made a report in 1869 upon trades'-unions. From this report and other sources of information the following conclusions may be deduced : — Trades'-unions serve two distinct purposes. In the first place a trades'- union performs the ordinary functions of a friendly society. A member of one of these societies is assisted, when thrown out of work either by illness, or by the stagnation of trade. It is not here necessary further to discuss the effects of a trades' -union, when it is simply used for the charitable purposes just indicated. But a trades'-union is always something more than a friendly society; its chief purpose is generally to organise the workmen of a particular trade into a combination, sufficiently powerful to enforce various regulations, both upon masters and men. Trades -Unions and Strikes. 247 The promoters of trades'-unions seem distinctly to understand that the most etiective way to raise the wages in any ^^articular trade, is to restrict the number of labourers who are employed in it. Consequently many of the rules of these societies are framed with the specific object of artificially limiting the supply of labour. Thus some trades'-unions will not permit a master work- man to take more than a certain number of apprentices. In the hat trade tlie number is limited to two. If the union has sufficient power to enforce obedience to its mandates, any restriction which limits the number of those brought up to the trade must exert a direct influence to raise the wages which are paid in this particular branch of industry. For suppose that those who are engaged in the manufacture of hats were freely permitted to take as many apprentices as they pleased, the number of journeymen hatters in the country might be very much increased. Let it be assumed that there would be twenty per cent, more journeymen hatters than there are now ; under these circumstances, there would be a greater number of labourers competing for employment in the hat trade, and their wages would consequently be reduced. The saving resulting from the lower wages will ultimately benefit those who purchase hats, because the price of hats would be reduced. The hat manufacturers would not be able to appropriate to themselves the savings which would accrue from the payment of a less amount in wages, because, when the cost of producing any commodity is reduced, its price is sure to be lowered in a corresponding degree, since people engaged in the same trade compete against each other for as large an amount of business as possible ; and in their anxiety to undersell one another, they ofi'er their commodities at a price just sufiiciently in excess of the cost of production to leave them the profit ordinarily realised in trade. It therefore appears, that those who purchase any commodity are compelled to pay a higher price for it, and that the wages of the labourers engaged in its manufacture are artificially raised, when restrictions are imposed which limit the number of those who are permitted to be employed in the particular trade. BOOK II. CH. IX. Trades'- unions sometimes attempt to raise the wages of a parti- cular trade by limiting the number of work- men. 248 Manual of Political Economy. These restrictions can on no grounds be defended ; in the first place, any such interference with the distribu- tion of the labour of the country, amongst its various branches of industry, introduces many most mischievous inequalities. The labour of which some employments are compulsorily deprived is thrown, as a burdensome surplus, upon other branches of industry ; and the wages in some employments are consequently as much depressed as the wages in others are raised. The members of a trades'- union, when they usurp such powers, virtually confiscate to their own adxantage a portion of the wages which would be paid to other classes of labourers, if industry were unshackled by such arbitrary rules. Although this injustice is striking, yet there still remains to be described a much greater wrong, which is inflicted upon those who are prevented by a trades'-union from following the employment they would select, if left to their own free choice. There is no right to which all men and women have a more indefeasible claim, than absolute freedom to follow those pursuits in which they think they are best quali- fied to succeed. The laws of a free country ought to secure to every one this right ; for, if it is denied, individual freedom at once ceases to exist. Such a right is denied, if a person is excluded by a trades'- union from following a particular employment. It is no excuse for the members of the union to say — Our trade is already overcrowded, wages are too low in it, and it would be disastrous if they should be still farther reduced by an increase in the number of those applying for employment. Every man has a right to judge of such things for himself ; he may wish to engage in the trade because he has a particular capacity for it, and if he is arbitrarily driven to some other employment, he is deprived of the advantages of the skill with which nature has endowed him. It would therefore seem, that trades'-unions may inflict upon labourers great social tyranny ; it is not the labourers who alone suffer, for every class of the community is more or less injuriously affected. These trades'-unions may imperil the very existence of an industry in any particular district: for the various restrictions imposed upon employers may so Trades' -Unions and Strikes. 249 much increase the cost of a commodity, as to render it impossible for them to compete against others in the same trade, whose operations are not similarly impeded. Examples may be quoted which prove that some branches of industry have been driven from certain localities by trades'-unions. These societies have long been very powerful in Birmingham, and their efforts were at one time chiefly directed against the introduction of machinery. These efforts were in a great degree successful, and consequently, when steam began to be generally applied, those trades which required much machinery settled in other localities, and the manufac- tures of Birmingham are to this day in a great degree confined to those branches of industry which require comparatively a much greater amount of manual labour than of machinery. It may perhaps be asked : — How can these trade societies exercise the influence they do, when everyone is aware that the coercion they practise is not based on any legal sanction ? No one can doubt that the members of a trades'-union commit a criminal act, if they attempt, in the slightest degree, to interfere with any individual who does not belong to their society. It would therefore appear that social terrorism is the source of their power ; for although such outrages are exceptional, yet a non-union man is subjected to so many petty annoyances that his life not unfrequently becomes a burden to him ; and employers are coerced in a similar manner, if they do anything contrary to the rules of a trades'-union. Thus if a master, engaged in some business such as wool-stapling, where the trade society is all-powerful, were to employ non-society men, all his labourers who belonged to the trades'-union would at once refuse to work for him, and he would' in this way be subject to great loss and inconvenience. It is not, however, these regulations concerning the internal arrangements of a trade, which have caused so much public attention to be directed towards trades'- unions ; the interest excited in these societies has been in a great degree due to their connection with strikes. The trades'-unions have, in fact, endeavoured to regulate wages, and they apply their organisation to compel BOOK II. t'H. IX. and drive away trade : instance of Birm- ingham. The con- nection between trades'- unions and strikes is intimate, though not necessary. 250 Manual of Political Economy. employers to agree to their demands. If, for instance, it is proposed to reduce the wages in some particular branch of industry where the majority of the men employed belong to a trade society, then, if the leaders of the society consider that the reduction ought not to be made, they issue an order that work should be discontinued rather than accept the reduction. If the reduction is still insisted on by the employer, the immediate consequence is a turn-out of the workmen, or, in other words, a strike. Now it is evident that a trades'-union need not necessarily have the slightest connection with a strike ; even if trades'- unions did not exist, strikes might still be of frequent occurrence. A strike implies a combination amongst a large number of workmen, and such a combination is not possible unless a considerable majority of those engaged in any trade agree to act in unison. Such combined action as a strike requires cannot therefore exist unless the workmen submit to be governed by an organisation. The trades'- unions supply this organisation, without which there cannot be complete unity of action. It is quite possible, however, to conceive that a trades'-union may prevent a strike, and many of these societies have, as yet, never been connected with a strike; still, as long as a great number of workmen in this country are warm advocates of the system of strikes, it is quite certain that trades'- unions and strikes will be intimately connected together. Since a strike requires combination, we have to in- quire, when investigating the efiects of strikes, whether workmen by combining can obtain higher wages. It can scarcely be disputed that they possess a perfect right to combine. The right may be, and has been, abused ; then, of course, it ceases to be justifiable ; but if employers •are freely permitted to invest their capital to the greatest possible advantage, the employed may equally claim to be allowed to obtain the highest wages they can for their labour. If, therefore, any number of them choose to form themselves into a combination, and refuse to work for the wages which are offered to them, they are as perfectly justified in doing this as capitalists are when they refuse to embark their capital because the invest- ment offered is not sufficiently remunerative. Workmen, Trades' -Unions and Strikes. 251 however, do an illegal and most mischievous act, which ought to be severely punished, if they attempt to sustain the combination by force, or if they coerce individuals to join it by threatening to subject those who keep aloof either to annoyance or personal violence. Workmen have sometimes maintained their combinations, not only by acts of violence, but also by various kinds of social terrorism. Justice obviously demands that the blame which attaches to such actions should not be borne by those who never abuse the power of combination. An increasing number of the intelligent artisans of this country each year become more decided advocates of trades'-unions. The influence of these societies is rapidly extending in other countries ; it is therefore very im- portant to ascertain the effect exerted upon wages and upon the general condition of the labourer by a legitimate use of the power of combination. It is interesting to remark, as pointed out in " The Economics of Industry" (p. 189) by Mr. and Mrs. Marshall, that when Trades'-Unions first began to be formed at the beginning of this century, they directed their efforts mainly to obtaining the revival of certain restrictions in trade, such as a limitation in the number of apprentices, which had been framed in the time of Mary and Elizabeth. Gradually, however, instead of asking for Government interference, trades'-unionists have so successfully directed their efforts to free them- selves from Government interference, that now the right of combination has been fully recognised and workmen are freely permitted to combine in any manner which would be lawful to other persons. When investigating the effect of trades'-unions on wages, it is essential to keep clearly in view the funda- mental distinction between the permanent and temporary consequences which arise from the operation of an economic agency. In every branch of industry there is a certain position of equilibrium to which profits and wages have a tendency to approximate. A long time, however, may be required to restore wages and profits to this position of equilibrium. Thus the woollen trade cannot permanently continue very much more profitable than the cotton trade, because the competition of capital BOOK II. CH. IX. The r/reat majority of intelligent artisans are in favour of trades^ - unions. The effect of competi- tion is gra- dual not immediate. ■252 Manual of Political Economy. BOOK II. CH. IX. Under- some cir- citmstances the force of competi- tion in neutral- ised for cm indefi- nitely loiKj period. If competi- tion acted instan- taneously, combina- tion would hare no effect on profits and wages. will gradually induce capital to be invested in the one trade and withdrawn from the other. Competition cannot exercise this equalising force instantaneously ; it takes, for instance, a considerable time to erect new woollen mills, and there will be alwaj^s much hesitation before men will relinquish such a business as the cotton trade, to which they have been accustomed. Hence, one branch of manufacture may continue for many years exceptionally prosperous, whilst in some other business there may be a corresponding depression. Competition exerts a similar equalising influence upon wages. If wages in one branch of industry are excep- tionally high, whilst in some other they are exceptionally low, labour will be gradually attracted to the business in which the high remuneration is given, and will be withdrawn from the business in which the remuneration is less than the average. But here again time is required for carrying out this equalising process. Labourers will rather submit to some temporary loss than cliangc their occupation. A considerable expense will also be incurred, if a man has to change his residence in order to obtain a new employment. In some cases it happens that such obstacles as these neutralise the force of competition, not temporarily, but for an indeflnitely long period. For instance, the wages of agricultural labourers in some localities are permanently depressed below the average rate. The reason of this is, that the force which competition would exert to advance these wages is neutralised by the labourer being prevented through ignorance and poverty from resorting to those localities where wages are higher. These general remarks enable us more exactly to determine the influence which can be exerted upon the condition of the labourers by the power of combination. If competition acted instantaneously, or in other words, if- profits and wages in every branch of industry were always at their natural rate, it might be at once concluded that the power of combination could exercise no effect either upon profits or upon wages. Suppose, for instance, that workmen by resorting to a strike obtained an advance in wages. This advance would be of no benefit to them, if the competition of other Trades -Unions and Strikes. 253 labourers, anxious to participate in this advance, could immediately produce its equalising effect. No conclusion of any practical value can be arrived at on the subject unless the mode in which competition acts is kept steadily in mind. In all those brandies of industry in which the competition of labour and capital freely acts there cannot be secured any permanent increase in profits or wages, by a combination either of employers or employed. It has, however, been previously remarked that in some cases the equalising effect of competition is neutralised through an indefinitely long period. This occurs with regard to agriculture, in those counties where wages are the lowest. When a branch of industry is in this position, there can be no doubt that labourers can by combining secure a permanent advance in wages. Suppose, for instance, that when the Dorsetshire labourers were earning only ten shillings a week they received so much extraneous assistance that they were able to maintain a prolonged strike. The farmers, under such circumstances, would almost inevitably have been vanquished in the struggle. They would be ruined if their land remained uncultivated, and since the wages previously paid were mininmm wages, it would be im- possible to obtain labour from other localities unless a higher remuneration were offered for it. Tlie power of combination has, within the last few years, since the establishment of agricultural labourers' unions, produced some effect in raising the wages of our worst paid agricultural labourers. Wlien these combinations become more sfeneral, various other ao;encies, such as migration and emigration, will be brought into operation to raise wages. It now remains to investigate the influence which a power of combination may exercise upon wages and profits, during the time which always elapses, before competition can produce its equalising effect. When men labour simply for hire, it is manifest that the adjustment of wages is analogous to the bargaining which is carried on by the buyer and seller of a com- modity. Although it is, no doubt, true, that the price, at which a commodity is sold, approximates to the cost at which it can be produced and brought to market, yet the price at which it is actually sold is often to a BOOK II. CH. IX. Thr effect of a trades'- union upon the wages of agricul- tural la- bourers described. Wages are fixed in the same way as a bargain, carried on by the buyer and seller of a commodity. 254 Manual of Political Economy. considerable extent influenced by various circumstances which may happen to place the buyer in either a better or worse position for bargaining than the seller. In a similar way wages ultimately depend upon the amount of capital and upon the number of labourers; yet the wages which, at any time, are paid in a certain trade are to a considerable extent influenced b}^ the relative advantages possessed by employers and employed for carrying on the bargaining by which wages are adjusted. The question therefore arises, Will workmen by com- bining, or by showing that they have the power to combine, improve their position in carrying on this bargain ? It is well known that employers in various trades fre- quently act in combination. For instance, the iron-masters in the midland counties hold quarterly meetings at which a scale of wages and prices is fixed. Every iron-master considers himself bound to conduct his trade in strict accordance with the scale agreed upon. If any one should disobey the decision of the meeting, he would subject himself, not indeed to personal violence, but to a social terrorism very analogous to that by which trades'-unionists so frequently maintain their organisations. The recalci- trant iron-master would be abused by his fellow-employers, and very probably an effort would be made to ruin one whose conduct was supposed to be injurious to the inter- ests of his class. It is impossible fully to understand the effects resulting from combinations of workmen unless it is remembered that similar combinations are formed by their employers. Let it be supposed that the iron-masters at one of their meetings decide, in consequence of a prosperous state of trade, to advance wages 10 per cent. The iron-masters, who like other people are liable to mistakes, may not have made such an advance in wages as the state of the trade would fairly admit. Wages might, perhaps, have been raised 20 per cent., without unduly trenching upon profits. A labovirer, impressed with the conviction that an advance of 10 per cent, is not sufiicient, demands something more from his employer. The employer, who has entered into a compact with others of his class, as to the wages which shall be paid, must at once feel the advantageous position Trades -Unions and Strikes. 255 he occupies in resisting the demands that the labourers make upon him, if they have no organisation for com- bined action. He knows that if any of them refuse to work for him, they will be unable to obtain higher wages from other employers in the locality ; because by previous agreement a uniform rate of wages prevails. A labourer has seldom saved sufficient to be able to maintain himself for any length of time without work ; he makes a great sacrifice if he seeks another occupation to which he is un- accustomed, and especially at a time when his own trade happens to be exceptionally prosperous. It therefore ap- pears, that the bargaining which often goes on in adjust- ing wages, implies a struggle, or a conflict of effort between employers and employed; in this conflict a great advantage will be possessed by those who can act in concert, over those who simply act as isolated individuals. The truth of this will be more distinctly perceived by considering what would occur if, in the case just described, the labour- ers combined to make a demand for a greater advance in wages. Assume that in the iron trade there is a powerful trades'-union ; that all the labourers in the district belong to it, and that they are as well organised as their employ- ers. The representatives of this trades'-union would feel that they were placed in a position of equality with their employers, when making a demand for higher wages ; the employer also would know that as a last resource a strike would be agreed upon. This would bring business to a standstill, and thus trade would be suspended when it was very prosperous, and when exceptionally high profits were being realised. The loss and inconvenience thus in- flicted upon employers would be a strong inducement to them to yield to the demand of their labourers if it could be fairly conceded. Each party to the bargain would thus be placed in a position of equality when arranging its terms. In the examj)le just investigated it has been implied that the employers do not, in the first instance, oflTer an adequate advance in wages. It often, however, happens that the labourers err on their side, and insist upon wages which cannot be fairly conceded. The only security against such errors is the serious loss inflicted both on masters and men by trade disputes. It is difficult adequately to BOOK II. CH. IX. Bargain- imj implies an antago- nism of interest. Another example. If the em- ployed do not com- bine, they are not in a position of equality with their emjjloyers. 256 Manual of Political Economy. BOOK II. CH. IX. The to^s described which a strike in- Jlicts both on employ- ee's and employed. Strikes arc inseparable from our present economic system, because, as long as ' ivages are settled in the same way as a bargain, it must often hapjien that one party will refuse to accept the price offer- ed by the other. estimate the loss which is caused to each party by such a suspension of business. The employers not only have a vast amount of capital lying idle, but a very considerable portion of their trade may permanently pass away to other localities. When business is recommenced many of their former labourers have left the district, and their places have to be occupied by inferior workmen. During a strike labourers often endure the most severe hardships ; the savings of many years are spent, and so acute is the dis- tress, that even household furniture has sometimes to be sold. All this suffering is aggi-avated by the losses inflicted on the employers, because if a great amount of capital is sacrificed in the conflict, less will remain to be distributed in wages when work is resumed. There can be no doubt that in the majority of strikes the masters have been sufficiently powerful not to concede the demands of their workmen. Not only do the superior resources of the employer enable him to carry on the struggle for a longer period, l>ut workmen are generally such unskilled tacticians that they usually strike, not to secure an advance in wages when trade is prosperous, but to prevent a reduction when trade is depressed. In times of depression a temporary suspension of business may very possibly be rather an advantage than a loss to employers. Consequently at such a time the prospect of a strike im- plies by no means so formidable a threat as when trade is active. From the tenor of these remarks it appears that strikes are inseparably associated with our present economic system. As long as the relations between employers and employed continue to be analogous to those existing be- tween the buyer and seller of a commodity, it must often happen that the one party will refuse to accept the price which is offered by the other for labour ; if the refusal is persisted in, a strike inevitably ensues. When strikes are regarded from this point of view, it is as hopeless to expect that legislation can prevent them, as it is to suppose that merchants could be compelled to sell their goods if an in- adequate price were offered for them. Something may no doubt be done by conciliation and arbitration, either to obviate or to render less frequent the trade disputes arising between employers and employed. A master who exhibits Trades -Unions and Strikes. 257 great personal interest in his workmen's welfare, is gene- rally able amicably to settle any difference which arises in his business upon a question of wages. Experience has also shown that the establishment of courts of arbitration often enables trade disputes to be arranged, without recourse being had to the disastrous expedient of a strike. The efficiency of these courts depends to a great extent upon making a wise selection when choosing an Umpire. It is usual for the employers and employed to have an equal number of representatives in these courts of arbitra- tion. The ultimate decision has therefore sometimes to be made by the Umpire or Referee, who must be a person absolutely unsuspected of any bias towards either party in the dispute. Such expedients as personal conciliation and courts of arbitration, although exerting a most useful influence, do not provide a completely efficient remedy for strikes. These disputes must be regarded as the natural outgrowth of the existing relations between employers and employed. In order to obtain a complete remedy for strikes, it will be necessary to remove the antagonism of interest now existing between employers and employed. Some plan must be adopted, which will make masters and workmen feel that they have an identity of interest. It is no doubt true that all those who are engaged in any business have a common interest in its prosperity ; but the grave defect connected with our present economic arrangements is that the amount of advantage or disadvantage which is derived from prosperous or adverse trade by employers and employed is not arranged according to any definite plan, but is too frequently settled in an angry struggle of rival pecuniary interests. Various schemes have already been tried with considerable success, which correct the defect just alluded to, and which introduce a system of co- partnership or profit sharing between masters and work- men.^ These schemes are based upon the general principle, that labourers should not work simply for hire, but should participate in the profits which are realised by their in- dustry. It has been previously shown that the power of ^ Full and detailed information on this subject is to be found in Mr. Sedley Taylor's book "Profit sharing between Capital and Labour." Kegan Paul. R BOOK II. CH. IX. Concilia- tion and arbitra- tion, though ■useful, do not remove the cause of these disputes. Strikes can only be effectually prevented by remov- ing the an- tagonism of interest betiveen employers and employed. This can be effected by copart- nerships of industry. The prin- ciple of copartner- ship de- fined. 258 Manual of Political Economy. combination enables workmen more surely to participate in the profits realised in times of active trade. From this it would appear that the power of combination establishes, as it were by force, a copartnership between employers and employed. If this fact should obtain general recognition it may be anticipated that the principle of copartnership will be generally introduced into our industry. In order to show that there are no practical difficulties opposing its intro- duction, which cannot bt, ultimately surmounted, we will proceed to describe some of the cases in which it has been applied. One of the first and most valuable experiments was made by M. Leclaire, a house decorator in Paris. The experiment, though well known, is particularly important, because its results have been verified by the most accurate testimony. In 1840 M. Leclaire employed about 300 workmen, and the carelessness and apathy of his men subjected him to constant loss and annoyance. He therefore resolved that he would endeavour to make the labour of his men more efficient by giving them some pecuniary interest in the work in which they were employed. He calculated that each workman by putting more zeal into his work could, without prolonging the hours of labour, produce surplus work equal in value to 6d. a day; and also that an additional 2^d. a day could be saved by each workman if he exercised greater care and economy in the use of tools and materials. In 1842, acting on this calculation, he assembled his men together and told them that he proposed to give them the whole of this extra 8hd. a day, or 11^. a year, if they would earn it, and he overcame the doubt and suspicion with which his proposition was at first regarded by dividing there and then with the 44 men, who, he reckoned, would be entitled to participate, the profits of the preceding year. From this moment the success of the scheme dates. The workmen were convinced of Leclaire's sincerity, and the scheme, which IS based upon the extra productiveness given to labour by the principle of profit sharing, has been a most remarkable success. A mutual aid society was started ni connection with it which gives all its members Trades -Unions and Strikes. pensions and annuities when they are disabled by age or sickness. The success of the system originated by Leclaire is strikingly manifested by the fact that it was so organised as to be independent of the fostering care of its author. Leclaire died in 1872 but the "Maison Leclaire" has more than maintained its prosperity since that date ; the business of the society and the share of profits allotted to labour has steadily increased. As another example, it may be mentioned that the Paris and Orleans Railway Company distribute a certain portion of the profits realised amongst the working staff of the railway, and [for many years the various plans of profit sharing adopted by the company worked admirably ; they produced on the part of the employes a remarkable degree of zeal and carefulness, arising from the conviction that the interests of the company were identical with their own. Between 1844 and 1882, the entire sum allotted to labour out of the profits of the company amounted to 2,583,378/.. Since 1868, however, the company has had to contend with a diminishing rate of profit, owing mainly to the fusion with other less productive lines of railway. The shareholders have availed themselves of the power which exists in France of appealing for the State guarantee ; under these circumstances there has been no surplus available as a ready-money bonus for labour, and the only advantage now enjoyed by the employes of the Paris and Orleans railway is that a sum equal to 10 per cent, on their annual earnings is allowed to rank as one of the working expenses of the railway, and is paid into the State Pension office, with the object of providing annuities for old age ^]. The fact that the late M. Leclaire and others have been abundantly recompensed for the share of profits allotted to workmen, deserves particular attention. It shows that copartnership does not require from the employer any sacrifice on behalf of his workmen, but, on the contrary, that both are equally benefited. The eflaciency of labour and capital must evidently be greatly increased, by improving the relations between employers ^See "Profit sharing between Labour and Capital" by Mr. Sedley Taylor, pp. 77—86. 26o Manual of Political Economy. BOOK II. CH. IX. Some of the col- lateral ad- vantages of copart - nership. and employed; and when labour and capital become more efficient, there is more to distribute both in wages and profits. The error is not unfrequently committed of supposing that the share of profits allotted to labour represents so much abstracted from the returns of the capitalists. The Royal Commissioners, who in 1869 reported upon trades'-unions, failed to appreciate the advantages resulting from copartnership, because they assumed that the share of profits received by the labourer was so much taken from his employer. If this were so, no particular benefit could attach to the system, because there would be no identity of interest established, if what was gained by the labourer were lost by the capitalists. The fundamental advantage of these schemes arises from the circumstance that the benefit they confer is mutual ; the share of profits received by the labourer is a measure of the gain secured by the employer, as a consequence of the additional efiicienc}^ given to labour and capital by introducing harmony, where before there was antagonism and rivalry of interest. Some idea may be formed of the enormous saving which might thus accrue. Not only would the loss inflicted on industry by strikes and lockouts be avoided, but a vast amount of waste would be obviated. Employers constantly complain of the loss they sustain fi'om the listlessness and apathy of their workmen. A heavy outlay has to be incurred in overlooking labourers, in order to see that work is not shirked. In some branches of industry it is impossible to obtain anything like an adequate supervision ; the labour is too much dispersed. This is particularly the case with agi'iculture, and to such a business copartnership could be applied with maximum advantage. It can be confidently asserted that a farmer would largely increase his own profits if he consented to allot to his labourers some portion of his profits. After paying them the current wages, and setting aside a fair amount, as interest upon capital and as remuneration for his labour of superintendence, he might agree to distribute amongst his labourers a portion, say one half, of any extra profits that might be realised. Each labourer's share of this bonus being determined by the aggregate amount of wages he had earned, the most Trades -Unions and Strikes. would consequently be obtained by those who were the best labourers. Such an arrangement would powerfully stimulate the industrial energy of the labourer who is now proverbially slow in his movements and apathetic in his work because he has no inducement, except when engaged in piece work, to exert himself more than he is absolutely obliged. Other plans of industrial partnership have been adopted which secure a more complete union between capital and labour. During the last few years the practice has been rapidly extending not only of allotting to workmen a share in profits, but also of enabling them to invest capital in the business in which they are employed. When the great carpet manufactory^ of Messrs. Crossley of Halifax was converted into a joint stock company, one-fourth of the shares were prefer- entially offered to the workmen engaged in the business. This arrangement, by enabling the workmen to become part owners of the concern, gave them a far more direct interest in the prosperity of the business than if they had been employed as ordinary labourers. Another very interesting experiment was carried out by the Messrs. Briggs, at their collieries at Methley, near Leeds. In this instance the workmen not only had an opportunity of purchasing shares in the company, but after a profit of 10 per cent, had been realised on capital, one half of the surplus profits was distributed amongst the labourers as a bonus. Every workman was thus given an innnediate interest in the success of the business. For many years this experiment was carried out with admirable success. Trade disputes, which had before been of frequent occurrence, altogether ceased, and the workmen were stimulated to increased exertions by the prospect of securing to themselves a share of the profits realised. The unprecedented rise in the price of coal, which took place in 1872, brought such sudden prosperity to coal- mining that it unhappily disturbed the harmonious relations between workmen and employers at Methley. A dispute arose upon the extent to which capital and labour should respectively participate in this extra profit, and the copartnership principle was unfortunately abandoned. It is obvious from what occurred at Methley that copartnership is likely to be carried out with the 262 Manual of Political Economy. The pro- (jress of copartner- ■ships ivill be fjreatly promoted by national education. best chance of success in those branches of industry which are not liable to great and sudden fluctuations in prosperity. These considerations lead to the conclusion that the system could be very advantageously applied in agriculture. A very interesting experiment of the kind was tried a few years since with marked success, by the late Lord George Manners, on a farm which he cultivated on his estate near Newmarket. The plan which he adopted was very simple, and resembled in all essentials the method which was carried out by M. Leclaire in Paris. The labourers on the farm received the ordinary wages which were current in the district ; but it was agreed that if through extra exertion, or greater skill on their part, extra proHts were realised, a portion of these profits should be distributed among them as a bonus on their labour. Lord George Manners unfortunately died before this experiment had been long in operation ; but he spoke confidently of its permanent success, and affirmed that it would prove alike advantageous to employer and employed. It may be hoped that these copartnerships will so rapidly extend as to fundamentally change the economic relations now existing between employers and employed. There can be no doubt, as was remarked in the last chapter, that the movement will be powerfully promoted by national education ; for all these schemes which have been described require men to repose a certain amount of trust in each other ; distrust and suspicion are always prominent characteristics of a low state of intellectual development. Ultimately it may be hoped that there will be so much moral and social advancement as to enable a perfect union between capital and labour to be established : this is secured when labourers supply all the capital which is required to sustain the industry in which they are engaged. When this is accomplished there is cooperation in its highest form ; the subject of cooperation is of so much importance that it w^ill be necessary to devote a separate chapter to its consideration. CHAPTER X. COOPERATION. WE have had frequent occasion to refer to the fact that the capital and labour which industry requires are in this, and in most other countries, generally sup- plied by two distinct classes, employers and employed. Industry is said to be carried on upon the cooperative principle when these two classes are merged into one, and when the capital which is needed for the production and distribution of wealth is supplied by those who pro- vide the requisite labour. Thus a cotton manufactory would be converted into a purely cooperative undertaking, if the operatives employed in it were able to subscribe a sufficient amount amongst them to purchase the manu- factory and to carry on the business on their own account. Again, an ordinary retail shop would become cooperative if the premises and stock-in-trade were owned by those who served in the shop, by the porters, and by others who were engaged in carrying on the business. The great majority, however, of the societies which are known in this country as cooperative, differ essentially both from the cooperative manufactory and the cooperative retail shop which have been just described. Cooperation has hitherto in this country been seldom applied to the pro- duction of wealth. Probably at least nine-tenths of the existing cooperative societies carry on those ordinary retail businesses the function of which is to distribute rather than produce wealth. These distributive societies, which are now generally known as cooperative stores, are wanting in the most essential characteristic of co- operation, for they do not necessarily establish a union, or, as we have described it, a merging of capital and Manual of Political Economy. labour. The capital in these stores is owned by, and the profits realised upon it are distributed amongst, the customers and the shareholders, and in many instances those who supply the labour obtain no share of profits. In thus pointing out that the title cooperative is now given to many trading concerns which are not conducted upon strictly cooperative principles, it must not be supposed that we underrate the great benefit which cooperation, even applied in this modified form, has conferred not only upo:i the working classes, but also upon the general community. The cooperative move- ment is no longer in its infancy, and in tracing its rapid development, we shall not only endeavour to describe the great advantages which have already resulted from it, but we shall also attempt to explain why cooperation may probably be more confidently relied upon than any other economic agency, to eflfect a marked and permanent improvement in the social and industrial condition of the country. One of the earliest and most successful of the co- operative stores in this country was established about the middle of the nineteenth century, and it had an origin so humble as at the time scarcely to attract any notice. It appears that in the year 1844, there was great depression in the flannel trade at Rochdale, and as the wages of the weavers were much reduced, the fact seems to have impressed itself upon some of them, that their scanty earnings did npt go so far as they might, because the articles sold to them in the ordinary retail shops were dear and often much adulterated. Twenty - eight of these poor weavers accordingly agreed to club together a small sum in order to purchase some tea and sugar from a wholesale shop. After they had done so, each one of their number was supplied with tea and sugar from this common stock, paying ready money for it, and giving the same price for it as they had been charged at the shops. They did not expect to secure any considerable profit ; the object they had in view was not so much to obtain a good investment as to avoid purchasing dear and adulterated articles. But they found that a very large profit had been realised. The great advantage of the plan became self-evident, for not Cooperation. 265 only were they provided with a lucrative investment for their savings, but they obtained unadulterated tea and sugar at the same price as they had been previously obliged to pay for these same articles when their quality was deteriorated by all kinds of adulteration. A fresh stock of tea and sugar was, of course, purchased. Other labourers were quickly attracted to join in the under- takinp;, and subscribe their saving-s. In lcS56 this society, now become famous as the Rochdale Pioneers, possessed a capital of about 12,900^. The business was not long restricted to articles of grocery ; bread, meat, and clothing were all sold on the same plan. Their capital so rapidly increased, that they were soon enabled to erect expensive steam Hour-mills ; and a supply of pure bread was thus ensured. During many years, this Pioneers' Society has attracted frequent public attention ; for it has gradually grown into a vast commercial institution, embracing a great variety of trades. The society occupied, in 190(3, forty branch establishments in Rochdale, besides its central building which was erected in 1867 at a cost of nearly 14,000/. The share capital of the stores so rapidly increased that it possesses far more than sufficient to carry on its business. [In 1906 the Pioneers' Society had 13,333 members ; a share and loan capital of 305,244?. ; and an annual trade of 292,592?. After paying a small fixed dividend upon capital the remaining profits are dis- tributed among the customers of the stores in proportion to the amount of their purchases ; this bonus is some- times received in cash but may be re-invested as capital in the society. As already stated, a capital far exceeding the amount required for carrying on the business of the stores has been accumulated. This capital is invested in various ways, some of it in the support of other cooperative societies, and in local industries ^] ; a large amount is invested in mortgages to members, chiefly on dwellings occupied by themselves. The remarkable success achieved at Rochdale naturally led to the establishment of similar stores throughout the country. In many of the manufacturing towns ^ [Rochdale Equitable Pioneers" Society, Ld. Statement of Accounts and Report, June, 1906.] 266 BOOK II. CH. X. Its method of doing humie-'i-'i described. The Civil Service Co- operative Stores. Manual of Political Economy. in the north of England, the working classes deal almost entirely at these stores ; but they have not been established in the large towns only, for they are now frequently to be found in agricultural villages. Exclusive of the large London stores such as those known as the Civil Service and the Army and Navy, there [were in 1895, 1,695 retail cooperative stores in the United Kingdom, and their annual sales amounted to 56,600,000^.^]. As previously remarked, the profits realised in these stores are distributed not amongst the employes, but amongst the customers and the shareholders. The particular method of distributing the profits which has been adopted at nearly all the stores is extremely simple, and is the one originally agreed upon at Rochdale, which we will now describe. Each customer, when he makes a purchase, receives certain tin tickets or tallies which record the amount of his purchases. The accounts are made up at the end of each quarter, and after a fixed dividend at the rate of [4|^ per cent, per annum on share capital up to 501., and 2| per cent, on share capital over 50^.] has been paid, the surplus profits are divided amongst the customers in proportion to the amount of their purchases. Each customer brings his tin tickets, which serve as a record of the amount he has purchased. The goods are sold at the prices which are current at the ordinary retail shops. The business is strictly a ready- money one. Under no circumstances whatever is any credit given. The strict adherence to this rule has doubtless contributed more than any other circumstance to the remarkable success of these stores. At the principal Cooperative Stores in London, the business is conducted on a difierent plan. Here also the rule of giving no credit is rigidly adhered to, but the customers, instead of receiving their share of the profits at the end of each quarter, obtain the goods at lower prices than those which are charged in the ordinary retail shops. The method of distribution adopted at Rochdale is certainly to be preferred when, as is the case with a majority of the stores, the bulk of the customers belong to the working classes. It is obvious that an individual's share of the profits is more likely to be saved if he ' [See Mulhall's Dictionary of Statistics, Appendix 1898.] Cooperation. receives it in a lump sum at the end of each quarter, than if he is enabled to save it in driblets each time he makes a purchase. Experience, in fact, shows that the amount which has to be received at the end of each quarter is very generally left as an investment in the society. Saving is thus powerfully promoted, for many men, by the accumulation of these small investments, gradually become the possessors of a considerable amount of capital. As affording a striking example of what can be achieved by the working classes through their own unaided efforts, reference may be made to the practice which for a long time prevailed at the Rochdale Pioneers' Store of devoting 2| per cent, of the net profits to educa- tional purposes. [As time went on and a continually growing sum was devoted to education from the rates and taxes Ihe 2 A per cent, on net profits was reduced to 1|. This produced in 1906 rather more than 800^. per annum, and from this sum are maintained seven news rooms, well supplied with newspapers and periodicals, a lending library of more than 16,000 volumes, and a reference library of 2,821 volumes. Scientific instru- ments of various descriptions are also kept for the use of members. The society organises holiday excursions at suitable seasons for its members and employes, to many of the most picturesque parts of England, Scotland, and Wales. A time table for the summer of 1906 of these holiday tours to Plymouth, Llandudno, the Isle of Man, Scarborough, etc, offers travelling facilities for periods varying from four to thirteen days ; such arrangements afford satisfactory evidence of the increased prosperity of the working classes and their demand for healthy and refined enjoyment. They certainly present a vivid contrast to the penury and want in which the Rochdale Pioneers' Society took its rise in 1844.^] The remark has already been made that nothing has done so much to promote the success of the stores as strict adherence to the ready-money principle. In the first place, there are no bad debts. Nothing probably interferes so much with the success of the retail trader as the loss he incurs from bad debts, and the great amount of capital which, when credit is given, he is sure 1 [See the Rochdale Pioneers' Ahiiauack for 1906.] j68 Manual of Political Economy. BOOK II. CH. X. Disadvan- twjes of the credit fsyntem. to have locked up in book debts. In the second place, it is obvious that when all the goods sold are paid for across the counter, a maximum amount of business can be carried on with a minimum of capital. It is shown from the published accounts of these stores that their capital is not unfrequently turned over ten times in the course of the year. In the third place, it is to be observed that when no credit is given, no credit need be received. The managers of these stores can pay ready money for all the goods they purchase. They conse- quently obtain them at the lowest possible price, and have also, as has been well descril^ed, the pick of the market. There are also many other most important advantages resulting from the adoption of the principle of giving no credit. The facility with which^ people are allowed to get into debt at retail shops gives a disastrous encouragement to improvidence. Credit, it has been truly said, is the great bane of the working classes. When a man is heavily in debt, not only does he too often become reckless, but to a great extent he ceases to be a free agent. The tradesman to whom he owes money can force him to go on dealing with him, and can charge him extravagant prices for inferior articles. Again, it is evident that under a system of credit, the honest who do pay are charged a higher price than they ought to be, in order to compensate the tradesman for the losses he incurs from the dishonesty of those who either do not pay at all, or who keep him waiting, for his money. There is good gi^ound for believing that if the retail business of this country were generally conducted on the ready-money principle, prices might be so much reduced that the public would gain far more than would be represented by the entire remission of the national debt. We express this opinion not simply as a vague surmise, for it has been shown at the principah stores in London that, although the goods sold there are quite 20 per cent, cheaper than they are in many retail shops, yet the busi- ness is so remunerative that a far larger profit is yielded on the capital invested in the business than is secured by the ordinary tradesman. This being the case, it appears that the credit system virtually imposes an mcome-tax of 20 per cent, upon all that portion of a Cooperation. man's income which is expended in the purchase of commodities of ordinary consumption. It need scarcely be said that paying such a tax is equivalent to a far more onerous burden than is imposed by the interest of the national debt. It is also to be borne in mind that the credit system is scarcely less injurious to the retail trader than it is to the general public. It is well known that a large number of tradesmen fail in business, not only in consequence of their losses from bad debts, but also in consequence of their money becoming locked up in book-credits. Not long since the price list of one of the London Stores was submitted to a grocer who was carrying on a large business in a provincial town. He admitted that the prices in this list were 20 per cent, lower than those which he charged, but he said that if he were paid ready money for all the goods he sold, he was sure that he could sell his goods as cheaply as they were sold at the Stores, and he was also certain that his business would at the same time become far more pro- fitable than before. Such considerations as these induce us to think that not the least important advantage likely to result from the cooperative stores is, that they will so conclusively demonstrate to the whole country the loss produced by the credit system as gradually to lead to the almost universal adoption of the ready-money principle in all retail transactions. Although it is pro- bable that these stores will absorb a great proportion of the retail business of the country, yet the individual trader need not fear that he will be superseded. Instead of expending his energies in vain attempts to seek the aid of the legislature in impeding the progress of these stores, he would act more wisely if he at once came to the determination that as they had secured their success by refusing credit, he might obtain a similar success by adopting the same principle in his own business. Many retail tradesmen, probably through the competition of the Stores, have lately with great advantage to themselves, adopted the ready-money principle. We have already referred to the fact that these co- operative stores are wanting in one important element of cooperation, because no share of the profits is allotted to the managers, clerks, porters, and the other employes 270 Manual of Political Economy. whose labour is essential to the carrying-on of the busi- ness. These stores may, in fact, be correctly described as joint-stock companies, which conduct their business on the ready-money principle. When considering in a previous chapter the advantages and disadvantages of the joint-stock system, it was shown that the circumstance which is likely most to impede the success of a joint-stock undertaking is that the paid manager has not so direct or immediate an interest in the prosperity of a business as one who owns the busi- ness and has his fortunes bound up in it. Joint stock companies may, no doubt, be freed from the difficulty to which allusion has just been made, by giving the managers and other employes a certain portion of the profits realised. They may thus be made to feel almost as active an interest in a joint- stock undertaking as if it were their own business, and carried on entirely with their own money. It therefore seems to be of the greatest importance that this plan should be adopted in the case of cooperative stores ; for not only would it meet a disadvantage under which all joint-stock com- panies sutler, but it would give to these stores a much more truly cooperative character than they can now fairly claim. In describing the remarkable progress of the Rochdale society it was stated that its capital soon became far more than sufficient for the store. Consequently it was necessary to determine the best mode of employing this surplus capital. This was an extremely delicate and difficult question, but the managers of the society, by the exercise of remarkable tact and sagacity, have shown that in almost every instance they were capable of dealing successfully with it. This we think will be proved as we proceed to describe the various under- takings that have from time to time been supported by this Pioneers' Society. It is the more important that such a description should be given with as much clear- ness as possible, because it serves distinctly to mark the gradual development and progress of the cooperative movement. As the bushiess of the store at Rochdale rapidly ex- tended, its managers were not unnaturally led to perceive Cooperation. the advantage of establishing a wholesale depot of their own, instead of purchasing the various goods they sold from ordinary wholesale houses. It was moreover felt that such a wholesale society might render invaluable assistance to small struggling societies if an attempt were made to crush them by a combination of tradesmen jealous of cooperation. In 1863 this wholesale society was enrolled at Manchester, and began business in 1(S64. [It had a rapid and uninterrupted success. In 1906 it had 24 purchasing and forwarding Depots in different parts of the world, besides seven sale and sample rooms in England and Wales. It manufactures, on a large scale, an immense variety of goods. It owns seven steam- ships. It also has a Bank Department with an annual turnover of £99,000,000. It is distributing goods to the value of over £20,000,000 a year.] No individual can purchase goods from the society ; its entire business consists in selling goods to various cooperative stores. [In 1905 it was supplying goods, in this way, to 1138 societies which held its shares.] There are also some stores which purchase goods from the Wholesale, but do not hold shares in it ; these are usually small struggling stores which have no spare capital. The business appears to be most admirably conducted. Under no circum- stances whatever is a longer credit given than seven days from the date of invoice. The result of strictly adhering to this rule is that notwithstanding the vast extent of the business, the amount lost by bad debts only amounts to a few pounds a year. The cost of management is unprecedentedly small ; not amounting to 1 per cent, on the returns. After a fixed dividend of 5 per cent, has been allowed on capital the remaining profits are distri- buted amongst the retail stores in proportion to the aggregate amount of their purchases. To those stores, however, which have no capital invested in the Whole- sale Society the share of profits allotted is only half as much as to those stores which have capital invested. The leading idea which appears to be predominant amongst the supporters of the Wholesale Society is a desire as far as possible to get rid of middlemen. [In order to do this, commodities are either manufactured or imported by the society or purchased direct from the 271 272 Manual of Political Economy. producers. The society manufactures to the value of 4,000,000^. a year and imports to the value of 6,000,000^. a' year. There is also a Scotch Wholesale Society; the head quarters are at Glasgow and it has branches at Leitli, Dundee, Kilmarnock, and at Enniskillen in Ireland. This society supplies goods (1906) to the amount of nearly 7,000,000/. annually. Its capital is 2,780,000/.. and 281 retail cooperative societies are federated to it.^] It is to be remarked that as the chief motive which prompted the establishment of the Wholesale Society was to give assistance to the various cooperative stores scattered throughout the country, the goods are sold at the lowest possible price ; only such an amount is charged for them as to cover the expenses of management, and leave a suf- ficient margin for profit. It is also to be remarked that the Wholesale Society, like the cooperative stores pre- viously described, is not so truly cooperative as it might be ; because its managers and other employes do not enjoy any share of the profits, but are remunerated b}^ salaries or wageSjjust in the same way as they would be in an ordinary wholesale house. At various times the proposal has been discussed to allot them a certain share of profits. The decision which may be ultimately arrived at on the subject will, in all probability, exercise a most important influence on the future of cooperation. It is sometimes said that the remarkable success obtained by such a society as the Wholesale, satisfactorily proves that it cannot be necessary to allot any share of profits to labour. The managers of this society could not possibly have displayed more ability or zeal. They are so devoted to the cause of cooperation that it is quite unnecessary to stimulate their activity by giving them a more direct pecuniary interest in the pros- perity of the undertaking. Such reasoning, however, as this is surely both unsound and shortsighted. A business, however successful it may be, cannot be regarded as rest- ing on a sure and permanent basis, if those who conduct it are not adequately rewarded, and if, taking advantage of the enthusiasm they may happen to feel for a cause, their employers give them less for their services than they could command in the open market. If this determination to deprive labour of all share of profits is persisted in, HSee Report of Thirty-eighth Annual Cooperative Congress, 1906.] Cooperation. cooperative societies will become nothing more than ordinary joint-stock companies in which a great part of the capital is owned by the working classes. We do not in any way desire to underrate the advantages of the movement even if it simply assumes this form. It must be an immense benefit to the working classes to obtain the commodities they purchase at a cheaper rate, and to have placed within their reach an eligible investment for their savings. Prudential habits will in this way be powerfully stimulated, and without an increase of prudence no permanent improvement can be effected in the condition of the working classes. Again, it is impossible to place too high a value upon the educational influence which may be exercised upon the members of cooperative societies. A workman wlio has a few pounds invested in a cooperative store soon understands what are the true functions of capital. Instead of thinking that capital is some mysterious agent specially created to oppress and injure labour, he becomes as much impressed as an indi- vidual employer can be that capital is not less essential to industry than labour, and that consequently it possesses a not less indefeasible claim to receive its due reward. But the friends of cooperation cannot too carefully remember that the mere fact of calling societies co- operative will do nothing to improve the industrial position of the labourer, if he is to enjoy no share in the profits, for we believe all experience has shown that a joint- stock company is not likely to be a less severe, or a more liberal taskmaster than the individual employer. Cooperation moreover loses its chief industrial advantage if the labourer is not permitted to participate in profits : for, as we have endeavoured repeatedly to explain, the great defect in our present industrial economy is that it fails to make labour as efficient as it ought to be, because it has not a sufficiently direct and immediate interest in the success of the work upon which it may be engaged. It is this defect which may be remedied by cooperation ; and it is because cooperation, when truly carried out, may remedy this defect, that we regard the application of the cooperative principle as one of the most effective of all agencies for securing improvement in the economic condition of the country. 273 274 Manual of Political Economy. BOOK II. CH. X. Coopera- tive pro- duction. The coope- rative cot- ton mill. As we have now shown how the success of cooperative stores led to the establishment of the Wholesale Society, we will next proceed to describe various other develop- ments of the movement. The large profits realised by the stores brought so forcibly home to the working classes the advantages of carrying on a retail trade on their own account, that they very naturally thought that they should be able to secure still greater advantages if the labourers could form themselves into associations to carry on some of the various trades in which they were em- ployed. One of the first experiments of this kind in what may be termed cooperative productive industry was made at Eochdale in 1855. Previous to this time, how- ever, several cooperative trading establishments had been in successful working in Paris. Some of these we will hereafter describe. But, reverting to what was done at Rochdale, we find that, as was the case at the Pioneers' Store, the experiment of applying cooperation to pro- ductive industry was commenced on a very small scale. In the first instance only a room was rented, and in it were placed a few looms. The cotton trade, however, was then in the height of its prosperity, and large profits were consequently realised even from so imperfect an eftbrt. Encouraged by this first success, the promoters of the undertaking determined to extend their operations, and part of a mill was accordingly rented. Their capital at that time was about 5()00Z., and the system of conducting the business was as simple as it was excellent. A divi- dend of five per cent, on capital was the first charge on profits. After this dividend had been secured, the re- maining profits were divided into two equal shares. One of these shares was given as an extra dividend on capital, and the other was distributed as a bonus amongst the 'abourers employed. Each labourer's share of this bonus was proportioned to the aggregate amount of wages he had earned. The most therefore was given to those who worked with the greatest regularity and the greatest skill ; and as, in addition to this bonus, the wages current in the trade were paid, it was natural that the best efibrts of those employed were stimulated, and the most prudent operatives in the locality were powerfully attracted to an undertaking where their labour received Cooperation. an extra remuneration, and where they obtained a lucra- tive investment for their savings. The undertaking- developed so rapidly that soon a larger mill was required than any that could be rented. It was therefore resolved to build one : it was commenced in 1856, and completed in 1860, at a cost of 45,000Z. The mill was fitted with the best machinery and was complete in every respect. So confident were the workmen of the success of the scheme that the outlay involved in the erection of this mill did not exhaust the capital they were willing to in- vest, and accordingly a second mill was soon commenced. These mills had scarcely time to get into full working when the civil war in America brought the cotton trade of Lancashire into a state of unprecedented depression. Long after many of the surrounding manufactories had been closed the cooperative mills courageously struggled on. The diflficulties, however, which had to be contended against were of so entirely unusual a character, that no one can have any just reason to feel less confidence in the cooperative movement because an association of workmen were unable successfully to contend against circumstances so exceptional as to be quite out of the current of ordinary calculation. Among the most suc- cessful of the cooperative associations connected with the cotton trade may be mentioned the Ilccles manufactory of Quilts and Table Covers established in 1861, and the Hebden Bridge fustian manufactory established in 1870. The Hebden Bridge manufactory began very humbly, and at first its only capital was formed by a weekly sub- scription of 3d. each from a few fustian cutters. These men began by cutting fustian, for the association they had formed, in their own homes, after their ordinary day's work was over. They thus gradually accumulated a small capital, and in 1874 a factory and an estate costing 7,0001. were purchased. In 1886 they began to weave their own cloth. [In 1905 the society was em- ploying 296 work people and its share capital amounted to 27,670^.] " The portion of profit falling to each worker is credited to his account as share capital until he has at least 20/. paid up in the society. This course has the effect of giving each of the work people a thorough interest in the welfare of the society ; greater care and 275 III 276 BOOK II. CH. X. The ques- tion of allottiwj a share of the profts to labour. It is much easier to apply the Manual of Political Economy. economy are exercised in all depaHments of labour ; and each one puts forth every endeavour to do his share towards making the business profitable, knowing that in proportion to the results, so will his share of profits be."^ There has never been any strike or serious dis- pute between the work people and the managers of the society. The manager and the committee are elected by the members from among their own body. It is to be remarked that in several of these manu- factories, which have been established by associations of workmen, the plan has been very generally departed from of allotting to labour a share of the profits. When depressed trade brought adverse times to the Rochdale Mill, one of the first things that happened was a conten- tion as to the right of labour to share in the profits. Those who possessed capital in the concern seemed to think that they were unnecessarily generous, and were making a sacrifice for which they received no return, if they surrendered smy fraction of profits to labour. Anta- gonism of interest thus arose in every respect similar to that which unhappily so widely prevails between employers and employed. The question whether labour should enjoy any share of profits is still being keenly disputed amongst cooperators, and it is ditiScult to say how it will be ultimately determined. There certainly seems to be good reason to hope that the party will ultimately prevail who, having obtained an insight into the true nature of cooperation, assert that the bonus which is distributed amongst labourers is not a sacrifice on the part of capital, but is rather a measure of' the increased efiiciency given both to capital and labour ; and that if such a bonus is withheld from labour, coopera- tion loses that which gives it its chief vitality ; and a cooperative society becomes little else than an ordinary joint-stock company. Before leaving the subject of cooperative production, it is desirable to point out that the cooperative principle i[See Cooperative Production in Great Britain, by J. C. Gray, " Age of Steel," January, 1887. See also address by Mr. T. Hutches, Co- operative Congress, 1887, and the Balance-Sheet of the Hebdeu Bridge Cooperative Society, June 30th, 1886, and .38th Annual Report of the Cooperative Congress, Birmingham, 1906.] Cooperation. 277 can be applied much more easily and nmcli more simply to the distribution than to the production of wealth. It is, for instance, evident that a cooperative store has not to contend with many difficulties which stand in the way of a cooperative manufactory. A s the business of a store is conducted on the ready-money principle, scarcely any risk need be incurred. It is not necessary to make any speculative purchases. The goods can to a great extent be bought as they are wanted. The returns in such a business are regular. The trade done in one quarter differs little from that done in the previous quarter, and there is no difficulty in contracting or expanding the business if it should be requisite to do so. A manufac- turing business is however, from the nature of the case, speculative and uncertain. Profits often depend almost entirely upon purchasing raw material at a favourable time. Sometimes the trade suddenly becomes so depressed that it is necessary to withhold the manufactured goods from the market. This of course cannot be done unless there is a reserve fund to fall back upon. It is probable that the cotton trade more than any other industry in the country has always been characterised by violent fluctuations. Prosperity and adversity seem to succeed each other in regular cycles, for if exceptionally high profits are realised for two or three years, there is sure to be a period of corresponding depression, when scarcely any profits at all can be secured. Sometimes the profits realised in the cotton trade are more than three times greater in one quarter than in the quarter immediately preceding or succeeding it. Thus in the quarter ending in June, 1872, the profits of the Sun Mill Company, Oldham,^ were returned at no less than 30 per cent., whereas in the quarter ending in September in the same year they sank to 9 per cent. It is obvious that the greatest prudence and forbearance are required in order i[The Suu Mill Compauy Limited is not a Cooperative Society in the sense of a necessary copartnership between capital and labour. It is an ordinary limited liability company, with a capital of 75,000/. in 15,000 shares of 51. each. The shares being issued at this amount renders it possible that they should be held by working people ; but there is no provision that they should be held by those employed in the Sun Mill ; and consequently identity of interest between employers and employed is not ensured.] BOOK II. CH. X. principle of coopera- tion to dis- tribution than to produc- tion. 278 Manual of Political Economy. BOOK 11. CH. X. Examples of success- ful coope- rative pro- duction. Cooper a- tii'e pro- duction in Paris. that a business which is liable to such severe and sudden fluctuations should be successfully carried on. There is, of course, a constant temptation to appropriate too large a portion of the exceptionally high proflts yielded in prosperous years, and thus leave an inadequate reserve to meet adverse times. That this temptation has been in many instances successfully resisted by associations of workmen, may justly be regarded as affording the most satisfactory evidence of the capacity of a consider- able number of the labouring classes to carry on most complicated and difficult industrial undertakings. The experiment of applying the cooperative principle to so speculative and fluctuating a trade as the cotton manu- facture was an extremely bold one ; for there is no other branch of industry in which associations of workmen have to resist so many temptations and to struggle against so many obstacles. Cooperative production may no doubt be far more easily carried on in those trades where the returns are more regular, and where the amount of capital which has to be invested in plant and material is small, compared with the amount expended in wages. [There are, however, at the present time (1906) 143 cooperative productive societies in the United Kingdom without taking account of the co-operative creameries which have already attained great importance in Ireland. These societies comprise a great number of trades ; they have a membership of nearly 34,000, and a share capital of £897,000.] ^ Cooperative production has assumed a more important development in France than in England. The French societies embrace a great number of different trades, such for instance as pianoforte making, house-painting, tailoring, file-cutting, spectacle making, carpentering, basket making, gas-fitting, paving, furnishing, market gardening, etc. At the time of the revolution of 1848, various attempts were made in France to encourage the establishment of cooperative productive societies by granting them state loans ; and it is particularly worthy of remark that in no single instance has any society which obtained state assistance secured any permanent success. One of the societies started in 1849, viz. that 1 [Report, Cooperative Congress, 1906.] Cooperation. of the pianoforte makers, received no state assistance and is now one of the most successful of the cooperative institutions in Paris. It had an extremely humble beginning; as, in the first instance, 14 workmen sub- scribed a capital of about 21. each. This society now consists of 18 members who employ in addition a certain number of auxiliary labourers who are paid by piece work, and the members are elected from among the auxiliaries. The freehold of the building in which the business is carried on belongs to the association and represents, together with plant and material, a capital of about 11,000^. The cooperative associations in Paris have obtained a varying amount of success. Many of them have departed from the principle, which may be regarded as the essence of cooperation, of employing no labour without allotting to it some share of the profits. This, however, ought not to cause any want of confidence in the future of cooperation. It will no doubt happen that the complete application of the principle will be arrived at by gradual steps, and it should be remembered that even in those cases where some of the labour employed does not participate in the profits, yet even here the labourers who are members of the association secure the important advantage of themselves supplying the capital which their industry requires. Without attempting to predict the exact phases through which cooperation will pass, it can scarcely be doubted that the principle is so well adapted to agriculture, that it is certain some day to be applied to that particular branch of industry with the most beneficial results. Hitherto cooperation has never been applied to agricul- ture except in a very imperfect form ; but these experiments, though very incomplete, have been most encouraging and satisfactory. [Since the foregoing words were written there has been an extraordinary development of the cooperative principle in dairy farm- ing, first in Denmark and then in Ireland. " Denmark can always be quoted as an example of what can be done by cooperation to retrieve the fortunes of an agricultural community. A tiny country with less than 2,500,000 inhabitants, she has, by means of cooperative 28o Manual of Political Economy. production, increased her exports of butter to Great Britain from the value of 767,000/. in 1870 to 9,302,000?. in 1902; her export to us in the same year of meat, chiefly bacon, was worth 4,238,000^., and that of eggs 1,366,000/. Denmark achieved this result, passing from penury to plenty, without any special advantages of climate or situation, but through the initiative and industry of her people and their adoption of cooperative methods. Cannot Ireland do what Denmark has done ? This was the question *vhich Sir Horace Plunkett and his band of helpers continually pressed upon the Irish farmer. Their success may be judged by the fact that, beginning in 1889 with one creamery having fifty associated members, at the end of fourteen years' work they had established 360 creameries with a membership of more than 80,000. The sales of butter from Irish cooperative creameries in 19U3 reached the total value of 1,350,000/."^ The plan pursued is to establish a creamery which is really a butter factory ; the farmers in the neighbourhood are invited to become shareholders in the proportion of a 1/. share for each cow they possess. All the shareholders send their milk once or twice daily to the creamer}'. It is at once measured, tested and paid for in proportion to the quantity of cream it yields. The butter milk and skim milk are returned. The whole of the cream thus collected is converted into butter on the most approved methods. Uniformity as well as excellence of quality is specially aimed at, as this is one of the most important conditions for commanding a good market.] It must not be supposed from the striking success which in numerous instances has been achieved by cooperation that a cooperative institution is not subject to many of the same dangers which beset ordinary commercial undertakings. If a want of judgment is shown in selecting the managers, if care is not taken to secure both intelligence and honesty, failure must, of course, inevitably result. All that need be contended for by the advocates of cooperation is that advantages are certain to result when the principle is judiciously and skilfully applied. As an instance of want of judgment, ^ See Quarterly Review, January 1905, p. 79. Cooperation. it may be mentioned that the idea seems to have found much favour among many cooperators that a cooperative bank should be established on the principle of allowing a fixed rate of interest of 5 per cent, on deposits. It seems to be thought that 5 per cent, is the proper rate of interest to be paid, but it need scarcely be pointed out that it is impossible for a cooperative bank to allow 5 per cent, when the current rate of interest is below that amount. Hitherto cooperative banking has not obtained any marked success in England; we cannot, however, leave the subject of cooperative banking without referring to the origin of the movement which took place in Germany in the year 1851, under the direction of the late Herr Schulze-Delitzsch. The object of these cooperative or credit banks, as first started under the wise supervision of this gentleman, was to give to the labourer, through the agency of self-help, direct access to the capital necessary to production. It is evident that an individual labourer cannot obtain the use of borrowed capital, for the simple reason that the security he is able to give for its repayment is insufficient ; but what is true of a single artisan ceases to be true of an association of artisans jointly and severally responsible for the debts of every member of the association, and especially where the terms of membership are such as to reduce to a minimum the risk of loss through the dishonesty or the incom- petence of those who join it. Such associations were formed through the infiuence of Herr Schulze-Delitzsch; the terms of the association are so drawn up as to exclude all but bona fide labourers, and as the cardinal principle of the association is self-help, the candidates for admission must give substantial proof that they are able to help themselves. The circumstances of the candidate for admission are always carefully enquired into before he is allowed to join. He is moreover required to become a shareholder in the concern. It may be urged that if all these securities are required to prove a man's honesty and his power to pay, he would have no difficulty in obtaining a loan independently of the association. A very little consideration will, however, show that this is not the case. The security ofiered by an individual 281 282 Manual of Political Economy. workman can in the vast majority of instances only be a personal security ; if therefore he obtained a loan at all it would be on exorbitant terms. The owner of capital advanced to an individual workman would run a very great risk of losing it altogether : if, for instance, the workman died or absconded, the owner of the capital would have no remedy. But the credit of a workman rests on altogether a different footing if he belongs to an association every member of which is jointly and severally responsible for the debts of all the rest. One fundamental principle of the Schulze-Delitzsch Credit Association is that of unlimited liability : this principle makes the credit of the association unimpeachable ; it also exercises an important influence in keeping up due watchfulness on the circumstances of the candidates for admission. The capital required for the working of the associations is obtained in two ways ; first, by the sub- scriptions of members, and secondly, by loans contracted in the open market on the credit of the association. The bulk of the business is carried on with capital obtained in the latter way. To give some idea of the proportions which this movement has assumed in the country in which it originated, it may be mentioned that in the year 1865 there were 961 of these Credit Associations in existence in Germany. Of these about one-half or 498 sent in their statistics to the central bureau, showing that they then possessed nearly 170,000 members, and that the money they annually advanced was equal to 10,000,000^.1 In 1877 there were 1,827 of these associa- tions, with over 1,000,000 members, owning 8,000,000^. of capital, with 20,000,000/. more on loan, and doing business to the amount of 110,000,000/.^ In 1884 the number of the associations had increased to 3,500. [The Raiffeisen banks of Germany, Italy, France, and Russia, are very similar in character to the Schulze- Delitzsch banks; the former, however, are for agri- culturalists only, and the latter for all classes of small producers. Raiffeisen banks have been started in connec- 1 See the eleventh Report of the Trades' Union Commissioners, Vol. II. Appendix, pp. 165—178. This part of the Report is by Mr., now Sir, K. D. Morier. f j- . -See Economics of Industry, by Mr. and Mrs. Marshall, p. 223. Cooperation. tion with the cooperative movement in Ireland, and have increased rapidly. There was only one in 1895, and in 1902 there were 145, with more than 6,600 members. No failures have taken place and no loss has been incurred.^] The progress of cooperation was for some time mate- rially impeded in England by various legislative restric- tions. Until 1867 no cooperative society was permitted to invest more than 200f. in any other society. This restriction at one time brought a very serious danger upon the Rochdale Pioneers. Having more capital than they could use in their own business, a portion of their capital, in consequence of their not being able to invest more than 200^. in any other society, was lying idle. It was therefore decided to repay to some of the largest shareholders a portion of the money which they had invested in the society. No sooner had this process of repayment commenced than a rumour not unnaturally gained credence that the wealthier shareholders had lost confidence in the concern, and were withdrawing their capital from it. A panic ensued, and such a run was made by frightened shareholders upon the funds of the society that it was for some time in imminent peril. It is impossible to have a more instructive example of the widespread mischief which may result from meddlesome and ill-considered legislation. As another instance of the manner in which the development of cooperation has been retarded by legal impediments, it may be mentioned that until two Acts were passed in 1867 and 1871, cooperative societies could not buy or sell land except for the purposes of their special trade. Now that these societies have been empowered to buy and sell land, many of them have invested a considerable portion of their surplus capital in the erection of houses for their members. The Rochdale Pioneers have already expended many thousands in this way, and it need scarcely be said that it is not possible to render the working classes a greater service than to make it more practicable for them to obtain suitable dwellings. The members of a i[See Report of Irish Agricultural Organisation Society Ltd. for 1902, also Ireland in the, New Century, by The Rt. Hon. Sir Horace Plunkett.] 283 284 Manual of Political Economy. cooperative society may obtain their houses just as the customers of a cooperative store, at the lowest possible price, since the object of investing the money of the society in building houses is not to obtain a large profit, but to secure the best possible house acconnnodation for the members of the society. Various other schemes have from time to time been propounded w^ith the object of improving the houses of the poorer classes. These schemes, though not cooperative in the sense in which we have employed the word, are based on the principle that much more can often be done by a union of several small capitals than can be done by each of these small capitals working separately. Thus, if a hundred men subscribed 200/. each, with the 20,000/. thus collected, a block of buildings could be erected which would provide each member with much better accommodation than if each had expended his 200/. in building a cottage for himself. Building societies afford important facilities for workmen becoming the owners of the houses in which they live. These societies gather together a great number of small capitals, and employ the fund thus collected in making advances to those who wish to build or purchase a house. The house itself is a security for the money advanced, and the loan is repaid by small weekly or monthly instalments. It is difficult adequately to estimate the good which is done by these societies. They have undoubtedly enabled many hundreds of thousands of workmen to become the proprietors of their own houses. In 1903, the number of Building Societies in the United Kingdom, sending in returns of their assets and liabilities to the Registrar of Friendly societies was 2,062.1 'It is remarkable that Building Societies have obtained little de- velopment in Scotland or Ireland compared with England ; for of this total of 2,062 societies only 125 belong to Scotland and 7tj to Ireland. No satisfactory explanation has, we believe, been given of this striking difference between England and Scotland. There is also a great disparity in the number of members of Friendly Societies in the two countries. Part of the difference is probably due to the fact that the system of registration of Building and Friendly Societies is not so complete in Scotland as in England ; but alter making due allowance for this, it seems difficult to resist the conclusion that the thrift for which the Scotch are proverbial has not hitherto taken the form of inducing them to place their savings in these societies. Cooperation. [Editions previous to that of 1888 of this book, contained a description of the operations of the Artisans', Labourers' and General Dwellings Company. The object of the Company, when first started, was the same as at the present time, namely to provide a large number of working class dwellings, at a rent equal only to a moderate interest on the original outlay ; thus checking the evils, moral and physical, of overcrowding. But the policy by means of which the company seek to achieve this object, has been very considerably changed. At first the company desired to do all in their power to encourage town workmen to become the owners of the houses in which they lived. In this respect the company resembled an ordinary building society. Large pieces of land, such as the Shaftesbury Park Estate, were acquired, and working class houses were erected, which the tenants were encouraged to buy. It was found, however, that the migratory habits of town workmen put many difficulties in the way of what the company aimed at. In practice a workman who had bought his house, often found that the necessity of living near his work forced him to migrate to another locality. Whether, under these cir- cumstances, he continued the owner of the house he had bought, or sold it, the company saw a considerable number of the houses they had built passing into the hands of middlemen, who frequently raised the rent to the actual occupier, and who, moreover, were not in a position to be good landlords in the sense of being able to lay out from time to time considerable sums in repairs and so forth. The aim of the company is to conduct their business on a sound commercial basis ; but its aim is far from being merely commercial. The shareholders voluntarily deny themselves a larger dividend than 5 per cent, on the capital expended ; any further sum which may be earned they devote either to the erection of fresh buildings or to the reduction of rents. It is therefore obvious that the objects of the company are not achieved if the houses are allowed to pass into the hands of middlemen, who will probably have no other wish than to extract the utmost profit from their purchase. These considerations have led the company in recent years to abandon the policy of endeavouring to sell their houses to their 285 BOOK II. CH. X. The opera- tions of the Artiaans^ Labour- ers' , and General Dwellinrfs Company described. 286 Manual of Political Economy. tenants ; they have ceased to be sellers and have become buyers, repurchasing, as opportunity offers, the houses they sold in former years. They are now convinced that retaining possession of the houses is the best means of securing the objects at which the company aim. The company had in 1905 provided about 6,000 cottages, at weekly rents ranging from 5.s. 9fZ. to 12.s. Qd. on their four large estates in the immediate neighbourhood of London. They also have provincial estates at Birming- ham and Salford, and they have erected large block buildings in the heart of London which will accommodate nearly 1,500 families. The total rental of the company amounted in 1903 to 188,000^. The only approach to the cooperative principle in the company's present work- ing is that every encouragement is given to tenants to become shareholders. Partly with the view of facili- tating this, the company afford Savings Bank facilities to their shareholders and tenants. Deposits of \l. and upwards are received and interest at 3 per cent, per annum is allowed. When the sum thus saved reaches a sufficient amount, its proprietor can if he likes become a shareholder in the company ; thus, in a sense different from that originally intended, he may become the owner either wholly or in part of the house in which he live.s.^ The operations of such a company as this, if sufficiently extended, must in time influence, in a direction favourable to the tenants, the whole housing of the working classes in London : for if there is a good supply of dwellings in various localities well provided with air, light, water and other sanitary conditions, at moderate rents, which are yet sufficient to pay a fair interest on the capital expended, other owners of house property will be obliged to improve the accommodation they offer or reduce their rents, unless they wish their houses to remain tenantless, or tenanted only by the lowest class of the thriftless and the outcast.] We have now described some of the more important results of cooperation, and we have also indicated some of the probable phases of its future development. Anyone ^[See the Report of the Annual Meeting of the Artisans', Labourers' and General Dwellings Company, 1886 ; and Report and Balance-sheet, 1887 and 1906.] Cooperation. who considers what it has ah-eady effected, and what it is capable of doing in the future, must, we think, come to the conclusion that we may look with more confidence to cooperation than to any other economic agency to improve the industrial condition of the country. It cannot be too carefully borne in mind that those who have achieved the most striking success in cooperation have not been assisted by any extraneous aid. They have placed their chief reliance in union of effort, in prudence, and in self- denial. In striking contrast to this, we shall in the next chapter describe various socialistic schemes, which, far from not depending on any extraneous aid, are to be carried out through the direct intervention of the State. 287 The ennence of coopera- tion is self reliance. BOOK II. CH. XI. Two schools of Social Reformers lieaded re- spectively hy Las- salle and Schulze- Dtlilzsch . Nationali- sation of the land CHAPTER XL STATE SOCIALISM AND THE NATIONALISATION OF THE LAND. IT has been pointed out in a previous chapter that the most characteristic feature in the socialism of the present day is the reliance which it places on the inter- vention of the State. The most distinguished advocate of this new form of socialism was probably Lassalle ; between him and the late Herr Schulze-Delitzsch there was for many years in Germany a keen and active con- test. They respectively became the founders of two rival schools of social and industrial reformers, and there was in almost every respect the widest divergence in the ideas propounded by each of these schools. Herr Schulze- Delitzsch gave, as we have seen, a most important stimulus to the cooperative movement ; and the guiding principle which influenced him was that the people were to rely for their improvement upon self-help. Lassalle, on the other hand, thought that what the people chiefly needed was a greater amount of aid from the State. The move- ment which he set on foot became embodied in the society known as the International. The International put forward various proposals, nearly all of which involve State intervention. The agency, however, on which the Internationalists, and the socialists generally of the present day, place by far the greatest reliance is the scheme which is known as the nationalisation of the land and the other instruments of production. As this plan of nationalisation may be regarded as the most important development of State socialism, it will be desirable to- consider it before describing other socialistic schemes the adoption of which would involve pecuniary aid from the State Socialism and the Nationalisation of the Land. 289 State. The subject of nationalisation of the land has, moreover, attracted special attention in consequence of two books which have been published on the subject, the one by Mr. Wallace,^ the well-known naturalist, the other by an American writer, Mr. Henry George.^ It has rarely happened that a book dealing with social and economic questions has been more widely read than Mr. George's work. It therefore becomes the more important carefully to examine the proposals there advocated. Although Mr. George writes in a style which is often particularly attractive, yet we have frequently found it extremely difficult to arrive at the exact character of his proposals. There seems, however, little room for doubt that if his scheme were carried out, the existing owners of land would obtain no compensation at all, or would receive as compensation an amount which would be only equivalent to a small proportion of the present selling value of their property. Nothing, in our opinion, can be more unjust than for the State to take possession of land without paying the full market price to its owners. It is sometimes urged in defence of such a course that the land originally belonged to the people, and that the State had no right to alienate national property in order to enrich a few favoured individuals. But the question as to whether or not it was expedient to have so com- pletely relinquished the rights which the State, as representing the nation, originally possessed in the land, appears to us to have no bearing upon the question of appropriating land at the present time without giving adequate compensation to existing owners. Land has changed hands an indefinite number of times since the principle of private property in land was first recognised ; and it would consequently be most indefensible if the State were to take possession, either wholly or in part, of the land of the country. In describing the injustice and inexpediency of the suggested schemes of land nationalisation, it must not be supposed that it would be desirable for the State to surrender its proprietary rights in the land in those countries where it still ' Land Nationalisation, its Necessity and its Aims, by Alfred Russel Wallace. ^Progress and Poverty, by Henry George, T BOOK II. CH. XI. as advo- cated by Mr. Wal- lace and Mr. George. 290 Manual of Political Economy. BOOK II. CH. XI. In those countries where the State pos- sesses pro- prietary rights in the land it is gene- rally expe- dient to re- tain them. possesses them. In India, for example, almost the whole of the land is owned by the State ; the cultivator, instead of paying rent to a private landowner, pays it to the State in the form of a land tax ; the land revenue which is thus yielded amounts to about 22,000,000^. a year, and represents a sum nearly equivalent to what is raised by all the imperial taxes that are imposed in India. As evidence of the fact that the cultivators would not be necessarily better off if the State had relinquished its proprietary rights in the land, it may be mentioned that by the celebrated permanent settlement of Lord Corn- wallis in 1793, over a considerable portion of Bengal the proprietary rights were transferred to the tax-collectors or zemindars for a fixed annual payment. The result has been that with the increase in wealth and population, the cultivators in the permanently settled districts pay, in the form of rent to the zemindars, three or four times as much as the zemindars pay to the Government. A large amount of revenue has consequently been sacrificed for the benefit of a special class, whilst the cultivators' position has been in no way improved ; but on the con- trary, the injury which has been inflicted on them may in some degree be measured by the amount of the additional taxation which they have to bear, in conse- quence of a large amount of revenue having been needlessly sacrificed. If the permanent settlement in Bengal had never been effected, the additional revenue which would now be obtained from the land would be sufficient to enable the Government to repeal so burden- some an impost as the duty on salt. The extent to which it is expedient for a Government to dispose of its proprietary rights in the land, suggests considerations of the utmost importance for many recently settled countries, such for instance as Australia. In that country vast tracts of land have been sold by the Government, and when the amount received is used as ordinary revenue the enquiry is at once suggested whether it can be wise to adopt an arrangement which virtually allows capital to be devoted to income. We cannot help thinking that it is unadvisable for a State thus completely to divest itself of the proprietary rights it possesses in the land. Although we believe that too State SocialisTn and the Nationalisation of the Land. 291 much importance can scarcely be attributed to the economic advantages which result from associating the ownership with the cultivation of the land, yet the industrial stimulus which is given by the feeling of ownership would, we think, still continue in active operation if, in such a country as Australia, the Govern- ment, instead of completely relinquishing its rights in the soil, retained some share of the property in the form of a land tax which, instead of being commuted as it has been in our own country for a fixed money payment, should be equal to some small proportion of the annual value of the land. If, for instance, in Australia the land had been sold with the condition that one-tenth or even one-twentieth of its annual value should be paid in the form of a land tax, no discouragement would have been offered to enterprise, and the revenue which might be yielded as the country advanced in population and wealth would be a valuable national resource, which might be utilised in rendering unnecessary the imposi- tion of many taxes which will otherwise have to be imposed. It has been thought necessary to make these remarks in order to bring out with distinctness the very different issues which are involved in surrendering proprietary rights which are still possessed by the State, or in resuming possession of those rights when, as in England, they have been long since surrendered. In considering the proposals which are now being brought forward for nationalising the land of England, it will be desirable, in the first place, to endeavour to describe some of the consequences which would result if no compensation, or inadequate compensation, were given to existing owners ; and we shall then proceed to discuss the subject on the supposition that full compensation is given, the land being bought by the State at its present market value. As a result of careful inquiry, we have come to the conclusion that until the appearance of Mr. George's book, almost everyone in England who advocated nationalisation, even including the members of such a society as the International, never entertained the idea that the land should be taken without full compensation. In England, perhaps more than in most coimtries, a BOOK II. CH. XI. If the land is nation- alised, is compensa- tion to be (jiven to existing owners ? 292 Manual of Political Economy. BOOK II. CH. XI. If not, nationali- sation is flagrantly unjust. But if full compensa- tion is given, the scheme ivould be a financial failure. respect for the rights oi' property is widely diffused ; and the fact has certainly not been lost sight of by many of the working classes, that if the policy of taking land without compensation were once embarked upon, it is not only the property of the wealthy owner which would be confiscated ; the small proprietor who by years of careful thrift and patient toil had acquired a plot of land, he too would be engulfed in this whirlpool of spoliation. It would be impossible to say where this wholesale appropriation would stop. The large land- owner and the peasant proprietor would not be its only victims. If the State were to take without compensation all the land of the country, the workman who through the agency of a building society is now able to call his house his own, would find himself dispossessed of the land on which it stands. If the nationalisation of the land without compensation is thus flagrantly unjust, it can, we think, be shown that nationalisation with compen- sation, though not so unjust, would prove incalculably mischievous in its consequences. In the opinion of a well-known statistician, Mr. [now Sir] Robert Giffen, the annual rent of the agricultural land in this country is about 66,000,000^. Take this at 30 years' purchase, and the amount of compensation required for the agricultural land alone would be 2,000,000,000^., or nearly three times the amount of the National Debt. And when the State had become the possessor of all the land, what is going to be done with it ? What principles are to regulate the rents to be charged? Who is to decide the particular plots of land that should be allotted to those who apply for them ? If the rent charged is to be determined by the competition of the open market, in what respect would a cultivator be better off if he paid a competition rent to the State instead of to a private individual ? and if the market price is not to be charged, who is to bear the loss? from what fund is the deficiency to be made good ? There is only one answer to this question ; it must be made good from the general taxation of the country ; and increased taxation means still more taken from the hard- won wages of the people. But the subject may further very properly be looked at from another point of view. If the Government owned the land and State Socialism and the Nationalisation of the Land. 293 once began letting it on any other terms than those which regulate the transactions of ordinary commercial life, there would be opened indefinite opportunities for State patronage and favouritism, and the demoralising corruption that would ensue would be more far-reaching and more baneful in its consequences than even the pecuniary loss which the scheme would involve. If land was to be allotted as a matter of patronage, who would have the fertile plots and who would be relegated to those barren soils which, under the most favourable conditions, will scarcely pay for cultivation ? It would therefore appear that the nationalisation of the land would inevitably lead to this dilemma : — if the land were let at less than its market price, not only would there be an unlimited field for State patronage with all its attendant corruption and demoralisation, but the difference between the amount at which the land would be let, and its letting value, if a competition rent were charged, would involve an enormous annual deficit that would have to be made good at the expense of the general body of the tax-payers of the country. It is further to be remarked that this deficit would by no means represent the whole loss that would be involved, because it cannot be doubted that the raising of so large a loan as 2,000,000,000^. which, as has been stated, is the estimated value of the agricultural land, would considerably afiect the credit of the State. The Government would have to borrow upon less favourable terms ; and the more unfavourable were the terms, the greater would be the difference between the amount yielded by the land and the annual interest on the loan, consequently the greater would be the loss which the community would have to bear. If in order to escape from this loss, and to provide a remedy against the difficulty of distributing the land among the various applicants, it should be decided, instead of letting the land at what is termed a fair price, to offer it to be competed for in the open market, the rents that would then be paid would be rack-rents ; and in what better position would the cultivators be, if instead of paying a rack-rent to a private individual they paid at least as high a rent to the State ? Instead of the position of BOOK II. CH. Xt. Unless rack-rents were charged the annual deficit woidd be enormous. Moreover if rack- renting were aban- doned the door wonld be opened to endless corruption and fa- vouritism. 294 BOOK II. CH. XI. The bene- fits arising from na- tionalisa- tion might he obtained by other means. Irish Land Act, 1881, and Tenants' Improve- ment Act, 1883. Manual of Political Economy. the cultivator being improved, he would, in numerous instances, be far worse off than he was before. A private owner can take account of many circumstances which it would be scarcely possible for the State to regard. It not unfrequently happens, for instance, under the present system, that the claims of an old tenant for consideration are not ignored, and there are many landowners who would not think of displacing an old tenant, although it might very likely happen that if the land were put into the market a somewhat higher rent might be obtained. It cannot, we think, be too strongly insisted upon that, in order to provide a security against favouritism and patronage, the State would have to administer its property according to strictly defined rules. If the State owned the land, rent would have to be levied with just the same rigour as an ordinary tax, and thus, so far as the cultivators are concerned, the result of nationalisa- tion would be that they would hold the land under a system of the most rigid rack-renting. It is sometimes contended that if the land were nationalised the disadvantages, to which reference has just been made, would be counterbalanced by the intro- duction of an improved system of land tenure. Thus, it is said, if the cultivator rented directly from the State, he would be protected against capricious eviction, and would be secured adequate compensation for any im- provements that might be effected in the land through his capital and skill. Nothing is farther from our intention than in any way to underrate the importance of the cultivator enjoying these advantages ; but it has been shown by the Irish Land Act of 1881, and by the Tenants' Improvement Act 1883, that it is possible to confer these advantages on the cultivators without bringing into operation all the evils which, as we believe, would result from nationalisation. The idea which forms the foundation of all these schemes of nationalisation is, that with the advance in the wealth and population of the country the value of land con- stantly increases, and that the portion of the additional value which does not result from an application of capital and labour, but is the consequence of the general progress of the nation, is a property belonging rather to 8tate Socialism and the Nationalisation of the Land. 295 the nation than to the individual, and might therefore be fairly appropriated by the State. Practical effect was sought to be given to this idea in the proposal made by Mr. J. S. Mill not long before his death, that the State should appropriate what he termed the unearned incre- ment in the value of land. But although this proposal with regard to the " unearned increment " of the land, sanctioned by his high authority, is deserving of most careful consideration, it seems to us that it can neither be defended on grounds of justice nor expediency. If the State appropriated this unearned increment, would it not be bound to give compensation if land became depreciated through no fault of its owner, but in consequence of a change in the general circumstances of the country ? Although there is perhaps no reason to suppose that the recent depression in agriculture will be permanent, yet it cannot be denied that in many districts of England there has been a marked decline in the selling value of agricultural land within the last few years. If, therefore, the State in prosperous times appropriates an increase in value, and if in adverse times the falling-off in value has to be borne by the owner, land would at once have a disability attached to it which belongs to no other property. If we purchase a house, a manufactory, or a ship, we take the purchase with its risks of loss and chances of gain ; and why with regard to land, and to land alone, should a purchaser have all the risks of loss and none of the chances of gain ? If thirty years ago 100,000^. had been invested in agricultural land, and if at the same time another 100,000/. had been invested in such first-class securities as railway, banking, insurance, water or gas shares, it can scarcely be doubted that if the latter investment had been made with ordinary judgment there would be, at the present time, a very much larger unearned increment of value upon the shares than upon the land. The increase in the value of the shares would have taken place quite independently of any effort or skill on the part of the owner, and therefore, it may be asked, why should this unearned increment remain as private property, if the unearned increment in the value of land is to be appropriated by the State ? BOOK II. CH. XI. Mr. Mill's doctrine of the ' ' un- earned in- crement ''' examined. Why should the State ap- propriate the tin- earned in- crement on land, hut not the un- earned in- crement on other pro- perty ? 296 Manual of Political Economy. BOOK II. CH. XI. The real end of land reform is to free land, and capital invested in land improve- ments, from legal resti'ictions which limit the amount of land brought into the market and impede the investment of capital in agricul- ture. We cannot help thinking that such proposals as those we have been considering, either to nationalise the land or to appropriate the unearned increment, would take us with regard to land reform exactly in the opposite direction to that in which we ought to move. If we associate with the ownership of land any disability or disadvantage which does not belong to other kinds of property, a direct discouragement is offered to the investment of capital in the improvement of the soil : whereas what above all things should be striven after, is to promote the free flow of capital to agriculture. At the present time, so great is the accumulation of capital in this country, that it flows in a broad and continuous stream towards almost every quarter of the world. This takes place at a time when the productiveness of millions of acres of land in this country miglit be increased by improved cultivation. As the field for the employment of labour on the land extended, wages would be increased, a stimulus would be given to the general industry of the country, and the extra food which would be yielded would bring additional comfort to every humble home. It therefore appears to us, as previously stated, that the chief end to be sought in the reform of land tenure is to free the land from all restrictions which limit the amount of land which is brought into the market. The existing laws of primogeniture, settlement, and entail, combined with a costly system of conveyancing, impede the transfer of land, and thus lessen the opportunities of associating the ownership with the cultivation of the soil. Such an association would, in our opinion, not only offer the best security for efficient agriculture, but would in various other ways be highly advantageous to the entire community. Some idea may be formed of the advantage which may result from uniting the ownership with the cultivation of the soil, if we consider how little chance there would be of manufacturing industry in our country successfully encountering the close competition with which it has now to contend, if in England manufactories generally had to be rented, whereas in other countries they were owned by the manufacturers. It can be at once seen at what a disadvantage English manufacturers would be placed, if every time they wished to introduce State Socialism and the Nationalisation of the Land. 297 new machinery or to carry out other improvements, they had to calculate whether or not a portion of the resulting profits would not be taken away from them in the form of increased rent. Legislation may give the tenant an important security for his improvements, but we believe it will be found that in all industry no legislation can give the same security as that which is obtained when a man feels that he is applying his capital and labour to increase the value of his own property. The next scheme of State socialism to which it will be desirable to direct attention is the construction of railways, canals, and other public works from funds supplied by the Government. Although a demand has sometimes been put forward that public works should be undertaken at the public expense, yet the system has hitherto in this country only been carried out to a very limited extent. Under certain conditions CJovernment loans are advanced to municipalities and other public bodies. The Public Works Loan Commissioners, through whom these loans are made, only make an advance upon adequate securit}^ such as the rates. In India, the Government regularly spends large sums of money on public works ; but the motive which prompts this ex- penditure is not to lind work for the unemployed, but it is supposed that the mass of the Indian people not having obtained the same social advancement as those by whom they are governed, it is requisite to construct for them railways, canals, roads and other works which would not be carried out through the private enterprise of the people themselves. Although considerations such as these may justify the Government in extending public works in India, yet experience has shown that even in India the greatest care and watchfulness are required to prevent very serious evils arising. It has often happened that the construction of public works in India has in- volved the Government of that country in very grave financial difficulties. When the return upon the works is not sufficient to pay the interest on the loans raised for their construction, the deficit has to be made good by an increase in general taxation ; and in a country such as India, where the mass of the people are extremely poor and where the resources of taxation are very limited, it BOOK II. CH. XI. 77te policy of con- structing public ivorks by the Govern- ment considered. in India, Manual of Political EconoTny. is almost impossible to exaggerate the harm that may be done, if it becomes necessary to resort to increased taxation. In France the construction of public works by the Government has been undertaken from motives altogether different from those which prevail in India. The primary object in France is to give additional employment to the labouring classes. It cannot be for a moment supposed that any remunerative public work would not be supplied through private enterprise and private capital. In no country, probably, is there a more general diffusion and greater accumulation of wealth than in France, and the enormous sums which are forthcoming whenever a new loan has to be raised show that it is scarcely possible to place any assignable limits to the amount of capital which the French people are willing to supply whenever they consider that an opportunity is offered of a safe and profitable investment. If therefore any particular public work is not constructed in France through private enter- prise, it can be fairly concluded that in the judgment of the French people it does not afford a reasonable prospect of profit. As all experience shows that an industrial work carried out by a Government is not likely to lead to greater economy than if it is constructed through private agency, a work which is not carried out by private enterprise because it is unremunerative, will in all probability be still more unremunerative if it is undertaken by the Government. We are thus again brought face to face with the same diflaculty which had to be met when considering the schemes for the nationalisation of the land, and we have to ask on .whom would fall the loss which would result? To such an enquiry only one answer can be given : the State, as we have often had occasion to remark, far from having any great store of wealth from which draughts can be freely made without any one being the poorer, has to obtain every shilling it expends from taxation. It cannot more- over be too constantly borne in mind that all taxation takes from the pockets of the people a great deal more than it yields to the State. It is probably a moderate estimate to assume, when account is taken of the expenses of collection and of the hindrance to trade involved in taxation, that if the carrvine- out of a public works carrying State Socialism and the Nationalisation of the Land. 299 policy led to a deficit of 5,000,000?., the real loss to the community would not be less than 6,000,000?. There is another consideration which demands most serious attention. The expenditure by the State of large sums upon public works disturbs the natural flow of labour. Great masses of workmen are aggregated in particular districts, and when expenditure begins to slacken they are naturally eager for fresh employment, and the Government, in order to appease political dis- content, may not improbably be forced to commit itself to still further outlay. As an instructive warning of the straits to which a Government may be forced if it inter- feres with the natural development of trade, it may be mentioned that in the Spring of 1883 there was much distress amongst the workmen of Paris ; many of them had been attracted from the country districts by tempting oflers of employment which were made during the time when public Avorks on a large scale were carried out in Paris. The demand for work became so persistent that it was seriously proposed to order new furniture for all the Government offices in Paris, not because it was wanted, but in order that employment might be found for the distressed cabinet-makers. It would be scarcely more unreasonable to engage some one to break all the lamp-posts with the view of giving work to those who would replace them. Considerations similar to those to which reference has just been made, apply to all the schemes that are from time to time brought forward for carrying out various industrial undertakings by State funds instead of by private enterprise. Thus it has often been advocated in the programme of modern Socialists that cooperative institutions should be aided by capital advanced by the State. Whilst placing the highest value upon the ex- tension of cooperation, we believe that no more fatal injury could be inflicted upon the movement than that the founders of cooperative institutions should be accus- tomed to rely, not upon their own efforts but upon State help. It is particularly worthy of remark that of the many French cooperative institutions which received assistance from the State at the time of the revolution of 1848, not one obtained any permanent success. It is not difficult to explain their failure. Every trade is BOOK II. CH. XI. Socialists sometimes demand Govern- ment aid for Coope- rative In- stitutions. Manual of Political Economy. certain sometimes to have to contend with the reverses of bad times ; the surest way of triumphing over these difficulties is to exercise patience, care, and perseverance ; and nothing is so likely to lead to failure as if encourage- ment is given to a relaxation of effort by the feeling that if fresh funds are required recourse can be had to the coffers of the State. If the credit of any commercial undertaking is good, there is no difficulty in its obtaining an advance of capital from bankers and others, whose special business it is to secure a profitable investment for the large sums placed at their disposal. If the State makes loans in cases where they cannot be obtained from ordinary commercial sources, it is clear that,in the judgment of those best qualified to form an opinion, the State is running a risk of loss which may necessitate increased taxation. Although in England very little support has been given to proposals to assist cooperative institutions by State loans, yet within the last few years other schemes, which we believe may produce consequences very similar to those just described, have received much public favour. In Ireland three-fourths of the purchase money is ad- vanced by the State to enable small farmers to purchase the land they cultivate, and it is evident that an effort will be made to extend the system to England and to Scotland. If the plan is simply considered in its financial aspects, it is at once evident that public funds are used in a manner that may lead to a loss which will have to be borne by the general body of taxpayers. For if the public money which is advanced could be regarded as a safe investment, there would, as previously remarked, be no necessity to have recourse to State assistance. If, moreover, the aid of the State can be evoked to enable small farmers to become the owners of the land they cultivate, it can hardly be doubted that gradually the system of State assistance will have to be extended. The workmen in the towns would not unnaturally think that they should share the advantages of State help; and they might urge that they should receive some assistance to enable them to become the owners of the houses in which they live. Such demands would be most power- fully stimulated if it became necessary to impose addi- tional taxation in consequence of losses that might accrue State Socialism and the Nationalisation of the Land. 301 on advances made by the State ; because a feeling would inevitably arise that if the community were fined for the sake^ of providing advantages for a special class, these advantages should be shared by all who had to bear the burden. We fear, however, that the financial loss may be by no means the most serious evil resulting from a large extension of the plan of creating small properties in land by means of Government loans. It is at any rate deserving of most careful consideration whether similar results will not follow the scheme of creating peasant properties by State help to those which have been produced by the attempt in a similar manner to foster cooperative institutions. If some hundreds of thousands of small farmers were debtors to the State, it might not improbably happen that, in a period of agricultural depression, they would not encounter their difiiculties by increased energy and enterprise, but would be encouraged to seek a remedy in the tortuous courses of political agitation. The State would be represented as a hard taskmaster, mercilessly exacting the uttermost farthing from the suffering and the impoverished ; and political support might be given to those who would most deeply pledge themselves to secure a partial remission of the debts that had been incurred. It seems probable that the scheme of State Socialism which in England, during the next few years, is likely to assume most importance is the erection of improved dwellings for the poor by funds supplied either from imperial or local taxation. It is almost impossible to overstate the evils which result from the overcrowding of a large portion of the population in \\T?etched and unhealthy dwellings. As stated by Mr. Bright in his rectorial address at Glasgow (March, 1883), it appears that even in that wealthy city no less than forty-one out of every hundred families live in a single room, and that beyond these forty-one, thirty-seven families out of every hundred live in two rooms.^ In view of such a ^ The deplorable state of things disclosed by these figures is probably in large measure due to the fact previously stated (see note p. 28-4) that the Scotch, compared with the English, have hitherto made little effort to provide themselves with better houses through the agency of Building Societies. BOOK II. CH. XI. Ought im- proved dwellings for the labouring classes to he pro- vided by the State ? ^02 Manual of Political Economy. state of things, no effort should be spared to bring into operation every agency which is calculated to improve the dwellings of the poor. Admitting that there c^n be no difference of opinion as to the desirability of the object to be attained, the question is at once suggested whether this object is likely to be promoted by erecting dwellings at the public expense. There is a wide distinction to be drawn between the interference of the State on sanitary grounds, and its interference with the object of supplying houses on more favourable terms than those on which they can be provided by private agency. There are strong grounds for concluding that it is expedient for the State to interpose, both with the object of preventing unhealthy houses being built, and in prohil^iting houses continuing in so bad a sanitary condition that they not only are dangerous to their inmates, but may become centres of disease to the neighbourhood. It can, however, be easily shown that immediately the State steps beyond these limits of interference, and attempts to control the rents that are charged by building houses through public funds, endless difficulties are at once suggested. If the rent asked for houses built by the State or by a municipality is not sufficient to pay the interest on the money expended in building them, the deficiency must be made good either by an increase in imperial or local taxation. Additional imperial taxation must in part ultimately be paid by the poor, and without discussing here the intricate question of the incidence of local rates, it is sufficient to say that rates are in a large part paid by the occupiers of houses. If, therefore, it became necessary, as the result of a municipality entering into building operations, to increase rates, the inevitable result must be that those who were fortunate enough to be selected as tenants by the muni- cipality would be virtually shifting a portion of the rent which they would otherwise have to pay, from themselves upon the rest of the inhabitants. Not only would this be manifestly unjust, but the very evil which it was sought to cure would in many instances be aggravated. A workman can only afford to spend a certain portion of his wages upon house-rent; suppose the amount spent by one who is earning 30s. a week is, State Socialism and the Nationalisation of the Land. 303 for rent and rates combined, 6s., the rent being 4s. 6d- and the rates Is. 6d. If his rates are increased by 6d. a week, the amount then remaining to him to spend in rent is reduced from 4s. 6d. to 4s. a week, and the accommodation which he will ultimately obtain will be proportionately diminished. There is yet another difficulty to be considered. What process of selection is to be adopted by the municipal authorities, in deciding who should be the favoured individuals to enjoy the advantage of living partly at the public expense, in houses with rents artificially re- duced ? It is obvious that poverty cannot be made the controlling principle of selection ; because, if this were done, a direct and powerful inducement would be held out to improvidence. Nothing could be more disastrous than to make the industrious poor feel that they were taxed in order to provide those who were impoverished by intemperance or improvidence with better and cheaper houses than they could themselves obtain. If no principle of selection were adopted, and if the houses built by the State or by the municipality were let at the highest rent they would fetch, is there any reason to suppose that a State or a municipality would, in such a trade as house building, be able successfully to compete with private enterprise ? This being the case, the result would be that although those who lived in the houses built by public funds Avould be paying competition rents, yet in all probability these rents would not be sufficient to return the interest on the outlay and the expenses of management, and the deficit would have to be made good either by adding to taxation or by an increase in rates. Probably, however, the most mischievous consequence that would result from the State or a municipality undertaking to supply houses, is the effect it would have in discouraging the efforts which the working classes are now making to provide themselves with houses. There is no fact connected with the social condition of the people more hopeful than the remarkable development of building societies. [These societies have enabled the working classes in the United Kingdom to invest no less a sum than 51,250,058?. in the purchase of the houses BOOK II. CH. XI. The dilem- ma again arises he- fween, on the one hand, rharr/ing a ftt/l com- jietiHon rent/or the houses built by the State or munici- pality, and on. the othe7- hand, encounter- ing ^finan- cial failure coupled with all the evils of favourit- ism and jobbery. Such a scheme tvould be a fatal blow to Building Societies. 304 Manual of Political Economy. in which they live.^] There is, we believe, no surer way of drying up this great stream of self-help and self- reliance than to teach the working classes that they should look, not so much to their own efforts, but to the State or to the municipality to provide them with the house accommodation they may need. The next scheme of State Socialism to which it is desirable to direct attention is the proposal, which has been sanctioned by the high authority of Prince Bismarck, to create a fund, obtained from a special tax levied upon employers, for the purpose of providing pensions and sick allowances for workmen who are partially or wholly disabled in consequence of accidents occurring in the course of their work. It has been sometimes suggested that the scheme is a natural outgrowth of that system of militarism which has assumed its highest development in Germany, and that so severe a strain has been imposed upon the industrial classes by compulsory military service that it is necessary to resort to exceptional measures to relieve it. It would, however, be foreign to our purpose in this place to consider the scheme in other than its economic aspects. With the object of clearly explaining the economic results which msbj be produced, it will be desirable to assume that the scheme is carried out in the simplest possible manner, and that the money required to give effect to the proposal is in part obtained by a special tax levied upon the profits of the employers. It will be necessary, in the first place, to consider what will be the effect of this tax, not only upon the employers, but also upon the rest of the community. Three questions are at once suggested : (1) Will the tax be really paid by the employers ? (2) Will the employers be able to compensate them- selves by a rise in the price of commodities, and thus shift the burden upon the general bod}^ of consumers ? (3) Will the employers be able, in consequence of the tax, to reduce wages and thus cause the tax to be really paid by the workmen ? We believe, from the answers to be given to these three questions, it will be clearly shown that the tax will ultimately have to be borne wholly or in large part 1 [Statistical Abstract, 1905.] State Socialism and the Nationalisation of the Land. 30.5 by the workmen. Suppose that the tax, in the first instance, is paid by the employer, and that his profits are consequently proportionately decreased. This diminu- tion in profits will render it less desirable to embark capital in the industry of the country ; because if capital were employed in some other way, such as the purchase of Government loans, or if it were exported for invest- ment abroad, the payment of the tax would be avoided. This lessening of the inducement to apply capital to home industry could have no other result than to diminish the demand for labour ; wages would consequently decline, and the tax, though paid by the employers, would really, in large part, be contributed by the labourers. It can be easily shown that very serious results might ensue if the employers attempted to compensate them- selves for the loss inflicted by the tax, by a rise in the price of commodities. In every country there is, in the great majority of industries, a keen and closely contested competition between the home and the foreign producer ; if the price of home products is artificially raised, the inevitable result will be at once to place home trade at a disadvantage ; business will become less active, profits and wages will both decline, and it may very possibly happen that the loss alike to employers and employed will be considerably greater than the amount of the tax. Even if there were not the competition just supposed, and if it were possible to maintain a rise in prices sufficient to compensate the employer for the tax, the labourers, being by far the most numerous class in the community, would, by having to pay an extra price for commodities, be just as certainly taxed as if the larger part of the tax were in the first instance levied from them. The same result would, of course, take place, if, as a consequence of imposing the tax upon the employer, he, in order to place himself on an equality with his foreign competitors, reduced wages. We, therefore, arrive at the conclusion that no course can be suggested which will prevent the tax, either wholly or in large part, being paid by the labourers ; and there- fore the effect of the scheme will be the same as if the labourers were directly taxed with the object of forming BOOK II. CH. XI. come out of the pockets of the workmen. 3o6 Manual of Political Economy. an insurance and annuity fund for their benefit. Amongst many objections that may be urged to such a plan of compulsory thrift, it may be mentioned that it would be impossible for the Government to obtain money for an insurance fund either from those who are unemployed, or from those who only earn wages just sufficient to provide themselves with the necessaries of life. The certain result of the Government making such an attempt would be to arouse a bitter feeling of resentment. Many forms of providence, such as insurance and making provision for old age and sickness, which are now rapidly spreading, would become unpopular; and we believe it would be found that not only would a Government hopelessly fail to introduce a system of compulsory thrift, but that the reaction that would result from the attempt would lead to there being far less thrift amongst the labouring classes than if it had never been sought to force it upon the people.^ ^ [Prince Bismarck's plan for the compulsory insurance of workmen in case of accidents came into operation in 1885. In case of total disable- ment the men receive a sum equal to two-thirds of their former average wages ; in case of partial disablement they receive half their former wages for 13 weeks, and after that a smaller proportion. In case of death, an allowance is made to the widow and children, not exceeding two-thirds of the average wages earned by the victim of the accident. To meet this liability, the employers in different trades have formed accident insurance associations called " Berufsgenossenschaften " ; the risk naturally varies in different employments ; it is found, for instance, that in the trade of ironfounders a payment to the Berufsgenossen- schaften of 0"48 per cent., on the annual sum paid in wages, is sufficient to cover the risk. Employers of labour in Germany, whom I have consulted on the subject, make no complaint as to the sum of money which they have been called upon to pay ; a firm which is paying, for instance, 15,000^. a year in wages is not seriously affected one way or another by paying 65/. a year to the Berufsgenossenschaften. All the higher class of employers would have provided for workmen injured in their service, without having been compelled to do so by law. The advantages of the scheme are (1) that it makes the lower class of employers recognise the claims of their workmen in this respect ; (2) the absolute certainty which it gives to the workman ; and (.3) the check which it will give to preventable accidents. The disadvantages of the scheme, from the employers' point of view, are the red tape with which it is worked by the German Government, and the consequent amount of elaborate book-keeping involved. The extra labour necessi- tated in keeping the books, in the manner laid down by the regulations, is estimated, by my informant, in his own business, as equal to half a clerk's time. It is obvious that this very considerably adds to the cost of the scheme, and that this cost is sure, ultimately, in the manner indicated in the text, to come upon the labourers.] State Socialism, and the Nationalisation of the Land. 307 Although a Government may by unwise interference materially retard social and economic movements which are calculated greatly to improve the condition of the people, yet we think that a Government may exert a very beneficial influence in making available various agencies that will render the practice of providence more easy. Unmixed good has, for instance, resulted from the intro- duction of savings banks, which are now so rapidly spreading in our own and other countries ; and it may be confidently anticipated that the people are more likely to make a prudent provision for the future, if they feel that they can enjoy the security of the State, and that years of thrift will not be lost to them by intrusting their savings to insolvent societies. It is, however, of the first importance that any scheme which is supported by the State should be conducted on sound commercial principles, and should be entirely self-supporting. Thus the savings banks which are administered through the Post-ofiice, far from throwing any charge upon the general taxpayers of the country, yield a profit which is sufficient to secure the State against any risk of loss. If this principle were once departed from, nothing but mischief would result. If, for example, in order to promote thrift, the State allowed a higher rate of interest on savings bank deposits than it could afford to pay, the general community would be taxed for the benefit of a special class, and rival political parties, prompted by a desire to gain popularity, might, having once departed from the path of sound finance, bid against each other by offering a still higher rate of interest, and thus an increasing burden would be thrown upon the community. In thus directing attention to the mischief which is likely to result from bringing into operation various schemes of State Socialism, we think it ought not to be concluded that an institution must necessarily be condemned because it may have associated with it some of the characteristics of socialism. As an example it may be mentioned that our Poor Law system is undoubtedly based upon socialism, because it confers upon every destitute person a legal right to be maintained at the public expense. It would not, however, be safe to conclude that the poor law ought to be abolished because BOOK II. CH. XI. It is pos- sible/or a Govern- ment to promote thrift, as e.g. throiujh the esta- blishment of Savings Banks. A 71 insti- tution is not neces- sarily had, because it is in some respects socialistic, e.g. the English Poor Law. 3o8 Manual of Political Economy. of the socialism which attaches to the system. Such a question ought to be determined by a careful balancing of advantages and disadvantages; and we believe that when this is done the conclusion will be that the abolition of the poor law, from the stimulus which would be given to all the evils associated with indiscriminate charity, would produce consequences which would be far more serious than any mischief which results from a poor law system when carefully and properly administered. Experience, however, has abundantly shown that a Government, in entering so far upon the path of socialism as to guarantee maintenance to all destitute applicants, incurs a responsibility so grave that, if it is not safe- guarded with the utmost caution, it may bring the most serious dangers upon the community. Before the intro- duction of the new poor law in 1834, for instance, pauperism was so much encouraged by the carelessness and laxity of administration which had previously prevailed, that English industry seemed likely to be permanently crippled by the burdens imposed upon it. If great watchfulness is not exercised in checking out- door relief, similar evils may again occur ; povert}'' and suffering naturally evoke so much sympathy that a demand for a more liberal administration of poor relief may easily be created. Proposals are also frequently brought forward to widen the application of the principle involved in poor law relief. Thus there are many who urge that as some of the poor find it difficult to pay for the education of their children, free education should be given at the public expense to all who choose to avail themselves of it.^ Amongst the pleas that are urged in favour of this proposal, it is said that as the money which free educa- tion would require would be contributed by the taxpayers and ratepayers of the country, parents would still pay for the education of their children, although in an indirect way. Precisely the same argument would justify such an extension of the present poor law system as would cause maintenance at the public expense not to be confined, as it now is, to the destitute; the right of enjoying it might also be conferred upon all who chose i[See note on p. 106.] State Socialism and the Nationalisation of the Land. 309 to avail themselves of it. It is also sometimes argued that a system of compulsory education has been intro- duced because it is in the interest of the State that the community should be properly educated, and that therefore, as the arrangement is carried out in the interests of the State, it is only fair that the State should bear the expense. But if this principle is accepted the responsibilities of the State might be indefinitely increased. It is to the national advantage that the people should be well fed, well clothed and well housed ; therefore it might be proposed that the feeding, clothing and housing of the people should be undertaken by the State. It is, moreover, to be remarked that the chief justification for the interference between parent and child, involved in compulsory education, is to be sought in the fact that parents who incur the responsibility of bringing children into the world ought to provide them with education, and that if this duty is neglected the State interposes as the protector of the child. It, no doubt, may be said that a very large part of the expense of popular education is now defrayed by grants obtained either from imperial or local taxation, and that as, consequently, so great an advance has been made towards free education, no harm could result from its complete introduction. In our opinion, however, great care ought to be taken to preserve some recognition of the individual responsibility which every parent owes to his children in reference to education, and instead of entirely sweep'ing away this responsibility, the people should be rather encouraged to regard the present system only as a temporary arrangement, and that as they advance, the portion of the charge for the education of their children which can now be shifted upon others should, instead of being increased, be gradually diminished. In bringing these remarks to a conclusion, we cannot help thinking that for some years to come many of the schemes which have been here considered may in various forms engage a large share of public attention. In endeavouring to explain some of the consequences which their adoption would involve, we should greatly regret to do any injustice to the motives of those by whom they are advoca,ted. Mischievous as we believe many of these 3IO Manual of Political Economy. BOOK II. CH. XI schemes would prove to be, the great majority of those by whom they are advocated are undoubtedly prompted by no other desire than to promote social, moral and material advancement. The conclusion, above all others which we desire to enforce, is that any scheme, however well intentioned it may be, will indefinitely increase every evil it seeks to alleviate, if it lessens individual responsibility by encouraging the people to rely less upon themselves and more upon the State. CHAPTER Xll ON THE ECONOMIC ASPECTS OF SLAVERY. i IT has been already remarked, that when land is culti- vated by a peasant proprietor, the entire produce belongs to him, because he provides the land, labour and capital ; but this ownership of land, labour and capital, by the same individual, is also characteristic of slave cultivation, for if a farmer owns slaves, they are as much a part of his capital as the horses which plough his ground. When land is cultivated entirely by slaves, no portion of the produce is allotted to the labourers in the form of wages ; slaves are not permitted to possess property, and they are therefore never paid wages ; they of course have to be fed, and so have the horses which till the ground. Slaves therefore should not be regarded as labourers receiving wages, since they are as much a portion of the cultivator's capital as any kind of stock or implements which he may possess. Consequently, in slave cultivation, the produce of the land has not to be distributed between rent, profits, and wages ; but simply between rent and profits. A discussion on the moral effects of slavery does not properly belong to Political Economy ; for this science only undertakes to investigate the phenomena which ' The American Civil War was at its lieight when this cliapter was written. Many of the remarks contained in it are consequently not pertinent to the present time. It is, however, perhaps advisable not to omit the chapter. It is still useful to be reminded of the true issue of that great struggle. This chapter, moreover, is chiefly based upon the speculations of the late Professor Cairnes, which afford a striking example of the skill with which the principles of economic science can be applied, to render intelligible the real character of a great political question. BOOK II. CH. XII. The pro- duce of slave culti- vation is divided amo7igst two classes. Import- ance of consider- ing the economic effects of slavery. Manual of Political JSconomy. concern wealth. No unimportant service, however, will be rendered to every philanthropist, and to every lover of freedom, if the principles of Political Economy demon- strate that slave labour is inefficient and uneconomical, and that it ultimately diminishes the productiveness of the soil. If these facts can be established, slavery must ultimately work its own destruction, provided that the area over which it is permitted to extend can be restricted. The economic aspects of slavery were never discussed in so clear and masterly a manner as in a work by Professor Cairnes, on ' The Slave Power.' The writer has most aptly said, that the labour of the slave has the three following defects : — ' it is given reluctantly ; it is unskilful ; it is wanting in versatility.' We will, there- fore, in the first place, explain the causes which produce, and the consequences which result from, each of these defects. No one can doubt that slave labour must be given reluctantly. The only object which the slave can have, is to do no more work than is sufficient to prevent corporal or some other kind of punishment being inflicted upon him ; the slave has no more interest in the pros- perity of the industry in which he is employed than the mere beast of burden, for, whether the crops are good or bad, he must be fed. An able-bodied slave could be sold in America for 2501., and therefore the self-interest of the slave-owners always provided a guarantee that the physical comforts of a slave were not so much neglected as to endanger his health. No farmer, if he wei-e in his proper senses, would ever permit a valuable horse to suffer, either from ill-treatment or from want of food, for if he could not afford to keep the horse properly, it would of course be better for him at once to sell it. A slave, therefore, has no motive to exert himself, for whether he is industrious or not, he is sure to obtain the food and clothing which his master thinks he requires. Consequently, his labour is extorted from him, and he requires to be most vigilantly watched. Slaves can, therefore, only be advantageously employed when the work upon which they are engaged is such that they can be collected together in gangs, for it is impossible to watch a great number of workmen when On the Economic Aspects of Slavery. 313 they are scattered about. This consideration suggests the reason why the only commodities which have been produced on any large scale by slave labour are cotton, tobacco, sugar, and rice ; for the cultivation which each of these commodities requires, is characterised by the circumstance that a great amount of labour is employed on a very small area, and the labour can therefore be concentrated. Mr. Olmsted, whose most valuable work on ' Slavery ' contains an exhaustive record of facts, has calculated that one labourer will cultivate ten acres of wheat, whereas one acre sown with cotton requires the labour of at least ten men. A similar remark holds true with regard to the other products, namely, tobacco, sugar, and rice, which are cultivated by slave labour. This necessity of working slaves in gangs, in order that they may be vigilantly watched, was strikingly exemplified by the geographical distribution of slavery in America ; for there was nothing in the original constitution of the States which composed the Federal Union that satis- factorily accounted for the fact, that the North was cultivated by free labour, whereas the South was culti- vated almost entirely by slave labour. It was sometimes hastily concluded, that Europeans could not work in the South, but this was an entire mistake ; many of the Southern States, such as Virginia, have a climate quite as well adapted to Europeans as many of the free States of the West, such as Wisconsin. The boundaries of slavery were not determined by climate, but by the nature of the products which the soil was best fitted to grow. If corn were grown by slave labour, this labour would be inefiicient, because it could not be sufficiently concentrated to be adequately watched ; hence slave labour becomes more expensive than free labour, and therefore cannot compete against it, when such a commodity as corn is grown. This conclusion was corroborated in a very remarkable manner, for some parts of the Southern States, such as the slopes of the Alleghanies, are well adapted to grow corn, and the other commodities which formed the staple products of the North. It is a most instructive fact, that these particular localities, although in slave States, and surrounded with slavery, were invariably cultivated by free labour. It BOOK II. CH. XII. This deter- mines the products upon ivhich slave la- hoxir is em- ployed, and its geo- graphical distribu- tion. Manual of Political Economy. was therefore proved that slave labour, because it was reluctantly given, must be most carefully watched ; and unless this can be done, the labour of the slave becomes so inejSficient that it is far more expensive than hired labour, even in those countries, such as America, where high wages prevail. Unskilfulness is the second defect which belongs to slave labour, and in fact this defect is an inevitable consequence of the first defect, because, when labour is reluctantly given, it is sure to be deficient in skill. If the slave has no motive to put forth his physical energies, he certainly has no greater inducement to apply his mental faculties in order to acquire skill and dexterity ; his position would in no way be improved, even if he were to show that he was a more valuable workman than his fellows. He must be fed, and so must they ; and the fact that his price would be advanced in the slave market by an increase of skill, is a matter of no consequence whatever to himself. The more a slave shows that he is capable of doing, the greater is the amount of work which will be extorted from him, and for this extra exertion he receives no additional reward whatever. It is, therefore, for the interest of the slave to disguise as far as possible from his master the amount and the kind of work which he can really perform; a heavy discouragement is consequentlj^ thrown in the way of the least mental efibrt, and slave labour must always be most unskilful. These conclusions can be corroborated by specific facts, for it has never even been proposed to employ slave labour either in manufacturing, or any other industry which requires skill on the part of the labourer. We will once more refer to Mr. Olmsted, for from personal observation he gives direct testimony with regard to the unskilfulness of slave labour ; thus, he says that the negro slave is entirely unfit to be trusted with machinery ; if he has placed in his hands any but the rudest tools, he is sure to break them. Mr. Olmsted afiirms that the slave owners of Virginia found it more economical to use implements so heavy and clumsy that it increased the cost of performing work at least ten per cent., simply because they were not so liable to be injured or broken. He also mentions the very curious fact, that On the Economic Aspects of Slavery, 315 mules were almost invariablj^ employed in the Southern States, instead of horses, because the slaves were sure to neglect or ill-use any animals of which they had charge ; the mule being a hardier animal than the horse, was consequently not so liable to be injured by the want of proper treatment. These facts, and others which might be enumerated, clearly prove that no skilled industry can ever be successfully carried on by slave labour. The third defect of slave labour, namely, want of ver- satility, is due to the same causes as those which produce the other two defects which we have already discussed ; for labour which is given reluctantly, and is unskilful, cannot possibly display any versatility. A labourer must possess considerable intelligence if he is able efficiently to perform several different kinds of work. Such intelli- gence, however, is sure never to be displayed by the slave; for if he only shows that he is able to do some additional kind of work, extra labour will probably be forced upon him, and therefore he rather loses than gains by acquir- ing versatility. Hence it is natural that slaves should show a great disinclination to be taught any new kind of work ; upon this point Professor Oairnes has said, ' The difficulty of teaching the slave anything is so great, that the only chance of turning his labour to profit is, when he has once learned a lesson, to keep him to that lesson for life. Where slaves, therefore, are employed there can be no variety of production. If tobacco be cultivated, tobacco becomes the sole staple, and tobacco is produced whatever be the state of the market, and whatever the condition of the soil.' Before proceeding to describe some important conse- quences which result from the defects in slave labour just enumerated, it will be advisable to anticipate a remark which may very probably be made. Some of our readers may say. Although it is true that the negro slave labour possesses all the defects which are here ascribed to it, yet these defects are inherent in the negro race, and do not necessarily form a part of the institution of slavery. The history of ancient countries no doubt gives some support to this opinion. When Greece was in her greatest glory, a considerable portion of her skilled industry was performed by slaves ; they constructed BOOK II. CH. XII. Slave labour is wanting in versatility. The expla- nation of these pecu- liarities of slave la- bour by the race of the slaves is untenable. 3i6 BOOK II. CH. xir. Slave la- hour iii only applicable to a few commodi- ties. Manual of Political Economy. buildings and other works which never have been sur- passed in artistic beauty. But the social position of the Athenian slave in no respect resembled the position occupied by the slaves in the United States. Even many Americans who did not live in the slave States despised the negro as a being degraded by inferiority of race, and considered that his colour made him a per- manent outcast. But the Greek slave was generally a captive obtained in war; perhaps he was respected for the courage he had sho;vn on the battlefield : he very possibly belonged to a race whom the Greeks scarcely regarded as their inferiors. The Greek slave had certain rights of property secured to him, and he always had a definite hope that he should be able, by his own exer- tions, honourably to emancipate himself. His industrial energy therefore, instead of being completely destroyed, was powerfully stimulated, and unlike the negro slave, whose interest it was to be unskilful, he had every motive to exert himself to the utmost. There is, there- fore, no parallel whatever between the condition of the Greek and that of the negro slave. Our previous con- clusions are consequently not in the least degree shaken ; for if slaves are as completely deprived of every human right as they were in America, we may be quite sure that their labour must exhibit all the defects which have been attributed to it, whatever may be the race to which the slave may happen to belong. From these defects in slave labour some very important consequences result. It has already been stated, that the slave is wanting in so many of those qualities which make labour efficient, that there are very few branches of industry which can be successfully carried on by slave labour. For instance, corn, and the various other products of European agri- culture, are never grown by slave labour. Slaves are never employed in manufacturing industry, because they cannot be entrusted with machinery; in fact, slave labour may be said only to produce four commodities, viz. cotton, sugar, tobacco, and rice. If any other kind of industry is attempted, slave labour is sure to be supplanted by free labour, because the superior efficiency of the latter makes it more economical. But although the four pro- ducts just enumerated can be profitably cultivated by On the Economic Aspects of Slavery. 317 slave labour, profit even in this case cannot be obtained unless certain conditions are fulfilled. It is, in the first place, evident that the unskilfulness and general ineffi- ciency of slave labour causes it to be extremely wasteful and careless. The cultivation of the land with such labour must inevitably be slovenly, and consequently the land is gradually impoverished. Moreover, there is another circumstance which tends to impoverish the land when it is cultivated by slaves ; for able-bodied slaves were, previous to the civil war, worth no less than 250Z. in the American markets. Hence a planter required a capital of 25,00()L in order to purchase 100 slaves. The greater part of the planter's capital was probably absorbed in obtaining slaves, and he therefore had little to spare for carrying out improvements in his land. Hence slave cultivation gradually exhausted the soil, and it, therefore, became all-important to the slave owners that they should be able to obtain fresh soils of virgin fertility. The highest authorities, many of them slave owners themselves, agreed with perfect unanimity as to the exhaustive nature of slave cultivation. We will quote the very remarkable testimony of the Hon. C. Clay, who was moreover a native of the South, and an advocate of slavery. He said, 'I can show you with sorrow, in the older portions of Alabama, and in my native country of MadivSon, the sad memorials of the artless and exhausting culture of cotton.' He then stated that the majority of the planters had not sufficient means to improve their land, either by rest or by the application of manures, and that they consequently moved farther West, or South, in search of virgin soils, which were impoverished in their turn ; and he then proceeded emphatically to affirm, that 'a country in its infancy, where fifty years ago scarce a forest-tree had been felled by the axe of the pioneer, is already exhibit- ing the painful signs of senility and decay apparent in Virginia and the Carolinas ; the freshness of its agricul- tural glory is gone, the vigour of its growth is extinct, and the spirit of desolation seems brooding over it.' These most suggestive remarks of Mr. Clay might be easily corroborated by a great mass of similar evidence. It may, therefore, be regarded as conclusively proved, BOOK II. CH. XII. It there- fore tends to exhaust the soil. Evidence of Mr. Clay. 3i8 Manual of Political Economy. Explana- tion of the policy of the South. that slave cultivation cannot continue to be profitable unless the slave-holders have at their command an abundant supply of fertile virgin soils. This suggests an explanation of the policy which was for many years pursued by the Southern States of America ; for they ceaselessly directed their efforts to bring new and unoccupied territories under the dominion of slave institutions. Texas was unjustly seized from Mexico, and yet its soil was not immediately wanted, for after its annexation comparatively few slaves were located there. The South, however, fully recognised the future importance of acquiring this vast area of fertile and unoccupied land. Similar motives induced the South to strain every effort to obtain possession of Kansas. At the commencement of the civil war in America, it was uncertain whether the issue involved was the immediate abolition of slavery. It was, however, foreseen by those most fitted to form an opinion, that the result of the war would determine the great question — Shall the limits of slavery be indefinitely extended ? As the struggle proceeded it was also foreseen that not only the exten- sion of slavery, but also its existence as an institution, were at stake. This prediction was justified by the events, for, happily for America and for mankind, the North triumphed, and slavery was for ever banished from the United States. It now only lingers as a recognised institution in Brazil^ and Cuba. 1 [Slavery was abolished in Brazil in 1888 by the then Princess Regent, and in Cuba as a result of the Spanish- American war of 1898.] BOOK III. EXCHANGE. CHAPTER I. ON VALUE AND PRICE. THE subject of exchange is so intimately connected with every question of poHtical econoni}^ that many writers on this science consider that the production and distribution of wealth cannot be understood without previously ascertaining the laws of exchange. There is reason for this opinion, because it is quite true that many commodities are only produced to be exchanged for other commodities, and the distribution of wealth, of course, implies the exchange of wealth. We believe, however, that clearness of conception is obtained by the arrangement adopted in this work, for the laws of the production and distribution of wealth have been discussed, without anticipating any of the laws of exchange, which will now be explained. The words value and price have already been occasion- ally employed without receiving any precise definition. Before investigating the laws of exchange, it is most important to define these words accurately ; for many of the most wide-spread errors with regard to economic science arise from confusing the words value and price. The difi'erence in their meaning will be best marked by an illustration. If a sack of wheat exchanges for a ton of coal, or if, in other words, a person who possesses a sack of wheat can obtain a ton of coal in exchange for it, then a ton of coal is the value of a sack of wheat ; or, employing more popular phraseology, a sack of wlieat is worth a ton of coal. It therefore appears that value implies the comparison of one commodity with another ; for a sack of wheat has some particular value with regard to every commodity for which it can be exchanged. X BOOK III. CH. I. Reasons for not previously consider- inc] value. Distinc- tion be- tween value and price. 322 Manual of Political Economy. BOOK III. CH. I. A general rise or /a! I, of value is impossible. Price is value esti- mated in the metals v^ed as money. If a sack of wheat could be exchanged for six pounds of tea, then six pounds of tea would be the value of a sack of wheat, when estimated in this particular manner. Value, therefore, is a relative expression ; for instance, if the value of wheat compared with any particular article falls to a certain amount, there must be a corresponding rise in the value of this commodity, compared with wheat; for if wheat declines in value, so that it will only exchange for half as much tea, then tea must manifestly rise in value, since it will now exchange for twice as much wheat. When, therefore, the general value of a commodity declines, less of every commodity can be obtained for it in exchange ; but if this be so, the value of all these commodities must rise when compared with the particular commodity in the value of which it has been supposed a decHne has taken place. These consider- ations demonstrate the erroneous nature of a statement not unfrequently made, that there is a general rise or fall in the value of all commodities. This is as impossible as it would be for each one of six rowers to row faster or slower than the other five. A cannot row faster than his five companions, except by each of these rowing slower than A. In a similar manner, value is a relative expression, and essentially implies comparison. It is quite impossible that there should be a general rise of values, for if there is a rise in the value of one commodity, there must be a fall in the value of all the commodities with which this one is compared. All that is here stated may appear so simple, that it will perhaps be supposed that time is being wasted in explaining self-evident truths. These truths, however, are by no means self-evident when involved in the entanglement of more complicated propositions. A shade of error has been cast over the writings of some eminent political economists because they have neglected to keep steadily in view the correct meaning of the word value. Price is a particular case of value. If the value of a commodity is estimated by comparing it with those precious metals which civilised countries employ as money, then it is said that the price, and not the value of a commodity, is ascertained. If a sack of wheat is exchanged for a quantity of gold, termed a On Value and Price. 323 pound sterling, it would be perfectly correct to say that the value of a sack of wheat, estimated in gold, is one pound sterling; but, for reasons which will be afterwards explained, it is found convenient to single out this case of value from every other, and consequently it receives a particular name, for it is not termed value, but price. The price of a commodity may, therefore, be defined as its value, when estimated by comparison with those j)recious metals which by general consent have been adopted as money. Although there cannot be a general rise or fall in values, there can be a general rise or fall in prices. If the precious metals become much more plentiful, their value compared with all other commodities declines ; since a certain quantity of gold or silver will exchange for a diminished quantity of all other com- modities. If the value of the precious metals, compared with other commodities, is diminished, the value of all other commodities, compared with the precious metals, must be increased ; but, as before stated, the value implied in this latter comparison is termed price, and consequently the price of all commodities will be increased. In political economy a series of propositions may be enunciated, which treat of the value of commodities, and not of their price. This course is usually adopted, but it only adds to the difficulty of the subject, without attaining any practical object of utility ; for none of the transactions of trade and commerce in civilised countries are ever arranged without the machinery of a monetary standard. Money has aptly been described as the uni- versal medium of exchange. If it is desired to ascertain how much of one commodity another will exchange for, the calculation is always made in money ; the prices of the commodities, and not their values, are considered. If, for instance, a person who possessed wheat, desired to purchase coal, it would be important for him to estimate the value of wheat compared with coal ; but he would not attempt to do this by actually bartering awa}'' his wheat for coal ; such bartering would be cumbrous and expensive. All that it would be necessary for him to do would be to ascertain how much money his wheat would exchange for. When he thus knew the price of a sack BOOK III. CH. I. Reasons for con- sidering price in- stead of value in this trea- tise. 324 Manual of Political Economy. BOOK III. CH. I. Ordinary method of political economists. We. shall assume at present that the value oj the preci- ous metals is not affected hy any change in the mines. of wheat, and also the price of a ton of coal, the value of wheat estimated in coal would be immediately known, because the quantity of coal for which a certain quantity of wheat would exchange would be accurately ascertained. As therefore, in practice, questions of value involve a comparison of prices, our investigations will be simplified if the laws regulating the price of commodities are considered, without attempting to establish propositions with regard to the values of commodities. But until the functions of money are explained, it will be necessary carefully to bear in mind that a certain assumption is made in all the investigations which involve the con- sideration of price. The assumption is this ; that when the price of a commodity varies, the variation is always supposed to be produced by something which affects the value of the commodity, and not the value of the precious metals. We will endeavour to explain ovir meaning still further, by an illustration. Suppose it is observed that the price of wlieat rises ; this rise in the price of wheat may be due to two very distinct causes. In the one case, wheat may become scarcer, and therefore dearer; in the other case, wheat in common with every other commodity may rise in price, in consequence of new discoveries of the precious metals, such as those made in Australia and California about 1850. In the following chapters, therefore, which precede the discussion of the theory of money, the assumption is made that variations in price are not caused by an alteration in the value of the precious metals. CHAPTER II. ON THE CAUSES WHICH REGULATE THE PRICE OF COMMODITIES. THE commodities which compose the wealth of a nation may be divided into three classes ; and the manner in Mdiich the price of any particular commodity is regulated depends upon the class or division to which the commodity belongs. The three classes may be characterised as follows : — 1st. Some commodities are absolutely limited in quantity ; however great the demand may be for them, it is impossible to increase their supply. Only a certain luimber of sculptures and paintings by ancient masters are extant, and no efforts can increase their number. Again, if some particular site is thought desirable for a house, the number of houses which can be built upon this site cannot exceed a certain limit. Thus, the shops in a thoroughfare such as the Strand, or Fleet Street, cannot exceed a certain number; articles of vertu, curiosities and antiquities, which are prized because some particular associations are attached to them, are in a certain degree hxed in quantity. There may thus be perhaps half a dozen very rare coins in the cabinets of collectors, and no one can feel certain that another of these coins will ever be discovered. 2nd. Some commodities can be increased in quantity, without any practical limit, but if their supply is in- creased their production will require a greater propor- tional expenditure of labour and capital, and therefore these commodities have a constant tendenc}' to become more expensive, as the demand for them augments. We have already remarked that this character peculiarly BOOK III. CH. II. Three classes of commodi- ties. Those which are absolutely limited in quantity. Those of which the sjipply may be increased by greater proportion- al labour. 326 Manual of Political Economy. BOOK III. CH. II. Those uihich may he indefi- nitely ill- creased at the same rate of labour. Laws which regxdate the price of these classes. Example of the first class. The price of a pic- ture hy a deceased artist. belongs to agricultural produce. If there is an increase in the demand for agricultural produce, it becomes necessary to resort to less productive land, which cannot be cultivated without a greater expenditure of labour and capital in proportion to the produce which is raised from it. Many of the most important speculations of economic science, for instance Ricardo's theory of rent, depend upon the tendency wliich agricultural produce has to become more expensive, as the demand for it increases. 3rd. Some commodities can be increased to a practi- cally unlimited extent without increasing their cost. Manufactured goods may be placed in this class; for although the cost of the raw material will, like the cost of agricultural produce, increase as the demand for it is augmented, yet the increase of cost which is thus pro- duced may be almost neglected, because it bears such a small proportion to the whole cost of the manufactured article. Other articles, such as household furniture and wearing apparel, may be placed in this third class. There is no reason why shoes, for instance, should become scarcer because there is a greater demand for them ; there could be no difficulty in supplying ?a\y number of shoes for which there may be a demand. Very diflerent laws regulate the price, and therefore the value of a commodit}^, according to the particular class to which it belongs. We will commence by con- sidering the commodities included in the tirst class. The works of a deceased artist have already been stated to be included in this class. Let us inquire what determines the price of one of Turner's pictures. The price is usually supposed to be regulated by demand and supply, but the words ' demand and supply ' appear to be a never-failing recipe for solving every economic difficulty; popular writers and popular speakers seem to think that an explanation based upon demand and supply must be not only very satisfactory, but also extremely scientific. The expression ' demand and suppl}^ ' too often conveys as little meaning to those who use it as to those to whom it is addressed. If the question were asked — What regulates the price of Turner's pictures ? — the reply would not improbably be made that the price is regu- The Causes which regulate the Price of GomTnodities. 327 lated by the ratio which exists between the supply of these pictures and the demand for them. It surely must be erroneous to speak of a ratio between demand and supply : there cannot be such a ratio, for supply in this case means a certain number of pictures, and demand in this case signifies a desire to possess a picture. It is, therefore, absurd to attempt to establish a ratio between a picture and a desire to possess it. A ratio can only exist when the two things compared are of the same kind. Demand is an indefinite expression; every educated person would like to possess a picture by Turner, and, therefore, in this sense the demand is almost universal ; but the universality of such a demand cannot produce much effect in determining the price of a picture ; every beggar would like to have a diamond, but a jeweller does not for this reason obtain a higher price for diamonds. This obvious ambiguity with regard to the meaning of the word ' demand ' has suggested to political economists the use of the term ' effectual demand.' It is intended to denote by this expression, the demand which is exerted by those who are not merely desirous to possess some particular commodity, but who also have the requisite means to purchase it. This demand is the only one which can be effectual in producing any influence on prices. Although the employment of the words ' effectual demand ' recognises a real difficulty, yet the difficulty itself continues to remain unsolved, for it cannot be said that the price of an article is regulated by the effectual demand for it, since a moment's consideration will clearly show that the effectual demand for an article varies with, and depends upon, its price. If Turner's pictures could be purchased at ten guineas each, there would be a much greater demand for them than if the same pictures realised a hundred guineas each. The effectual demand, therefore, varies with the price ; an adjustment takes place, the price ultimately being such that the effectual demand which results from it will be satisfied by the supply of the article in question. If one of Turner's pictures were to be sold, and three individuals, namely A, B, and C, were each willing to give 1,000 guineas for it, the effectual demand for this picture, when its price is 1,000 guineas, would be manifestly greater than the BOOK III. CH. II. The state- ment that it is deter- mined by the ratio of supply and demand is inaccu- rate. Meaning of the term ' effectual demand. ' Nature of the adjust- ment be- tween sup- ply and demand tvhich actually takes place. 328 Manual of Political Economy. BOOK III. CH. II. Higgling of the market. The notion of ' ratio ' between demand and supply must be discarded. A further analysis is necessary. supply ; for at this price three persons have a demand for one article. If A and B are each willing to give 1,500 guineas for this picture, but C will not give so much, the effectual demand for this picture, when its price is 1,500 guineas, still exceeds the supply. Again, suppose that A is willing to give 2,000 guineas for the picture, but that B will not give more than 1 ,900 ; the price at which the effectual demand will equal the supply may then be any amount between 1,900 and 2,000 guineas. The price, however, winch this picture will actually realise depends upon what has been aptly termed by Adam Smith the higgling of the market. Since B is willing to give 1,900 guineas for the picture, but no more ; and since A will not purchase it at a higher price than 2,000 guineas, the picture must consequently sell at some price between 1,900 and 2,000 guineas. If A had certain knowledge that B would not give for the picture more than 1,900 guineas, A would probably offer to purchase it at a price slightly exceeding this, and at this price he would no doubt obtain the picture. If, however, the owner of the picture knew that A would give 2,000 guineas for it, rather than not possess it, he might pretend to hesitate about selling the picture to A, and might ultimately succeed in inducing A to offer 2,000 guineas. Demand and supply, therefore, determine, within very narrow limits, the price of all those commodities which may be classed under our first division. The price which is actually realised oscillates between these narrow limits, according as the vendor or purchaser has the most skill and knowledge of trading operations. Hence it appears that the prices of all those articles which are classed under our first division are regulated, not by a ratio between the demand and the supply, but by an equalisation of the demand to the supply. The notion of a ratio ought therefore to be discarded, since it is not a ratio, but an equation. A further question may now arise. Why should A be willing to give 2,000 guineas for a picture, which B will not purchase at a greater price than 1,900 guineas, and for which C will not bid more than 1 ,000 guineas ? A, it is said, considers the picture worth 2,000 guineas ; but this is not a sufficient explanation. Why does he place The Causes which regulate the Price of Gommoclities. 329 this particular value upon the picture, whereas B and C place a less value upon it? A further analysis is consequently required. Value is composed of two elements, and these two elements respectively arise, first from the use which the individual may have for the article, and secondly, from the difficulty he may have in obtaining it. These two elements, which are the com- ponents of value, may be symbolised by the letters U and D. U is supposed to signify value as depending upon utility, and D signifies value as depending on difiiculty of attainment; both of these elements must always be present whenever an article has an exchange value. No commodity can be more essentially useful than water, yet water never has any exchange value, unless there is some difficulty in obtaining it. It is true that in larg-e towns water has an exchange value, and it is consequently sold at a certain definite price ; m this case, however, the element D is present, for in large towns there is a difficulty in obtaining water ; the spontaneous suj)ply which nature provides soon becomes exhausted, and water has at a considerable outlay to be brought from a distance. On the other hand, no article can obtain exchange value unless the element U is present ; since difficulty of attainment will not make an article valuable, unless it either can serve some practical use or gratify some desire. A precious stone, such as a ruby, is prized as an ornament ; it therefore has its use, because it serves to gi-atify a desire. It is generally said that rubies are very valuable, because they are so very difficult to obtain ; but if, in consequence of a change in fashion or taste, they should ever cease to be prized as ornaments, they would then have no value at all, although it might be just as difficult to find a ruby as before. Both the elements U and D must therefore coexist in every article which has exchange value, for an article, however difficult to obtain, can have no value unless it is capable either of supplying some want, or gratifying some desire ; on the other hand, no article can possess exchange value, if it can be obtained without difficulty, although the article may be of prime necessity. It is not possible beforehand to predicate in what proportion the two elements U and t) may combine to BOOK III. CH. II. The (wo elements of value. A bsohUe utility and difficulty of attain- ment. The first exempli- fied in the case of water. The second in the case of precious stones. 330 Manual of Political Economy. BOOK III. CH. II. The price may be de.lermined by either or both of these elements. The utility can be the sole ele- ment ope- rative, only jvhen the supply is abso- lutely limited. Exempli- fied by the former instance. form the value or price of any particular commodity. In almost every case the price at which an individual purchases a commodity represents in value only a very small portion of the use or advantage which the possession of the article confers upon the individual who purchases it. A person buys a coat for three pounds, because at this price a coat of the quality he requires is offered to him : but three pounds does not represent the use which the person who purchases the coat derives from it, for if he had the money he woald no doubt give thirty guineas, rather than be without a coat ; therefore, in this case, the element U only exerts a small portion of its whole force in determining the price of a coat. The price is in this case almost entirely regulated by D. or, in other words, by the difficulty of obtaining the coat. As, however, before remarked, IT, although only partially operative, can never be entirely absent. The example just quoted illustrates the manner in which the two elements U and D combine to produce the price of a commodity. U is in fact almost invariably only partially operative ; tliis is the general rule, for the case may be regarded as a very rare exception when U as well as D both exert their full influence upon the price of an article. When such a case does occur, the purchaser of a commodity is guided, in the price which he offers for it, solely and entirely by the consideration of the use or pleasure he expects to derive from the article. This can only happen when the supply of a commodity is absolutely limited. To explain this still further, let us revert to our original example, which supposes that three persons. A, B and C, are each anxious to purchase some particular picture by Turner; C will not give more than 1,500 guineas for it, B not more than 1^900, and A ultimately purchases it at a price between 1,900 and 2,000 guineas. With regard to C and B, 1,500 guineas and 1 ,900 guineas represent tlie value in use, which C and B respectively place upon the picture. This, therefore, is the monetary value of the element U, according to the individual opinion of C and B. In A's estimation, the value of the element U is greater, for to him the picture has a value of 2,000 guineas. As before remarked, the price which the picture actually realises will be some amount between The Causes which regulate the Price of CoonmocUties. 131 1,900 and 2,000 guineas, because if the price sank below the inferior limit there would be a greater demand for the picture than the supply ; if the price exceeded the superior limit the demand would entirely cease, because this superior limit denotes the greatest value in use placed upon the picture by the person who is most anxious to possess it. To recapitulate, therefore, it may be stated, that the following principle regulates the price of all those commodities the supply of which is absolutely limited. The demand depends upon the price ; the price must be such that the demand will exactl}^ equal the supply. The value in use which an individual may happen to set upon some particular article is the result of various motives, which it is almost impossible to analyse. Thus to one individual. A, the value in use of one of Turner's pictures is 2,000 guineas, for A would rather give this sum than be without the picture. To B, however, the value in use of the same picture is only 1,900 guineas. It is quite evident that various motives may induce a greater value in use to be attributed to this picture by A than by B ; A may be a wealthier man than B, and money may consequently not be of so much importance to him. A may perhaps also have a superior taste for art, which makes his appreciation of a painting greater than that of B. A may also be influenced by a hope of future gain, since he may expect to realise considerable sums by granting permission to have the picture en- graved, or he may think that after a few years have elapsed the demand for the works of the particular artist may so increase as greatly to enhance the value of the picture. In every case, a great variety of motives operate upon different individuals in determining the value in use which each may place upon any particular article. The articles, the supply of which is absolutely limited, are so few in number, that it may be thought that the above example has been too minutely investigated. It is, however, somewhat curious that those principles of economic science which are apparently the most simple are usually treated with the greatest obscurity. With few exceptions, political economists have failed clearly to BOOK III. CH. II. Value in use ca)inot be ana- lysed. The value of the class 0/ articles absolutely limited is often ob- scurely explained. 332 Manual of Political EconoTiiy. explain the principles which regulate the price of such a commodity as the one just considered. In the succeeding chapter the causes will be analysed which determine the price of those commodities comprised in the second of the three classes previously enumerated at the commencement of this chapter. CHAPTER III. ON THE PRICE OF AGRICULTURAL AND MINERAL PRODUCE. IT is desirable to devote a separate chapter to the consideration of the laws which determine the price of agricultural produce. In all questions relating to price, a broad distinction must be drawn between agri- cultural and manufactured produce. As previously stated, an increase in the demand for the former usually causes an advance in price : whereas the supply of manufactured commodities can be, as a general rule, increased without producing any material advance in their price. Many causes make the price of agricultural produce vary from year to year. Our corn markets are in- fluenced not only by the productiveness of the last harvest, and by the prospects of the next, but they are also greatly affected by the good or bad crops of other countries. Since so many circumstances cause a great fluctuation in price, it may perhaps appear impossible to establish any general laws with regard to the price of agricultural produce. It will, however, be shown that the variations in the price of such produce, though constant and great, obey certain laws with strict regularity. No farmer will rent land unless he believes that the price which the produce realises will, on the average of years, suffice to pay his rent and all the expenses of cultivation ; a surplus must also remain adequate to remunerate him, not only for the capital he has invested in the business, but also for his own labour of super- intendence. When the farmer is fairly remunerated for BOOK III. CH. III. Agricultu- ral pro- duce is subject to consider- able fluc- tuations in price. Determi- nation of the ordi- nary pro- fits of farming. 334 Manual of Political Economy. BOOK III. CH. III. They are determined by the average value of the pro- duce after deducting the rent and other expenses of cultiva- tion. Effects oj a rise oJ rents. his labour and capital he may be considered to realise the ordinary profits of trade. It is quite impossible that the prices in any particular trade can per- manently be so low as to prevent these ordinary profits being realised; because no traders would be satisfied to continue investing their capital in a business if much smaller profits were realised from this busi- ness than from others. From these considerations the following principle may be deduced — the price of agri- cultural produce must be such as will enable farmers on the average of years to realise the ordinary profits of trade. The profits of the farmer have above been described as the surplus which remains when all the expenses of cultivation have been deducted from the pecuniary value of the annual produce of a farm. These expenses include rent, the wages of labourers, the purchase of new implements, the wear and tear of old implements, the loss which arises from the ordinary casualties to which live stock is liable, &c. It must be evident that any cause which increases the farmer's expenses must diminish his profits. Suppose the average annual value of the pro- duce raised from a farm is 2,000^., and that the expenses of cultivation are 1,500/., the farmer having to pay 500/. in rent, 800/. the wages of his labourers, and the remain- ing 200/. being required for various other necessary expenses, such as the purchase of implements, &c. Deducting the 1,500/. from the 2,000/., which is the annual average value of the produce of the farm, it is evident that the 500/. which remain would be the farmer's profits. Now let it be further assumed, that this 500/. is a fair remuneration to the farmer for his capital and labour of superintendence. Consequently, when his profits are 500/., he may be considered to realise the ordinary profits of trade. In this case, the prices obtained for the produce cause everything to be in a state of perfect adjustment. It, however, frequently happens, that the rent of land in the course of a few years considerably rises. Let us inquire what will occur if the rent of this farm is increased from 500/. to 700/. a year, whilst the price of agricultural produce, and the expense of cultivating the farm, remain unchanged. On the Price of Agricultural and Mineral Produce. 335 This increase of rent would reduce the farmer's profits from 500^. to 300^. ; but it has been above assumed, that when his profits were 500^. he obtained no more than the ordinary remuneration for his capital and labour of superintendence. He consequently receives less than the ordinary remuneration when his profits are reduced to 300/. He therefore virtually cultivates his farm at a loss, because he would secure a larger income if he applied his capital and energy to some other business. Under these circumstances, farmers would be induced gradually to leave their farms, and the land would be thrown out of cultivation. But as it is necessary that the people should be fed, the land must be cultivated. It may therefore be concluded, that neither rent, nor any other items of the expense of cultivating land, such as cost of labour, can be increased, unless the farmer receives a compensating rennineration from a rise in the price of agricultural produce. Let us now, however, revert to Ricardo's theory of rent, in order to understand how a rise in rent is produced. This theory describes rent as a price which is paid for the use of an appropriated natural monopoly. This monopoly arises from the fact, that the supply of fertile land which can be brought under cultivation in any particular country, cannot be increased beyond certain limits. The difference between the rents paid for two different farms represents the excess of the pecuniary value of the one farm above that of the other, whether derived from greater fertility or from superior advantages of situation. The land of each country varies so greatly in fertility, that every country possesses some barren tracts which are too poor to be cultivated, even if granted rent free. England lias soils of every degree of fertility, from the barrenness of her Yorkshire and Devonshire moors, to the rich luxuriance of the weald of Sussex and Kent. There will consequently always be some land which may be considered to be on the margin of cultivation. Such land will pay for cultivation if let at a merely nominal rent. Hence Ricardo's theory of rent defines the rent of any particular land to be the pecuniary measure of the degree by which it exceeds in productiveness that land which is just upon the margin of cultivation. It is BOOK III. CH. III. Cause of a rise of rents as deduced from Ri- cardo's theory of rent. 336 BOOK III. OH. III. Gonclunion as to the price of agricul- tural produce. Proof that rent is not an element in the price of agricul- tural pro- duce. Manual of Political Economy. evident that in the absence of agricultural improvements and the increase of importation from abroad the margin of cultivation descends as the population of the country increases, for it becomes necessary gradually to resort to less productive^ land, in order to supply a larger demand for food. But as the margin of cultivation descends, rents must rise, because as less productive land is brought under tillage, the greater M^ill be the difference between the produce raised from any particular land and the worst land under cultivation, and rent may be regarded as the pecuniary measure of this difference. The worst land, however, which is in cultivation at any particular time, will only just bear a nominal rent, and does no more than retarn the ordinary rate of profit to the farmer for his labour and capital. If, as population increases, it is necessarj?- to bring still worse land into cultivation, it will be manifestly impossible to till this land except at a loss, unless a rise takes place in the price of agri- cultural produce. Hence this principle is established — that the price of agricultural produce must always be such as will enable the ordinary rate of profit to be obtained from the worst land in cultivation, which pays a merely nominal rent. It can be easily shown, from this proposition, that rent is not an element of the price of agricultural produce; or, in other words, corn and food would not necessarily be cheaper if every farmer's rent in England were remitted for a term of years. As this proposition may at first sight appear to be a somewhat startling paradox, it will be well to explain it in some detail. Let it be assumed that every farmer has the rent of his farm remitted for the next thirty years : all the land cultivated would then be rent free. The question arises, Would this change produce any effect upon the price of agricultural produce ? The quantity of agricultural produce required, in any particular country, is not affected by the amount of rent paid for the use of land. If, therefore, all the land of England were made rent free, there would be no reason to suppose that either more or less agricultural produce would be consumed than 'The word "productive" here includes fertility and advantages of situation. On the Price of Agricultural and Mineral Produce. 557 when the present rents were charged for land. The same area of land would therefore have to be cultivated ; the margin of cultivation would neither ascend nor descend. That land, however, whose fertility is such as to place it just on the margin of cultivation, paid merely a nominal rent before the supposed change was introduced which made land rent free. The price of agricultural produce was, previous to this change, such as to enable the farmer to realise the ordinary profit of trade upon this land ; the land would not, of course, continue to be cultivated, if the price of agricultural produce was not sufficient to enable such profit to be obtained. But even if all rents were remitted, it would still be necessary to cultivate this particular land, because there is no reason to suppose that the country will require less agricultural produce than before. Hence the price of agricultural produce cannot decline in consequence of a remission of rents, since, if such a decline in price occurred, much of the land which was previously cultivated at a merely nominal rent would cease to return the ordinary rate of profit, and would therefore be thrown out of tillage ; but this cannot take place, because the demand for agricultural produce is as great as it was before. Hence if all the land of the country were rent free, it would not necessarily follow that the price of agricultural produce would be reduced. It may, therefore, be con- cluded, that the price of agricultural produce is not affected by the payment of rent. The price is really determined by the demand for agricultural produce ; because, as the demand increases, it is necessary to resort to less productive land. As the population of a country increases, the demand for agricultural produce becomes greater. Hence the price of agricultural produce tends to rise as the popula^tion of a country advances. This rise in price may be counteracted in the two following ways : — 1st. The introduction of agricultural improvements may supply a country with an increased quantity of food, without extending the area of cultivation. 2nd. The increased quantity of food required by a country whose population is advancing may be supplied by foreign importation. The price ofagricul- turcd pro- duce tends to rise as population increases, hut this rise is partly counter- ■ acted, >. 338 Manual of Political Economy. The effect of the importation of food, either in reducing prices or in preventing them rising, will be fully explained in the chapter on international trade. The last few years have afforded a striking example of the influence produced by the importation of corn. Since the repeal of the corn laws a very great increase in our population has taken place, but so vast have been the importations of corn, that there has been no rise in its price. It is however more difficult and costly to import fresh meat than corn; consequently, although considerable quantities of fresh meat and live stock have been imported, [these importations for many years seemed to produce no effect in checking the increase in the price of meat. This increase was very marked and rapid up to about the year 1883 ; but since that time there has been no rise in the price of home grown meat. The upward tendency of the price of meat, in a country like ours, of a rapidly increasing population, has been checked by greater facilities of importation, such as have followed the discovery of the plan of bringing over meat, without freezing it, in chambers where the air is constantly kept in motion and at a very low temperature.^] The intro- duction of important agricultural improvements has also assisted in meeting the increased demands for food. Drainage has produced fertility, where before all was useless sterility. Moreover, new agricultural implements, such as the steam plough, may yet be destined so much to economise labour, tliat land which will not now pay to be cultivated, may be made to return a remunera- tive profit, without any rise in the price of agricultural produce. In the absence, therefore, of agricultural improvements, it may be said that the price of agri- cultural produce is determined by the extent to which the demand for it has to be satisfied from the soil of the country itself. If the importation of food does not keep pace with the increased wants of an advancing population, the price of agricultural produce must inevitably rise. The price of mining produce is regulated by laws very analogous to those which determine the price of agricul- tural produce. Mineral deposits vary in richness, in the ^ See note on p. 80. On the Price of Agricultural and Mineral Produce. same manner as land varies in fertility. Some mines are more expensive to work, and less advantageously situated than others ; just in the same way as land may be incon- veniently situated, because remote from markets. Sup- pose the price of iron declined one half ; a great number of the existing iron mines would at once cease to return any profit, and could not be worked except at a very considerable loss. But people will not continue invest- ing their capital if they cannot realise upon it an adequate protit, and therefore such a reduction in the price of iron would cause all the least productive mines to be shut up ; the supply of this metal would conse- quently be greatly diminished. If this diminished supply sufficed to satisfy the demand, the reduction in price might be permanent. But if the demand was in excess of the suppl}^ a rise in the price of iron must follow, because, without such a I'ise, no adequate inducement could be offered to increase the supply by reopening those mines which a reduction in price had caused to be closed. It, therefore, appears that the supply of iron which is forthcoming at any particular time depends upon the price which this metal realises, because the price determines what mines can be worked at a profit. The following adjustment must therefore take place : the demand varies, coiteris paribus, inversely with the price, for the greater is the price the less will be the demand. On the other hand, however, the supply varies directly with the price, because the greater the price the greater will be the supply. If the price is too great, the supply will exceed the demand ; if the price is too low, the demand will exceed the supply. The price, therefore, must be such as to adjust the demand to the supply. When the price reaches this point, it is in a position of equilibrium. It is no doubt quite true that there are constant varia- tions in price, which prevent this position of equilibrium being continuously maintained, but this does not lessen the importance of ascertaining that such a position of equilibrium really exists. The discovery that the planets move in ellipses was justly regarded as a most important scientific truth, and the importance of the discovery was not diminished, although it was afterwards proved that 340 Manual of Political Economy. The rise in jn-ice not always propor- tionute to an in- crease in the de- nvnid. the planets are constantly disturbed from their elliptic orbits by a great number of small perturbing forces. The elliptic orbit of a planet may be regarded as a position of stable equilibrium, because, as the planet is disturbed from this position, a force will be generated to restore equilibrium, and the intensity of this force, if the disturbing cause continues, will so constantly increase, that in the end it must prove elFectual. In a similar manner a position of stable equilibrium is reached when the price of iron is such as to equalise the supply to the demand; the price does constantly oscillate about this position, but these oscillations cannot exceed certain limits, because an agency is generated, as in the case of the planetary elliptic orbits, to restore the price to its position of equihbrium. The price so determined has, by Adam Smith and others, been termed the natural price. As we have endeavoured in this chapter to explain the manner in which an increase or a diminution in the demand for agricultural and mineral produce causes a rise or fall in price, it may be necessary to point out that an alteration in the demand is not necessarily accompanied by a proportionate alteration in price. It will not be difficult to show that it is impossible to lay down precise rules as to the effect exerted on price in any particular case by a certain alteration in the demand. Thus it may sometimes happen that a rise of 20 per cent, in the demand may produce an increase of price of more than 40 per cent., whereas it may also happen that an increase of 20 per cent, in the demand may create an increase of not more than 5 or 10 per cent, in price. The extent to which the price is aifected obviously depends upon the difficulty of meeting the increased demand. If, when more corn and coal are required, the additional corn can be grown on land nearly as produc- tive as that previously cultivated, and if the additional coal can be obtained by working seams but slightly more expensive to work, then it is evident that an increase in the demand may create a much less than proportionate increase in price. As soon, however, as it becomes necessary to resort to much less productive sources of supply in order to satisfy an increased demand, there On the Price of Agricultural and Mineral Produce. may then suddenly occur a rise of price M'hich may be out of all proportion to the extra demand. The remarks which have just been made suggest an explanation of the great and sudden rise in the price of coal which took place in 1872. For many years there had been a steady increase in the demand for coal, and yet the extra coal was produced without causing any important rise in its price. This no doubt arose from the fact that the additional coal required could be obtained without resorting to seams which were more expensive to work, and without pressing unduly upon the available supply of labour. At length, however, the demand reached a point when it could not be met without resorting to much less pro- ductive sources of supply. Deeper shafts had to be sunk, thinner seams had to be worked, and consequently there was a rise in the price of coal sufficient to provide compensation for this greater cost in producing it. Another circumstance was also brought into operation to increase the cost of obtaining coal. When all the workmen in any particular industry are employed, there are, in the absence of improved mechanical appliances, only two ways of increasing the supply of labour. In the first place, those who are already employed in the pai'ticular industry may be induced to work a greater number of hours a day, by the offer of higher wages ; or, secondly, labour may be imported from other industries. It is evident, whichever course is adopted, that a rise in wages must ensue. It has, however, been shown that the great rise in the price of coal, just alluded to, was to be attributed in a far greater degree to the increased cost of getting coal, than to a rise in the wages of colliers. From the evidence which was given in 1873 before a select Committee of the House of Commons, appointed to investigate the causes which had produced the rise in the price of coal, it appears that less than one-fifth of the rise which took place was due to an increase in the wages of colliers. The increase in their wages did not account for a rise of more than 2s. 6d. a ton, whereas the rise in price at the pit's mouth was certainly not less than IS.s-. 6d. a ton. It, therefore, follows that more than four-fifths of the increase in the price of -coal was added as extra profits on all the coal 342 Manual of Political Economy. obtained from sources of supply that were previously worked. As the annual output of coal at that time was about 120,000,000 tons, the amount of extra profit thus obtained by the owners or lessees of coal mines may be estimated at 66,000,000^. a year while the exceptionally high price lasted ; while the extra amount annually paid in*\vages was not more than 15,000,000L It can scarcely be necessary to point out that this rise in the price of coal imposed as real a burden upon the community as if the taxation of the country had been increased by an amount equivalent to the rise in the price of the coal retained for home consumption. The amount of coal used for domestic purposes in this country was then about 20,000,000 tons per annum. Assuming that the rise' in price was 13.s. (id. a ton, the burden thrown upon tlie householders of the country was equivalent to tlie imposition of an income-tax which would yield 13,500,000^. a year. To obtain this sum an addition of about Q^d. to the income-tax would be required. There is, however, this difference between a burden thus imposed upon the people and an income-tax which would yield 13,500,000^. a year. An income-tax is not levied upon very small incomes, whereas even the poorest person must bear his share of the burden which is imposed by a rise in the price of coal. It is also to be remarked that the loss which the community suffers from a rise in the price of coal is not to be estimated by simply considering the amount of coal which is used for domestic purposes. A rise in the price of coal must ultimately increase the cost of producing manufactured commodities, and it will be shown in the next chapter that the price at which manufactured commodities are sold to the consumer depends upon the cost of producing them. The nation may obtain one compensation for the loss resulting from a rise in the price of coal. It cannot be doubted tliat the comparative cheapness of coal led to very wasteful methods of burning it, both for manu- facturing and domestic purposes. The rise in its price caused the adoption of many contrivances for economiz- ing its use. As geologists agree that the available supplies of coal in this country are by no means inexhaustible, it is evident that the prevention .of waste On the Price of Agricultural and Mineral Produce. is of great importance, not only to those who are now living, but to future generations.^ Many causes have combined to prevent coal perma- nently retaining tlie I'emarkable advance in price which it reached in 1872. Towards the close of 1874 the price of coal began to decline, and this decline went on so rapidly that in about two years' time its price had receded almost to its former level. Tliis fall in price may be regarded as partly due to accidental circum- stances, but no doubt the fall has also been partly produced by causes which are certain to come into operation whenever there is a period of such exceptional prosperity in a trade, that the profits and wages obtained by those engaged in it greatly exceed their ordinary rate. With regard to those accidental circumstances which we have described, it may be mentioned that soon after the great rise in the price of coal took place, there was a marked change in the general commercial con- dition of the country. The extraordinary activity of trade which had continued for many years was succeeded by a period of industrial depression, and in no branch of industry was this depression more strikingly exhibited than in the falling off both in the foreign and home demand for iron. In a single j'ear, between 1873 and 1874, there was a decline of no less than 25 per cent, in the quantity of pig iron produced, and even this diminished quantity could only meet with a sale at considerably reduced prices. Consequently the iron masters not only greatly diminished their purchases of coal, but they could only afford to pay a much lower price for it. When it is remembered that the great development of the iron trade was one of the chief causes which contributed to the rise in the price of coal, it naturally follows that the decline of this trade exerted a corresponding influence in reducing its price. This fall in price was no doubt assisted by the depression in the ^ [As an illustration of the greater economy in the use of coal which followed its increase in price, it may be stated on the authority of a speech by Sir Lyon Playfair, M.P. [Time'^, Dec. 17, 1887), that formerly a steamer consumed 2200 tons of coal in carrying 800 tons of cargo a certain distance ; and that now (1887) the figures are exactly reversed ; the steamer consumes 800 tons of coal in carrying, for the same distance, 2200 tons of cargo.] 344 Manual of Political Economy. general industrial condition of the country. Coal is of course largely used in every industry in which machinery is employed, and, consequently ,'inactivity of trade is sure immediately to affect the demand for coal. But even had there not been this depression of trade, there were other circumstances in operation which would have caused a reduction in the price of coal. The exception- ally high profits and wages earned in the coal trade led to a largely increased production. New mines were opened in all directions, new shafts were sunk, all avail- able labour was pressed into this particular industry, and in fact everything was done to stimulate increased production. What happened in this case, as previously pointed out, is sure to occur whenever any trade becomes exceptionally prosperous. It is obvious that it would have been impossible for the high price of coal to be maintained unless the increased production, stimulated in the manner just described, had been accompanied by a corresponding increase in the demand for coal. But far from this being the case, we have seen that just at the very time when the new mines that had been opened began to yield their additional supplies, there was a depression of trade, and consequently a considerable falling off in the demand for coal. The decline in the price of coal was therefore assisted by two powerful circumstances, an increase in its supply occurring simul- taneously with a diminution in the demand. CHAPTER IV ON THE PRICE OF MANUFACTURED COMMODITIES. IN this chapter the price of those articles will be con- sidered which were placed in the last of the three classes previously enumerated. To such commodities the name of manufactured articles is given ; because the name suggests the leading points of difference between these commodities and those the price of which was considered in the last chapter. It may be thought that no such distinction really exists ; a manufactured article, it might be said, is in one sense either an agricultural or a mineral product. A piece of linen cloth is woven from flax, which is in every sense of the word as much an agricultural product as the wheat from which a loaf of bread is made. Since, therefore, bread and linen cloth are both made from the produce of agriculture, it may appear that the laws which regulate the price of one ought to regulate the price of the other ; and that, there- fore, those laws of price which were enunciated in the last chapter, with regard to agricultural and mining produce, will equally apply in determining the price of such a commodity as a piece of linen cloth. But there is this distinction : the value of agricultural and mining produce is almost entirely derived from the value of the raw material ; whereas the value of the raw material from which a manufactured article is made only forms a small portion of the entire value of this particular article. The reason of this must be manifest to all. Before a bundle of flax can be woven into a piece of linen cloth, it must pass through many different processes, carried on by many different classes of labourers. Not only must all these labourers be remunerated, but the BOOK III. CH. IV. Commo- dities of which the supply can be indefi- nitely in- creased without increasing the cost of produc- tion. The value of the raw material forms a small part 346 Manual of Political Economy. employers of these labourers have advanced capital and invested money in expensive machinery, and for all this outlay they must receive an adequate compensation. There must, therefore, be such a difference in the pHce of the flax in its raw state, and the price of the linen cloth into which it is woven, as will serve to give both to the employers and their labourers all the remunera- tion just pointed out. The value, therefore, of the raw material forms only a very small portion of the whole value of the particular article into which it is manu- factured. It is this circumstance which causes the price of manufactured commodities, and the price of raw produce, to be regulated by very different laws. Unless a fresh discovery is made, or unless improved machinery and improved methods of production are introduced, it is generally impossible to increase the supply of mining produce without resorting to less productive sources, or to increase the supply of agri- cultural produce without resorting either to less fertile land or to more expensive culture. Such produce there- fore, in the absence of counteracting circumstances, must rise in price as it becomes necessary to increase the supply, in order to meet a larger demand. But the same law does not apply in the case of a manufactured article. If it were known that the quantity of linen cloth required to be manufactured in this country would increase twenty per cent, in the next two years, manu- facturers of linen would have to increase their purchases of raw flax by twenty per cent. This increased demand for flax would cause its price to rise, in obedience to the principles enunciated in the last chapter. This rise in the price of flax would, of course, produce some effect on the price of linen; because the maimfacturers of the linen must be compensated for the higher price which is paid for the raw flax. But since the value of the flax forms only a very small portion of the whole value of the cloth into which it is woven, it follows that the rise in the price of the cloth due to the rise in the price of flax will be, comparatively speaking, small. Thus we are informed that a rise of twenty per cent, in the price of flax would not cause the price ot linen cloth to rise as much as five per cent. The causes, therefore, which On the Price of Manufactured Commodities. 347 affect the price of raw produce also influence the price of manufactured commodities, but only to a limited extent. If we omit the very trifling rise in price, in a manu- factured commodity, which results from an increased demand for the raw material, there is no reason why the price of manufactured commodities should in any way be affected by an increased demand for them. An increased demand for linen cloth to the extent of twenty per cent, need not necessarily influence any of the elements, with the exception of the price of the raw material, of which the cost of producing this cloth is composed. Machinery need not be more expensive, the wages of labour need not necessarily rise ; it is even quite possible to suppose that the production of an article may be cheapened as its supply is increased, because when commodities are manufactured on a large scale many of the processes of the manufacture can often be economised. For instance, division of labour makes labour cheaper and more efficient ; machinery on a large scale almost invariably works at less comparative cost than machinery on a smaller scale. A steam-engine exerting the same j^ropelling force as two smaller engines will originally cost less than the two, will consume a smaller quantity of fuel, and will not require the same amount of labour to superintend it. It is, therefore, quite possible that an increased demand for a manu- factured article may diminish its price. To illustrate this the following example may be quoted. An American, Mr. Nathan Thompson, invented a most ingenious machine for sawing and cutting, in their proper form, the planks of which light boats are made. It has been calculated that so much labour and time would be saved by this machine that the cost of a boat would be reduced at least thirty per cent. People, therefore, confidently predicted that the machine would be introduced, and that boats would inevitably decline thirty per cent, in price ; but this is too hasty a conclusion. It must be remem- bered, that so great is the rapidity with which this machine works, that a very few of these machines would soon turn out a great many more planks than are required in the construction of all the boats which are built in a year. The demand, therefore, for boats would BOOK III. CH. IV. The cost of production of manu- factures may dimi- nish as the supply increases. Illustra- tion of this principle from hoat- buildinfj machin- ery. Manual of Political Economy. not be sufficient to keep these machines fully at work. This would involve considerable loss. In the first place, a machine, when not at work, must be regarded as capital lying idle, and secondly, the men who attend it would be employed irregularly. Such labour is always expensive, because a man has to receive some remuneration for the time when he is not at work. These machines, therefore, can only exert part of their eff'ect, in reducing the price of boats, as long as the demand for boats is not sufficient to keep them actively at work. It is not improbable that this invention w^ill for some time effect no sensible reduction in the price of boats, because in so limited a trade people may hesitate to introduce expensive machines, and therefore boats may continue to be made according to the old plan in spite of the demonstrated excellence of Mr. Thompson's invention. But if a much greater number of boats were required to be made, no doubt these machines would be generally introduced, and nothing could then prevent a reduction in the price of boats proportionate to the decrease which these machines had effected in the cost of making boats. It frequently happens that the wages of the labourers employed in the manufacture of a particular commodity advance as the demand for the commodity increases. If this occurs, these particular manufactured goods will rise in price, in order that the employer may be compensated for the higher wages he is now obliged to pay. Suppose that, at a time when the activity of the cotton manufac- ture affords constant employment to all those accustomed to the trade, a new market for our cotton goods is suddenly opened. In order to satisfy this new demand the cotton manufacture must be extended ; new hands will have to be imported into the trade, and such untrained labour must for a time be, comparatively speaking, inefficient, and therefore more expen&ive than the labour of those who are accustomed to the trade. The period just preceding the American civil war afforded an example of this. So rapidly was the cotton manufacture extended in consequence of the large exports of cotton goods to the East, that the supply of labour in the district proved to be inadequate. The manufacturers, therefore, sent agents throughout the country in search of labourers, and in On the Price of Manufactured Gomraodities. one agricultural village in the Eastern Counties no less than a hundred labourers — including men, women, and children — were engaged for the purpose of being employed in some of the Lancashire mills. To these persons high wages were of course offered, in order to induce them to leave their own locality. But such labourers could not be worth so much as those who by practice had acquired skill in that trade. The regular Lancashire operatives, therefore, obtained a very important rise of wages ; and it is impossible for such a rise of wages to occur without increasing the cost of producing cotton goods. The question, therefore, arises — By whom is this .increased cost borne ? Would it come entirely out of the manu- facturers' pockets, or would it be borne by the purchaser of cotton goods ? The answer to this question will be found to involve an explanation of the principles by which the price of manufactured commodities is deter- mined. It will, in the first place, be proved that the manufacturers will be compensated for the rise of wages by a rise in the prices received by them from the purchasers of cotton goods. When discussing the subject of profits, it was pointed out that the profits of each particular trade approximate to a certain average. The constancy of this average is maintained by the competi- tion of capital. We do not mean to say that the profits of the butcher approximate to the profits of the cotton manufacturer, for there are causes which must create a permanent difference between the profits of these two trades. But although the average profits realised in dififerent trades may greatly and permanently diflfer, yet there is a certain rate of profit belonging to each trade, which is termed the natural rate of profit for that trade. Such a rate of profit indicates a point of equilibrium about which the average profits of the trade may be considered to oscillate. Sometimes they fall short of this point, sometimes they go beyond it, but the competition of capital is an agency which is ever at work to restore the average rate of profit to this position of equilibrium, whenever disturbed from it. It is impossible precisely to tell wdiat will be the average rate of profit realised in a particular business. Let us suppose that, in the cotton trade, it is ten per cent, upon the whole capital invested. 3SO Manual of Political Economy. BOOK III. CH. IV. 1/ ivaijts 10 ere in- creased ivithotU ail. increase of price, pro- fits must fall in the. trade affected. Hence the price is certain to rise. There is always in this country a vast amount of capital ready to be exchanged from one investment to another, if the slightest additional profit can be realised. Such a rapid transfer may be regarded as a proof that the competition of capital is active. Having, therefore, assumed that the average rate of profit in the cotton trade is ten per cent., let us attempt to trace what will occur if the profits realised in this trade are, by some disturbing cause, reduced below ten per cent. ; this being the natural rate of profits as determined by the competi- tion of capital. The rise in the wages of the cotton operatives which was caused by the increased demand for cotton goods in the East, was quite sufficient to have reduced the profits of the cotton manufacturers from ten to seven per cent. But if not more than seven per cent, were realised, the cotton manufacturer would be placed in an exceptionally unfavourable position, for it has been supposed that his business, after making allowance for all the various cir- cumstances connected with it, will be less remunerative than other branches of indu.stry, unless a profit of ten per cent, can be secured. Cotton manufacturers, therefore, would show an anxiety to contract, rather than to extend their operations, for they would be naturally desirous to withdraw as much capital as possible from tlieir own comparatively unremunerative business, and place it in other more lucrative investments. The manufacture of cotton goods would consequently be diminished just at the time when it ought to be extended, in order to meet the increased demand. But it is easy to show that such a contingency could not actually occur. An increased demand for cotton goods means an increased desire to possess them, accompanied with the requisite means to purchase them. Those individuals who want cotton goods will much prefer to pay a somewhat higher price for them rather than go without them altogether. Such a higher price, therefore, will be ofiered for cotton goods as will compensate the manufacturer for the increased wages which he is compelled to pay to his operatives. But the demand for a commodity is always diminished if its price is increased. The demand for cotton goods will not be so great as it would have been, but for the On the Price of Manufactured Commodities. 351 rise in the price of these goods necessary to compensate the manufacturer for the augmented cost of production resulting from a rise in the wages of labour. Hence it ^vould appear that the price of manufactured commodities is regulated by two principles. The first of these prin- ciples determines the average price of a commodity ; this price we have before described as a position of equilibrium from which there may be frequent temporary variations. The second principle accounts for these variations, and indicates the laws by which they are regulated. The meaning of this may perhaps be better explained by referring to an illustration already noticed. The orbit of every planet is mainly determined by the attraction of the sun ; and its orbit, so far as it depends on this attraction, is accurately an ellipse But each planet is acted upon by an almost infinite number of small dis- turbing forces, which cause it constantly to deviate from an accurate elliptic orbit. Although a planet, therefore, never continues even for a short period to move in an ellipse, 3"et for many purposes it is sufficiently accurate to consider that the ellipse is its real orbit. Other phenomena, however, most important to be considered, depend entirely upon those small disturbing forces which produce the variations in a planet's elliptic orbit. Hence astronomy requires not only that the main cause of a planet's motion should be explained, but also that the laws of the disturbing forces which act upon it should be enunciated with equal care and precision. We will now show the analogy which we have been indicating, by stating the two principles which regulate the price of a manufactured commodity. 1st. The price of each manufactured commodity must, on the average, approximate to its cost of production. The term ' cost of production ' includes not simply the cost of material, and the wages of labour, but also the ordinary profit upon the capital employed in producing the particular commodity. 2nd. The demand for a commodity varies with its price, and the price at any particular time must be such as to equalise the demand to the supply. With regard to these two principles it may be re- marked, that the first controls prices in the following BOOK III. CH. IV. The price of manu- factures is therefore determined by tivo principles, one deter- yrwiing the aver- age price, the other, the oscilla- tions about it. Statement oj these principles. 352 Manual of Political Economy. BOOK III. CII. IV. The aver- age price approxi- mates to the cost of produc- tion. The oscil- lations are determined by varia- tions in the supply and demand. Illustra- tion of the second principle from the Biriimirj- kam gun trade. manner. The price of any manufactured commodity cannot permanently to any considerable extent either exceed or fall short of its cost of production. If the price were greatly in excess, the producer would secure very much more than the ordinary rate of profit; and on the other hand, if the price of a commodity were much less than the cost of its production, the profits of those who produce the commodity would fall materially below the ordinary rate. But the competition of capital prevents the profits of any particular trade continuing, for a length of time, either above or below the ordinary rate of profit. With regard, therefore, to the price of a commodity, its cost of production may be regarded as a position of stable equilibrium, and whenever disturbed from this position, the competition of capital is at once brought into action, to restore equilibrium. Just in the same way the elliptic orbit of a planet may be regarded as a position of stable equilibrium : the planet is con- stantly disturbed from this position, but the attraction of the sun is at once brought into operation to restore its equilibrium. Although the competition of capital makes the profits of each trade and the price of each commodity tend towards what has been termed the natural rate, yet it is a matter of ordinary observation, that there are temporary fluctuations in the prices of all commodities which correspond to the temporary variations in the profits which are realised in any particular trade. Such temporary fluctuations in the price of a commodity, and in the profits of any particular trade, are produced by variations in the demand and supply. Many striking instances of these variations in price, consequent on a sudden variation in the demand for a commodity, were aflbrded by the circumstances of the American civil war. Let us take the case of the Birmingham gun trade in 1862, which was thrown into a state of sudden activity, in consequence of the purchase of a large number of rifles both by the Federal and Confederate armies. Before this sudden demand arose, the rifle trade was in its ordinary condition; the price of rifles closely approxi- mated to the cost of producing them, and the natural rate of profit consequently prevailed. When, however, On the Price of Manufactured Commodities. 353 an unusually large number of rifles was suddenly required, the price for a time rose greatly above the cost of production ; in fact, the cost of production tempo- rarily ceased to be the controlling force in regulating the price. These high prices of course stimulated the manufacturers to the utmost activity, and the greatest possible number of rifles was produced which could be manufactured by the available resources of the trade. Time is, however, required to increase the supply beyond a certain point ; the workmen accustomed to a trade are limited in number ; and new workmen cannot acquire the requisite skill without a long and tedious training. Therefore, the supply, even of a manufactured commodity, cannot be immediately increased beyond a certain point ; hence a very great and sudden demand for a particular commodity may cause it temporarily to assume the same character as those commodities the price of which has been previously considered,^ and of which the supply is absolutely limited in amount. It was shown that the price of such commodities must be so adjusted as to make the supply equal to the demand. Although the price of a manufactured article may vary greatly from its cost of production, yet such a variation must l)e regarded as only temporary. If, for instance, the price of such a commodity greatly exceeds the cost of producing it, unusually large profits are realised by those who produce it, and thus a powerful inducement is constantly held out to increase the supply. But as the supply is increased, the price will have a constant tendency to decline, until at length the price approximates to the cost of production of the commodity, and the trade is again restored to its normal condition. In order to prevent a possible misapprehension, it may be important to observe, before concluding this chapter, that the price of a commodity must be always such as to equalise the demand to the supply. This principle is equally true, both when the price is disturbed by sudden fluctuations in the demand and supply, and when the trade is in its normal condition, and the price of the commodity consequently approximates to its cost of pro- duction. Let us revert to the example just investigated, iSee Book III. Chap, ii, Z BOOK III. CH. IV. Hence the second principle is the same as that ivhich regulates the price of comryio- dities ivhose sup- ply is ab- solutely limited. The prin- ciple oj the equali- sation of supply and demand applies in all cases. 354 Manual of Political Economy. BOOK III. CH. IV. Explana- tion of the process by which stip- ply and de- mand are equalised when the price ap- proximates to the cost of produc- tion. and assume that a rifle which is ordinarily sold at bl. becomes worth 10/. owing to a sudden increase in the demand for rifles.' It has been before remarked, that, when the demand for a commodity is suddenl}^ increased, its price may temporarily cease to be controlled by its cost of production. The immediate available supply is limited; and it is therefore evident, that the increased demand cannot be immediately satisfied. The demand of those will, therefore, be first met who are willing to pay the highest price ; but, as the price of the commodity rises, the demand for it diminishes. Hence the price must continue to rise, until at length the demand is so much decreased that it can be satisfied with the immediately available supply, or, in other words, the demand becomes equal to the supply. It now only remains to describe the process which equalises the supply to the demand, when a commodity is selling at its cost of production ; or, in other words, when a trade is not disturbed from its ordinary steady condition. Let it again be assumed that a manufacturer of rifles will be adequately remunerated, and will obtain the ordinary profit realised in the trade, if he is able to sell his rifles at bl. each. But, as previously remarked, the demand for any commodity varies, ceteris paribus, with its price. Hence it is quite possible that, when rifles are sold for 51., the demand for them may be either greater or less than the supply. If the first case should arise, and the demand exceed the supply, then the price of rifles would soon advance beyond 51., and the manufacturers of rifles would consequently obtain an exceptionally high rate of profit. If, on the other hand, the demand for rifles at 51. each should be less than the supply, the price would become less than 51., and the manufacturers of rifles would continue their business at a comparative loss. But no branch of industry can per- manently continue to be in the state implied by either of the two contingencies just alluded to ; the competition of capital would, on the one hand, prevent manufacturers of rifles permanently obtaining an exceptionally high rate of profit ; and, on the other hand, manufacturers would refuse permanently to continue their business, if a greater return could be secured by employing their capital in On the Price of Manufactured Commodities. 355 some other investment. Let us, therefore, consider what would really take place under the circumstances supposed. The case assumes that there are no sudden fluctuations, either in the demand or supply, but that everything connected with the trade is in a steady condition. The cost of producing a commodity is composed of two elements; namely, profits upon capital, and wages of labour ; it is, therefore, evident, that if either of these elements be increased, the cost price of the commodity will also be increased. Thus, when certain wages are paid, the cost price of a rifle may be bl., but if these wages have to be increased, the cost price of a rifle may advance from bl. to Ql. The assumption has been made, that if rifles are sold at bl., the demand will exceed the suppty. Suppose that the price is slightly advanced beyond bl. ; the profits of the trade will thus be increased, an additional amount of capital will be brought into the trade, and the number of rifles made will be considerably augmented. All manufactured commodities, however, need skilled labour, and the requisite skill cannot be acquired without considerable training. Hence when a trade has to be extended, comparativel}^ untrained labourers must be employed. The skilled labourers already engaged in the trade will consequently be eagerly competed for, and their wages will rise. If, however, their wages rise, the cost of manufacturing the commodity will increase ; but a rise in the price of a commodity exerts an influence to diminish the demand ; these causes will continue to operate, until at length the supply is made equal to the demand. In a similar way we can explain the process of equalising the supply to the demand, when the demand for a commodity, selling at its cost price, is less than the supply. Suppose this case to arise with regard to rifles. Let it be assumed that the cost price of a rifle is 5^., and that at this price there will not be so many rifles purchased as are manufactured ; the price of rifles must therefore decline ; it would, however, seem that if they were permanently sold at 4/. 10s. the manufacturers of rifles would lose by their trade, because they only realised the ordinary rate of profit even when bl. could BOOK III. CH. IV. Case ivlien the de- mand is brought to exceed the supply. Case when the de- mand is less than the supply. Manual of Political Economy. be obtained for a rifle. It must, however, be borne in mind, that some of those engaged in a trade often possess special opportunities for carrying it on profitably ; their place of business may perhaps be in an exceedingly favourable situation, or they may themselves have a special aptitude for the business in which they are engaged. Again, as remarked in a previous chapter, those who possess sufficient capital to carry on produc- tion upon a large scale often obtain an exceptionally high rate of profit. When, therefore, the supplj?- of a commodity exceeds the demand, two causes will exert an influence to equalise the demand to the supply. In the first place, if the supply of the commodity is diminished, its cost price will also be diminished, because if less of the commodity has to be produced, only the most skilful workmen in the trade need be employed, and those only need continue the manufacture of the commodity who possess special advantages for producing it most cheaply. In the second place, as the price of the commodity is reduced, the demand for it will increase. These two circumstances, acting conjointly, must at length equalise the supply to the demand. It has, therefore, been shown that, in all cases, there is a tendency in constant operation to make the supply of a commodity equal to the demand. This principle is equally true, whether the price of a commodity is simply regulated by its cost of production, or whether the price temporarily ceases to be regulated by the cost of produc- tion, in consequence of sudden fluctuations, either in the supply or in the demand. CHAPTER V. ON MONEY. THE last three chapters have been devoted to an investigation of the laws which regulate the price of various commodities. The course usually followed by political economists, is in the first place to treat of the value of commodities, and to defer any discussion of the laws of price until the functions of money have been fully explained. In pursuing this course, they perhaps adopt a logical method, because money, as a medium of exchange, must necessarily be involved in the meaning of the term price. It has, however, been thought expedient to adopt the course pursued in the last three chapters, because the investigation of a subject which must always be complicated is rendered more difficult by speaking of the value of a commodity instead of its price ; the public almost invariably speak of the price of a commodity, and seldom consider its value by directly estimating the quantity of every other commodity for which it will exchange ; moreover, the last three chapters, although relating to price, have not required anything to be assumed, with regard to the laws of money, which was not quite self-evident. It has been already remarked, that price is a particular case of value. Every country, as it emerges from bar- barism into the first stages of civilisation, has found it absolutely necessary to select some substance as a medium of exchange. Without such a medium, every trading transaction must be conducted by direct barter ; the incon - venience of a system of barter is evident, for if the owner of a stack of corn wished to obtain clothes or fuel in exchange for his corn, he would be obliged to find some BOOK III. CH. V. Reasons for con- sidering questions of price before dis- cussing the Junctions of money. Use of money. ;58 Manual of Political Economy. other individuals who are willing to give him clothes and fuel for the corn which he offers. Commerce, hampered by such impediments, could never advance beyond its rude beginning. Consequently, in each civilised nation, some substance is sure to be adopted as a medium of exchange, by the universal consent of society. A medium of exchange provides a standard with which to compare the value of every commodity, and by means of which the exchange of commodities is facilitated in a most important degree. Any substance may be selected as this medium of exchange ; it has, however, been generally found most advantageous, for reasons which will be presently stated, to choose the precious metals as a medium of exchange. But various other substances have been used for a similar purpose by different nations. The Chinese have used pressed cubes of tea as their money ; some African tribes employ the shells called cowries. It must, therefore, be borne in mind that it is not essential that money should be composed of the precious metals ; whatever substance is adopted, by the general consent of society, as its medium of exchange, ought properly to be considered the money of that com- munity. Thus, in China, money has consisted of those pressed cubes of tea we have spoken of ; and, in Africa, the cowrie shells must be regarded as money. The money of our own, and of almost every other country, has so long been made of the precious metals, that we are naturally led to associate money with one or more of the precious metals. If, however, in any country, some substance is made to perform the functions of money, that substance is as justly entitled to be considered money as our own gold and silver coin. Even those nations enjoy the great advantage of possessing money, although they estimate the value of commodities by cubes of tea, and by cowrie shells, and exchange their goods for these substances, instead of buying and selling, as we do, for gold and silver. Such money, it is true, is rude and inconvenient, but even the possession of the rudest money indicates a great advance in civilisation beyond those tribes who have no money at all, and who are, therefore, compelled to conduct every trading trans- action by barter. The reason why the precious metals On Money. are almost universally employed as money, in preference to any other substance, will at once become evident by considering the purposes which money has to fulfil. The functions of money may be divided into two leading- classes. 1st. Money serves as a measure of value. 2nd. Money is a universal medium of exchange. We will proceed to consider the first of these functions. ' Measure of value ' may perhaps with advantage be replaced by the expression, measure of w^ealth. Without some such measure, the amount, either of a nation's or of an individual's wealth, could only be stated by enumer- ating a long catalogue of commodities. Instead of saying that a farmer is worth 9,000^., we should be able to form no other estimate of his wealth except by making an inventory of his possessions. The number of cows, horses, pigs, sheep, the quantity of corn, &c. he possessed, would all have to be separately enumerated. The value of a man's property is a meaningless phrase, unless there is some recognised standard of value. The value of a commodity is always supposed to mean its exchange value, for unless it has some exchange value it is not, in political economy, considered to have any value at all. No commodity can be more useful tlian water, but, as previously remarked, it is not wealth. It has in fact no exchange value, because when, as is usually the case, it can be freely obtained, nothing will be given for it in exchange. But no meaning can be assigned to the expression, exchange value of a connnoditj^, unless it is known for what other commodity it is intended to be given in exchange. It is as correct to say, that the exchange value of a sack of wheat is a ton of coal, or a barrel of beer, as it would be to estimate the value of the wheat by so much gold and silver. Everything, there- fore, with regard to the value of commodities, or the amount of wealth, is completely vague and indefinite, until society has agreed to select some particular sub- stance with which the value of all commodities may be compared. Such a substance becomes an universal standard, or measure of value, and thus has attached to it the first of the two characteristics which entitle a substance to be considered as money. It is not necessary 359 BOOK III. CH. V. The two chief func- tions of money. Money is a measure of value. Advan- tages of an universal standard of value. Manual of Political Economy. to select the precious metals for this standard of value, although they possess for this purpose many advantages which cannot be claimed by other substances. Suppose a nation agreed to adopt wheat as the genera] measure of value, the value of all commodities would be referred to wheat as a standard, wealth would be estimated by so many quarters of wheat, and it would, under this supposition, be correct to say, that the price of an article was not so many pounds sterling, but so many quarters of wheat One of the purposes, therefore, which money is intended to fulfil would be in this manner attained, for there would be one recognised substance to which the value of all other commodities might be referred. But when we proceed to consider the second important function which money is intended to perform, namely, a general medium of exchange, it will at once be understood that it would be impracticable to have such a substance as wheat for the money of a country. When a nation possesses not only a measure of value, but also a general medium of exchange, every trading- transaction is facilitated in the most important manner. There will then be a standard, by comparison with which the value of any commodity can be ascertained, and when the value is thus known, the commodity may be exchanged for a certain quantity of the substance thus chosen for the money of the country. But the funda- mental characteristic of money is that it is a general medium of exchange ; or, in other words, any commodity which may be required can be obtained by money, when, therefore, an individual exchanges a commodity for money, he obtains that which will give him the power of purchasing any article which he may require ; in this manner the great inconveniences of barter are obviated, for under a system of barter a person who possessed one commodity could not without great difficulty exchange it for any commodities he might require. For instance, the owner of a quantity of wheat, if he wanted meat, fuel, or clothes, would have to search for those persons who were willing to give him these articles in exchange for wheat. Since an universal standard of value is provided by money, the values of On Money. all commodities are known and registered by this stand- ard; or, in other words, the price of all commodities can be ascertained, since the price of a commodity is its value estimated in money. Money, therefore, enables the amount of wealth to be estimated, and when the price of commodities is ascertained, the purchasing power of any sum of money is known. The chief purposes which money is intended to serve have now been explained ; we can, therefore, at once pass on to consider the particular qualities which should be possessed by any substance which is used as money. In the first place, it is most important that any general standard or measure should vary as little as possible. For instance, all distances are referred to a certain standard unit of length. How endless would be the confusion if this standard varied ! A mile represents the same distance as it did a century since, and therefore, when a mile is mentioned, there can be no doubt as to the distance intended to be expressed. Weight, in a similar manner, is referred to a certain invariable stand- ard ; and, therefore, if it is said that the weight of a body is so many tons, there can be no ambiguity as to the weight which is meant to be described. It is, of course, quite as important that a standard of value should be as invariable as the nature of the case admits. It is obvious that it is impossible to obtain an absolutely invariable standard of value, because the value of every substance which is known to us is liable to variations. Some substances are, however, liable to much greater fluctuations in their value than others, and it is evident that these are quite unfit to fulfil the functions of money; the substance selected to be used as money should be liable to as few and as slight variations in its value as possible. This qualification is possessed in a high degree by the precious metals. If gold and silver were liable to as great fluctuations in value as wheat and cotton, it is manifest that money would be no uniform standard of value, although a pound sterling might always contain the same quantity of gold. The value of wheat and cotton fluctuates with almost every variation in the weather, and with almost every change in the politics of a nation. Unpropitious seasons have often been so 361 BOOK III. OH. V. Qualities desirable in sub- stances used for money. Asa stand- ard of value it should be subject to as few va- riations as possible. The value shoidd not vary sud- denly. 362 Manual of Political Economy. BOOK III. CH. V. Advan- tageti of gold and silver over other com- modilies in this re- spect. As a medium of exchange money shoidd pos- sess an in- trinsic value. destructive to the harvest, that wheat has been forced up almost to a famine price. These seasons of scarcity are now, so far as concerns our own country, in a great degree obviated by free trade, since we are now no longer restricted to our own soil for our supplies of corn. But even since the passing of free trade, there have been great variations in the price of wheat. In the year 1854, wheat was 90s. a quarter, in 1856 wheat was 40s. a quarter. The value, therefore, of any commodity not liable to such fluctuations would be, when compared with wheat, more than twice as great in 1856 as in 1854, assuming that gold remained constant. A ton of coal, for instance, would sell at the same money in 1856 as in 1854, but it would exchange for more than twice as much wheat in the former year as in the latter. If, therefore, wheat were chosen by a nation as a general standai-d of value instead of gold and silver, the value of all commodities estimated in wheat, or, in other words, the price of all commodities, might rise more than 100 per cent, in the short space of two years. Such great and sudden irregularities in price would throw commercial transactions into inextricable confusion. It is, therefore, evident that a substance should be selected as money which is subject to the smallest possible fluctuations in value ; upon this quality mainly depends the efficiency with which money can fulfil the functions wliich are required from it, as a standard of value. Let us now inquire what qualities money ought to possess, in order that it should become a convenient medium of exchange. In the first place, the substance chosen as money must possess an intrinsic value of its own. This may appear to be contradicted by the fact that a portion of the money of England and many other nations consists of bank-notes. In England, a person considers a Bank of England note for 10^. to be in every respect as valuable as ten sovereigns, yet the note has no intrinsic value whatever ; thousands of such notes might be manufactured for a few shillings; whereas the ten sovereigns for which one of these notes can be exchanged have an intrinsic value of their own ; if they were melted, they would be as valuable in bullion as in coin. The bank-note derives none of its value from the substance On Money. of which it is composed; it is simply a written warrant of a promise to pay, whenever demanded, the sum which it represents. If all believe that this promise is certain to be strictly fulfilled, there can be no reason why the note should not be as freely accepted as money. But a nation can never feel this entire confidence, either in the promise of the State or of private individuals, until Government becomes firmly settled, and commercial credit securely established. It is, therefore, necessary that the substance which is chosen as money should possess an intrinsic value. It has been explained, in a former chapter, that a substance acquires value from the con- junction of two qualities : in the first place, labour must be employed to obtain it, for the most essential necessaries of life, such as water and air, have no exchange value, if spontaneously supplied by nature ; secondly, no substance can have value unless it can be made to satisfy some want, or gratify some desire, of man. Hence, in order that the substance chosen as money should possess an intrinsic value, it must in the first place require labour to obtain it, and secondly, it must be regarded as useful for other purposes than being employed as money. The last requisite possessed by money, upon which we shall remark, is, that it should be a commodity sufficiently expensive to contain great value in a small bulk. If this were not so, whenever any valuable article was sold, the money which it realised would be extremely cumbrous, and inconvenient to carr}^ about, in consequence of its great weight and bulk. If we possessed no money but our copper coinage, the copper money equivalent to ten sovereigns would be a heavy load ; and the inconvenience would be still greater if a less valuable metal than copper, such as iron, were selected. Having now remarked upon the qualities which ought to belong to a substance which is used as money, we shall be in a position to appreciate the great advantage which the precious metals possess, as money, in comparison with any other substances. The first requisite is, that the substance of which money is composed should be liable to as few variations in value as possible. Gold and silver both fulfil this condition in a very striking manner. 363 BOOK III. CH. V. and nhould be oj great value in a synall bulk. Advan- tages pos- sessed by gold and silver. 564 Manual of Political Economy. BOOK III. CH. V. 'J 'hey do not sud- denly vary in value from year to year. Although, as will be explained in a subsequent chapter, the discovery of new gold and silver mines may so much increase the supply of these metals as permanentl}^ to affect their value, yet they are liable to much less variation in value than is probably the case with any other substance. Changes of temperature so much affect the growth of agricultural produce, that the abundant crop of one year may be succeeded by great scarcity in the next. Such causes, however, can in no way influence the productiveness of mines. The demand for some commodities varies almost from day to day, and the variation causes those constant fluctuations in price alluded to in the last chapter. Gold and silver, except when used as money, are chiefly employed for the manu- facture of ornaments, and various articles of luxury. Now it is evident that the demand for gold and silver plate does not vary greatly from year to year. The period since the gold discoveries may seem to offer an exception to the constancy in the value of the precious metals ; for some years after the gold discoveries of California in 1848, and those of Australia in 1850, the annual yield of gold was increased at least 300 per cent. About 1877 silver mines of such extraordinary richness were discovered, especially in the United States, that the annual aggregate production of silver increased from 7,000,000^. sterling to 23,000,000^. sterling.i There is no question of the day more important for the political economist to discuss than to trace the effects of these discoveries of the precious metals. This must be reserved for a separate chapter. Although it is not improbable that the value of gold and silver may in future years be depreciated by these or other discoveries, yet such sudden changes in the annual yield are extremely rare. In fact, history affords no other similar instance, except the discovery of the gold and silver mines of the American continent, at the time when the New World first became known to the Old. It is not, therefore, necessary for us to qualify our remark, that gold and silver are, as a general rule, subject to smaller variations in value than almost any other substances. ^ Many statistics relating to the precious metals have been kindly furnished to me by Mr. Stewart Pixley. On Money. The second of the enumerated qualities which ought to belong to money is, that it should possess an intrinsic value of its own. Nations, even from a remote antiquity, have always placed a great value upon gold and silver. Ancient remains prove that the most costly and highly wrought ornaments have long been manufactured from gold and silver. It is no wonder that ornaments in every age should have been made from these metals ; their singular brightness gives them beauty, and it is a beauty which is scarcely effaced by time. Iron soon rusts and decays, copper soon becomes corroded, but golden ornaments are dug up from the bogs of Ireland in almost as perfect a state of preservation as when they adorned the primaeval inhabitant of that island; and the golden ornaments discovered by Dr. Schlie- mann in Asia Minor although they perhaps belong- to a pre-Homeric age perfectly preserve their colour and lustre. The great malleability of gold and silver gives the workman abundant opportunity to display his artistic skill. Moreover, gold and silver have always been sufficiently rare to be esteemed for their scarcity. The great value possessed by these metals gives them the third essential quality which ought to belong to money ; namely, that it should contain great value in a small bulk. It should also be remarked, that gold and silver possess other qualities which make them specially adapted to fulfil the functions of money ; these metals are extremely durable, and they can be coined with facility, because they can be divided, without any diminution of value, into portions containing any assigned quantity or weight. All these considerations combined cause gold and silver to fulfil the purposes of money far more completely than any other substances. It is true that our own country, and several others, have copper, or rather, bronze, money in addition to gold and silver. Bronze, though very much less valuable than gold or silver, is very convenient for small payments. A piece of gold or silver, which in value would represent a penny, would be almost too small an object to be perceived ; and on the other hand, if bronze were used as the only money, any large payment would 365 BOOK III. CH. V. They pos- sess intrin- sic value. They have r/reat value in a small bulk. Bronze money. 366 Manual of Political Economy. require a weight of money too great to be carried by an individual. Although the metallic currency of this country is composed of gold, silver, and bronze money, yet it is found convenient that only one of these substances should be a general standard of value. The substance thus selected is gold. Some countries, however, have adopted silver instead of gold, as a general standard of value. We shall be able easily to explain why, in a wealthy country like England, gold is a better standard of value than silver. In the first place, gold is the more costly metal of the two, and it therefore contains greater value in proportion to its bulk. Secondly, it has been found by experience that the cost of obtaining gold, and consequently the value of gold, varies less than the value of silver, and sufficient has already been stated to show the importance of possessing, as a standard of value, that substance whose value is most uniform. It has, however, been frequently proposed to make both gold and silver a general standard of value, and the adoption of such a plan would involve what is technically termed a double standard, or bi-metalism. Various reasons may be stated which will prove that such a double standard is extremely undesirable. We have already pointed out the inconveniences consequent upon any variations in the value of the substance which is adopted as the standard of value. Gold and silver are both liable to fluctuations in value ; these metals, for instance, may at any time be cheapened, in consequence of the discovery of productive mines, and on the other hand, the cost of obtaining gold and silver may be increased by the gradual exhaustion of the richest gold and silver mines. If, however, gold and silver are iDoth adopted as a standard of value, the uniformity of this standard will be affected by variations in the value of two substances instead of one. For instance, let it be supposed that the value of silver is reduced five per cent., in consequence of the discovery of some rich silver mines. Let it also be assumed that nothing has occurred to affect the value of gold ; consequently, the value of silver, estimated in gold, will be depreciated five per cent. ; or, in other words, an ounce of gold will exchange for five per cent, more silver On Money. than it did previously. Now a double standard implies that any person who has a payment to make can use his own discretion as to whether he shall pay the amount in gold or silver. If, therefore, the case just supposed should arise, and the value of silver should be depreciated five per cent., it is manifest that every person who had a debt to discharge would take advantage of this deprecia- tion, and all payments would consequently be made in silver instead of in gold. The result would manifestly be, that the amount to be paid would be reduced five per cent., and the amount to be received would consequently in every case be diminished by a similar amount. It is evident that this unfortunate and most mischievous disturbance in the terms of monetary contracts is avoided if gold is the only standard of value. The bi-metalists, however, in view of the recent depreciation in the value of silver, contend that a considerable influence might be exerted to maintain the value of silver if a general agreement were arrived at to fix by law the relative value of silver and gold ; the proportion suggested is usually 15| to 1. Although some influence might thus be undoubtedly exerted to arrest the fall in the value of silver, yet we believe it would be as impossible permanently to fix, under all circumstances, the relative value of gold and silver as it would be permanently to fix the relative value of any other two commodities. A law might be passed declaring that a ton of coal should exchange for a sack of wheat ; but if through the discovery of richer deposits of coal it cost less to produce a ton of coal than a sack of wheat, a ton of coal would inevitably become less valuable than a sack of wheat. In the same way, if it became less costly to procure 15 J ounces of silver than it was to procure one ounce of gold, the value of silver would not as rapidly decline compared with gold as in case of an ordinary commodity, because, all persons being anxious to pay their debts in the metal which it cost least to produce, the demand for silver would be increased, and its decline in value might for a time be arrested. The value of silver and gold, however, must ultimately be regulated in the same way as the value of other commodities, i.e. by their cost of produc- tion ; and consequently the result of bi-metalism, or the 367 BOOK III. CH. V. 368 Manual of Political Economy. BOOK III. CH. V. Rerjula- dons which preserve a single standard in Eng- land. Reasons for a slight deprecia- tion of the silver coin- age. adoption of a double standard, must be to throw an uncertainty over all trading transactions by increasing the probability of debts being liquidated in a depreciated metal. It must not be imagined that England has a double standard, because silver and copper money form a part of our metallic currency. Our silver and bronze money must be regarded as subsidiary coins, and by a very simple arrangement all the advantages are enjoyed arising from the employment of such coins, without any of the inconveniences which belong to a double standard. It is fixed by law, in this country, that each silver coin should contain a certain quantity of silver, and it is also further enacted that these coins should exchange for, or, in other words, be equivalent in value to, a tixed quantity of gold. Thus a shilling always contains the same quantity of silver, a sovereign always contains the same quantity of gold, and twenty shillings are made equivalent in value to one sovereign. The silver, however, which is contained in twenty shillings is not really equivalent in value to a sovereign, for if the shillings were melted down, the silver which they contain would not purchase so large a quantity of gold as is contained in a sovereign. The Mint, therefore, obtains a profit on the silver which it coins ; in fact, our silver coinage may be regarded as a slightly depreciated currency. The Mint, however, is not permitted to issue more than a certain amount of silver coinage, and the reason why a silver coinage is, as it were, slightly depreciated, may be readily explained. For suppose that the weight of gold in a sovereign, and the weight of silver in a shilling, had in the first instance been so arranged that the quantity of silver contained in twenty shillings had been exactly equivalent in value to the gold contained in a sovereign. If this plan had been adopted, any subsequent rise in the value of silver com- pared with gold would have made it profitable to melt silver coin, and sell it as bullion. The silver coinage of the country would thus be constantly liable to be absorbed, for the purpose of being melted down ; there- fore, one of two things would occur, either the country would soon lose its silver coinage, or the Mint would have to bear a heavy loss ; since, if silver rose in value On Money. compared with gold, the Mint would manifestly lose upon all the silver coined, and an unlimited amount might be demanded as long as it continued profitable to melt silver coin. Such a contingency is, however, obviated by the judi- cious regulations which control the Mint. For since twenty shillings, although they exchange for a sovereign, do not contain an amount of silver equivalent in value to a sovereign, it is manifestly unprofitable to melt down our silver coinage, and sell it as bullion, unless there should be a very considerable rise in the value of silver compared with gold. The plan adopted by our Mint prevents any profit being realised by the melting of silver, unless the rise in the value of silver should be very considerable. In the currency of France the amount of silver contained in its silver coinage is much more nearly equivalent in value to the gold coinage for which it exchanges, than is the case in our own currency. For instance, the gold coin termed a ' Napoleon ' is said to represent twenty ' francs : ' and if four ' five-franc ' silver pieces were melted down, the silver which they contain was, at the time the standard was fixed, as nearly as possible equivalent in value to the gold contained in a ' Napoleon.' If therefore anything should occur to increase the value of silver compared with gold, it would become profitable to melt the silver coinage of France and exchange it for gold. The melting of the French silver coinage no doubt took place on a large scale during the time when there was a rise in the value of silver, consequent on the increased demand for silver to be exported to India, chiefly in payment for the greatly increased quantities of cotton that were pur- chased at very high prices from India during the American civil war. Gold took the place of the silver coinage which was thus melted. We have described our own silver coinage to be, as it were, a slightly depreciated currency ; it might therefore be supposed, that a person would incur a certain risk of loss if he were compelled to accept silver instead of gold in payment of a debt due to him. But in order to obviate such an occurrence, a law has been passed, which enacts that silver shall not be a legal tender for any amount 2a 369 BOOK III. CH. Y- Regula- tions of the Mint in England and France. Beasons for limit- ing the amount of a legal tender in silver. 370 Manual of Political Econoiny. exceeding 40.s., and pence are not a legal tender for any amount exceeding Is. Silver and copper money maj', therefore, be regarded as merely subsidiary coins ; and thus all the advantages of having convenient coins to discharge the smallest payments are obtained without any of the disadvantages which belong to a double standard. CHAPTER VI. ON THE VALUE OF MONEY. TO the expression ' value of money,' an ambiguity of meaning is attached, which it is necessary clearly to explain. The value of money has a popular signification, which is quite distinct from its scientific meaning. If the ' City article ' of any daily newspaper is perused, it will be perceived that the value of money is considered to be synonymous with the current rate of interest. Thus the value of money is said to be increasing, when the rate of interest is rising. What is known as the Bank-rate of discount is the measure, at any particular time, of the value of money, where this expression is regarded as signifying the current rate of interest. The Governors and Directors of the Bank of England announce from time to time, usually at their weekly meetings, the terms on which they will discount bills, or, in other words, the interest which must be paid by those who wish temporarily to borrow money from the Bank. In the language, therefore, of every-day life, the value of money is considered to be represented by the Bank-rate of discount; the value of money is thus said to rise, as this rate of discount advances, and to fall, as the rate of discount declines. It may be gathered, from the previous remarks on value and price, that the expression ' value of money ' has another and very difterent meaning. In political economy the greatness or smallness of value is estimated by the power which a commodity has to obtain other commodities in exchange for it. If a sack of wheat will, at the present time, exchange for a greater quantity of coal, of meat, and of every other commodity than it BOOK III. CH. VI. Distinc- tion be- tween the popular and scien- tific sense of vahie of money. The scien- tific sense of this expression. 372 Manual of Political Economy. BOOK III. CH. VI. 7'he value of [fold rises as prices fall, and falls «.« prices rise. The price of f/old is said to he fixed by law. would have exchanged for a twelvemonth since, it may be said that the value of wheat has risen. If, on the other hand, the wheat exchanged for a less, instead of a greater, quantity of coal, meat, &c., the value of wheat would be described as having fallen. In a similar manner, if a certain quantity of gold would, at the present time, exchange for a greater quantity of coal, of meat, and of every other commodity, than it would have exchanged for a twelvemonth since, it would be said that the value of gold had risen ; on the other hand, it would be affirmed that the value of gold had declined, if the gold exchanged for a less, instead of a greater, quantity of those articles just enumerated. But when it is said that gold exchanges for a greater quantity of any commodity, it is, in fact, asserted that the price of this commodity has fallen ; and again, when gold exchanges for a diminished quantity of any commoditj^ the price of the commodity has increased. Suppose that, a twelve- month since, the gold contained in two sovereigns would exchange for a sack of wheat, and that now this gold exchanges for two sacks of Avheat, it is manifest that the value of gold, estimated in wheat, has increased twofold in the course of a twelvemonth, and consequently the price of wheat during this period has diminished in the same ratio ; for wheat has, according to this hypothesis, during the time, declined in price from 4().'<. to 20.9. a sack. When therefore, in political economy, the value of the precious metals, or the value of money is spoken of, the purchasing power of money is referred to ; or, in other words, the power which money has to obtain other commodities in exchange for it. It must, therefore, be distinctly borne in mind, that although men of business consider the value of money to be represented by the rate of interest, yet the signification which is here attached to the expression ' value of money ' is such as to describe the value of money to be great when prices are low, and to be small when prices are high. A few lines above it was remarked that the value of money is the same as the value of the precious metals of which it is composed. This statement may perhaps require some elucidation. Our readers have no doubt frequently observed that the Mint price of gold is On the Value of Money. 373 3^. 17s. 10|r?. per oz. This price is fixed by law, and if an individual takes gold in the form of bullion to the Mint, the authorities are compelled by law to purchase it from him, at the price of 8^. 17s. 10|d. per oz. The price of gold therefore, considered as metal, is by Act of Parliament fixed at an invariable amount. This is not the case with any other metal, for we are all aware that the price of a ton of iron, or a ton of tin, varies greatly from time to time. It will now be explained what is really meant by the price of gold being thus permanently fixed by law. The fixed price which is given to gold by law is not unfrequently the basis of most erroneous conclusions. Some persons who profess to be authorities on monetary affairs decide, in the most offhand manner, that the value of gold was not affected by the gold discoveries, grounding this opinion upon the fact that the price of gold has remained unchanged. They say an ounce of gold now realises exactly the same price, namely 31. 17s. lO^d., as it realised before the gold discoveries. How then, they ask, can the value of gold have declined, whilst its price remains unaltered ? But this constancy in the price of gold only proves that the quantity of gold in a sovereign remains the same. The Mint authorities give 3/. I7s. lOhd. for an ounce of gold, because they know that there is just sufficient gold in an ounce to manufacture three sovereigns, and that portion of a sovereign which is represented by 17s. 10 Id Since, therefore, the price of gold remains constant, we may speak of gold and bullion as synonymous with the value of gold when converted into coin. The value of gold money, therefore, is regulated by the same laws as those which regulate the value of gold in bullion. In order, therefore, to investigate the value of money, it will only be necessary to apply those principles already enunciated which regulate the value of mineral products. It is very important to keep most distinctly before the student's mind, that money is composed of substances, the value of which is regulated in the same manner as any other ordinary commodities of trade. The subject of money is rendered confused and difficult, because, in consequence of the phraseology which is often employed, a belief is encouraged that there is something mysterious BOOK III. CH. VI. Erroneous conclu- sions from this state- ment. Its real meaning. The value of gold is regulated hy the or- dinary laws of value which are 374 Manual of Political Economy. connected with every economical question relating to money. It will be remembered that in discussing the laws of value and price, commodities were divided into three distinct classes, and these three classes were separated from each other respectively by the following characteristics. In the first class were placed all those articles whose supply was absolutely limited; in the second class, all produce was included the supply of which would, if increased, involve a greater proportionate expenditure of labour and capital ; and, in the third and last class, were enumerated all commodities whose supply might be increased without any practical limit. The commodities belonging to the second class were described in general terms, as agricultural and mineral produce. The laws of value and price which apply to this class were expounded in Chapter III., Book in. These particular laws therefore will have to be applied in order to establish the principles which regulate the value of money ; because, as above remarked, the value of money, and the value of the precious metals of which it is composed, are synonymous expressions. It is hardly necessary to repeat, that the fundamental conclusion established in the chapter just referred to, may be expressed in the following way. If the demand for agricultural or mineral produce renders it necessary so to increase the supply that resort must be had to less productive sources, the price, or, in other words, the value of such produce, will rise, in order to compensate the augmented cost of production. It is true that this law is not brought so distinctly or so immediately into operation, in the case of mineral as in that of agricultural produce, because mining is far more speculative and uncertain than agriculture. This uncertainty is most strikingly apparent in those mines which are worked for the precious metals. Thus the gold-digging of Australia has the character of a lottery. If a man cultivates a plot of ground, he can calculate approximately the average produce it will yield, and the profit that will be left to him ; but an Australian gold-digger cannot know beforehand whether the claim, upon wliich he purchases permission to dig, will prove a complete blank, or will contain nuggets sufficient to make him a rich man in a On the Value of Money. 375 few days. Although it may appear impracticable to apply the principles of economic science to a branch of industry so speculative and so irregular as gold-digging, yet the Australian diggers are of course influenced, in commencing and continuing gold mining, by the average amount of the gains realised. If the gold-fields became more productive, a greater number of diggers would be attracted to them, and the same effect would be produced if the gold that was found became more valuable. Agricultural and mineral produce, consistently with the law above enunciated, becomes more valuable, or in other words, rises in price, as it becomes necessary to increase the supply, in order to meet an increased demand. An increased demand for corn and meat is caused by an increased consumption of food, and we are all aware of the various circumstances which may affect the demand for such minerals as coal, copper, and iron ; the demand for these minerals increases with every extension of commerce. Let us, therefore, inquire : — Is there any difference in the nature of the causes which affect the demand for the precious metals ? Gold (and the same remark applies to silver) is devoted to two distinct purposes. 1st. Gold is employed as an ordinary article of commerce. 2nd. Gold is the substance from which a great portion of the mone}^ of most countries is made. By far the larger part of the gold annually produced is devoted to the last of these two purposes. Gold is, however, employed in a great variety of ways, both in arts and manufactures. But it is difficult even approximately to estimate the quantity which is thus absorbed. From the stamp which is in this country placed upon gold and silver plate, we are enabled to ascertain that the gold plate which is annually manufactured does not in value exceed 40,000/. The most competent autho- rities differ greatly in their calculations with regard to the amount of gold which is used in jewellery, gilding, and in various other ways. Mr. Jacob,^ writing about 1830, supposed that an amount of gold equivalent to 2,000,000/. ^ An historical Inquiry into the Production and Consumption of the Precious Metals, by William Jacob, F.R.S. 1831. BOOK III. CH. VI. Causes which may raise the price of agrictdtu- ral pro- duce. Do they operate in the case of gold ? The tivo uses of gold. The gold used for purposes of art \76 Manual of Political Economy. was thus annually absorbed. If this estimate was correct, this amount has probably been now trebled. At any rate, the gold which is required for industrial purposes cannot vary greatly from year to year. Hence, if the supply of gold is suddenly doubled or trebled, as it was by the dis- covery of the rich deposits in Australia and California, it is evident that the large additional supply must be almost entirely converted into gold coinage. It, therefore, appears, that any increase or decrease in the quantity of gold which is used, is t^lmost solely determined by the amount of gold which is manufactured into money. We must, therefore, in investigating the demand for gold, inquire into the causes which regulate the quantity of money which each country may require. There is little difficulty in explaining the circumstances which regulate the particular demand a country has for the various commodities it consumes. Thus England needs so many sacks of wheat, because there are a certain number of people to be fed. The quantity of cotton goods which the English annually require for their own use varies with the price at which these goods can be sold ; each successive reduction in price gives a greater number the power to purchase them, and consequently the demand increases as the price is reduced. It is almost impossible to make even a rough estimate of the amount of gold in circulation in England. All that can be definitely known is the amount that is each year coined at the Mint ; this varies greatly from year to year, but for the ten years ending 1881 it averaged about 8,000,000/. per annum. This, therefore, may approximately be regarded as the amount of gold which England annually requires to maintain her standard currency.^ But why has England this particular demand for gold coinage ? Why should she not keep in circulation twice as much gold coinage ? In giving an 1 [No gold was coined at the London Mint in the years 1881, 1882, and 1886. The average for the ten years ending 1887 is consequently much lower than the average for the ten years ending 1881, amounting to only 1,500,000^. per annum. The Sydney and Melbourne branches of the Mint have for many years past sent to England gold coin to the amount of about 2,500,000^. a yeai-. The amount of gold coined at the Mint in the ten years ending 1904 was nearly 69,000,000/. In the same period 21,000,000/. was withdrawn from circulation, so that the net increase was approximately 48,000,000/. or 4,800,000/. per annum.] On the Value of Money. 177 answer to these questions, an explanation will be afforded of the principles which regulate the distribution of the precious metals over the various countries of the world. It will be better in the first place to suppose, for the sake of simplicity, that England has no other money except a metallic coinage. It will afterwards be con- sidered whether the conclusions which are arrived at, on this supposition, have in any way to be modified, because England possesses paper money, such as bank-notes, in addition to her coinage. It will be necessary, as a preliminary inquiry, to investigate the general causes that regulate the quantity of money which a nation requires to keep in circulation. It is almost self-evident that the amount of money which a nation needs must bear some proportion to its wealth. England annually produces and accumulates a much greater amount of wealth than Ireland. A much larger quantity of commodities will, therefore, each year be bought and sold for money in England than in Ireland ; in order to carry on this exchange, a greater amount of money will be required in the one country than in the other. The population of England also much exceeds that of Ireland. English labourers are certainly as well remunerated as Irish labourers ; wages are generally paid in money, and therefore, as far as the payment of wages is concerned, England will require a much greater amount of money than Ireland. But we need scarcely remark further upon this subject, as it must be evident that the amount of money which a nation requires to carry on all its transactions of buying and selling must bear some proportion to its wealth and population. The vague expression 'some proportion^ is advisedly used in order to warn the student against the fallacy of supposing that the money which a country keeps in circulation is an accurate measure of its national wealth. The error of such a supposition will be clearly shown, if the mode of conducting the trade and commerce of a country is for one moment considered. A vast amount of wealth is daily bought and sold without the transfer of any money ; in fact, it is not too much to state, that money is rarely employed in any of BOOK III. CH. VI. Assump- tion made for sim- plicity. General causes which de- termine the quan- tity of money in circula- tion. It is in some pro- portion to the wealth and popu- lation of a country. Means by which the quantity of money in 378 Manual of Political Economy. BOOK III. CH. VI. circulation is econo- mised. Hence, though the ahsoliLte amount is uncertain, it increases with the increase of tvealth and popula- tion. those large transactions which constitute wholesale trade. The Leeds manufacturer who purchases wool from the stapler pays for it by a cheque, and not by gold or silver coin ; and when he sells the cloth which he has manu- factured, he does not receive gold or silver from the purchaser, but he is invariably paid by a cheque, or by a \A\\ of exchange. The cheques and bills of exchange which he may have thus issued on his own credit are returned to his bank, and the amount of money which they represent is deducted from the aggregate amount of bills and cheques which he may have received from others, and deposited at the same bank ; the balance which is left represents so much wealth which the manufacturer keeps with his banker, either for purposes of convenience or for security. It thus appears, that a manufacturer who may produce in the course of a year 100,000?. worth of cloth, may never have in his possession a greater amount of money than is sufficient to pay the weekly wages of his labourers, and to make such daily payments as are usually discharged by ready money. As another illustration, it may be stated that an individual whose personal expenditure is 1000?. a year, need never have more than a very small amount of money in his possession at any one time. He will discharge all his larger payments by cheques, and he will only require money to pay the wages of his servants, and to meet small current daily expenses, such, for instance, as buying railway tickets, paying cab-fares, &c. It is consequently manifest that the money which any individual has in his possession forms a very insignificant part of his aggregate wealth. Although it is, therefore, impossible to tell, from any a 'priori reasoning, whether the wealth of a country is fifty times or a hundred times as great as the amount of money which is kept in circulation, yet it may never- theless with certainty be concluded that as the wealth and population of a country increase, a greater amount of wealth is bought and sold for money. Such a con- clusion is correct, because although a great amount of wealth is exchanged without the transfer of money from one individual to another, yet money is required, and is always used in certain transactions, and these transactions increase both in number and in amount as the wealth and On the Value of Money. 379 population of a country increase. Thus labourers receive their wages in money ; and the amount paid in wages is sure to increase with every increase in the wealth of the country. Again, every individual uses money to discharge most of his smaller payments, such as the purchase of railway-tickets, the hiring of cabs, the settling of hotel- bills, &c. But as the wealth and population of a country increase, more will be spent in railway tickets, cab-fares, hotel-bills, &c., and, consequently, a greater amount of money will be required for these purposes. In order still further to show the difficulty of assigning any definite proportion between the wealth of a country and the amount of money kept in circulation, it may be mentioned that the amount of money which is required to carry on the trade of a country may partly depend upon the number of times a commodity is bought and sold before it is consumed. To illustrate this, suppose that a sack of flour is bought and sold ten times, to ten diflTerent individuals, before it reaches the baker who bakes it, and that each time the flour is paid for in money. It is manifest that this buying and selling will put as much money in circulation, or, in other words, wnll require the use of as much coin, as if ten sacks of flour had been at once sold by the miller to the baker. Sufficient has now been said to establish the two following principles, which regulate the quantity of money required to be kept in circulation: 1st. The amount of money required to be kept in circulation depends upon the amount of wealth which is exchanged for money. Hence, cceteris iDaribus, the amount of money in circulation ought to increase as the population and wealth of a country advance. 2nd. The amount of money required to be kept in circulation also depends upon the number of times com- modities are bought and sold for money, before they are consumed. The question now arises — Do the causes just described as regulating the demand for the precious metals, afford any explanation of the agency by which the demand and the supply of the precious metals tend to an equality ? With regard to any other commodity, there is, as we BOOK III. CH. VI. The a- mount of money is also affect- ed by the number of commer- cial trans- actions. Two prin- ciples at which we have ar- rived. Applica- tion of the jwinciple of demand and supply to the pre- cious me- tals. Manual of Political Economy. have shown, no difficulty in explaining this process of equalisation ; for the adjustment of tlie demand to the supply, and vice versa, is always effected by a rise or fall in price. An excess in the supply beyond the demand means, that at the price at which any particular article of commerce is offered for sale, there are not sufficient purchasers to take the whole quantity which is offered. But this apparent superfluity is, after all, a mere question of price, for if the price be lowered, new purchasers will at once coine into the market, and there will cease to be an excess in the supply. As soon as the price is sufficiently reduced there will be purchasers for the whole of the commodity which is offered for sale. The demand for a commodity always varies with its cheapness, although the ratio of this variation cannot be numerically defined. It is not onl}'' different for different commodities, but it also alters with every change in the economic condition of the country. As an example, Mr. Gladstone was confident in his belief that a reduction of fifty per cent, in the price of inferior French clarets would cause these wines to be purchased by classes of society in this country who never before purchased them, and that, therefore, the consumption of this wine would increase much more than one hundred per cent. ; and this belief was fully justified by events. As another example, it is perhaps not too much to say that at the present day even the poorest are generally able to obtain as much bread as tliey require, and, therefore, it is certain that the demand for bread would not be doubled, or, in other words, that twice as much bread would not be consumed, if the price of bread were reduced one half. But although we cannot beforehand define the exact point to which the price of any commodity must either rise or fall to adjust the demand to the supply, yet there can be no doubt as to the agency by which this adjustment is effected: when the demand exceeds the supply the price will rise, and thus diminish the demand ; when, on the other hand, the supply exceeds the demand, the price will fall, and thus increase the demand. But it would be naturally asked, Can the demand and supply of the precious metals be adjusted in the same manner ? This is a difficulty which must be clearly explained. On the Value of Money. 381 It has been frequently stated that the price of any commodity is an expression synonymous with its value estimated in gold, or in any other substance which is selected as money. It is, therefore, an evident contradic- tion to speak of the demand and supply of gold being adjusted by a rise and fall in its price. The price of gold is, in fact, a meaningless expression, since, according to the signification which we have just attached to the word price, the price of gold means the value of gold estimated in gold, and this is a phrase which can have no meaning. Let, therefore, the expression ' value of gold ' be substi- tuted for ' price of gold,' and this substitution will enable us to escape from our apparent difficulty. The value of gold accurately varies in the inverse ratio of the price of commodities. If the prices of all commodities rise one hundred per cent., the value of gold falls one half, for the same quantity of gold will exchange for or purchase only half as much of each commodity. In the absence, there- fore, of any counteracting circumstances, if the prices of all commodities rise one hundred per cent., twice as much gold or silver is required each time any commodity is purchased ; and there must consequently be twice as much gold and silver in the country circulating in the form of money. The following principle can therefore be enunciated : — The amount of gold actually in circulation varies, cmteris paribus, in the direct ratio of the price of commodities. If the prices of all commodities rise, each purchase requires an increased amount of money. Hence more money is kept in circulation, or, in other words, the quantity of metal employed is increased. The following is a summary of the somewhat compli- cated process by which the quantity of gold and silver in circulation is regulated. The greater is the quantity of coin in circulation, the higher, coiteris paribus, will be the price of commodities. But as the price of commodities rises, the value of gold, or the value of any other substance out of which money is made, declines. If the value of gold diminishes, the profits of the miners who produce this gold must diminish, and when the profits are thus reduced many will be dis- couraged from gold mining, and the suppl}^ of gold will consequently be also diminished. BOOK III. CH. VI. We must substitute value for price. Demand for gold varies directly ivith ]>rices. Summary of the pro- cess 382 Manual of Political Economy. We shall now be able readily to explain the means by which the demand for gold is equalised to its supply. It is necessary in the first place to inquire what is meant by a country's demand for the precious metals ; in order to simplify this inquiry, let it be supposed that such a metal as gold is employed for no other purpose except to be coined into money. This supposition will much simplify the investigation, and will not in any sensible degree affect the correctness of the ultimate conclusions ; for, as previously stated, the quantity of gold used for the ordinary purposes of art and manufacture is subject to very small variations from year to year. According to this assumption it will be correct to say that the amount of gold coinage which a country requires determines its demand for gold. It has already been remarked in this chapter, that the amount of coinage which a country keeps in circulation is primarily regu- lated by the amount of wealth which is exchanged for money, and by the number of times which any of the commodities that compose this wealth are bought and sold. If, in the absence of any counteracting circum- stances, England's wealth were doubled, and if in every trading transaction the amount of wealth bought and sold were doubled, England would require twice as much money in order to effect her transactions of buying and selling. But in what sense is an increased amount of money necessary ? What would be the consequence if a larger amount of money were not brought into circula- tion ? These questions will be answered by showing, in the first place, that the increased quantity of money is required in order to preserve general prices unchanged ; and that, secondly, if the money were not forthcoming, the prices of all commodities would decline, or, in other words, the value of gold would be increased. An investigation of the following hypothetical case will substantiate these propositions. Let it be supposed that the material wants of England's entire population are suddenly doubled, and that an adequate supply of commodities is spontaneously provided to meet this increased demand. According to this hypotliesis the supply of every commodity except money would be augmented ; each person who before purchased one loaf On the Value of Money. 383 of bread, one pound of meat, and one coat, would now purchase two loaves, two pounds of meat, and two coats. But since he possesses no more money than he did when his material wants were satisfied with only half the amount of commodities he now requires, he and every other individual can only now give the same quantity of money for two loaves, two pounds of meat, and two coats, as they before gave for one loaf, one pound of meat, and one coat. If, however, this be the case, bread, meat, clothes, and every other article must have declined one half in price. It is, therefore, evident that, in this imaginary case, where circumstances have occurred which doubled the demand for money without its supply being increased, the price of all commodities will be diminished one half, or, in other words, the value of gold will be doubled ; buying and selling, however, will not be interfered with, the people will not be pre- vented satisfying their demand for commodities, nor will less material wealth be produced and consumed. Again, it would be said that a nation requires, and therefore has a demand for, a greater quantity of coinage, if her population and wealth should increase ; but, in this case, the greater quantity of coinage is required in order to prevent prices from declining, for if the greater quantity were not forthcoming, trade would not be prevented from developing, the production of wealth would not be stopped, but the prices of all commodities would inevitably decline. This general decline in price is quite as undesirable as a general rise in price, for if prices either suddenly rise or suddenly fall the conditions of every monetary contract are immediately altered ; the annuitant, for instance, who is in the receipt of his 100^. a year, may suddenly find, if there is a general rise in the price of commodities, that his annual income is only one half as valuable ; or, in other words, will only pur- chase him one half as much of the necessaries and enjoyments of life. On the other hand, if prices suddenly fall, the burden of any fixed money payment will be at once increased ; thus the farmer who is bound to pay 500^. a year as rent to his landlord might be seriously impoverished, because this 5001. would repre- sent twice as much agricultural produce. It is, therefore. BOOK III. CH. VI. If the de- mand/or money in- creases faster than the supply, prices fall. All varia- tions in price are undesir- able. 'M Manual of Political Economy. most, desirable tliat the value of gold should remain as constant as possible. Hence, if an increase of population and wealth causes a country to require a greater amount of coinage, the demand for gold and silver which is thus produced represents a real want. Although it is clearly important that prices should not vary, the question now arises, Why should prices happen to be what they are at any particular time ? Why, on the one hand, should there not have been a smaller production of gold, and lower prices — or why, on the other hand, should there not be a greater production of gold, and higher prices ? The gold mines of the world have never in one year yielded more than a small portion of what they might have yielded if more labour and capital had been employed upon them. But this increased amount of labour and capital has not been embarked in gold mining, precisely for the same reason that a greater quantity of labour and capital has not been employed upon the mines of Cornwall. If the price of copper were greatly increased, then copper mining would become a more profitable speculation. There would be a greater inducement offered to extend mining operations, and an increased amount of copper ore would inevitably be raised. If, on the other hand, the value of copper were diminished, tlie profits of copper mining would also be diminished, and a smaller quantity of copper ore would be annually raised. If, in the same way, the value of gold were to increase, or, in other words, if general prices were to decline, an increased quantity of gold would be annually produced. If, on the contrary, the value of gold were to fall, or general prices to rise, the profits of gold mining would be decreased, and the annual yield of gold would diminish, because with the diminution in the profits of gold mining there would be less inducement to employ labour and capital upon gold digging. An increase in the demand for gold is evidenced by a fall in the price of commodities ; but, as we have just stated, such a fall in general prices stimulates an increa.se in the annual yield of gold, and in this manner an agency is constantly brought into operation to equalise the supply of gold to the demand, or, in other word.s, to preserve an uniformity of general prices. The process is exactly I On the Value of Money. 385 analogous to the equalisation of the supply to the demand in the case of every other commodity. If the demand for cotton goods increases, the price or value of cotton goods will rise, but a rise in the price of cotton goods causes their supply to be also increased. The reason, therefore, why there is an apparent exception in the case of gold arises from this circumstance. An active demand for any other commodity is characterised by a rise in its price or value. The same holds true with regard to gold, but since the price of gold is a meaning- less expression, it is necessary to say that an increased demand for gold signifies a rise in its value ; a rise in the value of gold can, however, only be shown by a fall in general prices. The leading propositions established in this chapter are briefly these : — If the demand for gold increases without the sources of its supply becoming more pro- ductive, the increased quantity of gold required will be obtained at a greater cost, and the result must be that the value of gold will rise. An increase in the value of gold must be shown by a fall in general prices. If, on the other hand, rich gold mines should be discovered, and the cost of obtaining gold should be lessened, the supply of gold will be increased, and its value must inevitably decline, unless circumstances should simultaneously happen which should cause various countries to require a greater amount of gold money. If such circumstances should occur, an increase in the demand for gold might be created, and the whole of the additional gold yielded might be absorbed without the value of this metal being decreased. If, on the other hand, no circumstances should occur to increase the demand for gold, the increase in the suppl}^ of gold must cause a decrease in its value. But a diminution in the value of gold, or, in other words, a rise in general prices, creates an increased employment for gold, because if the price of a commodity is increased, a greater amount of money is required to be used each time a commodit}^ is bought and sold. In this way the supply of gold will be always equalised to the demand, because, as the value of gold becomes depreciated by an increased supply, the demand for gold will also be increased in exact proportion to the amount of this 2b BOOK III. CH. VI. Recapitu- lation. 386 Manual of Political Economy. BOOK III. CH. VI. Circum- Uanccs which tend to equalise the demand to the sup- ply of gold. depreciation. Thus, if the value of gold is decreased one half, or, in other words, general pi'ices are doubled, the quantity of gold money required Avill also be doubled. This process of equalisation is moreover assisted by the two following circumstances : In the first place, as the value of gold diminishes, a greater quantity of it will be used for purposes of art and manufacture, and in this way a portion of the additional supply of gold may be absorbed. In the second place, a decrease in the value of gold exerts an influence to limit the supply, because gold mining will be rendered less profitable, and therefore the least productive mines will gradually cease to be worked. It will be shown, in a future chapter, that the principles just enunciated render us much assistance in determining the effects which have been produced by the gold dis- coveries in Australia and California. We have, in this chapter, explained the manner in which the demand for gold is equalised to its supply in the case of the countries which produce it ; but other countries, such as our own, either yield no gold [or yield it in such small quantities that it would not be profitable to work it, except in so far as it is found incidentally to the working of other metals. Such countries obtain their supply of gold by importation]. It will be, therefore, necessary to call to our aid the principles of international trade, in order to explain how the quantity of gold is regulated which a country like England annually retains for the purposes of coinage. The subject of international trade will therefore be considered in the next chapter. CHAPTER VII. FOKEIGN COMMERCE OR INTERNATIONAL TRADE. rr^HE advantages which a country derives fi-om foreign L commerce must be patent to the most casual observer. By foreign commerce a country obtains various com- modities which she cannot produce herself; her people do not perhaps possess the requisite skill, or her climate and other circumstances of her physical condition are unsuited to the growth and manufacture of the products in question. Foreign commerce therefore extends the range of man's enjoyments ; he is not confined to the products of his own soil, but commodities are brought from every region of the world to minister to his wants. Foreign commerce, however, confers another advantage which is equally important ; a single example will show how greatly foreign trade stimulates the production of wealth by increasing the efficiency of labour and capital. If the economic condition of various countries is considered it will at once be perceived that there is the greatest possible variation in the relative advantages which they respectively possess for the production of various commodities. For instance, the mixture of iron- stone and coal, often in alternate seams, gives England exceptional advantages in the manufacture of iron, and the production of iron can be greatly increased without any material advance in its price. The area of land in England which is suitable for the growth of wheat is so limited that it would probably be impossible to obtain from her own soil sufficient wheat for her population, and even if it were possible, it would become necessary to resort to such unproductive land that wheat would advance almost to a famine price. It is, therefore. BOOK III. CH. VII. Advan- tages of interna- tional trade. The mu- tual ad- vantage gained by France selling ivheat to England for hard- ware. 388 Manual of Political Economy. BOOK III. CH. VII. The fal- lacies of the Mer- cantile Si/stem. obviously advantageous for England to obtain a portion of her supply of wheat in exchange for iron. Other countries, such as the United States, Canada and Australia, possessing almost unlimited tracts of fertile land, can readily supply England with the additional w^heat she may require. As the advantages wdiich a country derives from foreign commerce admit of being thus easily explained, it would be instructive, before investigating the subject further, to inquire how^ it has come to pass that the real character of the benefits conferred by foreign trade has often been misunderstood. It is scarcely nece.ssarj^ to remark that until a time which w^as marked by tlie publication of Adam Smith's Wealth of Nations the doctrines of the mercantile sj^stem obtained almost universal acceptance. It was supposed that the gain which any country secured from foreign trade was to be estimated by the amount of money it brought into the country: and consequently the commercial policy of every countiy w^as dominated by the desire, as far as possible, to encourage exports and to discourage imports ; the greater the amount of goods that w^ere exported, the greater w^ould be the amount of money to be received ; and the larger the imports, the more money w'ould have to be sent abroad to pay for them. If therefore exports exceeded imports, money w^ould have to be received, and the balance of trade w\as said to be favourable ; whilst if imports exceeded exports the balance was regarded as unfavourable. Various expedients w^ere from time to time adopted to secure a favourable balance of trade. Exports w^ere encouraged by the granting of bounties, and imports were restrained by the imposition of duties and in various other ways. Although the system of bounties has long since been given up in England, yet formerly foreign trade was sought to be controlled quite as much by bounties on exports as by restraints on imports. Adam Smith says:^ "Bounties upon exportation are, in Great] Britain, frequently petitioned for, and sometimes granted | to the produce of particular branches of domestic industry. By means of them our merchants and manufacturers,! it is pretended, will be enabled to sell their goods asj ^ Wealth of Nations, Book iv. chap. v. Foreign Commerce or International Trade. 389 cheap or cheaper than their rivals in the foreign market. A greater quantity, it is said, will thus be exported, and the balance of trade consequently turned more in favour of our own country." Although there can be no doubt the granting of bounties on exports and the impeding of imports by the imposition of duties were in the first instance prompted by the desire to secure a favourable balance of trade, yet the system of protection which until a comparatively recent period controlled the commerce of our own country, and still controls the commerce of most other countries, may be regarded as a natural development of the same policy. So long as foreign commerce is considered to involve an antagonism between countries instead of an interchange of commodities which is mutually advantageous, it will inevitably be concluded that the interests of the home trader will be promoted at the expense of his foreign rival both by bounties on exports and duties on imports. It is argued that the home trader who enjoys a bounty is placed in a better position to undersell his foreign competitors in their own markets, whilst at the same time he can be effectually protected by sufficiently high import duties against their competition in his own market. England and Holland are almost the only countries which have adopted a complete free trade policy ; and as in many countries, including even our own colonies, protection holds an extremely strong position, it becomes of much practical importance to consider the advantages conferred upon a country by foreign commerce. In order to simplify the case as much as possible, let it be in the first instance assumed that the foreign trade between England and France consists in the exchange of two commodities only — iron and wheat — that iron is sent from England in exchange for wheat from France. Let it be supposed that, in France, the production of a ton of iron requires as much labour and capital as the production of twenty sacks of wheat ; but that in England the same quantity of iron requires as much labour and capital as would produce ten sacks of wheat ; then iron, estimated in wheat, is twice as valuable in France as in England. England therefore might say to France — It will be greatly to our mutual advantage if you will let me 390 Manual of Political Economy. supply you with iron, and receive from you wheat in exchange for it. For suppose you give me fifteen sacks of wheat for each ton of iron that I send you, then we shall each gain five sacks of wheat on every transaction ; if you manufacture the ton of iron yourself, it would cost you as much as twenty sacks of wheat, whereas you only have to give me fifteen sacks. On the other hand, I should only be able to get ten sacks of wheat for a ton of iron, if I sold the iron in my own country. We, therefore, each of us obtain a profit upon the transaction, which is represented in value by five sacks of wheat. This is a great gain, and a great saving of wealth, for the gain is made at no one's expense. In order that two countries should enjoy those striking- advantages which have just been pointed out as resulting from foreign commerce, it is not necessary that of the two commodities exchanged the first should be dearer in the one country than in the other, and that the second commodity should be clieaper; all that is necessary is that in the two countries there should be a difference in the relative value of the commodities which are ex- changed. It is very important to bear this remark in mind ; its truth may be illustrated by an example. Suppose the cost price of a ton of iron produced in France is 30^., and that the price of a sack of wheat is 30.s. ; a ton of iron would therefore exchange in France for twenty sacks of wheat. But, in England, a ton of iron is supposed to exchange for only ten sacks of wheat. Let it therefore be considered that a ton of iron in England is worth 101., and that a sack of wheat is worth 1^. Wheat and iron are therefore both cheaper in England than in France, but iron is three times as dear in France as in England, and wheat is only one and a half times as dear. There is, therefore, a difference in the relative value of wheat and iron in the two countries, and hence a foreign trade in these two commodities can be carried on with great advantage to the two countries concerned. For if England gives France a ton of iron in exchange for fifteen sacks of wheat, each country will upon the transaction obtain a profit which in value is to be estimated at five sacks of wheat. But all the gain which arises from this exchange would be at once lost if there Foreign Gominerce or International Trade. 391 were no difference in the relative value of wheat and iron in the two countries, for if wheat as well as iron were three times as dear in France as in England, it would be impossible for England or France to realise any profit by exchanging iron for wheat ; the transaction would involve heavy loss to each party, because there would be no profit to counterbalance the expense in- volved in exporting the commodities from one country to the other. In explaining the profit realised by two countries from foreign commerce, we omitted to mention the cost of carrying these commodities from one country to the other. This cost of carriage has, of course, to be deducted when estimating the aggregate gain resulting from foreign trade. This item must not only be considered, but it will be also necessary to point out the causes which fix the exact proportion of the whole cost of carriage which is borne by each of the two countries. It will, however, much simplify our investigations if for the present the consideration of the cost of carriage is omitted. In order still more to simplify the subject, it may, in the first instance, be assumed that England's foreign commerce is restricted to one country, and that her exports to this country, and her imports from it, are confined to two commodities. Reverting to our former example, let it be supposed that England's foreign commerce consists en- tirely in sending iron to France, and receiving wheat in exchange for it. As yet it has only been proved that England and France would both realise considerable profit if there was a difference in the relative value of wheat and iron in the two countries. It has been shown above, that upon every ton of iron exported, England and France might both obtain a profit equal in value to five sacks of wheat, if a ton of iron were worth twenty sacks of wheat in France and ten sacks in England : this particular profit would manifestly be realised if fifteen sacks of wheat were given for one ton of iron. But the question now arises — Is it necessary that these, and no others, should be the terms of the bargain ? Why should not twelve sacks of wheat instead of fifteen sacks be given for each ton of iron ? The trade would still be highly remunerative to each country, although the profit BOOK III. CH. VII. Co^t oj carriage. IJ com- merce he supposed restricted to two articles what would he the terms oJ exchange ?, 392 Manual of Political Economy. resulting from the transaction would now be unequally, instead of equally, distributed, for France would obtain a profit represented by eight sacks of wheat upon each ton of iron exported from England, whereas the profit realised by England upon the same transaction would be no more than two sacks of wheat. The terms of such a bargain are certainly not regulated by blind chance ; the buyer and seller in the transactions of international trade are shrewd merchants, whose business it is to buy as cheaply as they can and to sell as dearly. We will, therefore, proceed to describe the manner in which the bargain is ultimately adjusted. If England could receive fifteen sacks of wheat for every ton of iron she exported to France, the quantity of iron which she would be willing to export upon these terms might be greatly in excess of the quantity of iron which France requires. If this be so, then the supply of iron to France would manifestly be in excess of the demand ; it will, therefore, be necessary to consider how the supply, may be equalised to the demand. In making this investigation it will be shown that the process by which this equalisation is effected exactly resembles that process of equalisation which takes place in the case of commodities which are bought and sold in the country where they are produced. When the supply of any commodity is in excess of the demand, the commodity must be cheapened in order to equalise the supply to the demand ; by cheapening the commodity its supply will be diminished, and the demand for it will be increased. England, therefore, will be com- pelled to offer her iron to France on more favourable terms, if the quantity of iron which England exports is more than suflBcient to meet the demand which France has for iron. Let it, therefore, be assumed that France only gives England fourteen sacks of wheat instead of fifteen for eacli ton of iron. This change in the terms of the bargain will manifestly exert an influence in two distinct ways towards equalising the demand for iron in France to the supply which is imported from England. In the first place, the profit obtained upon the trans- action by the English manufacturer of iron will be diminished, and, therefore, he will be induced to export a Foreign Commerce or International Trade. 393 less quantity of iron to France than he did when fifteen sacks of wheat were given for each ton of iron. The supply of iron to France will in this manner be decreased. The demand for iron in France will, at the same time, be increased ; because if any commodity is cheaper the demand for it always becomes greater. Iron must mani- festly be cheapened in France if fourteen sacks of wheat instead of fifteen are given for each ton of this metal which is imported. If, however, this alteration in the terms of the bargain is not sufficient to equalise the demand to the supply, and if the quantity of iron which England is willing to export still exceeds the quantity which France requires, the terms of the bargain must be further altered in the same direction. It may, therefore, be assumed that England will be compelled to * offer France iron at the rate of thirteen instead of fourteen sacks of wheat for each ton of metal exported. Let it, therefore, be supposed that these are the terms upon which the international trade is finally adjusted ; thir- teen sacks of wheat being exchanged for one ton of iron. Some important propositions may be deduced from the description which has just been given of the internal mechanism which regulates the bargains of international trade. As an example, the reader will observe that the whole profit which accrues upon each transaction of inter- national commerce is shared, between the two trading countries, in the inverse ratio of the demand which one country has for the commodity which it imports from the other. Thus, in the case just considered, the parti- tion of the profit between France and England is made according to the following ratio : — England, upon each ton of iron exported, obtains a profit equal in value to three sacks of wheat, whereas the profit secured by France is seven sacks of wheat, or, in other words, more than twice as much as that which falls to the lot of England. But if the demand for iron in France should increase, France would obtain a smaller share of the profit, and England of course a greater share. This proposition, after what has been stated, can scarcely need any explanation. When thirteen sacks of wheat are given for one ton of iron, there is a certain definite BOOK III. CH. VII. one country for the pro- duce of the other makes the terms less favourable to it ; or the pro- fit of each country is in an in- verse 7-atio to its de- mand for the import- ed goods. 394 Manual of Political Economy. BOOK III. CH. VII. Effects of loivtrinri the cost of production of one of the commo- dities ex- changed. It does not follow that the country in which the pro- duction is cheapened loill gain all the ad- vantage. quantity of iron which England is willing to export upon these terms. But if this particular quantity of iron no longer satisfies the demand of France, then France, in order to induce England to send her more iron, must offer higher terms for this iron ; and thus France may, in consequence of her increased demand for iron, be compelled to give fourteen sacks of wheat instead of thirteen for each ton of iron. The whole profit of the transaction will then be divided between France and England in the ratio of ^ix to four, instead of in the ratio of seven to three. Let us next inquire what will be the efffect upon the ratio in which the aggregate profits are divided if the production of one of* the commodities interchanged is cheapened in England, but not in France. Suppose that in England some rich deposits of iron ore are discovered, or that, in the process of smelting, some improvements are introduced which France has not either the appliances or the enterprise to adopt. The cost of producing iron might in this manner be so materially diminished in England that a ton of iron will become equivalent in value to eight sacks of wheat instead of ten, while at the same time there is no diminution in the cost of producing iron in France ; and therefore in that country a ton of iron, if no supplies were obtained from other countries, Avould be still equivalent in value to twenty sacks of wheat. The whole profit which will now result from the interchange of iron for wheat between England and France will be represented by twelve sacks of wheat, instead of by ten. The question therefore arises. Will England be able to appropriate to herself the whole of the additional profit ? That she will be able to do so may at first sight seem probable, because the improve- ments or discoveries which have cheapened the cost of iron are due entirely to her, and have as yet exerted no effect in diminishing the cost of producing iron in France. England has previously been obtaining from France thirteen sacks of wheat for each ton of iron. If France were still to carry on the commerce upon these terms, now that a ton of iron is only worth eight sacks of wheat in England, the profit obtained by England would be increased from three sacks of wheat to five sacks of Foreign Commerce or International Trade. 395 wheat ; she would thus appropriate to herself the whole advantage arising from the diminished cost of iron ; France still having to give for iron exactly what she did before. But the competition of tlie English ironmasters will inevitably prevent this taking place : directly they find that the profits obtained upon the export of iron to France are so greatly increased, they will be anxious to send a much larger quantity of iron to France ; iron will, in fact, be forced upon the French markets, greatly in excess of the quantity required. This is sure to be the case, since before increased exports of iron were encour- aged by high profits, the demand for iron in France was exactly equalised to its supply. The terms upon which the trade between France and England is conducted must become less favourable to the latter country, in order to induce England to export less iron, and also to induce France to purchase a greater quantity of the iron im- ported from England. In this manner England may be compelled to accept only eleven or even ten sacks of wheat, for each ton of iron. We have here simply to repeat, what was stated in the case above analysed, that the terms upon which the bargain is finally adjusted depend entirely upon the equalisation of the demand to the supply. If, when a ton of iron is exchanged for eleven sacks of wheat, the quantity of iron sent to France is in excess of that which she requires, the terms of the exchange must be again adjusted ; it may, for instance, happen that when only ten sacks of wheat are given for one ton of iron, the demand for iron in France will be exactly equal to the supply : if this be so, then ten sacks of wheat for one ton of iron will be the terms upon which the exchange is finally adjusted. But if these were the terms upon which the bargain was ultimately arranged, it is manifest that France must obtain the greater portion of the profit which arises from the diminished cost of producing iron, even although this diminution in the cost of producing iron has been con- fined entirely to England. If ten sacks of wheat are given for a ton of iron, the profit secured by France upon each ton of iron she imports will be an equivalent in value to ten sacks of wheat, whereas the profit secured by England will be only two sacks of wheat. This is a Manual of Political Economy. smaller proh't than she obtained before the cost of producing the iron she exports was reduced. France, therefore, has been able to appropriate the whole of the additional profit. This may appear a paradoxical result, but it is one which very possibly may really occur. Allusion has so frequently been made in this chapter to the profit arising from international trade that the question will be naturally asked — Into whose possession does this profit ultimately fall ? When England obtains a profit of five sacks of vvheat upon each ton of iron she exports, is this profit solely enjoyed by the English merchant, and the English ironmaster, or is it distributed amongst the whole nation ? In answering this question it must be borne in mind that the profit arising from international trade is due to a saving of labour and capital ; this profit cannot be permanently retained by the merchants, or by those who produce the commodity exported ; because, as has been so frequently remarked, the competition of capital prevents exceptionally high profits being permanently secured in any branch of industry. It would, therefore, appear that the advan- tages which a country derives from foreigii commerce will be distributed amongst the consumers of the imported commodit}^ It, therefore, becomes necessary to consider how this distribution of gain amongst the consumers of miported commodities is effected. It has been supposed that in France a ton of iron costs as much to produce as twenty sacks of wheat, whereas in England the production of a ton of iron only costs as much as ten sacks of wheat. It is, therefore, evident, supposing there were no foreign commerce between the two countries, that the price of iron would be 201. a ton in France, when the price of wheat there was 1/-. per sack, and that in England the price of a ton of iron would be 15^., when the price of wheat in England was 30s. a sack. What eflfect would be produced upon the price of these commodities by a commerce between the two countries? In order to investigate the question which has just been put, let it be supposed that France gives England fifteen sacks of wheat for each ton of iron; a ton of iron must now, therefore, in each country be worth as much as fifteen sacks of wheat. In France a dl Foreign Commerce or International Trade. 397 ton of iron cannot any longer be worth more than fifteen sacks of wheat, because in exchange for this quantity of wheat Enghind is willing to give a ton of iron. Again, ten sacks of wheat will no longer be worth as much as one ton of iron in England, because, by sending iron to France, one ton of iron will procure fifteen sacks of wheat. The value of iron, therefore, if estimated in wheat, has risen in England, and declined in France ; or, considering the question from a different point of view, it may be said that the value of wheat, estimated in iron, has fallen in England ; whereas, on the other hand, it has risen in France. Foreign commerce has, therefore, in each country, produced a change in the relative value of these two commodities. The price of a ton of iron will now, in France, be no longer equivalent in price to twenty sacks of wheat. In the same way the price of a ton of iron will, in England, be no longer equivalent to the price of ten sacks of wheat ; for since in each country a ton of iron now exchanges for fifteen sacks of wheat, the price of a ton of iron must in each country be equivalent in price to fifteen sacks of wheat. If, therefore, in England, a ton of iron still continues to sell for 10^., fifteen sacks of wheat will only sell for 10?. ; or, in other words, wheat will be ISs. 4(/. a sack. If, in the same manner, wheat continues to be \l. per sack in France, a ton of iron will there sell for \bl.; there will therefore have been a reduction of twenty-five per cent, in its price, for before, a ton of iron sold for 20?. Hence it appears that the effect of foreign commerce between two countries is to reduce the price, in each country, of the commodity which is imported ; wheat will be reduced in price in England, and iron will be reduced in price in France, and the persons who consume wheat in England, and those who use iron in France, will consequently have dis- tributed amongst them the gain which results from international trade. In fact, the main efiect of foreign commerce is to increase the efficiency of labour and capital ; foreign commerce causes labour and capital to be applied in such a manner as will make them most productive of wealth. According to our assumption, England possesses peculiar advantages for the manufac- ture of iron, whereas France is much better adapted to BOOK III. CH. VII. The price, of the im- ported commodity is lowered in the im- porting country. Manual of Political Economy. grow wheat than to produce iron. Each country must, therefore, be mutually benefited, if England produces iron for France, and France grows wheat for England. We do not pretend to say that the figures above given represent with numerical accuracy the reduction in the price of iron and wheat which would actually occur. According to the hypothesis just made, wheat will in England be reduced in price to ISs. 4cl., and the price of a ton of iron raised from 10^. to 13Z. It may therefore be naturally asked: — Is it certain that the consumer of conunodities is benefited by foreign commerce ? May not the advantage arising from the reduction in the price of the imported commodity be entirely nullified by a rise in the price of the exported commodity ? It can be proved, without entering into details, that the wealth of a nation must be increased by foreign commerce. Foreign commerce increases the pro- ductive powers of labour and capital by causing labour and capital in each country to be applied to those particular branches of industry for which the country has the greatest natural advantages. Thus the wheat imported into England would cost very much more, if grown in England, than the iron costs with which this wheat is purchased from France. Consequently foreign commerce increases the productive powers of labour and capital, and therefore must augment each nation's wealth. It is, however, no doubt true, that a particular class of consumers may not be benefited, but, on the other hand, may be injured by foreign commerce. If, for instance, wheat is imported from France to England, in exchange for iron, an increased quantity of wheat must be grown in France, and, therefore, the price of wheat will rise in France ; the iron which France imports from England will of course be reduced in price. But to the great body of the people, and certainly to the labouring classes, cheap iron will afford no compensation whatever for even a slight rise in the price of bread. It is, however, to be borne in mind that any special class that may be injured by a rise in the price of an exported commodity will receive a compensation in the general stimulus given to the industry of a country by the development of foreign commerce. There is no section of the community which will probably more largely participate in these advan- tages than the labourers, because, as has often been It is. possi- ble that a particular clcbss may be injured. 404 Manual of Political Economy. explained, the chief result of free exchange, not only between different countries but also between different parts of the same country, is to increase the efficiency both of capital and labour, and if more wealth is pro- duced by the expenditure of the same amount of capital and labour, more can be distributed as profits to the employer and as wages to the labourer. We have been the more anxious to point out the loss which foreign commerce may inflict upon those who consume the exported commodity, although the loss is one which is doubtless more than made up for in practice by counterbalancing advantages, because it is too much the custom to think only of the interest of the trader or merchant, and entirely to forget the consumer. Many of our statesmen consider that the nation must be advancing in prosperity and happiness if the Board of Trade Returns exhibit an augmentation in the exports and imports. But on behalf of the consumer it should be borne in mind, that a rise in the price of the commodities exported is not unfrequently a prominent feature of an expanding foreign trade. Although this, as a possible result of foreign trade, is one which ought not to be lost sight of, yet we should be the last to advocate that commercial intercourse between countries should be impeded, because commodities may rise in price in the country from which they are exported. A policy which should attempt such restrictions would not only be unwise, but ought almost to be stigmatised as wicked. Man, we conceive, has an indefeasible right that the wealth which ministers to his wants, and provides his enjoyments, should be produced with as little labour as possible. This can only be secured by perfectly free commercial intercourse between all nations. The benefits conferred by foreign commerce are truly cosmopolitan ; for foreign commerce brings men of every nation in contact, and thus becomes the most powerful agent of civilisation. It removes the barriers between nations, and makes them one, as far as their industrial economy is concerned. A rancorous enmity, combined with an ignorance of the true principles of trade, for centuries raised every possible obstacle to a trade between France and England. Many of our manu- factured commodities are far superior to those possessed :i Foreign Commerce or International Trade. 405 by the French ; they, on the other hand, had products which could not be grown on our soil, and under our climate. If the Straits of Dover were bridged over by a narrow strip of land, and the two countries formed one nation, it would seem inexpressibly absurd that those who lived in the north of the country should scarcely be permitted to taste the products which are grown in the south ; it would seem equally absurd, that people in one part of the country should be compelled to manufacture certain commodities, under the most unfavourable con- ditions, because they were not permitted to purchase these commodities in another part of the country, although there, the quality would be better, and the price cheaper. A restrictive policy which seems so unreasonable if two nations become one, is not more defensible when the two nations are separated by a boundary which is often merely artificial. It has been thought desirable to point out the injury which in certain cases may be inflicted on particular classes by foreign commerce, in order to show more clearly the causes which make so many countries still favour a policy of protection. The advantages which England has derived from free trade are so striking and so apparent, that our countrymen are perhaps too prone to treat those who support protection with contempt and ridicule. It should, however, be remembered that in almost every country except our own the protectionist party is numer- ous and powerful. Free trade has never been popular either in France, the United States, or in our colonies. It has moreover been repeatedly shown that in America and Australia the great body of the working men are ardent protectionists. The reason of this is probably due to the fact that they observe the loss which may be inflicted upon particular classes of the community by unrestricted foreign commerce, whilst they fail to under- stand the advantages which will more than compensate this loss. It is supposed that labourers have a particular interest in protecting the trade to which they are accustomed against foreign competition. Thus a cotton operative in America might be ready to admit that the aggregate production of wealth in his country would be in- creased if all cotton goods were imported from Lancashire. BOOK III. CH. VII. The rea- sons ivhy protection is still up- held in many countries. 4o6 Manual of Political Economy. The fal- lacy of the doctrine of "recipro- city." But he would argue that if the cotton manufacture should cease in America, he would lose the advantage of his acquired skill ; he would be compelled to resort to some employment to which he was not accustomed, and in which he would consequently obtain lower wages. It is only fair to acknowledge that these allegations may be true. The only way in which thej^ can be met is to assert the principle that mankind in general is interested in having no unnecessary obstacles interposed to the production of wealth. A government cannot be pursuing a just or wise policy if it causes the labour and capital of a community to work with diminished eiEciency. The abolition of all protective duties in America might temporarily cause some loss to particular classes. The introduction of the greatest industrial improvements has always caused some suffering to individuals. Not a few coach-proprietors and road-side innkeepers were ruined by railways. Every new machine that is invented dis- penses with the necessity of employing some kind of manual skill which was previously a valuable possession to those who applied it. A government would not for these reasons impede the construction of railways or the introduction of machinery. It would be felt that the temporary interests of the few must not stand in the way of the permanent welfare of the many. Similar considerations resting on a wider basis suggest the arguments to be urged against protection. Free trade enables the labour and capital of each country to work with maximum efficiency. The additional wealth which is consequently produced when commerce is unrestricted far more than compensates a nation for the temporary loss inflicted on individuals by the abolition of protective duties. Although, as previously remarked, few can now be found in England who would fa\our the re-imposition of protective duties, yet there arose a few years since a new and somewhat curious objection to free trade. England, it is argued, is suffering because with regard to the abolition of protective duties there has not been sufficient reciprocity between her and other countries. It is in fact argued that free trade is excellent when all countries adopt it, but that a country pursues a too generous course. Foreign Commerce or International Trade. 407 and one involving too much self-sacrifice, if she abolishes protective duties whilst her neighbours retain them. It is no doubt perfectly true tliat England would be benefited if other countries adopted free trade. We, therefore, have every inducement to do all in our power to make them take such a course. It is also equally true that other countries have shared the advantages which England has derived from free trade ; but if we re-imposed protective duties because other countries are sufiiciently unwise to retain them, the only result would be that we should inflict an injury upon ourselves in order to avenge the unwise financial policy pursued by other countries. England would be largely benefited by the active stimulus which would be given to her iron trade, if America would T-emove protective duties upon manufactured iron. But we should be acting with ignorant perversity if we refused to buy the wheat from America which we so urgently require, because America refuses to purchase as much English iron as we are willing to sell her. It is, therefore, evident that with regard to free trade there is reciprocity, but in a sense directly opposed to those who desire that protective duties should be re-imposed because other countries will not abolish them. The advantages associated witli free trade are reciprocal, because even if only one country adopts such a policy, the benefits resulting are diffused over every country with which commerce is carried on. It is probable that the opinions in favour of reciprocity, to which reference has just been made, have received some encouragement from the attempts that have been made to negociate commercial treaties with various foreign countries. It cannot be denied tliat such treaties are to a certain extent a departure from the principles of free trade. Thus in negociating a commercial treaty with France, if it is said that in the event of France making a certain reduction of duty on various English goods, England will make corresponding reductions in duties on French goods, it at once becomes obvious that a certain sanction is given to the principle that reduc- tions in duties are made, not because they are good for the country which makes them, but because they lead to an increased foreign outlet for home produce. This 4o8 Manual of Political Economy. BOOK III. CH. VII. The cost of carriage must he taken into account. probably indicates the chief cause why England failed in her negociations to renew the commercial treaty with France ; for it is evident that unless England were prepared to depart from the principle of free trade she could not threaten France with re-imposition of duties. Although it is to be regretted that the commercial treaty with France was not renewed, yet an important advan- tage has been gained in leaving England greater freedom to deal with various import duties than she would have had if a treaty had beep concluded.^ It now becomes necessary, in order to complete the theory of international trade, no longer to omit the con- sideration of the cost of carrying from one country to another the commodities which are interchanged. The subject will be best explained by the former example. Let it be assumed that the cost of exporting iron from the English to the French market is \l. per ton, and that the cost of exporting wheat from the French to the English market is 2s. a sack ; the question therefore at once suggests itself : — What share of this cost of carriage is borne by each country respectively ? Let the terms of exchange be one ton of iron for twelve sacks of wheat; the iron in England being raised in price from 10^. to 13^. a ton, in consequence of the foreign demand. We will first examine what will take place if the cost of carriage were borne entirely by the exporter : the English merchants paying the whole expenses of sending the iron to France, and the French merchants paying the whole expense of sending wheat to England. Upon this liypothesis, although England would nominally sell her iron to France at 13Z. a ton, yet the real price would be only I'll., because 1^. per ton has to be deducted for cost of carriage; similarly 2s. a sack would have to be deducted from the nominal price which the French obtain for the wheat sent to Eni^land. If, therefore, France gave P^ngland 13Z. a ton for iron, iron must be selling in the English market for 12^. a ton : if it sold for more, it would be manifestly to the advantage of the English merchant to dispose of his iron at home, instead ^ The subject of commercial treaties and many questions connected with free trade and protection referred to in this chapter I have discussed at greater length in another book called Free Trade and Protection. Foreign Commerce or International Trade. 409 of exporting it to France; for the same reason wheat must be selKng in the French market at 2.9. a sack less than the price at which England purchases it from France, in order to compensate the French exporter of wheat for the cost of carriage. Eacli country will there- fore have to pay a higher price for the commodities it imports, in consequence of the cost of carriage ; therefore the demand for the imported commodity will not be so great as it would be if no expense were involved in carrying goods from one country to another. There will, therefore, be a diminution in the French demand for English iron, and in the English demand for French wheat. But the falling off in the demand may vary in different ratios in the two countries. Thus a rise of 2.s. in the price of French wheat may diminish the demand for French wheat in England by one-fifth, whereas a rise of 1^. a ton in the price of iron may cause only a decrease of one-tenth in the quantity of iron purchased by France from England. Our previous analysis has shown that the terms upon which commodities are exchanged, in international trade, are entirely regulated by the demand. Each country purchases the imported commodities by those which are exported, and the amount of the demand which a country has for any commodity depends upon its price ; if, therefore, a country wishes another to purchase a greater quantity of her exports, the price of these exports must be reduced ; consequently, when the bargain of international trade is finally settled, the price of imported and exported commodities must be such that each country is enabled, by means of her exports, to pay for all the commodities which are imported. If the cost of carriage should raise the price of the commodities interchanged in foreign commerce, the amount of this increased cost, which is borne by each of the countries respectively between which the trade is carried on, depends upon the relative degree in which the demand for imported commodities is affected. Thus it was above supposed that the cost of carriage diminishes the demand for French wheat in England by one-fifth ; whereas the same cause only diminishes the demand for English iron in France by one-tenth. We will illustrate this by a numerical example. BOOK III. CH. VII. The de- mand in each coun- try will be checked, but in different ratios. The share of cost of carriage borne by each de- pends upon this ratio. 4IO Manual of Political Economy. Suppose that 100,000 tons of iron would be each year exported from England to France, if commodities could be sent from one country to another without any cost of carriage ; and that, under the same supposition, France would export to England 1,500,000 sacks of wheat in exchange for the iron. Let it also be assumed that English iron would sell for 15^. a ton in France if there were no cost of carriage ; the cost of carriage, being 11. a ton, will raise the price of English iron in the French market to 16^. a ton. Similarly, it may be assumed that cost of carriage raises the price of French wheat in the English market from 20.s. to 22s. a sack. If English iron were sold to France at 15/. a ton, and if French wheat were sold to England at 20.s. a sack, France would import 100,000 tons of iron, and England would import 1,500,000 sacks of wheat; the equation of international trade would consequently be satisfied, because the exports from each country would be exactly equivalent in value to the imports. But the rise in the price of English iron to 16/. a ton diminishes the demand of France by one- tenth, and the demand of England for French wheat is diminished by one-fifth, if its price rises to 22s. a sack. Although, therefore, the French will only purchase 90,000 tons of iron at 16/. a ton, yet they may be willing to increase their purchases by 5,000 tons, if iron is reduced in price 5s. a ton. The English iron-masters must submit to this reduction in price, because the demand for iron in France has been diminished by the cost of carriage, and the supply will consequently exceed the demand if the price of iron remains at 16/. a ton. The French exporters of wheat must submit to a still greater reduction in price, in order to equalise the demand to the supply, because the demand of England for French wheat, when its price is raised, is more affected than is the case with the demand of France for English iron, when its price is raised. French wheat, therefore, may sell in England for 21s. instead of 22s. a sack ; if this be so, the French growers of wheat will only obtain 19s. a sack for the wheat which they export to England, because there must be sufficient difference between the price of wheat in France and England to cover the cost of carriage, which is 2s. a sack. Tn a Foreign Commerce or International Trade. 411 similar way the English iron-masters will only obtain 14^. 15s. a ton for the iron which they export to France, if iron is sold in the French market at Ibl. 15s. a ton; because there must be such a difference between the price of iron in the French and English markets to cover the cost of carriage, which has been assumed to be \l. a ton. The hypothesis which has been made consequently leads to the following results. If there were no cost of carriage, iron would be selling in the English and French markets at 15^. a ton. The cost of carriage, which is supposed to be 1^. a ton, raises the price of iron in France to 15Z. 15s. a ton, or, in other words, increases the price of iron by 15s. a ton. It would, therefore, appear that France pays seventy-five per cent, of the cost which is involved in sending iron from England to France. Again, if there were no cost of carriage, French wheat would be selling in England and France at 20s. a sack ; the cost of carriage, which is supposed to be 2s, a sack, raises the price of French wheat in England to 21s. a sack ; the cost of carriage, therefore, although amounting to 2s. a sack, only raises the price of wheat Is. a sack in England. It would, therefore, appear that England only pays fifty per cent, of the cost which is involved in sending wheat from France to England. These results consequently lead to the conclusion that France contributes more to the cost of carriage than England, or, in other words, that as far as international trade is concerned, the latter country is placed in a better position, as regards the cost of carriage, than the former country. This conclusion still further corroborates the following principle — If any new element, such as cost of carriage, affects the terms upon which the trade between the two countries is conducted, the re-adjustment of the bargain will most turn to the advantage of that country whose demand for the imported commodities is either most diminished or least increased by the new conditions of which account has to be taken. It has been assumed, in the remarks which have just been made, that the difference in the price of any com- modity, in two countries between which there is free commercial intercourse, cannot exceed the cost of sending BOOK III. CH. VII. RefiuUs ar- rived at from this analysis. General principles as to the effect pro- duced by any neiv element, such as cost oj carriage. The as- sumption 7nade above, that the 412 Manual of Political Economy. BOOK III. CH. VII. difference of price of any com- modity in, two coun- tries can- not exceed the cost of carriage, shorvn to he true. a commodity from one country to the other.^ Although this proposition appears to be a self-evident truth, yet it may be perhaps advisable to say a few words upon it. Let us take, as an example, the case above analysed. It has been there assumed that the cost of sending iron to France is IZ. a ton, and the cost of sending wheat from France to England is 2s. a sack. If there were no cost of carriage, the price of iron and wheat must be the same in England as in France ; because if iron would realise even as little as 2.s. bd. a ton more in France than in England, the English iron-masters would vie with each other to sell as much of their iron as possible in France, in order to secure the extra 2s. Qd. a ton. This eager competition would rapidly reduce the price of iron in the two countries to an equality. It will be remembered that it has been also assumed that if there were no cost of carriage English iron would sell in each country for 15^. a ton, and that French wheat would sell in each country for 20s. a sack. These prices would adjust the ec^uation of international trade, enabling the exports of each country exactly to pay for the imports. Again, it has been assumed that, when the cost of carriage is taken into consideration, English iron must sell for 15L 15s. a ton in France, and French wheat must sell in England for 21s. a sack, in order that the equation of inter- national trade may be satisfied. The question now suggests itself:' — What, under these circumstances, will be the price of English iron in England, and what will be the price of French wheat in France ? The answer may, at once, be given, that the price of iron in England will be 14^. 15s. a ton, and that the price of wheat in France will be 19s. a sack. This must be the case, for since the cost of sending iron from England to France is supposed to be 1^. a ton, the difference in the price of iron in the two countries must be iLa ton. If the differ- ence were less than this, and the price of iron were 15^. a ton in England, no iron -masters would send any iron to ' In proving the proposition that there cannot be a greater difference in the price of any commodity in two countries than what is equivalent to the cost of carriage between tliem, it is necessary to suppose that in those countries where import duties are imposed, the cost of carriage inckules not only the cost of conveyance but the amount of the duty. Foreign Commerce or International Trade. 413 France, as it would be so much more remunerative to sell it in England, Again, there cannot be a greater difference in the price of iron in the two countries than U. a ton, for if iron were IQl. 10s. a ton in France, and \bl. in England, the English iron-masters would vie with each other to sell all their iron in France, since their iron, after paying the cost of carriage, would realise 10s. a ton more in France than in England. These considerations establish the proposition that the difference in the price of any com- modity, in two countries, is exactly equivalent to the cost of sending this commodity from the one country to the other. It may be objected that prices in different countries cannot be compared, because countries have seldom the same currency. Without anticipating the remarks which will be made in a future chapter on currency, it will be sufficient to state that the price of a commodity in different countries can always be compared by con- sidering how much gold it will exchange for. The distinctive characteristic of a substance like gold, is, that it is a universal medium of exchange ; people in France are as ready to sell their commodities for gold as we are in England. The cost of sending an ounce of gold to France is most trifling, and therefore, if an ounce of gold would purchase a greater quantity of wheat in France, including the cost of sending the wheat from France to England, than could be purchased by the same quantity of gold in England, gold will be exported to France for the purpose of purchasing wheat. The demand for wheat would therefore rise in France, and its price would increase. Similarly, if the English consumers of wheat purchased wheat from the French instead of the English growers, the demand for wheat in England would decline ; this rise in the price of French wheat, and this fall in the price of English wheat, would continue until at length there ceased to be any profit in sending gold from England to purchase wheat in France. Such a profit would manifestly cease to exist if there were no greater difference in the value of wheat in the two countries, estimated in gold, than would be equivalent to the cost of carriage. But the price of a commodity has been BOOK III. CH. VII. The dif- ference of price must exactly equal the cost of carriage. These re- sults are not affect- ed by the difference of currency in tioo countries. 414 Manual of Political Economy. BOOK III. CH. VII. These truths may be extend- ed to trade between any niim- be7' of countries in any number of articles. defined to be its value estimated in gold. It may be, therefore, said that if the trade between two countries is perfectly free, there cannot permanently be any greater difference in the price of any commodity in the two countries than would be equivalent to the cost of carry- ing the commodity from the one country to the other. Throughout this chapter, the assumption has been made that foreign commerce has been restricted to two countries, and to two commodities. The principles which have been deduced from this assumption enable us to establish a complete theory of international trade. Let us consider how the bargains of foreign commerce are adjusted in such a country as England, which exports the most varied commodities to every country in the world, and imports in exchange every product which can either gratify the desires, or minister to the wants of the people. In this case it is equally true that there is an equation of international trade which must be satisfied ; it is easy to show, by a method of investigation similar to that pursued when corn was supposed to be exchanged for iron, that the aggregate exports must ultimately pay for the aggregate imports. The terms upon which this exchange is conducted are regulated entirely by the relative amount of the demand which exists in two trading countries for the various commodities which each country respectively imports. It has already been shown that England must give France a greater quantity of iron for the same amount of wheat, or, in other words, the terms of the exchange will turn to the advantage of France, and to the disadvantage of England, if England's demand for French wheat increases in a greater ratio than the demand of France for English iron. In a similar way the bargain of foreign trade will become less favour- able to England, or, in other words, England will be compelled to receive less for her exports, and to give more for her imports, if her demand for the various commodities which she imports increases in a greater ratio than the demand which other countries maj^ have for the various commodities which compose her aggtegate exports. It has been shown in this chapter that a country pays for its imports by the commodities it exports, and that Foreign Commerce or International Trade. 415 the equation of international trade is adjusted when the exports are exactly equivalent in value to the imports. It may, however, be thought that this adjustment never actually takes place, because in no country does it appear that the exports are equal in value to the imports. For instance, the value of the commodities imported into England always greatly exceeds the value of those which are exported. This excess has for many years con- siderably exceeded 100,000,000/. per annum. ^ On the other hand, the commodities exported from India always greatly exceed in value those which are imported. The value of the exports from India for the ten years ending 1886, exceeded the value of the imports during the same period, by nearly 190,000,000/., an average of 19,000,000/. a year. This excess of exports over imports is not an accidental circumstance, but represents the normal con- dition of Indian trade. We will, therefore, proceed to explain the cause of this apparent contradiction between actual facts and the conclusions which have been deduced from the principles of international trade. When it is said that exports and imports must be equivalent in value because a country pays for her imports by her exports, it is tacitly assumed that a country has to make to foreign countries no other pay- ment except for the commodities she imports, and that foreign countries have, on their part, to make no other payment to her except for the commodities which she has exported to them. Upon this assumption it is easy to show that there must be a constant tendency in operation to make the exports from a country equivalent in value to the commodities imported. For, reverting to our previous example, suppose that the foreign commerce of France and England respectively was confined to an interchange of commodities betM^een these two countries. If the value of the goods which England sells to France exceeds the value of the goods which France sells to England, it is obvious that a balance, which must be liquidated by a transmission of money, will be due each year from France to England. The amount of money in ^[See Statistical Abstract and Statesman's Year-Book, 1887. The excess of imports over exports for the ten years ending 1905 averaged 217,000,000/^. a year. States7nan's Year-Book, 1906.] BOOK III. CH. VII. The ex- ports of some coun- tries per- manently exceed the import^i ; and vice versa. Explana- tion of this apparent contradic- tion of what has been pre- viously stated. 4i6 Manual of Political Economy. BOOK in. CH. VII. Whe7i one country lias in- curred pecuniary ohl'ujations to another, the indebt- ed country must send more goods to the nation fromxchich it has borrowed than it receives in return, i.e. its exports to m,ust per- manently exceed its - imports from that country. France will thus be constantly diminished, and the amount of money in England will be pro tanto increased. The result of this will be that prices will be continually declining in France and continuallj^ rising in England. But a rise of prices in England and a fall of prices in France will make it more advantageous for England to purchase commodities from France, and will make it less advantageous for France to purchase commodities in England. Hence the exports to France will diminish and the imports from France will increase. It, there- fore, follows that when the exports exceed the imports a force is brought into operation to diminish the exports and to increase the imports, and this force will continue in operation until a position of equilibrium is attained and the exports are equal in value to the imports. But the conclusion which has just been established is, as before remarked, based on the supposition that the countries which trade with each other have no other payments to make or to receive, except for the com- modities which are imported and exported. But suppose that France has to make a large annual payment to England of 10,000,000^. as interest for money which England has lent to France : it can then be readily shown that the amount of commodities which England imports from France will exceed the value of her exports to that country by 10,000,000^. a year, this being the annual amount of the indebtedness of France to England. The exports can no longer be equivalent in value to the imports, because, if this were so, France would have each year to transmit to England 10,000,000^. in order to pay the interest on the money borrowed from England. If the monetary circulation of England were thus each year largely added to, and the monetary circulation of France were each year reduced, it is obvious that gold would become comparatively plentiful in England and scarce in France, or, in other words, prices would rise in England and decline in France. It would, therefore, each year become more advantageous for France to pay the amount owed to England by transmitting commodities instead of money, and thus it is evident that an adjustment would ultimately be attained, when France exported to England a sufficient amount of commodities not only to pay for Foreign Commerce or International Trade. 417 the commodities she imports, but also to pay the amount which she annuall}^ owes to England. It, therefore, appears that it is not correct to say that in all cases the equation of international trade requires that the exports of a country should be equivalent in value to the imports ; on the contrary, if a country is in debt to other countries, her exports will exceed in value her imports by an amount equivalent to her annual indebted- ness. If, on the other hand, a country should be a creditor and not a debtor of other countries, the value of her imports will exceed that of her exports by an amount which will be equivalent to the indebtedness of other countries to her. In estimating the amount of indebtedness of one country to another an account ought also to be taken of payment due for services rendered, such for instance as the carriage of goods. One of the chief reasons Why the imports from the United States to England always largely exceed in value the exports, is due to the fact that the carrying trade between the two countries is almost entirely done by British ships ; 80 per cent, of the international commerce of the United States being carried in foreign vessels chiefly English ; whereas of the aggregate tonnage reaching English ports 70 per cent, belongs to British owners.^ It is, therefore, ' [These were the proportions in 1882. The Statesman's Year-Book for 1887 states that in 1885 — 6 only 15 per cent, of the total exports and imports of the United States were carried in her own vessels; while the return given in tlie Statistical Abstract, 1887, shows that British shipping predominates even more than formerly over foreign shipping in our own ports. Of the total tonnage of ships entered and cleared at English ports in 1886, nearly 75 per cent, belonged to British owners. Sir Lyon Playfair has stated {Times, Dec. 17, 1887,) that England builds as many steam-ships in one year as the United States do in 15 years ; he adds that the practical result of the rivalry between England and America, in the matter of shipping, has been to sweep the commercial flag of the Stars and Stripes from the Ocean. England's marine is triumphant everywhere, according to the confession of Americans themselves, except in the coasting-trade of the United States, which is closely preserved by protection. In the year ending June 30th, 1905, the total tonnage of ships entering United States ports was 30,983,217, of which only 7,080,624 were of American nationality ; 15,773,539 were British and the remainder of other nations. Ihus the United States carried considerably less than a quarter of her foreign trade in her own ships. The total tonnage of ships entering the ports of the United Kingdom in 1904 was 114,626,044, of which approximately one third was foreign. — States- man's YeaV'Book, 1906.] 2d BOOK III. CH. VII. 4i8 Manual of Political Economy. BOOK III. CH. VII. 7'Ae in- debtedness of India to England causes the ixports from India to exceed in value the imports which she receives from Eng- land. evident that a considerable amount of the produce exported from the United States represents a payment to English merchants and shipowners for the service rendered in carrying American produce.^ The enunci- ation of these principles at once affords an explanation of the circumstance to which allusion has already been made, namely, that England's imports largely exceed her exports, whereas in India, and in many other countries, the exports exceed the imports. From the number of foreign loans that are raised in the London Money Market, and from the great amount of English capital that is em- barked in various foreign investments, it is quite evident that large sums are each year due to England from foreign countries, independently of the amount which may be due to England for the commodities purchased from her. Hence it follows that foreign countries will have to send to P^ngland an amount of commodities very largely in excess of the amount which would be required to pay for the commodities procured from England. It, therefore, appears that England's imports largely exceed her exports because of the great amount of capital which she has invested in foreign countries. After the explanation which has just been given, it is scarcely necessary to say that if a country borrows from other countries more capital than she lends to them, an exactly opposite phenomenon will occur to that which happens in England, for then the exports must be in excess of the imports. For instance, it is well known that scarcely any capital is embarked either by the Indian Government or by the Indian people in any foreign investment, whereas England has lent large sums to the Indian Government, and a great amount of English capital has also been invested in various under- takings in India, such as railways and irrigation works. A considerable amount is consequently each year due from India to England for the money which has thus been invested in India. India has also annually to pay P^ngland a very large sum for the expenses incurred by 1 [In 1904 it was estimated by Sir Robert Giffen and other statis- ticians, that the annual earnings of the merchant fleet of the United Kingdom amounted to 90,000,000^. This sum would, therefore, be included in excess of English imports over exports.] Foreign Commerce or International Trade. 419 the Government of India in England, such as official salaries, and official pensions. India, therefore, has to export commodities not only sufficient to pay for those which are imported, but also sufficient to liquidate the payments to which reference has just been made. Her exports must therefore each year be largely in excess of her imports. The principles of international trade have now been examined in sufficient detail. In the next chapter these principles will be applied to a very important case. The laws will be investigated which determine the value of money, when the precious metals of which money is composed are considered as commodities, exported and imported as ordinary articles of commerce. BOOK III. CH. VIII. Gold may he trans- mitted CHAPTER VIII. ON THE TRANSMISSION OF THE PRECIOUS METALS FROM ONE COUNTRY TO ANOTHER. Tj'^ACH country obtains its supply of the precious Va metals in two distinct ways. In the first place, gold and silver are imported from the mining countries as ordinary commodities of commerce, and secondly, the precious metals, in the form of money,^ are sent from 1 In this chapter, it is assumed that the value of the metal which is chosen as the standard currency in each country is the same whether in coin or in bullion. Thus in England, the standard currency being gold, the value of a given weight of gold, whether in coin or in bullion, is the same ; whereas, India having a silver standard, the same remark applies in that country to silver. It has already been stated that a certain weight of gold must have the same value whether in bullion or in specie, if no charge is made for the expense of coining this gold. In England the coining of gold is performed by the Mint gratuitously. If, therefore, an ounce of gold is taken to the English mint, its value must be exactly represented by the amount of money into which it can be coined. As previously stated, silver and bronze money have an exchange value as coins greater than the actual value of a corresponding weight of the metals of which they are composed. Hence the authorities of the Mint very properly decline to coin silver and bronze for private individuals ; if this rule were departed from, individuals would be able to make, at the expense of the nation, a very considerable profit by bringing silver and copper bullion to the Mint and getting it coined. If gold in bullion were in the slightest degree more valuable than when in coin, it would at once become profitable to melt money and thus convert it into bullion. If, on the other hand, gold bullion were less valuable than coin, bullion would be immediately taken to the Mint to be converted into money. It is, therefore, evident when no charge is made for coin- ing, that the value of bullion and specie must be exactly equivalent. It may, however, be thought expedient that the Government should not bear the cost of coining. A certain sum might be charged, termed a seignorage, when bullion is converted into money. If it be assumed that this seignorage is one per cent, upon the amount coined, the value of a certain quantity of the precious metals when in the form of money would exceed by one per cent, the value of the same weight of bullion. The question whether or not it would be desirable to impose a seignor- Transmission of the Precious Metals. 421 one country to another for various purposes. For instance, loans are raised in England for India, and these loans are in part transmitted to that country either in bullion or in specie. It also frequently happens that a large amount of capital in the form of bullion or specie has to be exported for the carrying on of some industrial undertaking, such as the Suez Canal [or the rebuilding of San Francisco after the earthquake]. A great portion of the rent of tlie land in Ireland is paid in money to absentee landlords. Capital may be invested in our funds and railways by foreigners, whose dividends will be annually paid to them in money. Again, with regard to international trade, it must be remembered that commodities are not always exchanged by barter, but are almost always bought and sold for money. English merchants who purchase wheat from France pay for it in money, instead of offering other com- modities, such as iron and coal, in exchange for this wheat. These and many other circumstances which might be enumerated, cause a considerable amount of the precious metals to be constantly passing, either in the form of money or bullion, from one country to another. It will be convenient, in the first place, to consider the precious metals as exports from the countries whence they are obtained. A considerable portion of the industry of Australia and California is devoted to gold-digging; gold is, to these countries, as truly a staple article of export as hardware or cotton cloth is in England. The precious metals may therefore be regarded as an ordinary article of export or import ; the value of these metals is con- sequently regulated by the same laws as those which determine the value of any other commodity which is bought and sold in the transactions of foreign trade. age at the English mint must be mainly determined by considering whether the inconvenience arising from even slightly altering a recognized standard of value would be compensated by removing the expense now imposed upon the nation at large by our present system of gratuitous coining of gold. It must moreover be borne in mind that as the representative value of our silver and bronze coinage is greater than its intrinsic value, the State makes a profit upon the coinage of silver and bronze, M'hich more than compensates for the slight loss in the gratuitous coining of gold. BOOK III. CH. VIII. either as an article of com- merce or as mo7iey. Gold forms part of the ordinary exports oj some coun- tries, and its value is determined on the same prin- ciples as that of other com- modities. 422 Manual of Political Economy. BOOK III. CH. VIII. A great increase in the pro- duction of gold icoidd he absorbed in the same loay as a great in- crease in the pro- duction of iron. For instance, Australia, like any other country, must pay for the commodities she imports by those which she exports. It makes no difference whatever that an important item of Australia's exports happens to be gold. It may in fact be shown, that the discovery of rich gold mines in Australia exerts on the industry of that country an influence similar to that which would be produced by the discovery of rich deposits of some material which England exports ; such, for instance, as iron. If the discovery of very rich deposits of iron-stone caused a great increase in the quantity of iron annually produced in England, iron would inevitably decline in price, unless there was simultaneously a considerable increase in the demand. This decline in price would increase the home demand for iron, and the foreign demand would also be increased, because iron w^ould be offered to foreign countries at lower rates. An equality between the demand and the supply would in this manner again be restored, and the whole of the increased quantity of iron produced w^ould be quickly absorbed. In a similar way, the results may be traced which would ensue from a great increase in the yield of gold in Australia, or of silver in Mexico and California. Taking the annual yield of gold in Australia to be about one million ounces, suppose that, from the dis- covery of richer deposits, or from improvements in quartz-crushing, Australia annually yielded 2,000,000 ounces of gold, instead of 1,000,000 ounces. How would this increased quantity of the precious metals be absorbed ? It has been said that additional supplies of iron would be absorbed by a decline in its value increasing the demand for it. Let us now inquire if an additional supply of gold will not be absorbed in a similar way. It is evident that Australia would not require this additional 1,000,000 ounces of gold for her own use. She will therefore export the gold to other countries ; but in what form, and for what purpose, will this gold be exported ? In the first place, Australia, having become so much w^ealthier, would more largely pur- chase foreign commodities. Every article of luxury or utility which Australia has been previously accustomed Transmission of the Precious Metals. 423 to obtain from foreign countries, she would now purchase in larger quantities. The consequence of this would inevitably be, that these commodities would advance in price, on account of the increased demand. Suppose the exports from England to Australia were increased by 20 per cent., this increased demand would cause the price of the articles which compose these exports to rise in England, as well as in Australia. The value of gold, estimated in these commodities, would therefore decline, and thus a tendency is exerted, just in the same way as in the case of the iron, to cause the increased yield of gold to be absorbed, in consequence of a decline in its value. Having now considered the case in which the precious metals are sent from the mining countries as a staple commodity of commerce, we will proceed to investigate the second of the two modes by which the precious metals are distributed over the world. At the com- mencement of this chapter an enumeration was made of some of the various purposes for which gold and silver are transmitted from one country to another in the form of money. The reason of this constant transmission is, that gold and silver contain great value in small bulk, and therefore can be sent from one country to another at comparatively little cost. The precious metals, more- over, are willingly accepted in exchange for goods purchased by every trading community in the world. In former years vast sums of specie were sent from England to India, to pay the wages of those engaged upon the railways, and other public works which were constructed principally by English capital. The precious metals are also transmitted from one country to another, for the purpose of investment. If, according to our former example, the yield of gold in Australia should be doubled, it would be reasonable to conclude, that the whole of this increased gold would not be entirely absorbed by the consequent expansion of trade. Many of those who possessed the gold would send a portion of it to England and other countries, to be invested in various securities, such as funds, railway shares, &c. Statistical returns prove that this is the course pursued. Almost the entire gold which Australia BOOK III. CH. VIII. Gold is also trans- mitted in the form of money. for the payment of debts. or for in- vestment. 424 Manual of Political Economy. BOOK III. CH. VIII. The quan- tity of _ money in circulation must in- crease as commerce increases in order that prices may not fluctuate. annually yields is sent to England. A portion of this pays for the commodities which England exports to Australia ; a great part of the remainder is invested in our funds, in railway shares, bank shares, and various other securities, which are bought and sold in our money market. The precious metals which are thus poured into England she again redistributes, having sent in some years no less a sum than 14,000,000?. sterling to India and China. In the remarks on price, it was shown that the general prices which prevail in a country are regulated by the extent of its commerce, and by the amount of the precious metals which exist in the country in the form of money. It may, in general terms, be stated, that if the population and wealth of a country increase, prices will decline, unless a greater amount of money is brought into circu- lation or unless various substitutes for money, such as cheques, bank-notes, &c., are more largely used. On the other hand, prices will rise if a greater amount of money is brought into circulation, when there is neither an expansion of commerce nor an increased production of wealth. It is most undesirable that there should be any great fluctuations in general prices ; it is true, however, that popular feeling is not unfrequently opposed to this idea, for there are many who still think that general high prices are advantageous to the producers of com- modities, and that a general decline in prices would benefit those who purchased the commodities. A general rise or fall in prices means that the standard of value is altered ; if there is a general rise in prices to the extent of one hundred per cent., two sovereigns will be only worth as much as one sovereign was worth before ; the country would not be richer ; the only result would be, that the terms of every monetary contract would be altered. Those who had fixed money payments to make would only have to give half as much value as before, and all whose incomes were derived from such invest- ments as funds, guaranteed stocks, &c., would have their real incomes diminished one half, for 300^. a year would now be worth no more than 150/. a year was worth previously. Such consequences would not only be dis- astrous to individuals, but would also, if of frequent Transmission of the Precious Metals. 42s occurrence, give to all monetary transactions an uncer- tainty which would act most prejudicially upon the interests of commerce. It is therefore of great importance that general prices, or, in other words, the value of gold, should fluctuate as little as possible. General prices are, as previously stated, regulated by the quantity of money, and substitutes for money, in circulation, compared with the amount of the nation's wealth and commerce ; hence, in order to prevent a fluctuation in the general prices which prevail in a country, the quantity of money in circulation ought to increase or decrease as the commerce of the country increases or decreases. It may appear that such an adjustment can have little chance of being made in England, because she i-eceives gold from so many sources, and again sends it to other countries for so many purposes. But, in spite of this apparent complexity, there is an agency constantly at work to regulate the quantity of money in circulation, so that the value of gold exhibits great steadiness, and, except within certain limits, is subject to few fluctuations. The mode in which this agency acts may be explained in the following manner. Suppose that the quantity of gold imported by England from the gold-producing countries during the next year were to exceed by 4,0()0,000Z. the amount which she imports during the present year, but that in every other respect there should be no difference with regard to her commerce, either home or foreign, between the next year and the present one. This extra 4,000,000/. of gold, it may be further supposed, is converted into coin. It might, therefore, appear that an additional 4,000,000Z. of money is brought into circulation, and that, in consequence of this increased specie circulation, general prices would inevitably rise. But this rise in general prices could not long continue ; a force would be brought into operation which would exert a tendency to restore prices to the point at which they previously stood. For if such a general rise in price should occur in England during the next year, and no similar rise should take place in other countries, it would manifestly be to the interest of England to purchase such connuodities as wheat from foreign countries, in order to avoid the higher prices prevailing in England. BOOK III. CH. VIII. Method of adjustment which tends to keep prices constant in England. 426 Manual of Political Economy. BOOK III. CH. VIII. Foreign merchants would also be anxious to participate in the high prices current in England, and would there- fore increase, as far as possible, the quantity of goods whicli they export to England. Both of these causes would act in the same direction, and would alike exert an influence to increase England's imports and to diminish her exports. The equation of international trade would therefore be disturbed, and a large amount of money would be sent abroad to pay for these increased imports ; in this manner the gold temporarily added to England's circulation would in great part be rapidly withdrawn. The extra 4,000,000^. of gold would not be permanently added to England's specie circulation, but would be gradually distributed over every trading country. The various modes in which the precious metals are transmitted from one country to another have now been described. A special chapter will be devoted to the consideration of the leading effects which have been produced by the discoveries of gold which have been made since 1848 in Australia and California. Allusion will also be made to the probable results of the discovery in the United States of silver mines of such extraordinary richness that the annual production of silver was suddenly almost trebled. CHAPTER IX. FOREIGN EXCHANGES. IN treating of the subject of foreign exchanges an explanation will be given of the manner in which the wholesale transactions of commerce are ordinarily conducted. If coal is exported to France and silk is imported from that country, a cargo of coal is not bartered for so many bales of silk, but the coal is sold for money and the silk is purchased with money, although, as we shall proceed to show, money in the form of coin is not sent by the English merchant to France, nor by the French merchant to England. Let it be supposed that A, an English merchant, sells a cargo of coal to B, a French merchant, for 1000/., and that C, another English merchant, purchases from D, a French merchant, a certain number of bales of silk for 1000/.^ It is manifest that there are two distinct ways in which such trading transactions as these ma,y be settled. In the first place, B may pay for the coal he purchases by sending to A 1000/. from France to England ; in a similar way C may pay for the silk which he purchases by send- ing to D 1000/. from England to France. It is evident that if this plan were adopted, the risk and expense would be incurred of sending 1000/. from France to Eng- land, and also of sending 1000/. from England to France A second very obvious course might be adopted, which would avoid the necessity of transmitting any money from one country to the other, and consequently the expense just alluded to would be saved. If C were instructed to pay the English merchant A 1000/., instead 1 The currencies of France and England are, in this case, supposed to be identical. BOOK III. CH. IX. Methods hy lohich interna- tional debts may be settled. 428 Manual of Political Economy. of paying the same amount to D, who lives in France ; if also the French merchant B were instructed to pay D lOOOL, instead of sending this amount to A in England, the debts due to A and D for the coal and silk they have respectively sold would be discharged without the trans- fer of any money from the one country to the other. The course just described is almost invariably adopted in the transactions of foreign commerce ; bills of exchange are the means by which the method is carried into practical effect. It is only necessary to explain the nature of bills of exchange, in order to show that they provide a macliinery which enables the bargains of foreign commerce to be arranged in such a manner that the least possible amount of specie is transmitted from one country to another. In the above example, when A sells B a cargo of coal for 1000/., A receives from B a bill of exchange. This bill is a written acknowledgment that B owes A ] 000/., and that this amount will be paid at the date for which the bill is drawn, if it is presented either at B's own banker's, or at any other establishment wdiich has con- fidence in B s solvency. In a similar manner the French merchant D, who sells 1000/. worth of silk to the English merchant C, receives from C a bill of exchange for this amount. The English merchant A has therefore in his possession a bill for 1000/., which has to be paid in France, and D, the French merchant, has also a bill for 1000/., which is to be paid in England ; if A and D exchange these bills, then A has a bill which will be paid in England and D has a bill which will be paid in France ; therefore both A and D's debt can be discharged without the transmission of any specie whatever from one country to the other. The exchange here supposed to take place between A and D is not usually effected directly by merchants themselves ; such transactions form a distinct business, which is carried on by a class of middle men, who are termed money dealers or bill- discounters.^ ^The persons by whom this business is transacted render ix, verj' important service to commerce. The popular prejudice sometimes ex- pressed against them probably arises from confusing them with the class of money lenders who advance money on accommodation bills at usurious rates of interest. Foreign Exchanges. 429 The English merchant A, instead of waiting to ex- change his bill with the French merchant D, at once sends it through his banker to an English bill-discounter, who readily cashes it for him, A paying a small sum for commission. D in a similar manner gets his bill cashed by sending it to a discount house in France ; in this way the English discount houses collect all the bills which are drawn upon France, and the French discount houses collect all the bills which are drawn upon England. The French and English discount houses then exchange the bills thus gathered together, and are remunerated for the trouble which they thus take, by the small commission which is paid to them. If, therefore, the value of the exports sold to France is exactly equal to the value of the imports which are brought from that country, the whole of the trade between the two coun- tries can be carried on without the transmission of any specie ; in fact, the transmission of specie can be as completely avoided as if the whole trade was one of barter, and coal and iron were bartered for silk and wine. It, however, very rarely happens that the debtor and creditor account between two countries exactly balances without the transmission of specie. Suppose that the annual value of England's exports to France is 10,000,000^., and that the annual value of the imports from that country is 12,000,000^. Under these circum- stances it is manifest that the bills which are in the possession of French merchants, and which are drawn in England, will exceed in amount by 2,000,000/. the bills which are drawn upon France, and which are in the possession of English merchants. It is, of course, to the interest of the English merchant to pay the French merchant by bills drawn upon France ; b}^ doing so the English merchant saves the expense of sending specie to France. The French merchants who have bought the goods we export, are for similar reasons anxious to pay the English merchants by bills drawn upon England. But since the value of England's imports from France exceeds the value of her exports to that country, Eng- land will have to pay to France a larger sum than France has to pay England ; therefore the demand which BOOK III. CH. IX. If the' value of imports and ex- ports are equal, transmis- sion of specie is avoided by the use of bills of exchange. If a balance is due from. Ewjland to France, bills of exchange on France ivill be at a premium about equi- valent to the cost of transmit- ting specie. 430 Manual of Political Economy. BOOK III. CH. IX. Bills on England will be at a corre- sponding discount. exists in England for bills drawn on France will exceed by 2,000,000^. the demand which exists in France for bills drawn on England. In fact, English merchants have to pay in France 12,000,000^., and there are only 10,000,000/. of French bills wherewith to make the pay- ment ; some of the English merchants, therefore, will be obliged to transmit specie to the amount of 2,000,000Z.; those who transmit this specie incur the expense of the transmission. If this expense were two per cent., it would, of course, be to the advantage of the English merchants to purchase bills in France, even if they paid one and a half per cent, premium for them ; if bills were bought at this premium it would be cheaper by a half per cent, to make payments to France by means of these bills instead of transmitting specie, which involves an expense of two per cent. English merchants, therefore, will compete for the purchase of bills drawn on France, and this competition will inevitably raise these bills to a premium which is approximatelj^ equivalent to the expense of transmitting specie to France. The premium upon bills cannot exceed this amount, because if it did so then it would be cheaper to transmit specie than bills. Similar considerations will show that, in France, bills which are drawn on England will be at a corresponding discount. French merchants have to receive 2,000,000l more for goods exported to England than they have to pay for goods imported from that country. In France there will be 12,000,000/. of bills drawn on England in possession of French merchants, and since France has only to pay England 10,000,000/., there will be a demand for only this amount of bills drawn on England. 2,000,000/. of the bills drawn on England must there- fore be sent to England to be cashed, and the money will then have to be transmitted to France. But if a bill drawn on England is not wanted in France to pay for goods bought in England, such bills must fall to a discount. A money dealer obviously cannot afford to give a merchant more than 98/. for a bill on England for 100/. if it is necessary to send his bill to England to be cashed, and have the money transmitted to France ; since it has been assumed that such transmission costs two per cent, of the specie transmitted. When, there- Foreign Exchanges. 431 fore, bills drawn upon France are at a premium in England, bills drawn on England will be at a corre- sponding discount in France. If the state of things which is here described exists, it is technically said that the exchange is against England and in favour of France. The origin of this phraseology may be readily ex- plained. It is evident that the exchange is against England and in favour of France, when the commerce between the two countries is such that it is necessary to send specie from England to France. At one time the belief was universal, and is still very general, that the profit which a nation derives from foreign commerce can be accurately estimated by the amount of specie which she succeeds in drawing to herself from other countries. This belief formed the basis of the Mercantile System. Statesmen of every commercial nation have, in years gone b}^ vied with each other in framing ingenious devices to encourage the importation of the precious metals, and to impede their export. It is no wonder, then, that the exchange is described as being against a country, when its foreign trade is in such a position as inevitably to require the transmission of specie to foreign countries. The exchange will, of course, be at par when the value of the exports to a country exactly equals the value of the imports from the same country. If it had been supposed, in the above example, that the value of Eng- land's imports from France was 10,000,000/. instead of 12,000,000/., then, in each country, the demand for bills drawn upon the other country would be exactly equal to the amount of bills to be disposed of; nothing would cause the bills of either country to rise to a premium, or fall to a discount, and the exchange would in each country be at par. Hitherto, in this chapter, we have supposed that the currencies of different nations are identical. We will now examine a case where two countries, such as France and England, have the different currencies which they possess at the present time, and which, in spite of reason, economy, and convenience, they will probably maintain for m.any years to come. BOOK III. CH. IX. 7'he mean- ing of the saying that in this case exchange is against England, and in favour 0/ France. The mean- ing of ex- change at par. Currencies have hitherto been sup- posed identical. 432 Manual of Political Economy. BOOK III. CH. IX. Hoiv our conclu- sions must he express- ed when the cur- rencies differ. In this case the money of one country may be de- preciated relatively to that oj the other. In the French currency, the franc, as the general measure of value, occupies the same position as the pound sterling does in our own coinage. If the French wish to express the value of a landed estate, or any other kind of wealth, they say that it is worth so many francs. In order to compare values which are thus differently expressed in the two countries, it will be sufficiently exact if we consider that 25 francs are equi- valent to 1^. sterling. When, therefore, an English merchant sells 100?. worth of goods to a French mer- chant, the former would receive a bill drawn upon the French merchant for 2500 francs, and not, as we have above supposed, for 100/. If imports from France to England exceed in value the exports from England to France, the exchange will be against England and in favour of France. 1 f this be the case, England will have to make larger payments to France than France has to England, and there will consequently be in England a greater demand for bills drawn on France than there exists in France for bills drawn on England. Conse- quently, a bill drawn on France for 2500 francs will in England be worth more than 100/.; on the other hand, a bill on England for 100/. would in France be worth less than 2500 francs. It is manifest that the premium which bills drawn on France realise in England, cannot exceed the cost of transmitting specie from the one country to the other. If the cost of this transmission should be two per cent, then, under the circumstances just assumed, it is quite reasonable to conclude that a bill upon France for 2500 francs would in England sell for 101/. 10.^., and that a bill upon England for 100/. would in France only sell for 2463 francs. It should moreover be borne in mind, that when the exchange is against one country and in favour of another, specie must not only be sent from tlie former to the latter country, but the money of the former country will also be depreciated in value, when compared with the money of the latter country. When the exchange is against England, suppose that a person who intends to travel in France takes 100/. to some money exchange office in London, for the purpose of having it changed into French coin. When the Foreign Exchanges. 433 exchange is at par, 25 francs are equivalent in value to 1^. sterling. The question now arises, How many francs will be given at a money exchange office in London for \00l. when the exchange is against England ? Since the exchange is against England, English money must be sent to France to adjust the trade between the two countries, but no French money will for a similar purpose have to be sent to England. The money exchange offices will therefore be compelled specially to obtain French money from France ; they must therefore be compensated for the cost of importing this French coin, and conse- quently \l. sterling of English money will exchange for less than its equivalent value in French money, namely 25 francs. English money, therefore, would be depreci- ated in value, compared with French money, and this depreciation would not be avoided, even if the English money were exchanged for French money in Paris, instead of in London. The exchange being against England, English money is sent from England to France : hence there is a surplus of English money in France, or, in other words, English money is at a discount when compared with French money. If, on the other hand, the exchange is in favour of England, the English money will be comparatively of greater value than French money, and \l. sterling will exchange for more than 25 francs. Suppose that a person wishing to exchange English monej^ for French monej^ goes to an exchange office in London. A favourable exchange implies that there will be a surplus of French money in England, because French money has been sent to England in order to adjust the trade between the two countries. People therefore will be anxious to dispose of this French money, for it will not in England perform the ordinary functions of money. English tradesmen will not accept 3 francs instead of half-a-crown, cab fares cannot be paid in French coin, and a person in London with only French money in his pocket would be subject to as many inconveniences as if a traveller were in Paris with only English money in his pocket. Those persons, therefore, in England to whom French money has been sent to pay for the excess of exports to that country, will be anxious to convert this French money into English 2e Meaning of favour- able ex- change in this case. 434 Manual of Political Economy. BOOK III. CH. TX. Causes which may increase the premi- um or dis- count on bills of exchange beyond the cost of transmit- ting gold. The state- ment that this pre- 9uiu7n is equal to the cost of transmit- ting gold must be modifed, money. This French money cannot be sent back to France, without involving the cost of transmission. A considerable loss will also be incurred if the other alternative is adopted, and the French money which is in England is melted in order to be sold as bullion. These considerations show that French money must be depreciated, or, in other words, when foreign exchanges are technically said to be against a country, the money of the country will be depreciated, when compared with the money of those countries with regard to which the favourable exchange is supposed to exist. From these remarks it would appear, that when two countries such as France and England are considered, the bills of exchange which are drawn upon either of these countries cannot either rise to a greater premium, or fall to a greater discount, than that which would be repre- sented by the cost of transmitting the precious metals from the one country to the other. Some facts, however, may be recalled, which seem to contradict this conclusion. For instance, it is well known, that when the news of Napoleon's return from Elba was first brought to England, the price of bills drawn upon foreign countries suddenly rose ten per cent. Mr. Mill has remarked, " Of course this premium was not a mere equivalent for cost of carriage, since the freight of such an article as gold, even with the addition of war insurance, could never have amounted to so much. This great price was an equiva- lent, not for the difficulty of sending gold, but for the anticipated difficulty of procuring it to send ; the expectation being, that there would be such immense remittances to the Continent in subsidies, and for the support of armies, as would press hard on the stock of bullion in the country." When the exchange is against any particular country, or, in other words, when bills upon foreign countries are selling at a premium, it may be thought that this premium must be always exactly equivalent to the cost of transmitting the precious metals. It may be urged that an unfavourable exchange is caused by the necessity of transmitting specie, in order to pay for an excess of imports over exports; therefore the competition of merchants amongst each other to purchase foreign bills Foreign Exchanges. 435 of exchange, in order to avoid the cost of transmitting specie, will force all foreign bills to a premium equivalent to this cost of transmitting specie. If, for instance, the cost of sending specie from England to France were two per cent., an English merchant who had payments to make to France would gain some profit, if he paid as high a premium as 1^. 198. per cent, for bills drawn on France. It would, therefore, seem to be proved, that when the exchange is unfavourable, bills must be at a premium equivalent to the cost of transmitting specie. There are, however, other considerations w^hich modify this conclusion, and which also explain the fact, that when the exchange is unfavourable, and bills at a premium, this premium does not remain constant, but varies from day to day. It is, no doubt, true that bills would invariably be at a premium approximating to the cost of tiansmitting specie, if it was always necessary to export specie, when the foreign exchanges happened to be unfavourable to a country. But it must be borne in mind that the balance which a country has to discharge when the value of its imports exceeds the value of its exports, may often be liquidated without the transmission of any specie. For instance, foreign commerce is liable to constant fluctua- tions ; various circumstances may at any time occur which may increase a country's exports or diminish its imports ; thus an exchange which is unfavourable may be rapidly converted into one which is favourable. If such an event is anticipated, those who have payments to make in foreign countries will delay transmitting specie, or, at any rate, will refuse to pay for foreign bills a premium equivalent to the cost of transmitting specie. Such a delay may be obtained by various arrangements ; for instance, a person whose credit is good can always readily renew his bills at the current rate of interest. There are, moreover, valid reasons for assuming that an unfavourable exchange cannot be of long continuance; for specie cannot be withdrawn from the currency of a country, to pay for an excess of imports over exports, without increasing the value of gold in that country, or, in other words, without reducing general prices. But a reduction of general prices at once exerts a tendency to BOOK III. CH. IX. because the actual transmis- sion of specie may be avoided, and an mifavour- able ex- change exerts a direct ten- dency to correct itself. 436 Manual of Political Economy. BOOK III. CH. IX. prevent the export of specie. If general prices are lowered in a country, the exports of the country will be increased, because it will be more profitable to sell commodities in foreign countries. Under the same circumstances, the imports will be diminished, because foreign countries will not export so large a quantity of commodities to this particular country, when generally lower prices prevail in it. It, therefore, appears that an unfavourable exchange cannot long continue, if the specie which is transmitted to foreig-n countries is supplied from the money of the country. It has, how- ever, been already stated that the precious metals are often transmitted from one country to another, as an ordinary commodity of commerce. Such an export of specie can scarcely be said to denote an unfavourable exchange, since the specie is not withdrawn from the money of a country, and no effect is consequently exerted on general prices. Australia, for instance, has often sent in a single year 10,000,000Z. of gold to England, but this export of gold from Australia does not show that the foreign exchanges are unfavourable with regard to that country ; this gold is simply exported from Australia as an ordinary commodity of commerce. CHAPTER X. THE FUNCTIONS OF CEEDIT. IN Political Economy the very name of Credit is ominous of confused and never-ending discussion. Questions concerning credit may be regarded as the polemics of this science; for the subject of currency is intimately connected with credit. The currency has always been a popular topic for much vague theorising ; it seems to be not unfrequently thought that out of the intricacies of the currency problem some specific may be evolved which will spontaneously create wealth, and which will provide an adequate remedy for every national disaster. It will, however, be perceived that the functions performed by credit and the influence it exerts on currency admit of a very simple explanation. Credit signifies the relation which exists between the borrower and lender ; credit consequently implies trust, or confidence. One individual, A, may have a larger amount of wealth than he wishes either to consume or to employ as capital. Another individual, B, may be greatly in want of this wealth, desiring perhaps a greater amount of capital to assist the industry in which he is engaged ; B, therefore, says to A, If you will lend me your wealth, I will pay you a certain annual sum for the use of it, and you may depend upon me to repay it to you at the expiration of a certain time. If A has sufficient confidence in B's solvency and is satisfied with the terms which are offered, A will lend the wealth to B. In other words, B calls his credit into action to borrow wealth from another individual, A ; credit, therefore, simply signifies borrowing and lending. The borrowing does not always take place in the precise manner just BOOK III. CH. X. Credit im- plies bor- roxoing and lending. 438 Manual of Political Economy. described ; there is, however, no difference in principle, although there may be some difference in the mode in which the transaction is conducted. For instance, it is customary, when wealth is lent, that the loan should be made in money. If, in the above example, the surplus wealth which A is supposed to possess consists of a stock of wheat, he will not, as a general rule, lend this wealth in the form of wheat, for he will almost invariably sell the wheat and then lend the money. Such a course is much more convenient, since a substance which is uniform in its value is always chosen to perform the functions of money. When money is lent, both the borrower and lender very accurately know how much they have respectively to pay and receive. But if, instead of money, any other kind of wealth, such as wheat, was lent, great risk would be incurred both by the borrower and lender ; because if the wheat were to be repaid at any particular time, it might then be only half as valuable, or, on the other hand, perhaps far more valuable that it was at the time when it was borrowed. , If it is borne in mind that credit is a synonymous expression for borrowing and lending, it will be readily perceived that various circumstances are implied in the existence of credit. In the first place, there can be no credit if a man has not confidence in the person applying for a loan. No one would be willing to lend his wealth, unless he believed that he who borrowed it would repay it. The more confident a man is in this belief the less remuneration will he require for the money which he lends. If A lends two sums of 100^. to B and C respectively, and if he places much greater faith in B's honesty and ability to pay than he does in C's, C will be compelled to pay a much greater sum for the use of this loan than B. It need scarcely be said that the annual sum which is paid for the use of borrowed money is termed the rate of interest. Therefore two individuals borrowing at the same time and from the same person, pay a rate of interest which is determined by the con- fidence which he who lends the money may feel that it will be repaid ; or, in other words, by the faith which he places in the solvency of those to whom the money is The Functions of Credit. 439 lent. Since B is supposed to be able to obtain a loan at a lower rate of interest than C, B's credit is for that reason said to be better than C's ; hence, credit should be defined as the power to borrow wealth. This definition is more precise than the meaning given above, but not inconsistent with it. Credit being defined as the relation between the borrower and lender, credit will be good when this relation is easily produced, i.e. when money is easily lent or borrowed ; or credit will be abundant when there is a large number of persons ready to enter into the relation on both sides, and a large amount of wealth ready to be lent and borrowed. It has been said that C's credit would not be so good as B's, if C were compelled to pay a higher rate of interest for money borrowed than B. But it must be remembered that B and C are supposed to borrow money in the same place and in the same country. If B bor- rowed in England and C in India, C would be compelled to pay a higher rate of interest than B, although C's credit, so far as depended upon personal character and means, might be quite as good as B's. It would in fact be necessary for C to pay this higher rate of interest, not because his own credit was not good, but because a generally higher rate of interest prevails in India than in England. The circumstances which determine whether the credit of any particular country is good or bad are very similar to those on which depends the credit of individuals. If the Government of a country is unsettled, a revolution may quickly displace the ruling dynasty, and the obligation incurred by one Government may be disavowed by the next which takes its place. In such a case as this those who lend money must be compensated for the increased risk which is incurred. States, either through dishonesty or through inability to pay, have sometimes repudiated their obligations. Those who subscribe to Government loans carefully examine the character and the financial position of the states to whom the money is lent. The result of this exami- nation is shown in the price of foreign stocks, for the prices of these stocks form a measure of the credit of different countries. Russia can borrow money at five per cent., whereas Spain for many years could not borrow BOOK in. CH. X. Credit in the power to horroio wealth. This power varies in individu- als and ill countries. 440 Manual of Political JEcono^ny. BOOK III. CH. X. Confused notion that credit is capital. under seven per cent., and now pays about six per cent. [The financial position of Turkey was so bad at the time of the revolt of Bosnia and the Herzegovina and of the war with Russia in 1876, that for some years she did not pay any interest on her loans ; her borrowing power was suspended and her five per cent, stock stood at a nominal price of 121. Since 1881 the management of the public debt of Turkey has been entrusted to an Inter- national Commission, to whom are relegated the excise revenues of the country. The appointment of this commission and the powers entrusted to them have, to a large extent, restored the confidence of those who have money to lend, and the public debt of Turkey has for many years stood at prices yielding from three and a half to four and a half per cent, according to the degree of security attaching to the various loans.] Hence the meaning to be attributed to the word credit, is the power to borrow, whether the credit of an indi- vidual, or the credit of a state is spoken of. It may perhaps excite surprise that so simple a signification is given to the word credit, for it is often spoken of in a most mysterious manner. Thus some political economists assert that the principles of this science can only be unfolded to those who properly appreciate the great maxim, that credit is capital. If the true nature of credit is borne in mind, it will be at once perceived that this maxim instead of being pregnant with meaning is a striking indication of confusion of thought and language. The fundamental idea attached to capital is that it is a fund from which to feed, and otherwise to support labourers. Credit is a power to borrow, and surely labourers cannot be fed on a power to borrow. The power to borrow, if exercised, may obtain capital. Just in the same way, the muscles of a man's arm will, if required, lift fifty pounds; but it would be absurd to say, that his muscles were fifty jjounds. We shall proceed to point out the real assistance which credit lends to the production of wealth ; in doing so, it will be shown that if there were no credit much less wealth would be saved, and a great portion of that which is saved would cease to be productively employed. Political economists are not, however, justified in affirm- The Functions of Credit. 441 ing that credit is capital, although it may be shown that the existence of credit materially aids the production and distribution of wealth. If there were no credit, all the capital of the country must be applied to industry by those individuals who actually possess it. A person who saves wealth, but does not wish to employ it upon any industrial purposes, would be prevented using it as capital, if he were debarred from lending this wealth to those who would be willing to devote it to the further production of wealth. The amount of wealth which is in this manner saved by those who wish others to employ it as capital is enormously great. Some conception of the amount may be formed from glancing over the accounts of such institutions as the London and County Bank, which it must be remembered is only one out of the many great London banks.^ The average amount of the deposits which are held by this bank exceeds 42,000,000^. This vast amount of wealth has been collected from a multitude of depositors, who are in very different positions in society, and who are engaged in the most varied occupations. Experience teaches that even the most prudently managed bank need not keep in the form of money an amount exceeding one-third of the sums deposited with it, in order to meet the every- day demands which are made upon the bank by those who have deposited money. If, therefore, a bank has deposit accounts amounting to 42,000,000?., at least 28,000,000/. of this sum may be applied by the bank to productive purposes. The profits of a banking estab- lishment mainly arise from such an application of their deposits, for the bank either employs the money directly as capital in carrying out some industrial work from which profit is realised ; or, as is generally the case, the bank lends the money to others, who use it as capital, and who pay a certain rate of interest for the loans thus received from the bank. But suppose that either from the instability of the Government, from a generally low state of commercial morality, or from any other cause, the credit of this country should be materially damaged. ^ [The total deposits in the jomt-stock banks of the United Kingdom in June 1905 reached the enormous sum of 1,356,532,000/. This includes the national Banks, but not the private Banks nor the Savings Banks.] BOOK III. CH. X. Credit aids the production of ivealth, by increas- ing the accumida- tion and jn-ojttable applica- tion of capital. 442 Manual of Political Economy, BOOK III. CH. X. Method bij which banks in- crease the effective resources of the country. Accumula- ted wealth is made useful hy credit. Confidence in banks and other similar institutions would thus be lost. Those who now deposit in banks the money which they do not require for their immediate wants, would then cease to do so, since they would be prompted to hoard it for the sake of security. Some idea may be formed of the extent to which such an event would affect the caj)ital of the country, when it is remembered that the credit of the London and County Bank enables it to gather together 42,000,000^. in deposit accounts ; of this amount a sum equivalent to 28,000,000/. is employed as capital. The foregoing remarks suggest one of the many modes by which credit economises the resources of the country. These deposit accounts represent the sums which tradesmen and others keep to meet their current expenses ; for instance, a person who receives an official salary of 1000/. does not wish to invest it, because he will ha^"e to live upon it during the year. He would also be afraid to keep so large a sum in his own house. He therefore deposits it in a bank, and gradually draws upon it as he requires it. In this manner, money which would not otherwise be invested as capital is collected by banks, and a large proportion of the aggregate sum which is so collected is productively employed as capital. Again, many persons who accumulate wealth would not do so if they were obliged to engage in business themselves, and to superintend the industry which may be supported by the wealth which they save. An indi- vidual, A, may have an annual income of 2000/. One thousand pounds a year suffices for his ordinary expendi- ture ; he is therefore glad to save the remaining 1000/. if he can profitably invest it. But very probably he does not wish to engage in any industry himself, or if he is already so engaged, he may not wish to extend his operations by bringing more capital into his business. He will, therefore, be anxious to lend the 1000/. which he is disposed to save, to some one whom he can trust, and who will pay him interest for the use of it. If it is assumed that the money is lent to B, B probably desires to borrow it, because he thinks that he can so advan- tageously employ this sum as capital, that there will be a profit remaining to him, after he has paid interest for The Functions of Credit 443 the use of the loan. If, however, A placed no confidence either in B's credit or the credit of any other individual, he would not lend the 1000^. he had saved, and therefore the money would not be employed as capital, unless A chose so to employ it himself. It has, however, been supposed that he is unwilling to do this ; in all proba- bility, therefore, he would spend the 1000/., if the absence of credit prevented him from finding a profitable invest- ment for it. The consequence of this would be, that the industry of the country would be seriously affected, since the accumulation of capital would be impeded. There is another mode in which the existence of credit most powerfully assists the production of wealth. It has been frequently remarked, that nothing contributes more powerfully to promote the wealth of a nation than its public works. The railways, docks, canals, and roads of this country are not only the surest signs of its wealth, but have also been the chief instruments of its industrial greatness. Such an undertaking as a railway, however, requires an amount of capital for its construction too large to be supplied by one individual. Such works, therefore, are carried out by a company, who collect the requisite amount of capital from a great number of individuals. These individuals would not entrust their capital to the company, unless they could place confidence in it, or, in other words, unless its credit was good. Moreover, not only must the personal credit of the directors of the company inspire confidence, but it is also necessary that the credit of the country in which the works are carried out should stand high ; because great risk will be incurred by sinking large sums of money in works which would be easily destroyed if the Govern- ment was in a state of anarchy, and property consequently insecure. Enough has now been said to show that credit, as powerfully as any other agent, contributes to the pro- duction and accumulation of wealth. Although credit is not capital, yet a great portion of the capital of each country is undoubtedly due to the existence of credit. The higher the credit of a community the more com- pletely can every particle of wealth which is saved be economised. Credit, in fact, enables the wealth which is BOOK III. CH. X. Undertak- inf)S too great for individual resources are carried out by credit. Thus credit creates capital. 444 Manual of Political Economy. saved to be immediately applied to the most productive purposes. Having in this chapter described the influence exerted by credit on the production of wealth, we shall in the next chapter discuss the manner in which the prices of commodities are affected by credit. '.^ CHAPTER XI. THE INFLUENCE OF CREDIT ON PRICES. WHEN an individual, B, uses his credit in borrowing- from A a certain sum of money, it is natural to suppose that A will require some written acknow- ledgment of B's liability to him. The written acknow- ledgment of such indebtedness may be given in many different forms, and these various forms may be regarded as the tangible evidence of the fact that credit has been given and taken. It will be well to describe some of these forms in detail. We will commence with a bill of exchange ; some remarks liave already been made upon this instrument of credit. It is well known that the wholesale trans- actions of commerce are seldom carried on by ready money. If A sells B a cargo of coal for 1000^., A receives an acknowledgment of the debt due to him in the form of a bill ; this bill is a written promise ^ that B will pay a certain sum to A on a particular day, and in the bill it is stated what consideration has been given for the debt which has been incurred. The time which has to elapse before the bill falls due is a matter of previous arrangement between A and B, but upon this point different customs prevail in various trades, which are very uniformly observed. When, for instance, a draper purchases goods of a warehouseman, a bill for three months is almost always given ; but in the book trade it is customary to give a bill for six months. A bill of exchange affords a convenient instrument for facilitating credit. If in the above transaction B, who is ^ The promise is almost invariably given in the form of a written order to a banker, who becomes the medium of payment. BOOK III. CH. XI. Different forms of credit. Bills of exchange. They are a conve- nient form oj credit. 446 Manual of Political Economy. BOOK III. CH. XI. Bank-notes and cheques as issiied hy State banks supposed to purchase the coals, should be a stranger to A, it is probable that A may require some additional security besides the written promise of B to discharge the debt. Some bank with which B does business may have perfect confidence in him. B will go to this bank and say, A is not satisfied with my promise to pay, but he no doubt would be if a public institution like yours would give him some testimony as to my solvency. The bank grants this request by placing its name upon the back of the bill, which is technically called endorsing the bill. This endorsement makes the bank liable to pay the bill in the event of B refusing to do so; A then accepts the bill, being satisfied with this additional secu- rity. Now A may perhaps be in want of ready money, and does not wish to wait until the bill falls due. He, therefore, gets this bill discounted ; discounting the bill means selling the bill for ready money. If the person who discounts this bill for A is satisfied with the security wliicli is provided by the two endorsements which are already on the bill, he accepts the bill without any further endorsement ; but if he is not satisfied, he may also require the endorsement of A, the person from whom he purchases the bill. A bill of exchange may thus be bought and sold any number of times before it falls due, and perhaps each time it is so bought and sold it receives an additional endorsement. Thus it not unfrequently happens that before a bill is finally pre- sented for payment it is almost completely covered with endorsements. Other very usual forms of credit are bank notes and cheques. The distinction between a bank note and a bill of exchange is this : a bank note is a written promise to pay a certain sum whenever it may be demanded ; whereas a bill of exchange is a written promise to pay a sum at a certain date, which is stated on the bill. Moreover, in almost every country, certain privileges are given to bank notes which are not possessed by any other instrument of credit. Almost every country has a State bank, the bank notes from which are generally made a legal tender. In this country, any debt can be discharged by paying the sum in Bank of England notes ; and, similarly, in France a debt can be discharged by The Influence of Credit on Pmces. 447 paying the amount in notes issued by tlie Bank of France. But tlie notes which are issued by private banks are not a legal tender. State banks are subject to certain restrictions, which vary in different countries. Our own bank is regulated by the Bank Charter Act, the f)i'ovisions of which we shall hereafter explain. It is only necessary here to state that this Act provides security that the Bank of England shall not issue notes beyond a certain amount, unless it possesses a corre- sponding quantity of gold to provide for their payment. Although a Bank of England note is as legal a tender as gold coin, yet our currency is said to be convertible, because the Bank of England is bound, if the demand is made upon it, to give gold in exchange for its notes. But the currencies of some other countries are incon- vertible, and when this is the case, no one has a right to demand coin in exchange for bank-notes, although the}" may be a legal tender. Besides the notes which are issued by the Bank of England, those private banking firms which existed previous to 1844 are allowed to issue notes under certain conditions. A moment's consideration will show that a bank-note, whether issued by a state establishment or by a private firm, is simply a convenient form for bring- ing into practical use the credit which may be possessed by the bank. All those who place perfect confidence in the solvency of a particular banker will be willing to accept his notes. A banker, therefore, whose credit is good, can circulate a great number of his notes in his own neighbourhood, his notes being willingly accepted by those to whom he is known. Such notes, however, are not convenient for payments which have to be made at a distance, to those to whom the banker is a stranger. The notes of private bankers are never made a legal tender, and if the notes are presented for payment at the bank from which they are issued, it is compulsory that either coin, or Bank of England notes, should be given in exchange for them. It is, however, manifestly to the advantage of a banker to issue notes ; for suppose 60,0001. of these notes are kept in circulation, it is ascertained, by experience, that an amount of legal tender equivalent in value to one-third of the notes BOOK III. CH. XI. or j)rivate hanhs. 448 Manual of Political Economy. BOOK III. CH. XT. Use of cheques. issued will be sufficient, if kept as a reserve, to meet all the notes which are presented for payment. A banker, therefore, whose notes circulate to the extent of 60,000^. has 40,000?. at his free disposal, to place in some profit- able investment. It is hardly necessary to describe a cheque. Indivi- duals deposit money with bankers for purposes of convenience or safety, and, of course, they can withdraw any portion of this money when they have a payment to make. But if A want."^ to pay B 1000?., A does not first withdraw 1000?. from his bank and pay the amount to B, who would then probably deposit the amount received in the bank with which he might happen to do business. A much more convenient course is adopted : A, instead of paying the money to B, gives him a cheque, which is simply an instruction to A's banker that the amount stated in the cheque should be paid to B when he demands it. A is thus saved the trouble of withdrawing money from his bank ; B is also saved the trouble of sending so much money to his bank, for now he has only to transmit the cheque to his banker, who will place the amount to his account, B's banker taking the trouble of getting the cheque paid by A's banker. The trouble of doing this, however, is very small, for cheques will be drawn upon B's banker, and in this manner the cheques drawn upon one bank are exchanged for those drawn upon another. A similar exchange is effected in regard to bills. This exchange is daily carried on in London, at an establishment called the Clearing House. The amount of bills and cheques thus exchanged is so enormous that it frequently reaches more than 200,000,000?. in one week.^ No gold whatever is required in settling the accounts between the various banks. When a balance remains in favour of, or against, a particular bank, the amount is placed to the credit or debit of this bank in the books of the Bank of England. Another form of credit, the telegraph draft, has lateljT- come so much into use that it has probably led to some diminution in the amount of bills of exchange issued. These telegraph drafts are orders sent by telegraph. [^The total amouut cleared in 1904 was £10,564,000,000, or more than an average of £203,000,000 a week.] The Influence of Credit on Prices. 449 The chief forms which credit assumes have now been described. It will be perceived that bills of exchange, bank notes, cheques, and telegraph drafts perform many of the functions of money. Credit, therefore, considered in this aspect, may be regarded in a certain degree as a substitute for money. We are thus led to the main subject of inquiry in this chapter, which proposes to investigate the influence produced by credit on prices. We will commence this investigation by explaining the manner in which bills of exchange, bank-notes, and cheques respectively perform the functions of money. Although, in the wholesale transactions of commerce, the terms of the exchange are almost invariably expressed in pounds, shillings and pence, yet it very rarely happens that any money is interchanged between the buyer and seller. In such transactions, bills of exchange provide a ready substitute for money ; it also frequently happens that the same bill of exchange supplies a substitute for money in many transactions besides the original one which first called the bill into existence. We have already said that bills are often almost covered with endorsements before they are finally presented for pay- ment. If, for instance, B receives from A a bill for 1000^., B may endorse this bill, and with it purchase commodities to the value of 1000^. from C. C in a similar way may again endorse the bill, and with it purchase goods from D, and the same process may be continued any number of times. But when this is done, it is manifest that the bill is as efficient in its purchas- ing power, or, in other words, exerts the same influence in buying and selling, as if A paid B a thousand sovereigns instead of the bill, and B purchased goods from C with this money instead of paying C for the goods by means of the bill. As long, therefore, as this bill is kept in circulation, it provides a substitute for an equivalent amount of money. If bills were not used, and if no other substitute for money were provided, it is manifest that when commodities were bought and sold for money, the money must be forthcoming. In discussing the laws of price, the principle was established, that general prices depend upon the quantity of money in circulation com- pared with the wealth which is bought and sold with 2f BOOK III. CH. XI. Credit is to some ex- tent a sub- stitute/or money. The func- tions of money may he per- formed by bills of ex- change. 450 Manual of Political Economy. BOOK III. CH. XI. As wealth increases, prices tend to decline; but this tendency is stopped by the use of bills. If bills were not used, the money in circula- tion must increase, or prices decline ; money, and also upon the frequency with which this wealth is bought and sold before it is consumed. If more wealth is produced, and an increased quantity of wealth is also bought and sold for money, general prices must decline unless a larger quantity of money is brought into circulation. Suppose, for instance, that the pro- duction of every kind of wealth is doubled in this country, that every one doubles his purchases of com- modities, and, at the same time, there is no increase in the amount of money in circulation. Upon this hypothesis, each individual, although he is supposed to purchase twice as much of every commoditity as he did before, will only possess the same amount of money with which to effect these purchases. He will, therefore, be only able to give the same amount of money for double the quantity of each commodity he purchases ; but this is tantamount to saying that general prices have declined one-half. In fact, if there should be an increased pro- duction of wealth, if there should be more buying and selling, or if any other circumstance should occur the effect of which is to require the circulation of a larger amount of money, the value of money must rise ; or, in other words, general prices must decline, unless an increased supply of money is forthcoming, so that a larger amount may be brought into circulation. When buying and selling are effected by bills of exchange, the necessity for money is as completely dispensed with as if the transaction was carried on by barter ; those trading transactions therefore in which bills of exchange are employed may be almost indefinitely extended without rendering it necessary to bring an increased amount of money into circulation. A consideration of some of the consequences which would ensue if bills of exchange did not exist, will perhaps more plainly indicate the influence which they exert upon prices. Suppose that all the commodities which are now bought and sold by means of bills of exchange were paid for by money; a largely increased amount of money would be required to be brought into circulation. If this additional supply were not forth- coming, money would rise in value, or, in other words, general prices would decline. Hence bills of exchange, The Influence of Credit on Prices. 451 in many classes of transactions, are a convenient and complete substitute for money ; consequently, if it were not for bills of exchange, one of two things must happen. Either the money in circulation must be increased, or the money already in circulation must become more valuable, since a greater amount of money will be required to carry on the trade and commerce of the country. But to say that money becomes more valuable is equivalent to stating that general prices decline. It, therefore, appears that we cannot, by a simple negative or affirmative, answer the question whether an increased issue of bills of exchange affects prices. All that can be said is this — If the buying and selling now carried on by bills of exchange were effected by money, then one of two things must occur- — either more money nnist be brought into circulation, or general prices must decline. The influence, however, which is exerted upon prices by bills of exchange is not due to anything peculiar in the nature or form, of a bill of exchange ; it is not the bill which produces the influence, but the influence is produced by the credit which is given. The bill is not this credit, but is simply a testimony or record of its existence. The truth of this assertion is illustrated by the fact that buying and selling may be carried on by book credits, instead of by bills of exchange. Sup- pose A sells B a cargo of coals for 1000^.; A, instead of receiving a bill of exchange from B, may debit him with the amount in his ledger. Let it be also assumed that A buys a quantity of coal for lOOOL from a third person C, and that C again buys 1000^. worth of timber from B. Then A appears a debtor for 1000/. in C's ledger, and C appears a debtor for 1000/. in B's ledger. Payment will therefore be made by cancelling each debt, for A will cancel B's debt, if C will cancel A's, and this of course C will be willing to do if B will cancel C's. In this case, although the buying and selling are nominally made for money, yet the resort to book credits enables money to be as completely dispensed with as if bills of exchange had been used. It is, therefore, credit, and not the particular form which credit may assume, that enables money to be dispensed with, and consequently produces an influence on prices. BOOK III. CH. XI. hence pricei are not affect- ed hy billfi, but hy the credit which they imply. The same effect miijld he produced hy hook credits. 452 Manual of Political Economy. BOOK III. CH. XI. hut not to so great a degree. Bank-notes are a still more powerful instrument of credit. Bills of exchange are, however, more potent in their influence on prices than book credits, simply because bills of exchange facilitate credit, and call a vast amount of credit into action which would never be given if book credits were always adopted instead of bills of exchange. For instance, if A receives from B a bill of exchange for goods sold, then A has the power of increasing his credit by means of this bill, for he can actually convert the bill into money, or he can purchase commodities with it ; but if A, instead of receiving a bill from B, simply has a register of his debt in his ledger, he would have no power of buying commodities by means of this book credit. Although in many transactions bills of exchange provide a perfect substitute for money, yet bank-notes seem more completely to perform all the functions of money ; we will, therefore, next proceed to inquire into the influence exerted upon prices by credit when in the form of bank-notes. A bank-note is a far more complete substitute for money than a bill of exchange, because a bank-note is used in those cases in which money would necessarily be employed, if bank-notes did not provide a substitute. The transactions, however, which are eflected by bills of exchange might, as we have seen, be often performed by book credits. Bills of exchange are seldom used, except in the wholesale transactions of trade and commerce, but bank-notes form a part of the ready money which a man keeps in his possession, to supply the ordinary wants of life. If, therefore, an amount of coin equivalent to one-third of the bank-notes issued is kept by the bankers as a reserve, it is manifest that each bank-note which is in circulation enables an amount of money to be dispensed with equivalent in value to two-thirds of the sum which the note represents. The bank-note circulation of Great Britain varies between 30,000,000^. and 32,000,000^. If it is 30,000,000/. sterling, it may be approximately said that, in consequence of bank-notes, a substitute is provided for 20,000,000^. of coined money. The same proposition may be expressed in different words, by saying that, if no bank-notes were in circulation, 20,000,000/. more money would be required. If this additional amount were not forthcoming money The Injluence of Credit on Prices. 453 would become scarcer, or, in other words, general prices would decline. It may be asked, What would be the effect upon pi-ices if the bank-note circulation were suddenly increased ? This suggests one of the most disputed of the currency questions. As previously stated, the bank-note circula- tion of England is placed under various restrictions, the nature of which will be presently detailed. The purpose we have in view, at this stage of our inquiry, is to investigate the effect which would be produced on prices if the bank-note circulation were largely increased by a removal of all restrictions which now limit its amount. We conceive that the effect which would be produced entirely depends upon circumstances. Let it be supposed that there is no change in the population, or in the commercial condition of the country. If, under these circumstances, an increased issue of notes were added to the money circulation of the country, prices would manifestly rise, because there would be now more money in circulation to carry on the same amount of buying and selling which was previously conducted by a smaller amount of money. If, however, the additional notes which are issued simply cause a corresponding amount of bullion to be withdrawn from circulation, it is mani- fest that no effect is produced on prices. The only result is that the trade of the country is carried on more economically, because these notes, which are simpl}^ pieces of paper of no intrinsic value, perform with equal efficiency all the purposes which were previously fulfilled by the gold, now supposed to be dispensed with. Conse- quently the economy of this substitution is evident ; gold is a valuable commodity, requiring much labour and capital to obtain it. We, therefore, have the follow- ing principles to guide us in an inquiry into the effects of a bank-note circulation. 1st. If bank-notes simply occupy, in the monetary circulation of the country, the place of a corresponding value of bullion, these notes produce no effect on prices. 2nd. If it can be sl\own that, either by the repeal of the Bank Charter Act, or by any other cause, the bank- note circulation of the country can be increased without withdrawing from circulation a corresponding amount of BOOK III. CH. XI. The effect of largely increasing the hank- note circu- lation would vary under dif- ferent circum- stances. The impor- tant ques- tion is whetlier they dis- place an equal amount of bullion, or increase the whole circtda- (ion. 454 Manual of Political Economy. BOOK III. CH. XI. Cheques are a less complete siibsfitute for money. Credit exerts a more powerful influence on prices by increas- ing the purchas- ing power of the country. coin, it is manifest that the aggregate money circulating in a country will be augmented, and general prices will, as a consequence, undoubtedly rise. Although a cheque is not so complete a substitute for money as a bank-note, yet cheques often provide facili- ties for dispensing with money which are possessed by no other instrument of credit, except a bank-note. It has already been explained in what manner cheques render the employment of money unnecessary. As an example, it has been stated that the returns of the Clear- ing House show that payments to the amount of more than 200,000,000^. a week are made by means of cheques, without requiring the use of any coin whatever. There can be no doubt that, if it were not for cheques, the great majority of these payments must be made with money ; in this case the money circulation of the country would have to be increased to a corresponding amount. If it were not so increased, a greater amount of buying and selling would have to be performed by the money already in circulation. This is equivalent to saying that general prices would decline. We have now investigated one part of the influence which is exerted by credit on prices : it must, however, be borne in mind that credit exerts upon prices another distinct kind of influence, which as yet has been scarcely noticed. Hitherto, in this chapter, those eflects on prices have alone been noticed which are due to the circum- stance that credit supplies, when in the form of bank- notes, bills of exchange, or cheques, a substitute for money, more or less complete. But by far the most powerful influence exerted by credit on prices is caused by increasing the purchasing power of the country. If it were not for credit, the demand for commodities would frequently be much less than it is. Iri fact, when credit is freely given, the demand for a commodity may in- crease without any assignable limits ; when the demand is so stimulated, prices may temporarily rise in a very striking manner. We lay particular stress upon the word ' temporarily,' because as frequently stated the price of all commodities, except those whose supply is absolutely limited, must always in the long run be regulated by their cost of production. But although cost of produc- Tlie Influence of Credit on Prices. 455 tion determines a point towards which the prices of commodities must ultimately have a tendency to approach, yet the prices of commodities may temporarily either very much fall short of their cost of production, or be greatly in excess of it. These variations in price are due to sudden fluctuations in the demand and supply of any particular commodity ; nothing exerts so powerful an influence in producing these fluctuations as an extended system of credit. If no credit were given, and if everything were consequently paid for by money directly it was purchased, there would be little specu- lation ; commodities would generally be bought as they were wanted ; everything connected with trade would be regular and uniform, and there would be no great variation in the demand. This regularity in demand exists with regard to those commodities which are not, from their nature, bought upon credit for speculative purposes, and the price of such commodities never devi- ates much from the cost of producing them. Bread is one of these commodities ; it is bought to be immediately consumed, and no one uses his credit to accumulate large stores of bread ; hence the price of bread is always regulated by its immediate cost of pro- duction. The price of bread of the same quality is uniform throughout large towns and districts, and if the cost of producing a loaf of bread is slightly lessened by a fall of 2s. a quarter in the price of wheat, the eflTect of this is shown by a corresponding fall in the price of bread. On the other hand, many commodities, such as wheat, are largely bought on credit for speculative pur- poses, and are consequently subject to the greatest fluctuations in the demand. Suppose some event occurs which forebodes a coming war ; merchants may then think that, if the war takes place, the foreign supplies of various commodities will be greatly diminished ; they, therefore, at once commence to make speculative pur- chases. Every man can use his credit as a purchasing power ; if he exerts his credit to purchase a commodity, he of course assists in increasing the demand for it. When the first rumours arose in 1854 of coming hostili- ties with Russia, large speculative purchases of tallow were made, because it was thought that all importations BOOK III. CH. XI. Variations in price are pro- duced by credit, and are great in articles bought for specula- tive pur- Example of tallow in the Eus- sian tvar. 456 Manual of Political Economy. BOOK III. CH. XI. Tea in the war with China. of that commodity from Russia would be stopped. The merchants who speculated in tallow employed their credit ; they did not withdraw their capital from profitable undertakings in which it might be invested, for the purpose of purchasing this tallow ; they simply employed their credit in the form of bills of exchange, and paid for the tallow with these bills. They no doubt intended, either to re-sell the tallow before the bills fell due, or, if they did not do this, they would probably pay a certain sum for permission to renew the bills from time to time. If a commodity in which speculation thus takes place does not rise in price as anticipated, many of the specu- lators are sure to be unable to meet their credit engagements, and a commercial crisis ensues. Each commercial crisis affords most striking instances of the wonderful extent of an individual's purchasing power, when he brings his credit into full activity. Mr. Mill refers to a very remarkable speculation in the tea trade, which is described in Tooke's History of Prices. We will give a brief summary of some of the facts, which are very instructive. It was expected, in consequence of our dispute with China in 1839, that there would be a rise in the price of tea. Many retail grocers were therefore extremely anxious to lay in a stock of tea, and they accordingly commenced making speculative purchases. One grocer is particularly mentioned who had a capital of 1200^., all of which was locked up in his business. If, therefore, he had wished to purchase tea and pay for it with money in his possession, he probably would not have been able to lay out more than 100/. But he adopted a different course, and employed his credit to its full extent as a purchasing power. He ordered chests of tea from every wholesale tea merchant with whom he was accustomed to deal ; they did not think of consulting each other, and had, therefore, every reason for supposing that the tea which he thus purchased was required for the legitimate purposes of his trade. He, probably following the custom of his trade, gave bills due at three months. Before, however, these bills fell due, tea had risen in price, and he was therefore enabled to realise considerable profits. Now it will be observed, that here was a grocer in a The Influence of Credit on Prices. 457 small way of business, who had purchased large quanti- ties of tea, and who therefore exerted an influence in increasing the demand for it, without employing a single farthing of money, either in the form of coin or bank- notes. The profits which the grocer, in the first instance, thus realised, he applied in the following manner to extend his speculations. If a grocer buys tea upon credit, it is customary that he should deposit as a security 21. upon each chest of tea purchased. The realisation of profit in the first instance enabled the grocer to pay this deposit, and his speculative dealing rapidly expanded. A few cargoes of tea, however, unexpectedly came to London, liaving sailed before the Chinese ports were closed ; a sudden fall in price took place, the grocer could not meet his engagements, and in the course of his examination as a bankrupt it was shown that he had purcliased 4000 chests of tea at a cost of 80,000/., the loss upon which was 16,000/. In this case, therefore, a comparatively poor man was enabled, by using his credit as a purchasing power, in a short time to buy 80,000/. worth of tea. Many others adopted the same course, and every grocer in the country might have employed his credit in a similar manner. It is, therefore, almost impossible to assign any limit to the rise of price which may temporarily take place when the demand for com- modities is stimulated by purchases made upon credit. The rise, as we have before said, was only temporary, for directly a panic commences credit is as sparingly allowed as it was before recklessly given. Prices rapidly fall, and they often sink as much below that position of equilibrium which is determined by cost of production as before they went beyond it. It must be evident, from tlie examples just given, that every contrivance which facilitates the employment of credit as a purchasing power increases the influence of credit on prices. Many people believe that bank-notes are more efficient as a purchasing power than any of the other instruments of credit. As it is conceived that commercial panics are caused by a reckless employment of credit, it is concluded that restrictions upon the issue of bank-notes provide the best remedy for the preven- tion of panics. These Opinions prompted the passing of BOOK III. CH. XI. Immense purchas- ing power produced by credit. The fiup- posifion that bank- notes are the most efficient purchas- ing power gave rise to the Bank Charter Act. 458 Manual of Political Economy. BOOK III. CH. XI. The Act was not wanted to secure the converti- bility of the bank- note, the Bank Charter Act. This Act was introduced and carried by the late Sir Robert Peel in 1844 ; its leading provisions admit of a brief and simple explanation. The main object of the measure was to restrict the issue of bank-notes ; it was therefore enacted that the Bank of England should not be permitted to issue notes beyond a certain amount unless a corresponding amount of specie or bullion were retained by the bank. The limit thus fixed was 14,000,000/., it being thought that the funds and various other property possessed by the Bank would prove a sufficient security to meet an issue of 14,000,000/,. of notes. The Bank is, however, compelled to keep in its possession specie exactly equivalent in value to every note that is issued beyond 14,000,000/. If, for instance, the Bank of England's note circulation is at any time 18,000,000/., the Bank is compelled to retain in its coffers 4,000,000/. of bullion or specie. In order that the public may feel sure that this obligation is faithfully obeyed, the Bank is compelled to publish in the London Gazette a weekly statement of its accounts. This statement shows at a glance what is the specie reserve at the Bank, and what also is its note circulation. The Bank Charter Act also provides that no banks established after the passing of the measure should be permitted to issue their own notes, and the old banks were not allowed to increase the issue of their own notes. High financial authorities still continue to differ as to whether this Act has the power of doing what it was intended to effect. Many people suppose that the Act secures the con- vertibility of our paper currency, but this is entirely erroneous. If the Act were rescinded to-morrow, it would still be as obligatory on the Bank of England as it was before to give specie for every note presented to it, if the demand were made upon it to do so. The Act compels the Bank to keep a certain amount of bullion or specie to meet these demands, but this obligation need scarcely be enforced in order to preserve the solvency of the Bank. The remarkable prudence and wisdom which distinguish the management of that institution are an adequate guarantee that sufficient bullion and specie would be voluntarily retained in the Bank to meet the demands made upon it ; and ev^n if it should unfortu- The Influence of Credit on Prices. 459 nately happen that the Bank should not be managed with the same prudence as heretofore, the weekly publication of the accounts of the Bank would afford sufficient security that an undue amount of notes could not be forced into circulation without an adequate reserve of cash to meet them. If such a forcing of the note circulation were attempted, a feeling of doubt about the solvency of the Bank would quickly arise ; and the desire of the public to convert their notes into gold would cause a large amount of these notes to be returned to the Bank. But those who most strongly support the Act base their advocacy not upon any security which is provided for the solvency of the Bank, but upon the restriction which the Act imposes upon the unlimited issue of bank-notes. These persons maintain, that during a period of active speculation, the Bank, if left uncon- trolled, might most powerfully stimulate credit by large issues of bank-notes, and thus contribute to force up the prices of various commodities to an unnatural point. But for reasons just stated it would be impossible for the Bank to keep in circulation an amount of notes dispro- portionate to the amount of cash reserve. There can, moreover, be no doubt that the credit purchases which are made in times of active speculation are rarely, if ever, effected by means of bank-notes. Bills of exchange and book credits are the instruments of credit which are almost invariably employed. For instance, the retail grocer who in 1839 was enabled to purchase 80,000/. worth of tea, although he only possessed a capital amounting to 1200Z., all of which was locked up in his business, never thought of employing bank-notes. The Bank Charter Act did not then exist ; the Bank was perfectly free to issue as many notes as it pleased, yet it would have been just as difficult for this grocer to obtain bank-notes on credit as it would have been for him to have borrowed money. It would, therefore, have been impossible for him to have speculated to any considerable extent if he had used bank-notes, instead of either bills of exchange or book credits. It thus appears that, at any rate in the primary stages of speculation, credit engagements are freely entered into, whether the issue of bank-notes is restricted or not. BOOK III. CH. XI. hut to 'pre- vent prices being raimd by an un- due issue of bank- notes. This can he done without bank-notes in the first stages of specula- tion. 460 Manual of Political Economy. BOOK III. CH. XI. The Bank Charter Act comen into opera- tion at a later jKriod. Temjio- rary sus- pension of the Act in 1848, 1857 and 1866. Import- ance of the relief afforded by this sus- pension. It is, however, maintained that the Bank Charter Act comes into operation in the later stages of speculation, for after these credit purchases have been continued some time, many find it difficult to meet their engage- ments ; bills begin to fall due, and an anxiety is shown to get them renewed. This, therefore, is the time when the Bank is pressed to discount bills ; large amounts will be willingly paid for accommodation, and the rate of discount consequently rapidly rises. This rise in the rate of discount affords the Bank an opportunity of realising large profits, if freely permitted to issue an unlimited amount of bank-notes. But the Bank Charter Act efiectually restricts the amount of accommodation which the Bank can give, for it cannot issue notes without purchasing an equivalent value of bullion ; if compelled to do this, the profit of the transaction is, of course, destroyed. In 1848, in 1857, and in 18G6, the three panics which have occurred since the passing of the Bank Charter Act, the pressure upon the Bank for accommodation was so severe that the Act had on all these occasions to be temporarily suspended. By adopt- ing this course, the pressure was immediately relieved. The failure of those was not prevented who had specu- lated recklessly and unfortunately, but the increased accommodation which the Bank was enabled to give saved many firms, who were not only solvent but wealthy, from succumbing under the sudden contraction of credit which is sure to accompany every panic. If, therefore, this relief had not been provided, many would have been ruined without any fault of their own ; for even the most prudent firms in this country conduct their business upon a system of credit ; they pay for the goods they purchase by bills, and they are justified in assuming that, if they wish it, these bills will be renewed, or advances will be made to them by their bankers, unless some very exceptional circumstances should occur. The credit of a solvent firm may perhaps be partly based upon the possession of property, and in ordinary times there is no difficulty whatever in immediately obtaining money upon this property to almost the full extent of its value. However, in the general course of commerce a merchant is seldom required to settle any of his transac- The Influence of Gy^edit on Prices. 461 tions by money, for he both pays and receives bills in almost all his transactions. But, in a commercial panic, there is a complete collapse of credit ; bills which were renewed before will not be renewed now unless some ruinous premium is paid, amounting perhaps to ten, twelve, or fifteen per cent. A general feeling of distrust and insecurity is prevalent throughout the commercial world, and consequently no one will, if he can avoid it, accept anything but money in payment of the debts that are due to him. All the usual sources of accommodation are closed. Banks can no longer afford to make advances, for the pressure upon them is particularly severe, since their customers hastily withdraw their money which may have been left on deposit. During a commercial panic there is a dearth of the legal currency of the realm ; in fact, this must be so ; because when credit collapses, payments have to be made in mone}^ which were never made in money before ; consequently a largely increased supply of money is temporarily required, and if it is not forthcoming, money must obtain a scarcity value, just in the same way as the value of any other commodity would be affected if the demand for it were suddenly and largely increased. None of the ordinary substitutes for money, such as bills of exchange, will suffice to relieve this scarcity, because these substitutes are only instruments of credit, and the severity of the panic is due to a thorough collapse of credit. But Bank of England notes, if allowed to be issued, will afford relief, because as long as these notes are payable on demand, people are as willing to accept them as the current coin of the realm. Now it is very remarkable that, on the three occasions when the Bank Act was suspended, relief was afforded on two occasions without the Bank issuing any additional notes. In 1857 the additional issue of notes did not exceed 1,000,000Z. sterling ; in a few days the majority of these notes were returned to the Bank, and the circulation was again in its normal condition. The relief may, therefore, be really regarded as a sentimental remedy. When the Bank Act was suspended, people thought that there would no longer be a dearth of money ; they were, therefore, not so desirous to receive every payment in money. Credit BOOK III. CH. XI. The re- lief wan afforded ivith re- markable ease. 462 Manual of Political Economy. BOOK HI. CH. XI. In the or- dinary condition of trade the Bank Act in in- operative. The ordi- nary bank- note circu- lation is not affect- ed by the Bank Charter Act. Prejudi- cial effects of the Act. was thus again gradually given as before, and the Bank was consequently not obliged permanently to increase its issue of notes, since the cause no longer existed which had so stimulated the demand for money that it obtained a scarcity value. When trade is in its ordinary condition, we believe that the amount of the Bank of England note circulation would be the same, whether the Bank Act existed or not. As long as bank-notes are convertible into coin upon demand, the amount of bank-notes which are kept in circulation is determined by exactly the same causes as those which regulate the amount of the copper and silver coinage. Unless something new should occur, such as a change in the mode of conducting business, it would be impossible to keep in circulation double the amount of our present bronze coinage. Bankers could not induce their customers to take pence instead of silver ; when a tradesman draws from his bank the wages to pay his workmen, he takes just as much gold, silver, and bronze money as he believes he shall require ; the pence he only uses to pay odd sums, for he would never think of burdening one of his workmen with a number of cum- brous pence, instead of paying him the amount in silver. Similar considerations apply to bank-notes ; for certain purposes they are extremely convenient. If a person who is travelling takes a considerable sum of money about with him, bank-notes are particularly useful ; they occupy so much less space, and are so much lighter than gold. But the repeal of the Bank Act would be as powerless to make an individual use bank-notes in those cases where he now employs gold, as it would be to induce a man to use pence instead of silver and gold. We therefore conceive that, in ordinary times, the amount of the bank-note circulation is entirely inde- pendent of the Bank Act ; we also think that this Act exerts no influence in the first stages of speculation. When, however, a continuance of excessive speculation produces a commercial panic, it has been shown, on the three occasions when such a panic occurred, that credit cannot be restored without a suspension of the Act. We, therefore, consider the Act to be prejudicial in its effects. It is generally practically inoperative ; it is true, that in The Influence of Credit on Prices. 463 a commercial crisis its effects are felt, but 011 such occasions its suspension has alwaj^s hitherto become necessary. Nothing can be more unfortunate than these repeated suspensions ; no one can tell from hour to hour what will be done, and yet every one is sure that, if the Act is suspended, an enormous revulsion will take place in the money market. The rate of discount in 1857 and in 1866 rapidly fell from ten to four per cent. All this uncertainty increases the excitement and distrust which are sure to be too pi-evalent in a period of financial difficulty. Inconvertible bank-notes are the only other instru- ments of credit which have not yet been noticed. In our own country, every bank-note can be immediately exchanged for coin. A private bank is obliged to give either Bank of England notes, or coin, for tlie notes which it issues ; and the Bank of England is obliged to give coin in exchange for all its notes ; our bank-note currency is therefore said to be convertible. The cur- rencies of some other countries are not in this position, and at the commencement of the present centuiy our own bank-notes were not convertible into coin. From 1797 to 1819, cash payments were suspended in this country, or, in other words, during this time the Bank of England was permitted to issue notes without being obliged to give coin in exchange for them. For some years after the Civil War, the United States afforded the most striking example of a large issue of inconvertible paper currency. The war severely tried the resources of the national exchequer ; it was consequently attempted to meet the financial pressure by an issue of Treasury notes, which were bank-notes not convertible into coin on demand. We shall presently consider some of the effects of this issue of Treasury notes, and we shall trace its influence on prices.^ Before proceeding further with this subject, it is neces- sary to point out the very dift'erent consequences which follow, according as an inconvertible currency is or is not made a legal tender. If an inconvertible currency is made a legal tender, an opportunity is immediately afforded to a Government to defraud its creditors to an 1 The United States resumed specie payments on Jan. 1, 1S79. BOOK III. CH. XI. Inconver- tible hank- notes. They may or mar) not he a legal tender. 464 Manual of Political Economy. BOOK III. CH. XI. Within certain limits they need not disturb the finances of the country, unlimited extent, and the whole monetary arrangements of the country at once suffer a most disastrous disturb- ance. Great stress has already been laid upon the fact, that when a currency is convertible, the bank-note circulation cannot be forced beyond its natural limits, because, if the bank-note issue is unduly increased, the notes are sure to be almost immediately returned to the Bank, in order to be exchanged for coin. But there is no practical limit to the issue of inconvertible bank-notes, and this is especially the case if these notes are made a legal tender. A Government may pay the interest of its debts in these notes. Government contractors may also have the debts due to them discharged in these notes ; the contractors, for instance, who supplied the Federal army with stores and provisions were paid in this manner. In fact, so indefinite is the power of issuing inconvertible notes, that the American Government was enabled in a few months to float 40,000,000/. of these notes, whereas the Bank of England notes in circulation do not much exceed half this amount. Inconvertible notes will be as freely accepted as coin, if people have confidence that an inconvertible currency is only a temporary expedient, and that the Government will take scrupulous care never to permit the issue of incon- vertible notes to exceed an amount which can with certainty be ultimately redeemed. It is, therefore, possible to conceive that exceptional circumstances may occur, during which an inconvertible currency may be issued, if kept within proper limits, without disturbing the finances of the country. For instance, there can be little doubt that the American civil war created a demand for a greater amount of money to be circulated in that country; more money was in fact required, because raising a large army, and supporting it in the field, would render it necessary to make many more payments in money. If the issue of an inconvertible cvirrency in America had gone no further than to satisfy this demand for a greater sum of money to be brought into circulation, no one's confidence in the financial credit of the Government would have been shaken, and the inconvertible currency would have exerted no eflfect on prices. But the American Govern- The Influence of Credit on Prices. 465 merit far outstepped these legitimate limits. These notes, therefore, became depreciated, and the conse- quence was that they fell to a discount, or, in other words, gold advanced to a premium. In the j'ear 1869 gold in America was at a premium of about thirty-two per cent., consequently notes which represented 132/.. only exchanged for 100/. of specie. In 1876 the premium was about twelve per cent. As soon as it was resolved to return to specie payments the value of the paper currency became equal to the value of the gold it repre- sented, and the financial position of the United States is now as high as that of any country in the world. If an inconvertible currency is made a legal tender, nominal prices may be forced up in proportion to the extent to which the currency is depreciated. Suppose, for instance, that the American Government during the civil war had contracted for a supply of rifles. A rifle manufacturer might have said, I am perfectly willing to sell my rifles at 10/. each, but if I sell them to the American Government I must obtain at least 13/., for they will pay me in their depreciated currency, and 13/. in their notes is barely equivalent in value to 10/. in gold. The nominal price of rifles in America would rise thirty per cent., in consequence of its depreciated cur- rency, and the same would be the case with every other commodity. It cannot be said that any injury or injustice is done if inconvertible bank-notes are not made a legal tender, although the issue of these notes may indicate a financial policy disastrous to a country. When these notes are not a legal tender, no one is obliged to accept them ; if an individual does take them, and afterwards discovers that the Government cannot meet its obligations, the loss which he suffers is as much his own creation as if he were to accept a bill of exchange from an insolvent trader. Such notes cannot exert the same nominal influence on prices as that just ascribed to inconvertible notes when made a legal tender. If inconvertible notes are not made a legal tender, there is no reason why prices should be estimated in them. Such notes would always serve as a barometer to measure the credit of a Govern- ment, for as confidence in a Government diminishes, 2g BOOK III. CH. XI. hut if in- creased be- yond those limits the circida- tion must he depre- ciated. If not made a legal ten- der no in- justice is done, hut the credit of the Go- vernment is destroy- ed by a large issxie of them. 466 Manual of Political Economy. BOOK in. CH. XI. these inconvertible notes would be constantly falling to a greater discount. The French Revolutionary Govern- ment of 1792 adopted the expedient of issuing incon- vertible notes in the form of assignats, and they attempted to maintain the value of these assignats by- assuring the people that they were the paper representa- tives of the confiscated landed property of France. But the value of an inconvertible note is not increased, although it is nominally issued as the representative of certain property, unless people can have an assurance that the holders of these notes will have a legal claim to the property, and that no more notes will be issued than will be equivalent in value to the property on which their security is pretended to be based. What would be the value of a mortgage on an estate, if the owner of it could create any number of mortgages, all of which should constitute an equal claim to the property ? The French people soon showed that they placed no faith in these assignats, which became so rapidly depreciated, that an assignat of 2000 francs was scarcely sufficient to purchase a cup of cofiee. CHAPTER XII. ON THE RATE OF INTEREST. 1 IN the minds of most people, every question concerning currency is so intimately connected with the rate of interest, that it will be advisable in this place to discuss the subject in a distinct chapter. It is the more neces- sary that we should take this course, because the price of many kinds of property is directly regulated by the current rate of interest. It was observed, in our remarks upon profits, that gross profits are made up of the three following components : — First, insurance against risk ; secondly, wages of superintendence ; and thirdly, interest on capital. This last component may be regarded as a remuneration for saving. The amount of the last component may be estimated by the interest which can be obtained upon capital, when invested in securities which, according to the general opinion of the community, involve no risk whatever. In our own country, this certainty against risk of loss is provided by the public funds, and therefore the interest which can be obtained on money, when invested in the Funds, always affords a measure of the current rate of interest in this country. The price of funds varies slightly from day to day, and consequently the current rate of interest must also be subject to daily fluctuations. But although the current rate of interest is liable to these constant variations, yet through a long succession of years they have been con- fined within comparatively narrow limits. [The rate of interest in English Funds was reduced in 188cS from three to two and three-quarters per cent. Looking back over the fifty years between 1854 and 1904, the lowest BOOK in. CH. XII. Rate of interest. It may he measured in England by the price of the public funds, vjhich is nearly constant, 468 Manual of Political Economy. BOOK III. CH. XII. though different from the 7-ate in other coun- tries. The rate of interest is subject to small oscilla- tions. price touched by Consols was 87^., and the highest 112^.] In the language of every-day life, the current rate of interest is said to be determined, or rather to be denoted, by the price of money. If an individual, a company, or a foreign Government, wishes to obtain money in the loan market, they are obliged to pay a certain price for the use of it, in the same way as they would be if they purchased any other commoditj-; the price which is so paid is represented hy the rate of interest which is promised by the borrowing party. Suppose the Russian Government cannot obtain a loan in our market under five per cent., whereas our own Government can at the same time borrow money at three per cent., those who lend money to our Government think that they incur no risk of loss, and therefore a remuneration of two per cent, is given for the risk which is supposed to be incurred when lending money to the Russian Govern- ment. With this remuneration for risk we are not concerned, when investigating the current rate of interest. It is evident that there is some point which may be regarded as a position of stable equilibrium about which the current rate of interest oscillates. In this country, although varying from day to day, it approximates to about two and three-quarters or three per cent. This point, therefore, about which the oscillation takes place, may be regarded as the average or normal amount of the current rate of interest. Two distinct investigations must consequently be made. In the first place, the causes must be ascertained which determine the average current rate of interest ; for the question may be natur- ally asked. Why should not the rate of interest fluctuate about two or about four per cent., instead of keeping with so much constancy to a little less than three per cent.? After having made this investigation, we shall then proceed to account for those small fluctuations in the rate of interest which are almost of daily occurrence. It would thus appear, adopting the language of the money market, and speaking of the price oi money instead of the rate of interest, that the laws which determine the price of money require the same mode ofl On the Rate of Interest. 469 exposition as those which regulate the price of every other commodity. In the chapters on Price it was explained that the price of each conmiodity was subject to constant variations, which were caused by fluctuations in the demand and supply ; but at the same time these variations always gravitate to a certain point, which is determined by the cost of producing the article, and which has been denominated by political economists the natural price. The first problem, therefore, which presents itself for solution is this. Why should the rate of interest in this country, upon the best security, be rather less than three per cent. ? why should it not be either much more or much less than this — say, for instance, five per cent., or two per cent. ? A century since, no money could be bor- rowed in this country, even by Government, at less than five per cent.; whereas, in Holland, the Government has frequently obtained loans at two per cent. The rate of interest is primarily determined by the capacity and desire the people of the country have to accumulate capital, compared with the demand for the capital which is so accumulated. Now, as previously remarked, the amount of wealth which is saved will vary cceteris paribus with the rate of interest which can be obtained. If five per cent, were the current rate instead of two and three-quarters per cent., there would be a greater induce- ment offered to every individual to save, and consequently a greater amount of capital would be saved. But on the other hand, the demand for capital varies inversely with the rate of interest ; there will be a greater demand to borrow when money can be obtained at two and three- quarters per cent., than when it is necessary to give five per cent. If, therefore, the rate of interest w^ere five per cent., there might be an amount of capital accumu- lated more than sufficient to meet the demands of those who washed to borrow ; if, how^ever, the rate of interest were only two per cent., the demands of those who wished to borrow might far exceed the amount of capital to be lent. An adjustment takes place similar to that which regulates the price of commodities, for the rate of interest must ultimately settle down to such a point as will equalise the demand to the supply ; or, in other BOOK III. CH. XII. The cur- rent rate of interest depends upon the accuniula- tion of capital and its re- lation to the de- mands of horroivers. 470 Manual of Political Economy. BOOK III. CH. XII. Explana- tion of the difference between rates of in- terest in different countries. In A ustra- lia it is high he- cause pro- fits are high. words, the amount of capital accumulated must satisfy the demands of those who wish to borrow. The principle just enunciated affords an explanation of the various rates of interest which prevail in different countries. The Dutch are more frugal in their habits and less expensive in their mode of living than we are. A less powerful inducement will, therefore, make them abstain from spending, and consequently two per cent, interest on capital may exert the same influence in causing the Dutch to accumulate as would be exerted upon the English by an interest on capital of nearly three per cent. It therefore appears that the amount of capital accumulated, or, in other words, the current rate of interest which prevails through an average of years, partly depends on national character. In countries where the Government is unsettled and property in- secure, the rate of interest is certain to be high, because under such circumstances it would be impossible to find any very secure investment ; consequently a portion of the interest received may always be considered as an equivalent for the risk of loss incurred ; in the same way people always expect to obtain a high rate of interest from hazardous speculations. In India, a high rate of interest has always prevailed, for there property has been insecure, the people being constantly pillaged by the native rulers who tyrannised over them. In a young prosperous colony such as Australia, the rate of interest is sure to be higher than in an old thickly peopled country like our own. In this case the high rate of interest is not to be accounted for, as in India, by a want of security with regard to property. It has already been remarked, with reference to Australia, that a generally high rate of profit is sure to prevail when there is a plentiful supply of fertile land. But if the average rate of profit which can be realised in trade is high, the rate of interest must necessarily be also high. If farmers in Australia on the average obtain a profit of twenty per cent., whereas farmers in England only obtain a profit of ten per cent., an Australian farmer will pay a much higher rate of interest for capital which he might wish to borrow with a view to extending his business, than an English farmer could possibly afford to pay. P]very On the Rate of Interest. 471 circumstance therefore in a country which tends to raise the average rate of profit must also produce an increase in the rate of interest ; . on the other hand, the rate of interest will be lowered by every circumstance which tends to reduce the average rate of profit. It has been shown in a previous chapter^ that the average rate of profit rises or falls as the cost of labour is increased or decreased ; it has been also explained that the cost of labour is less or greater according as food is cheaper or dearer ; hence, a bountiful supply of cheap food, whether imported from other countries, or obtained from our own soil by agricultural improvements, exerts a direct influence to raise the average rate of profit, and consequently to increase the average rate of interest. But in a country like our own, the rapid increase of population tends to make food become more expensive, and therefore the question, whether the general rate of profit, and consequently the average rate of interest, will decline as population advances, must be determined by considering whether agricultural improvements and foreign importations of food will suffice to meet the demands of a larger population without increasing the expense of obtaining food. The price of many kinds of property directly depends upon the average rate of interest. Suppose from any circumstance, such as the cheapening of food, or from the opening up of new and eligible investments for capital, that the rate of interest should rise throughout England, say from three to four per cent.; a correspond- ing decline must take place in the price of all such securities as the funds, railway debentures, and other investments, the interest upon which is fixed. The price of railway, mining, and other shares, would also decline ; for the price of these shares is now so regulated by the general competition in the money market, that the divi- dends paid upon these shares must be sufficient, not only to return the interests given by investments which are perfectly secure, but, in addition to this, to provide an adequate equivalent for the risk incurred. The price therefore of such shares must decline, if the rate of interest increases. The price of land would also be 1 Chap. V. Book 11. BOOK III. CH. XII. It \oill he ajfected by the cost of obtaining food. The pi'ice of property often de- pends upon the current rate of in- terest. 472 Manual of Political Economy. BOOK III. CH. XII. The, price of land will gene- rally fall a.s the rate of interest rises. of as affected by either a rise or fall in the general rate interest. In our own country, land is considered secure an investment as Consols. There are many advantages associated with the ownership of land which are not enjoyed by a fund-holder ; the possession of land gives social position and political influence, and also affords an opportunity for enjoying the pleasures of a country life. Money invested in land does not return so large an interest as if it were invested in the Funds, for the advantages just enumerated are considered to afford a compensation for the smaller interest received. If, therefore, the general rate of interest should rise, the price of Consols would decline, and the price of land would also decline, because land would be expected to pay a higher rate of interest than before. When it is said that the price of land tends to decline with a rise in the rate of interest, it must not be supposed that land necessarily diminishes in value as the rate of interest advances. The particular influence which is exerted on the price of land by a rise in the rate of interest may be understood from the following simple example : — Let it be supposed that money invested in land ought to return the same interest as money invested in the Funds ; and this interest may for convenience of illustration be supposed to be three per cent. A landed estate, therefore, the net income from which was 3000^. a year, would sell for 100,000^. But the same estate, if the net annual returns from it continued to be 3000^., would only sell for 60,000Z. if the rate of interest should advance from three to five per cent., and if people still expected to obtain the current rate of interest from money invested in land. Upon this hypothesis the price of this estate and all other landed property would decline forty per cent, if the rate of interest advanced from three to five per cent. It must, however, be borne in mind, that the causes which affect the average current rate of interest may also affect the returns to landed property, or, in other words, the rent of land. The con- clusion that the price of landed property would decline forty per cent, if the rate of interest advances from three to five per cent, is based upon the assumption that the rent of land remains unchanged: the current rate of On the Rate of Interest. 473 interest, in fact, simply determines the number of years' purchase which land will realise. It may, however, be remarked, that most of the circumstances which produce a rise in the rate of interest will usually decrease the rent of land ; thus, the rate of interest is raised by a diminution in the cost of labour ; cheap food decreases the cost of labour, but when food is cheap, agricultural produce is also cheap, and farmers cannot pay so high a rent for the use of land. Again, if the rise in the rate ^ of interest is not accompanied by any change in the price of agricultural produce, the farmer's profits will be the same as they were before ; he will not, however, be satisfied with the same profits, because the average rate of profit throughout the country will rise if the rate of interest is increased, and his rent must consequently be reduced. It therefore appears that a rise in the rate of interest will generally reduce the price of land in two distinct ways ; in the first place, as the rate of interest advances, the number of years' purchase which land will realise diminishes ; in the second place, the causes which produce a rise in the rate of interest generally exert an influence to decrease the rent of land. A remark may here be made to meet a difiiculty which may suggest itself to some of our readers. It may be asked. How can there be, with the keen competition of capital which distinguishes this commercial age, such a difference in the current rate of interest as that between England and Holland ? It mioht be thoug-ht that Dutch- men would place the same confidence in our funds as they would in their own Government securities, and that consequently capital would be sent from Holland to be invested in our funds, instead of being employed there at a lower rate of interest. If the Dutch did this on a very large scale, there would cease to be any marked difterence in the rate of interest prevailing in the two countries. But however active the competition of labour and capital may be, however keen and desirous traders may be to realise the largest profits, and labourers to secure the highest wages, yet the people of each community, more or less, restrict the range of competition to their own country. The prospect of very slightly higher wages would tempt our more intelligent workmen from London BOOK III. CH. XII. and for two dis- tinct rea- sons. Causes tvhich tend to keep up different rates of interest in different countries. 474 Manual of Political Economy. BOOK III. CH. XII. Confidence felt by each people in their own Govern- ment. Daily flnc- ttiations in the rate of discount. Bank of England rate of dis- count. to Scotland ; but a far larger inducement must be offered to workmen in order to induce them to undertake a shorter journey : to cross the Channel and to settle in France. As long, therefore, as these feelings continue, very different rates of wages may prevail in different countries. In a similar manner, although there is no doubt that capital passes more freely than labour from one country to another, yet the people of each country naturally feel more confidence in their own Government than is felt by the people of other nations. Hence they^ may be willing to accept a smaller rate of interest from their Government than would satisfy foreign investors. It is evident, therefore, that although capital is largely invested in foreign countries, yet people so highly appreciate the advantage of having their capital invested in their own country, that very different rates of interest may prevail in two neighbouring nations. We have now remarked upon the chief causes which determine the average rate of interest which prevails in different countries ; it is now necessary to explain those temporary variations in the rate of interest which are indicated by daily fluctuations in the price of Funds, or by frequent alterations in the rate of discount. [Prior to the South African war] the price of Funds did not vary more than fourteen per cent, during many years, consequently there was not more than about three-eighths per cent, difference in the interest which the Funds paid when at their maxinmm, and when at their minimum price. But alterations in the rate of interest at different times would appear to be much greater, if they are estimated by fluctuations in the rate of discount. The rate of discount very frequently varies as much as one per cent, in the course of a week, and during a commercial crisis it has in a few weeks advanced from four to ten per cent. The rate at which the Bank of England discounts bills is termed the bank-rate of discount, and this is an indica- tion of the general rate of discount throughout the country. The Bank could of course have no power to control the rate of discount, unless it carefully followed the wants of the money market; for if the bank-rate of discount was higher than the rate at which other estab- lisliments could afford to discount bills, no bills would be On the Rate of Interest 47 S taken to the Bank to be discounted. If, on the other hand, the Bank should discount bills at lower rates than other establishments, every bill would be taken to the Bank, and the Bank would be virtually resigning a large amount of profit. The bank-rate of discount is usually fixed each Thursday, at the weekly meeting of the directors and governors, and unless something very extraordinary occurs, it is not altered during the week. The bank-rate of discount also regulates the amount of interest which can be temporarily obtained upon money ; for joint-stock banks, such as tlie London and West- minster, allow interest one per cent, less than the bank- rate of discount upon all sums which are deposited with them exceeding 500^. The interest upon deposits, for instance, would be nine per cent., when in a commercial panic the bank-rate of discount was ten per cent. It may seem extraordinary that there should not have been a greater fall in the Funds and other such securities, when bankers would allow interest at the rate of nine per pent. Why, it may be said, should any one have kept their money in Funds or railway shares, which were only paying three or four per cent., when bankers would give nine per cent, interest ? It must however be remem- bered, that everyone knows that the rate of discount would only remain for a very limited time at ten per cent. ; it would rapidly, perhaps suddenly, return to its former amount ; as the crisis subsides, the price of all securities would improve, and then those who sold their Funds or shares to enjoy a temporary high rate of interest, would be obliged to repurchase them at advanced prices. The frequent variations in the rate of discount are not due to any permanent causes, but rather depend on the amount of money floating in the loan market, compared with the amount required to support the various advances made, and the various engagements undertaken upon credit. The rate of discount would immediately rise if any event should occur which would cause an increased demand for specie. Suppose, for example, that a prospect of war with China should induce our merchants to believe that we might for a time be shut out from commercial intercourse with that country ; m this case BOOK III. CH. XII. W/iy the Funds do not vary more rapidly. Rate of discount depends upon the amount of money in the market at a given time. 476 Manual of Political Economy. BOOK III. CH. XII. Summary of the re- sults ar- rived at. our merchants would at once send out large amounts of specie to China, for the purpose of purchasing tea and silk. These merchants would obtain this money by advances made to them on credit. If they had bills in their possession not yet due, they would immediately get them discounted ; hence the demand for discount, or, in other words, the demand for specie, will be temporarily increased, and the rate of discount and the rate of interest will both rise. Any circumstance which causes credit to be restricted will at once produce an advance in the rate of discount ; for a restriction of credit means, that people are more anxious to be paid in the form of money. There will, therefore, be a greater anxiety shown to convert all such instruments of credit as bills of exchange into money ; the demand for money will increase, and the rate of discount necessarily advance. If, therefore, we summarise the results of this chapter, it may be stated that the average rate of interest which prevails in any period depends upon the amount of capital existing in a country, compared with the various other circumstances which have been enumerated as affecting the economical condition of a nation. But those temporary variations in the rate of interest which are marked by almost daily fluctuations in the price of Consols, and in the rate of discount, are not determined by changes in the demand and supply of capital, in all the various forms in which it ministers to the production of wealth. These variations depend on the demand and supply of capital in one particular form, namely, money ; for it has been shown that a rise in the rate of discount is caused by an increased demand for ready money, usually resulting from a contraction of credit. CHAPTER XIII. THE TENDENCY OF PROFITS TO FALL AS A NATION ADVANCES. IT has been incidentally remarked in the last and several other chapters, that a high rate of profit is sure to prevail in young colonies which possess an abun- dant supply of fertile land. Moreover, the history of every progressive nation shows that the current rate of interest has gradually declined ; it would, therefore, seem that an advance in population and wealth is sure to be accompanied by a fall in the general rate of profit. The explanation of the different rates of profit which prevail in the various stages of a nation's progress, suggests questions of as much practical and scientific interest as any that are discussed in political economy. It is somewhat singular, too, that these particular ques- tions have perplexed many of the most eminent writers on this science ; for instance, Adam Smith failed to give a correct solution of the problem here presented. All his remarks on the subject seem infected with the fallacy that low prices produce a reduction in the rate of profit. General high or low prices indicate nothing with regard to the average rate of profit. High prices simply show that money has a small purchasing power ; on the other hand, low prices show that money has a large purchasing power. If, from the discovery of very rich gold mines, the cost of obtaining gold should be greatly reduced, gold might then decline in value one half ; if this should be so the price of every commodity would be doubled. It would not, however, follow that such a great rise in general prices would be accompanied by even the slightest alteration in the average rate of profit. BOOK III. CH. XIII. High or low prices do not im- ply a hic/h or low rate of profit. 478 Manual of Political Economy. BOOK III. CH. XIII. The rate of profit is primarily determined by the ratio in which produce is divided. The con- nection tohich, in certain cases, exists be- tween high prices and hifjh pro- fits ex- plained. In order to prove this, let us inquire in what manner the position of a manufacturer would be affected by such a change in the value of gold as that just supposed. If general prices were doubled, the manufacturer would be enabled to obtain double the price for his goods; but then it must not be forgotten, that the money cost of producing these goods would also be doubled, for he would be obliged to pay double the price for his machinery, and for the raw material. His labourers' wages must also be doubled, because now bl. would only have the same power of purchasing commodities as 50s. had before. It is therefore manifest, that a general rise or fall in prices is solely caused by an alteration in the value of the precious metals, and, consequently, can have no effect in determining the average rate of profit. In order that there should be no obscurity upon this subject, let us again impress upon our readers, that the rate of profit is primarily determined by the ratio in which any wealth which is produced is distributed between the capitalists and the labourers, who have contributed to its production. Unless, therefore, the amount of the wealth itself is increased, the share allotted to the capitalists can only be augmented by diminishing the share appropriated to the labourers. If, for instance, the employer's share is one -third, the labourers' share will be two-thirds, and if the em- ployer's profits should be increased, and his share should become one-half, the labourers' wages must be diminished, for their share would be one-half instead of two-thirds. This proposition, thougli apparently so simple, is funda- mental, and cannot be too carefully borne in mind by the reader. Adam Smith was probably induced to suppose that loM^ profits were produced by low prices, by misinterpret- ing certain phenomena of frequent occurrence. When any particular branch of industry is extremely pros- perous, the prices prevailing in it rapidly advance and an exceptionally high rate of profit prevails. On the other hand, when any particular branch of trade is depressed, prices decline and profits are reduced. The connection which thus appears to exist in certain cases between high or low prices and high or low profits can The Tendency of Profits to fall as a Nation advances. 479 be readily explained. Activity of trade is due to an augmentation in the demand for any particular com- modity ; on the other hand, an industry becomes depressed when the supply of the commodities produced exceeds the demand for them. In the first place, let it be assumed that a new market is suddenly opened for some kind of manufactures, such, for instance, as woollen cloth. An increased quantity of cloth cannot perhaps be at once produced to meet this new demand ; those who are anxious to purchase cloth compete with each other for its possession ; the price of cloth consequently rises and the manufacturer's profits are increased. This advance in profits can only be temporary, for the excep- tionally high profits will attract capital to the trade. The supply of commodities will be increased, and tlius the new demand will become satisfied. Prices will decline and the profit realised in the branch of industry will be gradually restored to the natural rate. In order to investigate the opposite case, let it be assumed that there is a sudden falling-ofF in the demand for cotton goods. The supply will, consequently, for a time, exceed the demand. The competition of those who are anxious to sell will reduce prices, and profits will decline. People are naturally anxious to contract their business if it ceases to be remunerative. The manufac- ture of cotton goods will be gradually contracted. The supply will be diminished ; prices will again rise, and profits will be restored to their natural rate. It is, therefore, evident that the prevalence of high or low profits in some particular branch of trade simply indicates that, for a time, either an exceptionally high or an exceptionally low rate of profit is realised. But a rise or a fall in general prices is solely due to an alteration in the value, or, in other words, in the purchasing power of gold, and denotes nothing whatever with regard to the average rate of profit. It has already been found convenient to employ the expression, ' the eftective desire to accumulate wealth.' This effective desire is sure to increase with the social progress of a nation. The less civilised people are, the less care will they have for the future ; the more prudent people are, the more desirous will they be to save wealth. BOOK III. CH. XIII. The effec- tive desire to accumu- late ivealth increases as a coun- try pro- gresses. 480 Manual of Political Economy. BOOK III. CH. XIII. Connec- tion be- tween the amount of wealth saved and the rate of profit. and thus accumulate capital. It is only the most back- ward tribes who do not make some pro\dsion for the future, and there is no doubt that a great amount of wealth would be saved, even if no profit could be obtained on capital. People would set aside something, in order either to make a provision for children, or to be prepared against old age, and such casualties as illness. But the great bulk of the capital of the country is saved for the purpose of obtaining a profit upon its investment. It, therefore, follows th^^t the amount of profit which is thus obtained primarily determines the amount of capital accumulated. It is, however, impossible to tell the exact ratio in which the amount of capital accumulated would increase or decrease with a rise or fall in the average rate of profit ; all that can be said is this, that the wealth saved will be greatly diminished, if the current rate of interest on the best security should fall from three to one per cent. On the other hand, tlie accumulation of capital will be most powerfully stimulated, if new and eligible investments for capital sliould be opened up. It must, however, not be concluded, that if at some future day our Government should be able to borrow money at one per cent., there would then be less capital accumulated than now. The reverse would assuredly be the case, because such a fall in the rate of interest would prove that the effective desire of the people to accumulate wealth had been much increased ; in fact, their prudence would have become so great, that then one per cent, interest would offer the same inducement to save as three per cent, does now. It would, therefore, appear that the amount of wealth which is saved in a country at any particular time is partly the cause and partly the effect of the average rate of profit, for the greater the amount of the capital which is accumulated, the less, cceteris paribus, will be the average rate of profit ; whereas, on the other hand, the less the average rate of profit, the smaller, coiteris paribus, will be the amount of capital accumulated. An adjustment takes place between these different influences; for it is evident, in the first place, that a certain average rate of profit results from a particular amount of accumulation, and, secondly, the amount which I The Teyidency of Profits to fall as a Nation advances. 481 is accumulated determines the average rate of profit. In each stage, therefore, of a nation's social and economical condition there must prevail a certain average rate of profit, this rate being adapted to the particular amount of capital which will be accumulated by the prospect of being able to obtain the rate of profit which is supposed to prevail. We are now in a position to investigate the general tendency of profits to rise or fall as a nation advances ; for this can be conveniently donp by con- sidering the principal circumstances which accompany a nation's economical progress, and by tracing the effect of these circumstances upon the average rate of profit. When a nation is advancing, capital and population are sure both to increase. If the population increases faster than the circulating capital of a country, there will be a smaller proportionate amount to distribute amongst the labourers, and their wages must inevitably decline. If this decline in wages is not accompanied by any diminu- tion in the industrial efficiency of the labourer, a smaller sum of money will be paid for the same amount of labour, and it would, therefore, appear that profits must consequently be increased. If, on the other hand, the circulating capital increases faster than the population, wages must advance, and the profits of capital will be diminished. It might, therefore, seem that an increase of population tends to augment the rate of profit, and yet such a conclusion is apparently contradicted by experience ; for in young colonies, whose fertile land is only partly occupied, a high average rate of profit always prevails; moreover, it may be observed tliat profits decline as a country becomes more thickly peopled. All the phenomena just described may be very simply explained. It has already been frequently affirmed that, in the absence of any counteracting circumstances, food requires more labour and capital to produce it, and therefore becomes more expensive, as the wants of an increasing population render it necessary to resort to less productive land. If food could be obtained in indefinitely large quantities without any increased cost, every advance in the population of the country would exert a direct influence to raise the average rate of profit. In every 2h BOOK III. CH. XIII. When a cormtry is progress- ing capi- tal and population both in- crease. Food con- stantly re- quires more la- hour to produce it as a coun- try pro- gresses, 482 Manual of Political Economy. BOOK III. CH. XIII. and tJms the cosf of labour in- creases. Hence two caii-ses comlnne to lower pro- ft, : increased cost of la- bour, and increased savinrj. old country the remuneration received by the worst-paid labourers may be regarded as the minimum wages, or, in other words, the least wages which will suffice to support the labourer. As an example of this, our own agricultural labourers may be cited, for everyone who is acquainted with their condition must know that their wages could not be reduced, without depriving them of many of the first necessaries of life ; such a deprivation would diminish their manual strength, and decrease the efficiency of their labour. The wages of the agricultural labourer in this country are barely sufficient at the present time to provide him and his family with the cheapest clothing, and the simplest food. Let anyone take the average earnings of an agricultural labourer in the west of England, and let an estimate be formed of this labourer's expenditure, and it will be found that it is impossible for an agricultural labourer to eat meat more than once a week ; he is moreover powerless to make any provision against old age or sickness. Let us inquire what will take place if population increases, and food becomes more expensive. It may be assumed, in order to illustrate the argument, that bread rises in price fifty per cent.; such an assumption is by no means imaginary, for within the last few years there has been in many districts in England a greater rise than this in the price of meat and dairy produce. Labourers would endure much suffering if they obtained less bread than they are now accustomed to consume ; if, therefore, bread rose in price fifty per cent., it would be impossible for agricultural labourers to live on their present wages; their wages, therefore, must be raised, or, in other words, the cost of labour increases, if no counteracting circum- stances intervene to prevent food becoming more expensive, as population advances. Hence, in a country like England, which is advancing in population and wealth, two agencies are constantly exerting an influence to reduce profits. In the first place, an increased population tends to make food more expensive, but if food becomes more expensive, the cost of labour is augmented, and this cannot happen without diminishing profits. In the second place, as a nation advances in wealth, the people The Tendency of Profits to fall as a Nation advances. 483 become more prudent, a smaller return on capital will induce them to save, and, consequently, a greater capital is accumulated in proportion to the profits which can be realised upon it. There can, however, be no doubt that many circumstances come into operation which act more or less powerfully to retard this fall in profits. Thus it should be borne in mind, that only a portion of the capital accumulated in England is invested in the country itself, either as circulating or as fixed capital. Our capital is freelj^ invested in other countries ; we subscribe to foreign loans, and by our aid many most important railways and other works have been carried out in every quarter of the world. As an example it may be stated that of the 15,000,000?. which was spent in making the Grand Trunk Railway in Canada, nearly the entire amount was subscribed by English shareholders. Every year the field for the investment of capital in foreign countries is raj^idly extending, and it will continue to extend, as the barriers, of prejudice are broken down between different nations, and as security of property is spread over a wider area. Now all this capital which is accumulated, but is not invested, in our own country, produces no efiect, either upon the average rate of profit, or upon the wages paid to our labourers ; and as the field for the investment in foreign countries may become of almost boundless extent, it is quite possible to conceive that capital may continue to increase, even witli greater rapidity than it has during the past few j^ears, without causing any fall in the rate of profit. If, however, this outlet for our savings should be at any time partially closed, a great stream of capital would be turned back upon England : the circulating capital of the country would consequently be greatly augmented ; the wages paid to the labourers, and therefore the cost of their labour, would be greatly increased, and the rate of profit would rapidl}^ decline. Observations have now been made upon the extent to which a fall in the rate of profit resulting from a con- stantly increasing accumulation of capital may be counteracted by the investment of capital in foreign countries. We will next speak of the princij)al circum- stances which counteract the decline in profits, which BOOK III. OH. XIII. The effect of these causes is retarded by the ex- 2)ortation of capital. The de- cline of profits is also check- ed by agri- cidturcd improve- ments. 484 Manual of Political Economy. wall be sure to accompany an increase in population, unless supplies of cheap food can be obtained. Agri- cultural improvements, and the importation of food from countries less thickly peopled than our own, are the chief circumstances which enable additional supplies of food to be obtained v/ithout an increase in its cost. In the first place, with regard to agricultural improve- ments, there can be no doubt that superior methods of culture have largely augmented the average yield from each acre of land in this country, and this larger produce has been obtained without a greater proportionate expenditure of labour and capital. Two very promi- nent improvements need only be mentioned. It is well known that much comparatively unproductive land has been made to produce large crops of corn, by the culti- vation of the turnip, and by the use of artificial manures. Improved implements are every year introducing greater efficiency and economy into agriculture. If we were compelled to obtain from our own soil all the additional food which an increasing population would require, food would greatly rise in price, the cost of labour would be increased, and profits would decline. Those political economists who consider that a decline in the rate of profit must of necessity accompany an advance in population and wealth, frequently affirm that material progress has very definite limits, and that the progress of each nation must, necessarily, sooner or later cease. It is, for instance, maintained that if the rate of profit continues to decline, the returns to the capital will, after a time, be so small, that no adequate inducement will be held out for increased accumulation. Under these circumstances, capital will not be further increased, the rate of profit will have reached its lowest limit, and the nation then will arrive at what is called a stationary state. A stationary state is of course a possible con- tingency, and there can be no doubt that England might soon be in this condition if those causes which have been enumerated, as tending to keep up the rate of profit, ceased to act for any length of time. But, with regard to almost all countries, the stationary state was more likely to be attained fifty years since than it is now. During the last century, the Dutch frequently lent The Tendency of Profits to fall as a Nation advances. 485 money to their Government at two per cent. ; this in- dicates a lower rate of profit than has prevailed in any European country for many 3'ears past. Holland in the 18th century no doubt very closely approached the stationary state. But the general condition of Europe was then so disturbed, that comparatively little capital was sent from one country to another for the purpose of being invested ; hence, nearly all the capital which was accumulated by the thrifty Dutch had to be invested in their own country, and the result of this was that the rate of profit which prevailed was so low, that no sufficient inducement was ofiered to increase the amount of capital accumulated. There are many other modes in which capital is ab- sorbed, besides those which we have enumerated ; for instance, the conversion of circulating into fixed capital tends to keep up the average rate of profit. During the first years of the great railway extension in this country, the average rate of interest undoubtedly rose ; there was a great demand for capital, and the tempting speculations which presented themselves induced many to withdraw capital from business, and embark it in railway under- takings. ' But when, by the conversion of circulating into fixed capital, the wages fund of tlie country is diminished, the cost of labour is decreased, and an influence is thus exerted to raise the rate of profit. Such diminution in the wages fund is by no means hypothetical ; the wages of labourers have often been for a time decreased by the sudden conversion of a large amount of wealtli into fixed capital, in the form of railways, machinery, &c. The injury to the labourers, it is true, is only temporary, because machinery and useful public works greatly augment the productive resources of the country, and create a larger fund, from which future capital may be accumulated. Some people have considered that the average rate of profit is kept up, or is prevented from falling, by the destruction of capital, which always takes place in those commercial panics which seem to recur with periodic regularity. The phenomena which accompany these crises give colour to this opinion. In conseipience of the increasing accumulation of capital, the money market is BOOK III. CH. XIII. The con- rersion of circulathm intojixed capital tends to keep up the rate of profit. A commer- cial crisis may tend to keep it up hy the de- struction of capital. 486 Manual of Political Economy. at length said to become glutted with capital seeking for investment; loans are freely offered, and the rate of interest declines. In such a state of things any undertaking which offers a prospect of unusual gain is eagerly supported; a speculative feeling is thus engendered, the excitement quickly blinds men's judgment, all kinds of fictitious schemes are brought forward, and capital is recklessly subscribed to carry out unprofitable under- takings. Directly the mania begins to subside the losses of individuals become revealed, and it is discovered that immense sums of capital have been wasted ; the surplus capital which was floating in the money market has been destroyed, capital becomes scarcer and the rate of interest rises. Hence, no doubt, a commercial crisis produces a considerable effect on the rate of profit by absorbing, or rather by destroying capital ; but it is to be doubted whether the influence thus exerted is so powerful as that which is produced by those other circumstances already described as sustaining the average rate of profit. ' The general remarks which have been made in this chapter may be ilkistrated by explaining the high average rate of profit which prevails in a young colony such as Australia. The material condition of a country in the position of Australia is characterised by an abundance of fertile land and by a comparative scarcity of capital and labour. The economy, therefore, of an old country like England affords a direct contrast; for in England fertile land is scarce, and labour and capital are both abundant. When fertile land is plentiful, food is sure to be cheap, and this will be especially true with regard to those kinds of food which require little labour for their production. For instance, immense flocks of sheep have been fed on the pastures of Australia entirely for the sake of their tallow and wool. The meat of these sheep was of no value whatever, until the gold discoveries brought a sudden accession of population ; for previously there were only enough people in Australia to consume a small portion of the mutton that was annually killed. Wheat, however, was not relatively so cheap as mutton, because the cultivation of wheat requires considerable capital and labour. Labour was, however, scarce, and the implements of agriculture were expensive. Although The Tendency of Profits to fall as a Nation advances. 487 labour and capital may be both scarce in such a country as Australia, yet it is evident that the returns of this labour and capital, if applied to cultivate the soil, must be extremely great when it is remembered that in such a country even the most fertile land can be obtained at a merely nominal price. The industry of a young colony is sure to be almost entirely confined to agriculture, for the great abundance of fertile land at her command gives her superior advantages in comparison with older countries. On the other hand, it is impossible for a young colony to compete successfully in manufacturing industry ; she does not possess the appliances which manufacturers require, the machinery would have to be imported, and labour would be more expensive. Our operatives would not, of course, emigrate to Australia unless they expected to obtain higher wages. The same considerations apply in a somewhat modified degree to mining industry ; the gold mining of Australia is an exception to this, because comparatively few countries produce gold, and therefore Australia has little competition. But in the case of such minerals as copper, which are produced both in England and Australia, it is impossible for Australian copper mines to compete against English copper mines, unless the former are far richer than the latter. Labour and machinery are so expensive in Australia, and the cost of bringing the ore from the mine to the coast is so great, that many a copper mine which is unprofitable in Australia would be a source of enormous wealth if it could be transferred to England. We may, therefore, conclude that the industry of a colony can be most advantageously employed in agricul- ture and in supplying those wants of the people for which provision cannot be made by importing commodities from other countries. For besides agricultural labourers, there must, in a young colony, be bricklayers and carpenters to build houses, and all the various retail dealers and others connected with them who minister to the daily domestic requirements of life. Since, therefore, agricul- ture is the staple industry of a colony, it is evident that the average rate of profit which prevails will be regulated by the profit which can be obtained upon agriculture. BOOK III. CH. XIII. Becttioii why in a young country atjriful- ture and viinmg are moi-e flour- ishing than manufac- tures. The rate of profit tohich pre- vails there will he regulated by the rate of profit obtained by agricid- ture. 488 Manual of Political Economy. Wlien there is abundance of fertile land, everyone can easily become a farmer ; hence capital would not long- continue to be employed in house building, or in retail trades, if a larger profit could be realised by investing it in agriculture. In order, therefore, to explain the high rate of profit which prevails in a colony, it will be necessary to show that the profits on agriculture are larger in a colony than in a thickly peopled country. Where fertile land is so abundant, it is of course only necessary to cultivate the most productive soils. Con- sequently labour and capital, when applied to agriculture, will be far more productive in a colony than in a country like our own. It may perhaps, however, be said, that we have land far more fertile than any which is tilled in Australia. This, no doubt, is true, but the English farmer has to pay a heavy rent for the use of land, and he does not on the average realise greater profits than the farmer who cultivates worse land, but who pays a smaller rent. England's population is so great, that there is a demand for all the produce which can be raised from her cultivated soil ; high rents therefore must prevail. These rents are an essential part of an English farmer's expense ; he pays his rent for the use of an efiicient agent of pro- duction, just in the same way as if he were compelled to purchase a useful machine. The farmer in a colony has, speaking comparatively, to pay no rent ; he is saved this heavy expense, and there consequently remains a greater amount of produce to be distributed between the farmer and the labourer. Wages and profits are, for these reasons, almost invariably higher in a colony where fertile land is abundant, than in an older country where the growth of population has made land scarce. CHAPTER XIV. OF OVER-PRODUCTION OR EXCESS OF SUPPLY. ALL political economists who preceded James Mill and Ricardo, and many who have succeeded tliem, seem to anticipate a general over-production of com- modities as a possible or even probable contingency. Dr. Chalmers and Mr. Malthus went so far as to impress upon all, the duty of exercising a moral restraint with regard to the accumulation of capital ; for if this were not done, they feared that wealth would only be created to be wasted, and that it would be impossible to consume a great portion of the commodities produced. Sismondi was actually opposed to the use of machinery, because he believed that if the production of wealth was so much facilitated there would inevitably ensue a general over- production of all commodities. The fundamental error involved in these opinions would probably never have been supported by the three great writers just mentioned, if there had not been some ambiguity in the meaning they attached to the expression ' over-production.' Let us therefore commence by defining what is meant by this word. Now, over- production may exist in two very different ways : in the first place, a greater quantity of commodities may be produced than can be sold at remunerative prices. In this case there may be no deficiency in the power of consumption. Everything which is produced can be readily consumed, but those wdio have a demand are not willing to pay such a price as will remunerate those who produce the commodities. It is difiicult, from the language employed, to determine whether this is the kind of over-production which is intended by Chalmers, Malthus BOOK III. CH. XTV. Supposed danger- of over-pro- duction. Over-pro- duction may have two mean- imjs. 490 Manual of Political Economy. BOOK III. CH. XIV. The evils ivkich may resultfrom over-pro- duction in the sense of low ■profits are ad- d2iced to prove the possibility of a pro- duction of more wealth than can he con- sumed. and Sismondi. It is, perhaps, more probable that they conceived a second kind of over-production, differing very essentially from this. It is possible, as an hypothesis, to suppose that a greater quantity of all commodities may be produced than people really want. In the course of this chapter it will be proved that such an over-production has never taken place in the past and is never likely to occur in the future. With regard to the first kind of over-production, it has been stated, when considering the laws of value and price, that some particular commodity is frequently produced in excess ; the price at which it sells will then cease to be remunerative, and the profits of those who produce the commodity are consequently reduced. These low profits discourage the production of a particular commodity ; in this way its supply is diminished, the demand is once more equalised to the supply, and prices are again made remunerative to the producer. When these low profits temporarily prevail in any branch of industry in conse- quence of over-production, it is said that the particular trade is dull or depressed. It is quite possible that such dullness and depression caused in the manner above de- scribed may exist in every trade ; if such a phenomenon should really occur, it would no doubt have been con- sidered by the above-mentioned writers to denote general over-production. In one sense, it would be over-produc- tion ; but the word has a double meaning, and by the aid of this ambiguity the most mischievous economic fallacies are speciously propounded and readily assented to. The method adopted is the following :^ — Certain phenomena are described, and are admitted to prove the existence of general over-production in one of its significations. When, therefore, the possibility of over-production is proved, numerous events are shown to result from over-production in its other signification, and therefore the possibility that these events may really occur is regarded as proved, because the existence of over-production in its other sense has been admitted. This method of reasoning affords a basis for an indefinite number of fallacies. If it be admitted that there is over-production, so far as it is represented by low profits, yet it can be proved that there never has been, and there never will be, over-production Of Over- Production or Excess of Supply. 491 in the sense that more commodities are produced than people will consume. Let us consider the case of a market being over-supplied with some particula.r commodity. If the American civil war had not occurred, the cotton manufacture of Lanca- shire would, no doubt, quickly have presented an example of what is commonly called over-production. During the years 1859 and 1860, the Eastern demand for cotton goods was extremely active ; prices ruled high, and unusually large profits were realised. Every manufacturer was consequently stimulated to produce on as large a scale as he possibly could. All the existing mills were worked to their utmost, and new mills were rapidly erected. The extra demand which caused these large profits would no doubt soon have been fully supplied. Manufacturers, if we may judge from past experience, would not have sufii- ciently diminished their production as the additional demand for cotton goods became gradually satisfied ; the market, therefore, would almost certainly have become over-supplied and the unusual activity which had pre- vailed in this branch of industry would infallibly have been succeeded by low profits and general dullness of trade. In fact, activity and depression always seem to succeed each other in regular cycles. Although the mai'ket may be thus over-supplied with cotton goods, no one can suppose that these cotton goods will be wasted ; there would be no difficulty whatever in selling the goods if they were only offered at a sufficiently low price. These low prices may be very disastrous to the manufacturer, but what he loses is gained, or is saved, by those who purchase cotton goods ; there can therefore be no waste — all that happens is simply that the producers of certain commodities miscalculate the extent of the demand when these commodities are offered at a particular price. If the demand is over-estimated, the producers will realise smaller profits than they anticipated. But such an excess of supply can only be temporary, because low profits will check production. The demand for a com- modity is determined by its price ; raise the price of a commodity, and the quantity of that commodity which will be purchased is at once diminished. But, on the other hand, by sufficiently lowering the price, the quantity BOOK HI. CH. XIV. Case of over-pro- duction of a single commo- dity, such as cotton.. The cotton ijoods would not be wasti'd, hut the profits of manufac- turers wotdd he temporari- ly lowered. 492 Manual of Political Economy. BOOK III. CH. XIV. Low pro- fits may temjJt to a misappli- cation of capital, hut not to a stiperjlu- ous pro- duction of loecdth. of a commodity which will be purchased may be in- definitely increased. There is a certain average rate of profit which prevails in a country at any particular time. Unless manufacturers and traders hope, on the average of years, to realise a certain rate of profit on their capital, they will not continue their business : they would rather withdraw their capital as speedily as possible, and invest it in other undertakings. A constant tendency is therefore in operation which so regulates the price of commodities that the ordinary rate of profit is, on the average of years, given to each class of producers. If the price of any com- modity is more than sufficient to do this, the production of the commodity is stimulated, the supply is increased, and the price of the connnodity must fall in order to make the demand meet the increased supply. But whenever the price of any commodity falls so low as to cause a particular branch of industry to be comparatively unre- munerative, there exists what is commonly called over- production ; such over-production can only be temporary, for the low prices will exert an influence to check the supply of the commodity, and the price of the commodity will soon be raised, so that the producers of it again receive the ordinary rate of profit. It, therefore, appears that however great may be the accumulation of capital, commodities are sure not to be produced so as to be wasted ; there will be always persons ready to consume the commodities which are produced, if the price at which they are sold is sufficiently low. Con- sequently the accumulation of capital, as was pointed out in the last chapter, may reduce profits, but never causes a superfluous production of wealth. Capital may be mis- applied and wasted, and when a very low rate of profit prevails, there is always a great temptation, as is proved by every commercial crisis, to squander capital upon useless and unproductive schemes. People become dis- satisfied with the small profits of legitimate trade, and therefore recklessly embark in any scheme that affords a prospect of large gain. But such a misapplication of capital, resulting in a waste of wealth, is a very different thing from wealth being produced in such superfluity that it must be wasted for want of consumers. It is true that the investment of capital in unproductive schemes is ofte: 1 Of Over-Production or Excess of Supply. 493 prompted by the prevalence of a low rate of profit. The capital, however, need not be so invested, for it could still be employed productively ; if it were so employed, the supply of commodities would be farther increased, and profits would again decline. This decline in profits would be disadvantageous to the producers ; the consumers of the commodities would be benefited, and the wealth of the nation would be increased to the full extent of this additional production. When discussing the subject of capital the most ex- treme case of over-production was assumed : for it was supposed that capital went on accumulating so fast, and the production of commodities was so largely increased, that at length the labourers were able to obtain every- thing which they required. It may be said that if in such a state of things capitalists should continue to accumulate, and labourers continue to labour, additional wealth would be produced, which no one would have any desire to consume ; but such a supposition tacitly assumes that men have an uncontrollable desire to labour, and that in fact they labour for labour's sake. This is entirely con- trary to the experience of human nature : men labour in order to satisfy their wants, and to provide themselves with the enjoyments of life. Labourers would gladly shorten their hours of toil, if, in consequence of an increased accumulation of capital, the remuneration of labour should ever be so largely augmented that their wages should become sufficient to supply them witli all the necessaries and enjoyments of life. It, therefore, appears that, upon the most extreme hypothesis, there cannot be over-production, in the sense conceived by jMalthus, Chalmers, and Sismondi. The fallacies the}^ propounded on this subject were no doubt due to a misinterpretation of the phenomena connected with the low profits which prevail in a trade when there has been an over-production of some particular commodity. Mr. J. S. Mill has aptly remarked that any "difierence of opinion on the subject of over-production involves radically difierent conceptions of political economy, specially in its practical aspect. On the one view we have only to consider how a sufficient production may be combined with the best possible dis- tribution ; but on the other, there is a third thing to be BOOK III. CH. XIV. The ex- treme case of over- jwoduction assumed in the chapter on Capital is imagi- nary. 494 Manual of Political Economy. BOOK III. CH. XIV. considered — how a market can be created for produce, or how production can be limited to the capabilities of tlie market. Besides, a theory so essentially self -contradictory cannot intrude itself without carrying confusion into the very heart of the subject, and making it impossible even to conceive with any distinctness many of the more com- plicated economical workings of society. " CHAPTER XV. THE GOLD DISCOVERIES, WE intend in the present and in the following chapter to trace some of the consequences which have already been, and which are likely in the future to be, produced by the discovery about the years 1848 — 50 of gold deposits of extraordinary richness in Australia and California, and by the development within the last few years of silver mines of such productiveness that the annual yield of silver in a short time was nearly trebled. Just prior to the discoveries in Australia and California, the annual aggregate yield of gold was not more than 10,000,000/-. This amount was, however, at once trebled by the additional gold obtained from Australia and California, for during the five years between 1852 and 1857, no less than 10,000,000?. of gold was annually yielded by each of these countries. When it was observed that the annual supply of gold was thus suddenly increased threefold, many not unreasonably thought that gold would rapidly decline in value. Some even went so far as to predict that this decline would be so great that in the course of a few years gold would be not more valuable than silver. It is at the present time scarcely necessary to remark that these anticipations with regard to a rapid fall in the value of gold have not been fulfilled. Although, for reasons which will be presently stated, we incline to the opinion that there was for some years after the gold discoveries a moderate decline in the value of gold, yet within the last few years this fall has not only been arrested, but in the opinion of some high authorities the tide has turned in the opposite direction, and there has lately been a BOOK III. CH. XV. The yield of gold was suddenly trebled by the dis- coveries in Australia and Cali- fornia. 496 Manual of Political Economy. BOOK III. CH. XV. The value of the sub- stance chosen as money should not he liable to frequent fluctua- tions. considerable increase in the value of gold. Lord Goschen/ for instance, considered that in consequence of a falling-ofF in the yield of gold in Australia and California, combined with an increased demand for gold owing to the demonetisation of silver in Germany, the resumption of specie payments in the United States and in Italy, and other causes, there had been during the ten years ending in 1883 a rise in the value of gold as shown by a fall in general prices. There can, moreover, be no doubt that the recent great increase in the production of silver must, if it continues, exercise an important influence in modifying many of the effects whicli Avould result from an increase in the annual supply of gold. It is manifestly of much importance to a community that the value of the substance which is selected as its money should not be subject to great and sudden fluctuations. If the value of money varies, the terms of every monetary transaction become materially changed. If the value of money increases, those who have flxed money payments to receive become enriched, and those who have to make them suffer a corresponding loss. If money is depreciated in value, the exact reverse takes place, and the recipients of all flxed annuities, such as fundholders, mortgagees, the proprietors of debenture stocks, have a serious loss inflicted on them. The dis- advantage which arises from a variation in value of the monetary standard is not to be measured simply by the loss and inconvenience it ma}^ cause to individuals. If the substance which is chosen as money were subject to great and frequent changes in value, a most serious impediment would be thrown in the way of commercial development, for it would be hazardous to enter into any transaction which involved deferred money payments. Thus if gold were liable to vary 50 per cent, in value within a short period, a man wdio had agreed to lease a house at 100^. a year might suddenly find that the rent lie had to pay had virtually increased bOl. a year. As therefore such serious inconvenience is caused by a change in the value of money, it becomes of great importance to endeavour to ascertain whether any effect ^ ^See paper read before the Institute of Bankers on Wednesday, April 18, 1883. The Gold Discoveries. 497 was produced in depreciating the value of gold in con- sequence of the large additional supplies that were obtained for some years after the gold discoveries. It will also be important to inquire whether any effect has recently been produced in raising the value of gold, in consequence of a falling-off in its supply, accompanied by an increase in the demand produced by causes to which reference has been made. It may be thought that a comparison of general prices affords ready means of testing whether or not there has been a change in the value of gold. Thus it may be said that if we desire to know whether gold was depreciated by the gold discoveries, all that would be necessary would be to compare general prices just previous to the dis- coveries with general prices after the discoveries. In a similar way, the question whether gold has risen in value in recent years might be determined by ascertaining whether general prices are higher now than they were ten years previously. If, however, such a comparison is made it will be at once found that it does not afford so easy a means of testing the value of gold as may be in the first in.stance supposed. Thus, taking the period of twenty years which immediately succeeded the gold discoveries, it will be found that although the prices of many articles advanced, yet the price of other com- modities declined. Again, if the period between 1873 and 1883 is taken, it can be shown that although the prices of many commodities have declined, there has been a steady rise in the price of others. This want of uniformity in the movement of prices admits of an obvious explanation ; for it is evident that many causes besides a change in the value of gold are in operation to affect the prices of different commodities. Thus, ever since the gold discoveries, the adoption of free trade and improvements in the means of communication have extended the area from which it is possible to obtain supplies of cheap corn ; and consequently, although there has been a steady increase in the home demand for corn to meet the needs of a growing population, this demand has been accompanied by a more than proportionate increase in the foreign supplies, and consequently there has been a decline in the price of corn quite independently BOOK III. CH. XV. A com- parison of prices does not afford an easy means of testing fluctua- tions in the value of gold. 498 Manual of Political Economy. BOOK III. CH. XV. The riiie in general prices is estimated, by the best authori- ties, as from 10 !o 15 2Kr cent. of any change in the value of money. On the other hand, with regard to meat and dairy produce, in con- sequence of the greater diflficulty and cost of importing them, the increased demand cannot be so readily met by foreign importations; and during the entire period which has elapsed since the gold discoveries there has been an increase in the price of meat and dairy produce.^ In arriving at any conclusion with regard to an alteration in the value of money, from a comparison of general prices, it is necessary to take a careful account of the various other causes by which prices may be influenced. Thus, during the ten years 1873-1883 a very considerable effect has been produced in lowering the price of many manufactured commodities by the stimulus that w^as given to excessive production in the period about 1872-4 of exceptional trade activity. The unusually large profits which were then realised in the iron trade and in almost every other branch of manufacturing industry caused the means of production to be greatly increased. When the activity subsided, there was an augmented supply of commodities to meet a diminished demand ; consequently it was inevitable that there should be a fall in prices quite independently of the change in the value of gold. After making due allowance for the circumstances to which reference has just been made, we think it may be concluded that, taking a period of about 20 years suc- ceeding the gold discoveries, there was a depreciation in the value of gold. This conclusion is chiefly based upon the arguments contained in a series of essays on the gold question by the late Professor Cairnes," and upon an elaborate investigation by the late Prof. Jevons. Prof. Jevons compared the average prices of many hundreds of commodities after the gold discoveries, with their prices previous to 1848. He also, with the utmost care, made allowance for the influence which might have been exerted upon the price of any particular commodity by causes independent of a change in the value of gold. ^ [In tlie case of meat, this rise in price has been checked, since 1883, by the increased importation of fresli meat from abroad. See note on p. 83.] - Essaijs on Political Economy, Theoretical and Applied. By the late Prof. J. E. Cairnes. The Gold Discoveries. 499 The result of his investigations proves that there was a rise in general prices amounting to 10 or 15 per cent. It may seem that there is yet another method of investigation, which will conclusively decide the question as to whether the value of gold was, or was not, depre- ciated. Thus, it may be said that in a previous chapter of this work, the value of gold as well as of all other mineral produce was stated to be regulated by laws similar to those which determine the value of agricul- tural produce. If the value or price of agricultural produce declines, the worst land in cultivation will cease to return any profit, and will consequently be thrown out of tillage. In the same way, if the value of mineral produce declines, the profits resulting from mining industry will be diminished, and many of the least productive mines will cease to be worked. It may therefore be thought that many of the least productive gold mines must during the period referred to have been relinquished if the value of gold had been depreciated by the discoveries in Australia and California, It does not, however, appear that gold mines in other parts of the world were thus relinquished. The evidence, however, which is derived from the con- sideration just mentioned, is not as conclusive as at first sight it may appear to be. We think it necessary thus to caution our readers, because it must be borne in mind that mining industry, and especially gold mining, is far more speculative and uncertain than agriculture. A decline in the price of agricultural produce almost imme- diately afiects the rent which farmers will consent to pay. Each farmer can very approximately calculate the profit which he will be able to realise, and he will refuse to rent his farm, unless he considers that he will be able to obtain an adequate return for his labour and capital. No such precise calculation can, however, be made with regard to the profits which a mine is likely to yield. The discovery of a new lode may, in a few months, vastly increase the profits and value of a mine. Even in our own country it has frequently happened that a copper or tin mine has in a short time increased in value a hundredfold. Mining therefore resembles a lottery ; BOOK III, CH. XV. It viight be supposed that, if gold had fallen in value, mines ivould have gone out of u-oi^h. This is not conclusive, because mining jirofits are unsteady and par- take of the nature of a lottery. 50O Manual of Political Economy. BOOK III. CH. XV. They are icor/ced whe7i (he average jjrofits are extremely low. The large svjypiies of gold re- ceived have pre- vented a difiar- rangement of the finances of the country. those consequently who are encraged in mining industry do not, and cannot, accurately calculate the profits which are likely to be realised. The chance of obtaining a great prize is the real motive which prompts mining enterprise. Thus, we believe it can be shown that the profit realised on the aggregate capital invested in copper and tin mines in Cornwall has never amounted to as much as one per cent., even at the time when mining industry was at its most prosperous condition. People, however, continue freely to invest their capital in this unremunerative industry, as long as they observe that a mine here and there has been so successful that lOOZ. originally invested in it would realise an income of many hundreds a year. People in a similar way were attracted to the gold fields by the intelligence of great and success- ful * finds,' and they seldom calculate what is the average profit realised by each person employed upon a gold field. It, therefore, appears that the supply of gold may not imniediately be much afiected by a slight deprecia- tion in its value ; a continuance of the depreciation must, liowever, after a time diminish the supply. Hence a depreciation in the value of gold is spontaneously retarded, because a depreciation in value exerts a tendency to decrease the supply of gold, and a diminu- tion in the supply at the same time exerts a tendency to increase its value. The absorption of such large additional supplies of gold, without producing any greater depreciation in its value than that to which we have referred, affords con- clusive evidence of some very important results which were produced by the gold discoveries. It has already been stated that these discoveries increased the annual supply of gold more than threefold, and it is evident that tliis large augmentation in the supply must have been accompanied by a very considerable decline in value, unless there had arisen an increased demand for gold at the time when these additional supplies were forthcoming. It can be readily shown that many circum- stances combined greatly to increase the demand for gold just at the time when the discoveries of gold were made in Australia and California. It is, for instance, deserving of special remark that the great increase in The Gold Discoveries. 501 the supply of gold coincided with tlie comineiicement of a new era in the commerce of this country. About that time the Navigation Laws were repealed, and with the adoption of this measure the principles of Free Trade were applied to our entire commercial system. Our trade and industry, being thus released from the trammels of protective duties, at once showed a most extraordinary development. This commercial develop- ment was also powerfully aided by the great extension of railways which took place about that time, and by the increased application of steam as a motive power to various branches of industry. Our exports in twelve years, from 1848-60, advanced from 60,000,000/-. to 135,000,000/., and our imports exhibited a corresponding increase. This increase in trade was maintained, and in 1874 the exports amounted to 250,000,000/., and the imports to 350,000,00()/.i In 1847 we imported about 500,000,000 lbs. of cotton, and 55,000,000 lbs. of tea ; in 1856 we imported more than 1,000,000,000 lbs. of cotton, and nearly 90,000,000 lbs. of tea. [In 1905 we imported 2,203,000,000 lbs. of cotton, and in 1904, 256,000,000 lbs. of tea.] This expansion of our trade and commerce was as sudden as it was great ; for it is an instructive fact, that the trade of this country seemed to be in a stationary state for several years previous to the intro- duction of Free Trade. Our exports and imports had, since the conclusion of the war in 1815, shown a progressive increase ; but about the year 1838, until the establishment of Free Trade, they remained almost stationary. It is quite evident that such a sudden development of trade and commerce would require a larger amount of money to be brought into circulation ; for, as the wealth of the country increased, a greater number of commodities would be each year bought and sold for money, and more money would also be required because the population was more numerous. Again, more money was wanted in order to pay the wages of the labourer ; for our exports could not advance from 60,000,000/. to 250,000,000/. [and later to 407,000,000/.], without the amount paid in wages being greatly 1 [In 1905 the total imports amounted to 565,000,000^., and the total exports to 407,000,000/.] 502 Manual of Political Economy. increased. It, therefore, appears that the sudden develop- ment of our trade and commerce about the year 1850, created a demand for a greater quantity of money to be brought into circulation. If no new supplies of gold had been forthcoming, this additional demand for gold must have inevitably caused a sudden rise in its value. The extent of this rise might have been very considerable, and those consequences would have ensued which have been already described. Everyone who had a fixed money-payment to make would have found this payment greatly increased, and the real burden of the National Debt would have been augmented in exact proportion to the increase in the value of gold. The extent to which the value of gold might have risen can be best understood by reflecting on the large quantities of gold which have been poured into this country without producing a greater depreciation in its value than has actually taken place. It, therefore, may be regarded as conclusively proved that the gold discoveries were made at a most opportune time, and that they averted a very serious evil ; for, if we had been left to the old sources of supply for obtaining gold, commerce could not have expanded as it did without a large and sudden fall in general prices. Although almost the whole of the Australian gold and a very considerable portion of the gold produced in California is, in the first instance, sent to England, yet England retains only a comparatively small part of this gold for her own use. The gold is re-exported, and has no doubt been partly employed, as it has been in England, in meeting the wants of increasing trade. The extraordinary development of commerce, to which reference has just been made, has by no means been confined to England, for the last fifty years may be regarded as a period of general and unprecedented industrial progress. More money was required in order to carry on this expanding ti'ade, and consequently there was a general increase in the demand for the precious metals. It may, however, be thought that there would have been a much greater increase in the demand for silver than in the demand for gold, because at the time of the gold discoveries many more countries used silver The Gold Discoveries. 503 as a standard of value than gold. For some time after the gold discoveries of Australia and California there was little increase in the supply of silver, and conse- quently many were led to the conclusion that silver, when compared with gold, Avould rapidly advance in value. There were also other considerations which seemed to warrant the opinion that there would be a rapid rise in the value of silver. Soon after the Indian Mutiny there was a large and continuous export of silver to India. In some years the amount exported was not less than 17,000,000^. A considerable amount of this silver was sent to India in payment for the largely increased quantities of cotton which were purchased from India by England during the American civil war. About this period also loans on a great scale were raised in England for the construction of public works in India. No less a sum than 90,000,000^. was raised in England for Indian railways. A portion of this amount was expended in England in the purchase of plant and material. It has, however, been calculated that con- siderably more than half the entire amount was sent to India in the form of silver to pay the wages of those employed in making the railways, and for other pur- poses. As there was then no increase in the production of silver in any way commensurate with this large increase in the demand, it is evident that the additional silver which was required to supply this export of silver to the East, must have been to a great extent provided from the stocks of silver already existing. It has, in fact, been ascertained that great quantities of silver were taken from the currencies of France, Germany, and other continental countries, to supply this export to the East. The void thus created in the silver currency was to some extent tilled up by the more extensive use of gold, and by the issue of a paper currency of small value. This increased use of gold indicates another source of absorp- tion of the additional supplies which were obtained from Australia and California, and consequently, as gold was ready to take the place of the silver which was sent away, this great increase in the demand for silver was not only met without any marked rise in its value, but the additional demand for silver, by Manual of Political Economy. creating an additional demand for gold, exercised a very important influence in maintaining the value of gold. During the last few years, as previously indicated, several circumstances have come into operation which have exerted an influence upon the value of gold and silver respectively, exactly in the opposite direction to the influence that was exerted for some years after the gold discoveries. It has been shown that many cir- cumstances then combined to lower the value of gold and to increase the value of silver: but [before the discovery of large deposits of gold in South Africa] there was for many years a considerable falling-off" in the annual yield of gold and a very great increase in the supply of silver. In consequence of many countries demonetising silver, there has been an increased demand for gold and a smaller demand for silver, and conse<|uently the value of silver when compared with gold luxs became considerably depreciated. This depreciation has been shown by a fall in the price of silver from GOd. to 4:2d} an ounce. We shall in the next chapter consider some of the eflects which have been produced by this fall in the value of silver. We have, however, noAv to consider whether the circumstances, to which reference has just been made, have increased the value of gold not only compared with silver, but have also increased its value when compared with general commodities. As previously stated, so high an authority as Lord Goschen considered there had been a considerable rise in the value of gold, and that many circumstances lead to the conclusion that this rise may continue. It appears that the evidence on which Lord Goschen chiefly relied was the decline in general prices during the ten years ending in 1883; but reasons have been already stated to show that great care ought to be exercised before this can be accepted as a conclusive test. Much stress is also laid upon the extent to wdiich the demand for gold was increased in consequence of the resumption of specie payments by the United States and Italy, and by the demonetisation ^[In January 1904 the price of silver had fallen to 27d. an ounce. The war between Russia and Japan caused an increased demand for silver in the East, and the price of silver in November 1906 stood at 3.3(Z. an ounce.] The Gold Discoveries. SOS of silver in Germany and other countries.^ It must, however, be borne in mind that although the amount of money which a country requires to keep in circulati(jn may be affected by the increase in its wealth and popula- tion, yet in the general progress of commerce many agencies are sure to be brought into operation to economise the use of money. Thus, with the extension of banking facilities many transactions are carried on by cheques which previously required the use of money ; and it has been shown that with the increased use of bills of exchange, telegraph transfers, and other instru- ments of credit, there may be a great increase in home and foreign trade without necessitating a proportionate increase of gold and silver. In view of all these circum- stances it is extremely difficult to arrive at a positive opinion as to whether there has been an alteration in the value of gold during recent years ; we are, however, inclined to think that although the depreciation in the value of gold which had previously taken place has been arrested, yet there has been up to the present time no marked rise in its value. In order to show the difficulty of making any positive prediction with regard to the future value of gold, it is only necessary to refer to some of the many circum- stances upon which its value depends. Thus, for instance, it is impossible to ascertain what will be the annual production of gold a few years hence ; new gold mines may be discovered," and the most contradictory opinions prevail about the future yield of gold from the existing mines. Although at the present time the Australian and Calif ornian gold fields are much less productive than they were soon after their first discovery, yet there are many who suppose that the yield of gold will again ^Lord Goschen estimated that this extra demand for gokl absorbed about 200,000,000/., but an able article in the Economist (May 12, 1883) adduced some reasons to show that this was too high an estimate and that the amount absorbed cannot be as much as 139,000,000(;. 2 [Since this sentence was written the annual gold supply of the world has been largely increased by the discoveries in South Africa. The total gold output of the Witwatersrand district in 1905 reached the value of 20,802,074/., and the amount for 1906 promises to be con- siderably in excess of this large sum.] BOOK III. CH. XV. So6 Manual of Political Economy. BOOK III. CH. XV. The silver mines of Nevada contain a large pro- portion of fjold: they coidd be luorked projitahly for the sake of the gold only. increase as gold mining becomes more systematically carried on, and as improved machinery is applied to quartz-crushing. As an illustration of the difficulty of foretelling with certainty anything about the future production of gold and silver, it may be mentioned, as already stated, that only a few years since, there seemed to be good reason to conclude that silver would con- siderably increase in value when compared with gold. There was a large additional demand for silver, and there was but a very slight increase in the annual yield of silver to meet this additional demand. The discovery, however, of rich silver mines in Nevada, and other parts of the United States, at once greatly increased the supply of silver. Many events have at the same time happened, to which we shall presently more specially refer, which have caused this additional supply of silver to be accom- panied by a considerable falling-ofF in the demand. It has consequently happened that instead of silver in- creasing in value, it has greatly fallen in value, when compared with gold. It also deserves to be particularly noticed that the discovery of these mines in Nevada will exercise an important direct influence upon the annual production of gold. It is a well-known fact that a certain amount of gold is almost always contained in silver ore. In the Mexican and South American mines, from which the largest portion of silver was formerly obtained, gold existed only in \QYy inconsiderable quan- tities ; in the mines of Nevada, however, the ore contains so much gold, that nearly 45 per cent, in value of their entire produce consists of gold ; or in other words, lOOi. worth of ore contains bbl. worth of silver, and 45^. worth of gold.^ Although the other silver mines in the United 1 The large proportion of gold contained in the silver ore in these Nevada mines may exercise a very important influence in determining the future value of silver. It has Ijeen stated tliat in one of these mines, on theComstock lode, 17,000,000 dollars worth of gold and silver were in one year (1875) raised at a cost of about 5,000,000 dollars, and consequently the mine yielded a profit in that year of 12,000,000 dollars. Assuming that 45 per cent, in value of the entire quantity of metal produced was gold, it would appear that rather more than" 8,000,000 dollars worth of gold was produced in this mine in one year. If, there- fore, it is remembered that the entire cost of working the mine was stated to be 5,000,000 dollars, it is evident that the gold contained in the ore would yield a very large profit on the outlay. It would, ther& '-i The Gold Discoveries. 507 States are not as rich in gold as the Nevada mines, yet it is calculated that at least 33 per cent, in value of the produce of the mines consists of gold. As the silver mines of the United States have often produced not less than 10,000,000^. of silver during a single year, it follows that more than 3,000,000Z. of gold was also produced at the same time ; this is an important addition to the annual yield of gold, and as many people think that these mines in the United States are only in the infancy of their development, it may not impossibly happen that the amount of gold obtained from this source may very considerably increase. In view of the uncertainty with regard to the future value of gold and silver, it is of great importance that arrangements should as far as possible be avoided which are based on the supposition that gold and silver will never vary in value. We shall in the next chapter show the very serious embarrassment which is felt by the Government and the people of India, in consequence of the depreciation of silver which has already taken place. A considerable portion of the inconvenience that will be caused to India by a fall in the value of silver might, as we shall hereafter explain, have been averted ; and although a change in the value of the substance chosen as money must produce great inconvenience, yet the amount of this inconvenience may be diminished if proper precautions are taken, and if people as far as possible avoid entering into arrangements on the supposition that the value of the precious metals will always remain stationary. We have now considered the influence that has been, and is yet likely to be, exerted on prices by the gold discoveries ; we will now proceed to describe the effects which these discoveries have produced upon the countries fore, seem that these mines would be highly remunerative even if silver were reduced in value to a mere nominal amount. The mine would in fact have realised a profit of 100 per cent., if the 9,000,000 dollars worth of silver had only been sold for 2,000,000 dollars, or, in other words, if silver realised little more than \s. an ounce. Most interesting information on the supply of silver and its probable effect on the supply of gold is to be found in the evidence given before the .Select Committee of the House of Commons on the Depreciation of Silver which sat in 1876. BOOK III. CH. XV. Altho'iKjh no con- Jident pre- diction is made, it must he remember- ed that a consider- able fall in the value of the pre- cious metals is a jwssible contin- gency. Influence of the gold discoveries upon the exporting countries. 5o8 Manual of Political Economy. BOOK III. CH. XV. Australia teas pre- viously rich in land, but poor in labour and capital. The gold discoveries attracted labour and capital, in which they have been made. We will, for the sake of convenience, chiefly confine our attention to a description of the economic progress of Australia ; for at the time of the gold discoveries, the commercial condition of Australia so much resembled that of California, that the remarks made with regard to the one country, will equally apply to the other. It has been previously stated, that of the three requisites of production — viz. land, labour, and capital — a young colony such as Australia possesses the first in an eminent degree ; for long previous to the gold dis- coveries, the great natural resources of Australia were known, but it was impossible, in consequence of a deficiency in the supply of labour, to make these resources adequately productive. Her pastures, for instance, grazed enormous flocks of sheep ; the popula- tion of the colony was, however, so small that these sheep were almost worthless except for their wool. An abundance of fertile land could be purchased at almo.st a nominal price; but previous to 1848, comparatively very few emigrants went to Australia ; consequently two of the requisites of production — namely, capital and labour — were wanting, and the progress of the colony was extremely slow. But directly it became known that rich deposits of gold had been discovered, thousands of emigrants were immediately attracted to Australia. This additional supply of labour exerted no immediate efiect upon the development of the other resources of the country ; in fact, her general industry was, in the first instance, seriously interfered with, for a great proportion of the labourers of the colony were attracted to the gold fields. Shepherds left their flocks, and almost every class of the community for a time relin- quished their ordinary avocations. The whole economy of the nation was quickly thrown into a state of con- fusion ; it was, however, soon discovered, that the average profits realised in the gold fields were not greater than the profits which could be obtained from many other employments. A considerable amount of labour was, therefore, rapidly withdrawn from the gold-diggings, and returned to agricultural and other industrial pursuits. There was, moreover, a large population at the gold fields^ i The Gold Discoveries. 509 whose wants had to be supplied. This new demand so increased the wealth of the colony, that meat which before could only be sold at a nominal price, soon realised Sd. and 4f?. a pound in the Melbourne market. Wealth was rapidly made, and a large amount of capital was saved. The high rate of profit which prevailed in the country attracted capital from England ; Australia in this way suddenly obtained the two remaining requisites of production — namely capital and labour — and she consequently advanced in commercial prosperity with wonderful rapidity. It, therefore, appears that the gold discoveries exerted a special influence in promoting the industrial progress of Australia. We have, however, been anxious to explain, that the benefit thus conferred is not due to the realisa- tion of an exceptionally high rate of profit in gold- digging. No doubt some of the Australian gold-diggers made great gains ; but, when the average earnings are estimated, it is found that gold-digging is not more remunerative than other branches of industry. For instance, when agricultural wages were 40s. or 508. a week in Australia, it was calculated that the average earnings of those engaged in many of the gold-fields did not exceed 35s. a week. But the discovery of gold con- fers a special benefit upon a colony ; because no other circumstance exerts so powerful an influence in attracting emigrants ; the reason of this is very obvious. In the first place it may be remarked, that in a hazardous speculation such as gold-digging, the instances of great success are brought into far greater prominence than the cases of failure. The same feelings which induce people eagerly to enter a lottery, attract them to an employment which offers chances of great gain. It must also be borne in mind, that gold-digging is not impeded by those obstacles which, in a young colony, retard the progress of almost every other kind of industry. Land cannot, for instance, be profitably culti- vated in a young colony, until roads have been made, and until there is a town population in the colony itself to purchase the produce. Manufacturing industry cannot be carried on with success, because labour is so dear. Moreover, all mining operations except gold-digging BOOK III. CH. XV. a/ though the 7-ate of profit in gold min- ing teas not excep- tionally high. Gold mining partake.'i of the nattire of a lottery, and i.s therefore very at- tractive. 510 Manual of Political Economy. BOOK III. CH. XV. ivhiht it requires little capi- tal. require a great expenditure of labour and capital. Expensive machinery has to be constructed, and the produce raised is bulky, and therefore the cost of conveying it to market is extremely great. Australia is, no doubt, very ricli in other minerals besides gold ; many of her copper mines are far more productive than tliose which have yielded large profits in Cornwall; but one single fact will show the difficulty of working an Australian mine with advantage. The price charged for bringing the ore from an Australian mine called the North Rhine Copper Mine, to port, was 51. a ton, whereas the average price which the smelters pay for English copper ore does not exceed this amount. When gold was first discovered in Australia, it was chiefly found in alluvial deposits near the surface, conse- ({uently the gold-digger required little capital except a few simple tools, and sufficient money to pa}^ his passage out; and therefore, in embarking in this industry'', he risked little more than a certain amount of time and labour. It, therefore, need not be a matter of surprise that the gold discoveries immediatel}?" attracted thousands of emigrants to Australia ; the labour which she required was thus supplied, and her future progress was conse- quently insured. i CHAPTER XVI.i THE DEPRECIATION IN THE VALUE OF SILVER. THE depreciation in the value of silver which has already occurred is likely to produce consequences of so much practical importance, that it is desirable to devote a separate chapter to the subject. The deprecia- tion has been so rapid that, as previously remarked, silver within a few years has fallen nearly 30 per cent, in value, when compared with gold ; the depreciation was so sudden that in six months, between January and July, 1876, silver fell from 56d. to 48c?. an ounce. [The present price of silver, November, 1906, is about 32f/. an ounce.] After what has been said in reference to the absorption of the increased supplies of gold, the question is at once suggested — How did it happen that an increase of 300 per cent, in the annual production of gold, pro- duced comparatively so little effect on its value ; whereas an increase in the annual yield of silver has been accompanied by so great and rapid a depreciation as that which has just been described ? It was shown in the last chapter that contempo- raneously with the increase in the supply of gold, various circumstances came into operation to augment the demand for gold. Amongst the prominent causes which increased the demand for gold, it may be sufficient here to enumerate — 1st. The rapid development of commerce. 2ndly. The considerable displacement of silver by gold in the currencies of many countries. ^ Many of the facts on which the conclusions of this chapter are based are taken from the Report of the Select Committee appointed in 1876, to inquire into the causes of the depreciation of silver, and from the evidence taken by that Committee. BOOK itr. CH. XVI. The recent increase in the pro- duction of liilvcr has been miLch less than ivas the increase in the pro- duction of qold in 1848-51. Yet the fall in the value of silver has been much more marked than ivas the fall in the value of gold. 512 Manual of Political Economy. BOOK III. (;h. XVI. The gold difcovej-ies ivere ac- companied hy a great increa>ie in the de- mand for gold : the silver dis- coveries, on the con- trary, have been ac- companied hy a con- siderable falling-of ill the demand/or silver. Si^dly. A large export of silver to the East between 1.S60 and 1870, causing a new field for the employment of gold in those countries from which this silver was withdrawn. These and other circumstances are sufficient to show how greatly the demand for gold has increased since its supply was augmented by the discoveries in Australia and California. What, however, has happened with regard to silver, affords a most striking contrast to that which occurred in reference to gold. The great addition in the supply of silver has taken place since 1870. Previous to that time there had been for twenty years no marked increase in the annual production of silver. From 1852 to 1862 the annual production is estimated to have ranged between 8,000,000^. and 9,000,000. From 1862 to 1867 it varied from 9,000,000/. to 10,800,000/. From 1868 to 1870 the production was somewhat lower. After this date the production rapidly sprang up ; in 1875 it reached 1 5,000,000/.; and in 1884 it was 23,000,000/. It therefore appears that nearly three times as much silver was produced in 1884 as was annually produced on the average between the years 1852 and 1862. This great production of silver in the United States is an almost entirely new source of supply ; for about 20 years ago her annual yield of silver was only 25,000/., and within sixteen years the production increased from 2,325,000/. in 1869, to more than 10,000,000/. in 1885.^ Great as is this increase in the production of silver, it is not, as already shown in the last chapter, greater than was the addition made to the annual supply of gold by the discoveries in Australia and California. But, whereas these discoveries were accompanied by an important increase in the demand for gold, it can be shown that this large increase in the supply of silver has taken place at the very time when there has been a most important falling-off" in the demand in those countries which had previously absorbed the greatest quantity of silver. We will proceed to explain the chief causes V The annual production of silver in the United States in 1903 was rather more than 14,000,000/.] The Depreciation in the Value of Silver. S13 I which have produced this diminution in the demand for silver. It was necessary to allude to some of these causes in the last chapter, in order to show the influence which they had exerted on the demand for gold. It will, however, be desirable to consider the subject here in greater detail. The demonetisation of silver in Germany exerted a considerable influence in lowering the value of silver, for it caused the German Government to become a seller, instead of a buyer, of silver. It has been calculated that the amount of silver in circulation in Germany in December, 1871, before the demonetisation began, was 60,000,000^. A considerable amount of silver would be annually required to maintain so large an amount of coinage. Although various estimates have been given of the amount of the subsidiary silver coinage which Germany still requires now that the demonetisation of silver has been completed, yet it may be safely assumed that the amount will not be more than half that which was previously in circulation, Germany sold a quantity of her surplus silver, and the eflect of these sales upon the value of silver was greatly increased from the fact that they took place contemporaneously with the large augmentation in the supply of silver from the mines in the United States. A policy similar to that which has been pursued in Germany has been carried out in the Scandinavian kingdoms. A gold currency has gradually taken the place of the silver currency. The consequence of this has been, not merely to throw a certain amount of silver (estimated at 2,000,000^.) into the market, but to diminish the demand which these countries have hitherto had for silver. Austria has also been contracting the amount of her silver currency, replacing it in part by gold ; as a result of this she was able to dispose of 4,000,000^. of silver between the years 1872 — 75. As long ago as 1865 Italy, France, Belgium, Switzerland and Greece, formed a monetary combination, which is known as the Latin Monetary Union ; the action of this Union and that of Holland has been to limit as far as possible the coinage of silver. Although France is a member of the Union, for a few years after the conclusion of the war 2k BOOK III. CH. XVI. The demo- netisation of silver in Germany has been one of the causes of the de- cline in the price of silver. Silver has also been demonetis- ed in the Scandina- vian king- doms. The Latin Monetary Union has caused the amount of silver coin- age to be contracted. 514 Manual of Political Economy. she adopted such vigorous measures to replenish her stock of silver, that between 1872 and 1876 she coined on an average more than 3,000,000/. of silver each year ; this however was only a temporary demand, for during the next four years her coinage of silver only averaged about 200,000/. a year. In England no change has been introduced into our currency, and consequently no important alteration in the demand for silver has taken place. The amount of silver annually required for arts and manufactures, is comparatively speaking so small, and fluctuates so little from year to year, that it exer- cises little influence on the value of silver.^ The resumption of specie payments which took place in Italy in 1883 increased her demand for silver, and a similar cause also increased the demand of other European countries, such as Russia, which has also abandoned its inconvertible paper currency. It seems, however, certain that whatever influence may thus be exerted in increasing the demand for silver, it must be small compared with the eflfect produced by the demonetisation of silver ; consequently, with regard to Europe, the demand for silver is more likely to diminish than to increase. In the United States, where the great increase in the production of silver has taken place, the withdrawal of the small paper money necessitates the use of a con- siderable quantity of silver coinage to replace it. It is diflicult accurately to estimate how much silver may be absorbed for this purpose ; but after a very careful investigation of this question by the committee which was appointed to consider the causes which produced the depreciation of the value of silver, it was concluded that the amount required by the United States would be probably about equal to the quantity of silver which ^The amount of silver-plate manufactured in England, and retained for home use, was of the value of 181,250/. in 1852, M 182,500;. in 1874, 191,500/. in 1875. In the year ending 28th May, 1883, the amount was about 200,000/. [The total weight of silver-plate hall-marked at Goldsmiths' Hall, including that afterwards exported, was in the year ending 28th May, 1888, 765,043 ounces.] J » J. I TJte Depreciation in the Value of Silver. 515 has been set free by the demonetisation of silver in Germany. There is likely to be no increased demand for silver in other parts of America, and it would there- fore appear, assuming that the amount of silver which Germany had to spare was sufficient to meet the additional demand for silver in the United States, that it is impossible to discover either in Europe or America any indication that the large increase in the supply of silver is likely to be met by a corresponding increase in the demand. It would, therefore, seem that two powerful sets of circumstances have acted simultaneously to de- preciate the value of silver: 1st, an increase in the supply, and 2ndly, a falling-ofF in the demand. One of the chief causes which has produced the depreciation in the value of silver is the falling-off in the demand for silver in India during recent years. India formerly absorbed far more silver than any other country. During the eight years previous to 1867 the annual import of silver into India in excess of the export was 15,000,000?. [In the ten years ending 1800— 1, the net import of silver into India, reckoned in tens of rupees, was about five millions ; in the seven years ending; 1887 — 8 the average was 7,700,000. When the rupee really exchanged at the rate of ten to a sovereign, it would have been correct to state this amount as 7,700,000?. ; but the value of the rupee having been fixed by law in 1898 at the rate of fifteen to a sovereign, the value in gold of the net import of silver during the last seven years, is reduced to little more than 5,000,000?.] It would, therefore, appear from these figures that India, some years since, absorbed far more silver than the amount annually produced, and consequently her demand for silver was partly met by drawing upon the silver currencies of France and other countries which had a silver standard. Now, however, the supply of silver is so much increased, and the demand of India is so much diminished, that, assuming the annual pro- duction of silver to be 20,000,000?., she only takes about one-fourth of this amount. The striking diminution in the demand for silver in the country which recently was by far the largest purchaser of silver, must evidently BOOK III. CH. XVI. The in- creased production of silver is talcing place simultane- otisly with a great de- cline in the de- mand. This di- minished demand for silver very mark- ed in India. India formerly absorbed more silver than was annually prod^ieed, she now takes only about one fourth of the annual pr'oduc- tion. Manual of Political Economy. produce so marked an influence on its value, that it becomes of the first importance to consider to what circumstance this falling-off" in the demand is due, with the view of ascertaining whether it is likely to be permanent. The causes which have produced the falling-off in the export of silver to India were carefully investigated by the Select Committee on the Depreciation of Silver, and the following conclusions were arrived at : — " 1st. That the total remittances actually made to India in Government bills and treasure together in the ordinary course of business have declined, but only on a slight scale. " 2nd. That except for other causes, and excluding the extraordinary years of the cotton famine, tliere is no evidence to show that the demand for silver would have materially fallen. " 3rd. But that the supply of a different form of remittance, namely. Government bills, has superseded to a great extent the necessity of remitting bullion. " 4th. That the eftect of this cause has to be measured in very large figures, as the yearly amount payable by India for the disbursements of the Home Government has risen since the Indian mutiny from 5,000,000^. to 15,()0(),00()^., a difference of which the magnitude will be appreciated when it is remembered that it is considerably more than half of the total amount of silver annually produced. " 5th. That the full effect of this substitution has only been recently felt, as that effect was retarded by the construction of the Indian railways, which involved an expenditure in India of money raised in England, counterbalancing therefore an equal amount of expendi- ture in England of money raised in India. " 6th. That the amount of the disbursements which has just been stated appears to represent the present normal expenditure of the Home Government, and that therefore, unless by some marked change of policy, no diminution of that amount can be looked for." Rep&H, p. xxxvi. It would therefore appear that although the exports irom India exceed in value her imports by an amount The Depreciation in the Value of Silver. averaging 19,000,000Z. a year, yet only a small portion of this balance, amounting on the average of the last ten years to between 4,000,000L and 5,000,000/., has to be liquidated by a transmission of silver to India, because India is in her turn indebted to England to an average extent of 16,000,000/.^ annually for payments which her Government has to make in England. The amount of specie which India has annually to receive to adjust her balance of trade is also diminished by the increasing proportion of the income of Indian officers, officials and other English residents in India, which is transmitted to, or spent in, England. In consequence of the greater facilities for travelling, English residents in India visit England much more frequently than formerly ; their wives and families are also often resident in England ; in fact, India is not now looked upon as a home by Englishmen, but is regarded simply as a place to reside in for a few years with the object of saving as much money as possible to be invested and spent in England. It has also been ascertained that a much smaller amount of the Indian debt is now held in India than formerly. The natives of India show a growing disinclination to invest in Government securities ; before the East India Company was abolished, a system prevailed of what were called ' open loans : ' money could be brought at any time to the Government treasury and deposited at a fixed rate of interest. Although there may be a dis- advantage in a Government borrowing money when it is not actually required, yet these ' open loans ' seemed well adapted to the circumstances of the country ; and they undoubtedly induced the natives to entrust their money much more readily to the Government than they do at the present time. These ' open loans ' formed a sort of savings-bank, and were advantageous both from a financial and political point of view : if they had been continued the amount of money which now has annually to be remitted to the Home Government would be much less than it is ; it is, moreover, of great importance to en- courage such investment on the part of the natives, because they are thus made to feel a direct pecuniary interest in the stability of the British Government in India. [iThe home charges in 1904 amounted to £18,000,000.] 5.8 Manual of Political Economy. BOOK III. CH. XVI. The Home char - plied to married men and bachelors. 538 Manual of Political Economy. BOOK IV. CH. 1. The un- equal pres- sure of taxes on commodi- ties cannot be redress- ed by an income- tax. Unsatis- factory na- ture of the theory that taxation should be propor- tionate to the amount of protec- tion deriv- ed from the State. the test of equality of taxation, inequality seems to be inseparably associated with the great majority of taxes that are imposed. But it may, perhaps, be said, that if taxes on com- modities exert upon different individuals such an unequal amount of pressure as that which has been described, it then becomes all the more important, that equality of taxation should be restored by a proper adjustment of an income-tax. The income-tax will be subsequently considered ; it is here only necessary to state that no plan of levying the income-tax which has ever been proposed would have the slightest effect in causing the two individuals, A and B, above described, to be taxed according to their means. Although many have advo- cated the policy of levying a different rate of income-tax on various kinds of income, yet no one has ever even suggested that two incomes, in every respect of the same kind, should be differently taxed, because the one income belonged to a bachelor, and the other to a man with a large family. It must, therefore, be evident that equality of taxation cannot mean the taxing of people according to their means, because this is an end which it is useless even to attempt to attain. There is another test of equality of taxation, which has been regarded by numerous writers as perfectly satisfactory. These writers affirm that the revenue of a Government is employed in protecting the lives and property of its subjects; consequently the amount which each individual contributes to the revenue ought to be proportioned to the benefit which he derives from the protection of the State. But if equality of taxation is to be secured in this manner, it would not only be necessary to tax the property which is protected, but it would also be necessary to impose a poll-tax upon every member of the community. The life of every individual is of some value to himself ; therefore, in protecting his person, a Government confers the same benefit upon each member of the community. It would, however, be a manifest absurdity to propose such a poll-tax, and, therefore, this scheme for securing equality of taxation, though it has an air of plausibility about it, is scarcely worthy of serious consideration. On the General Principles of Taxation. 539 It does not appear at all certain that Adam Smith distinctly conceived a plan for deciding whether, in any particular case, equality of taxation is, or is not, secured. His language, when apparently clear, sometimes fails to convey a definite meaning. His words are these : ' The subjects of every State ought to contribute to the support of the Government as nearly as possible in proportion to their respective abilities ; that is, in proportion to the revenue which they respectively enjoy under the protec- tion of the State.' Upon this fundamental principle it is repeatedly said that every system of taxation ought to be based. Notwithstanding the deference due to such a high authority, we believe it will be found that, if the language employed by Adam Smith is closely analysed, his first principle of taxation is not only expressed in words which are obscure, but that it is almost useless for any purposes of practical application. It will be observed that Adam Smith, in the first place, affirms that the subjects of a State ought to contribute to the support of the Government in proportion to their respective abilities ; then he professes to make this statement of his principle more clear by enunciating it in different terms ; for he explains that ' contributing to a Govern- ment in proportion to a person's abilities,' is the same thing as 'contributing in proportion to the revenue which he enjoys under the protection of the State.' These two statements of the principle, if they have any precise signification, do not mean the same, but entirely different things. Adam Smith apparently intends, by the first state- ment of his principle, to give an implied assent to the opinion, that equality of taxation cannot be secured, if simply the income, or property of each individual is considered, without taking any notice of various other circumstances which may cause any particular tax to be really much more burdensome to one individual than to another, although they may possess equal incomes. Hence this question is at once suggested. What does Adam Smith wish to signify by the expression ' ability to pay?' Should ' abihty to pay' be estimated by the amount of wealth which a man may possess ? If so, a man whose income is only 501. a year ought to pay just BOOK IV. CH. I. A dam SmiMs ex- pressions are indis- tinct, for they imply that taxa- tion ought to he pro- portioned to revenue and also to ahility to pay. which are different and incon- sistent test state- ments. A hility to pay shoxdd not he con- sidered as 540 Manual of Political Economy. BOOK IV. CH. I. propor- tionate to income. and pro- vides no lest of eqna.lity. Taxation on commo- dities ren- ders it im- possible to tax ac- cording to ability to pay. half as much in taxation as a man whose income is lOOi. a year. Without expressing an opinion as to the justice of such an arrangement, it is necessary to point out that different signilications are sometimes attached to the expression 'ability to pay'; and Adam Smith does not definitely tell us which signification ought to be accepted. Some people have urged that if an income of 50^. a year is only just sufficient to provide the possessor of it with the bare necessaries of life, then he who has such an income cannot be said to have any ' ability to pay ' a portion of it in taxation. Adam Smith probably did not make any allowance for such considerations as these; it may, therefore, be assumed that, in his opinion, a system of taxation would be perfectly equitable, if it could be so arranged that an individual whose income was 100^. a year, should contribute just twice as much to the revenue of the State as an individual whose income was only 50^. a year. This, in all probability, was his opinion, because he endeavours more fully to elucidate his principle by affirming that each individual ought to contribute in proportion to the amount of revenue which the State protects for him. But even admitting that this is the meaning of Adam Smith's principle, it may be asked. Does it pi'ovide any measure or standard of equality of taxation by means of which the justice of any particular tax might be ascertained ? Let us test the practical utility of this principle, by applying it to our own fiscal system. It has been previously affirmed that equality of tax- ation passes out of the legislator's control, if it is necessary to raise a revenue by taxing commodities. The amount which each individual contributes to a tax on commodities must be entirely regulated by the consumption of these commodities, and can, in no way, be apportioned to the ability of each individual to pay the tax. The inequality which, according to Adam Smith's definition, is thus introduced, cannot be remedied by an adjustment of that portion of the revenue which is raised by direct taxation. It may be a debateable question, whether an income derived from some temporary source, such as a profession, should be taxed at the same rate as an income which is derived from freehold land : but no one has ever thought On the General Principles of Taxation. 541 of proposing, that two incomes of the same kind and the same amount should be differently rated, because other taxes may levy from the possessors of these two incomes amounts which are not proportioned to their respective abilities to contribute to the revenue of the State. These remarks have been made with the view of showing that Adam Smith's first rule is of no practical use, if it is applied to test the justice or injustice of any one particular tax ; in fact, it is very important to establish this point, because many errors with regard to taxation have been based upon this first rule of Adam Smith. Examples of such errors are frequently met with in the various proposals which are made for the adjustment of the income-tax. Thus it is often affirmed that an income which is derived from a temporary source ouglit not to be taxed at the same rate as an income arising from a permanent source. It is argued that the owner of a temporary income has not the same ability to pay the tax as the possessor of a permanent income, since the former has to set aside a larger portion of his income to provide against future contingencies than the latter. Such an argument involves a fallacy ; it would no doubt be perfectly fair to apply Adam Smith's first rule to one particular tax, such as the income-tax, if it could also be applied to every other tax which is imposed. It has, however, been shown that such a general application of this rule is impossible ; it does not, therefore, follow that the inequality which is necessarily associated with some taxes, would be in any way diminished by attempting so to arrange one particular tax, that each individual should contribute to it in proportion to his ability to pay it. In order to illustrate this remark, let it be assumed that the whole revenue of the State is obtained by a 20 per cent, income-tax, and by a high duty on some article of general consumption, such as tea. Let it also be further assumed, that there are two individuals, A and P), whose incomes are respectively 500/. and 1000/. a year. If A and B have the same number of children, they will probably purchase nearly the same quantity of tea, and therefore they w^ill contribute, as far as the tea-duty is concerned, nearly the same amount to the revenue. BOOK IV. CH. I. Hence Adam Smith's first ride is of no prac- tical use as a test of the justice of a tax. Exemplifi- cation of the it-seless- ness of the ride as ap- plied to a system of taxation. 542 Manual of Political Economy. BOOK IV. CH. I. 7Vrte state- ment, of the principle. Equality of taxation may he ap- proximate- ly obtain- ed. although the ability of one to pay the duty is twice as great as that of the other. This inequality of taxation would manifestly remain untouched, if the income-tax were levied in strict accordance with Adam Smith's first rule, and if each of these two individuals were con- sequently made to contribute to the income-tax in proportion to his ability to pay. In order to remove the inequality which is connected with the tea-duty, it would be necessary to make some kind of compensation to the possessor of the smaller income, and, therefore, a smaller rate of income-tax ought to be levied from the possessor of the income of 500^. a year, because he contributes a larger proportion of his income to the tea-duty, than is contributed by the owner of the income of lOOOi. We readily admit that such an attempt to adjust the burden of taxation could never produce perfect equality; but it is only by adopting such a course, that even an approxi- mation towards equality of taxation can be attained. It, therefore, appears that, although Adam Smith's first rule of taxation ought not, under any existing revenue system, to be applied to any special tax, yet the principle is no doubt true, when expressed in the following manner : — The aggregate amount which each individual pays in taxes, ought to be in proportion to his ability to contri- bute to the revenue of the State. In the remarks which we shall now proceed to make upon various special taxes, it will be shown that the equality of taxation which this principle is intended to define, can never be perfectly secured. It may, however, be approximately obtained by giving to one class, with regard to some taxes, certain advantages which will, in a rough way, provide a compensation for disadvantages which the same class may sufier from inequalities of taxation, perhaps inseparably associated with other por- tions of the national revenue. i CHAPTER II. ON THE INCOME-TAX. IT is advisable to devote a separate chapter to the consideration of the income-tax. There still exists much difference of opinion amongst political economists with regard to various questions connected with the levying of this tax. One of the chief points of dispute is this : Ought incomes arising from a temporary source to be taxed at the same rate as incomes which may be regarded as permanent ? There is no doubt that the greater number of people who have written on this subject express a very decided opinion, that the barrister who is deriving 1000^. a year from his profession, ought not to pay so high a rate of income-tax as the landowner who receives lOOOL a year from freehold land. The arguments which are urged in support of this opinion may be divided into two classes; the first of these classes is based upon arithmetical reasons, whereas the other class appeals to the general principles of taxation. Let us, therefore, first consider the arguments which are supposed to be supplied from arithmetical con- siderations. It is urged that the income of a professional man ought to be regarded as an annuity for a certain term of years. It is, therefore, maintained that a man who derives lOOOZ. a year from some permanent source of income ought to pay a higher rate of income-tax than a man who only enjoys an annuity of 1000^. for a certain number of years, which, for purposes of illustration, we will suppose to be twenty. It will be expedient in the first place to discuss this question as one of pure arithmetic, and then consider the plea that is urged in favour of an annuitant. BOOK IV. CH. II. Ought tem- porary in- comes to he taxed as highly as permanent incomes ? Statement of the case. 544 Manual of Political Economy. BOOK IV. CH. II. Arithmeti- cal argii- ment. If the in- come-tax 7vere per- manent, no injury would he inflicted hy taxinij temporary and per- manent incomes at the name rate. on the ground that he is not so well able to pay the income tax which is now levied upon him as the possessor of a permanent income. The arithmetical argument will be most clearly eluci- dated by an example. Let it be assumed that the current rate of interest is three per cent., and that two brothers, A and B, each inherit from their father 20,000/.. A invests his money in the Funds, and the rate of interest is three per cent.; he will, therefore, obtain a permanent income of 600/. a year. B invests his 20,000/. in pur- chasing an annuity of 1200/., continued during his lifetime. Let it be further assumed that the income-tax is a shilling in the pound. According to the present mode of levying the tax, A would pay 30/. a year and B would pay 60/. a year ; and the question arises, Is this equitable, considering that A and B both possess the same amount of property ? In order to answer this question, let it be in the first instance supposed that the income-tax is a uniform permanent charge, and that the Government is willing to redeem the tax. It is upon the hypothesis quite evident, that an annuity of 1200/. a year for B's lifetime is exactly equal in value to an annuity of 600/. a year continued for ever, supposing the rate of interest to be three per cent.; for either of these annuities can be obtained by the investment of 20,000/. But if the income-tax were permanently fixed at the uniform rate of five per cent., A's 20,000/. would have to pay an income-tax of 30/. a year for ever, because he is supposed to invest it in the form of a permanent annuity. B's 20,000/., however, would only have to pay 60/. a j'-ear during his lifetime, because his annuity of 1200/. a year will cease at his death. If A and B wished to redeem the income-tax on the 20,000/. which they respectively possess, they would each have to pay exactly the same sum to the Government; for the present value of an annuity of 60/. a year to be continued during B's lifetime must be equivalent in value to a permanent annuity of 30/. a year, because it has been assumed that the present value of these annuities is equal. If, therefore, the income-tax were permanent and uniform, it appears on mere arithmetical grounds that a temporary income, such as an annuity for a limited term of years, ought to be On the Income-Tax. 545 taxed at the same rate as a permanent income. If it is supposed in the above example that permanent incomes are taxed at the same rate as temporary incomes, then A and B would have to pay the same amount to redeem the income-tax upon the 20,000^. which they inherited from their father. Such an arrangement would be just and equitable, since there can be no valid reason why B, because he decides on investing the money in a temporary annuity, should pay a less amount to redeem the tax than A, who invests the money in a permanent income. Hut an undoubted injustice would be inflicted on A, if temporary incomes were taxed at a lower rate than permanent incomes. Let it, for instance, be assumed that a permanent income pays a tax of live per cent., whereas a life-annuity annually pays two-and-a half per cent. According to this assumption, B would only have to pay half as much as A in order to redeem the income tax on 20,000/. Why, again, it may be asked, should not the amounts which A and B have both to pay be the same, when it is remembered that A and B both originally possessed 20.000/. and at their own free will chose difl'erent kinds of investment ? We, therefore, thiijk the above example, simple as it may appear, affords a conclusive arithmetical argument that, if the income-tax were permanent and uniform, temporary incomes ought to be taxed at the same rate as permanent incomes. The conclusion, how- ever, which has just been established is based upon a particular hypothesis ; and it remains to be inquired whether the same conclusion holds true, when an income- tax is neither permanent nor uniform. The income-tax has again and again been described by statesmen in this country as only a temporary expedient. In order to give a technical form to these assertions concerning the temporary character of the income-tax, the continuance of this tax from year to year is based upon a special Act of Parliament. The people were, for many years, repeatedly assured by successive Chancellors of the Exchequer, that the income-tax should be reduced immediately the finances of the country would permit such a reduction. It is, therefore, evident that the income-tax is neither permanent nor uniform ; for no 2m BOOK IV. CH. II. A difer- eiice ill the rate would he unjttHt to tlie posses- sor of a permanent income. The in- come-tax is, however, neither permanent nor uni- form. 546 Manual of Political Economy. BOOK IV. CH. II. If the income-tax is only for a fixed ■period, the temporary income shoidd be taxed at a lower rate. But the period is never really fixed. Residts tvhich ivoiddjol- low from different rates in our own country. other tax in our whole fiscal system is so temporary in its character, or so varying in its rate. When this is borne in mind, it may seem that the views above expressed cannot be maintained, and that temporary and permanent incomes ought no longer to be taxed at the same rate. In order to settle this point, let us revert to our previous example, and suppose that an income-tax of five per cent, is imposed for five years, and that A and B are two individuals who inherit 20,000/. each from their father. Let it also be further assumed that A invests his money in the Funds and obtains an income of 600/. a year, and that B purchases with his 20,000?. a life-annuity of 1200/. If, therefore, permanent and temporary incomes are taxed at the same rate, A will pay five times 30/. or 150/. during the five years that the income-tax is supposed to be continued, whereas B will pay 300/. in income-tax. Now it may be urged that this cannot be just ; for why should B pay twice as much in income-tax as A, since they both originally had the same amount of property, which they chose to invest in a difierent manner ? Hence it appears to us quite indisputable, that temporary incomes ought to be taxed at a lower rate than permanent incomes, if the income-tax can be really considered to be imposed for only a limited period, which we have here assumed to be five years. Experience, however, incon- testably proves that the time during which the income-tax will be continued can never be predicted even with approximate accuracy. This uncertainty, consequently, renders it impossible to frame any equitable method of adjustment based upon the hypothesis that the tax will not be continued for a longer period than that which is originally proposed. For let us see what would have been the result if such a method of adjustment had been adopted in our own country. In the year 1854 the Chancellor of the Exchequer confidently afiirmed that the income-tax would be gradually reduced, and would be entirely abolished in the year 1860. Here, then, a case is presented, exactly similar to that just described; for, reverting to our original example, it may be assumed that the two brothers A and B come into possession of 20,000/. each On the Income-Tax. 547 in the year 1854. A invests his 20,000^. in the Funds, and obtains a permanent income of 600/. a year, whereas T) purchases with his 20,000/. a life annuity of 1200/. It is, therefore, manifest that, if temporary incomes are taxed at the same rate as permanent incomes, B will each year contribute twice as much to the income-tax as A. Now if the income-tax is only a temporary impost which is certain to be repealed in the course of six years, B might very fairly urge that, since his income is derived from the same amount of property as his brother's, they ought to contribute the same amount to the income-tax. B might also further urge that, if he and his brother both wished to redeem the income-tax upon their 20,000/., they ought to pay the same amount for this redemption ; B would however be compelled to pay twice as much as A, in order to redeem the tax, if temporary incomes were taxed at the same rate as permanent incomes. Those who believed that the income-tax would inevi- tably expire in the year 1860, would have found it difficult to answer the argument just supposed to be advanced by B. But if such a claim in favour of tem- porary incomes had been admitted, what would have been the result? The year 1860 comes; the income-tax is neither repealed nor reduced, but is, on the contrary, greatly increased. We, therefore, maintain that an equitable adjustment would not have been secured, but, on the contrary, a great injustice would have been done to the possessors of permanent incomes, if, in the year 1854, our statesmen, acting on the supposition that the income-tax would only be continued for six years, had capitalised all temporary incomes, and then so arranged the income-tax, that the same amount of property, though differently invested, should contribute the same amount to the income-tax. Another example may be adduced, in order more clearly to illustrate the injustice which such a method of adjustment would have entailed. Let it be assumed that one of the brothers, B, invests his 20,000/. in the purchase of an annuity of 4000/., to be continued for six years. The other brother. A, still invests his 20,000/. in the Funds, and obtains a per- manent income of 600/. a year. Let it also be assumed, that in 1854 the income-tax was five per cent., and that BOOK IV. CH. II. The uncer- tain dura- tion of the income-tax prevents an equita- ble adjust- ment be- tween per- manent and tem- porary in- comes. A further example of the injus- tice result- ing from an at- tempted adjust- ment. 548 Manual of Political Economy. it was to remain at this amount until the tax was entirely repealed in 1860. If permanent incomes were taxed at tlie same rate as temporary incomes, then A during these six years would only contribute 180^. to the income-tax, whereas B, who has purchased an annuity of 4000^., would contribute 1200^. There can be no doubt that such a result would be extremely unfair, if the income-tax were certain to be repealed at the end of the period originally fixed. It has been before remarked, that A and B each inheriting 20,000^., the tax ought not to take more from one tlian from the other ; it would, therefore, seem that B as well as A ought to contribute only 30^. a year, and consequently B's income would only be taxed at the rate of | per cent. The equity of such a method of adjustment entirely depends on the income-tax being repealed at a fixed definite period. Experience, however, proves that the time for the repeal of this tax can never be anticipated with certainty; for, when the year 1860 arrived, the repeal of the income-tax seemed indefinitely remote ; according therefore to the method of adjustment which has been just described, B's 20,000^. invested in an annuity would in the aggregate only contribute 180^. to the income-tax; whereas A has already contributed the same amount, and will still have to pay income-tax upon his 600?. a year, during the whole time that the tax may happen to be continued. We, therefore, think that the most simple and the most just plan is to consider the income- tax, and every other tax, as permanent. The extreme uncertainty which exists with regard to the charges which may be made upon the revenue of a country, renders it impossible for any one to foresee when a particular impost may be reduced or repealed. But if the income-tax is regarded as a permanent charge, the whole weight of the arithmetical argument is opposed to the opinion that there should be any difterence in the rates imposed upon temporary and permanent incomes. Besides the arithmetical arguments which support such a conclusion, other subsidiary reasons may be advanced in favour of a uniform rating. In the first place it may be remarked, that a uniform income-tax can be collected with great facility, and at On the Income-Tax. 549 comparatively little expense ; there would, however, be endless complications and confusion, if a method of adjustment were attempted, based on the plan of capital- ising temporary incomes. For instance, a different amount of income-tax would have to be levied each successive year from individuals who possessed annuities for a limited period, since the capitalised value of a temporary annuity diminishes each successive year. Again, a great variety of complicated and uncertain rules must be laid down, for the purpose of estimating the capitalised value of incomes derived from speculative investments, such as mining. The difficulty of estimating the capitalised value of incomes arising from trades and professions would involve still more complicated calcula- tions. Thus the barrister of forty, who has a professional income of 1000?. a year, ought to be taxed at a higher rate than the barrister of sixty, who has the same professional income. The income of the one is likely to continue very much longer than the income of the other, and therefore the capitalised value of the former income is very much greater than that of the latter. Numerous other difficulties may be readily suggested. The income of the barrister is wholly lost to his family at his death, but the income which a solicitor obtains from his business may be partly enjoyed by his family after his decease, since the good-will of his practice may be sold, or some person may be taken into the business as a partner, who will pay the family a certain annual sum. The capitalised value of a solicitor's professional income must be, there- fore, greater than the capitalised value of a barrister's income of the same amount. Hence, it would appear that incomes derived from one branch of the law ought to be taxed at a higher rate than incomes derived from other branches of the profession. The settlement of such inti'icate questions as these would give to the income-tax some o£ the worst qualities that belong to a tax ; for it would be uncertain in its amount, and it would be so difficult to adjust in the various special cases which may arise, that a whole army of income-tax collectors and commissioners would have to be employed ; consequently the expense and inconvenience of collecting the tax would be enormous. These considerations strengthen BOOK IV. CH. II. further made, im- ■ practicable by the com- plicated arrange- ments ivhich it would ne- cessitate. Example in the diffi- culty of comparing a barris- ter's ivith a solici- tor's in- 550 Manual of Political Economy. BOOK IV. CH. II. Arguments infavotir of adjust- ment inde- pendent of the above arithmeti- cal consi- derations. The prin- ciple of equality, though true in the abstract, is imprcLC- t'lcable in our conviction, that the income-tax ought to be levied at a uniform rate, and vi^e entertain this opinion with all the more confidence, because the arithmetical arguments that can be adduced certainly do not oppose, but rather favour, the present method of levying the tax. The principle of a uniform income-tax is however opposed, for reasons which are quite independent of any arithmetical calculations. These reasons, which we now proceed to consider, are, in fact, based upon the first maxim of Adam Smith, which is popularly thought to define equality of taxation. The persons who oppose a uniform income-tax maintain that, whether a temporary and uncertain income ought to be taxed at the same rate as a permanent and certain income, is a question which must be settled independently of arithmetical considera- tions. For instance, it is frequently affirmed, that an income derived from a trade or profession ought to be taxed at a much lower rate than an income obtained from some such permanent and certain source as the Funds, or landed property. When it is asked why this distinction should be made, it is considered quite sufficient to reply, that the tradesman or professional man who obtains an income of 1000?. a year cannot so well afford to pay the income-tax as the individual who receives an income of the same amount from the Funds, or from landed property. This is undoubtedly true, since the income of the tradesman or professional man is uncertain, and may be altogether lost in the event of his death ; whereas the possessor of a permanent income can at his death leave it intact, to be distributed amongst his family. It is, therefore, indisputable that the income- tax ought not to be levied at a uniform rate, if the principle is admitted that each single tax should be so adjusted that every individual should contribute to it in proportion to his means, or, in other words, in proportion to his ability to pay the tax. It has been stated in the preceding chapter, that this principle is in the abstract perfectly true, and it would no doubt secure equality of taxation, if it could be practically applied to adjust all the taxes that are miposed. But the impossibility of this has already been No method of adjustment will cause individuals shown. On the Income-Tax. 551 to contribute to taxes on commodities in proportion to their means ; the amount which is levied from each individual, by these taxes, depends upon the quantity of a commodity which he consumes. Hence it has been concluded that equality of taxation is not necessarily promoted by adjusting some particular tax in such a way that each individual would contribute to it in exact proportion to his means. For instance, if the income-tax were adjusted in strict accordance with this rule, every labouring man in the country ought undoubtedly to contribute his quota to the tax ; and yet the introduction of such a change into our present fiscal system would certainly not promote equality of taxation. The labour- ing classes are most justly relieved from the income-tax; because, in the first place, it would be difficult to collect it from them, and, in the second place, they contribute to such a tax as the duty on tea, a much greater amount, in proportion to their means, than is contributed by the wealthier classes of the community. The remission of the income-tax upon such incomes as are ordinarily possessed by labouring men, affords some compensation for the inequality of taxation which is necessarily associated with such an impost as the duty on tea. Inequality of taxation may be, therefore, rather increased than prevented by applying to any particular tax such a rule as that above referred to. Equality of taxation can be best secured, not by botching and patching each single tax, but by contemplating the revenue as a whole. If it is found that any tax presses unequally on any particular class, it is almost invariably better not to attempt to adjust the tax by any complicated arrange- ments ; the inequality of taxation should be remedied by placing the particular class whom it prejudicially affects, in a relatively advantageous position with regard to some other tax. Thus the tea-duty presses very unfairly upon the working classes ; but it is in every respect more desirable to compensate them for this inequality of taxation, by a remission of the income-tax, than to afford them compensation by attempting to make the tea-duty so equitable in itself, that every individual should contribute to it in proportion to his means. Various proposals for making the tea-duty a more BOOK IV. CH. II. exectdion and unfair if applied to one tax alone. Equality of taxa- tion to he aimed at by con- templating the revenue a-s a whole. Some taxes, such as that on tea, can- not be made to operate fairly by themselves without 552 Manual of Political Economy. BOOK IV. CH. II. producing (jreater counter- halancing evils. linpossi- hility of levying the income-tax so as to make every one con- tribute ac- cording to his means. equitable tax have been, and may be, suggested ; for instance, one source of inequality would be removed, if the tea-duty could be made ad valorem. The duty which is now paid upon the tea consumed by the poor man is at least three times as great, in proportion to the value of the tea, as the duty which is paid upon superior tea. It has, however, been found almost impracticable to levy ad valorem duties upon such a commodity as tea ; it was soon proved that these ad valorem duties entailed a series of complicated arrangements, which materially interfered with the trade, and, consequently, the tax when made ad valorem, though apparently more just, was really more disadvantageous in its aggregate results than it was before. Let us, therefore, inquire whether similar obstacles would not oppose all the schemes which are often favourably received, for render- ing the income-tax more equitable. Almost insuperable obstacles at once suggest them- selves, if an attempt is made to levy the income-tax in such a way that each individual should contribute to it in proportion to his means. It may be at once asked, How is it possible to supply any test or measure of the amount which a man can afford to pay towards a tax ? Certainly such a test or measure is not provided by the nature of the source from which an income may be derived ; for the income of almost every individual is obtained from a great variety of different sources ; there- fore some portion of his income may be permanent, and another part of it may be temporary. Consequently it is impossible to judge of an individual's means, by con- sidering only one part of his aggregate income. Thus A may possess 2000^. a year in landed property, and may, in addition to this, derive 1000^. a year from his profession. Another individual, B, may possess only 500^. a year in landed property, but has a permanent income of 1000^. a year from the Funds. On what grounds do those who oppose a uniform income-tax affirm that the lOOOZ. a year which B obtains from the Funds, should be taxed at a higher rate than the 1000^. a year which A is supposed to realise from his profession ? B is a much poorer man than A, and it therefore cannot be maintained that B, with regard to a portion of his I On the Income-Tax. 553 income, should be taxed at a higher rate than A, because the former can better aftbrd to contribute to the tax than the latter. In addition to the difficulty which has been just suggested, it would be necessary to fix the rate at which each kind of income should be taxed by arbitrary rules, which would be subjected to constant discussion and revision. With regard to professional incomes, it has already been said, that the solicitor whose practice is worth lOOOi. a year is a far richer man than a barrister whose, practice is of the same value ; since a solicitor can either sell the goodwill of his business, or leave it to his children, whereas the practice of a barrister can neither be sold nor handed over to another. If, therefore, a per- manent source of income is taxed at the rate of five per cent., what principles can be found which will tell us the amount of income-tax which ought to be levied from the incomes of solicitors and barristers respectively ? There is also another reason of much force to be urged against the proposal to tax permanent and temporary incomes at a difterent rate. One of the chief objections which can be urged on economic grounds to an income-tax is that it is often a tax on savings, and therefore pro tanto dis- courages prudence. A simple example will show that this objection would apply with increased force if permanent incomes were taxed at a higher rate than temporary in- comes. Thus, take the case of a professional man with an income of 3000/. a year who annually saves 1000/. a year, and suppose that an income-tax of 5 per cent, is imposed upon incomes obtained from a temporary source, whereas the tax levied on permanent incomes is 10 per cent. On the thousand pounds saved, the income-tax levied in the 3'ear in which it is saved is 5 per cent., or 50/. The thousand pounds is invested to pay 5 per cent. On this income of 50/. an income-tax of 10 per cent, is levied, or 51. a year. If therefore it is supposed that the income- tax remains permanently in operation, from the thousand pounds which is saved 50/. is in the first instance taken, and in addition 5/. a year is subsequently levied. As the value of a perpetual annuity of 51. is 166/. it appears that from a thousand pounds which is spent only 50/. is taken by the income-tax, whereas the tax takes 216/. from a thousand pounds which is saved. These, and various BOOK IV. CH. II. 554 Manual of Political Economy. BOOK IV. CH. II. The pre- sent syntem is probably the best. Objections to a graduated income- tax. other considerations which might be adduced, lead to the conclusion, that the present method of levying the income-tax cannot with advantage be materiallj^ changed. The income-tax, as it is now levied, avoids the difficulties and complications just referred to. It must also be remembered that if the arrangements connected with any tax involve intricate details, the collection of the tax must be expensive. If, moreover, an attempt should be made to equalise this tax by a complicated process of adjust- ment, many practical difficulties would be sure to arise, which would probably lead to disputes and costly litigation ; and thus even those will become more dis- contented, who are specially intended to be benefited by the adjustment of the tax. For instance, it may be mentioned that a considerable proportion of the aggregate amount yielded by the income-tax is, under existing arrangements, collected with the maximum of ease and the minimum of expense. This will be at once understood when it is remembered that the income derived from consols, bank-shares, railway-shares, and other similar investments, is paid in a lump sum before the dividends are distributed, and thus the cost of collecting from the individual fundholder and share- holder is avoided. It would obviously be impossible to continue the arrangement if the rate of the tax varied with the amount of each individual's income, because it would be necessary before collecting the tax to ascertain what was the income from all sources of each fund- holder or shareholder. The increase in the difficulty and cost of collecting the tax, if the rate of the tax varied not only with the nature but also with the amount of the income, suggests a strong argument against the adoption of what is known as a graduated, or progressive, income-tax. It has often been proposed that the rate of the tax should increase with the aggregate amount of each individual's income. It is obvious that besides the objection to which allusion has just been made, the proposal to make the rate of the income-tax progressively increase with the amount of the income would almost indefinitely strengthen the objection that the tax operates as a discouragement to prudence. It would be virtually sanctioning the principle On the Income-Tax. 555 that the proportion which the State should take from a man's income should increase in the direct ratio of the amount he might save. The force of this objection will be more fully understood when we proceed, as we now do, to consider the incidence of the tax. As this expression — the incidence of the tax — has not been previously employed, it will be necessary to detine it. It is quite evident that a tax is frequently not really paid by the person from whom it is levied ; for instance, the beer duty is nominally paid by brewers, although it is really paid by the consumers of beer, since the price of beer is increased by the amount of the duty which is imposed. Similarly, all taxes on commodities are really paid by the consumer, although the Government generally levies the tax from either the producer or the importer of a commodity. Hence, it is said that the incidence of these taxes falls on the consumer, and therefore the incidence of a tax may be considered to denote the real, in distinction from the nominal payment of the tax. As another example it may be mentioned, that the incidence of the poor-rates which are levied upon the laud, ulti- mately falls upon the land-owner; for, although such rates are generally paid by the farmer, yet the rent of the land would be so much gi-eater if there were no such rates. If, however, there is a lease, any increase of rates falls upon the farmer during the continuance of the lease. The incidence of those taxes just mentioned, is very easy to trace ; but with regard to the incidence of some other taxes, such as the income-tax, many questions of perplexity and importance are suggested. Some of these questions we will now proceed to consider. It may perhaps be remembered that, when expounding some of the fundamental propositions concerning capital, the income-tax was occasionally referred to, in order to show the different results which ensue, according as the tax is paid out of capital, or is saved by means of increased economy. In the first case, the incidence of the tax partly falls on the labouring classes, whereas, in the second case, the incidence of the tax does not fall on any one but those who pay it. That this must be so is evident, from the following considerations. It has been frequently remarked, that the capital which supports BOOK IV. CH. II. Meaning of (he term, ' incidence of taxa- tion. ' The inci- dence of the. in- come-tax will vary according as it is paid out of capital or savedfrom expendi- ture. 556 Manual of Political Economy. BOOK IV. CH. II. If paid Old of capital the inci- dence will be to Home extent upon the labouring classes. Explana- tion of the process by lohich the incidence of the tax is thus changed. the industry of a country is composed of two portions, which are respectively termed circulating and fixed capital. The circulating capital of a country is the source from which wages are paid. If, therefore, this fund is diminished, there will be a smaller amount to distribute amongst the labouring classes, and less average wages will be received. The fixed capital of a country consists of machinery, stock, implements, and, in fact, of every kind of wealth which exists in some permanent form, and which is intended to give assistance to the future production of wealth. If, therefore, any tax should diminish the fixed capital of the country, and should thus cause less machinery to be used, or fewer useful public works to be carried out, the industry of the country would be interfered with, and the progress of the nation's wealth would be obstructed. If the income-tax were partly paid out of capital in a country which accumulates wealth rapidly, it is almost certain that the amount would be withdrawn, not from fixed, but from circulating capital. As far as the labourers are concerned, it in the first instance makes little difier- ence whether the income-tax is paid out of circulating or fixed capital ; because such fixed capital as machinery and railways can only be constructed by labour, and therefore, if a smaller sum is spent upon such works, a smaller sum will be distributed in wages. It, therefore, appears that the aggregate wages which are paid must be diminished, if the income-tax be either wholly or partly paid out of the capital of the country. It conse- quently follows that if any portion of the income-tax is paid out of capital which would otherwise be employed within the country itself, the incidence of the tax partly falls on the labourers, although the tax may never be directly levied from them. It will be instructive to explain the process by which the burden of this tax is, as it were, shifted from one class to another. Let it be assumed that an income-tax of ten per cent. is imposed, and that throughout the country one half of the tax is saved from each individual's personal expen- diture, whereas the other half is provided out of capital. Upon this hypothesis, an individual, A, who has an aggregate income of 2000^. a year, would be rated at On the Ineome-Tax. 557 200^. a year ; his net income is therefore 1800^. His personal expenditure is 1000^. a year, and he therefore annually saves 800/., which he can invest as capital in his business. If there were no income-tax, his annual income would be 2000Z., but, according to our hypothesis, he will only spend one half of the 2001. a year, which would be added to his income if the income-tax were remitted ; he would consequently each year save 900/-. if there were no income-tax, and this sum he might employ as capital in his business. The amount of capital which he accumulates is therefore annually reduced by 100/. in consequence of the income-tax. Circulating capital is, however, employed in paying the wages of labourers, and, therefore, the income-tax may diminish by 100/. the amount which A annually pays to labourers; conse- quently this amount is as really paid by the labouring- classes as if the income-tax was directly levied from them. It is impossible to assign the exact proportion of the income-tax which will be paid out of capital ; but it is nevertheless quite certain that an income-tax would be paid out of capital to a far greater extent in some countries than in others. As an example, it may be mentioned that the industrial progress of India is retarded by a want of capital ; her accumulation of capital is comparatively so small, that an income-tax could not be imposed in that country without diminish- ing the national capital, and in this way most seriously affecting the national weath. In England, however, the income-tax produces none of these serious consequences ; no branch of our industry which presents a fair chance of profit is ever retarded for want of capital ; in addition to all the capital which we invest in our own commerce and trade, we always seem to possess an almost unlimited supply of capital for foreign investments, if the terms which are offered for the use of it are sufficiently remunerative. It may, therefore, with considerable certaint}^ be concluded, that the income-tax does not seriously diminish the amount of wealth which is produced in this country ; for although some portion of the tax is paid out of capital, yet this amount is probably withdrawn, not from fixed capital, but from BOOK IV. CH. II. The share of the lax paid out of capital varies in different countries. 558 BOOK IV. CH. II. It aho varies (jreathj in different sections of the same country. In this country the effects of the in- come-tax are pro- bably not Manual of Political Economy. circulating capital, and also from that portion of the country's capital which is invested abroad. We say- that it is not fixed capital which is affected, because that part of fixed capital which consists of machinery, implements, and stock, is never sold for the purpose of paying the tax, nor can any one suppose that less machinery is employed in industry, or fewer useful permanent improvements carried out in consequence of the income-tax. Our circulating capital may no doubt, to some extent, be diminished ; if this be so, a portion of the tax is virtually contributed by the labourers. In England, however, as well as in most other countries, the average amount of the income-tax which is re- spectively paid out of capital or saved from personal expenditure, varies greatly in the different sections of the community. Those who have incomes of le50^. or 2001. a year are usually obliged to deprive themselves of many things which they consider almost indispensable. Such persons, therefore, if released from the income-tax, would probably spend the whole additional income which the remission of the tax would give them. The wealthy merchant, however, who is worth his 20,00()L a year, would most likely not materially increase his personal expenditure, although the repeal of the income- tax might give him an additional 1,000/. a year to spend. The additional 1,000Z. which he would thus annually accumulate would not induce him to extend his own business; he would probably invest the 1,000/. in some security. It, therefore, appears that the additional capital which will be saved, if the income-tax is repealed, would be principally thrown into the money market for investment ; the amount saved would not be employed as capital by each individual taxpayer, because in a country where so much commerce is transacted by credit, the individual taxpayer would, before the income-tax had been remitted, have had no difficulty in obtaining extra capital to embark in his business. As far, therefore, as the capital of the country is concerned, the effects of the income-tax are not in this country so important as they are generally supposed to be; because, let it be assumed (and it is rather an excessive estimate) that 6,000,000/. out of the 9,000,000?. A. On the Income-Tax. 559 which an income-tax of five-pence in the pound would now (1883) yield would be saved as capital, if the tax were repealed. 6,000,000/. thrown into the money-market for investment cannot produce any momentous results upon the industry of a country whose wealth is so great that many millions have often been raised in a few days for foreign investments, without apparently exerting any influence upon our trade. The remaining 3,000,000/., which according to our estimate is saved from personal expenditure, expresses the real amount of the temporary comfort and enjoyment of which the tax deprives the community. It has been already stated that to this last amount diflerent sections of the community contribute in very unequal degrees ; the wealthy man who is accumulating capital rapidly does not spend less in consequence of the tax ; his personal- comfort is not in the slightest degree interfered with, and the only result of the tax to him is that he possesses a few thousand pounds less of realized property. Very different con- sequences, however, result to those who possess the small incomes which just come within the range of the tax. For instance, an income just exceeding 700/. is taxed at the same rate as an income of 10,000/. There can be no doubt that the owner of a small income cannot pay even a few pounds towards an income- tax, without depriving himself or his family of the means of satisfying some real want or enjoyment of life. The income-tax, therefore, entails a far greater sacrifice upon such a person than upon the more wealthy man who can pay the tax without encroaching upon his personal expenditure. The inequality to which allusion has just been made has been, to a large degree, remedied in our own country by exempting all incomes of less than 160/. from payment of the tax. In order also to lessen the burden of the tax upon owners of small incomes, a deduction of 160/. is made before assessing the tax from all incomes between 160/. and 500/.; thus, if a man has an income of 300/., he lipays the tax upon an income of only 140/. [The principle jof exemption has also been extended as follows : On incomes not exceeding 500/., 150/. is exempt; not exceed- ing 600/., 120/. is exempt; not exceeding 700/., 70/. is BOOK IV. CH. II. SO impor- tant as has generally been as- sumed. The in- come-tax imposes great sacrifices upon per- sons luith moderate 560 Manual of Political Economy. BOOK IV. CH. II. Pro/>osal by Ben- tham and Mill. Difference between this pro- pofial and so?ne other schemes which have been pro- posed. Mischiev- ous nature of those lohich are unfavour- able to the accumida- tion of capital. exempt.] This is an adaptation of the plan recommended by Bentham and J. S. Mill. They maintained that the Legislature ought, in the first instance, to decide what is the maximum income which should be allowed to escape the income-tax, and they considered that a decision upon this point ought to be chiefly guided by the principle that an income should not be taxed if it was not more than sufficient to provide its owner with the mere neces- saries of life. Such a principle would, of course, only enable a rough estimate to be made ; the important thing, however, is to fix a limit. Let it, therefore, be supposed that the limit is 100/. a year. Mr. Mill pro- posed to deduct this amount from every income, and only tax the remainder. The owner, therefore, of an income of 120/. a year would only pay the tax upon 20/. This plan manifestly provides a complete remedy for the inequality which was formerly urged. The plan involves no practical difficulties, and is founded upon strict jus- tice ; since, if the tax is not imposed on an income of 100/. because such an income is no more than sufficient to provide its owTier with the mere necessaries of life, the tax ought, with regard to all incomes, to be remitted upon a similar amount which has to be expended in the mere necessaries of life. The scheme advocated by Mr. Mill is not to be con- founded with the proposal for a graduated or progressive income-tax to which reference has already been made. It has been urged that an income of 10,000/. ought to be taxed at a far higher rate than an income of 1000/, There is, no doubt, weight in the argument that the income-tax presses with unequal force upon the owners of comparatively small incomes, because the tax often involves some real sacrifice to them, whereas, with regard to the very wealthy, it in no way diminishes their means of enjoyment. It is, however, important to remember that the proposal to graduate the income-tax seems to sanction the principle that it is desirable to impose a penalty upon the accumulation of wealth. Any such scheme which is aimed against large capitals probably obtains popular support, because it seems to favour the prejudice which is so frequently expressed against what is termed the tyranny of capital. There was a time On the Income-Tax. 561 when it was very generally believed by the labourers of this country that tlie owner of a large capital possessed a peculiar power to oppress them. Superior education and the extension of cooperative institutions are already beginning to make the labourers understand that as capital increases the fund for the employment of labour increases. As previously shown, one of the strongest theoretical arguments which can be urged against the income-tax, is based upon the fact that it is imposed upon savings. The man who has 10,000/. a year and spends the whole of his income, only pays the tax once ; but the man who has an equal income, and only spends a portion of it, pays in the first instance the same amount to the tax, and is also each year compelled to pay the tax upon the income which is derived from the investment of the amount which he has saved from his annual income. The income-tax, therefore, to a certain degree, encourages spending, and discourages saving. It, there- fore, follows that one of the most serious objections which can be urged against the tax is greatly strength- ened, if it should be so graduated that the tax is increased in proportion to the amount which an indi- vidual saves. In conclusion, it is necessary to refer to a serious objection connected with the income-tax which cannot be obviated by any method of adjustment. It is evident that the tax can be accurately levied up 'U all incomes the amounts of which are publicly known. As previously stated, the Bank of England, when paying the dividends arising from the Funds, deducts the income tax, and hands the amount over to the Government. It is, therefore, impossible for a fundholder to evade the tax. The tax is also similarly deducted from all official salaries, and also from the pay of officers in the army and navy. The amount of the tax which is levied from various other kinds of incomes is also regulated by definite rules. For instance, a farmer's income is estimated to be equivalent to one half his rent. If, therefore, his rent is 8(i0/. a year, and if the income tax is a shilling in the pound, the income-tax leviel upon him will be 14/. His income may no doubt be either more or less than 400/. a year, but when the rule has once been made, he has no 2n objection to the in- come-tax from the cliJficnHy of estimat- ing Home if the in- comes upon lohich it is raised. 562 Manual of Political Economy. BOOK IV. CH. II. The dis- honesty which is occasimi- ally thtis produced power to evade any portion of the tax, because the amount at which he is assessed is precisely determined. But with regard to various other classes of traders it is impossible to ascertain the amount of their incomes by any definite rules. The income of a manufacturer or retail trader can only be approximately estimated ; an opportunity is tlius afforded to evade a considerable portion of the tax. Morality is unfortunately too often based on conventionality ; and many who pass for honest men do not hesitate to cheat the Government, although in the private transactions of life they would shrink from doing anything in the least degree dishonourable. Numerous cases have occurred which strikingly exemplify the dishonesty that is practised by many in their deal- ings with the Government. The following well-known instance has frequently been quoted. A particular street in London was, during a certain period, closed for traffic in consequence of im- provements which were being carried out. The business of the various tradesmen who lived in the street was prejudicially affected, and they consequently claimed compensation. The amount of compensation which each individual received was apportioned to the net income which he derived from his business. All the tradesmen, consequently, made a return of their incomes. As it Avas thought that these returns were excessive, they were compared with the amount of the incomes which these tradesmen returned for the assessment of the income- tax. In some cases there was no difference in the amounts returned for the two purposes. The result of the comparison, however, was to reveal that some of the tradesmen living in a respectable London street could practise so much deception that, while for the purpose of assessing the income-tax they returned their incomes at a certain amount, the amount returned when pressing their claims for compensation was a very much greater one. It is, therefore, evident that, as long as such duplicity is prevalent, many will evade a part of the income-tax which they are bound to pay to the Govern- ment. Hence the tax operates with a certain degree of unfairness, because some classes of the community have a chance of evading the tax, whereas others have not. On the Income- Tax. 563 can scarce- ly be con- sidered a loeighty argument ac/ainst the tax. The inequality which is caused by this power of evasion is not by many so much objected to as the general immorality which they conceive to be produced by such taxation. It is, for instance, maintained that the income-tax places so great a premium upon decep- tion, that many who would otherwise be honourable, are tempted to deceive the Government. Little attention, however, ought to be paid to such an argument. The morality of those individuals who are so easily led away from the paths of virtue and honour is scarcely worth the fostering care of a Government. Every precaution should of course be taken to detect and punish those who make false returns, because the burden which they escape is thrown upon the rest of the community. Although we have thought it desirable to direct attention to certain inequalities and other disadvantages connected with the income-tax, yet in our opinion it would not be expedient to repeal the tax. No tax which can be suggested is free from objections. If the income- tax were repealed many wealthy individuals might almost entirely escape contributing anything to the taxation of the country ; and the money which the income-tax now yields would have to be made good by increasing the taxes on articles of general consumption which are chiefly used by the poor. Thus greater inequality of taxation would result from the repeal of the income-tax than from its maintenance. BOOK IV. CH. III. Distinc- tion be- tween di- rect and indirect taxation. Taxes on commodi- ties are ne- cessarily indirect. CHAPTER III. TAXES ON COMMODITIES AND OTHER INDIRECT TAXES. THE last chapter was devoted to the discussion of the income-tax, and although the tax manifestlj'' differs in many essential respects from other direct taxes, yet the income-tax possesses many characteristics which are common to all direct taxes. We shall, therefore, be enabled, after having described indirect taxation in the present chapter, to compare or rather to contrast the two systems of taxation. Direct and indirect taxation are words of such frequent use that they probably need no definition. It may perhaps, however, be well to state that a direct tax is really paid by the person from whom it is levied, whereas an indirect tax, though nominally paid by one person, is really paid by another. An income-tax,^ and all assessed taxes, such as taxes on private carriages and dogs, are direct taxes ; for they deprive those who pay them of an amount of wealth equivalent to the tax. But an entirely different result follows with regard to an indirect tax, such as the beer duty ; for in such a case, although the beer duty is in the first instance paid by the brewer, yet the tax really comes out of the pockets of the consumers of beer, because the price which they are compelled to pay for beer is increased by an amount 1 As explained in the last chapter, an income-tax is sometimes partly paid out of circulating capital. In this case the tax dimini.shes the sum expended in wages, and is, therefore, really paid by the labourers. But it is sufficiently exact to state that an income-tax is a direct tax because it is intended that the tax should take so much wealth fr(un those upon whom it is levied. In the case of an indirect tax, such as tlie duty on beer, it is intended to tax the consumer of beer, and not the brewer who in the first instance pays the tax. Taxes on Gominodities and other Indirect Taxes. 565 which must at least be equivalent to the tax imposed. It is, therefore, manifest that taxes on commodities are indirect ; because if commodities are taxed they are increased in price, and consequently the consumers of the commodities really pay the taxes, although they may, in the first instance, be levied upon the importers or producers of commodities. It must not, however, be supposed that there are no indirect taxes except those which are imposed upon commodities ; for instance, a tax which is in its essential character direct, may become indirect by private and commercial arrangements, and by many other causes. Thus, in England, it is customary for the tenant-farmer to pay poor-rates ; it is, however, evident that all such charges as these are really paid by the landowner, because if a farmer has to contribute 100^. a year to poor-rates, he is able to pay so much less for the use of the land he cultivates ; consequently, if no poor-rates were imposed, the landlord might increase the rent of his farm by the whole amount which his tenant previously contributed to these rates. The same remark applies to various other rates, and also to tithes ; it, therefore, appears that there is not necessarily an essential distinction between a direct and an indirect tax, for we have seen that a direct tax may be converted into an indirect tax, simply by a private commercial arrangement, since there is no reason whatever why the poor-rates should not in all cases be paid by the landlord, and not by his tenant. If this were done, the poor-rates would become a direct tax. It is, therefore, possible that the words direct and indirect, when applied to a tax, may denote only a nominal distinction ; the tax, however, which is imposed on commodities cannot be made a direct one, since it would be impracticable to levy the tax upon each person who may have to purchase any particular article ; conse- quently, the real points of distinction between the two different systems of taxation will be best elucidated by comparing the effects of a direct tax with those which result from a tax imposed upon a commodity. At the commencement of this inquiry it may be important to remark that various commodities have been taxed in our own country, and are still taxed in many BOOK IV. CH. III. Other taxes may become in- direct, and in- direct taxes may he made direct. The taxes considered here are those im- 566 Manual of Political Economy. BOOK IV. CH. III. posed for revenue, not for pro- tection. Taxes on commodi- ties are al- most in- variably incapable of satisfy- ing the condition of equality of inci- dence. This may be partly coinpen- other countries, in order to protect native industry, and not solely for the purpose of obtaining revenue for the State. We intend hereafter to discuss the theory of protective duties, and we shall therefore, for the present, consider those taxes on commodities which are imposed for the sole purpose of obtaining revenue for the State. The last remnant of protection has been banished from our fiscal system, and every tax is now carefully adjusted with the view of placing the home and foreign producer in a position of equality. As previously stated, a tax upon any commodity must almost invariably be opposed to Adam Smith's first canon of taxation, which affirms that ' each person ought to contribute to the revenue in proportion to his ability to pay.' Taxes on commodities cannot be framed in obedience to this rule, for various reasons. In the first place, it may be remarked that taxes on commodities can seldom be made ad valorem, and it is quite evident that from this circumstance great inequality of taxation must inevitably result. As an example it may be mentioned that every pound of tea which is imported into this country has, at the present time, to pay a tax of 6(7. per pound. The inferior qualities of tea which the poor principally consume would, if admitted duty free, be retailed at a price certainly not exceeding Is. per pound. It, therefore, follows that the tea which is used by the poor, who are the least able to contribute to the revenues of the State, is taxed at the rate of 50 per cent., whereas the superior qualities of tea which are purchased by the well-to-do at three shillings per pound, only pay a tax of twenty per cent. This inequality of taxation, which in a greater or less degree is common to those taxes which are imposed upon commodities, rarely admits of any practical remedy. For instance, it has been frequently proposed to make the duty on tea vary with the quality of the tea; but those who are most competent to form a practical judgment affirm that such a method of adjustment would be frustrated by the extreme difficulty and uncertainty of testing the quality of tea at the Custom-house. As before remarked, the inequality to which we have just alluded, and from which taxes when levied upon commodities cannot as a general rule be Taxes on Commodities and othei' Indirect Taxes. 567 freed, must as far as possible be compensated by making other taxes, such as the income-tax, fall most lightly on those who are the most injured by the particular inequality which we have just described. These con- siderations induce us again to remark that equality of taxation can be most eftectually secured, not by framing any one tax in obedience to Adam Smith's first rule, but by applying a general process of compensation to the whole revenue. Let us next inquire to what extent taxes on com- modities can be made consistent with Adam Smith's second rule, which states that ' the amount which each individual contributes to a tax ought to be certain and not arbitrary.' In one sense almost all taxes on com- modities strictly obey this rule or principle of taxation. The producer or importer of a taxed commodity can always know the exact amount which the particular tax will levy upon him. If the duty on tea is hd. per pound, the merchant who imports a cargo of tea can calculate with strict accuracy the amount of duty which the tea must pay ; the same remark applies to the producer of a taxed commodity such as beer. The only case in which uncertainty can arise is when a tax is made ad valorem, because then the test which the Government applies to ascertain the value of any commodity may be uncertain and imperfect in its operation. There has been an instance of this in the financial measures of Mr. Gladstone. Within a few years the spirit duties have been raised, and when Mr. Gladstone proposed in 1860 a great reduction in the duty on wine, he felt that the difference between the duty on wine and spirits was so great that the revenue might be defrauded by mixing spirits with wine, and importing the whole as wine. With a view of preventing such a fraud, he proposed to tax wine in proportion to the amount of alcohol it contained. The plan which was adopted to ascertain the quantity of this alcohol was denounced by those engaged in the wine trade as most vexatious : and they chiefly based their complaint upon the uncertainty of the tax when it was so imposed, for they affirmed that they never could tell beforehand the amount of duty which any particular wine would have to pay. It must, BOOK IV. CH. III. sated by other taxes. Taxes on commodi- ties generally satisfy the principle of being certain. There are, however, exceptions in the case of ad valorem, duties. 568 Manual of Political Economy. BOOK IV. CH. III. They are generally paid at the time most convenient to the con- iut fre- quently at a time in- convenient to the pro- ducer or importer. however, be admitted that such uncertainty with regard to taxes on commodities is exceptional, and rarely if ever exists, unless an attempt is made to adjust the tax according to some ad valorem standard. The third rule of taxation laid down by Adam Smith affirms that ' every tax ought to be levied at the time or in the manner in which it is most likely to be convenient for the contributor to pay it ; ' the inquiry must there- fore be made whether taxes on commodities are generally consistent with this rule. In making this inquiry it will be necessary to distinguish the real from the nominal payer of the tax ; for it has been already stated that the burden of these taxes really falls upon the consumers of a commodity, although the tax is generally levied from the producer or importer. Taxes on commodities are no doubt paid, as far as the consumer is concerned, at a time and in a manner which is most convenient ; for the tax is in fact levied upon the consumer at the time when he pays for the commodity which he may purchase. But the producer or importer of a commodity may be called upon, in consequence of defective financial arrangements, to pay the tax at a time and in a manner most incon- venient. Sometimes the inconvenience just alluded to is entirely due to injudicious financial arrangements ; some- times, however, it is inherent in the nature of the tax ; when this is the case, the tax ought not to be imposed, except as a financial necessity. For instance, it seems that the duty on hops could not be levied, except in a manner which was most inconvenient to the growers of hops, and thus a strong argument was provided for the repeal of this duty. Hops were taxed at so much per pound, whatever was the quality or quantity of the crop; the tax was assessed immediately the crop was gathered in, and the hop-grower was compelled to pay the duty at a certain definite time, whether he had sold his hops or not. The hop crop is so uncertain, that the grower could never accurately calculate how much he should be called upon to pay. If he were not a man of large capital, he was compelled to sell his hops, whether he wished to do so or not, in order to pay the duty. A too abundant crop was also a great disadvantage to the grower ; the demand for hops does not vary greatly from year to Taxes on Commodities and other Indirect Taxes. 569 year, and, consequently, there must be great fluctuations in the price of hops, since the crop of one year is often three or four times as great as the crop of the next year. The amount of duty which a grower had to pay was proportionate to the abundance of the yield, and it, therefore, not unfrequently happened that a large crop was most disastrous to the grower, because the maximum amount of duty had to be paid when the price of hops was extremely low. These, and otlier inconveniences, seemed to admit of no adequate remedy, and therefore the hop duty has been most properly repealed. It generally happens that many of the inconveniences connected with the time and manner of levying a tax on a commodity can be greatly diminished by proper financial arrangements. As an example, the bonding houses may be referred to, which offer great facilities and advantages to those who import taxed commodities. A merchant may not wish immediately to sell the goods he imports, he is, therefore, permitted to place them in bond, and as long as they remain in bond he is not compelled to pay any duty upon them. This, no doubt, is a just arrangement, because the Government intends that the consumer of the commodity should really pay the tax imposed upon it ; therefore as short an interval as possible ought to elapse between tlie payment of the duty and the sale of a commodity. The merchant simply advances the tax, and if repayment is deferred, he will be compelled to employ a greater capital in his business, and the consumer will be consequently charged a higher price for the commodity. The last rule of taxation propounded by Adam Smith affirms that 'every tax ought to be so contrived, as both to take out, and to keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the Sta.te.' It has been previously stated that any tax which is expensive to levy will be inconsistent with this rule. The same remark holds true if a tax diverts labour from a productive to a more fli unproductive employment ; if it encourages smuggimg, and lastly, if it necessitates restrictive regulations with regard to the mode in which any trade or industry is conducted. Taxes on commodities cannot, as a general BOOK IV. CH. HI. This incon- venience may he avoided by judicious arrange- ments, such as bonding houses. Taxes generally take more out of the •pockets of the people than tiiey bring into the State treasury. 570 Manual of Political Economy. BOOK IV. CH. 1)1. The ex- penses of collection may he reduced by a judicious selection of taxes. But the price may he unduly enhanced for the consumer. rule, be completely free from all the faults which have been just described, but the faults may be much mitigated by proper financial arrangements. A tax, whether levied on a home-produced commodity, or upon one which is imported, must be expensive to collect. A great number of excise and custom officers must be employed to assess and collect the tax; and an enormous outlay is often required to prevent smuggling and other kinds of fraud. Smuggling is much more easily prevented in an island like our own, than in a country where a great extent of land frontier has to be protected. The difficulty of guarding 2000 or 3000 miles of frontier would render the imposition of custom duties most undesirable in such a country as America. The expense of collecting a certain amount of revenue by taxes on commodities is very much diminished, if the taxes are confined to a few articles of general consumption ; when a tax is imposed upon some article of limited use, the cost of collecting the tax is always enormous in proportion to the amount yielded to the State. About fifty years since, the tariff of this country contained a list of 300 or 400 articles which were subject to either excise or custom duties. The great majority of these duties have been most properly repealed, and at the present time, tobacco, tea, coffee, sugar, wine, foreign spirits, and a few other articles, are alone subject to custom duties; beer and spirits being the articles which chiefly contribute to that portion of our revenue which is raised by excise duties. Again, with regard to smuggling, there can be no doubt that it is much discouraged by the removal of extremely high duties on articles which contain a great value in small bulk, and which can therefore be readily concealed. A tax on a commodity may, however, in various ways which are not so frequently noticed, take out of the pockets of the taxpayer an amount which greatly exceeds that which the tax yields to the State. In the first place, it may be stated that when a commodity is taxed, the price which the consumer has to pay for it is increased by an amount which often exceeds the ampunt of the tax. Thus let us take the case of a tax being levied under very favourable circumstances, and suppose, as an example, that a retail grocer buys so Taxes on CoTnmodities and other Indirect Taxes. 571 manj^ chests of tea direct from bond. The amount of tea which he buys we may assume to be 3000/.; tJie value of this tea would not probably exceed 2400/., if tea were admitted duty free, because, considering the average quality of the tea sold, the duty on tea may be estimated at twenty-five per cent, upon its value. The grocer, when he sells this tea retail, will, of course, expect to realise the ordinary trade profit. This profit we will suppose to be twenty per cent. ; the grocer will therefore obtain 3600Z. for the tea, which cost him 3000/., whereas if it were not for the duty, the grocer would be obliged to give only 2400/. for the same quantity of tea, and would be remunerated with the same per-centage of profit, if he sold his tea to his customers at such a price as would realise for him 2880/. It therefore appears that those who purchase this tea pay 720/. additional for it, although only 600/. of this amount is received by the Government as duty. Hence, upon this hypothesis, the duty takes out of the pockets of the taxpayers twenty per cent, more than it gives to the revenue of the State. This is the most serious objection which can be urged against taxes on commodities, and it is one which has not been adequately considered. It must, moreover, be remembered that the case just described does not as a general rule adequately represent the amount which a tax on a commodity keeps out of the pockets of the people beyond what it yields to the State. For instance, it has been assumed that the tea is purchased by the retail grocer direct from bond, but no doubt it much more frequently happens that the tea, after it is taken from bond, passes through the hands of four or five dealers, before it is ultimately sold to the consumer. If, therefore, it is supposed that tea pays a duty of twenty-five per cent, upon its value, each of these dealers will require twenty-five per cent, more capital to conduct his trade in tea. The ordinary profit of trade must be realised upon the additional capital which is thus required to be employed; consequently, when a commodity is taxed, the consumer is gener- ally compelled to pay for it a price which is increased to an extent considerably exceeding the amount of the duty. BOOK IV. CH. III. This is the most serious objection against taxes on commodi- ties. 572 Manual of Political Economy. BOOK IV. CH. III. Il affects to somt extent all taxes on commodi- ties. Illustra- tion of the favlt. Results of taxinq raw cotton A more serious defect cannot belong to any tax than that it should take from the taxpayer an amount which greatly exceeds that which it yields to the revenue. This defect, to a greater or a less degree, accompanies all indirect taxation ; for all indirect taxes are in the tirst instance paid by the producers or importers of a com- modity, who are remunerated by the increased price which the consumer is compelled to pay. In every instance, some time must elapse between the payment of the duty and the sale of a commodity, and, consequently, the trader who first advances the tax must wait for a certain time before he is repaid by the consumer. But the trader is compelled to employ a portion of his capital to make this advance, and upon this capital he will expect to obtain the ordinary trade profit; this profit the consumer must return to him, in addition to the amount of the tax. This most serious defect, though inherent in all taxes on commodities, may be very much diminished by proper precautions. Thus it is evident that as short an interval as possible ought to elapse between the levying of a tax on a commodity and the time when it is ready for consumption. On this account it is much more desirable to tax manufactured goods than the raw material. In order to illustrate this point still further, let us briefly trace the different results which would be produced by a tax on raw cotton, and by a tax on cotton goods. It may be assumed that the two different taxes yield the same amount to the revenue. Let it, in the first instance, be supposed that raw cotton is taxed, and that a manufacturer who purchases 10,000^. worth of raw cotton has to pay 1000/. duty. The tax, therefore, compels him to employ a capital of 11,000L instead of 10,000^. Upon this additional capital he will expect to realise the ordinary trade profit, which may be assumed to be ten per cent. At the end of a twelvemonth he sells the goods which have been manufactured from this raw cotton to warehousemen ; since, however, the duty imposed on the raw cotton has necessitated the employ- ment of 1000^. additional capital, the price of these manufactured goods must, in consequence of the tax, be increased by 1100/., and not by 1000/., which is the Taxes on Commodities and other Indirect Taxes. 573 amount really received by the Government ; for if this were not so, the manufacturer would not be adequately compensated for the capital employed in his business. Let us now make a second supposition, and consider the tax to be paid upon the manufactured goods. Then the manufacturer would not be called upon to pay the tax, until his goods were actually purchased by the retail dealer, or wareliouseman, and consequently the tax would not compel him to employ a larger capital in his business. In this case, therefore, the price of the goods, when sold by the manufacturer, will not be increased by an amount exceeding the amount of the tax. It, therefore, appears that a tax on manufactured goods, if it can be easily levied, is far preferable to a tax on raw material. It, however, not unfrequently happens that a manufactured commodity cannot be taxed without subjecting the par- ticular trade to the most injurious interference ; for in order to assess an excise duty, and in order to prevent fraud, various kinds of restrictions, with regard to the particular mode in which trade is carried on, must be enforced, and great annoyance is often caused by the vexatious visits of the excise officers. Thus few taxes on a manufactured connnodity could be assessed and collected with greater facility than the duty on malt, yet maltsters were compelled to carry on their trade according to certain strict rules. Notice, for instance, had to be given when the barley was to be wetted ; the barley, when wetted, had to be thrown out in a particular manner on the floors to be dried, and the exciseman could visit the malt-house whenever he pleased. These hindrances to trade were justly regarded as so serious that they formed one of the chief reasons why, in 1880, it was determined to substitute a duty on beer for the duty previously levied on malt. Such interference would be a still more serious evil, if some commodity should be taxed which involved complicated processes of manu- facture, each of which had to be conducted according to certain rules, and to be watched by Government officers, in order not only to prevent fraud, but to assess the tax. Such interference would oppose an insurmountable obstacle to the development of a branch of industry, for all that enterprise would be checked which stimulates BOOK IV. CH. III. or manu- factured cotton goods. The last fax would take much less from the con- sumer. Taxes on manufac- tures, how- ever, cause annoyance In other ivays. 574 Manual of Political Economy. BOOK IV. CH. III. Question of taxing exports. Effects of an export duty such as a duty on coal. the introduction of machinery, and other industrial improvements. The remarks hitherto made in this chapter have been restricted to the import duties and to the excise duties that are imposed upon the commodities which are con- sumed in the country ; the Government, in fact, intends that the burden of these taxes should fall on the con- sumers. It is, however, manifest that various exported commodities may be also taxed ; but it has been thought desirable to consider separately the operation of export duties, because these duties are imposed with the view of shifting the burden of the tax upon foreign countries. It will, moreover, be shown that, contrary to popular opinion, it ahnost invariably happens that, in attempting to tax the foreigner, the country that imposes an export duty taxes itself. To discuss the operation of export duties, it will be necessary to recall some of the principles which were established with regard to international trade. When investigating that subject it was proved that there is a constant tendency in operation to make the exports of a country pay for its imports ; it was also shown that the amount of profit which each country derives from inter- change of commodities varies inversely with the demand which the one country has for the products of the other. Let us, therefore, bear these principles in mind when tracing the effects of an export duty. One of the most recent export duties that has been proposed was an export duty upon coal ; this financial measure met with a considerable amount of support in Parliament in 1860, at the time when the details of the commercial treaty with France were being discussed. Let it be assumed that a duty of 2s. was levied upon each ton of coal exported. The price of English coal in foreign countries would, in consequence of the tax, be increased two shillings per ton. The demand for commodities always varies inversely with their price, and therefore this increase in the price of coal would diminish the demand for English coal in foreign countries. The export of coal from England would consequently be diminished; the decrease in the export would be greater with regard to some countries than with regard to others. France, for Taxes on Gomimodities and other Indirect Taxes. 575 instance, purchases coal from Belgium, and if Belgian coal remained untaxed, France might probably cease to import coal from England if our coal was subject to an export duty. It, therefore, appears that the first result of any export duty would be to diminish the amount of our export trade. The commodities which were subject to an export duty would decline in price to the home consumer in consequence of the foreign demand for them being checked. It might, therefore, seem that an export duty on such an article as coal would confer two great advantages on the general body of the taxpayers ; in the first place, it would cause foreigners to contribute to our revenue, and thus relieve us of a portion of our taxation; secondly, the price of coal would be reduced, and this would be advantageous to the nation at large. It may, no doubt, be urged as a set-off to these apparent advantages, that the coal trade would suffer in consequence of this diminution in the export of coal, and that the owners of collieries would realise smaller profits, owing to the fall in the price of coal. It may, however, be rejoined, that the loss which thus accrues to those engaged in a particular branch of industry is more than compensated by the advantages which we have shown general body of the tax- an important point still remains to be determined ; for the effect which might be produced upon our import trade, if our exports were checked by the imposition of a duty, has not yet been considered. In order to investigate this question, it may be sup- posed that an export duty upon coal has caused France to cease importing coal from this country. It has been already proved that exports are exchanged for imports ; it is, therefore, manifest that if the export trade of a country is diminished, the amount of her imports, other things remaining the same, must also be diminished ; this must be so, because the commodities which are exported pay for those that are imported. Such a decrease in the foreign trade of a country must diminish national wealth ; since it has been shown that foreign commerce increases the efficiency of labour and capital, by enabling each country to apply itself to those branches of industry for which it possesses the greatest natural would be conferred upon the payers. But an important BOOK IV. CH. III. Its appa- rent ad- vantages. A partial set-off to them. Investiga- tion of the effects pro- duced on our import trade. 576 Manual of Political Economy. Effects of an export duty im- postd upon cotton by the United States. advantages. It, therefore, follows that the question, whether or not an export duty is advantageous as a financial measure, must be mainly determined by the circumstances of each special case. For instance, it is quite possible that an export duty may entirely prevent the export of a commodity ; this would no doubt be the result if an export duty were in this country imposed upon silk manufactures. The competition between France and England in the silk trade is extremely keen ; on the one hand, France has cheap labour, and her clearer climate is supposed to give a superior colour to her dyes. On the other hand, England can perhaps manufacture more economically, because she possesses more perfect machinery and clieaper fuel. It is consequently difficult to decide whether France or England can sell silk goods to foreign countries at the cheapest rate. It is, there- fore, evident that the imposition of even a small export duty upon English silks would, as far as this branch of industry is concerned, completely drive England from foreign markets. The prosperity of an important branch of industry would thus be imperilled, and an export duty under such circumstances would be most disastrous and indefensible. A much more favourable case for the imposition of an export duty will next be considered. It cannot be dis- puted that the United States have hitherto possessed to a great extent a natural monopoly for the growth of cotton. No other country has been able to produce cotton of so good a quality at so cheap a rate. Let us, therefore, trace the consequence which would have ensued if a small export duty, say of a halfpenny or a penny per lb., had been imposed upon American cotton. Even so small an export duty as this would have yielded a considerable amount to the revenue of the United States. Foreign countries who purchased American cotton would, of course, be compelled to pay this duty, and it will, therefore, be instructive to inquire whether such a finan- cial measure would in any way have prejudicially affected the material interests of the United States. The first effect of such a duty would manifestly be to raise the price of American cotton in all countries which import it, by an amount at least equivalent to the duty. If the Taxes on Commodities and other Indirect Taxes. S77 duty was a penny per lb., England would be compelled to pay sixpence instead of fivepence per lb. for American cotton. It may be perhaps thought that this rise in the price of American cotton would induce England to obtain cotton from other sources of supply ; this, no doubt, would be so, if other countries possessed the same advan- tages for the production of cotton as America. It, therefore, follows that it would be most unwise to impose an export duty either on a raw or a manufactured com- modity, if the commodity could be produced on as favourable terms by other countries as by the country which imposes the export duty. But with regard to cotton, it was shown during the civil war in America that, without the United States, it is impossible for England and other countries to obtain the quantity of raw cotton which they require. The available supply from other sources was in fact so limited, that a rise in the price amounting to 200 or 300 per cent, failed to bring us so large a quantity of cotton as we were willing to purchase at even these high rates. Until, therefore, the resources of India and other countries are more fully developed, it cannot be supposed that we should resort to other countries for raw cotton if the United States imposed a small export duty upon this material.^ The rise in the price of cotton which would be caused by this duty would slightly diminish the quantity of cotton which such a country as England would purchase. If the English manufacturers have to pay a higher price for raw cotton, they must charge a higher price for manufactured goods, and if the price of cotton goods is increased, the demand for them will be diminished. But a very slight rise in the price of cotton goods would be sufficient to compensate the manufacturer for a rise in the price of the raw material, and so slight a rise in price would exert but little influence upon the demand for a commodity which is not used as a luxury, but which serves to provide one of the necessaries of life. It is impossible to predict the position which the cultivation of cotton may in future occupy. The United States had, ^ [Of the total amount of raw cotton imported into the United Kingdom in 1886, nearly three-quarters came from the United States. In 1904 this proportion was still maintained.] 20 BOOK IV. CH. III. Such a duty rnuj/U not seri- oudy affect the price of manu- factured cotton, 578 Manual of Political Economy. BOOK IV. CH. III. and mii/ht, as an ex- ceptional case, be financially politic. Import duties im- posed/or the sake of protection. for some time previous to the war, possessed a natural monopoly for the growth of cotton ; as long as this natural monopoly continued, the imposition by the United States of a small export duty upon raw cotton would have been politic, considered merely as a financial measure. Although, in the special case just investigated, we have spoken somewhat favourably of an export duty, 3''et it must be borne in mind that our remarks were based on the fact that the United States possessed, with regard to the growth of cotton, a natural monopoly. This, therefore, is quite an exceptional case : an export duty would almost invariably, as shown in a previous example, jeopardise the export trade of a country, and thus diminish the national wealth. We have hitherto, in this chapter, considered that import duties are imposed for the sole purpose of obtain- ing revenue for the State. But until a very recent period it was almost universally believed that another most important end was attained by import duties. Fifty years since, the theory of Protection was as gener- ally accepted in this country as it is now discarded. In America, in France, and in most continental countries, the great majority of politicians are even at the present day ardent protectionists. It is, therefore, still extremely important, as a practical question, to investigate the effects of import duties when they are imposed for the double purpose of obtaining revenue, and of protecting native industry. It is quite evident that an import duty can be easily arranged so as to obtain the double object. We have already, for instance, alluded to the closeness of competition in the silk-trade, between France and Eng- land. If, therefore, an import duty, say of ten per cent., should be placed upon French silks, and if at the same time English silks should be subject to no excise duty, it is manifest that French silks would probably be almost entirely excluded from the English market. A similar end might be attained with regard to all other imported commodities which compete with commodities of the same kind produced at home. It is, consequently, possible to limit, or altogether stop the importation of a commodity, by subjecting it to a sufficiently high import duty. Taxes on Commodities and other Indirect Taxes. 579 The principles which have been established with regard to international trade clearly prove the loss which the nation suffers if protective duties either prevent or check the importation of commodities. When trade is carried on between two countries, the wealth of each is increased, because each country is enabled to apply its labour and capital to those branches of industry for which it pos- sesses the greatest natural advantages. Thus, reverting to our previous illustration, it has been assumed that the cost of growing corn, compared with the cost of produc- ing iron, is much less in France than in England. It may, for instance, be supposed that a ton of iron costs as much to produce, in France, as ten sacks of wheat ; whereas, in England, a ton of iron would only be equiva- lent in value to six sacks of wheat. It is, therefore, easy to perceive the loss which France and England Avould both suffer if protective import duties imposed in France upon English iron should prevent the importation of English iron into France, and if protective duties imposed in England upon corn should prevent the importation of French wheat into England. Such a protective tariff would cause labour and capital to be wasted, or, in other words, would deprive them of a part of their productive power. Six sacks of wheat cost England as much to produce as one ton of iron ; but if the trade between England and France were unrestricted, England might divert a portion of her labour and capital from the growth of wheat to the production of iron for France ; it would be manifestly greatly to the advantage of France to give England eight sacks of wheat for each ton of iron. Hence, unrestricted trade so much increases the wealth of a country, that a certain amount of labour and capital, which before would only obtain six sacks of wheat, now produces a ton of iron, in exchange for which a foreign country will willingly give eight sacks of wheat. The argument just adduced, considered in conjunction with the remarks which have been made upon inter- national trade, may be regarded as conclusively demon- strating the injurious effect which is produced upon a nation by protective duties. Protectionists, liowever, ignore this loss of national wealth ; they advocate the BOOK IV. CH. III. A protec- tive tariff always in- volves a ivaste of capital and la- hour. Protec- tionists ig- nore this /oss, and point out the tempo- rary evils inflicted 58o BOOK IV. CH. III. nj)on home induHtry hy free trade. A consi- derationof free trade in corn in England shoius that it cannot perma- nentlji in- jure any class of English traders. Manual of Political Economy. protective system, because they conceive that, without its support, some special branches of industry would be unable to compete against foreign countries. It might, for instance, be argued that it would be impossible for the Eno-lish farmer to compete against the French farmer, if wheat can be grown at a much cheaper rate in France than in England ; on the other hand, it would be equally impossible for the French iron-master to compete against the English iron-master, if cheap English iron is freely imported into France. It is, therefore, plausibly argued that free trade is a dangerous experiment, if it should cause the agricultural interest to be ruined in England, and the iron interest to be ruined in France. It can, however, be easily shown that no class of traders can either be permanently benefited by protective duties, or permanently injured by free trade.^ Landowners are the only class that can derive a lasting advantage from protection. Property in land may be described as the possession of a natural monopoly. The value of this natural monopoly may be artificially raised by protec- tion, but it can be shown that other circumstances almost invariably deprive even the landowners of this special advantage. Tlie efiect produced by the corn-laws on the position of the English farmer, may be quoted to prove tliat no class of traders can be permanently benefited by protective duties. The restriction which the corn-laws imposed upon the importation of corn no doubt increased its price in this country; it was, therefore, concluded that protection, because it increased the price of corn, conferred a special benefit upon the English farmers. It must, however, be borne in mind that permanent low prices are as advantageous to the English farmer as per- manent high prices. In a country like our own, where there is great commercial enterprise, the competition of capital is constantly exerting a tendency to equalise profits in difierent trades. If the price of all agricultural ^ [It was shown by the late Sir Lyon Playfair, in a speech (Dec. 1887), that even in the United States, with their most elaborate system of protective duties, there were 17i millions of workmen in unprotected industries against 2\ millions "in protected industries; and, as might have been expected, that the highest rates of wages in America are earned in the unprotected industries.] Taxes on Commodities and other Indirect Taxes, 581 produce should be doubled, the farmer's gross returns would cwteris paribus be doubled ; his profits, therefore, would be enormously augmented, if he were able to appropriate to himself all these additional returns. But if the profits of the farmers should be greatly increased, an active competition for farms would be at once stimulated, the rent of land would consequently rise, the profits of the farmer would soon be reduced to their former amount, and thus the landowner, and not the farmer, would be ultimately benefited. Again, if the price of agricultural produce should be reduced by foreign importations, the profits of the farmer might be greatly diminished ; traders, however, will cease to carry on a business, if they are unable to realise from it the ordinary rate of profit. Land- owners will, consequently, be obliged to submit to a reduction of rent; hence, it is not the farmer, but the landowner, who would ultimately suffer. Of course, farmers may be temporarily benefited by a sudden rise in prices, or temporarily injured by a sudden fall. For instance, many farms are let on lease, and the rent of such farms cannot therefore be eitlier immediately raised or immediately lowered. When, moreover, the profits which are realised in a particular trade are affected by a sudden change of prices, a considerable time must elapse before the trade is again restored to its normal or steady condition ; during this interval the trader may either secure exceptionally great gains, or may have to submit to an unusually low rate of profit. It has been proved, as a possible theoretical result, that the landowners may be injured by the abolition of protective duties. The experience which has been derived from the introduction of free trade into this country has shown that the landowner will generally receive compen- sation in various ways. During the last few years there has no doubt been a considerable depression in English agriculture, and rents have fallen. Still, however, the value of agricultural land, except in a few cases, is much higher now than it was before the corn-laws were repealed, and it seems certain that as the depression has been mainly produced by a succession of bad seasons, there will be again a rise in rents when more favourable BOOK IV. CH. III. Free trade miyht cause tem- porary in- jury to land- oioners; hut, in p7'actice, can rarely produce that effect. 582 Manual of Political Economy. BOOK IV. CH. III. Particular branches of indtistj-y may suffer from free trade for times return. The rise in rent and the increase in the value of land which, until quite recently, took place almost uninterruptedly after the introduction of free trade, may be readily explained ; for although the price of wheat has been reduced by foreign importations, yet a more than corresponding rise has taken place in the price of other kinds of agricultural produce. Meat and dairy produce are much dearer now than they were previous to the repeal of protective duties. It must, moreover, be remembered that the rise in tlie price of these articles is in a great measure due to free trade. Our commerce, released from the trammels of protection, has expanded in the most extraordinary manner. An augmentation in our export trade amounting to more than 150,0()0,000Z.^ represents an enormous addition to the accumulated wealth, or, in other words, to the capital of the country; but if the capital of the country is aug- mented, the amount spent in wages is sure to be increased, and thus the additional wealth which has been created by unrestricted commercial intercourse has been distributed amongst the nation at large. The population having largely increased and the people having been made wealthier, a greater quantity of meat, dairy produce, and beer is consumed. No commo- dities of a perishable nature can be easily and cheaply imported. Hence, meat and dairy produce have risen greatly in price since the introduction of free trade ; farmers have consequently been able to pay higher rents than they could when they were protected by prohibitive duties, and for many years after the introduction of free trade growing prosperity for the landed interest was substituted for the impending ruin which was so often gloomily predicted by protectionist statesmen. Foreign competition may, no doubt, cause some parti- cular branches, of industry to be altogether relinquished, if the industry has been artificially sustained and fostered by protective duties. As an example, it may be mentioned that this country, following the example of France, might i[The total exports from the United Kingdom in 1840 were 51,000,000^., in 1886 they were 212,000,000^., in 1905 they were 3.30,000,000/., not including more than 77,000,000/. of foreign and colonial produce shipped here for future exportation.] Taxes on Commodities and other Indirect Taxes. 583 have imposed high import duties upon sugar, with the view of encouraging the home-manufacture of sugar from beet-root. A home-sugar interest of great import- ance raiglit thus have been artificially created;- if, however, the support of protection should be removed, it would be impossible for the producer of home-grown sugar to compete against the foreign importer; this particular department of native industry would there- fore be immediately destroyed. Such a destruction of a branch of industry may be perhaps regarded as dis- astrous, because it may be thought that labourers would be thrown out of employment, and capitalists would be deprived of an eligible investment for their capital. The labourers engaged in one particular kind of industry no doubt sutler a loss if they are compelled to relinquish the labour to which they are accustomed ; each brancli of industry requires some special skill or knowledge, and consequently those who are compelled to engage in a new kind of labour lose the advantage of their acquired skill. Again, employers always suffer a certain amount of loss if they are obliged to relinquish the industry to which they are accustomed ; they also possess a special knowledge, which they must to a great degree sacrifice, and capital cannot be transferred from one employment to another without considerable waste. In every branch of industry there is a large amount embarked in the form of fixed capital ; machinery, buildings, and plant, cannot be converted to a new use without involving great expense. These temporary disadvantages may no doubt accompany the removal of protective duties, but an abundant compensation is provided by the great benefits which are sure ultimately to result from free commercial intercourse. The general body of the consumers are provided with cheaper commodities, and the wealth of the country must be increased, because labour and capital are both rendered more productive. The principal argu- ment which foreign protectionists still urge against free trade would be removed, if it is once clearly perceived that it cannot be any loss to a country to import com- modities instead of producing them. If commodities are imported, commodities of an ecjuivalent value must be exported to pay for those which are imported. If, BOOK IV. CH. III. a time, hut if-s ultimate effects must be bene- ficial, for it can- not he a loss to a country to import commodi- ties instead of pro- ducing them. 584 Manual of Political Economy. BOOK IV. CH. III. A consi- deration of Mr. Mill's ' young country ' arfjument. therefore, the introduction of free trade causes a nation to purchase commodities, instead of producing them herself, the aggregate wealth in the country cannot be diminished — labour and capital are simply transferred from one industry to anotlier ; since, if a greater amount of com- modities is purchased from foreign countries, a larger quantity must be also produced at home, in order to supply the increased exports which pay for these additional imports. The old battle between Protection and Free Trade is being fought out in our Australian colonies. The Melbourne correspondent of the Times, in one of his able letters, tells us that the protectionist party defend their conduct by quotations from the works of many political economists, including, amongst others, the late Mr. J. S. Mill. It is scarcely necessary to say that Mr. Mill explained the mischievous fallacies of protection probably more clearly than any other writer. The Colonial protectionists maintain that he supports their views, because in one passage of his Principles of Political Economy (vide Book v. Chap, x.) an opinion is expressed, that in the case of a young colony a protective duty may occasionally be wisely imposed, if it can be clearly shown that this artificial encouragement may cause some branch of industry to be permanently and prosperously established in a colony, and if it can also be shown that this branch of industry might never have been introduced, if it had not been first stimulated and fostered by protection. Mr. Mill makes this excep- tion in favour of a protective duty, because he supposes that any industry wJien first established in a colony has always to struggle with peculiar difficulties. The colony, therefore, will be placed under a great disadvantage, if it has to compete with a country in which some particular industry has been carried on for a long period. The colonial trader will relinquish this unequal struggle unless he receives some assistance from the State in the form of protection, and thus many different kinds of industry, for the successful prosecution of which the colony may perhaps have peculiar advantages, will be virtually banished from the colony. The arguments of the Colonial protectionists are thus presented in their Taxes on Comonodities and other Indirect Taxes. 585 most plausible and favourable form. Mr. Mill no doubt put a strong case, if we assent to the hypothesis upon which it is based. But in our judoiuejit he over-stated the peculiar difficulties which an industry has to contend with, when first introduced into a new colony. Australia has purchased from England nearly all the manufactured commodities she requires instead of producing them herself, because in England labour, machinery and fuel are cheaper than they are in Australia. Tliere is apparently no reason why these circumstances, which give to England a superiority in manufacturing industry, should act with less force if the Australians are induced to form manufacturing establishments by the promise that British goods shall be excluded from their markets. As long as labour, macliinery, and fuel continue to be so dear in Australia, that it is cheaper to buy goods in England and to pay in addition the cost of carrying them 12,000 miles, it cannot be supposed that manufacturing industry will thrive in this colony. But if, in the course of a few years, the economic condition of Australia should change ; if, for instance, labour should become so much cheaper in that country, tliat woollen or cotton goods could be made there cheaper than the}^ could be imported from England, then it appears to us quite certain that woollen or cotton manufactures would thrive in Australia, and that their progress would not be impeded by any special difficulties, which are so formidable that they can only be vanquished by a protective tariff. The most serious objection, however, to Mr. Mill's argument in favour of protection in a young colony, arises from the difficulty of abolishing a protective duty when it has been once imposed. Mr. Mill's case rests upon the supposition that protection may be resorted to as a temporary expedient, and that when the industry which has been thus fostered is strong enough to stand alone, the protection it has received can be easily relinquished. The experience of the United States, however, conclusively proves that those who are interested, either as employers or employed, in any particular industry, wliich has been protected, will not thus voluntarily accept free trade. Mr. D. A. Wells, the well-known American economist, HOOK IV. ('11. 111. The diffi- culty of abandon- inij a pro- tective policy. 586 Manual of Political Economy. has said, " Although the main argument advanced in the United States in support of protective duties is that their enactment is intended to subserve a temporary purpose, in order to allow infant industries to gain a foot-hold and a development against foreign competition, there never has been an instance in the history of the country wliere the representatives of such industries, who have enjoyed protection for a long series of years, have been willing to submit to a reduction of the tariff, or have voluntarily proposed it. But, on the contrary, their demands for still higher and higher duties are insatiable and never intermitted."^ It is remarkable that this demand for protection should have arisen in a community where the wages paid are higher than those which are received by the labourers of any other country. More- over, in Australia the position of the capitalist is as satisfactory as that of the labourer, for in previous chapters it has been frequently remarked that in Australia fertile land is so abundant, and as a con- sequence the productioD of wealth is carried on under such advantageous conditions, that profits as well as wages are extremely high. It is, therefore, evident that the various kinds of industry which flourish in that . colony must be singularly remunerative, and the com- I munity must incur a serious loss if protective duties should artificially stimulate certain trades, which would be less productive of wealth in proportion to the labour and capital invested in them, than are the various branches of industry which are now carried on. Hence ^ [The battle between Protection and Free Trade in America entered upon a new phase, when in Dec. 1887, the President declared in his message to Congress that the fiscal system of the United States took l from the pockets of the taxpayers a sum vastly in excess of what is needed for the administration of the Government. The accumulated surpluses of revenue over expenditure, in June, 1888, reached the enormous total of 28,000,000/. All the debt that can be paid off has been paid, and the American executive is embarrassed by the difficulty of finding some way of dealing with the large sums in its possessiou. President Cleveland denounced the tariff which took more from the citizens of the country than was i-equired for the necessities of the state "as an indefensible extortion and a culpable betrayal of American fairness and justice," " crippling our national energies, suspending the country's development, preventing investment in productive enterprise, threatening financial disturbance, and inviting schemes of public plunder."] Taxes on Commodities and other Indirect Taxes. in this, as in every other case, protection would exert a mischievous tendency to cause labour and capital to be transferred from one industry to some other which is less productive of wealth. In Australia the accumula- tion of wealth may be augmented almost without an}^ assignable limit, if a sufficient supply of labour is forthcoming ; and the protectionists in that country should not lose sight of the fact that their policy will make imported commodities dearer, and will thus diminish the advantages which a labourer will derive from emigrating to that colon}^. In the present and preceding chapters, the chief circumstances connected with direct and indirect taxa- tion have been briefly reviewed. Writers on taxation usually make a comparison of these two different systems, and attempt to balance the advantages and disadvantages of each. We think, however, that it is impossible fairly to make such a comparison, and the attempt may possibly lead to mischievous results. For instance, if it can be shown that direct taxation is more in accordance with Adam Smith's four rules than indirect taxation, the proposition is at once propounded that the whole revenue of the State ought to be raised by direct taxation. Some of the evil consequences which would be produced if such a proposal were carried into practical effect have been explained in this chapter. Direct and indirect taxation are both respectively accompanied by certain defects and inequalities which can only be partially remedied. It is impossible to decide with certainty, whether the defect which may belong to a direct tax is comparatively of greater moment than another defect which may be inseparably connected with a tax on a commodity. Thus an income- tax may be reasonably objected to on two distinct grounds ; in the first place, it taxes savings, and there- fore discourages the accumulation of capital ; in the second place, it cannot be accurately assessed with regard to certain classes of incomes. All taxes on commodities are, however, subject to certain imper- fections which are peculiar to this particular kind of taxation. Thus a tax on a commodity can be seldom made ad valorem, and therefore such a commodity as 587 BOOK IV. CH. III. A com pari soil is fre- quently made be- tween di- rect and indirect taxation. Such general compari- sons are futile. 588 Manual of Political Economy. BOOK IV. CH. HI. An ad- herence to either kind of taxation exdusirely must pro- duce had effects. Should taxes be the tea which is purchased by a poor man, is far more highly taxed than the tea which is purchased by the rich. What test, therefore, will decide whether the inequality consequent upon the difficulty of making taxes on commodities ad valorem, is of more serious moment than the discouragement which an income-tax places on the accumulation of capital ? It should, moreover, be remembered that some par- ticular section in the community must suffer a special injury, if the incidence of a tax is unequal and unfair. Inecjuality of taxation really signifies that a tax takes an undue amount from some one class ; it is, therefore, evident that all the particular defects which belong to each tax would be intensified, and would produce a concentration of inequality with regard to some one class of the community, if any tax should be so greatly in- creased that a large part of the revenue should be raised by it. For instance, the advocates of direct taxation would repeal most of the existing taxes on commodities, and would substitute an income-tax in their place. An income-tax of 4.s'. in the pound would thus be probably required, and such a tax could not be raised without increasing the evil consequences of an income- tax in a far greater ratio than the increase in the amount of the tax. Thus it is probable that our present income- tax does not to any serious extent discourage the accumulation of capital. But an increase of the income- tax to 4s. in the pound would so powerfully check the accumulation of capital, that the production of wealth would be greatly diminished, and the amount spent in wages would also be so much decreased, that the wages of the labourers would be considerably reduced. Again, if the chief part of the revenue of the State were raised by an income-tax, the inequality of taxation would be greater than any existing at the present time, since certain classes, such as traders and manufacturers, can escape a portion of the tax without much fear of detection. Hence it seems it would be unwise to obtain the revenue of a country exclusively by either direct or indirect taxation. Before concluding these remarks on the general prin- ciples of taxation, it will be well to refer to the question Taxes on Commodities and other Indirect Taxes. 589 whether or not it is desirable to maintain taxes with the object of reducing debt. Reference has already been made {vide p. 146) to the extent to which the national debts of most European countries have increased since 1850. There has also been a great increase in the debt of India during the same period. The civil war in America led to the creation in 4 years of a debt of no less than 556,000,000^.; this debt was reduced in a little more than 20 years to 270,000,000^. [; but in 1905 principally in consequence of the war with Spain the debt of the United States reached the sum of 454,928,000^.]. In 1848 the national debt of England exceeded by 74,000,000/.. the national debts of all European countries put together.^ Until quite recently no serious effort has been made to reduce the debt of England, and at the close of the Crimean war in 1855, her debt was 834,000,000/., or only about 66,000,000/. less than it was at the conclusion of the wars with Napoleon in 1815. The plan which has now been for some time in operation in England for the reduction of the debt, is to devote a certain sum each year for the conversion of perpetual into terminable annuities. Thus since 1877''^ the annual charge for the interest on the debt has been taken at 28,000,000/.3 If 28,000,000/. is each year set aside for payment of interest on, and reduction of debt, it is obvious that the amount available for the reduction of debt will each year increase. [In 1883 a bill was passed retaining this 28,000,000/. a year as a permanent charge for payment of interest and reduction of debt, and also providing for the creation of a series of terminable annuities which have cancelled many millions of debt. On the whole, and with the exception of the period of the South African War when additional debt was incurred to the amount of about 150,000,000/., the legislation just referred to has caused a very considerable reduction of the national debt. This will be appreciated by the fact that in 1857 the debt amounted to ^ See National Debts, by the late R. Dudley Baxter, p. 77. ^[An exception was made in the Budget of 1887 and during the South African War.] =* Subsequently reduced to 27,000,000/. BOOK IV. CH. III. imposed with the object oj payinq of debt?' The method adopted in England, for re- ducing debt. 590 Manual of Political Economy. BOOK IV. CH. III. 835,5()(),000L and in 1905 to 796,786,000^ from which about 40,000,000^. may be deducted in respect of the value of the Suez Canal Shares and other assets held by the Government. In 1888 Mr. (now Lord) Goschen carried through Parliament a measure for the reduction of the interest payable on the national debt. If therefore during years of normal expenditure, the fixed annual charge of 27,000,000?. for payment of interest and reduction of debt is retained the process of extinguishing debt will go on with satisfactory rapidity.] It is obvious that if the subject is regarded purely as one of arithmetic, it can make no difference, so far as H the ultimate reduction of debt is concerned, whether a surplus is applied to the immediate cancelling of debt or whether it is used in the conversion of perpetual into terminable annuities. There is, no doubt, one objection that may be urged against the adoption of the latter course. If, during the time that the conversion into terminable annuities is taking place, it becoiiies necessary to borrow, then the (Government is placed in the position of borrowing money with one hand while it is paying off debt with the other ; and thus the evils of the old [ sinking fund are revived. This phm of borrowing to ' pay oft' debt constituted the inherent defect of Mr. Pitt's well-known sinking fund. At that time the normal condition of the country was one of borrowing, and consequently the onl}^ effect of keeping such a fund in operation was to increase the amount of the loans that had annually to be raised. If before the terminable annuities lapse, it becomes necessary to borrow, either for a war or for any other purpose, the reduction of the |' debt is for the time suspended. When, howev^er, the financial condition of England is such that the regular recurrence of a surplus may be reasonably anticipated, it is no doubt easier to devote this surplus to the reduction of debt when it is allocated to this object, than if the j appropriation of the surplus were an open question year after year. It is often urged as an objection to the reduction of debt that the money devoted to this purpose would be more beneficially applied if it were employed in the remission of taxation. It. is sometimes said that it ouijht Taxes on Commodities and other Indirect Taxes. 591 to be left to " fructify in the pockets of the people." The question of the extent to which a country ought to reduce debt should obviously be determined by circum- stances. If the financial condition of a country is such that, in order to pro^dde for the reduction of debt, it is necessary to maintain taxes which seriously impede industry or are exceptionally burdensome to the people, the case for the reduction of debt is much less strong than if no taxes need be imposed which materially inter- fere with the industrial development of the country. But during periods of financial prosperity it cannot with any reason be urged that an effort should not be made to reduce the national debt. Although we may justly feel every confidence in the continued progress of the country, yet posterity may have to contend with difficulties which we have not to encounter ; and at the present time, with the exception of the duties on tea, coffee and sugar, no tax is imposed upon any article which can be considered a necessary of life. BOOK IV. CH. in. BOOK IV. CH. IV. Peculiar nature of a land-tax. Impor- tance of the land- tax in India. The land- tax is often in the nature of rent. CHAPTER IV. ON THE LAND-TAX. WE propose to discuss the land-tax in a separate chapter, because in some respects this tax differs in its incidence from all others. The Land-tax possesses a special, practical importance, for although it yields a very insignificant portion of tlie revenue of this country, yet a large part of the revenue of our greatest dependency, India, is provided by the taxes which are imposed upon land. The nature and incidence of the land-tax will be clearly understood, by considering the mode in which the dominion of Great Britain was established in India. The British traders who first settled in that country found it governed by a great number of rulers, who owned the soil, and derived their revenue by making their subjects pay a rent or tax for permission to cultivate the land. The dominions of these native rulers were obtained by the English, either by annexation, or by conquest ; and, consequently, our Government gradually became possessed of a great portion of the soil of India, and could exercise over it the same rights of property as those which an English landlord exercises over his own estate. The Government in India takes the place of individual landlords, and the cultivators of the soil rent their land from the Govern- ment instead of from private landowners. It, therefore, appears that there is no real, but simply a nominal distinction between a land-tax and rent, for in a previous chapter it was shown that rent is the price which is paid for the use of an appropriated natural monopoly. If land has been appropriated by the Government, then the price paid for the use of this appropriated natural On the Land-Tax. 593 monopoly is received by the Government, and is termed a land-tax. If, however, the price is paid to a private individual, then it is termed rent. From these considerations it is evident that, as far as the cultivators of the soil are concerned, it can be a matter of no consequence whatever to them, whether they pay a land-tax to the Government, or whether they pay rent to private landowners. Hence a land-tax is no burden upon the cultivator, nor does this impost cause any loss to the rest of the community. It, therefore, follows that a land-tax, as long as it does not exceed a rack-rent, cannot increase the price of products raised from the land ; for those who grow the products would not sell them cheaper if they paid rent to a private land- lord, instead of paying the same amount to the Govern- ment in the form of a land-tax. A land-tax consequently differs from all other taxes, for it possesses the excellent quality of providing a large revenue for the State with- out diminishing the wealth of the community. Those, therefore, are completely in error, who quote the aggregate amount of taxation which is raised in India, in order to prove how heavily the people of that country are taxed. At least 20,000,000Z. per annum is obtained in India by the land-tax ; but it would be as unreasonable to consider this amount as a burden laid upon the people, as it would be to consider that the whole rent which is paid to English landlords in this country is an impost levied upon the cultivators of the soil. It is, however, quite possible that a land-tax may exceed a rack-rent in amount, and the tax would, in this case, increase the price of agricultural produce. Suppose, as an example, that our Government should arbitrarily take possession of all the landed property of this country. The English farmer would then rent his land from the State, and not from private individuals ; the position of the cultivator would manifestly be unaffected by this appropriation of property if rents were determined then, as now, by competition. The same rack-rent would, in fact, be paid by the farmers, and the price of agricultural produce need in no way be influenced by such a transfer of property. But let us inquire what would occur if the Government resolved to levy a greater rent, in the form 2p BOOK IV. CH. IV. The land- tax dots not inju7~e the culti- vators of the soil. If the land- tax exceeds a rack-rent in amount it must raise the price oj agricultu- ral pro- duce. 594 Manual of Political Economy. BOOK IV. CH. IV. A land-tax which ex- ceeds a rack-rent tends to throw the soil out of cidtiva- tion. of land-tax, than the rack-rent which the cultivator previously paid. Let it, for instance, be assumed that the Government levies 500^. a year in land-tax from a farmer whose rent had been previously 400^. a year. It will be remembered that a rack-rent is the price which is paid for the use of land when rents are determined by competition. Since, therefore, free competition of capital is supposed to exist, the farmer, after paying a rent of 400/. a year, will realise on the average of years the ordinary rate of profit upon his labour and capital. The extra 100/. a year which it is assumed the Government levies from him, he cannot afford to pay ; or, in other words, the payment of this additional sum will prevent him realising the ordinary rate of profit upon his labour and capital, unless he is compensated by a rise in the price of agricultural produce. No class of traders will, however, continue an occupation if it is permanently less profitable than other branches of industry ; hence it is impossible for a land- tax to exceed a rack-rent in amount without producing a rise in the price of agricultural produce. It, therefore, follows that all that portion of a land-tax which exceeds a rack-rent in amount is really contributed by the con- sumers of agricultural produce, since the price of such produce is increased. Other considerations show that when a land-tax exceeds a rack-rent in amount, a counteracting influence is brought into operation which diminishes the aggregate revenue which the land-tax yields. For it is evident that the importation of agricultural produce will be encouraged, if the price of such produce is artificially raised in the home-market hy an excessive land-tax. But if an increased amount of produce is imported, a diminished quantity of produce will be grown in the country itself. Directly, therefore, a land-tax is greater in amount than a rack-rent, unless the increase in the tax is accompanied by restrictions upon importation, a tendency is exerted to throw land out of cultivation. This tendency will continue if the land-tax is increased, and thus the area of land from which the tax can be levied will be graduall}^ restricted. The land-tax which exists in our own country forms On the Land-Tax. 595 only a very small part of the rent which is paid to private landlords. Such a tax should properly be con- sidered to denote that the State has reserved a small pecuniary share in the ownership of the soil. The relative value of the shares which the landowner and the State respectively possess was very different formerly to what it is now. The land-tax in our own country was long since commuted for a fixed money payment, and the tax consequently did not increase with the enormous advance in the value of landed property. As far as the cultivator is concerned, it makes no difference whether he pays the land-tax or not, because if it is arranged that the tax should be levied from him he manifestly pays so much less rent to the landlord. As before said, such a land-tax as that which exists in England merely denotes the fact, that the State possesses a certain pecuniary interest in the soil ; and it is, therefore, evident that both the profits of the cultivator and the price of agricultural produce must be the same whether the land- tax exists or not ; or, in other words, whether the State has, or has not, reserved for itself a certain right of property in the soil. It would, therefore, have been a fortunate circumstance for the nation if the land-tax in this country were greater in amount than it is at the present time. It would now, however, be an unjust confiscation of property to increase the land-tax; such an augmentation of the tax would be paid entirely from the rent of landowners, and would, therefore, be as indefensible as any other impost levied upon one special class. But it would have been a boon to the tax-paying community if, when the land-tax was first imposed, its amount had been fixed, not at a certain sum of money, but at a certain definite proportion of the value of the land. If this arrangement had been adopted, the amount which the land-tax yields to the revenue would have been constantly augmented in proportion to the increase in the value of the land ; the amount of revenue thus raised, though constantly augmenting, would be felt as a burden by no class, because the land-tax is, as it were, spontaneously provided by the appropriation of a natural monopoly ; therefore the tax would yield a larger revenue as the value of this monopoly increases. BOOK IV. CH. IV. The land- tax in England only de- notes that the State retains a small in- terest in the soil. An aug- mentation of the land-tax now would injure the land- holders. 596 Manual of Political Economy. BOOK IV. CH. IV. Tithes are equivalent to a rent- charge. The Tithe Commuta- tion Act. It may he idtimately injuriowi to tithe- proprie- tors. The tithe which exists in this country is essentially a land-tax, and was originally equivalent in value, as its name implies, to one-tenth part of the produce of the land. The tithe has not been usually termed a land- tax, because it was originally appropriated to religious purposes, and consequently did not form a part of the general revenue of the State. Only a portion of the tithes in this country has, since the Reformation, served as a religious endov^ment, for tithes are now often possessed by private individuals like any other kind of property. A tithe is in fact a rent-cliarge upon landed property, and this rent-charge is frequently not possessed by the owner of the land. As far as the cultivator is concerned, it manifestly can be a matter of no consequence whether such a rent-charge does or does not exist. If the land which he cultivates is tithe-free, the whole amount which he pays for the use of it will be regarded as rent; if, however, the land should be subject to a tithe, the amount which the cultivator pays for the use of the land will be the same as it would be if the land were tithe-free ; but the whole of this amount will no longer be considered as rent, for it will be shared between the landowner and the tithe- proprietor. The tithe, like the land-tax, would be now very insig- nificant in amount, if it had been originally commuted at a fixed money payment. Previous to the Tithe Com- mutation Act, which was passed in 1837, the tithe was assessed as nearly as possible upon the principle of making it equivalent in value to one-tenth of the produce of the land ; the tithe consequently increased as the value of landed property increased, for the tithe would manifestly be augmented if the productiveness of land increased, or if the value of agricultural produce advanced. The main object of the Tithe Commutation Act was to facilitate the assessment of the tithe, and the amount which is now annually paid as tithe is determined by the average price of corn during the previous seven years. It is quite possible that tithe- proprietors may be ultimately injured by this commuta- tion. The amount at which the tithe is now assessed being m\e\y determined by the price of corn, it is evident that the tithe-proprietor is not benefited by a On the Land-Tax. 597 rise in tlie price of stock. In this work the opinion has been frequently expressed that stock is destined to become relativelj^ much dearer than corn, because stock must be always difficult to import, whereas the area from wliich corn is obtained is rapidly extending. A tithe, therefore, constantly represents in value a smaller proportion of the whole value of the produce raised from the land, if the amount at which the tithe is assessed is not influenced by the rise in the value of stock, but is solely determined by the price of corn. A tithe-proprietor under the present commutation derives no benefit from the increased productiveness of land. Improved methods of tillage may double the produce which is ra,ised from a farm, and yet the tithe paid upon it will not be increased, unless there is a rise in the price of corn. It was no doubt with great force urged by the promoters of the tithe commutation, that a tithe- proprietor ought not to share with the landowner the additional produce which results from superior agriculture. It was, for instance, maintained that the land is rendered more productive by the expenditure of capital upon it, and it would be unfair that the tithe- proprietor should be benefited by an outlay of capital which has been entirely contributed by the landowner. It was, moreover, argued that the admission of this claim on the part of a tithe-proprietor might seriously impede agricultural improvements, since landowners would be reluctant to invest capital if others were to share with them in the advantages of the outlay. BOOK IV. CH. IV. Tithe-pro- prietors derive no benefit jrom, %n- creased produc- tiveness of the soil. CHAPTER V. THE POOR LAW AND ITS INFLUENCE ON PAUPERISM. BOOK IV. CH. V. The rise of the English Poor Law, IN attempting to describe the influence which the English Poor Law has exercised upon Pauperism, it will be desirable in the first place to give a brief review of the circumstances which have led to the establishment of our existing system of Poor Law relief. In order to make the subject as clear as possible, it is necessary to distinguish between the two modes in which relief to the poor is granted. In the first place, relief may assume the form of almsgiving or charity; or secondly, the funds distributed amongst the poor may be administered by the State and be obtained through the ordinary channels of either imperial or local taxation. In this latter case a country is said to have a Poor Law. In England there was not any real Poor Law until the reign of Elizabeth. And until as recently as 1838 the relief of the poor in Ireland was not organised by the State ; it was rather left to the uncertain chances of voluntary charity. The causes which led to the gradual establishment of a Poor Law in England may be readily traced. As long as the relief of the poor was left to individual, and consequently unorganized, eflTorts it is obvious that many mischievous results would be sure to ensue. Indis- criminate almsgiving always in the end demoralises those whom it is intended to benefit, and intensifies the evil which it seeks to alleviate. Those evidently obtain the largest share of private charity who can excite in others the strongest sympathy for their sufferings. Mendicancy thus becomes a profession in which the greatest success is often secured by the least deserving. Mendicancy and vagrancy grew to such serious propor- The Poor Law and its Influence on Pav/perisTn. 599 tions in this country, that it was attempted to regulate them in numerous Acts of Parliament. Throughout the various statutes which were passed for this purpose one leading idea, based on principles which were incontest- ably sound, can generally be traced. Parliament showed the utmost care to indicate the broad fundamental distinction wdiich exists between voluntary and in- voluntary poverty ; various local authorities were enjoined to treat with sympathy and liberality all whose poverty was involuntary ; a severe measure of justice was, however, meted out to voluntary mendi- cancy. An able-bodied man who preferred to beg rather than to work excited intense indignation in the legislature of those days. Such a one was in sundry Acts of Parliament of Richard II. and in succeeding reigns termed a " sturdy vagabond " and " a valiant beggar," In one of these statutes it was decreed that if an able-bodied beggar were detected applying for relief when work was to be had, he was for the first offence to be wdiipped, for the second offence one of his ears was to be cropped ; and if he offended a third time he was to be hanged as an enemy to the commonwealth. The purpose of these Acts w^as defeated by their extreme severity ; such penalties were too harsh to be generally inflicted. Mendicancy and vagrancy went on increasing in spite of the efforts of the Legislature to check them ; the evil at length became so threatening to the well- being of the country that the necessity of adopting a different policy became generally recognised. In con- sequence of the suppression at the time of the Reformation of the monasteries and religious houses which had been centres of almsgiving and general relief, the attention of the Legislature was then particularly directed to the condition of the poor ; and in the reign of Henry VIII. two statutes were passed in which may be detected the germs of the celebrated Act of Elizabeth, from which our Poor Law system originated. These Acts of Henry VIII. not only rendered each locality responsible for the support of its own poor, but also attempted the extremely useful work of regulating the giving of alms. The impotent poor were to be sent to the place where they were born, and the local authorities BOOK IV. CIl. V. Early efforts to extirpate the pro- fessional beggar. 6oo Manual of Political Economy. BOOK IV. OH. V. The Eliza- hethan Poor Law. were, under the pain of heavy penalties, enjoined to treat them with kindness and liberality. With regard to the able-bodied or voluntary paupers, a very different policy was to be adopted ; work was to be provided for them, and if they did not accept it they were severely punished. But the most important provisions in these Acts were those which regulated almsgiving. All who desired to give relief to the poor were ordered to place their contributions in a common fund, which was distributed by the Bishop and clergy. If any one omitted to do this, and dispensed charity privatel3^ he rendered himself liable to a penalty equal to ten times the amount which he had given away. The intentions of those who framed these Acts were excellent ; they evidently desired to create a distinct line of demarcation between voluntary and involuntary pauperism, and they not uurea.sonably hoped by dis- couraging indiscriminate almsgiving to diminish mendi- cancy and vagrancy. But from the severe enactments which were subsequently passed against mendicancy, it is evident that the wise intentions of these legislators were to a great extent defeated. The reason of their failure can be readily understood. The distributors of the common fund had no power to impose a rate, and thus obtain from individuals contributions in proportion to their means. This defect in the law probably im- pressed itself upon Elizabeth and her advisers, and as a natural consequence, a remedy was suggested which was embodied in the celebrated Act passed in the 43rd year of her reign. The main provisions of this Act may be briefly described. It gave for the first time to every one a legal right to claim relief. In order to obtain the fund which the provision of this relief required, local authorities were empowered to impose a rate upon all such real property as land and houses ; the able-bodied were by its provisions compelled to work as a condition of obtaining relief ; the cost of maintaining able-bodied paupers was thrown upon any of their natural relations who could afibrd to bear the charge. The Act also provided for the annual appointment in each parish of overseers, who were responsible for the collection of rates, and the administration of relief. There is so little The Poor Law and its Influence on Pauperism. difference in all important principles between these provisioiis and those wliich were embodied in the New Poor Law of 1834, that it may at first sight seem difficult to understand why this latter Act was ever required. There probably never would have been any necessity for passing it had not the Pour Law of Elizabeth been most mischievously tampered with. It is obvious, from the description just given of its leading provisions, that one of the chief objects of its framers was to deal vigorously with voluntary pauperism. For 150 years this policy was continued with the happiest results. Mendicancy and vagrancy greatly diminished, and the restrictions imposed upon able-bodied paupers were regarded by them as so onerous that few, except the impotent poor, applied for relief. Between the passing of the Act in 1601 and the time to which we refer, several amending statutes were passed ; none of these, however, weakened, some of them materially strengthened, the original purpose of the Act. Thus in 1723, the ninth year of the reign of George I., a parish, or union of parishes, was empowered to build a workhouse, and the oiler of residence in it, if not accepted, was a bar against relief. This enabled local authorities to diminish or even altogether to abolish out-door relief. There is reason to believe that if the power thus conferred on local authorities had been more extensively taken advantage of, a vast proportion of the pauperism which has afflicted this country would never have existed. But unfortunately an entirely different policy was soon adopted by Parliament, and sanctioned by public opinion. It seems not improbable that this change of policy is to a great extent to be attributed to the remarkable influence exercised by the Elizabethan Poor Law in diminishing pauperism. Frequent reference is made by writers of the period to the fact that about the middle of the last century there was less pauperism in England than in any other country. It appeared at that time not unlikely that pauperism would in the course of a few years be almost exterminated. Un- fortunately, howevei', instead of persevering in a policy which had produced such happy results, the opinion began to prevail that, as there was comparatively so little 6oi BOOK IV. CH. V. Its efficacy in prevent- ing volun- tary l>auperi.sm. The work- house test. The aban- donment of the xoise provisions of the 6o2 Manual of Political EconoTny. BOOK IV. CH. V. Eliza- hetlian Poor Law almost involved England in bank- ruptcy. Restric- tions on out-door relief were given up. Gilbert's Act in 11 S2 abolished the work- house test. East's Act in 1815 authorised the allow- ance sys- tem and grants in aid of wages. . Ruinous conse- quences of the en- courage- ment thus given to pauperism. pauperism, there would be no danger in administering parochial relief in what was supposed to be a more liberal and kind-hearted spirit. The stringent provisions of the Elizabethan Poor Law were gradually relinquished ; out- door relief, instead of being discouraged, was directly- fostered by various Acts of Parliament; a lax adminis- tration of the law became general, and the result was that pauperism assumed such alarming proportions about the year 1832, as almost to threaten the country with national bankruptcy and permanent ruin. It is evident that the change of policy just indicated was gradually glided into without the slightest apprecia- tion of the consequences involved. It unfortunately happened that the leniency and liberality in the administration of the Poor Law which, as previously remarked, were introduced about the middle of the 18th century, were chiefly shown in granting out-door relief on more easy terms to able-bodied paupers. By an Act passed in 17G7, the 7th year of George III., guardians were appointed to protect the poor against the parsimony of overseers and other parish officers. Fifteen years later, by what is known as Gilbert's Act, most of the valuable safeguards in the old Poor Law were entirely swept away. The workhouse was no longer to be used as a test of voluntary pauperism, for by this Act the able-bodied were not obliged to enter it ; the guardians were ordered to find work for all able-bodied applicants near their own homes, and to make up out of the rates any deficiency in wages. The same fatal policy was continued, and was brought to a climax in 1815, when, by a statute known as East's Act, the workhouse test, imposed by the Act of George I., was altogether removed. After the passing of this Act, no one, not even an able- bodied labourer, was called upon to enter the workhouse, and justices were empowered to make money grants to people at their own homes. The extent to which the industrial classes were demoralized by these relaxations of the Poor Law soon became only too evident. The most pernicious influence was exerted, not only upon the poor, but also upon their employers ; every agency wliich could most powerfully promote pauperism had been brought in operation ; men The Poor Law and its Influence on Pauperism. 603 were virtually told that no amount of recklessness, self- indulgence, or improvidence would in the slightest degree affect their claim to be maintained at other people's expense. If they married when they had no reasonable chance of being able to maintain a family, they were treated as if they had performed a meritorious act, for the more children they had, the greater was the amount of relief they obtained. All the most evident teachings of common sense were completely set at nought ; labour was bribed to remain in localities where it was not wanted ; and it was prevented passing to those districts where there was a demand for it. Thus if wages in any parish were below what it was thought would provide a reasonable maintenance, the local authorities were empowered to grant an allowance in aid of wages. These evils were aggravated by various enactments known under the general name of the Laws of Settlement, which were passed with a view of hindering labourers from leaving the localities in which they were born. The allowance system and the Law of Settlement, though acting in very different ways, combined to impede the natural flow of labour. However great a surplus of labour there might be in any locality, the employed had no inducement to leave it, as long as their wages were made up to the average amount by grants from the rates. The employer, not caring about or understanding ulterior consequences, was apparently interested in keeping a supply of surplus labour about him ; it produced a low rate of wages, and he was virtually able to put his hand into the pockets of the neighbouring ratepayers to make up the deficiency to those whom he employed. The Law of Settlement placed such impediments in the way of a labourer passing from one district to another, that to a great extent men were constrained to seek employment only in the place of their birth. Few enactments have gver produced more wide-spread mischief. Adam Smith, in the Wealth of Nations, says that probably in his time there was scarcely an artisan of forty five years of age who had not at one period or another suffered some grievous wrong from the Law of Settlement. By the joint operation of all the baneful influences just described, a most alarming demoralization was BOOK IV. CH. V. The Laivs of Settle- ment. 6o4 Manual of Political Economy. BOOK IV. CH. V. The ap- pointment of the Poor Law Com- mission in 1832 resulted in the pufisinr/ of the A^ew Poor Law in 1834. Facts dis- closed during the inquiry instituted by the Com- produced. The extent to which it affected not onl}^ the employed, but also the employers, was brought to light by the searching investigations of the Royal Connnission which was appointed in 1832 to inquire into the Poor Laws. Amongst the Commissioners were some leading public men, and all their arrangements seem to have been devised with the object of making their examina- tion of the subject as accurate and scrutinizing as possible. Assistant Commissioners were appointed not only personally to \isit, and take evidence in different parts of England, but they were sent to foreign countries in order that they might inquire, into the various modes of administering relief to the poor. The evils of our Poor Law system were so fully unfolded that the necessity for some radical reform became generally recognised. After having to contend with much opposi- tion from those who supposed themselves to be interested in the abuses of the old system, an Act was passed in 1834 which has continued without much alteration up to the present time. This Act is generally known as the New Poor Law ; and before describing its more important provisions it will be useful to recount some facts which were brought to light by the Royal Commission of 1.S32. All the general objections which have been urged against the relaxation of the checks upon voluntary pauperism were strikingly corroborated by specific facts. In some districts out-door relief was granted to the able-bodied upon so liberal a scale that pauperism became a very remunerative employment. One of the Assistant Com- missioners who visited Eastbourne found that paupers who worked were paid at the rate of 16s. a week, whereas the average Vv^ages in the district were only 12.s. a week. The inferiority of the independent workman's pecuniary position was so notorious that this Commissioner actually heard two women complain that their husbands declined to better their lot by becoming paupers. In North Devonshire and in many other parts of England so large an allowance was granted for each additional cliild that was born, that the more numerous a man's family was, the better his circumstances became, and in this way an artificial stimulus was given to population. The habits of improvidence which were thus fostered produced evils i Tlie Poor Law and its Influence on Paiiijerisnn. 605 which could not be at once removed. A father cannot be improvident without teaching a lesson of improvi- dence to his children. Moreover, when there is a surplus population, the labourer can only secure minimum remuneration for his labour, or in other words he simply receives subsistence wages. It can, therefore, cause no surprise that in many localities where the abuses of the old Poor Law were most rife, we find that the supply of labour is still so much in excess of the demand that agricultural labourers until quite recently often received not more than 9.s. or lO.s'. a week, and late in the nine- teenth century were only obtaining 12.s. a week. Other influences of a still more demoralizing kind were brought into operation under the old Poor Law to stimulate an increase of population. A woman obtained from the parish a larger allowance for an illegitimate than for a legitimate child. The fathers of illegitimate children were also encouraged in a life of immorality by being free from all pecuniary liability to aflbrd them main- tenance. Can it excite surprise that from such a system we should have had handed down to us an inheritance of vice and poverty ? The subject presents equally melancholy aspects from whatever point it is viewed. Pauperism often came to be regarded as a paying profession which was followed, by successive generations of the same family. Thus the Commissioners tell us of three generations of the same family simultaneously receiving relief ; and the amount they drew from the parish exceeded 100/. per annum. As a natural consequence of the parish authorities being enjoined to find work at remunerative wages for all their poor, the feeling soon became general that pauperism was no disgrace, and that the allowance which was obtained from the parish was just as much the rightful property of those who received it, as the wages of ordinary industry. Indolence was thus directly en- couraged, and a spirit of lawlessness and discontent resulted. Although 1832 w;as a year of plenty, when bread and other provisions were cheap, yet at this time many of the rural districts were in a very disturbed state : riots and incendiary fires were of common occur- rence, and the Commissioners proved that these outbursts BOOK IV. CH. V. The had effects of the old Poor Laio are ^till visible in some dis- tricts. En- courage- ment given to im- morality. 6o6 Manual of Political Economy. BOOK IV. CH. V. Bates threatened to absorb the whole value of the pro- duce of the soil. Farmers and others compelled to hire pauper labour. of popular discontent were most frequent in those i localities where the Poor Law had been administered with the greatest laxity. The cost of pauperism grew constantly greater; rates so rapidly increased that it became evident they would soon absorb the whole fund from which they were provided. In some districts the rates absorbed more than remained of the produce of the soil, after all the expenses of cultivation had been paid. The Commissioners tell us that many farms were given up, that several of the clergy relinquished their glebes, and that much fertile land was thrown out of tillage. They mention one parish, Cholesbury, Berkshire, in which the whole land was offered to the assembled paupers, but they refused it, saying they would rather continue on the old system. Such a case may appear incredible, could it not be corroborated by much similar evidence. The Commissioners ascertained that a gentle- man who cultivated his own estate of about 500 acres, at Shelford, near Cambridge, annually paid in poor rates, 2.50L; the land to rent was worth about \l. per acre ; the rates consequently absorbed half the letting value of the farm. But great as was the charge thus imposed, it by no means represented the entire burden of pauperism. At Shelford, as in many other localities, it was the practice to allot the able-bodied paupers to different farmers ; each farmer was consequently obliged to employ a number of paupers in proportion to the extent of his holding, whether he required their labour or not. The gentleman to whom reference has just been made, proved that so much of the labour thus imposed upon him was of no use whatever, that it caused him an annual loss of at least 100^. a year. The whole annual cost of pauperism on this farm of 500 acres was therefore 350^. If rates had gone on increasing for a few years as they were at the time the New Poor Law was introduced, it is evident that this annual charge of 350^. would soon have grown into more than 500^.; this would have represented a higher rent than the land was able to bear, and consequently there would have been no other alternative than to have thrown it out of cultivation. When it is remembered that this was by no means an exceptional case, but might on the contrary be regarded The Poor Law and its Influence on Pauperism. 607 as typical of the condition of a large part of the country, it at once becomes manifest that England was at that time threatened with ruin. It has just been seen that a most onerous tax was inflicted upon employers by the plan of allotting to thetn a certain amount of pauper labour ; this was, however, by no means the greatest evil of the system. Evidence was repeatedly given that farmers and others were so much burdened with this pauper labour, that in order to make room for it they were often obliged to dismiss valued workmen. A farmer near Royston told the Commissioners that he tried hard to retain two excellent workmen who had been long in his employment, but at length he was obliged to dismiss them in consequence of so many pauper labourers being forced upon him. He also said, referring to the two paupers who took the place of the workmen he so reluctantly dismissed, that one of them turned out to be a dangerous thief, and the other an habitual drunkard. Even when they were not paid high wages, the labour of paupers was most costly ; it was reluctantly given ; it was unskilled, and they had to be worked in gangs in order that they might be the more effectually watched. Pauper labour had in fact many of the economic defects of slave labour. This painful recital of the ignorance, folly and injustice of the old Poor Law and the demoralization and degrada- tion that resulted, has been by no means exhausted ; but "nough has been said to enable us to understand the nature of the more prominent abuses which needed to be reformed at the time when the New Poor Law was passed.^ An explanation of the leading provisions of 3his Act, and an inquiry into its effects, will enable us ;o understand in what respects it has failed and in what t has succeeded. Having made this explanation, we diall be in a position to appreciate the reforms which ire still required. ' This short historical sketch of the Poor Law is taken from a course >f lectures I delivered at Cambridge some years since, which were tu])lished under the title of PaiiperUm, its Causes and Remedies. Tliis look is now out of print. Many of the facts here mentioned and iiuch other valual)le information are to be found in an able article on he Poor Law by Mr. George Coode in the 8th edition of the Encyclo- bcedia Britannica. BOOK IV. CH. V. xoere frequently thereby ohli(jed to dismiss valued workmen. 6o8 Manual of Political Economy. BOOK IV. CH. V. The New Poor Law 0/1834 hears a strowj re- semblance to the Eliza- bethan Poor Lata 0/I6OI. We have tliought it desirable thus to describe in con- siderable detail the evils connected with the old Poor Law, because it may at any time happen that a desire to free the New Poor Law from what many still regard as its harsher features, may bring into active operation many of the mischievous agencies associated with the old system. We have also thought it desirable to adopt this course, because a knowledge of the state of things which formerly prevailed will place us in a better position to understand the nature of the changes intro- duced by the New Poor Law. It has already been remarked that there is little difference in any funda- mental principle between the Elizabethan Poor Law of 1601 and the New Poor Law of 1834. The gradual relaxation of all the salutary restrictions upon voluntary pauperism contained in the former Act, as well as many grave abuses of administration, rendered new legislation absolutely necessary. By the New Act, the workhouse test was again revived, the plan of granting allowances in aid of wages was abolished, the appointment of paid overseers was provided for, and an official audit of accounts was secured. Illegitimacy was to some degree checked by making the father responsible for the support of the child, instead of rewarding the mother, and freeing the father from pecuniary liability, as was the case under the old system. The Laws of Settlement were rendered somewhat less burdensome to the labourer ; formerly it was easy to obtain a settlement in a parish either by occupation or by residence ; it was now made much more difficult to do so ; consequently there was less reason to prevent new comers locating themselves in a parish, and the migration of labour was somewhat less seriously impeded. Bj^ far the most important improvement, however, effected by the New Poor Law may be attri- buted to the more rigorous restrictions imposed upon able-bodied paupers. The allowance system, with its manifold abuses, which was now abolished, had directly encouraged voluntary pauperism. The workhouse test provided a most salutary check, and the greatest possible good would have resulted if it had been made obligatory upon local authorities to apply this test to all able-bodied paupers. TJie Poor Law and its Influence on Pauperism. 609 The Act of 1834 was followed in 1838 by a Poor Law Act for Ireland, and two or three years later by one for Scotland. The provisions against out-door relief enforced by this Act in Ireland were more severe than those in England, for no out-door relief at all was allowed to the able-bodied. Although the Scotch Poor Law allows no out-door relief to be given to the able-bodied, yet the Scotch Poor Law, both in many of its provisions as well as in its administration, has not imposed the same check upon pauperism as has been enforced in Ireland. The result has been, as will be presently shown, that although from the character of the Irish people and the general circumstances of the country it might be naturally anticipated that there would be more pauperism in Ireland than in England and Scotland, yet the reverse is the case.^ The Poor Law system has remained in its main features unchanged since the introduction of the New Poor Law in 1834. The only important alteration of principle that has been adopted is that by the Union Chargeability Act, passed in I860, the Union and not the Parish is made the area of rating. The principle of increasing the area of rating was still further extended so far as London is concerned by the Metropolitan Poor Act of 1870. By this Act a difterence was for the first time made between the areas of chargeability for out- door and in-door poor respectively : — the cost of main- taining the out-door poor being borne by the Union, whereas the cost of maintenance of in-door poor became a metropolitan charge. The Act has had an important effect in discouraging out-door relief, and the relative diminution in out-door pauperism in London is probably in a very considerable degree due to its operation. [The latest return of metropolitan pauperism,- dated December 16th, 1906, shows that there were then in London a total of 123,135 persons in receipt of relief, of whom 78,603 were in-door and 44,532 out-door paupers. The excel- lence of administration varies greatly in the different ^ [Great relaxations with regard to the administrations of the Poor Law in Ireland were made after 1884 ; and the amount of pauperism in Ireland, in proportion to population, is (1906) in excess of that of Scotland. ] ^ [Times article, The Legal Poor of London, Dec. 26, 1906.] 2q BOOK IV. CH. V. The Irish and Scotch Poor Laws. As lonr] as Old-door relief rvas much less restricted in Eng- land and Scotland than in Ireland, there loas less pau- perism in Ireland in pi-oporlion to popula- tion. The Metro- politan Poor A cl of 1870. 6io Ma7iual of Political Economy. BOOK IV. CH. V. The delu- sive econo- my of out- door relief removed by this Act. Unions. The Parish of Whitechapel has long set an example to the rest of London. In 1870, when improved methods of administration were adopted, the pauper population of Whitechapel was 6,749, of whom 5,339 were out-door and 1,410 in-door paupers. In 1906 the total had been reduced to 2,080, of whom only 26 were out-door and 2,054 in-door paupers. The pauperism of the whole of London in December 1906 was 26 per 1000 of the population, or only slightly more than 2| per cent.] One of the causes which has promoted the undue extension of out-door relief is its supposed cheapness when compared with in-door relief. Although we believe that out-door relief, through the encouragement it offers to pauperism, is far more costly than in-door relief, yet it cannot be denied that the immediate cost of maintain- ing an out-door pauper is often not half as great as it would be if he were compelled to enter a workhouse. The inducement which is thus offered to guardians to prefer out-door to in-door relief will obviously cease to operate if, as is the case in London, the whole charge for out -door pauperism is borne by each Union, whereas the inhabitants of a large district outside the Union have to contribute their quota to the support of the in-door poor. It cannot be doubted that a great effect would be pro- duced in diminishing pauperism through the discourage- ment of out-door relief if the principle of the Metropolitan Poor Act were extended to the entire country. It might, for instance, be arranged that whereas the charge for out-door relief should be borne by each Union, the cost of the in-door poor should be borne by the county rate. [Since the foregoing pages were written much has been done to render the workhouses more attractive than they formerly were. Palatial buildings have been erected furnished with various comforts and conveniences, which attract rather than repel those on the borderland of pauperism. While few could grudge such expenditure for the sick and aged, it becomes a serfous social problem when it is found that the workhouses are positively attractive to able-bodied men and women who ought to be self-supporting. A Royal Commission was appointed in 1905 to inquire into the whole subject, and it is hoped The Poor Laiv and its Influence on Pauperism. 6ii that their recommendations may be the prelude to greater uniformity of administration and to enlarged powers of discrimination between the deserving and undeserving poor.] Since 1870 the Poor Law has generally been adminis- tered in Great Britain, in reference to the granting of out-door relief, with greater strictness than it was previously, and the result is shown in a gratifying diminution in pauperism. Although the period between 1850 and 1870 was one of remarkable industrial pros- perity, yet throughout the time there was a steady increase in pauperism. About 1873 this tide of prosperity was checked, and during many succeeding years there was very serious depression in agriculture and many other branches of industry. It is possible that the difficulties and losses which had to be encountered during this period induced a general recognition of the importance of a more careful administration of the Poor Law ; but whether this be the explanation or not, it cannot be doubted, as previously stated, that during this period out-door relief has been generally given much more sparingly than formerly. We consequently find that, although population has steadily advanced, the number of persons in Great Britain in receipt of relief on the 1st January 1887 was 910,000 (on July 1st, 1887, the numbers were 769,615), as against 1,200,000 on the 1st January 1871, thus showing a decrease of 290,000.^ During the same period the question of pauperism in Ireland presented an exact contrast to that which it presented in Great Britain ; the population of Ireland has diminished, the strictness of administration with regard to out-door relief which formerly characterised tlie Irish Poor Law has been departed from, and the number of paupers has increased from 74,000 to 113,000.^ Considerable discretion is left to the Guardians as to the extent to which out-door relief should be given, and the result is shown in the striking disparity in the amount of pauperism in different localities. Speaking 1 [The mean number of paupers in England and Wales in 1901, exclusive of casuals and insane, was 675,727 ; the diminution referred to in the text has therefore been well maintained.] ^[The number of Irish paupers on the 1st January 1901 was 101,090. BOOK IV, CH. V. The effect of im- proved adminis- tration of the Poor Laiv in Eng- land be- tween 1871 and 1882 and of a relaxation of restric- tlons on out-door relief in Ireland. The dis- parity in the amotmt of pauper- 6l2 Manual of Political Economy. BOOK IV. CH. V. different unions is almost en- tirely due to differ- ence in the excellence of admin- istration. Linton. Preston. Atcham. Pauperism in Oxford and Cam- bridge in 1883 con- trasted. generally there is far more out-door relief in the rural districts of England than in the towns, and the amount of pauperism in the rural districts is generally far in excess of that which prevails in the towns. It may be mentioned, as an illustration of this, that in Linton, a rural union in Cambridgeshire, out of a population of 13,064, there were in 1887 113 persons in receipt of in-door relief, and not less than 831 in receipt of out- door relief. Consequently more than one out of every thirteen was a pauper. In Preston in the same year with a population of 129,160 there were only 673 in-door paupers and 787 out-door paupers, and consequently onl}^ about one out of 88 of the population was on the pauper roll. In the union of Atcham, which includes the town of Shrewsbury, the number of persons in receipt of relief on the 1st July 1887, out of a population of 48,633, was only 591, or about one in 82 of the whole population. Of these 591, as many as 393 were in-door paupers and only 198 were out-door paupers. Of these 198, there was not one able-bodied adult; they were all either intirm, children, or lunatics. The reform of the Poor Law administration in this union is almost entirely due to the unwearied labours of the late Sir Baldwyn Leighton. The lessons so well inculcated by him of the necessity of extreme care in allowing out-door relief, cause this union to be one of the best administered in England.^ This remarkable difference in the amount of pauperism is no doubt in part to be attributed to the greater poverty of an agricultural population, but an examination of pauperism in places whose population is similarly circumstanced shows with striking distinctness the extent to which pauperism is encouraged by lax administration of out-door relief. Thus it will be difficult to find two towns which are more alike in the general condition of their population than Oxford and Cambridge. Each is the seat of an University, and each is the centre of a large agricultural district. In Oxford with a popu- lation of 21,900 there are 323 in-door paupers and 220 out-door paupers ; which together represent 2-48 per cent. ^ These statistics of pauperism in the different imions are obtained from a return which is periodically issued by the Local Government Board. The Poor Law and its Influence on Pauperism. 613 of the population. In Cambridge with a population of 35,372 there are 203 in-door paupers, and 1,556 out-door paupers, which together represent 4'97 per cent, of the population. Cambridge consequently, where out-door relief is freely given, has in proportion to its population just twice as much pauperism as Oxford, where the Poor Law is more carefully administered.^ No greater misfortune could happen to the country than if we again relapsed into a lax administration of the Poor Law, and out-door relief were generally freely given. Poverty would be indefinitely increased and on all sides agencies would be brought into operation to depress the condition of the labourer. The growing- burdens involved in increasing pauperism would impose a serious tax on industry, and the improvidence which, as we have seen, was fostered in the days of the old Poor Law, would be actively revived, with the inevitable result of an over-stocked labour market, and a rapid decline in wages. Proposals are not unfrequently brought forward which would undoubtedly lead to such results as those which have been just described. Thus it has been sometimes suggested that there should be a national poor rate, and that pauperism, instead of being a local charge, should be either wholly or in part defrayed from the Con- solidated Fund. If such an arrangement were carried out, it cannot be doubted that all the guarantees for careful and economical management would be seriously weakened. If local authorities were allowed to draw upon the imperial exchequer, there would be a scramble for public money, and pauperism would be so much stimulated that in a short time it would be impossible for the industry of the country to struggle against the burdens which would have to be borne. In the interest of the poor themselves, the administration of the Poor Law cannot be too carefully watched. Economists of high authority, such as Malthus and Dr. Chalmers, were ^ [These figures were taken from a return published on January 1st, 1883. Since that time the administration of the Poor Law in Cam- bridge has greatly improved. The number of out-door paupers has been reduced from 1,556 in 1S83 to 620 in 1887, and the total pauperism of the town was at the latter date only about 2^ per cent, of the population.] BOOK IV. CH. V. The work- inq classes sniffer more than any other from a lax adminis- tration of the Poor Laiv. A national poor rate would he disastrous. 6i4 Manual of Political Economy. BOOK IV. CH. V. The aboli- tion of the Poor Laiv is not ad- visable either on political or econo- mic grounds. Various agencies which may he brought into operation to diminish pauperism. SO much impressed with the evils resulting from the old Poor Law, that they strongly argued in favour of the entire abolition of the system. They apparently thought that no country could safely incur the responsibility of conferring upon everyone a legal claim to be maintained. In our opinion, however, experience shows that when the Poor Law is properly administered, relief may be restricted to those cases where it is really required, and pauperism is far less encouraged than it would be if the poor had no other resource than indiscriminate and unorganised charity. Amongst the advantages associated with a poor law, much importance is to be attributed to the influence which the existence of a definite protection against starvation exerts in preventing the feeling of desperation and despair amongst the poorest classes ; and these feelings being to a considerable extent checked, socialistic schemes and theories have never obtained any very great hold in this country upon the masses of the people. It is a fact of much significance that, in a visit paid to London in the spring of 1883 by Mdlle. Louise Michel, the leader of the most extreme section of French socialists, nothing impressed her more favourably in England than our Poor Law system, and after a visit to the Lambeth workhouse she declared that if the French poor possessed similar institutions which would give them a legal protection against extreme destitution, many of the most serious of the evils for which they demanded redress would be removed. Besides careful administration of the Poor Law, reference has in previous chapters been made to many other agencies, that may be brought into operation to diminish pauperism. Thus much stress has been laid upon the influence that has already been exerted by national education. Great importance has also been attributed to improvements in land tenure and to the extended application of the principles of co-operation and co-partnership. It is also of great moment that no opportunity should be lost of bringing within the reach of the people every available facility for the promotion of thrift. It is a gratifying fact that there has been lately a marked decline in intemperance accompanied by The Poor Law and its Influence on Pauperism. 615 a corresponding growth of providence amongst the poor. As illustrative of the spread of saving habits amongst the poor, it may be mentioned that no less than one in six of the entire population of the United Kingdom is a depositor in the Post Office Savings Bank. It may be confidently anticipated that with the increase of pro- vidence amongst the poor, many new forms of saving will gradually be developed. By an Act passed in 1882 ^ it is possible to devote the smallest sum, even as little as Id. a week, to the purchase of a deferred annuity or to life insurance ; and it cannot, we think, be doubted that when the people feel that they have within their reach a perfectly safe means of making provision for the future, it will much less frequently happen that parochial relief is the only resource in old age and for those who are left widows and orphans. Before concluding this chapter it will be desirable to direct attention to the very serious encouragement that is given to pauperism by the many difficulties that are thrown in the way of women being able to earn their own maintenance. If the pauper statistics of any locality are examined it wall be found that a large proportion of the able-bodied who are in receipt of parochial relief are women. Thus reference has been made to the great amount of pauperism in Cambridge. Out of the 311 able-bodied adults who in 1883 were in receipt of out-door relief no less than 230 were women. The difficulties which women have to encounter in earning their own livelihood are often considerably increased by various laws, passed with the mistaken idea of promoting their interests, which either forbid women to be employed in certain kinds of industry or else place such restrictions upon their labour as to considerably reduce their cliance of employment. The Factory Acts, as is well known, limit the hours of labour of women, young persons and children in certain indus- tries. This restriction, so far as it applies to children and to young persons, appears to us perfectly justifiable, because children are not in a position to protect them- selves, if the cupidity of parents and employers combines to subject them to the manifold evils of overwork. ^Government Annuities Act, 1882. BOOK IV. CH. V. Every cir- cumstance which hinders the em- ployment of women tends to increase jjanperism. The Fac- tory Acts. ^i6 Manual of Political Economy. BOOK IV. CH. V. State in- terference with women's labour is unjust. Interference with the hours of labour of adults cannot, however, be justified on these grounds, and all attempts to extend the application of the Factory Acts, so far as they concern adult women, to those employed as assistants in shops or in domestic industries should be most steadfastly resisted. Reduction of hours and due allowance for rest and for meals may, we believe, be obtained by adults through voluntary means without calling in the aid of the State. Whenever it is proposed to place legal or other restrictions upon the industry of women, it should be remembered that every avenue of employment which is closed directly causes a great number of women to be crowded into those employments which are still left open; and wages, low enough already, are still further depressed. Those who take upon them- selves to decide what work is fit or unfit for women are too apt to forget that any industry is better than the wretchedness inevitably associated with a life of depen- dent pauperism, and that there may be worse evils in a woman's lot than anything connected with honest industry. It has been repeatedly shown that women need not suffer any injury from work which is supposed to be degrading in its influence. No one, for instance, can deny that in many parts of England the women who are employed in agriculture are in a most unsatisfactory condition ; their wages are extremely small ; they are poorly and unsuitably clothed, and often, driven into the fields by the pressure of poverty, they work when they ought to be attending to their home duties. Many who observe these evils are anxious that Parliament should prohibit the employment of women in agriculture ; but if the labour is differently carried on, it is proved that women suffer no evils, but are benefited by working in the fields. Mr. Henley, one of the Assistant Com- missioners who, in 1867, inquired into the condition of people employed in agriculture, has given a most interest- ing account of the rural population of Northumberland. When his description of these Northumberland labourers is compared with the distressing accounts which are given of the peasantry in other parts of England, it is difficidt to believe that the Dorsetshire and Northumber- land labourers are inhabitants of the same country. The The Poor Law and its Influence on Pauperism. 617 latter earn good wages ; they live well but frugally ; fuel is cheap ; and their houses are clean and com- modious. At particular seasons of the year the women of the family work in the fields ; but home duties are never neglected. I'he women being well and suitably clothed, their out-door labour is beneficial to them, for they generally appear in the most robust health. Their close contiguity to Scotland seems to have given these peasants a certain enthusiasm for education. Gqod schools are abundant, and the children are generally kept at them until they are twelve or thirteen years of age. Facts such as these should make us hesitate before we sanction any measures which would compel women to be even more dependent than they now are upon parochial relief. POOK IV. CH. V. t Contrast hetwten imperial and local finance. CHAPTER VI. LOCAL TAXATION.! IN the last chapter we considered the influence which is exercised on pauperism by the existing method of administering parochial relief. As yet we have only incidentally referred to the various financial questions which are connected with our Poor-law system. It will, therefore, be desirable to devote a separate chapter to the subject of local taxation, and after having done so, we shall as far as possible explain some of the various complicated economic questions which are associated with the incidence of local taxation. When taxation is spoken of in this country it is too frequently forgotten that there is not only imperial but also local taxation to be considered, and the one subject offers in many respects the most striking contrast to the other. For several years past, although many taxes have been remitted, and the expenditure lias been kept extremely high, yet the imperial revenue has been more than sufficient to meet all demands. When, however, we turn to local taxation, we observe an entirely different " state of things. Local expenditure, in the United King- dom, meaning by that phrase the money raised and spent by local authorities, has been constantly increasing, until it has reached in 1884-5 no less a sum than 66,000,000^.2 ^ Many of the figures and other facts on local taxation contained in this chapter are taken from Mr. R. H. I. Palgrave's work on the Local Taxation of Great Britain. 2 [In the year 1902-3 the local expenditure of the United Kingdom reached the enormous annual sum of 152,165,000^ Although this is the amount officially returned as the local expenditure of the United King- dom, it is important to bear in mind that in many towns the gas and Local Taxation. 619 It" the local expenditure continues to increase during the next twenty-five years in the same ratio as it has increased during the past twenty-five years, it will con- siderably exceed the imperial expenditure. So far as the finances of the State are concerned, there has been almost invariably during many past years a balance on the right side. With regard, however, to local expendi- t\n-e, exactly the reverse has taken place. Local authorities, from one end of the country to the other, are habitually spending more than their ordinary income. It not unfrequently happens that the expenditure is so greatly in excess of revenue, and the deficit to be made up is consequently so large, that the amount which has to be borrowed bears no inconsiderable proportion to the entire amount raised by municipal taxation. [The loans incurred by local authorities in the United Kingdom amounted, in 1902-3, to 442,471,000^., or considerably more than half the National Debt.] A statement of the financial position of London for 1881 may be quoted as an example : Local Revenue of London in 188L Raised by rates ------ ,, dues, tolls, fees, and rents - ,, duties ------ ,, Government subvention ,, miscellaneous receipts - ,, loans --.-.. £ 5,470,812 511,695 428,746 578,283 1,699,837 2,260,470 £10,949,843 From these figures it appears that the expenditure so far exceeded the revenue, that the amount raised by loans was about 40 per cent, of that raised from rates. The state of things disclosed by these figures is so serious, that it may be supposed that the metropolis is an exceptional case. Unfortunately, however, this is not so, for the financial position of London is typical of what is going on in other parts of the country. As previously stated, the annual amount of local expenditure in Great water are supplied by the municipality ; consequently a portion of the amount levied in the form of local taxation must be regarded as a sum paid for value received.] BOOK IV. CH. VI. Excess of expendi- ture over income is a charac- teristic of local finance. Local re- venue of London in 1881. 620 Manual of Political Economy. BOOK IV. CH. VI. The state of local finance in London is typical oj the wJiole country The diffi- culties which sur- round the investiga- tion of the subject. Appropri- ation of capital to income. Britain and Ireland is 66,000,000^./ and the entire amount raised by local taxation is about 44,000,000?. while the sum raised by loans was 13,300,000Z. Thii large excess of expenditure over revenue deserves mosi anxious consideration. It will probably be urged that the ordinary revenue is always adequate to meet the ordinary expenditure, and that the loans which are annually raised, being devoted to carry out works of permanent improvement, should be regarded not in the light of financial deficits, but as capital embarked in eligible investments. It will also, no doubt, be said that a country which is advancing so rapidly in wealth and population can afford this local expenditure, and that the increase of expenditure is after all of trifling importance compared with the growing prosperity of the country. Pleas similar to these are very generally accepted as constituting valid excuses for the large outlay upon which we have just been commenting. A little inquiry, however, will at once disclose facts which show that such a defence as is generally put forwaixl in favour of the present local expenditure is inadequate and un- i satisfactory. In the first place, it is to be remarked that the li circumstances connected with the raising and spending i of these loans seem to be involved in the most inextricable i confusion. It is, for instance, difficult to discover what steps are being taken to repay the loans which are borrowed. Although it is constantly asserted that these j loans are devoted to such reproductive works as the carrying out of permanent improvements, yet those who confldently make these assertions have probably seldom taken the trouble to see whether they can be borne out by the published accounts of local authorities. Nothing has been a more fruitful source of iinancial embarrass- ment than the appropriation to ordinary revenue of money which is professedly intended to be expended as capital. i[The year here quoted is 1884. The tendency to excessive expendi- ture, far beyond what can be raised by rates, has continued unchecked since the above passage was written. In 1902-3 the total local expenditure of the United Kingdom reached the sum of 152,165,000/., nearly 40,000,000/. of which was raised by loan.] Local Taxation. 621 An audit of accounts which does not trace the manner in which loans are spent is ahnost worthless. The accounts of local authorities have rarely been submitted to this ordeal, and until they have been, it will be impossible to know the true position of local finance. As will be presently more fully shown, the existing system of local government seems especially devised to weaken some of the most effective securities for economy, and to destroy the guarantees of administrative efficiency. A few years ago, it was stated by the President of the Local Government Board, that "there is a chaos as regards authorities, a chaos as regards rates, and a worse chaos than all as regards areas of taxation. And not only that, but every different form of collection which it is possible to conceive is employed by the various local authorities administering these various areas." That this description is in no way exaggerated, is abundantly shown by such facts as the following : — In country districts there are usually three areas of rating — petty sessional divisions, highway districts, and Poor-law unions. These, instead of being co-incident, often over- lap each other so as to produce such inextricable confusion, that the Sanitary Commission, in its report of 1870, declared that the result is "the maximum of embarrassment and waste of local government, and the utmost loss of means and effectiveness." In towns the state of things is worse, if possible, than in the country. It usually happens, for instance, that there are in boroughs three separate rating authorities — viz. the board of guardians, the town council, and the local board of health. County magistrates also levy rates for county purposes from a town population. These various authorities levy rates at different times, by different sets of officials, and often by different methods of assessment. In many places it happens that the town council attends to the police, appoints various committees, levies a borough rate, manages the water-works, and levies a water rate. The local board of health manages the roads, levies rates for their maintenance and for all sanitary matters. Sometimes it happens that when the water-works and the gas-works are owned by the municipality, the one is managed by the town council BOOK IV. CH. VI. The audit oj the accounts is rarely searching. Confusion caused by the differ- ent areas of rating not being coinci- dent ; and by the number of different bodies who have the poiver to levy rates. 622 Manual of Political Economy. BOOK IV. CH. VI. The con- stantly in- creasing complexity of the sub- ject. The con- stantly in- creasing demands made upon and the other by the local board of health. It will scarcely be believed that the town council and the local board of health are composed of exactly the same persons. They are, in fact, the same body under two different names. It is easy to imagine how innumerable are the complications which are thus unnecessarily created, when it is remembered that the result of giving this body two different names is that rates are collected by different sets of officials at different times. The borough rate, which is levied by the town council, is in some cases paid out of the poor rate, which is levied under the authority of the board of guardians. Other rates — such, for instance, as the cemetery rate, and a contribution to the county lunatic asylum — are paid out of the poor rate. The board of health levy a general district rate and a lighting rate. The general district rate is levied, like all rates under the Public Health Act, with an exemption of 75 per cent, in favour of market-gardens and railways. These exemp- tions do not apply either to the borough rate or to the poor rate. Instead of the system being improved, additional complexity is constantly being accumulated upon it. Nothing has been a more striking characteristic of the legislation of recent years, than the rapidity with which new rates have been called into existence. From time to time various schemes are favoured by the public for effecting reforms in the social condition of the people. Each of these schemes, as it obtains legislative sanction, too frequently leaves its mark on the country in the creation of a new rate. Thus in a comparatively few years Parliament has called into existence the following new rates :— Burial Board Rate, Public Library and Museum Rate, General District Rate, Sewerage Rate, Parish Improvement Rate, Animals Contagious Diseases Rate, Borough Lunatic Asylum Rate, Borough Baths and Wash-houses Rate, Borough Improvement Rate, and Borough Burial Board Rate. ^ There is scarcely a single subject of social reform now discussed_ by the public, with which there is not sure to be associated some proposal that will necessitate an increase either of local or imperial taxation. Special Local Taxation. 623 attention has already^ been directed to various schemes now constantly brought forward, which would involve a large expenditure of public money, and would conse- quently lead to a great increase in either imperial or local taxation. These proposals are, no doubt, power- fully encouraged by the feeling so widely prevalent, that in a country where wealth is accumulated with such great rapidity as in England, neither harm nor peril can result from an increase in expenditure. It is not, how- ever, difficult to show that such an argument is erroneous, and is calculated to produce very mischievous conse- quences. In order to prove this, it is only necessary to remember that, even in the most prosperous towns, there are sure to be found thousands whose condition is one of extreme poverty. The vast accumulation of wealth, which is so striking a characteristic of the present time, does not, unfortunately, prevent a great number from ji\ing in squalor and destitution. There are so many thousands just on the verge of pauperism, that nothing can be more erroneous than to assume that there is a marked difference in the j)ecuniary resources of some of those who are, and some of those who are not, in the receipt of parochial relief. The addition which is sure to be made to the number of paupers by any adverse circumstance, such as a depression in trade or scarcity of food, affords indisputable evidence that the struggle which thousands are carrying on to resist the necessity of claiming relief from the parish is so close and so severe, that the issue of the contest may be determined oy some circumstance, the influence of which may at ^rst appear to be but trifling. The balance between lependence and independence is so nicely adjusted, that :he weight of a hair is sufficient to turn the scale. It ^\\\, in fact, be scarcely disputed by any who are practically acquainted with the present condition of our Door, that each addition made to the rates weakens the 'orce of resistance of those who are carrying on the struggle to which we have just referred ; and conse- [uently each increase in rates must exert a tendency to ncrease pauperism. This, therefore, suggests one of the Qost serious considerations connected with the growth of ^See Chap. xi. Book ir. BOOK IV. CH. VI. the rates are eiicou- raged bi/ the opinion that the wealth of England is so great that there is no need for eco- nomy. As rates increase, pauperism increases. 624 Manual of Political Economy. BOOK IV. CH. VI. Reasons why the Consoli- dated Fund can- not he re- lied upon Jor the re- lief of local bur- dens. local expenditure, for it shows that unless some agencies can be brought into operation to exercise an economising influence, a large expenditure at the present time will create a necessity for a still larger expenditure in the future. Many agencies may, no doubt, be brought into operation not only to diminish the present local expendi- ture, but also to prevent its increase in the future, Reference has already been made to the importance of consolidating the various rates, and introducing more concentration into local administration. The necessity has also been insisted upon of most carefully guarding against the tendency which there now is to make new demands upon local funds. Before proceeding further, however, it is desirable to say a few words upon various proposals which are now receiving much support, the eftect of which would be, not to promote greater economy, but to produce greater extravagance in local |; expenditure. [ From time to time it is proposed to transfer various [ charges from local to imperial funds. There are many, i for instance, who advocate a national poor rate, and the i? House of Commons in 1872 affirmed by a large majority t that a considerable portion of the cost of maintaining!) lunatics and the police should be borne by the Consoli- 1 dated Fund, and the amount voted out of imperial funds \ for this purpose considerably exceeds 4,000,{)()0^. a year. |i Such proposals as these obviously suggest two distinct ii sets of considerations — viz., those which are political and \ those which are financial. It would, of course, be I inappropriate to discuss the subject here in its political aspect. Upon this branch of the question it need simply be remarked that a transfer of charges from local to imperial funds would inevitably weaken the principle of local self-government. The money which is provided by the State ought, of course, to be administered by the State, and not by local authorities. The principle of local self-government has done so much to diffuse amongst the people a spirit of self-reliance, that it behoves us to resist with the utmost firmness the intro- duction of any centralising tendency. It is, however, not difficult to show from purely financial considerations the grave peril which would be incurred if sanction were Local Taxation. 625 given to demands that are now constantly being made, to transfer various charges from local rates to the Con- solidated Fund. No device that can be imagined would more effectually weaken all the guarantees for economy. Each locality is interested in economy when it is known that the district will have to bear the burden of any outlay which may be incurred. But when public money is to be spent there is a regular scramble for it, and each town and each district thinks that it is directly benefited by getting the largest share possible of this money. There is the broadest distinction between economy in the abstract and economy in the concrete. A candidate seeking the suffrages of a constituency may be applauded to the echo by pledging himself in favour of rigid frugality in the expenditure of public money ; and at the same time it is only too notorious that this enthu- siasm would not be forfeited, but would on the contrary be greatly increased, if he should afterwards exert himself to obtain for this same constituency a grant of public money to be squandered in some perfectly useless local undertaking. Experience more and more confirms the opinion that the great bulk of the people think that money can be taken out of the Consolidated Fund just in the same way as water is drawn from a perennial fountain ; the stream, it seems to be supposed, ceaselessly flows, and no labour nor sacrifice is required to replenish it. When, however, it is remembered that the Consolidated Fund, far from being this fountain of wealth, never obtains a shilling which is not taken out of the taxpayer's pocket, it at once becomes evident that the transfer to this fund of local charges would, by lead- ing to greater expenditure, not lessen the aggregate burden of taxation. As a striking instance of the inconsiderateness of many of the opinions which are propounded in reference to taxation, it may be mentioned that those who urgently demand the transfer of local charges to the Consolidated Fund, simultaneously display an equal eagerness for a ' free breakfast-table,' and for the unconditional repeal of the income-tax. It might be thought that a moment's reflection would suffice to show that if 2,000,000?. of local charges were transferred to the Consolidated Fund, this 2r BOOK IV. CH. VI. 626 Manual of Political Economy. fund would have to be increased. The money will not be rained down from heaven. There is one way only by which it can be obtained, and that is by increased taxa- tion. But if taxation is to be increased, direct taxes, such as the income-tax, must be augmented, or indirect taxes, such as taxes on commodities, must be made to yield more to the State revenue. CHAPTER VII. THE INCIDENCE OF LOCAL TAXATION. WITH a few exceptions, all local taxation is confined to levying rates on land, houses, and business pre- mises. The exceptions to which we refer are certain tolls and dues, and in a few instances, certain commodities, such as in London, corn, coal and wine, are subjected to a small local tax. It often happens, however, that the toll or due is simply the price charged for a distinct service rendered, and therefore can hardly be regarded as taxa- tion. Thus a market toll is paid for the accommodation whicli a market provides ; a harbour due is in a similar way paid for the accommodation obtained by shipping. These tolls and dues, when so adjusted as to return not more than a fair compensation for the outlay incurred in the erection of the market or in the construction of the harbour, may be properly looked upon as rent paid to a corporate proprietor. In such a case it would be as unfair to consider these charges to be taxes, as it would be to consider as taxation the price paid for a telegram or for the postage of a letter. With the exception of the duties in London above referred to, and a small tax on coal in Brighton and a few other towns, there is scarcely any instance in this country of commodities being sub- jected to local taxation. The only other source of income besides rates from which local revenue is derived consists of a certain amount of landed and house property held by corporations. It is extremely difficult to ascertain the exact amount of this property, and many questions con- nected with its management and its appropriation require very careful investigation. In reference to the local taxation of London it appears that in a single year, 18G8, 628 Manual of Political Economy. BOOK IV. CH. VII. Local tax- ation con- sists almost entirely of rates on real pro- perty. an item was put down of 580,000Z. as rents and sales of property. It is certainly somewhat remarkable, that the money derived from the rent of property and the sale of property should be thus lumped together in one sum. Few questions bearing upon the future financial position of London can possess greater practical interest than to determine at what rate its corporate property is being sold and devoted to ordinary income. Unless some reasons can be alleged which do not readily suggest themselves, it seems very difficult to justify these sales of property, when it is remembered how rapidly property is advancing in value in London. Not only has it been shown that local taxation con- sists almost entirely of rates levied upon real property, but it is essential to remember that under the present system these rates only can be resorted to if it is neces- sary to obtain an increase of revenue from local taxation. Thus, as the expenditure of London increases, the local authorities have the power to provide for it by increasing the rates; they could not, however, without a special Act of Parliament, increase the duty on coal or impose any fresh taxation on commodities. This at once sug- gests a fundamental and most important distinction between imperial and local finance. If the national expenditure increases, the additional revenue which maj'' be required can be obtained in many different ways. Any existing taxes or duties can be increased, or new taxes can be imposed. The additional revenue, however, required to meet an augmentation in local expenditure is obtained by the imposition of higher rates upon land, houses and buildings. The remark has already been made that each tax has its own peculiar inequality, and with it there is sure to be associated some special dis- advantage or injustice. Thus, it is impossible to prevent a great deal of fraud in connexion with the income-tax. Many incomes, of which the exact amount cannot be ascertained, often pay much less than they ought, and consequently an additional burden is thrown upon in- comes which can be accurately known, such as those derived from the Funds and from salaries. It is probable that if no deception were practised in connexion with the income-tax, a tax of bd. in the pound would produce The Incidence of Local Taxation. 629 as much as is now yielded by a tax of Qd. in the pound. The chief inequahty belonging to taxes on commodities is to be attributed to a very different cause. Thus it has been shown that such a duty as that on tea cannot be made ad valorem. Consequently the cheaper qualities of tea have to bear three or four times as heavy a tax as is imposed upon the expensive teas consumed by the rich. It is, therefore, evident that if either the income- tax or the tea duty be alone increased when additional revenue is needed, those will be placed in an excep- tionally unfair and unfavourable position who are most affected by the particular inequality which, as we have shown, belongs to each of these methods of obtaining revenue. When the incidence of local rates is investigated, it will be readily perceived that what has been said in reference to some special inequality clinging to each tax is certainly true with regard to local taxation. From facts to be presently adduced it will be shown that local rates fall with the greatest severity upon the occupiers of houses. Hence as all increase of local expenditure has to be provided out of rates, each addition to the rates must necessarily accumulate inequality upon the occu- piers of houses. No redress can be given to them, as may be the case with imperial taxation, by occasionally shifting the main pressure of the extra burden to some other class. Before proceeding to trace the incidence of local taxa- tion, it is important to show in what proportion the aggregate amount raised by rates is contributed by different classes and different kinds of property. An impression no doubt very generally prevails that by far the largest portion of the amount raised in this country by local taxation is taken from the land. The following facts will, however, clearly prove that by far the largest portion of the amount now raised by local taxation is levied not on the owners or cultivators of land, but on the occupiers of houses. It will, moreover, be shown that the great increase in local expenditure which has taken place for some years past has caused an addition to the burdens on land, which can be regarded as of only trifling importance when compared with the augmentation in 630 Manual of Political Economy. BOOK IV. CH. VII. Land, in compari- son with other kinds of proper- ty, con- tributes a constantly diminifih- ing amount to local taxation. rates paid by the occupiers of houses. The striking figures which are about to be quoted are contained in Mr. R. H. I. Palgrave's work on 'Local Taxation.' In 1814, of the whole amount of property assessed to rates, 69-28 per cent, consisted of land, 27 84 per cent, of houses, and 2-88 per cent, of other property. It is impossible to obtain accurate returns for tlie period between 1814 and 1842, but in 1843 and 1868 the percentages respectively were — Land Houses - Railways Other property 1843. 49 10 41-44 2-82 6-64 1868. 33-20 47-27 1111 8-42 These figures prove with striking distinctness that land, in comparison with other kinds of real property, is contributing a continually diminishing amount to local taxation. Such a conclusion, though at variance with what is currently believed on the subject, admits of a very obvious explanation. Although there was up to the period to which reference has been made, 1868, a con- stant increase in the value of land, yet, in consequence of its quantity being limited, the addition made to its aggregate value is small when compared with the increase in the value of houses and buildings, the number of which can be indefinitely multiplied. Accordingly, it is found that, estimating the value of land by the amount at which it is assessed, the increase in its value between 1814 and 1843 was 14 per cent.; between 1814 and 1868 it was 28 per cent. Houses increased in value during the same periods no less than 138 per cent, and 356 per cent.; and the increase in the value of other kinds of property was respectively 428 and 1727 per cent. Mr. Purdy, who was for many years oflficially connected with the Poor-Law Board, and had a high reputation as a statistician, stated, after a very careful investigation, that, in consequence of the great increase in the aggregate amount at which houses and other kinds of property are assessed, "in 1864-65, as against 1851-52, 10'3 per cent, had passed from the land, and gone upon other assessable property." It therefore, appears that a constantly increasing proportion of local expenditure has I The Incidence of Local Taxation. ^Z^ to be borne by the occupiers of houses, and not by the owners of land. It will be necessary to bear this conclusion very carefully in mind when inquiring whether the demands of those can be justly conceded who assert that the land is unfairly burdened with local taxation, and that relief ought to be given out of the Consolidated Fund to the owners of land. When it is so frequently stated that the owners and cultivators of land are subjected to peculiar hardship from the present system of local taxation, it is apparently forgotten that rates are generally much lower in the rural than in the urban districts. Again referring to Mr. Palgrave's work on Local Taxation, it may be mentioned that he gives the average rates for Wiltshire as 3s. 10|(i.; in Salisbury, 7s. lOd; Cheshire, 2s. 9fd; Chester, 5s. 2|d; Devon, :js. 2ld.; Plymouth, Qs. \0d.; Norfolk, 3s. Id.; Norwich, 7s. id. ; King's Lynn, 7s. 2|ci. ; Leicestershire, 2s. 7|(i. ; and Leicester, 4s. 4|(i.^ Such facts as these add one more argument to the many that can be advanced in support of the conclusion, that the burdens of local taxation press with greater severity upon the occupiers of houses and business premises than upon the landed interest. It is now, however, necessary for us to proceed to consider by whom the rates which are levied upon various kinds of property are really paid. It seems to be a fundamental principle of our system of rating that rates are to be levied on the occupiers and not on the owners of property. Thus in the case of cultivated land, rates are paid by the tenant-farmer and not by the landowner. In the case of houses and business premises, rates are levied on the occupier, and not on the owner either of the building or of the ground on which it stands. It cannot, however, be too carefully borne in mind that, although rates are thus always paid by the occupier, yet there is a fundamental distinction between the incidence of rates when imposed ^ The higher rates prevailing in towns are no doubt partly due to the circumstance referred to in the last chapter, that rates in towns frequently include payments for water, lighting, paving, draining, etc. But after making full allowance for this, it cannot be doubted that local taxation is almost invariably much higher in the towns than in the rural districts. 632 Manual of Political Economy. BOOK IV. CH. VII. Funda- mental dis- tinction be- tween the incidence of rates imposed on land and those im- posed on hnildinris. upon land, and when imposed upon houses and buildings. It will not be difficult to show that rates, though levied on the occupier of land, are really paid by the land- owner, whereas the occupier of a house or building is not, to the same extent, able to shift the burden from himself to the owner. As the distinction just pointed out is of the utmost importance, it will be desirable to explain it with as much care as possible. Let us therefore, in the first instance, inquire upon whom the burden of rates really falls in the case of cultivated land. Probably the best way to consider the subject will be by the following example. Let it be assumed that a tenant-farmer pays a rent of 1000^. a year, and that in addition to this rent he also has to pay rates to the amount of 200^. a year. Suppose an Act were passed to abolish all rates by transferring all local charges to the Consolidated Fund. If the farmer were a yearly tenant, the landowner would naturally say to him, ' You are now released from all rates, and the 200Z. a year which you are thus saved you can afibrd to pay me as additional rent.' If the tenant objected to pay this additional rent, the landowner would have no difiiculty in obtaining it from someone else. Nothing would have occurred to affect either the price of agricultural produce or the cost of cultivating land, and the farm let at 1200^. a year would be just as cheap, or would yield just as large a profit, as when the tenant had to pay 1000^. a year as rent, and 200^. a year in rates. If the farmer, instead of being a yearly tenant, held the land upon lease, it is evident that although the landowner would not be able so immediately to appro- priate to himself the saving resulting from the land being relieved from rates, yet he would be able to do so at the expiration of the lease. It is, therefore, evident that if rates were altogether remitted, the advantage would be sooner or later appropriated not by the culti- vator but by the owner of land. From similar reasoning it can at once be shown that, if rates are reduced, the rent of land will be ultimately increased by an amount exactly equivalent to the reduction in rates. If, however, there is a lease, the rent cannot be raised until the expiration of the lease, and consequently, during this time, the tenant is able to appropriate to himself the The Incidence of Local Taxation. 633 advantage resulting from the reduction. Tenant-farmers, therefore, are entirely misled, if they suppose that they are interested in the amount of rates which is paid to the same extent as the landowners. If rents were regulated entirely by competition, and not at all by custom, an increase in rates would be no loss, and a reduction of rates would be no gain, to those farmers who are yearly tenants. In the case of farms held on lease, the extra burden resulting from an increase of rates is borne by the farmer, and the saving resulting from the reduction of rates is also appropriated by him during the period his lease may have to run. In order still more clearly to show that rates are really paid not by the occupier of the land but by its owner, it will perhaps be desirable to consider the question from a somewhat different point of view. It is a well-known principle of economic science that at any particular time there is a certain rate of profit appropriate to industry. This is termed the natural rate of profit, and it may be regarded as indicating a position of stable equilibrium. If the profits exceed this rate, then the industry becomes exceptionally remunerative. There arises an active com- petition to participate in these extra profits, and profits are reduced by the force of competition. In a similar way, capita] will not continue to be embarked in an industry which is exceptionally unremunerative, and thus a force is brought into operation to raise profits if they are reduced below their natural rate. Assuming that farmers could appropriate to themselves the benefit resulting from a decrease of rates, fai'ming would become an exceptionally profitable industry. Farms would be so actively competed for that the rise which would take place in rents would at length be equivalent to what had been saved in rates, and consequently the farmer would ultimately be no better oft* than he was before. When it was proposed to abolish the Corn Laws the farmers were the staunchest advocates of protection. They were deluded into the belief that they, as a class, were specially interested in the maintenance of high prices. They seemed incapable of recognising the very obvious fact that their rents were adjusted according to the price of agricultural produce. High prices simply BOOK IV. CH. VII. The inci- dence of rates levied on land is on the otoner, not on the occupier. 634 Manual of Political Economy. BOOK IV. CH. VII. The inci- dence of rales levied on houses, when the area of building land is practically unlimited, is upon the occupier. meant high rents. Untaught by experience, they are apparently about to commit the same error, for they seem to think that if rates are reduced they will be able to appropriate the advantage to themselves. As, however, sufficient has probably been said to establish the proposition that a rate is a charge upon land, and is not a tax on the cultivator, we will now proceed to consider who really pay the rates which are levied upon houses and business premises. It is evident that in the case of a house there are three distinct persons to be considered. In the first place, there is the owner of the ground on which the house stands ; secondly, there is the owner of the house itself ; thirdly, there is the occupier or tenant of the house. It may in the first instance be assumed that the occupier has not a lease, but is simply a yearly tenant. It generally happens that the aggregate rent which is paid by the occupier consists of two portions. He pays a ground-rent to the owner of the land, and he pays a rent to the owner of the house. The amount of the latter sum must be sufficient to give a proper remuneration, or, in other words, to yield a fair profit for the outlay incurred in building the house. This being the case, it is obvious that the amount of rent thus paid cannot be affected by the amount of rates levied upon the house. Capital would not be invested in building unless the return was sufficient to yield the ordinary rate of interest. It, therefore, follows that rates must be borne either by the occupier of a house or by the owner of the land upon which it is built. In order to ascertain whether the burden of rates really falls upon the owner of the ground or upon the occupier, let us suppose that house property is relieved from the payment of rates. We have then to determine whether the saving which would result would be appropriated by the owners of ground-rents or by the occupiers of houses. In deciding this question it must be borne in mind that the area of land on which houses can be built is not limited in quantity. If, for instance, it is assumed that there is a house, the rent of which is 60^., the ground-rent 10^., and the rates 20Z., we have to consider whether the 201. saved by the remission of rates, could or could not be The Incidence of Local Taxation. 635 appropriated by the owner of the ground-rent. If it were possible for him to appropriate this amount to himself, it is at once obvious that his ground-rent would be advanced from 10^. to 30/. We now, however, have to inquire what is the determining cause which fixed the ground-rent at lOZ. previous to the remission of rates. It is manifest that to this question there can only be one answer. The ground-rent is simply the price paid for the use of a plot of ground, and this price is regulated by demand and supply. The mere remission of rates can exercise no direct influence either upon the demand for, or upon the supply of, building ground, and conse- quently no change can take place in its price. It, therefore, follows that ground-rents will remain the same as they were before, and the saving resulting from the remission of rates cannot be appropriated by the owner of the ground-rent, but will represent so much gained by the occupier of the house. It will be observed that in establishing this proposition it has been stated that the remission of rates can exert no direct influence upon the price of building ground. The expression ' direct influence ' has been employed because it may no doubt happen that a slight indirect effect may be exerted upon the price of building ground by the remission of rates. The gain which will accrue to house occupiers from such a remission will enable them of course, if they please, to live in a somewhat better house. Thus a man who saves '201. a year from having to pay no rates may 1)6 induced to take a better house. Again, it no doubt happens that a man often delays commencing house- keeping until he thinks he is able to aflford to take a house suitable to his position. The remission of rates, by lessening the cost of housekeeping, would increase the demand for houses. It, therefore, follows that the remission of rates, by inducing some people to live in better houses, and by inducing others to commence housekeeping, would exercise some influence on the demand for building ground. The price of this building ground would somewhat advance, and a small portion of the benefit resulting either from a remission or reduction of rates would fall to the share of the owners of ground- rents and of building ground. Making, however, full BOOK IV. CH. VII. 636 Manual of Political Economy. BOOK IV. cir. vir. Investiga- tion of the incidence of rates on houses and husiness premises, where the land, on ivhich they are built, possesses exception- al advan- tages. allowance for this, we still arrive at the conclusion that by far the greater part of the advantage would, in ordinary cases, be undoubtedly appropriated by house occupiers. We say ' in ordinary cases,' because it is necessary to point out that in Certain exceptional instances the reverse of what has just been stated takes place, and the gi'eater proportion of the rates is paid, not by the occupier of the house, but by the ow^ner of the ground. The reader will probably perceive that through- out the above investigation it has been assumed that the area of building ground is not limited in quantity. It is, however, obvious that this assumption is only true in certain cases and with certain qualifications. It is, for instance, perfectly well known that some houses possess a monopoly of advantages so far as situation is con- cerned. Sometimes the advantage consists in beauty of prospect. A small area of ground may command a beautiful view, and there is no power whatever of increasing the number of houses built upon it. In other cases the advantage arises from convenience of situa- tion for business purposes. Customers, for instance, are more likely to be attracted to those shops wdiich happen to be situated in the leadincr thorouohfares of our large towns. The competition for business premises possessing these exceptional advantages of situation is so great that the rent is only in a slight degree determined by the value of the building itself. Thus, business premises at Charing Cross or in Lombard Street which may only cost 10,000^. to erect may not improbably let for 300l)Z. a year. A profit of ten per cent, may be regarded as more than an ample return upon money invested in building. Consequently, in such a case as that just described, where the annual rent is 3000^., certainly not more than 1000^. of this amount can fairly be regarded as the rent of the building ; the remaining 2000/. is the annual price or rent paid for the use of the ground on which the building stands. Assuming that the rates on this building are 5s. in the pound, or, in other words, 750/. a year, we have to determine whether these rates are borne by the owmer of the building or by the occupier. In order as far as possible to simplify the investigation, we will, in the first instance, suppose that The Incidence of Local Taxation. 637 the owner of the ground is also the owner of the build- ing, and it will then be only necessary to determine whether, if rates were altogether remitted, the gain would be secured by the owner of the building or by its occupier. It is at once obvious that the rent which the occupier pays is not regulated by the cost of erecting the building. The cause which here determines value or rent is not, as in ordinary cases, cost of production, but the demand which exists at any particular time for an article the supply of which cannot be increased bej'^ond definitely assigned limits. The rent of an ordinary house is ultimately determined by the cost of production, just in the same way as the price of ordinary commodities is regulated by the outlay involved in producing them. If, however, there is some article, the supply of which cannot be increased, such, for instance, as a vase designed by a distinguished artist no longer living, it is evident that its price is not influenced by the original cost of producing it, but is solely controlled by the demand of those who may wish to purchase the vase. The demand which may be regarded as proving effectual in this case, or, in other words, the demand which ultimately fixes the price, is to be measured by the amount ofiered for the vase by the purchaser willing to pay for it the highest price. If we inquire why there is this demand for the vase, or why a person is willing to pay this highest price, we can only say that the desire may be prompted by pleasure, or by a prospect of ultimate profit. Analogous considerations will show that the price or rent paid for a house possessing exceptional advantages of situation is only in a small degree influenced by the cost of building the house, but is determined by the highest price which anyone is willing to pay who wishes to occupy the house, either for purposes of pleasvire, or in order to secure the extra trade profits which will result from the occupation of premises in a peculiarly favour- able situation. It is evident that this demand, whether prompted by pleasure or by an anticipation of gain, is not influenced by the amount of rates which may be levied on the premises. Thus, assume that there are two sets of business premises, one in the Euston Road, and the other at Charing Cross, which, so far as regards the BOOK IV. CH. VII. 638 Manual of Political Economy. size and general character of the buildings, are identical. It is by no means unreasonable to suppose that if the premises in the Euston Road let for 500^. a year, those at Charing Cross would let for 2000^. If these should be the two rents respectively paid, the difference, 1500?, a year, would represent the pecuniary value possessed by premises of this character when situated at Charing Cross, compared with the Euston Road. In saying that the rents are 2000?. and 500?. respectively, it is assumed that these rents include the amount paid in rates. Suppose that there is a uniform consolidated rate in the metropolis of 5.s. in the pound; the aggregate rent of 2000?. which is paid for the building at Charing Cross, will consist of 1600?. paid as rent to the landlord, and 400?. paid as rates. The 500?. of rent for the building in Euston Road is composed of rent to landlord, 400?., and rates, 100?. Let us now inquire what would take place if rates were altogether remitted. What is true in the case of the entire remission of rates would, pro tanto, hold good in the case of reduction of rates. As the two buildings, which we are now considering, are in every respect of the same size and character, it is mani- fest that the cost of erecting each must have been the same. Let it be assumed that this cost was 4000?., upon which there is a return of 8 per cent. The Euston Road premises which let for 400?. a year may consequently be regarded as yielding an ordinary rent of 320?. a year and a ground-rent of 80?. The premises at Charing Cross, in consequence of their erection costing the same as those in the Euston Road, yield the same ordinary rent, viz. 320?., and the ground-rent will consequently be 1280?. The remission of rates would not in any way affect the pecuniary value for business purposes possessed by the house at Charing Cross. The demand for this house would be the same as it was before the rates were remitted ; consequently its owner would be able to secure the same rent for it, viz. 2000?. This rent of 2000?. previously consisted of three distinct elements ; viz. 400?. rates, 1280?. ground-rent, and 320?. ordinary rent, or, in other words, the return for the money spent in building the house. The amount of this return is solely regulated by the ordinary rate of profit upon money invested in The Incidence of Local Taxation. 639 building, and is, not, therefore, in any way affected by the remission of rates. Hence, when no rates are paid, the aggregate rent is still 2000^. a year, and as the ordinary rent still remains at 320^. a year, it therefore follows that the ground-rent will be increased by 400/., viz. from 1280/. to 1680/. From these considerations it appears to be proved that in the case of buildings possessing exceptional advantages of situation, rates are not a charge on the owner or occupier of the house, but upon the owner of the ground, because it has just been shown that if rates were remitted, the saving resulting would simply represent so much added to the ground- rent. When business premises do not possess any exceptional advantages of situation, it is evident, from considerations similar to those adduced in the case of ordinary dwelling-houses, that rates are a charge upon the occupier or tenant. It still, however, remains for us to determine whether the tradesman who pays rates upon his shop, and the merchant or manufacturer who pays rates upon a warehouse or manufactory, is able to shift the burden of these rates upon the purchasers and the consumers of commodities. Putting this question in another form, we have to ascertain whether rates are to be regarded as a deduction from trade-profits, or whether they are a tax imposed on the consumers of merchandise. It will be easy to show that the answer which must be given to this inquiry will be different under different circumstances. In the first place, let it be assumed that the rates imposed in different localities are the same, and that the home trader has to encounter no foreign competition. Upder such circumstances there can be little doubt that rates would be really paid by the consumer and not by the trader. If this were not so, any increase in rates would represent so much taken away from the profits of trade. But if trade profits were thus diminished, they would sink below their natural level, and the force of competition would at once be brought into operation to restore them to their former position ; for it is obvious that capital would not continue to be invested in business if it could be more advantageously employed in other undertakings. We have next to inquire what would Are rates on trade premises a burden on profits or on the con- sumer ? 640 Manual of Political Economy. BOOK IV. CH. VII. take place when rates are higher in some localities than in others. Those who carry on business in localities where rates are exceptionally high would be unable to shift the burden of the extra rates upon the consumer, because the competition of those localities where rates are comparatively low, would prevent the price of the commodity being raised sufficiently to compensate those traders upon whom the exceptionally high rates are imposed. It is, therefore, evident that the trade of a district may be seriously imperilled if it has to bear rates much in excess of those which are levied in other localities. A merchant or manufacturer may be unable to continue his business, or may be induced to withdraw his capital to other localities, if he has to bear the burden cast upon him by excessive rates. Summarising the conclusions at which we have just arrived, it may be generally stated that rates, so far as they represent a uniform charge upon business premises, are a tax imposed upon consumers. In those cases where rates are exceptionally high, the excess above the ordinary amount constitutes a special tax imposed upon the traders of the locality. In order to complete the investigation, we have next to inquire whether the conclusions at which we have just arrived have in any way to be modified, when the com- petition of foreign traders is taken into account. It has been shown that, as rates are ordinarily a charge upon the consumer, an increase of rates will raise the price of commodities. Such a rise in price, however, will at once stimulate foreign competition. The foreign producer, anxious to avail himself of these high prices, will send us a greater quantity of goods. This augmentation .in the foreign supply must exert an influence in reducing prices. It will consequently follow that the home trader, when rates increase, will only be able partly to recoup himself by a rise in prices. The burden in this case will have to be shared between the trader arid the consumer. The more rates are increased, the greater will be the advantage given to our foreign competitors. It may quite possibly happen, that a constant increase in rates might ultimately jeopardise the very existence of many branches of industry, in which there is a The Incidence of Local Taxation. 641 close competition between the home and the foreign producer. It may, in conclusion, be desirable to trace the incidence of rates when imposed upon such undertakings as rail- ways and gas and water-works. Nothing can be more anomalous and confused than the methods adopted for levying rates upon these undertakings. It has been already stated that rates are levied upon the annual letting value of business premises, and not upon the profits realised from the business. In the case of rail- ways and water -works, rates are levied by an absolutely unintelligible process. They are, in a certain rough way, imposed upon the profits realised. The laws of rating, so far as this kind of property is concerned, are simply a mass of heterogeneous and contradictory jargon, which no amount of human ingenuity can interpret. A late eminent judge, in giving his decision in a dispute arising from the rating of some water-works, declared it to be impossible to reconcile or to understand the various contradictory Acts of Parliament which bore upon the subject. We must, however, forbear from pursuing this branch of the subject at greater length ; for the object we have in view is rather to trace the incidence of rates than to adduce instances to prove how imperatively our entire system of local finance and administration requires fundamental reform. The rates which are imposed on railways are usually supposed to be a charge upon rail- way travellers, and not a charge upon the proprietors of railway stock. Some valid reasons, however, may be adduced for arriving at a different conclusion. It will be scarcely denied that there is a certain point at which railway fares might be fixed, so as to, return the maxi- mum profit. Railway managers very likely have hitherto failed to discover this point. Some competent authorities assert that the profits of railways would be greatly increased if existing fares were considerably reduced. But whether this .should ultimately prove to be so or not, the fact still remains, that as railways are ordinary commercial undertakings primarily administered for profit, the facilities which are offered for the convey- ance of goods and passengers, so far as fares and accommodation are concerned, are such as will, in the 2s BOOK rv. CH. VII. Incidence of rates on railways, ct-C. 642 Manual of Political Economy. opinion of directors and managers, yield the largest amount of profit. Bearing this in mind, let it be supposed that, in consequence of an increase of local rates, an extra charge is thrown upon a railway. We have, therefore, simply to inquire whether the railway proprietors will be able to recoup themselves for this extra charge by increasing the fares for goods and passengers. It certainly seems that such a question admits of but one ans."^er. If fares could with advan- tage be raised after the extra rates were imposed, why were they not raised before ? The original amount at which these fares were fixed was supposed to indicate a point at which the maximum of profit would be realised. How, then, can it be imagined that an increase of rates would prompt railway proprietors to raise their fares, or, in other words, to do that which would lead to a reduction in their profits ? Hence it follows that local rates diminish the profits of railway shareholders, and any imperial tax levied on railways, such as the railway passenger duty, has the same efiect. In corroboration of this view it may be mentioned that when the railway passenger duty was reduced in 1883, there was at once a general rise in the value of railway shares. From analogous considerations it follows that rates imposed upon water-works and gas-works represent a charge upon the profits of these undertakings. There is a certain price which will yield a maximum of profit ; and, consequently, a rise in price, instead of providing compensation for an increase of rates, would simply tend to reduce profits. It not unfrequently happens, however, that when an Act of Parliament is obtained for the con- struction of gas and water-works, the proprietors are prohibited from appropriating to themselves a dividend of more than a fixed amount, generally 10 per cent. When this maximum dividend has been reached, it is evident that rates are solely a charge upon the consumer, because if there were no rates there would be so much more of extra profits, to appropriate to a reduction in the price of gas and water. In those cases where gas and water- works are owned by a municipality, there can be no object in rating them at all. If they are made to The Incidence of Local Taxation. 643 pay rates, it is siiiipl}' taking money out of one pocket and putting it into another. There is one peculiar injustice associated with the present method of levying local taxation, upon which it is desirable to make a few remarks. It will be seen that the inequalit}' to which we refer presses with par- ticular severity upon the leasehold occupiers of dwelling- houses and business premises. It is, as we have shown in the last Chapter, a prominent characteristic of local tinance in this country, that the aggregate local expen- diture each year exceeds b}^ many millions the aggregate amount which is raised by local taxation and by grants from the imperial exchequer. This excess of expenditure over revenue, which amounted on an average, during the seven years preceding 1884, to more than 12,000,000/. annually, has to be met by raising loans upon the security of the rates. It is surprising that the amount of local indebtedness, which is being rapidly accumulated throughout the country, has hitherto attracted so little notice. It has often happened in recent years that the imperial revenue has exceeded the expenditure by 3,000,000/. or 4,000,000/. a year ; and yet we persistently ignore the fact, that the addition which is each year made to our local indebtedness greatly exceeds any diminution which is effected in our national obligations. Every facility seems to be given to local authorities to get into debt, and what makes the matter still more serious is that the circumstances under which these loans are con- tracted are frequently involved in inextricable confusion. This system of constantly borrowing is often justified upon the plea that the money is devoted to works of permanent improvement. But it is sometimes difficult to discover whether a portion of these loans is not occasionally applied to purposes which ought to be defrayed out of ordinary revenue. Again, it is frequently urged in defence of this system of borrowing for works of per- manent utility, that at the time the loans are contracted arrangements are entered into which will secure the repayment or redemption of the loan in a certain limited period. Thus, if 500,000/. is required for the carrying out of a new system of drainage, or for the construction of water-works, the money is raised either in the form 2s2 Injustice to lease- holders in compelling 644 Manual of Political Economy. BOOK IV. C'H. VII. them to f'Ui/for improve- mciifs the value of which is appro- priated hji the owners. of terminable annuities, or, which comes to the same thing, the local authorities consider that the loan involves a charge of six or seven per cent., and the amount of this interest above the current rate is devoted to the creation of a sinking fund, which will enable the loan to be paid off' in a certain period, say twenty-one years. It is easy to show that this arrangement, instead of constituting a defence of the present system, is essentially unjust. If 500,000^ is, as we have supposed, raised for drainage purposes, or for water-works, let us inquire what will take place if the loan is paid off* in twenty-one years, seven per cent, interest being charged upon it during the period. The loan will obviously, upon this hypothesis, throw upon the rates, during a period of twenty-one years, an additional charge of 35,000^. a year. Suppose that just previous to the time when this loan was con- tracted, a man takes a lease of a house or of some business premises for twenty-one years. During the entire period of the lease he will be obliged to contribute his share to the extra charge thrown upon the rates by this loan. At the expiration of the lease, this improve- ment, which has cost oOO,OOOZ., is paid for. The owner of the leasehold property has not contributed* a single shilling to the amount, although his property is per- manently improved by the expenditure. The tenant will probably find at the expiration of the lease that his rent is raised in exact proportion to the extent to which the property has been improved. The landlord will be able to say, " You paid me 60^. before, but the house is well worth Qbl. or 70^., now that the town has been so well drained, and now that there is a constant supply of water almost free of charge." Of what avail will it be for the tenant to plead that it is he and not the landlord who has paid for the drainage works and the water ? Sooner or later, of course, just such a rent will be charged for the house as the house is worth. The wrong which is in this way inflicted on leasehold tenants is so entirely indefensible, that it seems impossible to understand how it has been so quietly submitted to. Urban occupiers, at least, have the remedy in their own hands. They are the majority of the ratepayers, and it rests with them to determine whether loans should be raised at all, and if Tlie Incidence of Local Taxation. 645 raised, under what conditions they shall be contracted. Loans raised upon the security of county rates are in a somewhat different position, because the county magis- trates, being a non-elective body, are not subject to the ratepayers' control. It is, however, to be observed that by far the greater portion of the loans has been raised, not in rural, but in urban districts, and it is to this circumstance we must partly attribute the fact to which we have already alluded, that rates are now, on the average, in the towns, nearly twice as high as they are in the country. BOOK IV. CH. VII. INDEX. Aggregation of land in England, 196 Agricultural, produce tends to become increasingly costly with increased demand, 75, 81, 151, 325, 471; labourers, poverty of, in England, 157, 190; Holdings Act (1875), 227, 230 ; (1883), 230 ; Commission (1882), 228 71.; land of England, estimated value of, 292 ; improve- ments, effect of, on price of food and on rent, 338, 471 Agriculture, cooperation and copart- nership applied to, 258, 279 Allotment gardens,effect of ,on wages, 244 Allowance system, the evils of, fi02 Annuities, Government, 615 Arbitration, boards of, 257 Artisans' Labourers' and General Dwellings Company, 285 Babbage, on division of labour, 56 Bagehot, Walter, on rapid transfer of capital to exceptionally profitable trades, 170 n. Bank Charter Act, 447, 453 ; tem- porary suspension of, 460 Bank-notes, 446, 452 ; bank-note cir- culation of Great Britain, 453 Bank of England, position and pri- vileges of, 446, 457, 462 Banking, cooperation applied to, 281 Barter, as a method of exchange, 322 Baxter, Dudley, on national debts, 146, 589 Bentham's proposal for exemptions from the income-tax, 560 Bills of exchange, 378, 428, 445, 449 Bi-metalism, 366 Boards of arbitration, 257 Bonding houses, 569 Book credits, 452 Bounties on exports, 388 Brassey, Lord, on cost of labour in different countries, 49 ; on wages, 140, 143, 144 Bronze coinage, 365, 368 Building Societies, 284, 303 Business premises, incidence of local rates on, 631 Cairnes, on effect of gold discoveries, 62; on the wages-fund, 137; on increase of population in Ireland, 148; on economic defects of slavery, 311 ; on the gold discoveries, 498 Canons of taxation, Adam Smith's, 535 Capital, a requisite of production, 11, 45 ; definition of, 17, 29 ; glut of, 26 ; fixed and circulating, 40 ; produc- tiveness of, 50; increase of, 83, 182 ; attracted by exceptionally high profits, 160, 350; effect of export of, 185 Cheques, a substitute for money, 378, 443, 446, 448, 454 Chinese, poll tax on, in Australia, 93 Coal, rise in price of, in 1872-4, 140, 341 Colonisation, Wakefield on, 59 Combination of labour, 59 Commercial treaties, 408 Commercial panics, 460, 462 Commons, enclosure of, 244 Competition, effect of, on wages, 116, 161, 352 ; on profits, 170, 173, 352 ; on rent, 119, 334 Conacre, 224 Consolidated Fund, increasing ten- dency to throw local charges on, 625, 631 Index. 647 Consumption, productive and unpro- ductive, 15 ; unproductive, dimi- nishes wealth, 22 Conversion of circulating into fixed capital may injure labourers, 41 Cooperation of labour, simple and complex, 59 Cooperation applied to farming, 208, 258, 278 ; as a remedy for strikes, 257 ; principles of, defined, 263 ; hindered in England by legislation , 283 ; aided by the state in France, '298 Cooperative Banks, 281-2 Cooperative Stores, 69, 259, 263 ; Eochdale Pioneers, 264,283; Whole- sale Society, 271 ; production, 275, 278 ; banking, 282 Copartnership, 257 ; adopted by M. Leclaire, 259 ; by Messrs. Briggs, 261 ; by Messrs. Crossley, 261 Cost of carriage, in international trade, 391, 409 Cost of labour. Lord Brassey on, 49 ; as affected by education, 49; J. S. Mill on, 177, 181; as affected by price of agricultural produce, 473 Cost of production, in its relation to value or price, 347 Cottiers, the Irish, 211, 221 Cotton famine in Lancashire, 175 Cotton trade, activity in the, 161, 171, 350 Credit, in retail trade, disadvanta- geous, 267 ; definition of, 438; aids the production of wealth, 441 ; influence of, on prices, 441, 447 ; various forms of, 441 ; as a means of increasing purchasing power, 452 ; as a means of speculation, 456 Credit banks in Germany, 281 Currency, the silver and bronze, of England, 368, 420 ; gold, 366, 375 ; convertible and inconvertible, 459, 463, 464 Custom and competition as control- ling rent, profits and wages, 116 Debt, the English National, 32, 33 Debts, vast increase of National, 146 Demand and Supply, as regulating wages, 138, 254 ; as regulating prices, 329, 355 ; as regulating value of gold and silver, 378 ; equalisation of, in international trade, 392 Demand, for commodities, not a demand for labour, 21; effectual, defined, 327 Depreciation in value of silver, 504 ; report of Parliamentary Committee on, 511 Depreciation of gold, 864, 495, 498, 502 Depression of trade, effect of, on pro- fits and wages, 171, 172 Derby, Earl of, on agriculture, 228 Devon's, Earl of, Irish land commis- sion (1845), 223 Difficulty of attainment, an element of value, 329 Diminishing productiveness, law of, 76 Division of labour, 52 ; Adam Smith on, 52 ; J. S. Mill on, 54 ; Babbage on, 56 Dorsetshire labourer, condition of, 157 Double standard, disadvantages of, 366, 526 ; as adopted in France, 369 East's Act, 602 Education Act (1870), 200 n., 241 ?t., Education, effect of, on cost of labour, 49 ; on wages, 239 ; on efficiency of labour, 239; on crime, 241 ; on intemperance, 241; on pauperism. 241 ; free, 110, 308, 614 ' Effectual Demand,' definition of, 327 Elizabethan Poor Law, the, 600 Emancipation of serfs in Russia, 208 Emigration, beneficial effect of, 150, 243 ; cannot be regarded as a per- manent remedy for over-popula- tion, 152 Emigration of Chinese to Australia. 93 Enclosure of commons, 244 English shipping trade, predomi- nance of, 417 Exports and imports, of England, increase of, 140, 501 ; tend to an equality, 416 Exports of England, permanently less than her imports, 415; of India permanently exceed her imports, 418 Export of capital, effect of, on wages and profits, 185, 483 Factory Acts, the, 615 648 Index. Farming, large and small, 70, 188; how to combine the advantages of, 207 ; cooperative, 258, 279 ' Favourable ' and ' unfavourable ex- change,' meaning of these terms, 431 Franco-German war, economic effects of, 30, 90, 209 Free education, 110, 308, 614 Free trade, in corn, 80, 579; effect of in reducing price of food, 84, 141, ■582; in absorbing the new supplies of gold, 501; carried by Sir Robert Peel, 141; benefits of, 403, 578 Free trade and protection in Austra- lia, 584 Friendly Societies, 246 Foreign commerce, 322, 387; benefit of, to consumers, 403 Foreign loans, effect of, on accumu- lation of capital, 89 Fourier, 105, 107 George, Mr. Henry, on condition of labouring population, 140 ; on nationalisation of the land, 289, 291 Germany, demonetisation of silver in, 504, 513, 526 Giffen, Sir Eobert, on value of agri- cultural land of England, 292 Gilbert's Act, 602 Gladstone, Rt. Hon. W. E., reduces duty on light wines, 380, 567 Gold, discoveries, effect of, in Austra- lia, 62 ; advantages of employing, to fulfil the functions of money, 362; discoveries, effect of, on value of gold, 364, 495, 498,502; used in manufactures, 375 ; circumstances which regulate the demand for, 376 ; transmitted as ordinary ar- ticle of commerce, 421, 435; fluc- tuations in value of, 497 Goschen, Rt. Hon. Lord, on the appreciation in value of gold, 496, 504 Government Annuities Act, 615 Government work for the unem- ployed, 236 Grants in aid of wages, evils of, 602 Henley, Mr., on condition of North- umbrian peasants, 616 Houses, incidence of rates on, 634 Ignorance, effect of, in keeping wages low, 157 Importation of food, effect of, on price of agricultural produce and on rents, 338 Imports and exports, of England, in- crease of, 140; tend to an equality, 415 Imports of England permanently in excess of her exports, 415 ; of India permanently less than her exports, 415 Incidence of taxation, 555 ; of local taxation, 555 Income-tax, 541; different effects of, when paid out of income and when paid out of capital, 37, 555 ; ob- jections to a graduated, 554, 560; unsuited to India, 557; exemptions, 559 Inconvertible currency in U.S.A. and in England, 463; in France, 4()6 India, economic condition of, 91, 418, 525; decline in the demand of, for silver, 515 Indian Salt-tax, 39, 87 ; Land-tax, 290, 529 ; ' Home Charges,' 518 Indirect taxes, 564 International Society, the, 287 International trade, 387 Interest, rate of, affects saving, 88 ; remains constant at same time and place, 167 ; variations in rate of, 467, 472 Irish Land Act (1881), 209, 226, 294, (1870), 225 Irish Land tenure, 209—226, 222; Commission (1845), 223 Jevons, on effect of the gold dis- coveries on prices, 498 Joint-stock Banks in London, amount of deposits in, 441 n. Joint-stock Companies, effect of, in creating capital, 67-8 ; 270 Labour, a requisite of production of wealth, 12, 45, 48; productive and unproductive, 13 ; productiveness of, varies in different countries, 49; division of, 52; efficiency of, pro- moted by education, 239 Labour-saving machinery, in U.S.A., 144 ; effect of, on wages, 143 Lancashire cotton famine, 174 Land Acts, Irish, 209, 225, 226, 294 Index. 649 Land, a requisite of production, 11, 47 ; varies greatly in productive- ness, 75, 120 Land laws in England, 196, 295 Land reform in England, 296 Land tax in India, 290, 529, 592 ; in England, 593 Land tenure in Ireland, 209 Lassalle, 288 Latin Monetary Union, 513 Law of the increase of land and labour, 74, 80; of diminishing pro- ductiveness, 77; of the increase of capital, 85 Laws, to regulate wages, 231 ; to regulate length of a day's work, in U.S.A., 234; to regulate length of a day's work, advocated in France, 234 Leclaire's co-partnership scheme, 258 Legal tender, 369, 447, 465 Leicester, Earl of, on agriculture, 228 Life insurance, State-aided, 304 Loans, effect of, on increase of capi- tal, 33, 35, 89; for public works in India, &c. , 34 ; compared with increased taxation, 37 Local expenditure of Great Britain and Ireland, 619 Local finance, complexity of, 622 Local revenue, of London, 619 Local taxation, Mr. Palgraveon, 618, 631; Mr. Purdy on, 6.30 Local taxes on commodities, 629 London, local finance of, 619, 630 Machinery, opposition of labourers to, 43, 249 Malthus on Population, 147, 182 Margin of cultivation, 125, 131, 335 Marshall, Mr. and Mrs., on Trade Societies, 251 ; on the Schulze- Delitzsch credit banks, 281 Martineau, Harriet, on physical suf- fering caused by protection, 141 Mercantile system, 8, 388, 431 Metayers, 104, 211 Metropolitan Poor Act, 609 Migration, of capital, 169, 350; of labour, beneficial effects of, 243 Mill, John Stuart, definition of pro- ductive labour, 12 ; on the wages- fund controversy, 136; on Ricardo's doctrine that rate of profit depends on wages, 177 ; on cost of labour, 178 — 181 ; on peasant proprietors, 188 ; on protection in a young country, 584 ; on the unearned in- crement, 295 ; on exceptionally high rate of discount for foreign bills of exchange, 434 ; on effect of speculation on prices, 456 ; on over-production, 493; on the in- come-tax, 560 Mineral produce, laws governing value of, 334, 338 Mining industry highly speculative, 499, 509 Mint, regulations of the, with regard to coinage, 369, 373, 420 n. Money, functions of, 323, 359 ; dif- ferent substances used as, 358 ; qualities desirable in substance selected to be used as, 361 ; value of, 371 Morley, Mr. John (Life of Cobden), on physical suffering caused by protection, 142 National debts, 33, 589 ; national debt of England, method of re- ducing, 589 Nationalisation of the land, 111, 288; as advocated by Mr. Henry George, 289, 291; by Mr. A. R. Wallace, 289 National poor rate, objections to a, 613 Natural price, 339 Natural rate of profit, 168, 350 Over-production, meaning of, 489 Owen, Robert, 105, 109 Palgrave, Mr. R. H. I., on local taxa- tion, 618, 631, 632 Panics, commercial, 458, 460 Paris and Orleans Railway, profit- sharing in the, 259 Paris, cooperative production in, 278 Pauperism, cost of, under the old Poor Law, G04; in England, Scot- land and Ireland compared, 609, 611 ; in various English Unions compared, 612; increased by inter- ference with women's labour, 616 Peasant i^roprietors, 113, 187, 201 ; cultivators, 114 ; aided by the State, 300 Peel, Sir Robert, the fiscal reforms of, 141 ; author of the Bank Charter Act, 458 650 Indeoc. Permanent settlement, the, in India, 290, 525 Political Economy, definitions of, 4,45 Poll-tax on Chinese in Australia, 93 Poor Law, socialistic elements in the, 108, 307; checks on population, 237 ; origin of, in England, 598 ; the Elizabethan, 600; Commission, 604; the New, 605, 608 ; evil effects of the old, 605 ; the Irish and , Scotch, 609 ; advantages of a, 614 Poor rate, objections to a national. 614 Poor rates, incidence of, 565 Population, increase of, in Victoria, 76 ; effect of increase of, on cost of agricultural produce, 78, 82, 131, 336; in raising rents, 131, 336; on wages, 143, 182; Malthus on, 147, 182; Cairnes on increase of, in Ireland, 148 Price, definition of, 322 ; commodities divided into three classes in respect of their, 325 ; of commodities ab- solutely limited in quantity, 326 ; of agriculture and mineral pro- duce, 333, 374 ; of agricultural produce not influenced by rent, 134, 336 ; of manufactured com- modities, 345, 351; of gold, 373 ; as affected by cost of production, 346 ; influenced by credit, 445, 449, 454 ; as influenced by speculative purchases, 455 Primogeniture, English law of, 196 Private property, rights of, 102 Production, requisites of, 10, 45 ; on large and small scale, 65 Profits consist of three elements, 163; natural rate of, 168 ; effect of com- petition on, 169, 334; how far dependent on wages, 175 ; why higher in some countries than in others, 469; relation of, to prices, 477 ; tend to diminish as a nation advances, 481 Profit-sharing, Mr. Sedley Taylor on, 257 n. Protection, abandoned in England, 141 ; the theory of, 578; Mr. D. A. Wells on, in U.S.A., 585 Public Works Loan Commissioners, functions of. 297 Public Works, construction of, by the Government, 297 Purdy, Mr., on incidence of local taxation, 630 Eack-rents, 119, 211, 222 Raiffeisen banks, 282 Railways, incidence of local rates on, 641 Rate of interest, affects saving, 88 ; how connected with price of land, 472 ; varies in different countries and at different times in the same country, 469, 463 Rate of profit varies in different countries, 126 ; in different trades, 168 Rates, incidence of local, 627, 632, 634 'Reciprocity,' fallacies of, 406 Reirt, Ricardo's theory of, 77, 121, 176, 335 ; as controlled by com- petition, 119, 334; by custom, 103; how affected by agricultural im- provements, 127; by variations in rates of wages and profits, 129 ; by increase in population, 131 ; a portion of, consists of interest on capital spent on improvements, 132 ; not an element in the price of agricultural produce, 134, 136 Ricardo"s theory of rent, 77, 121, 176, 335 ; objections to, 121 ; im- plies the existence of active com- petition, 135 Rieardo on profits and wages, 176 Rochdale Pioneers' cooperative stores, 264 ; cooperative production at, 274 Salt-tax in India, 39, 87 Saving, affected by rate of interest, 88, 480 ; by ' effective desire of accumulation,' 86, 479 ; by habits of thrift and foresight, 85 Savings Banks, 202, 307, 615 Schulze-Delitzsch, Herr, the founder of coojjerative banking, 281, 288 Serfs, emancipation of, in Russia, 208 Settled Land Act (1882), 197 Settlement, Laws of, 000 Shaftesbury Park Estate, 285 Shipping trade of England, predo- minance of, 417 Sidgwick, Mr. Henry, on wages-fund controversv, 138 n. Index. 651 Silver, as fulfilling the functions of money, 3G2 ; recent increase in annual supply of, 3(J4, 504, 511 ; coinage in England, 3(58 ; effect of demand for, on value of gold, 503 ; demonetised in Germany, 504, 513, 526 ; depreciation in value of, 411 ; decline in demand for, 515 ; plate, amount annually manufactured in England, 514 Sismondi on metayers, 221 Slavery, economic effects of abolition of, in West Indies, 92 ; economic defects of, 114, 311 Slave labour, Hon. C. Clay on, 317 Smith, Adam, Wealth of Nations, 8, 388 ; on division of labour, 52 ; on causes of different rates of wages in different employments, 153 ; on bounties on exports, 388 ; mis- taken as to connection between profits and prices, 477 ; on taxa- tion, 534, 567 Socialism, 105 ; State-aided, 288 Soetbeer, Dr., on relative value of silver and gold, 519 Specie payments resumed in U.S.A. and Italy, 504,514; suspension of, in England, 463 ; in France, 466 Speculation, promoted by credit system, 455 Standard of value, 366 State aided, socialism, 288 ; work for the unemployed, 236; public works, 297 ; industry, 298 ; coope- ration, 299 ; peasant proprietors, 300; industrial dwellings, 801 ; life insurance, 304 State-ownership of land in India, 290 ; in Australia, 290 ' Stationary State,' the, 484 Statute of labourers, 232 Strikes, 246, 249 ; influence of, on wages, 250 ; involve great loss of wealth, 256 ; due to antagonism of interest, 256 St. Simon, 105, 106 Substitutes for money, 377 Taylor, Mr. Sedley, on copartnership or profit-sharing, 257 n. Taxation, canons of, 535 ; general principles of, 533 ; incidence of, 555 ; local, 618 Taxes on income, 37, 543; objections to graduated, 554, 560 Taxes on raw material, 39, 572 ; on commodities, 551, 564; on exports, 574 ; can seldom be made ad va- lorem, 566, 629 ; on imports, 576 ; for the purpose of reducing debt, 588 Telegraph drafts as instruments of credit, 448 Tenant right in Ulster, 225 ; in England, 226 Tenants' Compensation Act (1883), 294 Tendency of exports and imports to an equality, 416 Thornton, W. T., on the wages fund, 136 ; on peasant proprietors, 188 Tithe Commutation Act, 128, 596 Tithes, 596 Tooke's History of Prices, on effect of speculative purchases on prices, 456 Trades Unions, their influence on wages, 162, 246, 253 ; Royal Com- mission on (1869), 246, 260,282; formerly opposed machinery, 249 ; formed by employers as well as by employed, 254 Treaties, commercial, 407 Turgot on metayer tenures, 218 Ulster tenant right, 225 Unearned increment, doctrine of the, 295 Unemployed, ought the Government to find work for the, 236 Union Chargeability Act, 609 Utility in its relation to value, 329 Vagrancy, Acts to suppress, 599 Value, definition of, 321 ; commodi- ties divided into three classes in respect of their, 325 ; of commodi- ties of which supply is absolutely limited, 326; of agricultural and mineral produce, 333 ; of agricul- tural produce not influenced by rent, 134, 336 ; of manufactured commodities, 345, 351 ; as affected by cost of production, 346 ; of sil- ver and gold compared, 519 Wages, as influenced by demand and supply, 138, 253 ; Lord Brassey on, 49, 140, 143, 144 ; have not increased proportionally with the 652 Index. increase of wealth, 142 ; effect of increase of population on, 143, 151, 185 ; of machinery on, 143; of ex- port of capital on, 146 ; of warlike expenditure on, 146 ; depend on ratio between labouring population and wages fund, 152 ; causes of variation in, in different employ- ments, 153 ; in different localities, 157 ; influence of commercial pros- perity on, 160, 348 ; of Trades unions on, 162, 246, 251; of legis- lation on, 232 ; of national educa- tion on, 239; of allotments on, 244 ; of competition on, 116, 253 ; of women depressed by out-door relief and by legislative interfer- ence with their labour, 615 Wages-fund, controversy on the, 136 Wakefield, on combination and co- operation of labour, 59 ; on theory of colonisation, 60 Wallace, Mr. A. E., on nationalisa- tion of the land, 289 Wars, rapidity with which nations recover from losses caused by, 30 ; should they be paid for by in- creased taxation? 32 Wealth of Nations, by Adam Smith, 8, 388 Wealth, the subject-matter of politi- cal economy, 4; definition of, 6 Wells, Mr. D. A., on protection in U.S.A., 585 Wheat, price of, in England, 78 Wholesale Cooperative Society, 271 Women, wages of, 615 Workhouse test, the, 601 Young, Arthur, on peasant proprie- tors, 188, 190, 193; on metayer tenure, 214 Zincke, [Be v. Barham, on peasant pi'oprietors, 195 n. OLAJJO PRINTED AT THE UNIVERSITY PRESS BV ROBERT MACLEHOSE AND CO. LTD, This book is DUE on the last date stamped below ^vt*-s ■ ^ 5 ISM. REC'D CD hR 2 7 APR 6 lil84 1384 Form L-9-15wi-7,'32 ;j^71 lilanuai of ]^907 economy- 3 1158 00021 4279 HB 171 F28m 1907 UC SOUTHERN REGIONAL LIBRARY FACIL AA 001 157 556 UNIVEF^ ■TORNIA Loo . .oL.i3iS UBRA-RV snr.^nnn*