UC-NRLF SB fl7 605 of lE LIBRARY OF THE UNIVERSITY OF CALIFORNIA. Class OUTLINES OF ECONOMICS A SYLLABUS FOR INTRODUCTORY STUDY by HERBERT ELMER MILLS, Ph. D. Second Edition POUGHKEEPSIE, N. Y. 1909 Copyright, /pop, HERBERT KILMER ENTERPRISE PRINT, POUGHKEBPSIE, N. Y. Within the last few years several excellent text-books in Economics have appeared, each of which has its own points of superiority. These Outlines were prepared in 1906 with the intent of guiding the student in using these several books and of making available in unified, systematic form the particular excellencies of the different books. They are in no sense a substitute for text-books. Each student must have for constant use Marshall's Economics of Industry, Seager's Introduction to Economics, or his Economics, Briefer Course, and Seligman's Principles of Economics. Other very desirable books are Bullock's Introduction to the Study of Economics, Fetter's Principles of Economics, Gide's Princi- ples of Political Economy (2nd Amer. ed.), and Mill's Prin- ciples of Political Economy. In the present revision many changes of wording have been made; the treatment of American Monetary History has been much condensed; and the references have been adapted to the newer editions of the works cited. At the appropriate places "Required Readings" in Bullock's Selected Readings in Economics have been introduced and nearly the whole of that collection is so included. I am in- debted to Miss Emilie Louise Wells, Instructor in Econo- mics, Vassar College, for valuable suggestions and much laborious verification of references. Lectures to the class will follow these Outlines. At the meetings in sections each student will be held responsible for fuller treatment of points indicated in the Outlines; for argu- mentative discussion of debatable questions; and for constant illustration based on reading and personal observation. It is hoped that note taking during the lecture hour will be found unnecessary. Grasp of the thought, reflection and application are more desirable than voluminous but unassimilated notes. Department of Economics, VASSAR COLLEGE, September, 1906. 226776 Outlines of Economics. CHAPTER I. INTRODUCTORY. I. Definition, Scope and Scientific Character of Economics. a. Definitions used at different periods of economic study reveal the change in its character. Adam Smith, 1776: Inquiry into the Nature and Causes of the Wealth of Nations. Nassau Wm. Senior, 1836: "The science which treats of the nature, the production and the distribution of wealth." John Stuart Mill, 1848: "Writers on Political Economy profess to teach, or to investigate, the nature of Wealth, and the laws of its production and distribution." Wilhelm Roscher, 1854: "The starting point as well as the object point of our science is Man." Luigi Cossa, 1877: "The science of the social ordering of wealth." Henry C. Adams, 1886: ' 'Political Economy treats of industrial society." J. N. Keynes, 1890: "The science which treats of the phenomena arising out of the economic activities of mankind in society." ''Economic activity may be defined as human 6 Introductory. activity which directs itself towards the production and ap- propriation of such means of satisfying human needs as are capable of being made the subject of exchange." R. T. Ely, 1908: "The science which treats of those social phenomena that are due to the wealth-giving and wealth-using activities of man." H. R. Seager, 1908: "The social science of business." Cossa, Introduction to Political Economy, pp. 58-65; Kly, Out- , lines of Economics, (1908) pp. 1-7; Keynes, Scope and Method of Political Economy, ch. 3; Seligman, Principles, 3; Fetter, Principles, pp. 3-5. b. " 'Money,' or 'general purchasing power' or 'command over wealth' is the center around which economic science clusters; this is so, not because money or material wealth is regarded as the main aim of human effort, nor even as afford- ing the main subject matter for the economist, but because in this world of ours it is the one convenient means of measur- ing human motive on a large scale." Marshall, Principles of Economics, (5th ed.) Bk. I., ch. 2; Mar- shall, Economics of Industry, Bk. I., ch. 3. c. Not all subjects of study are sciences. The character- istics of the sciences are ability to classify facts or phenomena in orderly arrangement; and to establish relations of sequence or cause among them. From these follows some possibility of prediction. Sciences have these characteristics in very different degrees. In spite of the apparent freedom of the individual will, human actions are capable of scientific study, and, when masses are considered, of comparatively accurate prediction. The social sciences are incomplete and in many respects very inexact ; but, because it possesses a more accurate measure of the relative strength of human motives, Economics is more exact than the others. Introductory. 7 Economics aims to discover truth and must be distinguished as a science from statesmanship, philanthropy, social reform, which, as arts, endeavor, on the basis of the truth discovered by Economics and other sciences, to accomplish results. Marshall, Principles, (5th ed.), Bk. I., ch. 3, passim; Mar- shall, Economic* of Industry, Bk. I., ch. 4; Gide, Principle* of Political Economy, 2d ed., pp. 1-7; Cossa, Introduction, pp. 40- 57; Davenport, Outlines of Economic Theory, pp. 1-7; Fetter, Principles of Economics, ch. 1, 3; Keynes, Scope and Method, chs. 1-3; Walker, Political Economy , 3rded., pp. 17-23; Seligman, Principles, 14; Cairnes, Political Economy: its Character and Logical Method, pp. 25-42. 2. Economic Law and Method. Economic laws are statements "that certain action may be expected under certain conditions from the members of a social group' ' in lines ' 'of conduct in which the strength of the motives chiefly concerned can be measured by a money price." In Economics as in other sciences the adjective normal is used to describe that which is in accord with scientific law. Like most other sciences Economics uses both induction and deduction in discovering its laws. son, Principles of jrotottcal economy, Vol. 1., pp. l-ZU; beager, Introduction to Economics, 31, 32; Seager, Economics, 9, 10; Hadley, Economics, pp. 23-25; Cairnes, Political Economy: Its Character and Logical Method, L/ecture III. 3. Relation of Economics to other Subjects of Study. Economics and the other social sciences are closely related and mutually dependent. Even when we endeavor to decide the appropriate course of social action in lines in which the motives are mainly economic and in which accordingly economic laws will be our chief guide, we get assistance from History, Psychology, Sociology, Law, Politics, Statis- 8 Introductory. tics, Finance and other studies which deal with man individ- ally or socially. But Economics having its own special field of investigation should be discriminated from all these other subjects. Cossa, Introduction, pp. 23-39; Seligman, Principles, 12, 13; Seager, Introduction, pp. 1, 2; Seager, Economics, 2; Keynes, Scope and Method, chs. 4, 9, 10; Ely, Outlines, (1908) pp. 11-14; Marshall, Principles, (5th ed.) Appendix C."; Fetter, Prin- ciples, ch. 1, 2; Dictionaries and Encyclopaedias for definition and scope of the various social sciences. 4. Importance of the Economic Factor in Social Development. "Economic Interpretation of History." It is asserted by some that since "the existence of man depends upon his ability to sustain himself, the economic life is therefore the fundamental condition of all life. ' ' Marx says: "The economic structure of society is the real basis on which the juridical and political superstructure is raised and to which definite forms of social thought correspond; in short, the mode of production determines the character of the social, political and intellectual life generally." This "economic interpretation of history does not exhaust the possibilities of life and progress; it does not explain all the nicities of human development; but it emphasizes the forces which have hitherto been so largely instrumental in the rise and fall, in the pros- perity and decadence, in the glory and failure, in the weal and woe of nations and peoples. It is a relative rather than an absolute explanation." Seligman. Seligman, Economic Interpretation of History; Ghent, Mass and Class, ch. 1; Marshall, Principles, pp. 1-4; Marshall, Econo- mics of Industry, pp. 1-4; Spargo, Socialism, ch. 4. 5. Value of the Study of Economics. The study of Economics gives better understanding of his- tory, deeper insight into our present social organization, guiding principles in connection with nearly all social activ 1 - Introductory. 9 ties, deeper sympathy and interest in connection with some profound social and ethical problems, intelligence and discre- tion with which to temper our feelings in the presence of social evils. It also provides a mental discipline surpassed by few if any studies, since it encourages precision, accuracy, discrimination, clearness of thought and expression. Many of its problems are of such difficulty that they require most intense application. A continued chain of reasoning is frequently necessary as in a mathematical demonstration; but since the forces and factors that must be borne in mind are very numerous, comprehension and grasp in an unusual de- gree are necessary. It gives a training in that kind of think- ing which is necessary for success in every day life and action. Andrews, Institutes of Economics, 16; L/aughlin, Study of Political Economy, chs. 2, 3; Cossa, Introduction, pp. 93-110; Patten, American Economic Association Publications, 5: 473- 486. Marshall, Principles, (5th ed.) Bk. I., ch. IV., 5, 6; Marshall, Plea for the Creation of a Curriculum in Economics. CHAPTER II. FUNDAMENTAL CONCEPTS. I. Definitions Relating to Value. Utility is capacity to satisfy a want. Value is power in exchange or an estimate of relative utility. Price is value expressed in money. Demand means the quantity that will be taken at a given price. Supply means the quantity that will be furnished at a given price. Seager, Introduction, 26; Seager, Economics, 5; Bullock, Introduction, 107, 111, 112. 2. Wealth. a. In defining wealth we hold to common usage and dis- criminate between wealth and welfare even though etymologi- cally and ethically such distinction be unfortunate. Wealth (as used in Economics) does not necessarially mean abundance. Those goods having utility, which are external to the in- dividual, and limited in amount constitute wealth. Wealth is that which has value. Wealth may be private or public {= social or collective). Some valuable sources or condi- tions of wealth are not wealth. Although from a logical and psychological standpoint there is no difference between the utility of a service and the utility of material wealth, services are not included in wealth. b. There has been constant change in the forms of wealth with development of human desires. The forms of wealth at any time and in any country are determined by and reflect the prevailing civilization. A large amount of wealth at present consists of very durable but very indirect means of satisfying wants. Fundamental Concepts. n c. Since man's power to devote himself to higher aims and activities depends upon possession of wealth sufficient to satisfy fundamental needs and is often conditioned upon pos- session of other contributory wealth, wealth is essential to individual and social progress; and the study of Economics is a study of that which conditions science, art and all higher life. Wealth does not necessarially advance welfare or civili- zation. It is the nature of man, his tastes and interests which determine what things are wealth; but these in turn are affected by his choice and use of wealth. Seligman, Principles, 4, 5; Marshall, Principles, Bk. II., chs. 1, 2; Economics of Industry, Bk. II., chs. 1,2; Davenport, Out- lines, ch. 2; Bullock, Introduction, pp. 84-87; Fetter, Principles, ch. 3; Gide, Principles, pp. 46-49; Andrews, Institutes, 1, 2, with notes; Clark, Philosophy of Wealth, ch. 1; Kly, Outlines, (1908) pp. 95-100. 3. Production and Consumption. Production is the creation of utility; the utility created may be of form, of place, or of time. Consumption is the destruction of utility. Labor is exertion with some other end in view than merely the pleasure involved in the exertion. Productive labor was formerly held to be only that which produced utility in durable form. All labor may be regarded as productive which accomplishes the end in view; that is, which aids in the satisfaction of a want. Individual acquisi- tion is not necessarially social production. Marshall, Principles, Bk. II., ch. 3; Economics of Industry , Bk. II., ch. 3; Fetter, Principles, pp. 43, 257-260; Seligman, Princi- ples, 119, 120; Clark, Philosophy of Wealth, ch. 2; Gide, Principles, pp. 75-80; Seager, Economics, 6. 4. Income and Capital. A piece of wealth is desirable because of the utility that comes from it. There is an income of benefit. Common usage does not apply this term to the utilities coming from 12 Fundamental Concepts. consumption goods; but does apply it to the utility coming from wealth used in production of further wealth; and also extends the term to any addition to wealth whether coming from use of land, from accumulated wealth used in produc- tion, or from human effort in form of wages, salaries or profits. While the income is in reality one of utility or utility-producing wealth, it is commonly thought of and ex- pressed in terms of money. We think of income as a stream or flow not as a store. One may sell for a lump sum his right to receive indefi- nitely an income from a piece of wealth, that is, its income may be capitalized as may any other income. Thinking, then, of such estimated lump-sum or capitalized values of in- comes of utility, we may say with Seligman that "the totality of capital is equivalent to the totality of wealth." But usage limits the word capital from the individual point of view to that "wealth which he devotes to acquiring an income in the form of money." (Marshall). Further the usage of econo- mic discussion defines capital from the social point of view as < the products of past industry used as aids to further pro- duction," (Seager), excluding land. While the particular pieces of capital may be called capital goods, the business man thinks of capital as "the complex of capital goods used in connection with each branch of production measured in money. ' ' (Seager) . Capital is classified from point of view of durability as fixed or circulating; from point of view of mobility as spec- ialised or free. Marshall, Principles, Bk. II., ch. 4; Marshall, Economics of Industry, Bk. II., ch. 4; Seager, Introduction, 60; 69-71; Sea- ger, Economics, 8, 43; Seligman, Principles, 6; 137; Fetter, Principles, pp. 114-117; Bullock, Introduction, pp. 131-138; Davenport, Outlines, pp. 119-121; Gide, Principles, pp. 120-129; Hadley, Economics, pp. 5-7; Mill, Principles, Bk. I., chs. 4, 6; Nicholson, Principles, Bk. I., ch.6, except 7; Walker, Political Economy, Part II., ch. 3; Andrews, Institutes, 28, 29; Hearn, Plutology, ch. 8, 1; Palgrave, Dictionary, article Capital. CHAPTER III. NATURE AND DEVELOPMENT OF ECONOMIC SOCIETY. I. Organic Nature of Society. A society is not an accidental aggregation of unrelated in- dividuals but is organic in character. It has the power. of growth from within; it manifests "differentiation" or spec- ialisation of function, and "integration" or that close inter- dependence and inter-relation of parts which creates an essential unity. Social evolution is in accord with the general evolutionary tendency from the homogeneous, or generalized, to the heterogeneous, or specialised. An efficient cause of progress has been that "struggle for existence" which results in the "natural selection" of those methods, institutions, structures, groups i 'which are best fitted to derive benefit from their environment." Social evolution is not merely biological but largely psychical and increasingly self-directed. Whether this evolution results in progress or degeneracy de- pends upon whether or not it helps create a social environment favorable to that higher personality which is the goal of human existence. In the field of economic structure and activity the highly organic nature of modern society is preeminently apparent. Marshall, Principles, Bk. IV., ch. 8; Economics of Industry, Bk. IV., ch. 8; Fairbanks, Introduction to Sociology, pp. 31-44; Small and Vincent, Introduction to the Study of Society, pp. 87- 96; Ritchie, Principles of State Interference , pp. 3-51; Darwinism and Politics,^. 1-83; McKechnie, The State and the Individual, pp. 1-26. 2. Characteristics of Modern Industrial Society. Prominent in modern industry are separation of occupa- tions; division of labor; machine processes; great diversity in 14 Nature and Development of Economic Society. required industrial skill; opportunity for extensive wage em- ployment of unskilled laborers including women and children; large industrial units; trusts; loca-1 specialisation of industries; rapidity and cheapness of communication and transportation; wide markets; separation of industrial functions; the wages system; enormous employment of capital; profit as the test of success; money; the credit system with its elaborate machinery; possibility of economic maladjustment; crises and depressions. Economic freedom, competition and recognition of the private property right are general characteristics of modern society that exert profound influence on all its economic and social relations and give rise to many of the more special characteristics mentioned above. These characteristics are not the result of conscious action or catastrophy but of a long process of evolution. 3. Evolution of Private Property. From communal ownership is developed individual owner- ship of weapons, animals, slaves, chattels, land. The origin of individual ownership is often force and fraud; but the development and persistence of the system of private property rights, as distinguished from possession, has its real explana- tion in the fact that that it encouraged industry, thrift and accumulation of wealth which aided the social groups pos- sessing them to survive. The occupation, natural rights, labor and legal theories of private property have been re- placed by the social utility theory. The private property right in its various aspects is, then, limited by this principle of social utility. Seligman, Principles, ch. 9, and works there cited; Hadley, Economic, pp. 26-34; Fetter, Principles, pp. 362 369; Gide, Principles, pp. 428-437; Ely, Outlines, (1893) pp. 257-264; Pal- grave, Dictionary of Political Economy article Property. Nature and Development of Economic Society . 1 5 4. Evolution of Freedom. Freedom in the sense of positive capacity for self-deter- mined action was unknown among savages. Subjection to nature, to the strong and to custom was accompanied by ex- termination of captives. Slavery, serfdom and the wage system, each introduced because of its relative economic superiority, were steps in advance. There is now a consider- able degree of freedom as of marriage, movement, occupation, association, consumption, production, contract, trade. Lib- erty is not an end but a means to that higher development of individuality which is the only real freedom. Liberty except as based on equality and a sense of social responsi- bility is dangerous; and hence we must by social control restrict liberty to secure freedom. Positive individual free- dom is a social product. Seligman, Principles, ch. II.; Hadley, Economics, 29-44, 78- 82; Fetter, Principles, ch. 44; Ely, Outlines, p. 42, pp. 267-270; Webb, Industrial Democracy, pp. 844-850; Problems of Modern Industry, ch. 10; Ritchie, Principles of State Interference, pp. 83- 151; McKechnie, The State and the Individual, pp. 305-321; Ritchie, Natural Rights, pp. 135-147. 5. Evolution of Competition. Competition, a form of freedom, has undergone develop- ment. At first largely a rivalry between groups it becomes more and more extensive within the group. Under modern industry competition has tended constantly to replace custom as a determinent of price. While more necessary, it is also more pregnant with danger. It is the cause of progress, selecting those who can best serve society, leading to accu- mulation of wealth, protecting the consumer, encouraging energy. It is found between commodities, between individ- uals, between markets, between classes, between countries. It involves dangers and without initial equality of competitors 1 6 Nature and Development of Economic Society. may not realize its benefits. It is limited and controlled by custom, co-operation, monopoly or government regulation. Seligman, Principles, ch. 10; Marshall, Principles, (5th ed.) Appendix A; Economics of Industry, Bk. I., ch. 2; Hadley, Economics, 76, 77, 87, 97; Fetter, Principles, pp. 425-430; Hadley, Freedom and Responsibility, ch. 5; Ely, Evolution of Industrial Society , pp. 123-163; Palgrave, Dictionary of Political Economy two articles on Competition. 6. Evolution of Economic Stages. There have been various explanations of economic develop- ment; as, barter, money, credit economies; or from status to contract; or from a militant to an industrial society; or through hunting, pastoral, agricultural, commercial, indus- trial stages; or stone, bronze, iron, steel ages. Although these are all suggestive and partially true, they are inadequate. From the economic standpoint there are ' 'three great stages known respectively as the self-sufficing economy, the trade or commercial economy, and the capitalist or industrial econ- omy." (Seligman.) Seligman, Principles, ch. 5 and works there cited; Ely, Evolu- tion of Industrial Society, pp. 3-73; Biicher, Industrial Evolution, chs. 1-3; Conrad, Grundnss-, (1907), ler Teil, 40. 7. Evolution of Industrial Organization. a. Including under "industrial organization" the rela- tion of the producer to the consumer, of the different classes and occupations of workers to each other, of the different classes of workers to capital and to risks of sale, of hand work to capital, we find constant development of more complex relations. b. Under the "family system" "production was carried on within the family, by the family, for the family." There was no market; no wage; no machinery; little division of labor; little capital; little separation of industrial function. The productive unit was self-sufficing. Transition begins in the Nature and Development of Economic Society. 1 7 hiring of itinerant or more permanent workmen. This sys- tem is exemplified more or less fully in the slave plantation of early Rome, in the mediaeval manor, in the frontier farm, in the Southern plantation. c. Under the "guild" or handicraft system the producer of a good produces it for others; he owns tools and material; he works by hand; he words at a specific trade; he may em- ploy others but they are "help" on their way to independ- ence and a status like his own; he assumes the risk of finding a market and deals directly with the consumers of his prod- ucts. In the Middle Ages such producers formed associa- tions or guilds in each trade to promote the welfare of that trade. They came to regulate conditions of work and the character of goods and acquired large civic and political power. d. Under the domestic system the work is done by crafts- men as under the guild system, but distributed and ordered by a capitalist who takes the risks of sale and often furnishes the materials. The typical producer under the domestic sys- tem did not own raw material or finished product and tended to rent the more expensive tools. This capitalist is not a .hand-worker but an employer or entrepreneur. The market is a comparatively wide one. Means of transporta- tion, of exchange and of handling capital are improved. In the textile industries this system was dominant in England from the sixteenth to the eighteenth century. # of Nations, Bk. I., ch. 10. 5. Further Causes of Differences in Money Wages. Even when the net advantages and disadvantages of wages in different trades are the same, nominal differences may re- sult from the following causes : a. Cost of living. A large money wage may yield no more than a small one if the expenses of living are large. b. Cost of learning trade. c. A trade may have relatively small money wages because of the leisure or other attractions connected with it. d. Supplementary earnings. e. Danger incurred. A high wage may be partly com- pensation for risks involved in the calling. /. Social esteem. Social esteem or prejudice may account for difference in wages. g. A high money wage for the day, week or year may not involve high wages for the entire life of the worker, if work be irregular or if the length of effective working life be short. h. A low nominal wage may be accounted for by unusual chances for great success or certain promotion. Seager, Introduction, 136; Seager, Economics, 95; Marshall, Principles, Bk. VI., ch. 3, 3-8; Economics of Industry, Bk. VI., ch. 3, 3, 4; Bullock, Introduction, 287; Seligman, Principles, 178; Carver, Distribution, pp. 179-184; Adam Smith, Wealth of Nations, Bk. I, ch. 10. Required Reading, Bullock, Selected Readings in Economics, pp. 543^563 ; Adam Smith on Differ- ences in Wages. 58 Distribution of Wealth. 6. Reasons for the Continuance of Difference In Real Wages. a. Differences in marginal productivity tend to fix wages. These differences in productivity are due to unequal abilities which are the result of all those facts of heredity and environ- ment which affect efficiency. In the environment may be emphasized such influences as home surroundings and standard of living, length and character of school training, child labor, caste and social prejudice, and all those influences considered in chapter v., C., 3. b. The continuance of a certain standard of wages is large- ly due to these wages which fix the standard of living, which in turn largely determine efficiency upon which productivity and, in the long run, wages depend. Such is the circle of influence. Seager, Introduction^ 137, 138 ; Seager, Economics, 96-98. 7. Influence of Wages on Supply of Labor. Wages in a static society would be determined by supply as well as by demand. Does the supply of efficient labor re- spond in real life to changes in demand as shown in wages ? a. Increased remuneration stimulates to increased exertion. b. Increased remuneration stimulates to better prepara- tion and hence greater efficiency. c. Increased wages, so far as they improve the standard of living, not only increase efficiency but increase the number of the population surviving to productive age. d. Increased wages tend over a great part of the world to accelerate marriage and to increase the birth rate, although in modern industrial countries this seems to be a cause of fluctu- ation about a gradually decreasing birth rate that has come with higher standards of material comfort. e. All things considered, then, an increase in wages above the prevailing standard of living (which is in a sense the cost of production of labor) tends to increase the supply Distribution of Wealth. 59 of efficient labor. This standard of living is not, however, a fixed minimum of existence but a more or less elastic stand- ard held with varying degrees of tenacity by different groups and individuals. Trade Unionism tries to raise this stand- ard of living and to make it universal. It tends steadily up- ward largely because of social action. dustry t Seager, Economics, 113, 114; Seligman, Principles, 174, 177 ; Carver, Distribution, pp. 164-179 ; Bullock, Introduction, 284; Smart, Distribution, Bk. II., chs. 14, 16, 17, 18; Fetter, Principles, ch. 21 ; Pierson, Principles, pp. 315-331 ; Webb, In- dustrial Democracy, pp. 632-643 ; Ely, Outlines (1908) ch. 22. 8. Conclusion as to Wages. In our actual dynamic society wages tend as in an imagin- ary static society to be fixed by productivity and the standard of living ; but very slowly and inaccurately. Since the econ- omic changes of modern times are constantly following one another, even that adjustment which might be brought about slowly is never realized. Many wages are higher or lower than our only standard of justice, merit, would set. Even though men are rewarded according to the values they pro- duce, these values are, because of social changes, variable and even fickle in some lines of production. Though the tendency is for men to be rewarded according to the efforts they put forth and according to the skill they have acquired, they fre- quently are not. Here then is the basis for the charge that our distribution involves social injustice. But these changes "largely neutralize one another . . . and cause the actual form of society to hover much nearer to the theoretical static form than would be possible if these influences worked separ- ately." (Clark.) Further, it is the profits resulting to entre- preneurs from these changes which are the incentive to econ- omic improvements, the results of which, in the long run, go very largely to labor. 60 Distribution of Wealth. Clark, Distribution, ch. 25; Marshall, Principles, Bk. VI., ch. 2; ch. 5, 4-7; Economics of Industry, Bk. VI., ch. 2; ch. 5, 4; Seligman, Principles, 176, 179; Seager, Introduction, 155- 157; Smart, Distribution. Bk. II., entire, but especially chs. 13, 19, 28. 9. Wages Not Arbitrary. The departures of distribution from the principle of reward according to merit are not due to arbitrariness but to general social influences. Wages are social assessments of worth as judged at the time often capricious and fickle, but very largely on a sound basis. Smart, Distribution, Bk. II., chs. 1-13, and especially ch. 1, an entertaining piece of sound argument. E. INTEREST. I. Definition and Discrimination. a. Interest, in form paid for the use of money, is really paid for the use of capital which the money represents. In Economics the term refers to the earnings of capital, whether a loan be involved or not. b. The rate of interest on ordinary long loans is not affected by the supply of money, but in financial centers, since actual cash is often needed to meet obligations, the rate of interest on loans is directly affected by supply. c. That which seemingly is a high rate of interest some times conceals wages of management or insurance. Seligman, Principles, pp. 392, 395; Seager, Economics, 100, 101; Bullock, Introduction, pp. 389, 396-398; Marshall, Prin- ciples, Bk. VI., ch. 6, 4; Economics of Industry, Bk. VI., ch. 6, 2 ; Fetter, Principles, ch. 16 ; Andrews, Institutes, 108, 111 ; Gide, Principles, pp. 568-572 ; Pierson, Principles, pp. 225-232. 2. Normal Tendency of Interest Approximated in Actual Society. Since the mobility of capital is much greater than that of labor, actual interest approximates the normal much more closely than do wages. The transfer of capital from less to more productive employments is brought about mainly by the Distribution of Wealth. 61 direction of the replacement fund. Capital goods which do not earn, in addition to their replacement fund, current rates of interest are not replaced, and the portion of capital thus set free is turned into capital goods of the sort that promise the greatest earnings. Because of this mobility of capital, there is an approximation of interest rates in different employments to a general rate. Seager, Introduction, 142, 147, 156; Seager, Economics ; 102, 103; Carver, Distribution, pp. 214-215; Clark, Distribution, pp. ch. 18. 3. Differences in Economic Interest. a. In spite of this tendency toward a general rate of inter- est, different capital goods are earning different rates because, an investment of capital once having been made with any degree of specialization and permanency, it cannot be with- drawn immediately. Any change in economic conditions may make the rate above or below the current rate. b. Differences in risk may also require larger earnings to attract necessary capital, although this apparently higher rate of interest is commonly a larger replacement fund. So social disrepute of a trade may require a higher rate of interest to attract capital to it, although such higher rate is almost uni- versally composed partly of wages of management. c. There are differences in marginal productivity of capi- tal in different localities because of the limitation of supply of capital in certain regions. Seager, Introduction, 143-145 ; Seager, Economics, 104, 105 ; Flux, Economic Principles, pp. 90-96. 4. Differences in Loan Interest. Competition tends to make a uniform rate of interest pre- vail in the same loan market. So perfectly does competition work that a difference of rate on loans of the same duration is evidence of difference in security. In addition to differ- 62 Distribution of Wealth. ences due to risk there are differences in loan rates in different regions. The money market is an international one. Seager, Introduction, 146 ; Seligman, Principles, 166 ; Bul- lock, Introduction, pp. 394-395 ; Marshall, Principles, Bk. VJ., ch. 6, 4, 5 ; Economics of Industry, Bk. VI., ch. 6 ; Andrews, Institutes, 109, 110. 5. Tendency of Interest. a. With progress in civilization (which involves increase of wealth and capital, not only absolutely but relatively to t labor and natural resources) the total product of capital in- creases, but its marginal productivity decreases. The rate of interest tends downward, but the quantity and quality of capi- tal are bettered to the advantage of the other factors in pro- duction. b. There is no reason to think that interest will fall to noth- ing, because ^every decrease in the rate increases demand for capital ; and because every decrease in the rate tends some- what to discourage saving. Seligman, Principles, 169, 170; Seager, Introduction, 302 I Seager, Economics, 239 ; Gide, Principles, pp. 577-581 ; Pierson, Principles, pp. 213-217. 6. Regulation of Interest. Interest, prohibited in the Middle Ages, was at first allowed in certain contingencies and then generally with a limitation of the rate. Such regulation still prevails in many American states, but is contrary to the general tendency toward econ- omic freedom. It is not only easily evaded, but tends actu- ally to increase the rate to the necessitous borrower. Where equality in bargaining does not exist, regulation seems to have some justification. Seligman, Principles, 171 ; Bullock, Introduction, 268 ; Fet- ter, Principles, p. 135 ; Hadley, Economics, 155-157 ; Andrews, Institutes, 112. Distribution of Wealth. 63 7. Justification of Interest. For varying reasons in different ages objection has been made to the rightfulness of interest. Consideration of this topic is not within the scope of this course, but it should be noted that interest is now justified on the ground of social utility. The capital which is essential to progress would not be accumulated without the incentive of interest. Although the motive of saving is personal gain, the result is general ad- vantage. Bullock, Introduction. 268 ; Seager, Introduction, 299 ; Ely, Outlines (1908), pp. 416-426. F. BENT. I. Definition and Discrimination. Rent is the share of income that goes to the owner of any natural agent. Economic rent, or the real earnings of a natural agent, must be distinguished from contract rent, or the sum that one pays in return for the right to receive the earnings of a natural agent. The term rent is frequently extended to the sum paid for the use of other things than natural agents. Seager, Introduction, 119; Seager, Economics, 81; Selig- man, Principles, 159; Fetter, Principles, ch. 8; Nicholson, Principles, Bk. II., ch. 14, 1 ; Elements, Bk. II., ch. 10, 1. 2. The Basis of Rent. a. There would be no rent were there a superabundance of best land. b. There would be no rent if unlimited applications of capital and labor to land produced the same proportionate return. c. Because of the scarcity of best land and because of the fact of diminishing returns, the necessary food and raw mater- ial demanded by increasing population can be secured only by resort to poorer lands or by less productive applications of 64 Distribution of Wealth. labor and capital to the best land. The effective motive in either case is the higher price of the produce of land resulting from increasing demand. d. Since all equal units of a crop will have equal value in the same market, the price, fixed at the marginal cost of pro- duction, will yield a surplus on that part of the crop raised at relatively greater advantage. This surplus arising from su- perior productivity of land above the extensive or intensive margin or cultivation is economic rent. e . The income of permanent improvements obeys the same law as income ascribable to the land itself. Seager, Introduction, 63, 120-122, 127; Seager, Economics, 82, 83; Bullock, Introduction, 272, 273; Seligman, Principles, | 160; Marshall, Principles, Bk. IV., ch. 3; 2-6; Bk. VI., ch. 9; Economics of Industry, Bk. IV., ch. 3, 2-5; Bk. VI., ch. 9; Carver, Distribution, pp. 185-202; Gide, Principles, pp. 582-590; Davenport, Outlines, pp. 75-85; Pierson, Principles, pp. 84-92; Flux, Economic Principles, pp. 97-105; Mill, Principles, Bk. II., ch. 16, 1-5; Nicholson, Principles, Bk. II., ch. 14; Elements, Bk. II., ch. 10; Walker, Political Economy, pp. 193-200; Ely, Out- lines (1908), pp. 348-359. 3. The Relation of Rent to Prices. a. Generally speaking, rent is the result of price not price the result of rent. b. In the case of a crop raised in part on actual no-rent land, rent (that is, the disposition of the surplus) does not in- crease price, although this surplus, being a part of supply, helps fix the price. c. " More commonly the marginal land for any particular use itself affords a rent because, though marginal for the given use, it is above the margin for some other use to which it might be applied." (Seager.) In such a case the marginal rent is an element in price, but the differential rent due to the use of better land for this particular purpose does not increase price. Distribution of Wealth. 65 d. The intensive margin of cultivation is a no-rent mar- gin. The price of the commodity thus raised intensively is not increased by the payment of rent, but is determined by wages and interest at the margin. e. Wages and interest are necessary to secure the supply of labor and capital. They are therefore necessary elements in cost of production. "Rent, however, is wholly a result of production, ' ' and not a cause. Seager, Introduction, 127; Seligman, Principles, 161; Bul- lock, Introduction, 274; Marshall, Principles, Bk. V., ch. 8-11; Economics of Industry , Bk. V., ch. 3, 8, and Appendix C; Car- ver, Distribution, pp. 206-210; Smart, Distribution, ch. 26; Clark, Distribution, ch. 23; Pierson, Principles, pp. 93-99; Flux, Econ- omic Principles, pp. 109-114; Mill, Principles, Bk. II,, ch. 16, 6; Hobson, Distribution, ch. 4, pt. i.; Andrews, Institutes, 105; Walker, Political Economy, pp. 200-202. 4. Rent of Water Power and Mines. These rents are determined similarly to that of land. In the case of water power the marginal power used must yield a return large enough to pay interest on the investment of capital necessary for utilization. The rent of water-power is constantly limited by the cost of the possible substitutes for it. In the case of mines the product does not renew itself. Hence the marginal mine ought rationally to be one which paid not only working expenses but enough to compensate for exhaustion of the deposit. Practically on account of the speculative nature of most mining there are no-rent mines and " the rent of better mines is measured up from them as a no- rent margin." (Seager.) Seager, Introduction, 123; Seager, Economics, 84; Marshall, Principles, Bk. V., ch. 10, 6; Flux, Economic Principles, p. 108 ; Nicholson, Principles, Bk. II, ch. 14, 5 ; Elements, Bk. II., ch. 10, 7 ; Walker, Political Economy, pp. 212-216. 5. Qualifications of the Law of Rent. a. The rotation of crops complicates but does not contra- dict the law of rent. The product of the entire period of ro- 66 Distribution of Wealth. tation must be divided among the years to find the annual product. b. The variations of weather and price affect returns for a year ; but in stating law of rent the average return is assumed. c. Situation, transportation facilities or any other charac- teristic that affects utility, is as important as fertility in deter- mining rent. Seager, Introduction, 124, 65; Seager, Economics, 85; Bul- lock, Introduction, 271. 6. Rent and the Land Owner. a. If the land is rented, contract rent tends to approxi- mate the economic rent more or less closely according to the extent that competition prevails. Custom, a feeling of obli- gation on part of the owner or other cause may leave part of the rent in the hands of the worker. b. If the land is worked by the owner, the economic rent accrues to him. It is not always differentiated by him from other parts of his income. c. The capitalization of the rent at the current rate of in- terest fixes the selling price of land. d. In some regions rents are not competitive, but are fixed by custom. Such are the system of farming on shares and the metayer system. Marshall, Principles, Bk. V., ch. 9, 3 ; ch. 10; Economics of Industry, Bk.VI., chs. 9, 10; Seager, Introduction, 126, 128; Seager, Economics, 86, 87 ; Bullock, Introduction, 270, 275 ; Seligman, Principles, 163 ; Fetter, Principles, ch. 15 ; Gide, Principles, pp. 606-613 ; Flux, Economic Principles, pp. 114-117 ; FJy, Outlines, pp. 359. 7. Tendency of Rent. Other things remaining the same, an increase of population or of the standard of living raises rents. This is true both of rural and urban lands. This tendency may be checked by Distribution of Wealth. 67 improvements in production or transportation which increase supply. Seligman, Principles, 162 ; Bullock, Introduction, 276 ; Gide, Principles, pp. 590-593 ; Davenport, Outlines, pp. 86-92 ; Flux, Economic Principles, pp. 112-114; Pierson, Principles, pp. 107- 120; Ely, Outlines, pp. 360-363. 8. Justification of Rent. Private property in land rent is attacked by different classes of social critics. " The question of the justification of rent is not one of its existence but of its disposition." While from the individual point of view there seems much ground for objection to individual appropriation of that which is in part the gift of nature and in part social product, long ex- perience shows private ownership of land has all in all ad- vanced social welfare. Some of the " unearned increment " (not, however, peculiar to land) might be heavily taxed with social advantage. Seligman, Principles, 164; Seager, Introduction, 299; Seager, Economics, 236; Smart, Distribution, pp. 306-308; Gide, Principles, pp. 593-600 ; Ely, Outlines, pp. 363-366. G. CONCLUSION AS TO ACTUAL, DISTRIBU- TION. a. The rewards of the factors of production are derived from and depend upon the values of the commodities they produce. But in a more fundamental sense the values of commodities depend upon these rewards of the factors of pro- duction. The values of commodities and the shares in distri- bution are but two ways of regarding the same sum. The National Dividend is the National Income. b. The same fundamental principles determine the values of commodities and of the factors of production. In each case it is the marginal utility ; but the margin is fixed by the forces of supply, or in other words, by the cost of production. 68 Distribution of Wealth. Both in the case of commodities and of the factors of produc- tion, the departures of market, or actual, values from normal values are to be explained similarly. c. Even in our actual changing society distribution is not accidental or arbitrary ; nor is it under the control of the powerful ; but tends to approximate to the principle of re- ward according to deserts. But the rapid changes in modern society, the interference with the perfect working of compe_ tition, the monopolistic conditions that prevail and the im- mobility of labor due largely to its not being a mere com- modity, result in many departures from a desirable result. There is, then, opportunity for social effort to minimize these departures from an ideally just distribution. The Labor Problem deals with such topics. CHAPTER VIII. CONSUMPTION. (References will be found at the end of the chapter.) I. Definition and Discrimination. Consumption is the destruction of utility. The purpose of production is consumption and the purpose of much consump- tion is production an incessant cycle. Economic consump- tion is the destruction of utility for the sake of advantage ; is is either unproductive of wealth or reproductive of wealth. Uneconomical consumption is waste. 2. Dependence of Consumption on Utility. a. A thing has utility because of the psychological condi- tion of the consumer. Hence the consumption of a person depends upon his psychological organization and character. b. "The art of consumption consists in knowing when to leave off in one thing and begin in another. The ideal of consumption is attained when the marginal utilities of the articles consumed are all equal." (Nicholson). 3. Dependence of Consumption on Price. a. Consumption is directly dependent upon price and therefore constantly limited or stimulated by all changes in methods of agriculture, manufacture, transportation and com- munication. b. This dependence of consumption on price frequently leads people to be affected unduly by prices. Useless things and articles of poor quality are bought because of low nomi- 70 Consumption. nal price. The desirability of intelligence and self-control are evident. c. Price, however, has significance only when compared with income. Normally, income not only does but should fix consumption, since income represents a person's production of utility as socially estimated. Ought a person to consume more utility than he produces ? It should be remembered that many most valuable social services are not directly paid for. 4. Dependence of Consumption on Distribution. The degree of equality in distribution in a social group shapes its consumption. The same group income on an ante- bellum plantation and a Brook Farm would produce very dif. ferent results. Communal or social consumption is economi cal of wealth ; but economy is not desirable at the expense of broader social considerations. 5. Effect of Consumption on Production and Its Methods. a. The stimulus to economic progress and industry is found in wants. A large proportion of all consumption tends directly or indirectly to further production of wealth. b. Where capital and labor are not fully employed, de- mand for commodities may increase employment of labor. c. Ordinarily, demand directs rather than employs labor. The mere destruction of wealth does not produce wealth. The consumer determines the form of wealth produced. De- mand for luxuries is no more a demand for labor than any other expenditure. The direction of labor into certain lines results in a permanent means of further production or enjoy- ment, in contrast with that which is merely transitory. The consumer determines whether a beautiful or an ugly thing shall be produced. He chooses between a rapid or slow destruc- tion of wealth. Consumption. 71 d. Consumers determine the numbers employed in each occupation. Some of these occupations are educational and tend to encourage development of productive skill ; while others are debasing and not productive of wealth. e. Consumers determine industrial methods. Whether it be sweatshop or factory, child labor or skilled adult labor, hand or machine, craftsmanship or highly specialized labor, is for the consumer to decide. The department store and the trust are due to the patronage of the public. Required Reading : Bullock, Selected Readings in Economics, pp. 307-318 ; Bastiat, The Seen and the Unseen. 6. Relation of Consumption to Accumulation. Saving is in reality the accumulation of wealth, most of which becomes, by investment, capital. If all should save in an extreme degree, there would be a falling off in demand for the very goods which the saving would help produce. The right proportion between saving and consumption is attained automatically through price, wages and interest. At present the greatest need is an increase of expenditure for the promo- tion of efficiency in workers. 7. Wasteful Consumption. There is much waste of wealth due to the choice of the perishable rather than the durable ; to imperfect utilization ; and to individual rather than social ownership of certain forms of wealth. Not all high prices involve great cost. 8. Ethical Aspects of Consumption. a. Because of the reaction of the use of wealth on charac- ter, it is a profoundly ethical question what one buys and consumes. b. Even more important is the effect of one's consump- tion on the lives of others. Because of the complicated 72 Consumption. nature of our productive system, the purchase of an article which may in no way injure its consumer, may involve physical, intellectual, artistic and moral debasement to others. Although for the most part unconsciously, there is, perhaps, no way in which the average person influences the lives of others more constantly than by his expenditure. Unneces- sary personal service, degrading occupations, long hours and bad sanitary conditions in store and factory, the sweatshop, child labor and many other industrial evils could not exist were consumers aroused to their ethical obligations and organ- ized so that they might be informed. The Consumers' League aims to meet this need. Labor Legislation and the Trade Union Label are further forces in this direction. As Democ- racy in its social sense, or as Miss Addams puts it, ' ' identifi- cation with the common lot, ' ' prevails, the aroused conscience of the consumer will be a great force working for social ad- vancement. 9. Consumption Reflects Social Progress. The civilization of every period is largely shown by its consumption its buildings, weapons, utensils, objects of art, clothing, etc. The costumes of the different classes in the middle ages were a reflection of the constitution of the society of the time. The disappearance of these distinctive caste cos- tumes is a part of our democratic tendency. That alleged " aping of their superiors ' ' which leads those of small incomes to dress like the well-to-do is but a striving to realize that Christian Democracy which most profess. Statistics of consumption throws much light on the question of the progress of the working classes. Seligman, Principles, 228 ; Seager, Introduction, 43-46; pp. 294-295 ; Seager, Economics, 16-23 ; Marshall, Principles, Bk. Ill, ch, 6, 4, 5 ; Economics of Industry, Bk. Ill, ch. 6, 3 ; Fetter, Principles, chs. 40, 41 ; Gide, Principles, Bk. V. ; Bullock, Introduction, 65-68 ; Andrews, Institute, 50, 124-331; Davenport, Outlines, pp. 330-344; Ely, Outlines, (1908) pp. 113-120; Walker, Political Economy, Pt. V.,ch. 3; Consumption. 73 Mill, Principles, Bk. I., ch. 3, 4-6; Hadley, Economics, pp. 318-335 ; Bastiat, Essays on Political Economy, Essay, ' ' That which is seen and that which is not seen;" Palgrave, Diction- ary, articles, Consumption and Luxury ; Conrad, Handworter- buch, articles, Konsumption and Luxus ; Leslie Stephen, Social Rights and Dut es, Essay on Luxury ; de L/aveleye, Luxurv ; Elements of Political Economy, pp. 243-264 ; Thompson, The Purse and the Conscience; Stevenson, Lay Morals, ch. 4 ; Faw- cett, Manual of Political Economy, pp. 19-29 ; Ruskin, Time and Tide, Lecture 2nd ; Munera Pulveris, ch. 6 ; Crown of Wild Olive ; A Joy For Ever ; Unto This Last ; Morris, A rchitecture, Industry and Wealth, chs. 3, 4 ; Say, Treatise on Political Econ- omy, Bk. III., chs. 4, 5; Smart, Studies in Economics, chs. 8, 9, 10 ; Taylor, Exercises in Political Economy, ch. 9 ; Richardson, The Woman Who Spends ; Veblen, Theory of a Leisure Class ; Blatchford, Merrie England, ch. 23 ; Ely, Problems of To-day, ch. 15 ; Devas, Political Economy, pp. 6-7, 21, chs. 6, 7 ; Roscher, Principles of Political Economy, Vol. II., pp. 221-252; Allen, Democracy and Diamonds, Contemporary, 59 : 666 ; Addams, The Social Ministry of Wealth, Int. Jour, of Ethics, 4, 173 ; Davidson, Luxury and Extravagance, Int. Jour, of Ethics, 9, 54 ; Devas, The Moral Aspect of Consumption, Int. Jour, of Ethics, 10 : 41; Greg, What is Culpable Luxury ?, Contemporary, 21 : 216 ; Smith, Mr. Greg on Culpable Luxury, Contemporary, 22 : 126 ; de Laveleye, Morals of Luxury, Pop. Sci. Mon., 28 : 669 ; Leroy- Beaulieu, The Office of Luxury, Pop. Sci. Mon., 47:25; The Social Function of Wealth, Pop. Sci. Mon., 48:829; Martin, Is Lavish Expenditure of Wealth Justifiable ?, 19th Century, 44:1024; Moran, The Ethics of Wealth, Am. Jour. Sociology, 6:823 ; Sidg- wick Luxury, Int. Jour, of Ethics, 5:1: Simey, Luxury, Ancient and Modern, Econ. Rev. 12 : 146 ; Luxury in America, Spectator, 82 : 482. The Duties of the Very Rich, Spectator, 78 : 168 ; Culpable Luxury, Spectator, 77 : 511 ; Ward, The Use and Abuse of Wealth, Forum, 2:549; Reports and Pamphlets of the Consumers' league and of the National Consumers' league, C HATER IX. MONEY. I. Origin. a. The division of occupations made necessary exchange which was at first carried on by barter. Barter has serious disadvantages, since each article must be valued in terms of all others ; since many articles are not subdivisible ; and since there is such limited correspondence between needs and goods. b. Gradually certain articles, very generally desirable, were selected instinctively as media of exchange. These articles were frequently connected with the industry of the time. Skins, cattle, wheat, tobacco, salt, nails, cloth, wam- pum, are a few of the articles which have served as money. c. The qualities necessary for a satisfactory money are general desirability, durability, divisibility, adaptability to coinage, high value in proportion to bulk, steadiness of value. Copper, iron, lead, zinc, have served as money, but silver and gold have replaced all others except for very small coins. The very elastic demand for the precious metals and the con- stancy of their supply, composed of the accumulations of centuries, are the cause of the stability of value of gold and silver. d. Government, then, does not arbitrarily select the money commodities, but recognizes actual usage. Government gives certainty and definiteness to money by establishing a standard of weight and fineness. Government also declares certain money legal tender, which must then be received in payment of debt. Money. 75 Seager, Introduction, 168, 170; Seager, Economic*, 118, 120; Seligman, Principles, p. 451 ; Fetter, Principles, ch. 13, 1 ; Bullock, Introduction, %% 131, 132, 133, 135 ; Gide, Principles, pp. 213-218 ; Andrews, Institutes, 72-75 ; Hadley, Economics, 205-207, 209 ; White, Money and Banking, Bk. I, ch. 1 ; Scott, Money and Banking, pp. 15-20; Jevons, Money and the Mechan- ism of Exchange, chs. 1, 4, 5, 6, 8, 9; Walker, Money, ch. 2 ; Political Economy, pp. 120-126; Mill, Principles, Bk. Ill, ch. 7. Required Reading : Bullock, Selected Readings in Economics, pp. 387-405 ; The Natural History of Money. 2. Coinage. a. Coinage has undergone a long process of evolution. At first the quality of the metal was attested by the seal of a ruler. Then the weight was stamped on the coin. Successive changes have by gradual selection resulted in the present form of coin. b. Coins are ''ingots of which the weight and fineness are certified by the integrity of designs impressed upon the surface of the metal." Jevons. Coinage endeavors, then, to fix with exactness the weight and fineness of the metal and to make alteration of the coin impossible without detection. c. "Free Coinage" means that anyone may bring any amount of bullion to the mint and have it coined. If this work of coinage is done without charge the coinage is said to be gratuitous. A charge for coinage equal to the expense in- volved is called brassage. If more metal is kept by the government than is sufficient to cover cost, this deduction is called seigniorage. If seigniorage is deducted from legal tender coin the money is said to be debased. d. Mobility of the precious metals from monetary to other uses and vice versa is secured by free and gratuitous coinage. Desirable as this is in the case of standard coins, it involves expense and inconvenience without compensating advantage to have the lesser coins turned into bullion without loss. Limited issues of small coins having less than their proper- 76 Money. tionate share of metal are therefore made and called subsidiary or token coinage. Such coins are usually legal tender to only a limited amount. e. The "mint price" is the amount of money which a given amount (usually an ounce) of metal will produce when coined. The mint price of gold in the United States is $20.67 P er ounce. The bullion value of a silver dollar would equal the face value if silver sold at $1.29 an ounce. The difference between the face and the bullion value of a silver dollar is seigniorage. Seager, Introduction, 171 ; Seager, Economics, 121 ; Selig- man, Principles, (3rd ed.) 188; Fetter, Principles, ch. 45, 1; Bullock, Introduction 134, 147 ; Hadley, Economics, 208, 210, 211 ; White, Money and Banking, Bk. I., ch. 2; Johnson, Money and Currency, pp. 177-187, p. 12 ; Scott, Money and Banking, pp. 69-83 ; Jevons, Money and the Mechanism of Ex- change, chs. 7, 13 ; Walker, Money, chs. 9, 10 ; Political Econ- omy, pp. 126, 127, 143-147 ; Nicholson, Money and Monetary Principles, pp. 35 52; Principles, Bk. III., ch. 12; ch. 13, 3, 4; Kly, Outlines, pp. 217-221. 3. Functions of Money. a. The word money is used in different senses as the point of view is scientific, popular, financial, legal, or figurative. It maybe defined as " a generally accepted material means of payment and medium of exchange." (Fetter.) b. Money serves as a medium of exchange, a measure of value and a standard of deferred payment. c. As a- large part of all business is based upon credit and carried on by credit instruments, an important function of money is to serve as a cash reserve to insure solvency. Seager, Introduction, 168 ; Seligman, Principles, 187 ; Bui lock, Introduction, 146 ; Hadley, Economics 202 ; Fetter, Principles, ch. 13, 2, 3 ; Johnson, Money and Currency, pp. 11- 17 ; Scott, Money 'and Banking, ch. 1 ; Walker, Money, ch. 1 ; Jevons, Money, etc., ch. 3; Nicholson, Principles, Bk. III., ch. 9; Money and Monetary Principles, pp. 13-23. Money. 77 4. Value of Money. a. The value of money is its power in exchange. It is high when prices are low j low when prices are high. b. The value of money is determined by the demand for and the supply of money. Other things remaining equal, diminishing marginal utility decreases the value of money as its quantity increases. "Demand for the money commodity depends (a) on the use of the commodity for other than monetary purposes, (b) on the amount of business, and (c) on the need for money as a reserve for credit operations. The general law of the value of money may thus be expressed in the equation ; the volume of money multiplied by the rapidity of circulation is equal to the number of transactions in cash that are effected at a given price level." (Seligman, p. 456.) c. Cost of production is related to the value of money as it is to any other value, but its influence is felt slowly because the existing stock is very large compared with the annual production. If the level of prices is low, then production of the money commodity is accelerated. Also if the cost of pro- duction of the money commodity is decreased, its production is accelerated. Such increased production tends to continue until the value of money is equal to the marginal cost of pro- duction of the money commodity. d. Changes in value of money may proceed from a change in amount of goods offered for sale ; from a change in the quantity of the money commodity produced ; from a change in the relative amount of the money commodity demanded in the arts ; or from a change in the rapidity of circulation. e. Since every change in the value of money reacts upon business, upon the cost of living and upon obligations of debtors and claims of creditors, steadiness of value is most necessary. /. Since the relative values of other commoditie are con- stantly changing, it is hot possible to ascertain changes in the 78 Money. value of money by changes in the price of one article. Changes in value of money are best ascertained by index num- bers. Comparison of the weighted averages of the prices, at different times, of carefully selected list of commodities will indicate whether the general price level is rising or falling, and consequently whether money is more or less valuable. As indications of changes in general well-being, index numbers must be used with caution since they " deal with payments for products and not for services ; with wholesale prices in- stead of retail ones ; [and] are based on prices in the whole- sale markets nearest the point of consumption." (Hadley.) g. Under free coinage the division of a precious metal between the arts and monetary use is determined by the relation of the marginal utility in one use to that in the other. "Equilibrium is reached when the marginal utility of an ounce of gold employed in the arts is equal to the marginal utility of the things which that ounce will buy if it is con- verted into money." (Hadley.) h. If the money supply of a country is large compared with that of other countries, prices in that country will be relatively high. The resulting excess of imports into that country will in time cause an export of money. A deficiency of money will cause a reverse tendency. This is commonly described as the International Distribution of Money. z. Sir Thomas Gresham (i6th century) observed that when such a movement of money occurred, full weight coins were selected for export since they were taken abroad only by weight, while worn or debased coins were kept at home, since they passed for face value. He enunciated the law that "bad money always drives out good money. ' ' This is true only when the country has relatively to others an excess of money. Thus qualified the principle explains the shipments of the more valuable metal from a bimetallic country and the exports of metallic money from a country issuing paper money in excess. Money. 79 j. A deficiency of money is temporarily overcome by a diversion of a relatively greater portion of the monetary metal into monetary uses either from the new supplies or from the amount of the metal in use in the arts or as ornament. A more permanent deficiency is met, as has been shown, by in- creased production. k. A temporary relative deficiency of money in one country results in a rise of interest on short term loans in that country. This attracts money from foreign banking centers. Should the deficiency be more permanent or serious, it is overcome by the principle of the International Distribution of Money. , Principles (3ded.), 3 189-197, 200; Seager, Introduc- tion, 172, 193-200; Seager, Economics, 119, 122, 144-149; Bullock, Introduction, 137-142, 145, 147-150, 152-154; Hadley, Economics, 212, 216-229; Johnson, Money and Currency, pp. 17-33, 103-134, 194-201; Gide, Principles, pp. 223-227, 237-241; Fetter, Principles, pp. 436-447; Walker, Political Economy, pp. 127-142; Money, chs. 3, 4; Nicholson, Principles, Bk. III., chs. 13, 14, 17; Mill, Principles, Bk. III., chs. 8, 9, 19, 20; Nicholson, Money and Monetary Problems, pp. 23-71, 85-106, 126-147; Scott, Money and Banking, ch. 4. 5. The Production of the Precious Metals and their Relative Value. a. The forms in which the precious metals are found in the earth and the methods of extracting them have had and still have important effects on their monetary value. Gold is one of the most widely distributed metals. It is found in placers ; in beds of existing or former rivers ; in quartz and other rocks ; in clay and even in sea-water. This wide dis- tribution of gold has important bearing on its steadiness of value. b. Gold is separated from sand or gravel by washing, either by the process of " panning " or by "sluicing." Hy- draulic mining is an extension of sluicing. "Dredging"* may also be considered another extension of this method. 8o Money. Quicksilver is used in the final collection of the gold in con- nection with these processes. Some gold ores are crushed and treated with quicksilver ; others are treated by a chlorina- tion process ; but more recently they have been treated most economically by the cyanide process. Some ores are best treated by smelting. The modern application of capital and science to extraction of gold has had important results on its supply and its value. c. Silver is found free or in chemical combination or in combination with other metals. It is secured by amalgama- tion, by smelting, or by elaborate technical methods. The application of capital and modern scientific methods have decreased its cost of production. d. In the ancient world great stores of the precious metals were accumulated for non-economic reasons. These hoards were widely scattered by the Alexandrine and Roman con- quests, with beneficial effects on commerce. During the later Empire production, which was now carried on for economic reasons, was checked by war, scarcity of slaves, bad mining, the lease system and the barbarian invasions. The low prices resulting from the scarcity of the precious metals were among the economic causes of the Fall of the Empire. Production continued insignificant through the Middle Ages, although slightly stimulated by the Crusades.