""! HF 1007 B81 V UNIVERSITY OF CALIFORNIA AT LOS ANGELES THE UNIVERSITY LIBRARY This book is DUE on the last date stamped below MAY i 8 is Deo 12 '» rm L-9 v-1, '41(1122) THE MACMILLAN COMPANY NEW YORK • BOSTON • CHICAGO • DALLAS ATLANTA • SAN FRANCISCO MACMILLAN & CO., Limited LONDON • BOMBAY • CALCUTTA MELBOURNE THE MACMILLAN CO. OF CANADA, Ltd. TORONTO INTERNATIONAL TRADE A STUDY OF THE ECONOMIC ADVANTAGES OF COMMERCE BY HARRY GUNNISON BROWN ASSISTANT PROFESSOR OK ECONOMICS IN THE UNIVERSITY OF MISSOURI NrfB g Otfe THE MACMILLAN COMPANY 1920 All rights reserved 3SLH Copyright, 1914, By THE MACMILLAN COMPANY. J. S. Cushing Co. — Berwick Chapter IV (of Part II), § i. 126 ECONOMIC ADVANTAGES OF COMMERCE farmer does not get back this extra money for nothing ; he must give extra products for it. To assume that the farmer does not have to give extra products to get back the additional money paid for the higher priced clothes, is to assume that the protected industry is not encour- aged by the higher prices the farmer pays for its goods ; for this is to assume that the higher prices so paid by the farmer for the protected goods, are balanced by higher prices which those in the protected industry must pay for the farmer's products. This would mean no change in the relative positions of farmer and manufacturers because of protection, save a merely nominal change. The idea which protectionists who use this "get it back again" argument endeavor to convey is that, somehow, producers of protected goods get larger real incomes because of the tariff ; while, at the same time, those whose purchases of goods at higher prices make these larger incomes possible, lose nothing by the system. The absurdity of such an argument is perhaps best shown by an illustration. Suppose that, in a small town, there are a number of robberies, as a result of which each of the merchants of the town finds himself minus several hundreds of dollars. Finally, the thief is apprehended. But upon being accused of his crimes, he asserts in his own defence that he has really done no harm. Though he admits having robbed the various merchants of money, yet he points out that he has lived in the town and has used all of this money to buy their goods and that thus they have "got it back again." The obvious fact is, of course, that the merchants have only got their money back by giving up for it other goods of supposedly equal value. 1 1 Cf. Sumner, Protectionism, New York (Holt), 1885, p. 125. SPECIAL ARGUMENTS FOR PROTECTION 127 Protection may, as we have seen, 1 benefit one section of a country at the expense of other sections; and the gains to the section benefited will perhaps be distributed among all classes. If the West and the South are taxed to develop manufacturing in Rhode Island, the Rhode Island truck farmers and dairymen may share in the local gains by virtue of having a home market provided for them at the expense of others. But to say this is very different from saying that they would gain if the local market were provided entirely at their own expense. §5 The Argument for Protection to Agriculture in the Older Countries against a Future when Cheap Foods and Raw Material may not be Obtainable from the Newer Countries An argument not generally familiar to Americans, has been used in favor of protection to the agriculture of the more crowded European countries, in particular the agriculture of Germany. 2 There is, it is claimed, too great a reliance of the older and more densely settled countries upon the new countries for food supplies and raw materials. Eventually the new countries will be more thickly settled, will, like the old, devote themselves in larger part to manufacturing, and will have smaller surpluses of food, etc., for export. Therefore, the old and thickly settled countries, which will probably have grown still more in population during the period of importing food and raw materials from abroad, will get 1 Chapter V (of Part II), § 6. 2 See Adolph Wagner, Agrar- und Industriestaat, Jena (Gustav Fischer), iooi, p. 73. A good statement of the argument is given in Taussig, Principles of Economics, New York (Macmillan), 191 1, Vol. I, pp. 534. 535- 128 ECONOMIC ADVANTAGES OF COMMERCE their food supplies and raw material with increasing diffi- culty. The suggested remedy is that the thickly settled countries should levy, each, a protective tariff on such imports, force its people to get along, in the main, with what can be produced in their own country, resist thus the tendency to specialize in manufacture, and so prevent the growth of a population which is dependent upon foreign surpluses for its food and necessary mate- rials. If the fear is that the new countries, when they come to develop manufactures, will almost without exception shut out, by protective tariffs, goods manufactured in the older countries, and so eventually compel the latter to be self-sufficient, there is reason in the suggestion that these older countries remain self-sufficient from the beginning. By so doing, they will avoid the intense suffering which must result from a return to a sparseness of population capable of securing sufficient food, etc., at home. But if the world can be expected to attain a liberal attitude towards trade, if a tendency towards low tariffs can be hoped for (and this is perhaps more likely to be the case as the stage of infant industry is left behind), then the argument for protection of agriculture has very little force. For no matter how extensively the now sparsely settled countries eventually go into manufac- turing, they will not go into it, if not artificially encour- aged, unless it yields, on the average, as satisfactory returns as agriculture. 1 That manufacturing popula- tions in the older countries will have to meet the compe- tition of manufacturing groups in the newer, is true. But assuming free trade (and if trade is not free, then in 1 On the margin of production. SPECIAL ARGUMENTS FOR PROTECTION 129 proportion as restrictions are slight), this merely means that the manufacturing populations of the older countries, cannot charge higher prices and therefore cannot get higher wages and profits per unit product, than the manu- facturing groups in the newer countries. It does not mean that the condition of the old countries must be- come appreciably worse than that of the new. So long as many persons in the new countries care to engage in manufacturing (and that they will do so is all that is feared), it must be that manufacturing is about as profit- able as agriculture. If it were much less so, assuming free trade or any near approximation to free trade, the newer countries would withdraw from manufacturing and the older countries could carry it on without competi- tion. If manufacturing in the new countries is as prof- itable as agriculture, and if trade is free, manufacturing in the older countries (assuming equal efficiency) must also be, except for the greater costs of transporta- tion, as profitable as agriculture in the new, because as profitable, save for transportation costs, as manufactures in the new. §6 The Infant Industry Argument for Protection The argument which is usually regarded by economists as stating the best case for the protective tariff, is the so-called infant industry argument. The more careful thinkers who advance this argument admit that protec- tion involves a cost, a temporary loss of productive power. They admit that it involves turning industry from a more productive into a less productive line. But they urge that the newly established line may be only tempo- rarily less productive and may be eventually more pro- i 3 o ECONOMIC ADVANTAGES OF COMMERCE ductive and advantageous for the country than the older lines of industry. It is urged that a country may have natural advantages adequate to the successful carrying on of a given industry, but that, at the begin- ning, the competition from more experienced manage- ment and better trained workmen abroad is likely to prevent the growth and development of the industry, and, therefore, to prevent the attainment of the greatest possible efficiency in it. Give such an industry tempo- rary protection, it is said, so that it can get a start, and it may eventually undersell its foreign rivals. Then the protectionist country will perhaps realize a gain which will more than compensate for the temporary loss. 1 It should be said, to begin with, that this argument for protection applies at all, only in regard to those industries in which success depends largely on acquired skill and not merely on natural advantages. It is hardly an argument, therefore, in favor of protection to much else than new manufactures, and it is not an argument in favor of perpetual protection for these. It is highly probable, however, that in some cases, if the industries to be protected are chosen wisely, and are not protected too long, the desired results can be attained. In the United States, a considerable part of the silk industry, started by protection, seems eventually to have reached a position where it can produce as cheaply as foreign concerns and where, therefore, it does not need pro- tection. 2 But while such suggestions have a great deal of force, the opposing considerations, especially on the practical 1 This view was presented in Alexander Hamilton's Report on Manufactures, and later, in Germany, was urged by Friedrich List. 2 Mason, "The American Silk Industry and the Tarifl," American Economic Association Quarterly, December, igio, p. 177. SPECIAL ARGUMENTS FOR PROTECTION 131 side, are also not without weight. In the first place, though new industries may indeed be developed in this way, yet they can be thus developed only by drawing the labor force required, from other lines. It follows that the development of skill and the progress of invention in those other lines may be retarded as much as in the new lines they are forwarded. New ideas are less likely to be evolved among a few than among many. And in proportion as there are more persons in the new lines, there are fewer persons in the old lines. Indeed, it is not inconceivable that some of the older industries, indus- tries still capable of further progress, may be made so comparatively unprofitable — especially if their neces- sary machinery or materials are taxed by the tariff — as to be entirely given up. We have already seen that protection tends to decrease the export trade l and that it may, by leading to rise of prices, 2 ruin other industries.' Before, then, protection is accorded to an infant or em- bryonic or projected industry, inquiry should be made as to the following points : first, as to whether that industry can be expected to develop without such aid ; second, as to whether, if it will not, such aid will suffice to develop it to a point where it can and will sell its products more cheaply than they can probably be secured elsewhere, and enough more cheaply to compensate, with interest, for the loss incident to starting it ; third, as to whether the attempt to encourage it might not involve a risk of discouraging other industries, which would balance any hoped-for gain. In view of all these considerations, it becomes impor- 1 Chapter IV (of Part II), § i. 2 Or a change in value relations of money systems, which acts similarly. 3 Chapter IV (of Part II), § 6. i 3 2 ECONOMIC ADVANTAGES OF COMMERCE tant to judge the fitness of the governing body to apply such a policy, decide upon its effects, and select the industries to be encouraged. 1 It is a special function of the enterpriser-capitalist to select for his own investment (and the investments of those whom he influences) indus- tries capable of succeeding. If he does not, the principal loss falls upon him and upon others in like situation. The community suffers only indirectly and incidentally. The enterpriser-capitalist is a product of selection. His power to direct industry into profitable chan- nels is due to his possession of capital, or the confidence of other business men and investors, or both. His pos- session of capital and of this confidence, though some- times due in part to inheritance from able progenitors or relatives, is frequently due, in no small degree, to past successes. He has the power to direct industry into those lines which he believes will pay best and which, there- fore, are presumably the lines most needed by the com- munity, because he has successfully so directed industry in the past. Men whose knowledge of law or politics has made them members of a law-making body are not, as a rule, the product of the same kind of selection. If they were, the fact that their own fortunes are not at stake does not conduce to caution. In case a new industry established by protection never becomes profitable, the loss which its establishment causes falls upon the general public and not upon legislators as such. Similarly, in case an industry is prematurely established or in case its establishment retards other industries, the loss is that of the public. Given the present form of our own and other republican 1 Cf. Bastable, The Theory of International Trade, fourth edition, London (Macmillan), 1903, p. 140. SPECIAL ARGUMENTS FOR PROTECTION 133 governments, there is a special pressure tending towards unwise selection of lines to be favored. This is the pres- sure of localities or, at least, of large interests in various localities. For in republican government, legislators usually represent districts, states, or other territorial units. When it is proposed to encourage various indus- tries, when the idea of protection is politically dominant, many and influential interests in each state and district are likely to desire that the industries of that state and district shall get such help at the general expense. The tariff eventually decided upon, the tariff to which legis- lators from different sections can agree, is not likely to be one which even attempts, scientifically, to apply the theory of infant industry protection. Instead, it is likely to be a hodge-podge of special favors, distributed ac- cording to the relative strength of conflicting interests, and bringing general and long-continued injury to the public. The longer such a system continues and the more extensive its application, the greater are the difficulties in the way of its reform. More and more industries are built up by tariff barriers, and their owners and work- men taught to rely upon these barriers for protection against foreign rivalry. Managerial effort, which might otherwise be devoted to development of the highest efficiency, is instead devoted to the exertion of political pressure. Every effort is made by numerous interested persons to retain and increase the favors secured. Those engaged in the industries assisted are seldom ready to consent to reduction of the tariff after a period of favor- itism, however long, but endeavor, usually, to keep the protection indefinitely. Proposals for reduction are met by predictions of dire calamity, and strong opposi- tion to reduction is thus aroused. 134 ECONOMIC ADVANTAGES OF COMMERCE To the suggestion that protected industries might decline and die without protection, the answer has been made that "no industry will ever be given up except in order to take up a better one, and if, under free trade, any of our industries should perish, it would only be because the removal of restrictions enabled some other industry to ofler so much better rewards that labor and capital would seek the latter." * There is doubtless reason in the contention that, since many persons have invested capital in the protected industries and since many others have acquired skill not equally useful in other lines, relying upon a continuance of the past policy of our government, therefore the entire protective system should not be swept away with one blow. Time should be given (as, under the tariff reduction policy of the present administration at Washington, it is being given) for ad- justment to new conditions. Nevertheless, the public cannot be held to have pledged itself or to be under any obligation to maintain indefinitely the protective system. Producers must be held to have taken the risk of change, knowing eventual removal of tariff duties to be the public's privilege. Because the people have been will- ing to pay higher prices for goods during a limited period, it does not follow that they are duty bound to suffer an equivalent annual loss through all future time. §7 The Argument that a Protective Policy should be Fol- lowed in Order to Diversify Industry It is also sometimes argued that protection is of use to diversify industrial activity within a country. We 1 Sumner, Protectionism, p. 130. SPECIAL ARGUMENTS FOR PROTECTION 135 have already seen that, while the protective policy encourages protected industries, it may cause the decline of others. Yet if applied carefully and consist- ently with the object of diversification in view, it is probable that a high tariff would increase the number of industries carried on. It does not follow that prosperity would be increased. There is no special advantage in having a larger number of occupations carried on when the average income is reduced by having them. As a matter of fact, a large country like the United States, with a wide range of natural resources and a versatile population, would be certain to have diversified industry within its borders, under either protection or free trade. With its mines of coal, iron, copper, etc., the United States could hardly fail to be not alone an agricultural country, but a manu- facturing country as well. §8 The Argument that Protection should be Applied as a Means of Getting and Maintaining a Certain Degree of National Self-sufficiency Not all of the arguments for a protective tariff are strictly economic in character. There is, for instance, the argument that protection should be used to insure national self-sufficiency. This argument, in so far as it carries great weight, is of a military significance. It is urged that a country at war with another or others, is likely to have its foreign trade seriously interfered with. 1 If the country in question has relied on foreign 1 It may, of course, be interfered with to some extent if another country or other countries, with which it habitually trades, are at war. But only a part of its foreign commerce is likely, in that case, to be affected. 136 ECONOMIC ADVANTAGES OF COMMERCE trade for the necessaries of life, it will be subject to a considerable strain during the war period, and perhaps will be less able to carry the contest to a successful con- clusion. If it has relied upon foreign trade for firearms and ammunition, it may be in no better position. It is asserted, therefore, that a country should adopt the policy of producing all necessaries, including all things required for war purposes, within its own borders, even though to do this brings economic loss. It must be admitted that this argument, like the argu- ment for protection to infant industries, is not without claims to a respectful hearing. There are, however, some considerations of importance on the other side. In the first place, close trade relations, such as are more likely to follow from a free trade or from a low tariff policy than from protection, do much to promote inter- national good feeling and, therefore, to prevent the occurrence of war. And in the second place, even if war does occur, it may well be that the larger wealth and population made possible by a liberal trade and tariff policy will give greater military strength, through the larger fighting force which can thus be supported, than would any degree of national self-sufficiency. 1 In this connection we may cite the case of Great Britain. If national self-sufficiency is imperative, there would seem to be nothing which it would be more important to produce in the home country than food. Had Great Britain persisted in a policy of excluding for- eign grain and compelled her people to live upon what they could themselves produce, she would have been aiming at this ideal of self-sufficiency. Had Great Britain carried out such a policy, however, her population 1 Sumner, Protectionism, p. 143. SPECIAL ARGUMENTS FOR PROTECTION 137 could not have become so great by many millions as it has, nor could her wealth have become so great. She has chosen rather to specialize in production, to import foodstuffs, to attain a numerous population and large wealth. She is not, it is true, self-sufficient in time of war. She must rely for her food upon lands across the seas. But the wealth which a free trade policy has brought her makes possible the maintenance of the most powerful navy in the world, a navy by means of which her commerce is protected. Is England not a stronger nation, a richer nation, and a not less independent and happy nation, than she could have been had the contrary policy been followed ? §9 Free Trade within the United States With the exception of political or military arguments, practically every consideration advanced in favor of tariff duties on goods produced in foreign countries, could be urged with no less (and no greater) plausibility in favor of tariff duties levied by one State or section on goods produced in another State or section. Is it suggested that we do not wish to send money out of the country and that to do so makes us poorer ? An exactly parallel argument would assert that we should adopt measures to keep money from being sent out of the State or the county. Do stanch protectionists tell us that to let goods come in from abroad at low prices, must lower American wages ? If so, then for Ohio or Illinois to let low-priced goods be imported from New York or from Pennsylvania, must tend to make wages in Ohio and Illinois lower than they otherwise would be. If to shut out English goods from the United States makes 138 ECONOMIC ADVANTAGES OF COMMERCE additional employment for American wage earners, then to shut out Connecticut goods from Rhode Island must make additional employment for Rhode Island wage earners. It is hardly necessary to pursue the com- parison further. Carried to its logical conclusion, the system of protection would prohibit all trade and, there- fore, all the gain in wealth which flows from trade. Fortunately, the Federal Constitution makes tariff barriers between the different states of the United States impossible. If it did not, we should doubtless find some of our states levying protective duties against their neighbor states, as Massachusetts, New York, and Pennsylvania did under the old Confederation of 1781. 1 As it is, trade between the states is, for the most part, regarded with equanimity. The coal of Pennsylvania is exchanged for the shoes, woolen and cotton goods, clocks, etc., of Massachusetts, Connecticut, and other New England States. The wheat, corn, and meat of the Middle West, and the cotton, rice, and sugar of the South, are sold throughout the country, and the special products of other sections are given in payment. When improvements in transportation facilities make low transportation rates possible, we regard the consequent reductions as cause for rejoicing, because of the stimulus thus given to trade. There is no reasonable doubt that free trade within the borders of the United States adds greatly to our national prosperity and adds, also, to the prosperity of each separate state. To widen this free trade area, so far as lies within our power, would still further increase our economic welfare. 1 Hart, Essentials in American History, New York (American Book Co.), 1005, P- 199- SPECIAL ARGUMENTS FOR PROTECTION 139 § 10 Ethical Considerations Bearing on the Policy of Protection Before concluding this discussion of the high tariff system, let us consider briefly the moral issues involved. The maintenance of this system means that wealth is to be gained, in the favored industries, not by serving the public well, not by giving to the public better goods than could otherwise be secured or goods at lower prices than must otherwise be paid, but by depriving the public, through influence on legislation, of such benefits. The maintenance of protection means that political influence calculated to injure the community will often bring larger returns to those who wield it than would business carried on in rivalry with others for the benefit of the community. As a consequence, energies which might be devoted wholly to legitimate business, that is, to seeking profit through efficient service, spend them- selves instead in selfish political activity, in the attempt to make impossible any rivalry in service from foreign producers, in the attempt to force higher prices from con- sumers, and so to realize, at the expense of consumers, higher profits than are earned. If the ideal of industrial morality is that profit shall be in proportion to service, if to seek profit by disservice is immoral, then the selfish attempt of private interests to realize wealth by arbi- trarily shutting out foreign competitors through tariff restrictions, like the attempt to shut out domestic competitors through seeking railroad discriminations, violates this ideal and is immoral. i 4 o ECONOMIC ADVANTAGES OF COMMERCE §n Summary In this chapter the attempt has been made properly to estimate the value of most of the standard arguments for protection. The argument that protection increases national prosperity by getting and keeping more money in circulation in the protectionist country was shown to be fallacious, since money is not the ultimate or prin- cipal end of trade. The popular "wages argument" for protection, so much used in political campaigns, was shown to have little better basis. Money wages tend to be somewhat higher because of the tariff, 1 but real wages are almost necessarily lower. The much feared "competition of cheap foreign labor" is beneficial to our wage earners when it means cheap goods from abroad, and is injurious to our wage earners only when it means immigration of this cheap labor. Those who attempt to show, inductively, e.g. by comparison of English and American wages, that protection makes wages higher, fail to take other things, such as relative density of population, into account. The argument that pro- tection increases the opportunities for employment was likewise shown to be untenable. It increases employ- ment in any industry only by making that industry more profitable. But in so doing it makes other industries less profitable. Natural resources and accumulated capital, which make employment at remunerative wages possible, are not increased by protective tariffs. The third argument considered was the so-called " home market" argument. This is one of the principal 1 Except, of course, in the case of unrelated currencies. See Ch. V (of Part ID, 5 3- SPECIAL ARGUMENTS FOR PROTECTION 141 arguments by which the farmers' votes are sought for the protective policy. Examination showed that the gaining of a home market by protection involves the losing of a foreign market in whole or in part, and that the higher prices which protection makes farmers pay for goods are not compensated for by the fact, supposing it to be a fact, that those to whom the money is paid have more money with which to buy farm produce. An argument having, if convincing, more significance at present for Europeans than for Americans, is that in favor of protection to agriculture, as security against a time when the newer countries may be less inclined to buy manufactured goods of and sell food-stuffs, etc., to the older ones. We saw, however, that if future trade is unimpeded or is impeded only by low tariffs, the older countries can always have a market for their manu- factures without having to accept returns less by much more than necessary transportation costs, than those of manufacturing industries, and, therefore, agriculture, in the more largely agricultural countries. Unless great restrictions on future trade are feared, this argument for protection to agriculture has little force. Protection to infant industries has been urged, even by some careful thinkers, as a desirable temporary policy. The principal objections are practical. It is difficult to be certain that the development of other industries is not being hindered as much as that of the favored in- dustry is being helped. It is difficult to be certain that the protected industry will eventually reach a point of development such that the cheapness of its products will repay the public for the admitted temporary loss. It is doubtful if a legislative body is usually competent to select industries for protection, on this principle, and it 142 ECONOMIC ADVANTAGES OF COMMERCE is probable that, in practice, political pressure from interested parties in various localities will play much too great a part. There is danger that the temporary pro- tection will be continued much longer than is necessary or desirable, since its beneficiaries seldom want to give it up. Protection is also urged as a means of diversifying industry, and it probably has somewhat this effect. Yet diversification can be purchased at too great a cost. And a large country, with varied resources, is pretty sure of a considerable diversity of industry, even without protection. The argument for protection to insure national self- sufficiency is, in the main, a military argument. Na- tional self-sufficiency is undoubtedly an advantage in time of war. So is large population and great wealth. Protection tends to increase the degree of self-sufficiency and to limit wealth and (consequently) population. It cannot be definitely asserted, therefore, that protec- tion has often an adequate military justification. The greater wealth and population resulting from a free trade policy may mean the possibility of a larger army and navy and a greater safety from attack. Most of the arguments for protective tariffs on foreign produced goods (though not, of course, the military argu- ment) might be used with equal plausibility in favor of protection by one part of a country against goods pro- duced in another part. It is generally taken for granted, however, at least in the United States, that free intra- national trade brings benefit to each separate state or other section of the country. If so, free trade with for- eign countries would, in the same way, bring gain to the nation as a whole. SPECIAL ARGUMENTS FOR PROTECTION 143 The industrial and commercial ideal is that wealth shall be gained by service to the community and not by injuring the community. Tested by this ideal, the effort of interested parties to get protection for their industries is morally wrong. For they are endeavoring to gain busi- ness and wealth by prohibiting a foreign competition beneficial to the public, instead of by serving the public better than do their foreign rivals. CHAPTER VII The Nature and Effects of Bounties Bounties as Compared and Contrasted with Protection Somewhat similar in principle to an import protective tariff is a bounty. A bounty is a payment made at intervals by government to the persons engaged in some industry which it is desired to encourage, in proportion to the quantity of goods turned out or sold or in proportion to the quantity exported. The purpose is, or purports to be, the encouragement and development of the industry receiving the periodic payment. A bounty is like pro- tection in that it tends to divert industrial activity into a different line or lines than such activity would other- wise follow. Thus, to use our previous illustration, Canada could, by means of a bounty as well as by pro- tection, encourage Canadian production of linen. The beet sugar industry in continental Europe has been, largely, so encouraged. Likewise, by means of bounties or so-called shipping subsidies, a number of countries have endeavored to build up their shipping interests. 1 On the other hand, the bounty differs in several re- spects, in its application, from protection. To begin with, a protective tariff encourages an industry by guar- anteeing it the home market, i.e. by shutting out goods from abroad. But a bounty does not attempt to inter- 1 See discussion of shipping subsidies in Ch. VIII (of Part II), § 2. 144 THE NATURE AND EFFECTS OF BOUNTIES 145 fere with foreign competition. It endeavors, rather, to enable the home producer more easily to meet foreign competition. 1 The one method, protection, directly shuts out rivals. The other method provides home producers with the means to drive out rivals. It follows, as a second and related distinction, that, while a protective tariff enables the protected producers to charge more for their goods, a bounty puts the favored producers in a position to sell their goods for less than they could otherwise afford to take. 2 It is thus that these producers are enabled to capture the business. A bounty may, because of this difference from protec- tion, divert industry out of its natural channels to a greater degree than a protective duty. For the latter can do no more than guarantee the home market to pro- ducers who, since they need protection at home, are unlikely to get any considerable business elsewhere; and in fact, protection, by causing inflow of money and higher money costs, is likely to have the effect of making invasion of foreign markets more difficult than before. But the former, a bounty, may make it possible for an industry, through competition in lower prices, to capture the markets of the world, though very probably at great expense to the taxpayers of the bounty-paying country. Third, the burden of protection falls upon the buyers of protected goods in proportion to their purchases of these goods; while the burden of a bounty falls upon taxpayers in proportion to their respective contributions to the tax fund. Protection compels consumers to pay higher prices. A bounty compels citizens to pay higher taxes. 1 Cf. R. Meeker, History of Shipping Subsidies (in Publications of the Ameri- can Economic Association, August, 1905), p. 172. 2 Cf. ibid., p. 173- PART 11 — L 146 ECONOMIC ADVANTAGES OF COMMERCE §2 The Various Possible Effects of Bounties on the Level oj Prices The effect of a bounty on the general level of money prices in the bounty-paying country is similar to that of protection. We may, for the purposes of our discus- sion, distinguish three cases. In the first case, the bounty acts like a protective tariff in that it decreases imports. Thus, Canada might have a bounty of 43 cents a yard or slightly more, on linen cloth, which would enable the Canadian cloth producers to sell at home for $1 or slightly less a yard, instead of $1.43. As a conse- quence, we may suppose, the Canadian cloth producers would be able to get complete control of the home market. Then, as in the case of protection, no money would flow to Ireland or elsewhere, for linen. But foreign con- sumers would still buy Canadian wheat, and there would be a tendency for prices in general, in Canada, including the price of linen, to rise. 1 Eventually Canadian prices would be enough higher than before, as compared with foreign prices, to bring back equilibrium in trade. If Canada's currency system were unrelated to the systems of other countries, if, for example, it were based on incon- vertible paper, the rise of money prices would not take place, but equilibrium of trade would eventually result through a change in the relative values of Canadian and other currencies. 2 In the above assumed case, we have supposed a bounty not quite high enough to make it easy or perhaps possible, x This might lead, as in the case of protection, to a demand for a greater bounty, or to a demand for bounties to industries previously not encouraged See Ch. IV (of Part II), § 6. » See Part I, Ch. VI, §§ 6, 7, 8, g, and Part II, Ch. IV, & 3. THE NATURE AND EFFECTS OF BOUNTIES 147 for Canadian linen producers to meet transportation costs and invade foreign markets. Let us now suppose a bounty of 60 cents a yard. With a production cost of $1.43, this bounty would reduce the net cost to 83 cents a yard. Even after paying transportation costs, Cana- dians could then perhaps sell linen abroad for 85 or 90 cents a yard, thus greatly increasing their business and driving out foreign competitors. In this case, not only would Canadian importation of linen be decreased, but Canadian exportation of linen would be greatly increased. As a consequence, there would be a net inflow of money into Canada and a relative rise of Canadian prices. This rise would continue until equilibrium became estab- lished either by larger purchases of Canadians abroad, or by smaller purchases of foreigners in Canada, or by both. Thus, Canadians might even, if prices should rise sufficiently, buy goods abroad which they had pre- viously produced at home. If so, other Canadian pro- ducers would clamor for bounties or for protection. Nevertheless, an equilibrium of trade must eventually be established. 1 The third case would be realized if, at the time of es- tablishing a bounty on linen manufacture, Canada was already largely supplying the world with linen and could not hope greatly to extend her foreign market. In this case, the effect of the bounty (assuming free competition among present and potential Canadian linen producers) would be to lower the price of linen without correspond- ingly increasing its sale. Less money would therefore flow into Canada, while as much as before would flow out. Other things equal, there would be a net outflow of money, and money prices would fall. It hardly needs 1 Cf. Ch. IV (of Part II), § 6. 148 ECONOMIC ADVANTAGES OF COMMERCE to be stated that, if Canada's money system is assumed to be different from those of other countries, there would be a change in the value of Canadian money in terms of other money, rather than a fall in Canadian prices. 1 §3 The Various Possible Effects of Bounties on the General Welfare in the Bounty-paying Country and in the Countries with which it Trades Consideration of the effects of a bounty on the general welfare of the bounty-paying country and of the countries with which it trades, may profitably follow the line of the above three cases. In the first case, where it decreases imports by enabling the home producers to gain the home market buj: does not enable them to gain a foreign market, the bounty acts substantially like a protective tariff. It tends to prevent imports but not to stimulate exports. It conduces to national self-sufficiency. It prevents what would else be a profitable trade. Like protection, it turns labor and capital away from the chan- nels they would naturally follow, away from what are presumably the most profitable channels, into channels favored by law. The effects on total production are obviously the same, whether diversion is caused by pro- tection or by bounty. Not only is the bounty-paying country injured, but also the countries with which it trades are, presumably, to some extent injured. These other countries lose a profitable export trade, and they do not secure goods more cheaply from the bounty-paying country since the bounty is not high enough, in the first case discussed, 1 See, particularly, Part I,,Ch. VI, §§ 6, 7, 8. THE NATURE AND EFFECTS OF BOUNTIES 149 to encourage sales abroad by the recipients of this bounty. The second case to be considered is that in which the bounty encourages export by the bounty-paying country, of the goods on which the bounty is paid. If desired, the bounty may be paid only on exported goods. In this second case, as in the first, the prosperity of the bounty-paying country is made less than it otherwise might be. Industry is turned from more profitable into less profitable channels. Trade with other coun- tries is not prevented to the extent that it is in the first case or in the case of protection, and may be actually increased. But the trade stimulated is not relatively a profitable trade. The export of linen by Canada, in our illustration, takes the place of other exportation more profitable to Canada or of internal trade which would be more profitable. It is as uneconomical to encourage a trade which would not otherwise take place, as to dis- courage, by protection (or by high export taxes), trade which otherwise would take place. The effect of the bounty on other countries than the one which pays it, is, in this second case, beneficial. We know that other countries would gain by the trade if the new industry were one which became established in the bounty-paying country because of suddenly dis- covered natural resources or because of acquisition of skill. And as far as other countries are concerned, the bounty has the same effect as either of these other causes of development of the favored industry. It is no longer desirable for them to produce the goods in question for themselves. These goods can be got more cheaply at the expense of the taxpayers of the bounty- paying country. The persons in other countries, who 150 ECONOMIC ADVANTAGES OF COMMERCE formerly produced these goods, must, it is true, change their occupation. 1 But there are presumably other occupations equally or almost equally, profitable, and the consumers of these other countries gain, therefore, more than the producers lose. 2 In the third case, the bounty does not appreciably increase the sales abroad by the favored producers of the bounty-paying country, but simply results in their selling about the same quantity of their goods at lower prices. In this case, the loss to the bounty-paying country is more obvious than in the other cases, while it is even clearer than in the second case, that foreign countries gain. Since the bounty simply lowers prices without extending trade, it benefits foreign consumers without driving any foreign producers from the line of produc- tion favored into other lines. 3 1 The trade between second and third countries and their relative gains from trade, may be affected. A bounty on the production of linen in Canada may, by encouraging export of Canadian linen, drive Irish manufacturers out of, say, the German market. Irish linen producers are injured. German linen con- sumers are benefited. But Ireland can get its own linen, thereafter, more cheaply by importing it from Canada, and gains in so far as linen is desired to use. Ireland is injured in so far as Canada enters trade as her competitor in selling linen to Germany, but this loss is balanced by Germany's gain. Ireland gains in so far as she secures linen from abroad more cheaply than she could make it herself. It becomes more economical for Ireland to devote herself to some other line or lines. If the new products which she now endeavors to ex- port are less desired abroad than the old, the rate of trade will tend to become somewhat less favorable to Ireland and more favorable to these other countries, than before. Ch. II (of Part II), § 2. Ireland will also, probably, become some- what more self-sufficient. But the conclusion remains that when all other countries except the bounty-paying country are considered, the general result is favorable. See, however, Ch. IV (of Part II), § 6. 5 See Ch. IV (of Part II), § 2. ' There is a tendency, also, for the rate of trade to become more favorable to other countries and less so to the bounty-paying country. Money flows out df the latter and into the former. Prices fall, relatively, in the latter and rise, relatively, in the former, though this change would probably be slight in the case of a bounty on only one kind of goods. Hence, foreign countries may be THE NATURE AND EFFECTS OF BOUNTIES 151 England was for a long time a very great gainer by virtue of the export bounties paid on beet sugar until 1903, 1 by the beet sugar producing countries of conti- nental Europe. Had only one such country adopted a bounty-paying policy, the effect would have been much larger exports of sugar for that country and a slightly lower price of sugar for buying countries. This is the kind of situation discussed in our second case. But when all the Euro- pean beet sugar countries were simultaneously paying bounties on exported sugar, the net result was that no one of them could extend its export trade to anything like so great a degree, while all of them had to accept very low prices for their product. There was then a closer approximation to the conditions described in our third case, though probably, since beet sugar largely displaced cane sugar from the West Indies and elsewhere, the con- ditions of case 3 were not realized. However this may have been, it is obvious that the sugar consumers of other parts of the world were great gainers by virtue of these bounties, and gainers at the expense of the bounty-paying countries. Particularly did the bounties redound to the profit of free-trade England, whose people were not prevented by tariff restrictions from securing the sugar cheaply. 2 So it resulted that the English were able to consume several times as much sugar per capita as, for instance, the able to buy other goods than the favored kind more cheaply than before from the bounty-paying country, while having higher money incomes with which to buy. 1 Fisk, International Commercial Policies, New York (Macmillan), 1007, p. 137. 2 Although eventually, because of colonial sugar interests in the West Indies, England supported the general agreement to discontinue the bounty competi- tion. It does not follow, of course, that England acted wisely in so doing. 152 ECONOMIC ADVANTAGES OF COMMERCE bounty-paying Germans. 1 Furthermore, all those Brit- ish industries which depended upon the use of sugar prospered in a large degree. 2 In the confectionery and preserving trades, thousands of persons were employed and many thousands of tons of sugar were annually used. If, in some distant future, the philosophy of protec- tionism comes ever upon the discredit which it deserves, the descendants of those whose taxes supported the favored business of sugar production may at least con- sole themselves with the thought that many foreigners were benefited. Though the bounties turned industry from its natural channels, though they caused the con- sumption of beet sugar, when cane sugar would have involved a less labor cost, though they diminished the economic well-being of the world as a whole, though part of the taxpayers' burdens was therefore in every sense a net loss ; yet another part of their burdens was compensated for by extra gains, in the form of cheaper sugar, to the people of a neighbor nation. §4 The Various Possible Effects of Bounties on Wages and Rent A bounty, or system of bounties, would usually affect money wages as compared with real wages, just as does a protective tariff. The immediate effect of a bounty would be to tax the people more than it lowered the price of the goods favored. For illustration, suppose that Canada can buy linen, in Ireland, for $i a yard, while the cost of linen produced in Canada is $1.43. By granting a bounty of 43 cents or of 53 cents, the 1 Sumner, Protectionism, New York (Holt), 1885, p. 81. 'Ibid., p. 86. THE NATURE AND EFFECTS OF BOUNTIES i53 Canadian government enables home manufacturers to sell linen at $1 or at 90 cents a yard. The people of Canada lose, as taxpayers, 43 cents to gain nothing, or 53 cents to gain 10 cents. Unless the taxes are so levied that they do not fall upon and cannot be shifted to wage earners, 1 real wages must be lower. 2 This remains true after the inflow of money which raises prices (or the outflow — case 3 — which lowers prices). For money prices and money wages will tend to be affected in equal proportion by the change in money supply. A bounty on exports only, may lower the price of the favored goods, to foreign consumers, at the expense of taxpaying citizens of the bounty-giving country, while it will not lower the price to domestic consumers. §5 Why Bounties may be Less Objectionable than Protection if Encouragement of Infant Industries is in Any Case to be Attempted The bounty method has sometimes been recommended as superior to the method of protection, for the estab- lishing and developing of an infant industry. Since the bounty system is more clearly seen to involve taxation, public support is less likely to be given to schemes for its widespread application. It is perhaps not quite so unlikely that care will be used in deciding upon the industry or industries to be favored. For the same rea- son, the likelihood that the bounty will remain a perma- nent burden upon the general public may be somewhat less. 1 Even if the necessary taxes fall in no sense upon wage earners, and so really \ raise wages, they raise wages less by turning labor into unprofitable lines than if the money were directly paid to wage earners, as a forced charity. 'There is, however, as with protection, a conceivable exceptional case. Cf. Ch. V (of Part II), § s- 154 ECONOMIC ADVANTAGES OF COMMERCE §6 Summary A bounty, like protection, is a special favor granted by government to some industry or industries. It differs from protection in that it does not tax foreign competition, but enables the domestic producer to meet it, in that it lowers instead of raises the price of the favored goods, and in that the burden falls upon tax- payers as such rather than upon consumers. A bounty may simply insure domestic producers their home mar- ket, or it may be high enough to enable them to meet transportation costs and increase their foreign business, or it may enable them to sell the same amount of goods abroad as before, at lower prices. In the first two cases, the level of prices in the bounty-paying country will rise as compared with the levels in the countries with which it trades. In the third case, the level of prices in the bounty-paying country will fall. In all three cases, the effect on the national prosperity of the bounty-pay- ing country will almost certainly be unfavorable. In the second and third cases, other countries will be likely to profit to some extent at the expense of the taxpayers in the bounty-paying country. Since a bounty system tends to burden the taxpayers, with no corresponding gain to the general public, it tends to lower real wages, for it can hardly be supposed that wage earners will be unaffected by the level of taxation. If an infant indus- try is in any case to be established, however, the bounty method may be better than the method of protection. CHAPTER VIII Uneconomical Government Interference with, and Encouragement of, Transportation Navigation Laws One of the important methods which governments have sometimes followed in order to develop a national mercantile marine, has been the method of navigation acts, excluding foreign vessels from certain designated commerce. For example, England's navigation acts of 1646 to 1660 (act of 1 65 1 perhaps of chief importance), prohibited the importation of any goods into England or Ireland or any of the British Colonies, except in British ships, owned and navigated by British subjects, or in ships of the country where the goods were produced ; also these laws prohibited the export to foreign ports of any goods produced in the American colonies, except in British ships. 1 Our own Federal law regarding the coasting trade is of the same genus. This law requires that "no merchandise shall be transported by water, under penalty of forfeiture thereof, from one port of the United States to another port of the United States, either directly or via a foreign port, or for any part of the voyage, in any other vessel than a vessel of the United States." 2 1 See Lindsay, History of Merchant Shipping, London (Low, Low and Searle), 1847, Vol. II, pp. 182-189. 2 30 Stat. L. ch. 26, p. 248. Referred to in the Report of the Commis- sioner of Corporations, on Transportation by Water in the United States, Part ISS 156 ECONOMIC ADVANTAGES OF COMMERCE Such navigation acts are closely analogous to protec- tive tariffs. Like protection, they develop the favored home industry by excluding foreign competition, not, as in the case of the bounty, by providing funds to help meet this competition. Like protection, these laws can do no more than guarantee home patronage ; they can not insure successful invasions of other commerce, de- pendent solely on foreign patronage. As with protec- tion, the burden of these laws rests upon consumers (of goods carried in the protected ships), rather than upon taxpayers as such. The burden rests upon consumers, because the exclusion from the designated commerce, of ships presumably able to carry goods more cheaply than the favored domestic ships, 1 tends towards high transportation rates, and, therefore, towards higher prices to consumers, of goods carried, or towards decrease of domestic commerce, or both. The burden of such a policy may not be equally distributed over a country enforcing it, but may rest with especial weight upon those sections of the country which, being on or near the coast line, have most to gain from cheap water transportation. A navigation policy like that established by the historic navigation laws of England, above mentioned, may also tend, by increasing transportation costs, to limit the export trade of the country adopting such a policy. Only in case other countries have no available alternative source of supply for goods desired, can the extra cost of I, 1909, pp. 118, 119. Since the above was written, Congress has passed a law (August, 1914) admitting foreign-built ships to American registry if owned or purchased by Americans (See New York World, Aug. 18, 1914). Such ves- sels were not previously ranked as American and had to sail under alien flags. But the new law does not permit foreign-built ships to engage in the coasting trade. 1 If the latter carried goods more cheaply, they could drive out foreign rivals without legal aid. ENCOURAGEMENT OF TRANSPORTATION 157 carrying these goods rest as a burden on the consumers of those other countries. The main argument against navigation laws is the same as that against protection. Like protection, it diverts labor and capital from lines which the)- would otherwise follow,, into relatively unprofitable lines. These laws are, therefore, as indefensible, economically, as are protec- tive tariffs. Where navigation laws would be likely to develop a national marine, able, eventually, to compete in the world's commerce successfully without aid, there is a reasonable probability that conditions are favorable to this success and that it would be attained in time without government coddling. Where, in spite of navi- gation laws intended to develop a national marine, abil- ity to compete outside of the protected limits is never attained, the protective laws involve a continuous burden on the general public. Whatever military justification may exist for such protection to national navigation, economic justification is usually absent, and is probably always of doubtful weight. Subsidies to Native Shipping Another method of encouraging a national mercan- tile marine is that of paying so-called shipping subsidies. Shipping subsidies are simply bounties paid to the ship- ping industry. What was said in Chapter VII (of Part II ) regarding bounties applies, therefore, to shipping subsidies. Like bounties and like protective tariffs, shipping sub- sidies divert national industry out of its natural lines into a line which, without such encouragement, it prob- ably would not follow, or which it would not follow to 158 ECONOMIC ADVANTAGES OF COMMERCE the same extent. Unlike protection, subsidies do not exclude foreign competition, but simply endeavor, by money payments, to make it possible for the national marine to meet this competition. As with other bounties, therefore, the burden falls upon taxpayers, rather than upon shippers or ultimate consumers. The two last classes may even gain somewhat, if a subsidy is sufficient to cause lower freight rates in spite of the greater cost of transportation in native ships. But even these classes will gain nothing if a subsidy is just high enough to en- able native ships, previously unable to compete, to charge rates no higher (and no lower) than those charged by foreign ships. One of the cruder arguments for subsidies, as for pro- tective tariffs, is to the effect that when we patronize foreign vessels we have to send our money abroad, and that we would " save " this money if we carried the freight in our own vessels. As a matter of fact, money is not the one thing for which trade, in the last analysis, is carried on. Furthermore, if money flows out unduly, it thereupon begins to flow back again, in accordance with the principles which we have so often set forth in previous chapters. 1 As regards the most economical directions of industrial and commercial development, it should be apparent that if British or other ships can carry goods more cheaply than our own merchant marine, then our labor may better be devoted to the lines where it yields greater returns, to services which others cannot so well per- form for us, to our factories, farms, mines, and railroads. If American labor is more profitable when devoted, for instance, to the running of railroad trains, then it is poor economic policy to draw it, by subsidies, into the running of ships. 1 See, for example. Part I, Ch. V, §§ 6, 7, 8. ENCOURAGEMENT OF TRANSPORTATION 159 Another argument for subsidies is based on the asser- tion that "trade follows the flag." This assertion, used in relation to subsidies, suggests that a national merchant marine acts as a species of advertisement, that, for ex- ample, the American flag flying at the mast head of a merchant ship will stimulate a desire in South America or elsewhere, to examine, and, therefore, eventually to buy, American goods. Except for purposes of adver- tisement, foreign ships serve as well to carry American goods to market as do American ships, and better in proportion as they carry these goods more cheaply. Probably there is some advertisement for a country's goods in the ubiquitousness of its merchant ships. Yet we must beware of exaggerating the amount and the value of this advertisement, and of overlooking its cost. France has made considerable effort to develop shipping and has hoped thereby to develop foreign commerce, while the United States has done almost nothing to stim- ulate foreign trade in American ships ; yet a practically stationary foreign commerce of the former country has been contemporaneous with an extensive growth of the commerce of the latter. 1 "The history of the world's commerce seems to show conclusively that the nation- ality of ship owners is quite a secondary matter in the development of trade." 2 So far as the presence of a nation's ships, e.g. American ships, on the high seas and in foreign harbors, really tends by its advertisement to stimulate American export trade, it would seem that the persons having to pay for this advertisement should be those who expected to reap special gain from it. Why should not merchants 1 Meeker, History of Shipping Subsidies (in publications of the American Economic Association, August, 1905), p. 213. ' Ibid. 160 ECONOMIC ADVANTAGES OF COMMERCE and manufacturers who are interested in exploiting the trade of any part of the world, and who seriously think that the presence there of vessels flying the American flag will bring them a larger market, be willing to sub- scribe to the stock of American lines, or pay a little extra to have their goods carried in American vessels, or both ? Is it not possible that American merchants and manu- facturers will not do this to any great extent, because the gain would be so small as not to equal the cost ? Hard- headed business men spend a great deal of money in ad- vertising. Some of them are enthusiastic over the as- sumed gains of this particular kind of advertising if it is proposed that it shall be done at public expense by means of subsidies. But would they consider the rather problematical results of such indirect and indefinite advertising worth paying for out of their own business profits? By the subsidy method, many persons and many sections of the country are taxed to secure results which may be of little or no benefit to them and which are probably of not very much benefit to any one. Another argument in favor of subsidies is one that corresponds to the infant industry argument for protec- tion. It is urged, in this view, that subsidies should be given to divert industrial and commercial activity more largely into shipping, in the hope that the mer- chant marine will develop in efficiency until it is able to stand alone. An important counter-argument is the fact that no one is able to foresee with any certainty whether or not the shipping industry ever can stand alone and that legislators are less likely to risk the public wealth wisely than business men are to risk their own. There is great danger that subsidies, once started, would con- tinue indefinitely on the plea that they continued to be ENCOURAGEMENT OF TRANSPORTATION 161 necessary. 1 And if, as a consequence of a subsidy system, the national mercantile marine should become larger, though at the general expense, then the political pressure to maintain the subsidy system would very probably become greater. It is altogether too probable that if the giving of subsidies is generally recognized as a proper function of government, men who would otherwise de- vote themselves to planning improvements and to seek- ing real progress in efficiency, will instead devote them- selves to influencing political action, in order that they may get, or maintain, or increase, a subsidy. 2 This method of acquiring gain is not consistent with the ideal of industrial and commercial morality. Industry and commerce should be so organized that profits will be made only by serving the public, and that profits will be large to any person or firm in proportion as that person or firm serves the public well. The prosperity of those engaged in operating a nation's merchant marine ought not to be made dependent upon their political influence rather than upon their economic service. Apart from purely economic considerations, shipping subsidies are sometimes urged as a means of increasing a nation's naval strength. Two principal naval reasons are commonly given for the maintenance of a merchant marine, even at the expense of a subsidy. The first is the desirability of having a "naval reserve" made up of large and swift merchant steamers suitable for conver- sion into cruisers, colliers, and transports, should need for such arise. As a matter of fact, it is only as colliers and transports that such vessels are likely to be useful, since ships of war are nowadays highly specialized, and 1 Meeker, History of Shipping Subsidies, p. 81. 2 Ibid., p. 216. PART H — M i62 ECONOMIC ADVANTAGES OF COMMERCE merchant vessels cannot, economically, be made over into cruisers. 1 The second reason is the desirability of having experienced seamen from whom to recruit colliers, transports, and additional fighting ships when war threat- ens, to replace those killed and wounded, to hold cap- tured vessels, etc. These objects may be perfectly justifiable, even laud- able, in themselves. And it may be cheaper to pay subsidies to certain lines, thus helping to keep them in ships and men capable of emergency use by government, but letting them be mainly supported by commerce, than to support, continuously, and wholly at public ex- pense, a larger naval force. But if the policy of sub- sidizing ships appears necessary to us for military reasons, we should frankly recognize that this policy involves an economic loss, that it is an expense borne for the same purpose as the expense of maintaining a navy. We should not deceive ourselves into the belief that the subsidizing of ocean navigation is an economically profit- able policy. We should therefore aim to get the largest military result possible at the smallest possible cost. Large payments to swift mail lines and possibly to cer- tain other ships constructed for speed and carrying ca- pacity and conforming, in other ways, to possible emer- gency requirements, mark the limit beyond which we should not go in subsidizing, even if we should go so far. Subsidies granted according to these principles are pay- ments for certain definite services or potential services, and are not to be classed with subsidies granted for purely commercial reasons. 1 Meeker, History of Shipping Subsidies, p. 215. ENCOURAGEMENT OF TRANSPORTATION 163 Indirect Subsidies, Favoring Native Ships as Compared with Foreign Ships A country may try to extend and develop its own merchant marine, to the consequent decrease (or slower increase) of the number of foreign ships, by indirect as well as by direct subsidies. Any service which a coun- try, through its government, performs for its own ships without pay, while charging foreign vessels for it, is equivalent to a money subsidy. Were it not for clear treaty obligations, there would probably be, in the United States, as strong a demand for free use of the Panama Canal by all of our American merchant ships, as there has actually been for its free use by American vessels engaged in the coasting trade. 1 To let American vessels use the Panama Canal free would be equivalent to a money subsidy, because it would amount to the same thing as to make a charge for the use of the canal and then to make a payment equalling this charge, to American shipping interests. In either case, the taxpayers of the nation would bear a burden, or lose a chance for lower taxes, that special interests might be encouraged. For if letting American ships use the canal free would mean that the canal could never pay a reasonable return on its cost, then taxpayers must meet the deficit by taxes paid to government over a series of years, in order to liquidate, or at least pay in- terest upon, the indebtedness caused by building. If, on the other hand, though all American ships used the canal free of tolls, the amounts collected from foreign 1 For a discussion of the economic advisability of giving American coasting lines this special privilege, see § 4 of this chapter (VIII of Part II). 1 64 ECONOMIC ADVANTAGES OF COMMERCE ships would suffice to pay interest on the debt contracted, still this interest might be had and more besides, were the American lines also made to contribute. 1 In other words, to allow American ships free use of the canal must, in any case, mean either a loss or a smaller net revenue yielded to the government than might otherwise be yielded. If the canal is to yield the nation a revenue because of its use by foreign ships, that revenue should be used to lighten the burden of taxation on the whole people ; it should not be used to encourage a single in- dustry by giving it something for nothing. Thus to en- courage American shipping would be to give it an artifi- cial advantage over other American industries, and would be, in so far, to interfere with the tendency of labor and capital to engage in the industries really most profitable for the nation. There is no economic gain 2 in having our commerce carried in American ships if foreign ships are able to carry it more cheaply. Nor would the pros- perity of the nation as a whole, including those who bear the burden of taxation, be so much furthered by having our commerce carried in American ships which could pay little or nothing for the use of the canal, as by having it carried in foreign vessels which could pay a reasonable amount for its use without charging corre- spondingly higher transportation rates. Assuming these to be the relative abilities of native and foreign vessels,' 1 It is not intended to assert that either American or foreign ships should be charged exorbitant rates. Such rates on ships carrying American commerce, of whatever nationality the ships might be, would tend to discourage this com- merce, even when it could pay the proper costs of its own movement and would therefore be profitable. As to the effect on American welfare of exorbitant rates charged ships not carrying American commerce, see footnote at end of this section. 1 Unless we assume a gain from the advertisement thus secured. See § 2 of this chapter (VIII of Part II). ENCOURAGEMENT OF TRANSPORTATION 165 the foreign vessels would be a more economical means for us of carrying our commerce than our own; for them to carry it would mean either lower rates and, therefore, lower prices to consumers and higher prices to producers, or larger returns to the government, favor- able to taxpayers, or both such lower rates and higher prices ; for them to carry our commerce would mean gain to our people as producers and consumers, or as tax- payers, or as both. It would be desirable, therefore, for our capital and labor to seek other kinds of activity ; but this is just what discrimination in the rates charged for use of the canal would prevent. 1 §4 The Free Use for Navigation of Government-built Canals Since to give free use of the Panama Canal to all Amer- ican ships and to no others, seemed clearly to involve a violation of treaty obligations, Congress was content, in the Panama Canal Act of 191 2, to confer this privi- lege only upon American ships engaged in the coasting trade. Even this lesser tolls exemption appeared to many to be a violation of treaty rights; and the law has recently, 2 at the request of President Wilson, been changed in this regard so as to require the same charges from American coasting vessels as from all other mer- chant ships. We shall discuss, here, the possible eco- 1 Were we to plan/intelligently, so to discriminate in rates charged for use of the Panama Canal, as to pay for it, as largely as possible, at the expense of for- eigners, we would base the discrimination on the sources and destinations of goods carried, rather than on the nationality of the ships which carried them. Goods going to and from the United States would be allowed, perhaps, to pass through the canal at fairly low rates, lest American consumers or producers be unduly taxed ; while goods going from one foreign country to another would be charged the highest rates possible to collect. * June, 1914. 166 ECONOMIC ADVANTAGES OF COMMERCE nomic effects of tolls exemption for American coasting ships. As we have already seen, 1 the Federal govern- ment assures American vessels a monopoly of the coast- ing trade, including the trade from any port of the United States to any other port, e.g. from Baltimore to San Francisco. Free use of the Panama Canal by American vessels engaged in the coasting trade could not, there- fore, increase our mercantile marine at the expense of foreign rivals in the trade. The primary effect of free tolls to this special class of ships would be to reduce the expense of coast to coast trade, and therefore, supposedly, to reduce rates. Possibly foreign vessels could carry at the lower rates, even without free tolls. If the coasting trade were open to foreign ships, the effect of discrim- ination in favor of American vessels engaging in this trade might simply be that the American ships would be able to get part of the trade away from their foreign competitors, at substantially the same rates. As it is, such free tolls would tend to make rates lower than they would else be, though much of the saving might be di- verted to the owners of monopolistic navigation com- panies. Hence traffic would be encouraged to go through the canal, which otherwise would not. The construction of a canal across the Isthmus of Panama, to be used without charge by American coasting vessels, would therefore mean that traffic from the East to the West, and vice versa, which is not worth the whole cost of carrying, might nevertheless be carried at the expense of the tax-paying public. If it is worth $5000 to get certain goods from New York to San Fran- cisco, and the cost of carriage, including proper payment for all necessary facilities, is $6000, and if this cost is 1 § 1 of this chapter (VIII of Part II). ENCOURAGEMENT OF TRANSPORTATION 167 covered by the charge made, the goods will not be sent. It will be more economical to have a greater degree of local self-sufficiency and less geographical division of labor. But if the taxpayers should contribute more than $1000 in the form of maintenance and running cost of the canal, and interest on its cost of construction, then the goods would be shipped, for the charge to the shippers could be made less than $5000. The total cost would be $6000 and the total gain would be $5000. There would be a real net loss. But this loss would be borne by the taxpayers, and therefore the traffic would be carried. Again, the encouragement of the coasting trade by the building of an Isthmian ship canal to be used by coasting vessels, free of charge, might mean that goods would be carried by water or partly by water, at the tax- payers' expense, which might be more economically carried by rail. Suppose that a quantity of goods can be shipped from New York to Salt Lake City by rail for $4000, including a proper allowance for wages of em- ployees and something towards profits. Suppose that, at the same time, the cost by water and rail, including risk, damage, longer time in transit, maintenance cost of the canal and interest on canal facilities provided, is $5000. $1000 may be saved if the goods go by rail, and to make them go by the other route, if we include interest on the cost of partly constructing this route for them, maintenance expenses, etc., would be to waste $1000. The community or the nation would be so much poorer, yet if the government were to provide the $1000 or more in the form of canal facilities paid for, eventually, by the taxpayers, shippers would gain by using the water- way route. 168 ECONOMIC ADVANTAGES OF COMMERCE It is not asserted, of course, that all goods ought to pay in the same proportion to use the canal, if discrimi- nations should prove to be practicable. If the plant is incompletely utilized, it may not be improper to let some goods go through for comparatively low rates, provided they would not otherwise go at all. But no goods ought to be allowed to go through which cannot pay at least a fair share towards running expenses, wear and tear from use, and (probably) a little towards inter- est. And the canal should not have been built (mili- tary considerations aside x ) , unless it was expected that the traffic through it, as a whole, would be enough cheaper to pay interest on it. To build it, if it could not be made to pay, was economic waste, was, as above pointed out, to encourage transportation not really worth its total cost to the people. Now that the canal is completed, it would be unfair to the American people as a whole that the traffic which goes through it should not, if possible, pay for it, that those who realize the chief benefit should not contribute in proportion to the benefit realized. Here, as in the case of protection, we meet the possibil- ity that government interference with the direction of industry may affect differently the people of different sections, benefiting some at the expense of others. It is obviously only that part of our population living on or reasonably near the coast, which has much to gain from subsidizing, directly or indirectly, coast to coast water transportation. Those living in the far interior will, in any event, have to rely mainly on other means of trans- portation. Yet by the scheme of indirect subsidizing under discussion, but which has, fortunately, been aban- 1 As a matter of fact, it is hardly to be doubted that economic considerations had great weight in inducing its construction. ENCOURAGEMENT OF TRANSPORTATION 169 doned, those in the interior would be made to contribute to the cost of facilities of transportation which others use and which they cannot use in the same degree. 1 The principles above elaborated apply equally when government builds canals in the interior, if traffic is al- lowed to use these canals free of charge. New York State is now enlarging the once busy and profitable Erie Canal at an estimated cost of not less than $100,000,000, in order that it may carry barges of 1000 tons capacity from the Atlantic Ocean to the Great Lakes and vice versa. The plan is to charge nothing for the use of the canal. This will mean a burden on the taxpayers of the state, an uncompensated loss to the taxpayers in those parts of the state which cannot economically use the canal either to market their produce or to obtain goods for consumption. It amounts to a gift by the tax- payers of the state of New York to those producers and consumers in other states, who can sell their products for more or buy desired goods for less, because of the free use of the Erie Canal. It involves encouragement to transportation via the canal of goods which might better go by railway or by the St. Lawrence river. If the traffic which is expected to use the canal would be able to pay the cost of operation and maintenance, and interest on the $100,000,000 or more sunk and to be sunk, then it should be charged this cost and interest, to the end that those who reap the benefit of the canal in lower cost of carriage, and in prices of goods higher to producers and lower to consumers, shall pay for the advantage so se- 1 An excuse for such discrimination against dwellers in the interior might perhaps be found in the fact that those living on the coast chiefly bear the burden resulting from the limitation of the coasting trade to American vessels. Two policies, each tending towards economic waste, would partially offset each other as regards inequality of effect. 170 ECONOMIC ADVANTAGES OF COMMERCE cured ; and that those who reap the most gain shall pay the most ; and to the end that the burden shall not fall upon the general pubb'c without any regard to propor- tionate use and to benefits received. 1 If, on the other hand, it is not believed that those using the canal can meet such charges and still find it profitable to carry- goods over it, then we must conclude that the canal ought not to be (or, in part, to have been) enlarged, since the total expenses, including cost of this enlarge- ment, of carrying goods over it, will probably be greater than the benefits to be received from transporting the goods, or will be greater than if the goods were carried over another route, e.g. a railroad. Before the days of railroads, much confidence was felt in the possibilities of canals. A number of our states expended a great deal of money in canal building. To- day it is generally recognized that, since the capital cost of canals is a tremendous initial expense, railroads are generally cheaper. Only in a comparatively few cases can canal building be expected to pay. These are, first, cases where the canals connect navigable waters located near to each other, and between which, if they are con- nected by a canal, there will be large traffic ; second, cases where comparatively short canals, like the Suez Canal, save a very great sailing distance and so are extensively used ; third, cases more doubtful, where short canals con- nect with the ocean, great cities which have grown up not 1 It is no sufficient answer to this contention to cite the usual practice regard- ing our numerous streets and roads. To charge tolls, individually, on each person as he used any given street, would obviously be an intolerable nuisance. These facilities we must have, anyway, and substantial justice may be secured, if care is taken to avoid extravagance, by levying on local property owners accord- ing to some fair system. Since land values depend largely on streets, etc., it may be possible, by basing assessments or taxes on land values, to make costs to different persons vary, on the whole, in proportion to benefits. ENCOURAGEMENT OF TRANSPORTATION 171 far from it. 1 "Practically all the canals now in most suc- cessful use are ship canals, forming comparatively short links between important natural waterways, and opening up extended routes of transportation by water for large vessels. Such short-link ship canals are to be clearly distinguished from long inland canals, and the success of the one offers no safe criterion as to the probable success of the other." 2 Moulton's study of the much vaunted waterway system of Germany seems to provide conclusive evidence that canals are as cheap as railways for shippers, only if the taxpayers, in effect, help pay the freight, and that, in general, canals and canalized rivers involve tremendous loss to the nation which undertakes their construction, and are therefore a source of indus- trial and commercial weakness rather than of strength. 3 If there were adequate reason to believe that canals, generally, were cheaper and more satisfactory means of transportation than railroads, it would not be necessary to have public agitation and political pressure to get canals built. Private companies would undertake to build them for profit, just as they build railroads for profit, and just as canals were built, in England particu- larly, before the days of railroads. 4 As a matter of fact, investors are not clamoring for a chance to buy the securi- ties of such companies, nor are promoters eagerly looking for opportunities to project new lines. When the build- 1 Preliminary Report of United States National Waterways Commission, 191 1, pp. 13, 14. Reprinted in Final Report, 1912, pp. 75, 76. See, however, as to an example of the third class of cases, viz. the Manchester Ship Canal, Moulton, Waterways versus Railways, Boston and New York (Houghton Mif- flin Co.), 1912, Ch. VII. 2 Report of Commissioner of Corporations on Transportation by Water in the United States, Part I, p. 45. ' Moulton, Watenv ays versus Railways, Chs. IX, X. * Ibid., p. 99. 172 ECONOMIC ADVANTAGES OF COMMERCE ing of canals is mentioned favorably, the assumption is always made that taxpayers shall bear the burden, or at least the risk, of building them. §5 The Improvement of Harbors Water transportation which is not worth its cost, may likewise be stimulated by a wrong system of harbor im- provement. In the United States, the construction and care of lighthouses, the building of breakwaters, the dredging of harbors, and the dredging of channels between the sea and harbors, are done largely by the Federal gov- ernment. 1 It cannot be said that nothing is paid to- wards the expenses involved, by the traffic aided, since the tonnage dues collected by the government amount to $800,000 or $900,000 a year. 2 But considering the fact that the Federal government appropriates about $5,000- 000 a year for lighthouse maintenance alone, 3 and, on the average, appropriates millions of dollars each year for dredging, breakwater construction, etc., the traffic entering and leaving the ports of the United States can- not be said to bear the costs which it occasions. Rather is this traffic, in a considerable degree, subsidized at the expense of taxpayers. As with canals, so with light- houses and harbors, we must conclude that those who benefit by them should be the ones required to pay for them, and that to place the burden of their construction 1 Report of Commissioner of Corporations on Transportation by Water in the United States, Part III, 1909, pp. 39, 40. 2 Johnson, Ocean and Inland Water Transportation, New York (Appleton), 191 1, p. 252. Given in Report of Commissioner of Corporations on Transporta- tion by Water in the United States, Part I, p. 404, as $1,076,571.69 in 1908. The coasting trade is free even from this. 3 Ibid., p. 262. ENCOURAGEMENT OF TRANSPORTATION 173 and support on the general public, with no reference to benefit received, is undesirable and unfair. 1 We must further conclude that constructions and improvements made in harbors, for which the traffic using the harbors cannot afford to pay, involve national economic loss and ought not to be undertaken. In many cases the money spent in harbor improve- ments by the Federal government is wholly or partly wasted, for appropriations are frequently made for which there is no economic justification and for which there would be no economic justification even if the largest sums possible were to be realized by charging the users. Such wasteful appropriations are doubtless in part due to lack of business sense among legislators. They are perhaps more largely due to the pressure of local interests. The very fact that these appropriations are so largely made by the central government, and that there is, or seems to be, a chance for interested localities to get some- thing for nothing, results in expenditures which would not be made if the localities particularly concerned had always to provide the means, or if private capital had to be induced to do so. 2 1 It is not a sufficient answer to the above argument, to assert that our tariff system taxes trade and that therefore this trade pays for itself by paying for the facilities used. For the burden, nevertheless, does not fall where it properly belongs. It does not fall anything like evenly on all traffic which uses the facil- ities provided. On some goods the tariff has been, until recently, prohibitive, artificially interfering with normal and profitable trade. On other commerce and on passenger traffic, the tariff duties are little or nothing. Such commerce and traffic may, in effect, be receiving a subsidy, while the remainder of commerce is burdened. The principle of charging the cost of facilities provided, to those who use them and upon different interests in some proper proportion to the benefit received, is not conformed to. We fall far short of the economic ideal when we set up contradictory policies of discouragement and encouragement. These contradictory policies do not exactly neutralize each other, but in one case there is a net loss in one direction, and elsewhere there is a net loss in another direction. 2 Cf. Preliminary Report of National Waterways Commission, p. 20 (Final Report, p. 82). T 7 4 ECONOMIC ADVANTAGES OF COMMERCE A different system, and one which is economically more defensible, is that common in Great Britain. There the central government, except as naval considerations may be involved, does nothing whatever by way of har- bor improvement, but leaves this matter to the localities immediately concerned. The British system of harbor improvement and maintenance requires the creation for each harbor of a so-called "public trust" or public harbor trust. 1 A public harbor trust is a semi-public body or a corporation, authorized by parliament, to which body is granted power to own, improve, and manage a particu- lar harbor. It has been compared 2 to the board of trustees of an American university or charitable institu- tion. The members receive no salaries, but regard their position as an honorary one. The composition of a harbor trust is determined by statute. Representatives are usually selected by the British government, the government of the city concerned, boards of trade and chambers of commerce, ship owners' associations, and other interested parties. Money is borrowed for neces- sary improvements, usually at low rates, for the harbor trust is authorized to collect port and dock charges from vessels utilizing the facilities given, and this power makes the security good, at least in the case of a port sure to have large traffic. Sometimes money is borrowed from the municipality itself. In any case, money needed in excess of what has been collected in previous years from traffic, is borrowed, and must be paid back out of future collec- tions. There are no stockholders, and, therefore, there is no attempt to make a profit above a fair interest and 1 Described in Smith, The Organization of Ocean Commerce, Philadelphia (Publications of the University of Pennsylvania), 1905, pp. 129, 130. * Ibid. ENCOURAGEMENT OF TRANSPORTATION 175 sinking fund. Indeed, a private corporation authorized to collect tolls from all the shipping of a port, for the sake of dividends to stockholders, would, unless strictly regu- lated, be an intolerable monopoly. But the British system of harbor control does make the traffic pay for the facilities required, and is in so far consistent with the economic principles so wisely applied to British trade and commerce generally. There is no attempt to encourage trade which is not nationally profitable, by partly supporting it, i.e. by providing free harbor facilities at public expense and, therefore, at the expense of other lines of economic activity, any more than there is the attempt to interfere with nationally profitable trade by high tariff duties. The public trust unites responsibility with direct action. It furthers efficiency, economy, and lowness of rates, but it does not subsidize. The function of maintaining lighthouses, however, almost of necessity devolves upon a central government. No city or private corporation is in a position to perform this function and make the traffic benefited pay for the service provided, since much of the benefit will be received by vessels which have no occasion to visit the particular city or to come within reach of the particular corporation. The British government, therefore, maintains the light- houses, but collects "light dues" in return, amounting to about $2,500,000 yearly, from vessels entering English harbors. These dues pay the entire yearly cost of main- taining the lighthouses and about $250,000 a year be- sides. 1 Here, also, is no policy of subsidizing, no attempt 1 Johnson, Ocean and Inland Water Transportation, p. 262. If the slight charge above yearly cost is criticised, it should be remembered that a reason- able return on investment is not an improper aim. 178 ECONOMIC ADVANTAGES OF COMMERCE inland waterways) going long distances, railroad charges average very much less than this, probably markedly less than a half cent. The facilities provided by the government on the above mentioned three rivers would, therefore, have to reduce the transportation cost upon them to zero, in order that the construction or invest- ment by the government should be proved worth while, unless the traffic benefited moved an average distance of over 6000 miles. For even at zero cost of carriage, each ton carried one mile would secure a saving of but one-half a cent. And unless it were carried 6000 miles, the total saving would not amount to the $30 interest and maintenance cost. What is the reason for the numerous appropriations of this sort made by our government ? A partial explana- tion may be found in the current American practice of donating to commerce the improvements made, and letting the general public bear the burden in indirect and, therefore, hardly realized taxation. Commercial interests are the more ready to plead for comparatively useless dredgings, revetments, and canalizations, because, however small the benefits are, they reap these benefits, and because, however heavy the cost is, others mainly bear it. Any reform which goes to the root of the evil must espouse the principle of making those contribute most to the fixed charges and maintenance costs of navi- gation improvements, who chiefly use those improve- ments and to whom their benefits chiefly go. A further partial explanation is suggested by noting the distribution, throughout the country, of money appropriated for waterways. In the general River and Harbor Act of 19 10, appropriations were received by 296 congressional districts in the United States, out of a ENCOURAGEMENT OF TRANSPORTATION 179 total of 39 1, 1 in other words, by over three-fourths of such districts. Apparently the appropriations were given to nearly every district in which there was a stream or harbor offering any excuse for expenditure. This River and Harbor Act illustrates what has been called the "pork barrel" system of waterway development. The difficulty is one which seems to apply generally to the activities of a democratic government. A despotic or aristocratic government is based on the privilege of special persons or classes. It governs largely in the in- terest of legally privileged classes. It insures to those classes, political and economic privileges maintained at the expense of others. Such a government was that of France before the Revolution. Such is that of Russia to-day. In the case of a popular government and an in- telligent people, privilege is probably less excessive, and its forms less obnoxious. But there may still be, espe- cially if the government carries on industrial functions or interferes at all with the natural laws of trade, the privilege which comes from bargaining. One class wants a special kind of tariff law, adverse to the public interest. Another class desires legislation subversive of currency stability, also contrary to the general wel- fare. The representatives of each, in Congress, may support the desires of the other, in return for counter support. The evil shows itself most of all, perhaps, through the influence exerted by localities or by special interests in different localities. We have noted this particularly in the case of the protective tariff. 2 And just as, in the case of the tariff, congressional representatives from 1 Fuller, American Waterways and the Pork Barrel, loc. cit. 'Chapter VI (of Part II), §6. 180 ECONOMIC ADVANTAGES OF COMMERCE different states and districts desire, each, to get or keep a high tariff for the goods produced in his district, what- ever the effect on the common weal, and sometimes inconsistently with their party platforms, so these repre- sentatives desire appropriations of money to improve waterways, each for his own district, even though the cost to the country as a whole far exceeds the benefit, and even though each district suffers more from its forced contributions to improvements in other districts, than it gains. There is, consequently, a process of "log- rolling," so-called, in which A votes for B's project in return for support of his own ; and the ultimate result is an appropriation or set of appropriations having no consistency and involving general loss. Each Congressman thus acting, feels that he is gaining favor with his constituents. The persons interested in local waterway constructions make representations to him regarding the importance of them. He feels that the people of his district are not concerned primarily in having him act the part of a wise and conscientious legislator, careful not to waste the nation's resources, but that they are concerned rather in having him "do something" for them. If he succeeds in getting what is desired, the newspapers of the district publish the fact that, through his influence, Congress has been led to ap- propriate a sum to improve navigation on the local stream or to deepen the local harbor. The fault is not alone that of the Congressman who, under such circumstances, does the thing which he believes his constituents desire, but is also largely the fault of those constituents them- selves, whose selfish local interests overshadow in their minds the greater interests of the nation of which they are a part, and whose limited intelligence will not let them see ENCOURAGEMENT OF TRANSPORTATION 181 that the system practised is likely, in the end, to hurt more than to help even their own welfare. It would seem, then, that a reform which would go to the root of the difficulty must not only insist upon the attempt to charge users rather than taxpayers, for facil- ities provided, but must also insist that the entire first cost and risk of constructing these facilities shall not fall upon the nation as a whole. If government expenditure rather than private investment is thought to be necessary to improve certain waterways, at least the government expenditure and risk should be partly borne by localities most directly concerned. If such localities will not support certain improvements, themselves, they should not expect the nation to do so. If the nation refuses to bear the burden alone, but insists, always, upon local aid, there will be far less pressure for Federal appropriations, and many wasteful expenditures will be avoided. 1 §7 Subsidies to Railroad Building The subsidizing of transportation, by government, has extended, in the United States (not to mention other countries), to railroads also. The railroads of the United States have, it is true, been built pretty largely with private capital, but they have also received aid from the national government, from many of the states, and even from county and city governments. The states and local governments, in some instances, invested in railroad securities, so enabling the roads to get capital 1 Cf. Preliminary Report of National Waterways Commission, pp. 19, 20 (Final Report, pp. 81, 82). See also Report of Commissioner of Corporations on Transportation by Water in the United States, Part I, pp. 8, 59, for reference to European practice. i8 2 ECONOMIC ADVANTAGES OF COMMERCE which, perhaps, private persons would have been less ready to provide. But the Federal government, in addi- tion to making loans, made very extensive land grants to companies constructing numerous desired lines, 1 chiefly in the less densely settled parts of the country, the West and Southwest. The grants made between 1850 and 187 1 turned over to the railroad companies about 159 million acres of the public domain, an area exceeding five states the size of Pennsylvania. 2 So far as the land grant policy was based on military conditions, we cannot judge it on economic grounds alone. But so far as it can be regarded as a commercial policy, it can be judged in the light of commercial principles. We shall not, of course, be able to decide, absolutely, whether the land grants and other government aid to the railroads actually decreased the total of national wealth. So to decide, we should have to know not only what has happened, but just what would have happened if business and transportation development had taken its natural course. But we can lay down general prin- ciples of usual application, which, in the long run, are apt to be safest to follow. To begin with, it must be admitted that there is such a thing as undesirable transportation. The labor and capital of a country should be applied in order of pref- 1 See, on this subject, Haney, A Congressional History of Railways in the United Slates, Vol. II. The Railway in Congress : 1850-1887, Madison, Wis. (Demo- crat Printing Co., State Printer), 1010, Chs. II, III. Also Sanborn, Congres- sional Grants of Land in Aid of Railways, Madison (Bulletin of the University of Wisconsin), 1899, Chs. VI, VII. A good brief account is in Johnson, A merican Railway Transportation, 2d revised edition, New York (Appleton), 1909, Ch. XXII. 2 Not including land forfeited by failure to conform to conditions. The granting of the mere rights of way might be regarded as analogous to the grant- ing of farms to actual settlers. But the granting of millions of acres additional cannot be so regarded. ENCOURAGEMENT OF TRANSPORTATION 183 erence to different industries according to their relative importance, according to the relative need for them. In other words, the people should devote their efforts to the lines which pay best. It may be said that the people living in the Middle West and Far West, where railroad building was encouraged by government more than in the East, desired railroads as a means of reaching eastern markets. But the mere existence of railroads leading to markets does not in itself mean greater prosperity, since the benefits so received may be appreciably less than if the same capital were invested in some kind of produc- tive enterprise for immediate local needs. Unless the trade made possible by a railway brings as much wealth and prosperity as could have been had by foregoing the trade and producing more locally, unless, that is, as much of desired wealth is produced by the railway as would be produced were the labor and capital applied instead to the farms and ranches, to building houses, making furniture, etc., the building of the road is not economy for the community. If a railroad when con- structed will yield the people of a community a benefit equivalent to what the same investment would yield in another line, then those who receive this benefit can afford to pay, for the use of the railroad, a proper return on the capital invested. If they cannot afford to pay such a return, it must be because they are not receiv- ing a correspondingly valuable service and, therefore, it must be that the capital invested in the railroad is not producing the value which it might have produced if invested otherwise. If the territory through which a railroad is desired is sparsely settled and would offer but small traffic in pro- portion to trackage, thus only very partially utilizing i8 4 ECONOMIC ADVANTAGES OF COMMERCE the plant of the railroad, then high charges would be required, in order that the railway plant might pay to the owners the average rate of profit on investment. But high charges may be as serious preventives of reach- ing markets as absence of railroads leading to markets. If, therefore, only small traffic can be hoped for, it may be truer economy for the territory concerned and the various communities in it, to be more self-sufficient, to depend more exclusively on natural waterways, or to carry goods by using horses and vans, than to build a railroad. The people of a given section of the country may think that they gain nothing by having an incompletely utilized railroad, if they have to pay, in high freight and passenger rates, interest on its cost. They may not be prepared to patronize such a road, feeling that the ser- vice is not worth the charges. Yet if the road is paid for in part by government aid, even though they have to pay the taxes that make the aid possible, they may de- lude themselves into thinking that they are gainers by having the railroad. Nevertheless, the people are pay- ing for the service rendered just as surely by this method as by the other, and if it is unprofitable for them to pay the amount in the one way, it is unprofitable to pay it in the other. The chief difference is that if govern- ment supports the enterprise without receiving any cor- responding return, the cost of the service rendered is paid for by the people without any regard to the propor- tionate benefits received. If the assistance is by grants of land, the essential principle of the policy is the same. The public domain belongs to the whole people. It rests with them to give it to settlers, to keep it as forest reserve and for other ENCOURAGEMENT OF TRANSPORTATION 185 purposes, or to secure money revenue by selling it. To contribute it to railroad companies is as much a cost as to contribute the equivalent in money. 1 As a consequence of the land grant policy, capital was diverted to transportation purposes which might have yielded larger returns in agriculture or in manufact- ures. In so far as the policy had this effect, it lessened rather than increased national prosperity. Because of the land grant policy, also, population tended to be di- verted towards the Middle and Far West, while there was still room in the East, South, and Central states. As a result of this diffusion of population, goods were probably carried by rail over longer distances than would have been necessary had population been for a time more concentrated and had its extension westward been more gradual. Had the westward movement, except that by water to the Pacific coast, been slower, a shorter connection could have been kept by the near frontier with the more densely settled parts of the country, and the necessity of long hauls of meagre traffic through undeveloped sections could have been, in part, avoided. It is doubtless true that some sections of the West are exceptionally rich and fertile, as some are exceptionally mountainous or arid. That the former should event- ually hold a large population was both unavoidable and desirable. But that the movement westward should have been artificially hastened, at the cost of millions of acres of the public domain, at the cost of diverting labor from other industries into transportation, at the cost of unnecessary distances in transportation, and at the cost of building railroads in advance of traffic, ought not to be too readily taken for granted. 1 See, however, considerations later in this section, especially in footnote. 186 ECONOMIC ADVANTAGES OF COMMERCE As some parts of the country presumably gained by the policy, so other parts probably lost wealth. Many of the eastern farmers, for instance, found themselves disadvantaged by competition with producers of the West. So far as western farmers, by virtue of natural advantages, were able to undersell the farmers of the East, the result was economical and beneficial. But so far as western farmers were, in effect, given bounties, by having transportation provided in part at national expense, the result may very well have been a national loss. If the prosperity of the government-aided western farmer was increased, that of the eastern farmer was decreased. If the value of western land was raised, that of eastern land was lowered. 1 One type of municipal or local aid deserves particular mention. This is aid which is made conditional on the choice of a route through the town or city giving it. Such aid introduces an uneconomical basis (from the social point of view) of calculation into the choice of a route. The route selected is less apt to be the one which, all matters of traffic and expense considered, is most profitable, and, therefore, socially most desirable, but is apt, rather, to be a route favored by the largest promises of local aid. 1 To the argument that the government so raised the value of the remainder of its own land, it can be answered that it is not the business of a government to depreciate the land of citizens in order to raise the value of public land. If the principle that land rent is largely a social product and belongs mainly to the whole people, were commonly accepted, depreciating some land to raise the value of other land would appear clearly to be uneconomical. It is probable, in the case under discussion, that enough railroads would soon have been built, and that the government, even in the narrow sense here used, lost more than it gained by making the grants. ENCOURAGEMENT OF TRANSPORTATION 187 §8 Summary Let us now briefly restate the principles set forth in this chapter, regarding government interference with and encouragement of transportation. Navigation laws were first considered. These laws attempt to develop the national merchant marine by excluding foreign ships from certain trade. The United States excludes foreign vessels from the coasting trade. Considered from the purely economic viewpoint, these laws are analogous to protection, and for similar reasons they are economi- cally undesirable. Shipping subsidies are in the nature of bounties. In general it may be said that they are without economic justification. It may be defensible, however, or even desirable, to make definite payments to certain lines of ships, in order to have a claim to vessels as naval reserves. Subsidies may be indirect, as when certain privileges are given to a nation's own merchant vessels, at the tax- payers' expense, which are denied to the ships of other nations. The purpose of discriminating subsidies, direct or indirect, is not so much to increase commerce as to have it carried in vessels of the subsidy-paying country. Facilities for transportation are frequently provided by government at the taxpayers' expense. These tend to stimulate commerce which is not worth the expense borne, and which could not pay this expense. Such a policy is unfair to the general tax-paying public and vio- lates the principle that those who gain by any facilities should be the ones to pay for them. Such provision of commercial facilities at public expense would have been the carrying out of the plan to allow United States coast- 188 ECONOMIC ADVANTAGES OF COMMERCE ing vessels to use the Panama Canal free. Such provi- sion of facilities at public expense is the plan to have the Erie Canal forever free from tolls. Sections of the country, or of the state of New York, which have little or nothing to gain by the creation of these facilities, would have been, or will be, taxed that other sections might use them toll free. The Federal policy of harbor and river improvement is also a policy of subsidizing commerce, and is, therefore, popular with and favored by the in- terests subsidized. Like the protective tariff policy, the policy of subsidizing water transportation is partly the result of bargaining between representatives of differ- ent districts, each trying to get something at the general expense. The British system of a Public Harbor Trust avoids private monopoly of facilities, but makes the traffic using the facilities provided, pay for them. Land grants to railways, like other aids to water trans- portation, are indirect subsidies given to commerce, and, as such, are open to objections. The general rule which it is safest for government to follow, is that those who chiefly benefit by facilities provided for commerce should chiefly pay for them, rather than that these facilities should be paid for by the people in general, without regard to proportionate benefits received. INDEX Advertising value of a nation's ship- ping, 150-160. Agriculture, results of a policy of pro- tection to, 72-73 ; fallacious home market argument for protection addressed to those concerned in, 124-127; the argument for protec- tion to, in the older countries, against a doubtful future, 127-129. B Bastable, The Theory of International Trade, cited, 25, 30, 50, 54, 74, 81, 107, 132. Beet sugar industry, bounty granted, in Europe, 144; effects of bounties on bounty-paying countries and on sugar-consuming countries, 151-152. Bounties, nature and effects of, 144 ff . ; as compared and contrasted with protection, 144-145 ; effect of, on level of money prices in bounty- paying countries, 146-148; conse- quences of, to general welfare of bounty-paying country and of coun- tries with which it trades, 148-152 ; effects on wages and rent, 152-153; less objectionable than protection for encouraging infant industries, 153; comparison of shipping sub- sidies and, 157-158. Canals, the free use of government- built, 163, 165-172 ; comparison of railroads and, as to economy, 170- 171 ; burden of building, borne by taxpayers, 171-172. Carver, views of, on protection, 108 n. Coal, protective tax on, at expense of wage-earning public, 99. Coasting trade, United States laws con- cerning, 155 ; plan of granting free use of Panama Canal to American, 165-169. Competition, monopolies secured against foreign, by protective tariff, "3- Constitutional justification of a pro- tective tariff, 1 1 2-1 13. Cotton-raising states, disadvantages of protective tariff to, 112. Day, A History of Commerce, cited, 70. Diminishing utility, law of, 28. Diversification-of-industries argument for protection, 134-135- E Edgeworth, "The Theory of Inter- national Values," cited, 21 ; dis- cussion of view of, regarding effect of import duty, 48 n., 107-108 n. Employment, the argument that pro- tection makes, 122-124. England, wages and prices in Germany and, compared, 96; error made in comparing conditions as to wages in United States and, 120-122; weak- ness of national self-sufficiency argument for protection shown by case of, 136-137 ; gain to, from ex- port bounties paid on beet sugar by other countries, 151-152; early navigation acts of, 155. See also Great Britain. Erie Canal, the free use of, an injustice to taxpayers of New York State, 169-170. Ethics of the question of protection or free trade, 139. Export duties, consequences of, when levied for revenue, 52-55 ; effect of 189 190 INDEX protective, on a country's trade, 57-60; effect of, on flow of specie and on money prices in tax-levying country, 60-70. Export trade, injury resulting to a country's, from policy of protection, 58-SO. F Farmers, a tariff for benefiting wage- earners at expense of, 100-110; home market argument for protec- tion addressed to, 124-127. Fisher, Irving, Elementary Principles of Economics, cited, 5 ; The Pur- chasing Power of Money, cited, 67. Fisk, International Commercial Policies, cited, 151. Free trade, meaning of, 30-40 ; advan- tages to countries adhering to prin- ciples of, 80-83 ; wages and prices under protection and, compared, 96 ; condition of, between States of United States an argument for suc- cessful operation of, between nations, 137-138. See Revenue tariff. Fuller, Herbert Brace, "American Waterways and the Pork Barrel," cited, 176, 179. Geographical specialization in pro- duction of goods, 8-9; interference with, under conditions created by a protective tariff, 62-63. George, Henry, Protection and Free Trade, cited, 120. Germany, comparison of wages and prices in England and, 96; argu- ment used for protection to agricul- ture in, 127-129; beet sugar bounty in, 151-152; conclusions concerning waterway system of, 171. Great Britain, advantages secured by policy of free trade in, 81-83; system of harbor improvement and light- house maintenance followed in, 174-176. H Hadley, Economics, cited, 122 n. Haney, A Congressional History of Railways in the United States, cited, 182. Harbors, uneconomic improvement of, at public expense, 172 ff. ; British system of improvement and main- tenance of, 174-176. Harbor trusts in Great Britain, 174-175. Hart, A. B., Essentials in American History, cited, 138. Home market argument for protection, 124-127. I Immigration, danger to wages in United States from, rather than from lack of protective tariff, 121-122. Import duties, two classes of, 39; conditions where, when levied for revenue, the burden is borne by the levying country, 41-43; shifting of burden by the levying country to another or other countries, 44- 51 ; effect of protective, on a coun- try's trade, 57 ff. ; unprofitable industries set up at the general ex- pense by protective, 60-66. See Protective tariff. Incomes, loss in the way of, resulting from system of protection, 68-69. Inefficiency, encouragement of, in some degree, by protective tariff, 80. Infant industry argument for protec- tion, 129-134; as applied to boun- ties, 153. Intercommunity trade, 11-17; limits to fluctuations of, 19 ff. Interest, statement of theory of, 86 ; effect of protection on rate of, 86-89. International trade, distinction be- tween intranational and, one of degree only, 16-17. Investment, character of, as a part of trade, 29 n. J Johnson, Ocean and Inland Water Transportation, cited, 173, 175; American Railway Transportation, cited, 182. L Land grants to railroads, 182-186. Land rent, laws of wages and, 80-92 : INDEX 191 effect of protection on wages and, under varying conditions, 93-110; effect of bounties on, 152-153. Large scale production, protective tariff and, 71-72. Levi, The History of British Commerce, cited, 70. Lighthouses, maintenance of, by a central government, 172, 175-176. Lindsay, History of Merchant Shipping, cited 155. Loria, "Effects of Import Duties in New and Old Countries," cited, 106. M Make-work argument for protection, fallacy of the, 122-124. Manfuactures, consequences of policy of protection to, 73. Mason, "The American Silk Industry and the Tariff," cited, 130. Meeker, R., History of Shipping Sub- sidies, cited and quoted, 145, 159, 161, 162. Military argument for protective tariff, to insure national self-sufficiency, I35~i37 ; for shipping subsides, as a means of increasing a nation's naval strength, 161-162; for build- ing Panama Canal, 168. Mill, J. S., Principles of Political Economy, cited, 21, 24, 25, 26, 45, 46, 52, 74; System of Logic, cited, 120. Mississippi River, unwise expenditure of money in improvement of, 176- 177. Monetary standards, rate of inter- change of goods between countries not affected by difference in, 24- 25- Money, fallacy of the argument for protection, that it keeps money in the protected country, 116-118; argument for shipping subsidies based on, 158. Monopolies, differing prices of goods of, at home and abroad, 4 n. ; protec- tive system as an encouragement to, 113. Moulton, Waterways versus Railways, cited, 171. N Naval reasons for shipping subsidies, 161-162. Navigation laws, 155-156; analogous to protective tariffs, 156-157. Panama Canal, question of indirect! subsidizing American ships by al lowing them free use of, [63; lai - of economic justification for plan of allowing American coasting trad'- free use of, 165-169. Parasitic industries, establishment of, by protective tariff, 60-66. Patten, Economic Basis of Protection, cited, 106. "Pauper labor" argument used by protectionists, 1 19-120. Politics, part taken by. in the protec- tion of infant industries, 132-133; operation of, in American waterway development, 178-181. Population, density of, and rate of wages, 120-121. "Pork barrel" system of waterway development, 1 78-1 81. Prices, tendency of, through influence of trade, toward equality in dif- ferent countries, 3-7 ; tendency of, to be lower in the country where goods can be produced with greatest relative advantage, 7-1 1 ; high rate of wages docs not imply high, 9 ; effects of protective tariff on, 67- 70, 74-78; effect of bounties on level of, in bounty-paying countries, 146-148; effect of artificial naviga- tion laws on, 156. Protection. See Protective tariff. Protective tariff, distinction between revenue tariff and, 39-41 ; effect of, on a country's export trade, 57- 60; how unprofitable industries are set up at the general expense by, 60-66; view of, as "mutual tribute," 64 ; effect of, on money pri< M 1 1 protected and of unprotected goods, 67-70; improbability of increase of national wealth by, 71 n. ; opa of, as to industries in which largr 192 INDEX scale production is advantageous, 71-72; applied to industries of in- creasing cost, 72-74; effect on cost of unprotected goods got from other countries, 74-78; chimerical prop- osition as to establishing a tariff "equal to the difference in cost of production at home and abroad, together with a reasonable profit," 79-80; not necessarily conducive to efficiency in methods of produc- tion, 80; relative advantages in world's commerce of countries hav- ing high and countries having low or no tariffs, 80-83 ; effect on rate of interest and therefore on wages, 86-89; effect of, on wages and rent under varying conditions, 97-1 10 ; may benefit one section of a coun- try at the expense of other sections, 111-113; as an encouragement to monopoly, 113; the argument for, that it keeps money in the protected country, 116-118; the wages argu- ment for, 1 18-122; the make- work argument, 122-124; the home market argument, 124-127; the in- fant industry argument, 120-134; diversification of industries argu- ment, 134-135 ; argument concern- ing national self-sufficiency, 135- 137 ; successful working of free trade between States of United States an argument against, 137- 138; ethical considerations bearing on question of, 139; bounties as compared and contrasted with, 144-145 ; analogy between navi- gation laws and, 156-157; points of similarity of shipping subsidies and, I57-I58- R Railroads, comparison of canals and, as to economy, 170-172 ; comparison of transportation costs on rivers and, 177-178; subsidies to building of, 181-186; error made in giving municipal or local aid to, 186. Railroad wages, study of, 96 n. Rate of interchange of goods between communities, 19 ff. ; determination of, by conditions of supply and de- mand, 22-25; effect on, when one country offers a variety of goods, 26-27 ; effect when one country receives periodic payments of obli- gations from another, 27-29; ef- fect of production in any country under conditions of different cost, 29-32; under conditions involving more than two countries, 32-35 ; tariffs and, 39 ff ■ Rate of interest, effect of protection on, 86-89. Rent. See Land rent. Revenue tariff, 39 ff . ; conditions under which it is borne by the levying country, 41-43 ; shifting of burden by the levying country to another or other countries, 44-51 ; consequences of a, on exports, 52- 55- Rivers, uneconomic improvement of, by United States, 176-181. Sanborn, Congressional Grants of Land in Aid of Railways, cited, 182. Schiiller, Schutzzoll und Freihandel, cited, 124. Self-sufficiency, argument for protec- tion in order to get and maintain national, 135-137- Shipping, navigation laws designed to encourage, 155-157; advertising value of, 150-160. Shipping subsidies, 144; shown to be without economic justification, 157- 162; naval reasons for, 161-162; indirect, favoring native ships as compared with foreign ships, 163- 165. Sidgwick, views of, on protection, 107 n. Silk industry in United States, an ex- ample of infant industry argument, 130. Smith, The Organisation of Ocean Commerce, cited, 174. Southern states, effect of protective system on the, 112. Subsidies, to shipping, 144, 157-165; to railroad building, 181-186. INDEX i93 Sumner, William Graham, Protec- tionism, cited, 61, 82, 126, 136, 152; quoted, 64, 65, 134. Supply and demand, conditions of, determining rate of interchange of goods between countries, 22-25. Tariffs, effect of, on location of in- dustries, 1 1 ; revenue and protec- tive, distinguished, 30-41. See Pro- tective tariff and Revenue tariff. Taussig, Principles of Economics, cited, 7, 23, 27, 74, in, 127. Trade, conditions governing intercom- munity, n-16; international com- pared with intranational, 16-17; conditions regulating rate of, be- tween communities, 19 ff. ; supply and demand as the determining factor in, 22-25; effect on rate of, when one country offers a variety of goods and when it receives periodic payments of obligations from the other, 26-29; influence of produc- tion in any country under conditions of different cost, 29-32; effect of entrance of an additional country into, 32-35 ; cost of transportation as related to, 36; revenue tariffs and, 39-56; effects of a protective tariff, 57 ff. See also Rate of inter- change of goods. 'Trade follows the flag" argument for shipping subsidies, 159. Transportation, cost of, as related to trade, 36 ; navigation laws and shipping subsidies for encourage ment of, by water, 155 ff. ; com- parison of railroads and canals for purposes of, 170-172; comparison of cost of, on railroads and on rivers, 177-178. V Variety of goods, advantages to coun- try offering, for export, 26-27. W Wages, high rate of, does not imply that goods cannot be produced and exported at low money cost, 9 ; reduction of, resulting from rise in rate of interest due to protective policy, 88-89; laws of wages and land rent, 89-92 ; effect of protec- tion on, when protected and un- protected goods are produced under conditions of substantially constant cost, 93-96; effect of bounties on, I52-I53- Wagner, Adolph, Agrar- and Indus - trieslaat, cited, 127. Weighted average, defined, 5. Wheat-producing areas, disadvantages of protective tariff to, 112. Wool industry, protective tariff and, in United States, 61 ; an illustration of the establishment of a parasitic industry at the general expense, 05, 99-100. Printed in the United States of America.