'««♦ Hate stamped below INTRODUCTION TO THE Study of Fxonomics BY CHARLES JESSE BULLOCK, PH.D. ASSISTANT PROFESSOR OK ECONOMICS IN WILLIAMS COLLEGE NFAV EDITION, REVISED AND ENLARGED SILVER, BURDETT AND COMPANY New York BOSTON Chicago Ctccq. (SO 3 Copyright, 1897, By Silver, Burdett and Company Copyright, 1900, By Silver, Burdett and Company 2^5.1 3?K PREFACE. This work is designed for an introductory text-book of economic science. The first three chapters aim to familiarize the student with an orderly treatment of some leading facts in the economic history of the United States before the study of economic theory is commenced. Throughout the book economic principles arc discussed with special reference to American con- ditions, and their workings are illustrated by frequent allusions to American experience. Some of the chapters treat of topics that are ex- tremely diflicult. In such cases no attempt has been made to secure a false appearance of simplicity. The subject of public finance has been only incidentally touched upon. The author considers it impossible to discuss taxation satisfactorily without studying public expenditures also. To do this would have required more space than could be allotted to that subject. When many important points of economic theory are unsettled, as is certainly the case at the present time, the preparation of a text-book is not an easy task. The author believes that it is neither desirable nor pos- sible to introduce the beginner to many controversies 4 PREFACE. on fundamental points of theory. For this reason he has been obliged oftentimes to present his own views much more dogmatically than he would desire to do under other circumstances. On practical problems, however, such as bimetallism and monopolies, where weight of opinion is nearly evenly balanced, every effort has been made to present both sides of the controversies. The author has received invaluable assistance in the preparation of this work. Special acknowledgment should be made to Professor Charles H. Hull, of Cornell University, to whose suggestions and criticisms this book owes much of whatever value it may have. The thanks of the author are due especially to his wife, who prepared nearly all the manuscript for the printer, light- ening by one half the labor of writing this work. CHARLES JESSE BULLOCK. Ithaca, N. Y., April, 1897. PREFACE TO THE SECOND EDITION. In this second edition the greater part of the original work remains unchanged, except for the fact that at a few points the materials have been brought up to date. The chapter on value, however, has been considerably altered, and the sections relating to normal value have been entirely rewritten. Finally, at the risk of length- ening the book unduly, a new chapter devoted to public expenditures and revenues has been added. C. J. B. Wii.i.iamstown, Mass., April, 1900. CONTENTS. CHAPTER I. PAGB Introduction to the Economic History of the United States 11 I. Westward Expansion 11 II. Land Tenures in the United States 14 III. Growth of Population in the United States ... 18 IV. Systems of Labor in the United States , . . . 22 Literature on Chapter I ... 30 CHAPTER II. The Growth of Foundational Industries .... 32 I. The Fur Trade and Cattle Raising 32 II. Agriculture 35 III. Fisheries and Mining 43 Literature on Chapter II 47 CHAPTER III. Manufactures and Transportation 48 I. Colonial Manufactures 48 II. The Industrial Revolution and the Factory System . 53 III. Transportation . . 58 6 CONTENTS. PAGE IV. Ship Building 65 V. The Textile Industries 69 VI. Iron and Steel Industries 74 Literature on Chapter III. 77 CHAPTER IV. The Consumption of Wealth 79 I. Human Wants 79 II. Economic Goods 84 III. The Consumption of Wealth 87 IV. Statistics of Consumption 99 V. Economy in Consumption. Saving and Investment . 101 VI. Demand 110 Literature on Chapter IV 1M CHAPTER V. The Production of Wealth 115 I. Production in General 115 II. The Factors of Production 118 Literature on Chapter V 142 CHAPTER VI. The Production of Wealth {continued) 148 I. Organization of the Factors of Production .... 143 H. Stages in the Developmenl of Production .... 157 III. Freedom in the Establishment of Productive Ihider- takings 100 IV. Cost of Production 102 V. The Invcsl niriii of Labor and Capital upon Land . 164 VI. Large-Scale Production 170 Literature on Chapter VI 179 CONTENTS. 7 CHAPTER VII. PAOK The Theory of Exchange 180 I. Exchange in General 180 II. Value 183 III. Market Value 186 IV. Normal Value 194 V. Exceptions to the Theory of Normal Value .... 2U9 Literature on Chapter VII 217 CHAPTER Vm. Money 218 I. Development of Metallic Money ....... 218 II. The Value of Metallic Money 227 III. Debased Money. Gresham's Law 242 IV. Inflation and Contraction 252 V. Government Paper Money 257 Literature on Chapter VHI 263 ■■ ' CHAPTER IX. i% Money and Credit 264 I. Credit and Instruments of Credit 264 II. Banks as Institutions of Credit 273 III. Advantages and Disadvantages of Credit .... 278 IV. Territorial Distribution of the Precious Metals . . 279 V. Summary of the Theory of Money 282 Literature on Chapter IX. 287 CHAPTER X. Monetary History of the United States. Bimet- allism 288 I. Monetary History of the United States 288 n. Bimetallism 297 Literature on Chapter X ... 308 CONTENTS. CHAPTER XI. PAGE Monopolies 309 I. The Nature of Monopolies. Monopoly Value . . . 309 II. Classes of Monopolies 313 III. General Considerations concerning Modern Monop- olies 318 IV. The Problem of Natural Monopolies 320 V. Capitalistic Monopolies 325 VI. Final Considerations concerning Monopolies . . . 329 Literature on Chapter XI .... 336 CHAPTER XII. International Trade 337 I. The Foreign Trade of the United States .... 337 II. The Nature of International Commerce 339 III. International Values 344 IV. Restriction of International Trade 351 Literature on Chapter XII 374 CHAPTER XIII. The Distribution of Wealth „ . . 375 I. Social Income 375 II. Private Income 378 III. Primary and Secondary Distribution 380 IV. General Classification of Private Incomes .... 385 V. Interest 387 VI. Rent 399 VII. Wages 410 VIII. Profits 424 Literature on Chapter XTII 431 CONTENTS. CHAITKIl XIV. PACK The Wages System 432 I. General Considerations on the Labor Contract . . 432 II. Labor Laws and the Labor Contract 437 III. Labor Organizations and the Labor Contract . . . 440 IV. The Unfavorable! Relation of Laborers to the Product of their Labor 44!) V. Conciliation and Arbitration 453 Literature on Chapter XIV. . . 457 CHAPTER XV. Land Nationalization. Socialism 458 I. Land Nationalization 458 II. Socialism 404 Literature on Chapter XV 477 CHAPTER XVI. The Economic Functions of Government 478 I. Economic Functions performed by Governments . . 478 II. Examination of Modern Theories of Governmental Functions 182 III. The Several Functions of Government considered from the Point of View of Individualism . . . 4S8 Literature on Chapter XVI 102 CHAPTER XVII. Governmental Expenditures and Revenues .... 493 I. Public Expenditures 493 II. Public Revenues 49S III. Taxation in the United States 514 Literature on Chapter XVII 551 10 CONTENTS. PAOB BlBLIOGRAPnY 553 I. English and American Works 553 II. Periodical Literature 568 III. French and German Works 569 (1) French Works on Economics 569 (2) German Works on Economics 570 Index 573 330- B^- INTR0DUCTI0N TO ECONOMICS CHAPTER I. INTRODUCTION TO THE ECONOMIC niSTORY OP THE UNITED STATES. I. Westward Expansion. § 1. The English colonies in North America were planted on the mere threshold of a vast territory of con tinental extent and imperial richness. Re- Westward sistlcssly the line of settlement has been movement of pushed westward until, at the present day, pop no distinct frontier of unsettled land exists in the United States. This westward expansion of population over a vast area of free land has been the fundamental fact in the economic history of the country, exerting an influence upon almost every phase of its economic life. § 2. The colonists of the seventeenth century, ad- vancing through the valleys of the rivers flowing into the Atlantic, pushed their settlements The first slightly beyond the "fall line," or the point J^^SHm where the first falls obstructed the naviga- expansion, tion of the rivers. The frontier of the seventeenth century corresponded roughly with the western border of the Atlantic coast region. From 1700 to 17C0 the 12 ECONOMIC HISTORY OF THE UNITED STATES. frontier was advanced another stage toward the west. Emigrants gradually followed the rivers that penetrate the Appalachian region, and formed settlements in the table-lands of Pennsylvania, Virginia, and the Caro- linas. In New York and New England many settlers pushed toward the interior of those sections. Mean- while, the eastern or tide water regions became an area of more or less continuous settlement. § 3. The third stage in the advance of the frontier occurred between 1760 and 1790. Settlers moved _ ,_, , through the valleys and mountain passes of The third ° J r and fourth the Appalachians, and emerged in Tennes- see, and Kentucky, and around the upper branches of the Ohio River. Thus the frontier passed over the mountains, while the area of continuous settle- ments advanced well into the Appalachian region. With the Appalachian mountains once passed, emi- grants moved rapidly into the Mississippi Valley. In 1820, Ohio, southern Indiana and southern Illinois, Tennessee, Kentucky, and southeastern Missouri were included within the settled area. West of the Missis- sippi and along the Great Lakes, a fourth region of frontier existed. § 4. From 1820 to 1850 the westward movement of population was very rapid. The construction of the Erie Canal, in 1825, and the use of the The fifth and sixth steamboat upon the western rivers, facili- tated communication with the East, and stimulated the settlement of the Mississippi Valley. By 1850 the frontier was advanced to the eastern boundary WESTWARD EXPANSION. 13 of Kansas and Nebraska, while great states had arisen east of the Mississippi. At the same time a new fron- tier of settlement was begun in California, Oregon, and Utah. By 1880 the territory intervening between the Kansas-Nebraska and the Pacific frontiers of 1850 had become populated, although somewhat sparsely. In many places frontier conditions still existed, but areas of thicker settlement had so broken into the old Rocky Mountain frontier that a distinct line of frontier no longer existed. The decade from 1880 to 1890 saw almost the complete disappearance of an " American frontier." § 5. Up to the present time the economic history of the United States has been marked by a continual west- ward movement of population over vacant „. ... 1 L Significance lands. In the future it will be altogether a of westward story of the more complete development of P the territory won for the cause of civilization by the labors and privations of the American pioneer. The significance of this movement for westward expansion has been understood by few. For this reason, says Woodrow Wilson, " the history of the country and the ambitions of its people have been deemed both sordid and mean, inspired by nothing better than a desire for the gross comforts of material abundance ; and it has been pronounced grotesque that mere bigness and wealth should be put forward as the most prominent grounds for the boast of greatness. The obvious fact is that for the creation of the nation the conquest of her proper territory from Nature was first necessary; and this task, which is hardly yet completed, has been 14 ECONOMIC HISTORY OF THE UNITED STATES. idealized in the popular mind. A bold race has de- rived inspiration from the size, the difficulty, the dan- ger of the task. Expansion has meant nationalization ; nationalization has meant strength and elevation of view." II. Land Tenures in the United States. § 6. Systems of land tenure influence powerfully the economic development of a country. In Europe, the The urfiuence possession of land has often conferred of land economic superiority and social distinc- tenures. tion. In the Middle Ages the large land- owners became the feudal rulers of Europe, while the small owners and the landless men were obliged to place themselves under the protection of some feudal lord, in a position of economic and social dependence. In modern Europe the landed aristocracy has lost most of its exclusive political privileges, but retains something of its former social superiority. Land tenures have in most countries remained aristocratic, — that is, such as to perpetuate large estates and to make difficult the growth of a large number of small holdings. Such land tenures keep the mass of the agricultural popula- tion of Europe in a position of economic dependence upon the land-owning classes. In the United States economic development has taken a different direction. In some colonies efforts Tenures in were made to create large estates whose the united proprietors should enjoy special privileges, SDBXGfli and various conditions sometimes made it difficult for small proprietors to acquire titles to land. LAND TENURES IN THE UNITED STATES, lo But, in the long run, the tendency was toward a popu- lar system of land tenure and land transfer. After the Revolution, practically all traces of aristocratic laud laws were swept from the statutes of the states. Small holdings had always been the rule in New England, while large estates became more common as one passed toward the South. These differences had an economic explanation. The more fertile lands of the middle and southern colonies made large farms and plantations profitable economically. On the less fertile soils of New England, smaller farms and a more careful cul- tivation were an economic necessity. Similar causes explain differences in agricultural tenures that exist in the country at the present day. § 7. Since vacant lands abounded, the management and settlement of such public lands became an impor- tant problem early in colonial history. ^1^™!^^ The usual outcome was that the people of public ~ lands. finally secured the right to acquire owner- ship of the vacant territory by simple methods of reg- istration, and by making a payment that was often nominal. The growth of democracy in the colonies made such a solution inevitable. The War for Independence placed in the control of the United States nearly all the territory now comprised within its limits east of the Mississippi. 1 The public The territory west of the Alleghanics was domain of the J , ° United States. ceded to the national government by the 1 On the subject of land cessions, see maps in MacCoitn, Historical Atlas; Hinsdale, The Old Northwest; Gannett, The Building of a Nation. 16 ECONOMIC HISTORY OF THE UNITED STATES states, and became a public domain. In 1785 and 1787 Congress passed ordinances that provided for the ad- ministration of the Northwest Territory. These ordi- nances laid down the lines which the policy of the United States has always followed, in many important features. The lands were divided by a governmental survey into townships six miles square. 1 Entire townships or sec- tions of townships were sold at public sale for not less than a dollar per acre. This system enabled settlers to locate easily in the states north of the Ohio, and conse- quently the flow of population into the Ohio Valley was very rapid. By several acquisitions the United States extended its territory to the present limits ; and the public domain included, at one time and another, 2,889,175 square miles. 2 The thirteen original states, together with Maine, Kentucky, and Texas, were never part of the public domain. Their area is about 699,000 square miles. This vast public domain has been sold at public and at private sale at a common price of $1.25 to $2.50 per acre. Since 1862 a free homestead of not Disposal of the public more than one hundred and sixty acres has been granted practically free of charge to every citizen who is the head of a family, or above the age of twenty-one, on condition that he shall actually cultivate the land for five years. Lands valuable for minerals, for timber or stone, for town sites, etc. have 1 See Fiske, Civil Government, 81-88 ; Hinsdale, The Old North- west, 255-279. 2 For these statistics see Donaldson, The Public Domain, 10-14 ; Sato, The Land Question, 21-77. LAND TENURES IN THE UNITED STATES. 17 /)ccn sold on special terms. Vast tracts of land have been given away for the purpose of assisting in the construction of railroads and military roads, for the endowment of schools and colleges, and for military bounties to soldiers and sailors. In these ways the larger part of the original domain has passed out of the hands of the United States. In 1894, exclusive of Indian and military reservations, there remained about 850,000 square miles of public domain. To this should be added nearly all of the 577,390 square miles included in the limits of the territory of Alaska. Of the lands that remain, only a small part will be available for agricultural purposes until the arid regions of the West shall be irrigated. There have been great abuses in the administration of the public domain. Vast tracts of land have been secured by fraud, railroads and other cor- J Result of the porations have secured land without fulfill- public land ing the conditions upon which the grants ^ cy ' were made, while land and timber thieves have sup- ported lobbies at Washington to prevent the passage of laws designed to protect public interests. Yet, in spite of all abuses, millions of settlers have found homes on lands secured from the United States, the resources of the country have been developed, and twenty-seven states, carved out of the public domain, have been admitted to the Union. On the agricultural lands, holdings of moderate size have been the rule ; and the public-land states have become composed of a large number of proprietors, not of landlords and tenants. 2 18 ECONOMIC HISTORY OF THE UNITED STATES. III. Growth of Population in the United States. § 8. During the seventeenth century the population of the English colonies grew quite slowly, but from 1700 to 1775 numbers increased rapidly. Statistics of . . increase of Mr. Bancroft estimates the population in population. 1754 at l5l65?000 whites and 263,000 ne- groes. In 1775 it had increased to 2,500,000 souls. The English element predominated in most of the colo- nies at that time, but the population was quite hetero- geneous. In New York the Dutch stock prevailed, on the Delaware River there were settlements of Swedes, in Pennsylvania there were many Germans, in the moun- tainous districts of the Appalachian frontier Scotch-Irish were most numerous, while the southern colonies con- tained many Huguenots. The First Census of the United States, in 1790, showed the population to be 3,924,214. The subsequent growth of the country is shown in the following: table : — Date Per cent Number of of Population. of inhabitants Census. increase. per sq. mile. 1790 3,929,214 4.89 1800 5,308,483 35.10 6.61 1810 7,239,881 36.38 3.09 1820 9,033,822 33.07 4.76 1830 l'i.si ;r,,n-_>n 33.55 6.35 1840 17,069,463 32.67 843 1850 28,191,876 36.87 7.93 1860 81,443,821 35.58 10.84 1870 38,558,871 22.03 13.80 1880 60 155,783 30.08 17.29 1890 62,622,250 24.86 21.31 THE GROWTH OF POPULATION. 19 § 9. The enormous increase of the population of the United States during the last century is due partly to natural increase bv a constant excess of J Natural births over deaths. From 1700 to 1820 increase of the natural increase was very great, so that pop population doubled repeatedly in periods of about twenty- live years. This was due to the abundance of fertile land which was usually accessible to every one. Food, clothing, and shelter could be secured very cheaply. An increase of numbers meant not so much an increase of mouths to be fed, as an addition to the productive labor of each family employed upon new land. Under such conditions marriages occurred early, families were large, and the natural increase of numbers was rapid. After 1820 it was noticed that the rate of natural increase began to diminish. This became apparent in the older and more thickly populated regions. In recent times this condition has become very general, as the pop- ulation of more states has become relatively dense. 1 § 10. Immigration has been so large that the smaller rate of natural increase has been less apparent than it would have been otherwise. From 1790 to 1820 immigration was small, less than 250,000 persons coming to this country during that period. Between 1820 and 1850 over 2,400,000 immi- grants arrived on our shores, and as many more came 1 See Tucker, "Progress of the United States," 89-107, published in 1843, for a discussion of the decreased rate of natural increase. Also read Ma vo-S. Mini's " Statistics and Sociology," chaps, v., vi., vii., and yiii. 20 ECONOMIC HISTORY OF THE UNITED STATES. between 1850 and 1860. In the latter year more than thirteen per cent of the total population was estimated to be of foreign birth. After the close of the Civil War immigration assumed larger proportions than ever. The West welcomed immigrants, bureaus were estab- lished to aid them, the cost of ocean and land trans- portation was cheapened, and transportation companies made efforts to obtain passengers from foreign lands. In 1871, 321,350 immigrants came to this country ; and in 1882, 788,992 arrived. Since then the annual aver- age has been about half a million. The whole number of immigrants from 1820 to 1894 has been 17,428,000. The Census of 1890 showed that the population of the United States fell into the following groups : — Native-born whites with native parents . . 34,358,348 Native-born whites with foreign parents . 11,503,675 Foreign-born whites 9,121,867 Colored persons 7,638,360 Formerly, most of the immigrants came from Ireland, England, and Germany. More recently, larger num- bers have come from the Scandinavian countries. Dur- ing the last decade immigration from Ireland has fallen off, while Austria-Hungary, Poland, and Italy have sent vast numbers of immigrants. § 11. The general movement of population has always been westward, on account of the unoccupied lands of Mobility of the frontier. Not only immigrants, but also o^thTun^ed man y °f the native population, have formed states. this stream of westward migration. No other country o£ tbe world has shown, at least in THE CllOWTII OF POPl'/.AriON. 21 modern times, an equal amount of internal migration. This mobility of population lias diminished the force of all economic shocks. In 1890 it appeared that 21.55 per cent of the native-born inhabitants of the United States were living in a different state from that in which they were born. In 1880 it was shown that only one half of the people of native birth were living in the county where they were born. § 12. In progressive countries there has appeared, in modern times, a marked tendency of the population ta concentrate in cities. This has been the Growth f result of the development of manufactures cities - and commerce, and of the improvement of transporta- tion facilities. The following table shows the growth of that portion of the population of the United States which lives in towns and cities of 8,000 inhabitants and over. In 1790 the number of such towns was six, in 1890 it was four hundred and forty-eight. Census Years. Population of the Population of Inhabitants of Cities in each 100 United States. Cities. of the Total Population. 1790 3,929,214 131,472 3.35 1800 5,308,483 210,873 3.97 1810 7,239,881 356,920 4.93 1820 9,633,822 475,135 4.93 1830 - 12,866,020 864,509 6.72 1840 17,069,453 1,453,994 8.52 1850 23,191,876 2,897,586 12.49 1860 81,443,321 5,072,256 16.13 1870 38,558,371 8,071,875 20.93 1880 50,155,783 11,318,647 22.57 1890 62,622,250 18,284,385 29.20 22 ECONOMIC HISTORY OF THE UNITED STATES. A comparison of different sections shows more striking results. In the North Atlantic States 51.81 per cent of the people live in cities. In Massachusetts and New York the numerical increase of the urban population is larger than the total increase of the population of the states, so that there has been an actual depopulation of the rural districts. This concentration of the popu- lation in cities is greatest in all the states where manu- facturing and commercial interests are most important. IV. Systems of Labor in the United States. § 13. In the original colonies there was a great scarcity of laborers. Small proprietors cultivated their . own lands, but on the larger farms and Scarcity of ' & laborers in plantations there was great need of addi- tional laborers. This lack was intensified as other industries grew up beside agriculture. To supply this need immigration was encouraged, and various systems of obtaining laborers were developed. § 14. Indentured white servants were found in all the colonies at an early date. They were of three indentured classes. The first and principal class con- servants, sisted of free persons who desired to mi- grate to the colonics, but were unable to pay the expense of transportation thither. They voluntarily contracted with some one in America to place their labor at his disposal for a term of years, in return for his assuming the expense of transporting tbem to the colonies and supporting them during the stipulated terms of service. The second class was made up of LABOR SYSTEMS IN THE UNITED STATES. 23 English political or criminal offenders, whose labor was sold for a term of years or fur life. The third and least important class was composed of persons in the colonies who were sold into servitude for a term of years, either for criminal offenses or for non-payment of debts. Sometimes orphans were bound out to service in this manner. This system of indented servitude differed very materially from slavery. The term of service was usually from three to six years. At its character of close the servant was entirely free. The this s y stem> rights of servants under the contracts were usually safeguarded fairly well. On becoming free, servants often rose in the social scale, even into positions of prominence. Many of them became free laborers, but the majority became landholders and swelled the number of small proprietors. Except where slavery assumed greater importance, the larger part of the laboring class of the colonies was composed of servants. In the eight- ^ aioithe ccnth century the system of indented serv- system, itude declined in the southern colonies, yet it continued everywhere until the Revolution, when further impor- tations of servants from England became impossible. Thus the supply gradually disappeared by expiration of the terms of service ; yet indented servants were found here and there until the present century, when the sys- tem was abolished by Law in some states. .This class of servants had been an important addition to the labor force of all colonies where slavery had not assumed 24 ECONOMIC HISTORY OF THE UNITED STATES. greater importance. But by 1780, even in the northern states, the system was less profitable to employers, since laborers had become more abundant and it was less desirable to hire workmen for so long a period as six years. § 15. Slavery differed from indented servitude in that the master had the legal right of ownership of the person of the slave. In the sixteenth cen- Slavery. tury various European nations entered upon the African slave trade, and introduced slaves into the New World. In 1619 a Dutch ship landed twenty African slaves in Virginia, and soon African slavery Was introduced into the English colonies. The English slave trade became very large, and the government fos- tered it, forcing negroes upon the colonies even in opposition to protests and restrictive legislation. But the profits of the trade were so large that the colonists finally entered upon it. After the Revolution various states restricted this nefarious traffic ; and, in 1807 and 1808, Congress finally abolished it. English and American traders brought thousands of slaves into the country ; while, in the southern colonies, __ „ the negroes multiplied rapidly by natural Growth of & L i J J slavery in the increase. In the eighteenth century the importation of slaves gradually declined in the colonies north of Maryland, this tendency being most marked in New England. After the Revolution slavery was gradually abolished in the northern states. In 1790 the distribution of slaves among the states was as follows : — LABOR SYSTEMS IN THE UNITED STATES. 25 New England States 3,886 New York, Pennsylvania, and New Jersey .... 36,484 Southern States 657,527 697,897 Up to this time the course of the institution of slavery had been shaped mainly by economic forces. It is incorrect, however, to say that moral causes that considerations had nothing to do with the ^story^ abolition of the institution in the North, slavery, for an opposition to slavery based upon moral and religious grounds commenced early in the eighteenth century. Moreover, this feeling was not confined to the North, but was shared by eminent southern statesmen. Said Jefferson, writing concerning slavery, " I tremble for my country when I reflect that God is jii3t." But back of all such considerations lay the fact that slavery had never been profitable in the North, and that in the South it had enabled the slave-owners to accumulate much wealth. Abolition, therefore, would cost the northern states little ; while, in the southern states, it would destroy millions of dollars of property. In the South the demand for labor, to be em- ployed in raising tobacco, rice, and indigo, caused a rapid increase of slavery. In the North smaller hold- ings and more careful cultivation were the rule. The careless and indolent slave was wholly unsuited for such work. On small farms, also, overseers could not be employed, and slave labor could not be directed properly. Finally, the expense of feeding and clothing slaves was much larger in the North, while the mor- 26 ECONOMIC HISTORY OF TIIE UNITED STATES. tality of negroes was far greater; so that the cost of slave labor was high and its efficiency was low. The result of slavery was to divide the United States into two groups of states, — one dependent upon slave The end labor, the other upon free. From 1790 to of the in- I860 there arose a bitter sectionalism based upon these differences. Slavery was for- bidden in the Northwest Territory, and the great states formed in that region entered the Union as free states. Into the free states the increasing tide of immigration flowed, population increased rapidly, and manufactures and commerce developed. The southern states received few immigrants, and fell behind the rest of the country in respect to the growth of population and industries. By 1860 the free states had a population of 19,083,927 ; while the population of the slave states was only 12,815,374, of which number 3,953,696 were slaves. The invention of the cotton gin, in 1792, vastly extended the cultivation of cotton in the South, and this soon became the great staple crop of that section. Other branches of agriculture were neglected in order that the production of cotton might be increased. Slave labor was adequate to the work of producing large crops of cotton by wasteful surface culture extended con- stantly over new lands. But improved agriculture and mechanical or manufacturing industries, which required more efficient labor, could not be undertaken with the labor of slaves. So the South was shut up to agricul tural pursuits that tended toward the gradual impover- ishment of the soil. It could have no part in the LABOR SYSTEMS IN THE UNITED STATES. 27 economic progress of the nation, and remained in 1860, as it had been in 1790, exclusively an agricultural region. Slavery had become, therefore, a distinct impediment to the economic progress of the South. The abolition of the institution freed that section from an absolute barrier to its further progress, and made possible the development, by free labor, of the manifold resources of the New South. § 16. From the first, free laborers existed in all the colonies. They were often people who had been able to pay the expense of their passage from the Free laborers. Old World, but lacked the capital or the en- terprise to engage in some industry upon their own account. Their numbers were recruited by indentured servants whose terms of service had expired. The num- ber of free laborers varied greatly in the different colonies, but it was largest where slavery was least general, and free workers were not brought into com- petition with slaves. In the northern colonies free laborers increased rapidly during the last half of the eighteenth century. John Adams, writing in 1780, says that one cause of the opposition to slavery in Massachu- setts was " the multiplication of laboring white people, who would no longer suffer the rich to employ these sable rivals so much to their injury." Alexander Hamilton, writing in 1791, says: " There are large dis- tricts which may be considered as pretty fully peo- pled. ... If these districts have not already reached the point at which the complaint of scarcity of hands ceases, they are not remote from it." 28 ECONOMIC HISTORY OF THE UNITED STATES. One cause of the scarcity of hired laborers was the abundance of free land. Almost any one could become Effect of a proprietor, and cultivate the soil on his free land. own account. The land was usually fertile, and the return to the agriculturist was large. These facts made it necessary for an employer of labor to pay wages sufficiently high to induce people to work for hire, rather than to secure land and engage in agriculture. American wages have felt this influence even to the present day. Economists have found one explanation of the high rates of wages in this country in these two facts of free land and the productivity of American agriculture. The elder Winthrop wrote in 1645, " Our children's children will hardly see this great Continent filled with people, soe that our servants will still desire freedom to plant for themselves, and not stay but for verie great wages." In 1723, a leading royal official wrote of the colony of New York : " North America containing a vast tract of land, every one is able to procure a piece of land at an inconsiderable rate, and therefore is fond to set up for himself rather than work for hire. This makes labor continue very dear, a common laborer usually earning 3 shillings by the day ; and consequently any undertaking which requires many hands must be undertaken at a far greater ex- pense than in Europe, and too often this charge only overbalances all the advantages which the country naturally affords, and is hardest to overcome to make any commodity of manufacture profitable which can be raised in Europe." From earliest times there is an LABOR SYSTEMS IN THE UNITED STATES. 29 abundance of evidence to show that, wages have been higher in the United States than in European countries. Within the last decade the most desirable portions of our public lands have been occupied, and laborers will have more difficulty in the future in finding an outlet in the unsettled regions of the West. In the eighteenth century there were three classes of free laborers. First, there were many free laborers in the northern colonies engaged in agriculture m 00 D Classes of or in domestic service. Such laborers, male laborers in , n , 11 1 • -1 1 j 1 the colonies. and female, were usually hired by the year, and did not receive the highest rates of wages. In the southern colonies, such work was performed by slaves. The second class of laborers comprised those engaged in mechanical or manufacturing pursuits, or in trade and commerce. These were found in all the colonies, since slave labor could not be utilized for such purposes. This class of laborers received the highest wages and was always in demand, since the supply of skilled workmen was always inadequate. The third class was composed of unskilled laborers of the towns and villages. Their wages were sometimes high, but employment was irregular and their yearly income was not so large. The rapid growth of population during the present century has increased the number of laborers who work for hire. With the disappearance of 1 l Labor in the indented servitude, free laborers formed the present only class of workmen in the North and West. The abolition of slavery gave to the South the advantages of free labor. 30 ECONOMIC HISTORY OF THE UNITED STATES. LITERATURE ON" CHAPTER I. On Westward Expansion: Turner, The Significance of the Frontier in American History; Roosevelt, Winning of the West, especially I. 101-133 ; Roosevelt, Thomas H. Benton, 1-46 ; Sumner, Andrew Jackson, 1-21 ; Shaler, Kentucky, 53-120 ; Carr, Missouri, 1-13S ; Smyth, Tour in the United States, I. 178-183 ; Wilson, Division and Reunion, 2-7 ; The Eleventh Census of the United States, Volume on Population, xvnr.-xxxvi. On Land Tenures : Maine, Early History of Institutions, 98- 118; Leslie, Land System of Ireland, England, and Continental Europe ; Pollock, The Land Laws ; Mill, Political Economy, Bk. II. Chaps. 6, 7, 8, 9, 10; Jones, Peasant Rents; Probyn, Systems of Land Tenure ; Cheyney, Early American Land Ten- ures ; Cheyney, The Anti-Rent Agitation in New York ; Egles- ton, The Land System of the New England Colonies ; Doyle, The English Colonies in America; Wef.den, Social and Economic History of New England; Bruce, Economic History of Virginia; Willoughby, Government and Administration in the United States, 107-110; Donaldson, The Public Domain; Sato, His- tory of the Land Question in the United States ; Hinsdale, The Old Northwest ; Gannett, The Building of a Nation; Johnson's Universal Cyclopaedia, VIII. 359-360. On the Growth of Population : Eleventh Census of the United States, Volume on Population ; Bancroft, History of the United States, I. G02, II. 389,390, IV. 52; Tucker, Progress of tin' United States; Smith, Statistics and Sociology; Smith, Emi- gration and Immigration; Whitney, The United States, Supple- ment, 1-25 ; Gannett, The Building id a Nation, 51-129; Kf.t- tell, "Immigration," injEighty Years' Progress, I. 228-241; The Statistical Abstract of the United States, 1894, I and 5. On the Labor System: Waltershausen, Die Arbeits- Verfassung der Englischen Kolonien in Nbrdamerika ; Lodge, History of tin' English Colonies in America ; Doyle, The English Colonies in America; Bancroft, History of Hie United States; LITERATURE. 31 Bruce, Economic History of Virginia; Weeden, Economic and Social History of New England; Wright, Industrial Evolution of the United States; Bali.acii, White Servitude in the Colony of Virginia; Basset, Slavery and Servitude in North Carolina; Brackett, The Negro in Maryland; Ingle, The Negro in the District of Columbia; Tremain, Slavery in the District of Co- lumbia; Steiner, History of Slavery in Connecticut; Eighty Years' Progress, I. 103-122; Moore, History of Slavery in Massa- chusetts ; Tucker, Progress of the United States, 108-118; Hins- dale, The Old Northwest, 345-367 ; Ingle, Southern Sidelights; Lalor's Cyclopaedia of Political Science, " Slavery"; Kalm, Trav- els into North America, I. 303 ; Oldmixon, British Empire in North America; Ingram, History of Slavery; Mill, Political Economy, Bk. II. Chap. V. ; Roscher, Political Economy, I. 207- 234. Note. — Students should consult the maps in the Eleventh United States Census Report on Population, pages XII. -XXVIII., for illustration of the westward movement of the frontier. 32 ECONOMIC HISTORY OF TEE UNITED STATES. CHAPTER II. THE GROWTH OP FOUNDATIONAL INDUSTRIES. I. The Fur Trade and Cattle Raising. § 17. The development of the industries of the United States has been described in the following words : x " The United States lies like a huge page in The develop- to l & mentofin- the history of society. Line by line as we read from west to east we find the record of social evolution. It begins with the Indian and the hunter ; it goes on to tell of the disintegration of sav- agery by the entrance of the trader, the pathfinder of civilization ; we read the annals of the pastoral stage in ranch life ; the exploitation of the soil by the raising of unrotated crops of corn and wheat in sparsely settled farming communities ; the intensive cultivation of the denser farm settlement ; and finally, the manufacturing organization with city and factory system." § 18. The earliest English colonists began to traffic with the Indians for peltry. In New England the fur The fur trade furnished the earliest basis for the trade. foreign commerce of that region. In New York the Dutch and the English fur traders pushed up t lie Hudson River, reaching, through the Mohawk 1 Turner, Significance of the Frontier in American History. THE FUR TRADE. 33 Valley, the Great Lakes and the Illinois country. In Virginia the traders crossed the Alleglianies by the close of the seventeenth century, and later explored the moun- tains of Tennessee and the Carolinas. In the Caro- linas the colonists began at an early date to compete with the Virginians for the trade with the Indians of the Southwest. Meanwhile, in the Mississippi Valley, the French extended their traffic with the Indians, dot- ting the interior of the continent with their trading posts, For the control of this valuable trade the English and French contended until the French and Indian War wrested this territory from France. In the early history of this country the fur trade was important because it furnished a valuable industry which aided in building up a thriving com- ^am^f. merce. But more than this, it prepared the significance of . the fur trade. way for the advance of civilization across the Appalachian ranges. The fur traders, following Indian trails, 1 planted the first posts in the outlying western wilderness. In their track, hunters and trappers fol- lowed. As numbers grew and game became scarce, both traders and hunters moved on into the wilderness. Their places were soon taken by the cattle raiser, and then by the farmer ; and settled communities grew up. The trading post, therefore, located at some convenient place along an Indian trail or a river course, became the nucleus of a new area of settlement. - 1 See Roosevelt, Winning of the West, i. 251, 314, ii. 329 ; Speed, The Wilderness Road ; also the speech by Senator Benton, quoted bjf Turner iu "The Indian Trade," 72, 73. 34 ECONOMIC HISTORY OF THE UNITED STATES. This process has heen repeated at each step in the settlement of the West. After the Revolution, the set- tlers in the Mississippi Valley followed the Later history r ' J of tie fur paths marked by the early French traders. New Orleans and Mobile were the centers of the Indian trade in the southern part of the Valley, while the region of the Great Lakes was the seat of perhaps the greatest fur trade of the world. From Ohio to Wisconsin six lines of rivers furnished water routes from the Lakes to the Mississippi. 1 At these points old trading posts rapidly developed into important towns. Beyond the Mississippi, fur traders ascended the Missouri, penetrated the Rocky Mountains, and guided the earliest exploring expeditions and first immigrant trains through the mountain passes to the Pacific coast. Of this trans-Mississippi trade St. Louis was long the center, since the Missouri River gave it access to the entire Northwest. Along this route the Pacific Fur Company sought to establish a line of trading posts con- necting its station at Astoria, Oregon, with the Mis- sissippi Valley. 2 § 19. Cattle grazing has often been a special industry in the United States, and has an economic significance catue distinct from that of agriculture. European raising, cattle were imported into both Spanish and English colonies at an early date. In Virginia and the Carolinas cattle raising soon became distinctly a frontier 1 See Turner, Character of the Indian Trade, 21 ; Hinsdale, Old Northwest, first map. a Head Washington Irving, Astoria. AGRICULTURE. 35 industry. Cattle were turned loose in the forests, where they multiplied rapidly. Advancing settlements pushed the large herds of cattle westward, where vacant lands abounded. In 1770 Wynne described the large herds, often numbering one thousand cattle, that were common in the Carolinas. A few years later Smyth gave an account of cattle raising on the Carolina frontier, where vast numbers of horses, cattle, sheep, and hogs were turned loose in the forests and savannas. Each owner branded his cattle with a brand which was recorded by the clerk of the county court. West of the Alleghanies the cattle raisers occupied new lands some time in advance of the coming of a settled agricultural population. Across the Mississippi the same process has been repeated ; and, at the present day, cattle raising is carried on as a separate industry on the ranges of most of the Western States. It has gradually declined as the growth of a farming population has diminished the land available for grazing. In 1880 about 3,750,000 cattle and 7,000,000 sheep remained on the western ranges. Hi. Agriculture. § 20. Agriculture has always been the largest single industry of the United States. The first task of the American settler has been to clear away the production of forests and bring the land under cultivation, the cereals. The earliest English colonists endeavored to raise such crops as would furnish an adequate food supply. For this purpose maize, or Indian corn, proved best adapted. The colonists learned from the Indians how to plant 36 ECONOMIC HISTORY OF THE UNITED STATES. this hardy cereal, and secured large crops of corn, which became their most important article of food. At every stage of westward migration the same process has been repeated. Before the forests have been wholly cleared, corn has been sown in partial clearings, pumpkins and beans have been planted in the same patches of land, and an abundant food supply has been secured. When the fertile and open prairies of the Mississippi Valley were reached, the production of corn greatly increased ; and the United States became able to supply large amounts for export. In 1895 the value of the corn and corn meal exported from this country was $15,299,000. In that year the corn crop amounted to 2,151,000,000 bushels, and its value was about $567,000,000. The cultivation of wheat has been extended continuously since the early days of colonization, although Indian corn proved a more reli- able crop at first. Wheat and flour were exported from the middle colonies at an early date, and at the close of the eighteenth century New Jersey, Pennsylvania, and New York were the granary of the United States. Early in the present century the fertile prairies of the Ohio Valley began to yield large amounts of wheat. Between 1830 and 1850 exports of wheat and flour increased from 23,385,000 to 71,000,000 bushels. The culture of wheat has moved steadily westward. Minnesota, Nebraska, Kansas, and the Dakotas now form the gran- ary of the United States. Exports of wheat amounted to 144,000,000 bushels in 1895. For the year last men- tioned the wheat crop of this country was estimated at 467,000,000 bushels, valued at $237,000,000. For a lung AGRICULTURE. 37 time large crops of oats, barley, rye, mid buckwheat have been raised in the United States, and the oat crop alone approaches in value the corn ami wheat crops. In 1895 this country produced 824,000,000 bushels of oats, valued at #163,000,000. § 21. In the northern portions of the United States, special attention has been given to the grass and hay crop, since it has been necessary during the 1 . Production long winters to feed live stock upon hay of grass stored up in the summer months. In New andhay - England and some of the middle colonies great difficulty was experienced at first in providing sufficient food for live stock during the winter, and the animals often died of starvation. Near the coast a scanty supply of salt hay was secured from the salt marshes, but in the thickly wooded regions of the interior even this resource was lacking. Hayiields gradually appeared as the for- ests were cleared, but the quality of the grass was usu- ally poor. In 1750 timothy grass was introduced, and half a century later clover began to be generally culti- vated. Since then the quantity and quality of the grass crop has steadily improved. In the prairies of the Mis- sissippi Valley no such difficulties were encountered by the settlers, since a luxuriant growth of grass was found in those regions. At the present day grass and hay form the largest crop raised in the country. In 1895, after our pasture lands had furnished pasturage during the months when grazing was possible, the hay crop was valued at $393,000,000. § 22. In the first century of settlement many of the 38 ECONOMIC HISTORY OF THE UNITED STATES. fruits and vegetables known in Europe were introduced vegetables m t° tne colonies. Little attention was paid and fruits. f- f] ie development of fine varieties of fruit until the present century, during which the fruit crops have increased constantly in importance. The cultiva- tion of nearly all vegetables has been very widely ex- tended, but the white and the sweet potato have formed the most important crops, furnishing a considerable part of the food supply of the country. In 1895 the potato crop was valued at $78,000,000. § 23. The cultivation of flax and hemp was com- menced in America early in the seventeenth century, and many of the colonies attempted to stim- Production of vegetable ulate it by means of bounties. The entire hemp crop has never been large, however, and it has diminished for the last thirty years. Ken- tucky and a few states of the Mississippi Valley produce about all the hemp raised in the country at the present time. Flax has always been raised in larger quantities, and has been much used in the manufacture of home- spun cloth. For nearly forty years the flax crop has steadily decreased in all sections except the states of the Mississippi Valley. The production of cotton was stimulated between 1770 and 1790 by the invention of improved machinery for spinning and weaving that fiber. From New Jersey to Georgia experiments were made in cotton culture ; and in the coast regions of the South Atlantic States a very fine variety, known as "sea island cotton," was developed. On the uplands in the interior there was raised an inferior grade, whose uso was limited AGRICULTURE. 39 by the fact that its short fibers could be separated from the seeds only by an expensive and laborious process. In 1792 Eli Whitney invented a cotton gin which per- formed this work very easily. This made the upland cotton available for exportation to the English market, where the demand was rapidly increasing. Between 1792 and 1800 the cotton exports from the United States increased from $30,000 to $3,000,000, and by 1810 the crop was valued at $15,000,000. Cotton culture was extended rapidly in the Gulf States, so that in 1859 the crop was valued at more than $200,000,000. Most of this cotton had been exported to England, and it was to the planters of the cotton states what tobacco had been to the colony of Virginia. Other industries had been neglected for the one business of cotton raising. The extension of cotton culture made slave labor very profit- able to the planters, and fastened the institution of sla- very more firmly onto the economic life of the South. The substitution of free labor for slave, since the Civil War, placed no permanent check upon the cultivation of .cotton. In 1888 the crop amounted to 3,438,000,000 pounds, valued at $292,000,000. Texas, Mississippi, Alabama, and Georgia led in the production of this great staple product. ^ 24. About 1750 the sugar cane was introduced into some of the Gulf States. While other states have ex- perimented with this industry, it has shown 1 J ' Production of constant growth in Louisiana only, where sugar, rice, , r , i . -ii i. and tobacco. most or the crop is now raised. \\\ recent vcai's sorghum has been cultivated in a number of 40 ECONOMIC HISTORY OF THE UNITED STATES. states, while the sugar beet has been introduced in Nebraska and California. But the entire product has furnished only a small part of the sugar consumed in the United States. Rice has been produced in large quanti- ties in the coast districts of the Carolinas, Georgia, and Florida. Tobacco has always been an important crop in certain sections of the country. In Virginia and Maryland it early became the principal product. A superior quality of tobacco could be raised on the rich soils of those colonies, while the London market fur- nished a constant demand. With this crop the planters of those colonies paid easily for large quantities of man- ufactured supplies imported from England. For two centuries the entire economic life of Virginia centered around the production of tobacco for the foreign market. The Middle Atlantic States finally commenced the cul- tivation of tobacco, and it has extended into New Eng- land and the Mississippi Valley. The crop has always tended to exhaust the fertility of the soil, and its con- tinued cultivation has usually made it necessary to resort constantly to new lands. In 1894 the tobacco crop of the United States was valued at about 128,000,000. The State of Kentucky produced more than one third of the entire crop. § 25. Stock raising has always been a part of American agriculture, and live stock products form a other impor- lU()S ^' important part of the agricultural prod- tant products. uce f the country. Millions of gallons of milk and more than a billion pounds of butter and cheese are furnished by the dairies each year. Plains, AGRicur/rt /;/■:. 41 bacon and lard, live cattle, and dressed beef are ex- ported in great quantities after the domestic demand has been satisfied. Wool is raised in large amounts, al- though a considerable part of our entire supply has been imported. Poultry and eggs are other important products, whose value is not far from 1200,000,000 annually. § 26. Agriculture in the United States has been carried on chiefly by proprietors, not by agricultural tenants. The result of popular systems of Land land tenure has been that we "have mil- tenures, lions of farms just large enough to profitably employ the labor of the proprietor and his growing sons ; while we have also multitudes of considerable estates upon which labor and moneyed capital, live stock, and improved machinery are employed under skilled direction; and we have, lastly, those vast farms, the wonders of the world, in Illinois and California, where 1,000 or 5,000 acres are sown as one field of wheat or corn ; or, as on the Dal- rymple farms in Dakota, where a brigade of six-horse reapers go, twenty abreast, to cut the grain that waves before the eye almost to the horizon." The following statistics from the Census of 1890 show the character of our agricultural tenures : — Year. Number of Farms cultivated by Owner. Number of Farms rented for Money. Number of Farms rented for Share of Products. 1880 1890 2,984,306 3,269,728 322,357 454,659 702,244 840,254 42 ECONOMIC HISTORY OF THE UNITED STATES. § 27. The most striking feature of American agricul- ture has been that an abundance of fertile land has Extensive encouraged extensive methods of farming. cultivation. From the fertile soil of new fields, large crops have been raised with little or no attempt to renew or to enrich the land. When in this manner the fertility of one field has been exhausted, another has been brought into cultivation. In older countries, where land is scarce, a more careful, intensive form of cultivation is necessary ; and the farmer is obliged to return to the soil, by means of fertilizers, the various mineral ingredients that are taken from it by each year's crops. European writers have called the American practice " wasteful, wanton earth-butchery," and have criticised Americans for per- sisting " in taking up fresh land instead of the more costly process of manuring a worn-out soil." But it should be remembered that we have been rich in fertile lands, and until recent times poor in most other kinds of wealth. Our extensive agriculture has converted a portion of the natural fertility of our soils into other kinds of wealth that were less abundant. In the older sections of the country intensive cultivation has long been practiced. After the great staple crops of corn and wheat have been raised for successive years with the smallest expenditure of capital and labor, the soil becomes perceptibly impoverished; and the production of grain moves steadily westward toward unoccupied territory. Then, on the older lands of the East begins a more care- ful, intensive cultivation of smaller crops, vegetables, fruits, or grass for the support of the dairy. On the MIXING. 48 better portion of these lands cereal crops are still raised by higher cultivation, while the poorer soils are often allowed to revert to forest. In the vicinity of towns and cities market-gardening allows a still more intensive application of labor and capital. On the newer lands of the West extensive farming, for some time to come, may suffice for the production of large staple crops ; but in most parts of the United States the agriculturist must, in the future, resort to scientific soil cultivation. In this direction much has been done already. During the present century experiments and innovations have rap- idly increased, while agricultural societies and. publica- tions have diffused knowledge of improved methods. In the invention and practical use of agricultural inachin ery the United States has led the world. III. Fisheries and Mining. § 28. The rivers of most of the colonies abounded in fish, but New England possessed sea fisheries that formed the basis for a profitable commerce with the West Indies and with Europe. Thousands of hardy fishermen pushed their voyages as far as the Banks of Newfoundland, where there were the greatest sea fisheries of the world. The cod fishery has been the most important of these, although the whale fishery enrolled vessels of a greater tonnage from 1840 to 1858. During the last thirty years the character of the fishery interests of the United States has changed. The shore and inland fisheries have been developed into greater commercial importance than those of the deep sea. In 44 ECONOMIC HISTORY OF THE UNITED STATES. 1871 the United States Fish Commission was estab- lished. This body has been successful in propagating artificially more than forty kinds of fish. In 1890 the value of the fishery products of the country was over $42,000,000. § 29. Iron was the first metal to be produced success- fully in the English colonies. By 1650 Massachusetts Mining had established the industry of smelting iron industries. frQm the « bog . ores » t fc at were f ound in marshes and at the bottom of ponds. The iron industry gradually spread through the other colonies, and became especially important in the middle colonies. Pig and bar iron were exported to England from 1718 to the time of the Revolution. Copper and lead were mined in small quantities in some of the colonies, but other attempts at mining met with little success. In the upper Mississippi region, lead was mined by the French and Spanish ; but the vast stores of mineral wealth around Lake Superior remained untouched by European colonists. Early in this century gold was discovered in the Caro- linas and Georgia, where about 124,000,000 worth of the Deveio ment y e ^ ow me tal was mined up to 1847. Mean- of mining:, while the lead mines of the upper Mississippi 1800— I860. were developed quite rapidly. In 1820 anthracite coal fairly began to be mined in Pennsyl- vania, and the coal fields of that state began to be opened up. This caused a rapid expansion of the iron industry. About 1840 coal was first used in smelting pig iron, and the production of iron greatly increased. It more MIXING. 45 than doubled between 1828 and 1842. Smelting by charcoal still continued, however, in those states when; wood was abundant. After 1830 geological surveys were established in many states, and the mineral resources of the country were explored more systematic- ally. Between 1845 and 1850 copper mining was commenced in the Lake Superior district. The copper product of the country increased from almost nothing to more than 8,000 tons in 1860. Meanwhile gold had been discovered in California, and the gold product of the United States increased from $889,000 in 1847 to $05,000,000 in 1853. This last figure was nearly five times the annual product of the world from 1800 to 1845. Fifteen years later, silver was discovered in Nevada. By 1860 the mineral resources of the United State's were fairly beginning to be developed. Since 1860 the growth of the mining industries of the country has been constant. The output of coal has increased until it forms the most valuable Mining mineral product of the United States. In industries 1894 the statistics of the production of coal 5UlceI8t)0 were as follows : — Variety. Tons. Value at Mines. Bituminous .... 118,820,405 46,358,144 •$107,053,501 78,488,063 Pennsylvania produced practically all of the anthracite coal, and more of the bituminous than any other state. 46 ECONOMIC HISTORY OF THE UNITED STATES. Iron mining has advanced as steadily as coal mining. The output of iron ore increased from about seven mil- lion tons in 1880 to sixteen million tons in 1890. In 1895 the output was 15,957,014 tons. Michigan pro- duces more than one third of the total product, while Alabama now produces more than Pennsylvania. Cop- per mining has developed wonderfully. The Lake Superior mines have now been equaled, temporarily at least, by those of Montana. Lead and zinc have been mined steadily, Missouri retaining its importance in this industry. In the production of gold and silver the United States has held a position of great impor- tance, although within recent years the mines of Aus^ tralia and South Africa have yielded larger amounts of gold. In the production of silver this country has led all others. While it is impossible to mention all the mineral products of the country, the growth of the petroleum industry should be noted. In 1889 the prod- uct of crude petroleum was valued at nearly twenty- seven million dollars. In 1894 the total value of the crude mineral products of the United States was esti- mated to be more than five hundred million dollars. LITERATURE. 41 LITERATURE ON CHAPTER II. On the Fur Trade : TURNER, Character and Influence of the Indian Trade in Wisconsin ; Turner, The Significance of the Frontier in American History, 89-92; Weeden, Economic and Social History of New England ; Beeh, The Commercial Policy of England toward the American Colonies, 57-02 ; Eighty Years' Progress, II. 343-347; Thwaites, The Colonies, see Index. On Cattle Raising : Turner, Significance of the Frontier in American History, 92-93; Bruce, Economic History of Virginia; Weeden, Economic and Social History of New England; Smyth, Tour in the United States, I. 140-146, II. 78-79 ; Wynne, British Empire in America, II. 288; Eighty Years' Progress, I. 37-08; Tenth Census, III. 953-1116; Nimmo, Report on Range and Ranch Cattle Business; Salmon, Report on the History and Condition of the Sheep Industry in the United States. On Agriculture: Weeden, Economic and Social History of New England; Bruce, Economic History of Virginia; Ramsay, History of South Carolina, II. 199-231 ; Smyth, Tour in the United States, I. 288-299, II. 56-76, 110-140; Eighty Years' Prog- ress, I. 19-131 ; Bolles, Industrial History of the United States, 1-181; Ingle, Southern Sidelights, 47-00; Shaler, The United States, I. 375-416, II. 54-57, 525-527, 017-021 ; Whitney, The United States, Part IX. ; Tenth Census, III. p. XXVIII.-XXXII1. ; Eleventh Census, Volume on Agriculture ; Statistical Abstract of the United States,' 1895. On Fisheries: Weeden, Economic and Social History of New England ; Eighty Years' Progress, II. 378 et seq. ; Goode, The Fisheries and the Fishery Industry of the United States; Eleventh Census, Report on Fisheries. On Mining: Weeden, Economic and Social History of New England; Eighty Years' Progress, II. 17-170; Swank, History of the Manufacture of Iron ; Bolles, Industrial History of the United States, 607-780; Wright, Industrial Evolution of the United States, 80-103; Shaler, The United States, I. 417-484; Whit- ney, The United States, 259-30S ; Report upon the Production of the Precious Metals; Statistical Abstract, 1895. 48 ECONOMIC HISTORY OF THE UNITED STATES. CHAPTER III. MANUFACTURES AND TRANSPORTATION. I. Colonial Manufactures. § 30. The poverty of the American colonists and their remoteness from the English market compelled Household them to undertake the work of converting industries. raw materials into finished products. Many kinds of manufactures had their beginning within the household. Soap making, candle making, dressing and manufacturing leather, the work of the carpenter and the smith, spinning yarn, weaving homespun cloth, mak- ing clothes. and hats, and many other industries were carried on within the family. The larger farms and plantations, equipped with tool houses, forges, grist mills, and saw mills, were almost self-sustaining eco- nomic units. This lasted until the close of the eight- eenth century. § 31. Yet, even in the early days, various manufac- tures were carried on for commercial purposes, not for Production for consumption within the household. Salt the market. an( j j r0 n works were established for the purpose of supplying the domestic market. Brick mak- ing, cordage making, tanning, and other industries became important commercially. Saw mills and grist COLONIAL MANUFACTURES. 49 mills were run for public as well as domestic supply. Thus began a division of occupations, which was carried further when increasing numbers of artisans devoted themselves to the trades of the blacksmith, carpenter, wheelwright, shoemaker, cooper, sawyer, shipwright, bricklayer, etc. Such workmen performed much work that had been done formerly upon the farm. An abundant supply of timber made it possible to establish various manufactures of wood. From pipe- staves and clapboards to wagons and ships, 1 ° * Principal man- many of the colonies supplied the domestic uiacturing demand, and had a surplus for export. The manufacture of iron was firmly established between 1650 and 1750. In some places rolling mills converted the iron into sheets and bars, while slitting mills cut it into rods. Wrought-iron nails, household utensils, and many kinds of tools were produced ; and the manu- facture of arms and cannon was begun. During the Revolution the iron industry stood the country in good stead. The textile industries also became important. The first colonists, with spinning wheel and hand loom, began to spin flax, hemp, cotton, or wool into yarn, and to weave the yarn into cloth. Gradually fulling mills were built, where homespun fabrics were rolled and pressed in hot suds and fuller's earth in order to thicken the goods and increase their weight. In the eighteenth century a number of factories produced cloth for the market. The colonists probably produced three fourths of the cloth consumed by them. The finer 50 ECONOMIC HISTORY OF THE UNITED STATES. grades of cloths were always imported from England* but the majority of the people depended upon the coarser domestic fabrics. The manufacture of cordage and sail cloth was an important auxiliary of the ship- building industry. Boots and shoes were important in inter-colonial trade as early as 1700. Lynn, Massa- chusetts, was a center for this branch of manufacture. Of other industries, paper making, printing, and pub- lishing, and the manufacture of glass, pottery, and hats were the most important. § 32. This development of colonial manufactures took place not only in the face of English competition, The attitude but m s prtc of repeated attempts to destroy of England, these industries. The commercial policy of England was to limit the colonies to the production of raw materials useful to English manufacturers, and to reserve the colonial market exclusively for the sale of English manufactured products. As early as 1699 Parliament prohibited wool or manufactured woolen goods from being exported from any of the colonics. In 1731 the exportation of hats was prohibited, and the industry was placed under oppressive restrictions. In 1751 Parliament forbade the erection of new iron fur- naces, forges, rolling mills, or slitting mills, with the purpose of restricting the colonies to the production of pig and bar iron. Although these restrictions were evaded, they were an obstacle to the development of colonial industries. § 33. Manufactures were further developed in the northern colonies than in the southern, where the energy COLONIAL MANUFACTURES. 51 of the people was occupied with the cultivation of tobacco and rice. Even in the northern colonies, fisheries, ship building and commerce with the West In- ^ .. ° Other obsta- dics absorbed a large portion of the available ciestomanu- labor and capital. Finally, in all sections of the country, scarcity of labor and high wages hin- dered manufacturing enterprises. The high rate of American wages has existed since the earliest times, 1 and was a matter of record as early as 1645. It was due to the productiveness of labor employed upon new land. Laborers would not enter other industries un- less employers oould afford to pay as high wages as could be secured in agriculture. An industry could be established only when the superior efficiency of labor, or some other advantage, enabled the employer to pay the prevailing high wages. § 34. Although the United States imported from England a large part of its manufactured supplies, yet Alexander Hamilton, in 1791, could give „ M , o Hamilton's the following account of American man- Report on ufacturcs : 2 "To all the arguments which are brought to evince the impracticability of success in manufacturing establishments in the United States, it might have been a sufficient answer to have referred to the experience of what has been already done. It is certain that several important branches have grown up and flourished with a rapidity which surprises, af- 1 See page 28. 2 See " Report on Manufactures," in Taussig, State Papers and Speeches on the Tariff, 48, 49. 52 ECONOMIC HISTORY OF THE UNITED STATES. fording an encouraging assurance of success in further attempts. Of these it may not be improper to enumer- ate the most considerable." These were in substance as follows : — 1. Leather, shoes, harness, trunks, gloves, glue, etc. 2. Irou bars and sheets, steel, nail rods and nails, imple- ments of husbandry, artificers' tools, household utensils, arms, etc. 3. Ships, cabinet and coopers' wares, wool and cotton cards, machinery for manufactures and agriculture. 4. Manufactures of flax and hemp, cables, cordage, sail- cloth, twine, etc. 5. Bricks, coarse tiles, and potters' wares. 6. Ardent spirits and malt liquors. 7. Writing and printing paper, wrapping paper and paste- board, paper hangings. 8. Hats of fur and wool. 9. Refined sugars. 10. Oils, soap, tallow candles. 11. Copper and brass wares. 12. Tin wares. 13. Carriages of all kinds. 14. Snuff, chewing and smoking tobacco. 15. Starch and hair powder. 1G. Lampblack and painters' colors. 17. Gunpowder. " Besides manufactories of these articles, which are carried on as regular trades, and have attained to a con- siderable degree of maturity, there is a vast scene of household manufacturing, which contributes more largely to the supply of the community than could be imagined without having made it an object of particular inquiry.'' THE INDUSTRIAL REVOLUTION. 53 II. The Industrial Revolution and the Factory System. § 35. While the American colonics were struggling for independence, there began in England a series of economic changes which ultimately trans- The Industrial formed completely English industry and Revolution commerce. These changes constituted the n s land - Industrial Revolution. Between 1790 and 1850 the United States was affected by the same influences. For this reason, we must now consider briefly the course of the Industrial Revolution* in England. The economic condition of England in 1760 was prim- itive when compared with the present order of things. Manufactures were carried on mainly by J J English hand, and water or horse power was seldom manufacture? utilized. The woolen industry was the prin- cipal branch of manufacture, the iron trade coming next in importance, while manufactures of silk, linen, and cot- ton were much smaller. The textile industries were carried on often in country districts in combination with agriculture. The men of a household attended to the farm, while the women and children spun yarn for sale. Weaving usually occupied the men during the winter. In all industries the tools and machinery were sim- ple, so that a person needed but little capital in order to become an independent producer and the employer of a few journeymen and apprentices. After 1740 the iron trade began to decline, because it was no longer possible to secure supplies of wood sufficient to furnish charcoal for smelting iron ores. 54 ECONOMIC HISTORY OF THE UNITED STATES. In 1TG0 the entire foreign commerce of England amounted to about 8120,000,000, a very small figure when compared with the development of the Commerce and transportation next fifty years. Domestic commerce was restricted by the difficulty of inland trans- portation. Roads were very bad, while the construction of canals had only commenced. London was the only national market, where products of all sections were ex- changed ; and the rest of the domestic commerce was carried on through a few local markets, through annual fairs, or through traveling merchants. Labor and capital were hampered by many restrictions. In most towns industries were under the control of ex- Legai position elusive guilds, which supervised prices, qual- ° f nar* 1 " 1 ^ °^ g°°ds, an ^ many details of busiiicss. 1760. In such towns no one could engage in any trade without becoming a member of the guild, and serv- ing an apprenticeship of seven years. Laborers could not move from one parish to another, unless they could give guarantees that they would not become dependent upon the poor rates of the parish in which they settled. They were forbidden to form associations for any purpose, while justices of the peace were empowered to regulate wages. Joint-stock corporations hardly existed in any industries except banking, insurance, and foreign trade. Adam Smith, in 1776, could appeal to experience to prove that such companies, whose hired managers con- trolled other people's money, would generally be man- aged wastefully and negligently; so that they could not compete with the common business partnership. THE INDUSTRIAL REVOLUTION. 55 Between 17G0 and 1840 English industries were revo- lutionized. The cause of this was a remarkable series of inventions which affected the cotton and Changes in woolen industries first. The production of the textile cotton and woolen goods had long been hin- dered by the difficulty of supplying weavers with enough yarn. The rude hand loom could weave cloth faster than the spinners could produce yarn, a single thread at a time, upon the spinning wheel. Between 17G4 and 1780 three inventors, Hargreaves, Arkwright, and Crompton, perfected appliances which finally enabled a spinner to spin many thousand threads of yarn at once. These inventions enabled spinners to produce more yarn than the clumsy hand looms could weave into cloth. But, in 1785, Cartwright invented a power loom which, after undergoing improvements for many years, placed appliances for weaving on an equality with the machinery for spinning. Meanwhile, James Watt had invented the steam engine in 1769. Sixteen years later it began slowly to displace water power in running the new spin- ning machinery. These inventions first revolutionized the manufacture of cotton, but during the first quarter of the present century all textile industries were affected by them. The steam engine was first used in coal mines, in sink- ing shafts, in pumping water out of the mines, and in hoisting coal from the pit. In this wav ° . . Changes in sufficient supplies of coal could be obtained the iron to run the smelting furnaces, and the iron industry was stimulated into new life. By the use of t lie 56 ECONOMIC HISTORY OF THE UNITED STATES. steam engine the blast furnace was great!} 7 improved, so that the production of iron increased rapidly. From 1755 to 1800 many canals were constructed between important places, with the result of cheapening changes in transportation. Early in the present ccn- transportation. turv the highways of England were greatly improved. During the second quarter of the century railroad construction was commenced, and the steam engine revolutionized land transportation. By 1850 it had been applied successfully to ocean transportation. One result of the Industrial Revolution was the growth of the factory system. The new machinery was far more expensive than the old hand loom or spin- tne factory ning wheel. Consequently the ownership of capital tended to pass out of the hands of the laborers, who became dependent upon capitalist employers for the supplies of tools and materials with which they worked. Then it appeared that, in order to apply water or steam power advantageously in operating the new machinery, it was necessary to concentrate a number of machines in the same building. Moreover, as the product of an establishment increased, the processes of manufacture could be divided more profitably among different classes of laborers. This fact necessitated more thorough superintendence and organization. Such causes led to the gradual concentration of industry in large factories, and to the disappearance of the small establishments of the domestic producers. In a period of such rapid growth and change, the old restrictions on the establishment of industries and the THE INDUSTRIAL REVOLUTION. 57 regulation of prices and wages could not be maintained. More and more these laws and customs fell changed . ,. , . ,. , , . . condltionsof into disuse, and capitalists and laborers were labor and left free to establish new enterprises, and to capital - arrange their respective interests by a contract which was nominally free. Competition became the ruling economic force, and regulation by law was given up for the time. One of the most important results of the In- dustrial Revolution was the destruction of mediaeval restrictions upon competition, and the abandonment of prices and wages to determination by the contracts of the competing parties. § 36. In 1789 agriculture and commerce were the principal industries of the United States, although do- mestic manufactures had been established. The industrial There appeared here and there a desire to ^ e ^g U ^? d promote the rapid growth of manufactures, states. in order that the country need not depend upon England for manufactured goods. Largely from a desire for what was termed " industrial independence," attempts were made to foster manufactures. In this effort a great obstacle was encountered. England possessed the in- ventions that were revolutionizing industry, while with- out such appliances it would have been hopeless for Americans to attempt to compete with the manufac- turers of the mother country. But England intended to retain the United States as a market for her manu- factured products, and did not intend to allow the new inventions to be used outside of her own borders. Strin- gent laws prohibited the exportation of machines, plans, 58 ECONOMIC HISTORY OF THE UNITED STATES. or models of machinery ; and the emigration of skilled workmen was forbidden. After unsuccessful attempts to secure a knowledge of English machinery and meth- ods, a cotton mill was finally equipped in 1790, at Pawtucket, R. I. A few years later the cotton gin was invented. Yet the cotton industry grew very slowly until after 1807, when foreign commerce was forbidden by the embargo, and domestic manufactures rapidly developed. Slater's cotton mill at Pawtucket marked the estab- lishment of the factory system in the United States. . , , Yet weaving was still performed by hand, The completed ° l J factory sys- and weaving and spinning were not united in a single factory. In 1814 Mr. Francis Lowell constructed a power loom at Waltham, Mass., and completed a factory equipped with machinery for spinning and weaving cotton. This marked the com- pletion of the factory system. Before long other indus- tries were developed in a similar manner, and American manufactures commenced a period of steady growth. III. Transportation. § 37. The first roads in the colonies had to be cut through the dense forests that covered the Atlantic Roads. coast regions. Indian trails offered more or less beaten ways that were often widened and straightened into highways. Continuous roads finally connected the principal towns of the tidewater districts, but wagon roads did not exist far from the scacoast until after 1750. Bridges were constructed very slowly, and most rivers had to be forded. The larger streams TRANSPORTATION. 59 wore crossed by ferries, which gave very poor, and often dangerous, service. The colonial roads were 'in the charge of the local political units, the towns and counties. They were constructed only as local needs demanded, without reference to any general plan for colonial highways. The " road tax " levied by the towns or counties was paid in labor, not in money; and the work of road building was very badly done. Both this custom of " working out the road tax," and the bad roads produced by it, remain in many country districts to ibis day. About 1790 turnpike roads, or highways constructed and maintained by tolls, began to be built. Early in the present century the turnpike systems were rapidly extended. These roads were built by corpora- tions which were given rights of way, and allowed to charge tolls. They were advantageous in a time when the local governments could not be induced to build ade- quate highways, but grave abuses soon appeared. The tolls were often excessive and the roads were poor. In more recent times the tendency has been to bring all roads under public control, and to provide for highways by general taxation. Still more recently some of the si ale governments have begun to aid in the very neces- sary work of improving our roads, which are the worst to be found in any civilized country. Early in this century, after settlements had been planted west of the Allcghanics, it became 1 B ' Road building very necessary to have some means of com- by the united munication between the seaboard and the Mississippi Valley. There arose a strong movement in 60 ECONOMIC HISTORY OF THE UNITED STATES. favor of the construction of long-distance highways, canals, and other improvements by the national govern- ment. Between 1806 and 1837 the United States built a highway known as the Cumberland Road, which ex- tended from Washington to Cumberland, and thence by way of Wheeling, through Ohio, Indiana, and Illinois, to the Mississippi River near St. Louis. By 1840, a grow- ing opposition to internal improvements by the national government put an end to such expenditures by the United States. § 38. The original colonies were favored with easy means of intercolonial communication by sea, while a Transporta- number of navigable rivers gave access to tionbywater. the interior regions of the seaboard. Lines of packet sloops were established along the seacoast and on the Delaware and Hudson rivers. After 1807 steamboats were placed upon many of these routes. A few years later they appeared upon the Great Lakes. On the rivers of the Mississippi Valley, steam navigation was exceedingly important, From 1815 to 1860, steam- ships multiplied on all these waters. They furnished an easy means of access to all parts of this region, and greatly hastened the development of the Valley. After 1860 the railroads began to secure a large part of this carrying trade. On the Great Lakes the steamboat has held its own, and to-day the lake fleet comprises more than one fourth of our entire merchant marine. Washington, when a young man, perceived the possi- bility and desirability of constructing canals connecting the Hudson River and the (neat Lakes, and connecting TRA NSP OR TA TTON. 61 Chesapeake Bay with the Ohio River. Between 1790 and 1800 many canals were projected, and a few were built. The era of canal construction really commenced after 1820. The Erie Canal was opened from the Hudson River to Lake Erie in 1825, and soon cheapened transportation from the Ohio Valley to the seaboard so that rates fell to one tenth of the former cost. Branches were built, and towns and cities sprang up wherever the canal met a branch or a natural watercourse. Before long other canals were built between the Ohio River and Lake Erie, between the Hudson and Lake Champlain, and between the coal regions of northeastern Pennsylvania and the seacoast. Many states entered upon the construction of elaborate canal systems. Pennsylvania, Virginia, Indiana, and Illinois were among the number. Generally these canals proved unsuccessful, and were either abandoned or fell into the hands of railroads. Indeed, railroads made their appearance very soon after the canals were opened. In many cases the canals could not compete with the railroads; but other canals, notably the Erie, proved to be successful competitors, and have tended permanently to lower transportation charges. § 39. By 1830 the era of railway transportation was opened by the completion of the first few miles of the Baltimore and Ohio Railroad. Shortly after, ^^^^ railroads were built from Boston to Albany, transportation, from Richmond to Chesterfield, from Albany to Sara- toga, and from Charleston to Hamburg. By 1840 there were 2,755 miles of railways in the United States. 62 ECONOMIC HISTORY OF THE UNITED STATES. Practically all were in the Atlantic States, and they were short, independent lines, radiating from Boston, Albany, New York, Philadelphia, Baltimore, Richmond, and Charleston. They were local roads, yet they fur- nished an almost continuous line of transportation from New York to North Carolina. 1 Between 1840 and 1850, railroads were extended very rapidly in New England, where 2,600 miles of track were in operation the latter year. A road Second decade l J ofrauroad was completed from Boston to Albany, so that New England was placed in direct com- munication with the West, via the Erie Canal. By 1850, railroads had been pushed well into the western portions of New York, Pennsylvania, and Maryland. Georgia had started a railway system, while roads were being constructed in the Mississippi Valley. As yet no lines of railway connected the seaboard with the West, while the roads still remained local companies serving- local needs. From 1850 to 1860 the railway mileage of the United States increased from 8,571 to 28,919 miles. The Mid- The turd die Atlantic States rapidly pushed their rail- decade, ways westward. In the Southern States remarkable progress was made. But in the Mississippi Valley railroad expansion was most noteworthy. Chi- cago and St. Louis were finally connected with ihc Atlantic coast, while the states north of the Ohio and east of the Mississippi were covered Avith a network of 1 See Scribner's Statistical AJtlaa for maps showing railroad construc- tion by decades. TRANS P OR TA TION. 63 railways. Twenty-seven million acres of public lands had been granted by Congress to aid the construction of railroads in the West and South. The people looked upon the roads in a friendly manner ; and states, coun- ties, and towns granted large sums of money to further their construction. The Civil War checked railroad building only tem- porarily. After 1866 it was continued on a larger scale than ever. For political reasons the United The fourth States favored the construction of railroads decade - to connect the Pacific coast with the rest of the Union, and granted millions of dollars and millions of acres of land to aid the Union and Central Pacific roads. Then in the Southwest and Northwest land grants and sub- sidies to railways were renewed. In 1873 the country had 68,48-4 miles of railroads. Since that time many thousand miles of road have been built in the states west of the Mississippi, 1 r Railroad con- and other lines have been pushed through to struction from the Pacific coast. In 1896 there were over 180,000 miles of railroads in the country. During the last twenty-five years, railways have often been con- structed as speculative enterprises far in advance of the needs of the country. Sometimes the construction of such a road leads to the rapid development of the region through which it runs, and so creates a paying business. But such enterprises often lead to the building of un- necessary lines that can have no immediate prospect of becoming paying investments. The character of American railways has changed 64 ECONOMIC HISTORY OF THE UNITED STATES greatly since 1850. The early roads were short, local Railroad con- affairs. Between 1850 and 18G0 local roads soiidation. began to be consolidated into through lines. Thus the numerous local roads that together covered the distance from Albany to Buffalo were consolidated by Vanderbilt into the New York Central Railroad. About the same time the Pennsylvania Railroad secured a through line from Philadelphia to Pittsburg, and the Baltimore and Ohio pushed its way westward. Then followed efforts to secure control of .roads that should give access to Chicago and other points in the Missis- sippi Valley. At length, five trunk lines were formed, controlling through routes from the West to the sea- board. In all directions a similar process went on. The reason for such consolidation was that the union of several short lines under one management diminished the expenses of operation. The establishment of trunk lines introduced a new era of railroad rate-making. The old local roads had enjoyed a practical monopoly in their several districts. Competition existed only at a few points where com- peting roads met. But the trunk lines could compete with each other for the through freight between the West and the East, and the sharpest rivalry sprung up. The economies of operation made possible by consolida- tion enabled the trunk lines to reduce their charges, while competition for through traffic obliged them to do so. Competition finally became so fierce as to lead to " railroad wars," in which rates were often lowered be- low the cost of transportation. Such " cut-throat com- SHIP BUILDING. 65 petition " was followed by pooling agreements bet ween the different roads, by which rates were maintained at a higher level, and the profits thus secured were divided between the roads composing the pool. In 1887 Congress prohibited the formation of pools, and endeavored by an Inter-State Commerce Act to remedy certain abuses. But the roads have frequently succeeded in maintaining rates by traffic agreements of a more or less secret char- acter. The consolidation of railroads did not end with the establishment of through lines east of Chicago. West of that city the work of consolidation has ex- tended to the Missouri River, and from the Missouri to the Pacific. Between St. Louis and the Southwest the same process has gone on. In 1890 it was estimated that one eighth of the railway mileage of the country was under a single management, while over one half of the railroads had fallen under the control of twenty other managements. The prospect is that a few great trans-continental lines will finally control all the trans- portation business of the country, except that which is of a purely local character. IV. Ship Building. § 40. The forests of the New World supplied abun- dant materials for ship building, which was begun in the first years of the colonial history. Massachu- Co]on iai ship setts had built one hundred and twenty ves- b* 11 ^?- sels as early as 1655. By 1700, many ships were built each year in New York, Pennsylvania, and Delaware. In the southern colonies less was accomplished until the 5 GO ECONOMIC HISTORY OF THE UNITED STATES. middle of the eighteenth century, when ship building developed rapidly in all of the colonies. In the year 1769 over three hundred and eighty vessels, with a total burden of 20,000 tons, were constructed in America. Between 1780 and 1800, wooden vessels were built upon some of the Great Lakes. Ship building was the first mechanical industry to be largely developed in the colo- nies, and it made possible the growth of a large and profitable commerce. § 41. In 1789 the tonnage of the ships registered in the foreign trade was 123,893 tons. For the next twenty-five years Europe was in a state American . shipping from of continual war, and American ships se- cured a large part of the carrying trade of Europe. By 1806, the ships registered in foreign trade had a tonnage of 795,507 tons. In the same year the ships in the coasting trade had a tonnage of 340,540 tons, while the sea fisheries employed ships with a ton- nage of over 69,000 tons. The United States, in 1790 and 1792, levied discriminating taxes upon foreign ships, with the possible result of throwing more of our com- merce into the hands of American ship owners. After 1816 the restoration of peace in Europe caused us to lose a part of the carrying trade of European countries. In 1840 our foreign trade employed no larger tonnage than in 1806, but our coasting trade employed ships with a tonnage of 1,176,000 tons. Between 1817 and 1820 our navigation laws were extended, and made especially severe against foreign ships. The reason for such illib- eral measures was the resentment aroused by the harsh SHIP BUILDING. 67 policy pursued by England until 1830. The laws en- acted by Congress at that date are mainly unchanged at the present day. They aim to prevent Americans from purchasing foreign ships and entering them under Amer- ican registry. They exclude foreign vessels from our coasting trade, and impose discriminating charges upon foreign ships. Many of these regulations prove hin- drances to American interests, while they have not bene- fited American ship builders materially. § 42. From 1840 to 1861 the tonnage of the vessels registered in the foreign trade increased from 762,838 to 2,496,894 tons, while the tonnage of the ' . ' & Ship building coasting fleet increased to 2,704,544 tons, from i84o to During this period seventy per cent of our foreign commerce was carried in American vessels, while our ships did a large part of the carrying trade of the world. In producing wooden sailing vessels American ship builders were unequaled, and their magnificent clip- per ships were superior to all others. This was ac- complished, moreover, when wages and the cost of all materials except wood were much higher than in other countries. But, after 1850, steamships began to replace sailing vessels in ocean commerce. In the construction of steamships the United States was soon outstripped by Great Britain. The Civil War struck a terrible blow to American shipping interests, and our merchant marine rapidly diminished. § 43. Since the war our foreign marine has also con- stantly declined, although the ships engaged in the coast- ing trade have increased. On the Great Lakes there has 68 ECONOMIC HISTORY OF THE UNITED STATES. been wonderful progress. The total merchant marine of the United States diminished from 5,539,813 tons in 1861 to 4,684,029 tons in 1894. At the same time, the proportion of our foreign trade carried in American ships decreased from 75 per cent in 1855 to 13.3 per cent in causes for the 1894. The causes of this decline are par- decttne of our tiall in dispute. But it certainly began a few merchant ma- J c j o rine. years before the Civil War, so that the rav- ages of Confederate privateers only hastened a process that had already commenced. One primary cause is the fact that iron and steel ships have so largely replaced wooden vessels. As early as 1855 it was determined that iron ships, although more expensive to construct, were in the end more durable and consequently cheaper than wooden ships. It also appeared that iron vessels better withstand the strain of heavy steam machinery. More recently, steel has replaced iron for ship construc- tion. Now, American builders had a great advantage in the cheapness of their wood supply, as well as in their skill in constructing wooden vessels. Iron ships, how- ever, could be built more cheaply in England ; and there- fore the ocean-carrying trade passed to ships of English construction. More than this, American builders were handicapped by the fact that they were very slow in turn- ing from sailing vessels to the construction of steam- ships. So long as steel vessels retain their present superiority, American ship builders will not regain their former position until they are able to construct steel vessels as cheaply as the builders of foreign nations. In recent years the outlook has improved. The creation TEXTILE INDUSTRIES. 69 of our new navy has stimulated the construction of steel vessels, while the cost of building them has greatly de- creased. The expense for labor is the principal item of cost that is larger here than in England, but this dis- parity seems to be diminishing. Unquestionably, the steel ships now constructed in this country are unex- celled in any particular by ships manufactured in any country of the world. V. The Textile Industries. § 44. Spinning machinery was introduced into the cotton industry in 1790, but nearly twenty years passed before as much was accomplished in the 1 The cotton woolen industry. The period of commercial and woolen restriction following the embargo in 1807 practically shut off foreign supplies. This caused a rapid development of woolen and cotton manufactures. Many of the mills built at this time, however, were badly constructed and equipped, so that they turned out a very coarse product. Between 1815 and 1825 the power loom was introduced into this country. Large factory towns grew up in such places as Lowell, Lawrence, Fall River, Cohoes, and Patterson. § 45. Since 1820 the growth of cotton manufactures has been continuous. The industry has been concen- trated largely in New England from the be- t -i^r^r. The cotton ginning. In 1890 seventy-six per cent of the industry cotton spindles were located in that section, after I820 ' Massachusetts having the largest number. Since 1870 there has been a marked development of cotton manu- 70 ECONOMIC HISTORY OF THE UNITED STATES. facture in the South. The capital so invested increased from $17,375,000 in 1880 to $53,827,000 in 1890. Since these factories can obtain raw cotton without incurring any considerable expense for cost of transportation, it seems probable that the future development of this industry in the South will be rapid. The following table shows the rapid growth of cotton manufactures in the United States : — 1840. 1880. 1890. Value of product Pounds of raw cotton ) consumed ) Number of spindles in ) factories ) Capital invested $46,350,000 126,000,000 2,284,000 $51,102,000 $192,090,000 750,343,000 10,653,000 $208,280,000 $267,981,000 1,117,945,000 14,188,000 $354,020,000 The cotton manufacture in the United States has been conducted hitherto mainly for supplying the domestic market. In the Tenth Census, Mr. Atkinson summed up the situation as follows : " The principal Present con- , , ,, r . . . ~ , dition of market for our own fabrics is found among the cotton t he thrifty working people, who constitute the great mass of our population. It has therefore happened that, although we have not until re- cently undertaken the manufacture of very fine fabrics, the average quality of the fabrics that we do make is better than that of any other nation, with the possible exception of France. It is for tlto wants of the million TEXTILE INDUSTRIES. 71 that our cotton factories are mainly worked, and we have ceased to import staple goods, and shall never be likely to resume their import. On the other hand, we may for a long period continue to import the finer goods that depend mainly on fashion and style for their use, and that are purely articles of luxury." Yet in 1895 we exported over $13,789,000 of cotton manufactures, while imports of this sort amounted to $33,196,625. In the future it is probable that the United States, hav- ing the advantage of immediate proximity to the great source of the world's supply of raw cotton, will surpass other countries not similarly situated. § 46. The manufacture of woolen fabrics did not de- velop as rapidly as the manufacture of cotton. One reason for this was that the domestic supply The w00 ien of wool has never been sufficient, while of industr y- cotton this country has possessed a cheap and abundant supply. Moreover, tariff duties often imposed on imported wool have for much of the time increased the cost of raw materials to the manufacturer. The woolen manufactures that sprung up during the War of 1812 suffered considerable reverses after 1815, but by 1828 the industry seemed to have surmounted what- ever initial difficulties there may have been in the way of its development. The statistical table on page 72 shows the growth of woolen manufactures in the United States since 1810. It is interesting to study the location of the woolen industry in the United States. At the opening of the present century it was, like all domestic industries, 72 ECONOMIC HISTORY OF THE UNITED STATES. Articles. 1840. 1860. 1880. 1890. Woolen Goods : 1. Capital 2. Product Worsted Goods : 1. Capital 2. Product Carpets : 1. Capital 2. Product Felt Goods : 1. Capital 2. Product Wool Hats : 1. Capital 2. Product Hosiery and Knit Goods : 1. Capital 2. Product §15,765,000 20,696,000 $30,862,000 61,894,000 3,230,000 3,701,000 4,721,000 7,857,000 4,035,000 7,280,000 $96,095,000 160,606,000 20,374,000 33,549,000 21,468,000 31,792,000 1,958,000 3,619,000 3,615,000 8,516,000 15,579,000 29,167,000 $130,989,000 133,577,000 68,085,000 79,194,000 38,208,000 47,770,000 4,460,000 4,654,000 4,142,000 5,329,000 50,607,000 67,241,000 Total : 1. Capital 2. Product 15,765,000 20,696,000 42,849,000 80,734,000 159,091,000 267,252,000 296,494,000 337,768,000 widely diffused throughout the country. With the rise of the factory system, it hecame more concentrated either near the sources of the domestic wool supply, or by available water powers. Gradually, however, the manufacture has become concentrated near the markets where both foreign and domestic wools are more easily gathered, and in the vicinity of labor markets where skilled textile operatives are to be found. Eight cities, Philadelphia, Lawrence, Providence, and Lowell being the most important, now turn out nearly thirty-six per TEXTILE IND US Til I ES. 73 cent of the woolen product of the country. New Eng- land, New York, New Jersey, and Pennsylvania possess more than eighty-five per cent of the woolen machinery. Of these, Pennsylvania leads, Massachusetts holding second place. At the present time the woolen goods produced in the United States are sufficient to supply eighty-nine per cent of the domestic demand. In 1895 imports of woolen goods amounted to $38,539,000, while the exports were less than one million dollars. § 47. A complete account of the textile industries of the United States should include some mention of the silk manufacture and of establishments de- combined tex- voted to dyeing and finishing textile prod- tne industries, nets. The product of silk fabrics has increased from $1,809,000 in 1850 to $87,298,000 in 1890 ; while the product of the dyeing and finishing industries in 1890 was $28,900,000. The imports of silk manufactures in 1895 amounted to $31,206,000, and the exports of such goods were insignificant. The following table shows how the textile industries of the United States are concen- trated in the same states : — Locality. United States Massachusetts Pennsylvania New York Hlioile Island New Jersey Connecticut New Hampshire Maine Woolen Product, 1890. $337,708,524 7 , _>.C>S1,40S 89,337,419 53,340,151 84,722,493 9,984,640 20,843,965 14,445,172 8,814,256 Cotton, 1S90. $267,981,724 100,202,882 18,431,773 9,777,295 27,310,499 5,902,615 15,409,476 21,958,002 15,316,909 Silk, 1890. $87,298,454 5,557,5(19 19,357,546 19,417,790 2,229,062 30,760,371 9,788,951 Dyeing and Finishing, 1890. $28,900,560 6,496,215 5,240,761 3,636,051 4,743,561 6,183,397 15,388 Not separately reported. Not separately reported. Total Textiles. $721,949,262 184,938,074 132,367,499 86,171,293 67,005,615 52,831,023 46,757,780 37,256,364 24,911,166 74 ECONOMIC HISTORY OF THE EXITED STATES. VI. Iron and Steel Industries. § 48. The Industrial Revolution began an era of machine production, and caused a new demand for iron as the material needed for machine The iron in- dustry from construction. Therefore iron occupies a 1789 to I860. ... , r • i- i. ii position oi peculiar importance at the pres- ent day. The development of other industries neces- sarily increases the demand for iron, while a depression in business causes the demand to slacken. Many years passed before the revolution in English methods of pro- ducing iron affected the industry in the United States. Until nearly 1840 iron continued to be smelted by char- coal, with methods that differed little from those of colonial times. Pennsylvania already produced one half of the iron smelted in this country, and Pittsburg was becoming the center of the iron industry in western Pennsylvania. About 1840 anthracite coal was used in smelting, and the blast furnaces began to be improved. The industry was then placed on a modern basis, and the product increased from 200,000 tons of pig iron in 1830 to over 000,000 tons in 1860. In 1850 coke began to be used in smelting, and some years later uncoked bituminous coal was employed. Gradually the produc- tion of pig iron was concentrated in the vicinity of the coal supplies, since it was cheaper to carry iron to the coal regions than to carry coal to the iron mines. Thus most of the iron produced in Michigan has been smelted in other states where coal is more abundant. By 185G the iron and coal resources of the United States had been developed so far thai Mr. Abram S. Hewitt could IRON AND STEEL. 75 write, " In point of fact the materials for making a ton of iron can be laid down in the United States at the furnace with less expenditure of human labor than in any part of the known world, with the possible excep- tion of Scotland." Ten years later the English econo- mist Jevons wrote, " It is impossible there should be two opinions as to the future seat of the iron trade. The abundance and purity of both fuel and ore in the United States, with the commercial enterprise of Ameri- can manufacturers, put the question beyond doubt." § 49. Yet the iron resources of the country had hardly begun to be developed in 1860. The increase in the product of pig iron during the thirty years from 1860 to 1890 is shown herewith : — Year. Product in Tons. Value. 1860 1870 1880 1890 987,559 2,052,821 3,781,021 9,906,607 $20,870,000 69,640,000 89,315,000 145,643,000 Of this product Pennsylvania has produced nearly one half, — Ohio, Illinois, and Alabama coming next in importance. In 1860 the steel product of . 1 r Iron and steel the United States was very small, amount- industries ing to only 11,838 tons, valued at $1,778,240. "^ I86 °' In 1867 steel was made by the newly introduced Besse- mer and open-hearth processes, and the industry has ever since shown a constantly increasing product. In 1890 the rolling mills and steel works turned out 5,049,000 tons of steel. The Census of 1880 showed 76 ECONOMIC HISTORY OF THE UNITED STATES. the United States to be " the second iron-making and steel-making country in the world." Since that time it has surpassed England in this respect. § 50. Many kinds of manufactures of iron and steel have been established in this country for a long time. „ M The manufacture of wrought-iron nails, of Manufactures ° of iron the simpler kinds of tools and cutlery, and of firearms are some of the older branches of this industry. Yet up to 1860 the American market was largely supplied by foreign producers of iron and steel manufactures. The exports of such commodi- ties never exceeded $1,000,000 until after 1840, and amounted to only $10,000,000 in 1865. During the last fifty years, however, remarkable progress has been made in the American manufacture of iron and steel. Wire and cut nails, iron and steel pipes, cutlery, tools and machinery of all kinds, stationary and locomotive engines, arms and armor plate, steel rails, and many other products of iron and steel are now turned out in quantity sufficient to supply the greater part of the do- mestic demand and to leave a surplus for export. In 1895 the iron and steel products exported from the United States amounted to $82,000,000, while the im- ports of such commodities were slightly more than $23,000,000. One important feature of this kind of American manufacture has been the early and exten- sive use of interchangeable mechanism. Firearms, sewing machines, locomotive engines, watches, clocks, agricultural implements, and many other products have been constructed with interchangeable parts ; and in this field American manufacturers have won celebrity. LITERATURE. 77 LITERATURE ON CHAPTER III. On Colonial Manufactures : Weeden, Economic and Social History of New England ; Bruce, Economic History of Virginia ; Eighty Years' Progress, II. ; Beer, Commercial Policy of Eng- land toward the American Colonies ; Taussig, State Papers and Speeches on the Tariff, 1-107 ; Swank, History of the Manufac- ture of Iron ; Bishop, History of American Manufactures ; Wright, Industrial Evolution of the United States, 23-103. On the "Industrial Revolution": Toynbee, The Industrial Revolution ; Gibbins, The Industrial History of England, 143-22-4 ; Cunningham, Outlines of English Industrial History; Cunning- ham, Growth of English Industry and Commerce, II. ; Rogers, Six Centuries of Work and Wages ; Hobson, Evolution of Modern Capitalism, 10-116; Ely, Outlines of Economics, 26-62; Wright, Industrial Evolution of the United States; Wright, The Factory System of the United States, Tenth Census, II. 529-610 ; Taylor, History of the Factory System ; Rand, Selections Illustrating Economic History since 1763 ; Taussig, Tariff History of the United States, 1-67. On Transportation : Eighty Years' Progress, II. ; Weeden, Economic and Social History of New England ; Bolles, Indus- trial History of the United States, 603-664; McMaster, History of the People of the United States ; Jenks, Road Legislation for the American State ; Shaler, American Highways ; Johnson's Universal Cyclopaedia, " Transportation ; " Tenth Census, IV. ; Eleventh Census, Report on Transportation Business; Scribner's Statistical Atlas ; Shaler, The United States, II. 65-190 ; Had- ley, Railroad Transportation; Poor's Railroad Manual, 1881. On Ship Building : Wright, The Industrial Evolution of the United States, 29-42 ; Bolles, Industrial History of the United States, 569-602; Tenth Census, VIII.; Wells,' Our Merchant Marine ; Bates, The American Marine ; Shaler, The United States, I. 518-624. On the Textile Industries: Eighty Years' Progress, IT.; Wright, Industrial Evolution of the United States, 132-188; Taussig, Tariff History of the United States ; Bishop, History 78 ECONOMIC HISTORY OF THE UNITED STATES. of American Manufactures ; Bolles, Industrial History of the United States, 369-443 ; Tenth Census, II. ; Eleventh Census, Reports on Textile Industries. On the Iron and Steel Industries : Swank, History of the Manufacture of Iron ; Bishop, History of American Manufactures ; Eighty Years' Progress, II. ; Bolles, Industrial History of the United States, 185-315; Wright, Industrial Evolution of the United States ; Taussig, Tariff History of the United States ; Tenth Census, II. 729-935 ; Eleventh Census, Report on Manufac- turing Industries, III. HUMAN WANTS. 79 CHAPTER IV. THE CONSUMPTION OF WEALTH. I. Human Wants. § 51. The preceding chapters have explained briefly the history of the leading industries by which the people of America have endeavored, for Deflation nearly three centuries, to supply their wants of economics - for food, shelter, clothing, and all those commodities that are needed to support life, and to make civilized existence possible. The science of economics treats of precisely these efforts of mankind to secure certain material objects, or certain services of other people. It deals, in short, with those activities of man which are directed toward securing a living. The reason why men carry on these activities is that they have certain needs or wants which can be appeased only by appro- priate human action. Therefore, human needs may well be made the starting point of economic studies ; and our first work will be to examine into the character of the wants that impel men to constant efforts to secure a living for themselves and their families. § 52. Man has a material body which demands cer- tain objects necessary for its preservation and develop- 80 PRIXCiPLES OF EC 0X021 1 OS. ment. From this source arise certain bodily wants, some of which man shares in common with other animals. The origin of hu- needs for food, drink, clothing, and shelter man wants. f or one " s se if an( \ one's family are the prin- cipal bodily wants of this character. Beyond this point the wants of the lower animals hardly extend ; but man, endowed with superior faculties and a higher spiritual nature, has developed a multitude of higher needs. Some of these are of a spiritual character, as the desire for companionship, for intellectual or religious develop- ment, and the like. But others are of a material nature. As men become more intelligent and refined, they grow dissatisfied with the ruder and coarser forms of food, clothing, and shelter. They demand more varied and palatable food, finer clothing, more beautiful houses. Their aesthetic faculties transform the demands of their animal natures, and infuse a spiritual element into what were formerly simple material desires for food, clothes, and shelter. A dining table artistically arranged, a beautiful dress, or a finely designed house will serve as examples of material goods that satisfy animal wants which have been partially transformed by the de- mands of man's aesthetic faculties. Moreover, it must be noticed that many spiritual wants can be satisfied only through the medium of material objects. Thus a printed book is often the only means by which knowl- edge can be communicated from one mind to another. Finally, many of man's higher needs have a distinctly social character. One of the strongest human wants is the desire for the society of one's fellows. Out of HUM AX WANTS. 81 this desire of men to live together in an organized society, there arise many social wants of an economic character which are oftentimes satisfied by collective or social action. Roads, bridges, sewers, schools, asy- lums, parks, postal facilities, and many other economic goods are the result of social action, and minister to social or public needs. § 53. In the development of human wants a certain order can be observed. In the lowest stages of barba- rism, men are found to be almost devoid of Development any but the animal needs and desires. They of wants - can advance in civilization only as fast as their higher faculties can be developed, and higher wants aroused within them. The principal difficulty in efforts to civi- lize a savage race is to make such people desire any- thing more than the purely animal satisfactions with which they have always been contented. As men ad- vance in the scale of civilization, their wants rapidly increase in number and variety- We have seen that this is due to the development of higher spiritual facul- ties. These both arouse within men higher desires, and also make it possible to devise means for their gratifica- tion. These higher desires, and the power to satisfy them, are alike peculiar to man. The food of the horse or dog, and the abodes of the birds or the beaver, have in all known times remained the same, except as they have been modified by human action. The progress of the human race from barbarism to civilization has been marked first and fundamentally by an increase and a diversification of wants. This has been due to the influ- 6 82 PRINCIPLES OF ECONOMICS. ence of man's spiritual faculties in transforming purely animal wants, and in developing multitudes of higher desires. § 54. Economics is not directly concerned with all the possible wants of man's nature. It studies only classification those wants which impel him to exertion in of wants. order to secure a living, in order to procure certain material objects, or certain services of other per- sons. In a rough way, therefore, we may classify the wants with which economics deals as (1) wants for mate- rial objects, and (2) wants for personal services. But a further classification of wants will be of use. We may divide them into " existence wants " and A second " culture wants." The first class comprises classification. q\\ ^he purely animal wants ; the second includes all wants for those things which lead to the refinement and ennobling of men's lives. Many of the wants of man's animal nature are for objects necessary to the continued existence of families Existence °f human beings ; others are for objects of wants. relative indifference, so far as the mere preservation of life is concerned. The non-satisfaction of necessary wants leads to physical pain, disease, or death. Hence normal persons will procure the objects necessary for such needs before attempting to satisfy other desires. The demand for such " necessaries of life " will, therefore, remain strong and fairly constant even if other satisfactions have to be given up. Another fact should also be noticed. As fast as the lower exist- ence wants arc appeased, men often become conscious of HUMAN WANTS. 83 new needs and desires, which they now have an oppor- tunity to satisfy. Progress in civilization depends upon the awakening of such higher wants. With a progress- ive people, therefore, the 'satisfaction of existence wants serves merely to arouse new desires, and to stimulate men to attempt to satisfy them. The non-satisfaction of culture wants may result in a loss of comfort, of pleasure, or of social esteem. These wants are largely acquired ; yet the culture force of habit may make such desires very wants. strong, so that they may seem to have almost the im- portance of existence wants. To people in one social class, expensive clothes or a private carriage may seem a decency merely, and a necessity to the maintenance of social position or esteem. To other people such objects may be luxuries, and may seem to have no connection with real personal welfare. These culture wants, there- fore, vary greatly according to individual tastes or social position. The number and the possible variety of such wants are, moreover, really illimitable. Existence wants, are far less expansive. The absolute amount of nourish- ment, of clothing, or of shelter which a person requires is limited quite narrowly, and cannot be greatly in- creased. But the possible varieties of fine food and clothing are very many. When we come to such cul- ture wants as the desires for books, pictures, foreign travel, and the like, the possible increase in the abso- lute number and variety of human wants is practically infinite. These wants may be directed toward the development of one's faculties and activities, rather 84 PRINCIPLES OF ECONOMICS. than toward the satisfactions of the senses. A thirst for knowledge, or the pursuit of literature and art for their own sake, may have for their objects the develop- ment of faculties, not sensuous gratification. While the awakening and the satisfaction of culture wants are both desirable and necessary, if life is to be made worth the living, the development of such tastes may take undesirable directions. Luxurious desires may be car- ried too far ; and the constant increase of wants, even of wants desirable in themselves may lead to extrava- gance and prodigality. II. Economic Goods. § 55. Everything which satisfies a human want is a utility or a good. The-ahstract noun futility " means the utilities power to satisfy^ \Van4;s. Ecb^Ktinic^t^*^ or goods. f man's^e£Eprfs-to suppTy^iinrself with cer- tain utilities, or goods. These ^utilities may oe efth^r material objects or personal services. To such goods the term " wealth " is applied. In common usage wealth often means great riches, but such is not the sense in which the economist uses the word. To him the poor man's dwelling and the rich man's palace are alike wealth, in that they are both want satisfiers, or utili- ties. Our definition of goods and wealth serves to make clear one very important point. Nothing can be wealth except as it is able to satisfy a human want. The conception of goods or wealth, therefore, is purely relative to human needs. A change in men's wants may render much former wealth valueless, and con- ECONOMIC GOODS. 85 verscly. The passing away of the belief in magic made charms and relics worthless, while varying fashions in dress are constantly producing similar results. § 56. It is necessary now to give a more exact defi- nition to the term " economic goods." We have seen that economic goods include both material ob- jects and personal services, but not all such g00ds- objects or services come within the scope of the definition. Some goods exist in such supera- bundance that men, without making any effort or sac- rifice, find all wants for such objects completely satisfied. Such goods are free to all, no lack of them is ever ex- perienced, and they are not objects of economic effort. Air, sunlight, and water are generally examples of such free goods. But many other things can be secured only by effort or sacrifice of some sort, for the reason that the supply of such utilities is limited. Such limitations may be due to the impossibility of increasing the num- ber of the goods in existence, as in the case of old paintings and antiques; or to the fact that the supply of the commodity in question can be increased only by the labor of production. Utilities of which the supply is limited, as compared with human desires for them, are called economic goods. Men never experience any lack of free goods since all their wants for such objects are abundantly supplied. But in the case of economic goods, men experience constantly unsatisfied wants which they seek in some manner to satisfy. Economic goods, since they are limited in supply, can be obtained as a rule onlv by exertion or sacrifice 86 PRINCIPLES OF ECONOMICS. of some sort. For that reason they may usually be Transferabii- exchanged for other goods. Material ob- ity of econom- i e cts may be transferred from one person ic goods. to another. Man's faculties cannot be thus transferred, but the services which his faculties enable him to render may be exchanged for the services of others or for material objects. In so far as the ex- change or transfer of personal services forms a part of man's economic activities, personal services must be regarded as economic goods. The utility, or the power which commodities possess to satisfy our wants, may arise in any one of four ways. The object mav be fitted, as for example Elementary, form, place, pig iron, to serve as the raw material for utilities. some desirable product. Such a commod- ity possesses elementary utility. Next, after undergoing changes in form, the pig iron may become a finished product adapted for man's use ; and may then acquire form utility. Again, when trans- ported from the forge or rolling mill to the place where some consumer may make use of it, the iron product acquires a place utility. Finally, some commodities may be most desirable only at certain times, as ice in summer, and fuel in winter. A good placed before the consumer at just the time when it is desired will possess a time utility. The terms " utility " and " good " as used by the economist have nothing to do with the real desirability or moral estimate of the object in question, or of the want to which it ministers. Cer- CONSUMPTION OF WEALTH. 87 tain wants may be undesirable or harmful in their grati- fication ; but if men possess such wants, and demand such undesirable objects for consumption, those objects assume economic importance and must be considered economic goods. III. The Consumption of "Wealth. § 57. All goods are produced for the purpose of being consumed. By consumption the economist means the destruction of utilities. This takes place The consump- whcu goods are used up by consumers, who tionof apply them to the purposes for which they were designed. Utilities may be destroyed also by the natural decay of goods, by the action of the elements, as in floods or tornadoes, or by wanton waste on the part of man. Usually when the term consumption is used, we shall refer to the rational destruction of utilities in the satisfaction of human wants. It is important to note the difference between the consumption of durable goods and the consumption of perishable commodities. A book, a coat, 1 Durable and or a house may yield a large number of perishable satisfactions through many acts of repeated s ° use. An article of food is able to yield but a single satisfaction in a single act of consumption, and may be called a perishable good. The book, the coat, and the house may be considered relatively durable goods, which are consumed only by a .series of acts extending through a considerable period of time. Some goods, such as land, may be so used that their utility may never be 88 PRINCIPLES OF ECONOMICS. destroyed ; and may, therefore, be considered absolutely durable goods. The consumption of wealth tends to produce positive pleasure or to avert pain. The pleasures produced or consumption tne P ams averted may be either present or and production, prospective, but they are the usual results of acts of consumption. The production of utilities, on the other hand, necessitates, in most cases, some pain or hardship. Disagreeable labor must be performed, or desired ease be given up, or some sacrifice be incurred. In their efforts to satisfy wants, men are constantly weighing the probable pleasures of consumption against the sacrifices necessary for the production of consumable wealth. A man's action is likely to take that direction in which he considers that the largest balance or surplus of pleasure over pain can be obtained. The older econo- mists expressed this by saying that " every man desires to obtain additional wealth with as little sacrifice as possible." This fact will guide us in our study of the consumption of wealth. § 58. Human wants are satiable. If a person con- sumes at any given time successive units or portions of a commoditv, he finds that the later units pro- The law of J ' l diminishing duce less pleasure or satisfaction than the first. If enough of the commodity is con- sumed, a point may finally be reached at which the consumption of any more units ceases to produce any satisfaction whatever, and may even cause pain. This will be seen if we suppose a man to be supplied with successive pieces of bread The first piece might serve CONSUMPTION OF WEALTH. 89 to appease the pangs of extreme hunger; and would, therefore, have a very high degree of utility. The second piece might be consumed with great pleasure, but it would not have the same intense utility that the first possessed. A third piece of bread might completely satisfy the man's desire for food at that time, so that a fourth piece would have no utility whatever for consump- tion at that moment. In this case, then, the second piece of bread has a smaller utility than the first, while the third has less than the second. After the third piece has been consumed, the point of satiety is reached. This law is often illustrated by the follow- illustration ing diagram : — of the law In this diagram the lines 1 2, 2 3, 3 4, 4 5, etc., represent eight units or pieces of bread. The pleasure derived 90 PRINCIPLES OF ECONOMICS. from the unit first consumed, 1 2, may be infinitely great, since this first piece may be necessary to preserve life. The second unit, 2 3, has a utility measured by the perpendicular line 3 b ; and the parallelogram erected upon 2 3 represents the utility of this second unit. Each subsequent unit has a smaller degree of utility, repre- sented by the several perpendicular lines. The utility of the eighth unit, 8 9, is nothing, because it is supposed that the point of satiety is reached after seven units are consumed. Now if the successive units are made very small, the diminishing utility of the commodity may be represented by a curved line, as in the following figure : Here the utility of the first unit, o, is infinite; the utility of any unit, m, is represented by the perpendicular line, m n ; while the last unit, x, possesses no utility whatever. CONSUMPTION OF WEALTH. 91 We must now distinguish between total and marginal utility. Each unit of the supply, until the point of satiety is reached at x, possesses a certain J . Total and degree of utility represented in our diagram marginal by a perpendicular line drawn at the proper u y ' point. The sum of the utility of all the units is the total utility of the entire supply, ox. On the other hand, the marginal utility is the utility of that portion or unit of the supply which is last consumed. In our illustration, x is the marginal unit of the supply, and the marginal utility has become zero. If, however, the supply should be reduced to o m units, m would be the marginal unit ; while the marginal utility would be represented by the perpendicular line m n. At any given moment it is safe to conclude that if a person's supply of any commodity is increased, the marginal utility of the commodity will de- .. . crease. But if a considerable period of upon me time passes, it is possible that the person's diminishing wants may expand, so that a larger supply utmty * at the later period may have as great a marginal utility as a smaller supply had at the former period. When different times are considered, the law of diminishing utility must be used with a great deal of caution. § 59. In supplying their wants men consume com- modities in a certain order. In selecting goods for consumption two things are considered : _ L D The economic first, the utility of the goods; and second, order of con- ,, . c sumption. the cost or sacrifice necessary to procure Uiem. Those commodities will be selected first which 92 PRINCIPLES OF ECONOMICS. yield the largest surplus of enjoyment above the neces- sary costs. Suppose bananas and oranges to be offered for sale at the same price, say twenty cents a dozen. Then a person who prefers bananas to oranges will certainly purchase bananas. They have for him a greater utility than oranges ; and, the cost being the same, will yield him a greater surplus of utility over costs. But now suppose that the person buys six bananas. Then it is probable that an additional half- dozen would have less utility for his personal consump- tion at that time than the first six bananas possessed. The diminished marginal utility of the larger supply of bananas might leave a smaller surplus of utility over costs than could be obtained by buying a half- dozen oranges. Hence it is possible that he may buy six oranges instead of buying an additional half-dozen of bananas. Now let us assume a second case. Suppose that the person prefers oranges to bananas ; and suppose that an orange costs five cents, while bananas happen to be selling for a cent apiece. Under such circumstances, it is evident that the greatest surplus of utility over cost could be secured by purchasing bananas instead of oranges, unless the person's preference for oranges should be great enough to overcome the difference of four cents in the cost of the two kinds of fruit. Com- parisons of this sort lie at the basis of the judgments formed by purchasers in a market. a second Tliis principle may be illustrated by the illustration. f ii ow j,H r diagram : — CONSUMPTION OF WEALTH. 93 2 9 X' A 4 6 8 .T Commodity 1. — Oranges. Commodity 2. — Bananas. In these figures the lines X' and A X represent the entire supply of the commodities 1 and 2. The lines 2, 9, A 4, A 6, and A 8 represent various amounts of the supply, of which 2, 9, 4, 6, and 8 are respec- tively the marginal units. The lines OP, 2 L, 9 N, A B, ±H, 6 K, and 8 31 represent the utility of the various units of the supply, 0, 2, 9, A, 4, 6, and 8. The curved lines P X' and B X represent the diminish- ing utility to a particular person of the successive por- tions of the supply. The lines C, 2 E, 9 X, A 2), 4 F, 6 6r, and 8 M represent the cost or sacrifice necessary to secure each unit of the supply. 1 Then the lines OP, EL, D B, F II, and G- K represent the surplus of utility over cost in the case of the units 0, 2, A, 4, and 6 1 For convenience of illustration wo will assume the cost of all the units to he the same. Then the continuous lines CN and DM represent the cost of all units. 94 PRINCIPLES OF ECONOMICS. respectively. Now the person in question Avill select a certain number of units of commodity 2 first of all, since the first units of this commodity possess for him the larger surplus of utility over cost. He will not pur- chase more than ^4.4 units of this commodity, however, before he finds that, beyond the marginal unit 4, ad- ditional units would yield a smaller surplus of utility over cost than the first units of commodity 1. Simi- larly, the person would not buy more than 2 units of commodity 1, since, beyond the marginal unit 2, a0 to $600 a year. Per cent. 55.01 18.0 12.0 5.0 3.5 1 2.0 2.0 2.5 90.0 1-10.0 100.0 A man with an income of from $750 to $1000 a year Per 50.0 18.0 12.0 5.0 5.5' 3.0 3.0 3.5 cent. 1 85.0 I J- 15.0 100.0 § 64. Subsequent investigations in the United States and in Europe show the substantial accuracy of these investigations statistics by Dr. Engel. Such recent inves- b y rea e us a of or tigations are summarized in the Seventh Massachusetts Annual Report of the United States Com- and of the united states, missioner of Labor, opposite. These statistics show that about nine tenths of the income of very poor families are expended for the satis- faction of the mere existence wants, for food, shelter, and clothing. Nearly half of the income of such a family is expended for food alone. As the income of a family increases, its members prefer to dent number of family budgets for a period of years to construct a sort of social signal service. His idea is that changes in total expenditure and in expenditures for various items in a sufficient number of typical fami- lies could enable us to predict the coining of industrial storms. " Conclusions. ECONOMY IN CONSUMPTION. 101 Percentage of Expenditure for Families of Different Incomes. Income Income Income Income Income sl-jm and over. Object of Income under $200. $300 and $500 and $700 and $900 and expenditure. under $400. under $600. under $800. under $1000. United States. Per cent. Per cent. Per cent. Per cent. Per cent. Per cent. Rent 15.48 14.98 15.15 15.60 14.96 12.69 Kuel 7.07 6.04 5.63 4.42 4.00 2.57 Lighting .... 1.01 .98 .97 .88 .74 .45 Clothing .... 12.82 14.14 15.27 10 33 16.84 15.71 Food 49.64 45.59 43.84 38.89 34.34 28.63 All other purposes 13.98 18.27 19.14 23.88 29.12 40.05 Europe. Rent 9 38 11.93 10.26 9.49 10.49 Fuel 5.38 6.49 3.32 3.97 5.19 flighting .... 1.66 159 1.37 1.20 1.53 Clothing .... 19.08 14.18 15.21 18.97 14.15 Food 48.32 49.58 50.06 44.00 46.24 All other purposes 16.18 17.23 19.78 22.37 22.40 expend a constantly increasing proportion of their means for the satisfaction of culture wants. The desires for food, for clothing, and for shelter are seen to be far less expansive than the higher needs, which constantly claim a larger portion of an increasing income. Evidently, as the means of a family increase, a larger surplus of utility over costs can be secured by reducing the pro- portion of the income expended for existence wants, and by diversifying the objects of family consumption. V. Economy in Consumption. Saving and Investment. § 65. By economy in consumption is meant securing the greatest amount of satisfaction obtain- Econom y in able from a given expenditure or destruction consumption, of utilities. This necessitates (1) a knowledge of the 102 PRINCIPLES OF ECONOMICS. most advantageous uses to which a good ma) 7 he devoted, and (2) economy in the application of the good to the chosen purpose. The importance of such a rational ordering of our consumption is well expressed by a recent French writer in the following words : " The human race . . . could increase its welfare almost as much by a better ordering of its consumption as by an increased production of wealth, and this without any real retrenchment in consumption." It is highly desirable that men should develop their higher wants, and should have the means of maintaining a high standard of living. Rational economy Economy and ° ° J a high stand- does not imply the non-satisfaction of desir- vmg. a ^j e wants, but rather means abstinence from useless or injurious expenditure, and the most complete utilization of the goods devoted to the satis- faction of necessary and worthy desires. These aspects of the subject of economy require some consideration. § Q6. Some kinds of expenditure produce effects which are directly pernicious to those who indulge in injurious such forms of consumption. Anything of consumption. ^]jj s sor ^ f or instance intemperance, unfits a man for rendering to society the highest service of which he is capable ; and is condemned in advance as both wasteful and immoral. More need not be said here upon this topic. Other kinds of consumption are not in themselves directly pernicious, but may nevertheless be Luxury. questionable. Luxurious expenditures are. of this character. Every one knows that extravagance ECONOMY IN CONSUMPTION. 103 and prodigality exist, and the careful observer will admit that these evils are not confined to any single so- cial class. Yet it is very difficult to frame any general definition of luxury, or to establish any general prin- ciples by which what is commonly termed luxurious expenditure may be judged. We must admit that men of great genius or ability have much greater needs than other men, and that they may wisely incur expenditures which others might not be justified in making. More- over, the luxuries of one time may become decencies or necessaries of the succeeding age. As Laveleye says, " A shirt for the body and a chimney in the house were great luxuries in the Middle Ages ; to-day they are neces- sities even for the poorest." Furthermore, it seems probable that some expenditures that might be called luxurious tend to develop finer tastes and the finer arts, and may in this way produce beneficial effects. A cer- tain amount of rational luxury is not to be indiscrimi- nately condemned. The question of luxury appears, therefore, to be a complicated one ; nevertheless, it is possible to lay down certain general principles. First, it is cer- Test for tain that there exists in the world a large luxury- number of unsatisfied wants for the comforts, and even for the necessities, of life ; in other words, multitudes of human beings are destitute of the means for satisfy- ing most pressing wants. Every luxurious expenditure causes a sacrifice of the means, or the productive power, available for the satisfaction of other wants. The money that pays for the millionaire's palace might have built 104 PRINCIPLES OF ECONOMICS. an orphan asylum, or endowed a college. Since this is the case, we have the feeling that, in any instance of luxurious expenditure, the benefits derived from the outlay should be in some way commensurate with the sacrifice involved. If millions of dollars are lavished in ostentatious display during a hard winter, when multi- tudes of people are on the verge of starvation, we feel that there is an immense disproportion between the pleasure actually derived from such expenditure and the possible good that might have been accomplished with the resources thus squandered. While the law gives to every one the undoubted right to expend his property in whatever manner he may desire, yet there exists a growing feeling that the possession of wealth imposes upon a person the moral obligation of admin- istering that wealth as a social trust. This obligation, moreover, is as binding upon the possessors of small incomes as upon those who enjoy great riches. This feeling was expressed by Ex-mayor Hewitt, of New York, in his speech at the recent dedication of the new buildings of Columbia University. Speaking of the university, Mr. % Hewitt said : " It will not lack the means of usefulness, nor the opportunity of expanding its influence, when the rich men of our city realize the opportunity which it affords for making the millions which they control fulfill the duty imposed by the pos- session of wealth, and by which alone its possession can be justified." On these principles, luxurious expendi- ture can be justified only when its results are propor- tionate to the sacrifice involved. Excessive luxury is ECONOMY IN CONSUMPTION. 105 a violation of the moral obligation incumbent upon the possessor of wealth to administer his property as a trust for the welfare of society. § G7. We have next to consider the question of econ- omy in the use of goods devoted to the satisfaction of reasonable and desirable wants. Probably Economy in more loss is produced by wastefulness in the application ., . , , . .-I • j , i of resources. this department than is caused by unde- sirable consumption. Economy in productive consump- tion will be treated of in the chapter devoted to pro- duction. At this point we shall be concerned mainly with economy in consumption. The statistics of family consumption previously pre- sented show that families whose incomes range from $200 to $1200 per year, spend from 60 to Economic im- 90 per cent of their incomes for the ordi- portanceof nary household expenses of rent, food, fuel, ousekee P in 8:. light, and clothing. These expenses fall, as a rule, to the direction of the wife and mother. Economy in the expenditure of from 60 to 90 per cent of the income of the ordinary family depends, therefore, mainly upon the skill and intelligence of the women who administer the affairs of the household. Here " a penny saved is a penny earned," and the practice of household economy has been hitherto the chief economic function of women. It has been demonstrated that there is Waste in con- a great deal of waste in family consump- sumption of tion, the real extent of which is not at all appreciated. The chief item of loss is in connection with the expenditures for food. If we place the aver- 106 PRINCIPLES OF ECONOMICS. age income of an American family at 8500, — and it will not greatly exceed that figure, — then nearly 8250 of this amount is expended each year for food. Waste occurs in any or all of the following ways : (1) Need- lessly expensive foods containing little real nutriment are used ; (2) there is a failure to select the foods best suited to the needs of the family ; (3) a great deal is thrown away which ought to be utilized ; (4) bad prepa- ration of the food causes it to lose much of the nu- triment which it does contain ; (5) badly constructed ovens diffuse heat, instead of confining it, and cause enormous loss of fuel. We shall state less than the truth if we estimate that fully one fifth of the money expended for food is absolutely wasted, while the excess- ive expenditure often fails to provide adequate nutri- tion. In this manner, ten per cent of the income of the average family is uselessly squandered. This means a waste of 850 out of each family income amounting to 8500. 1 Destruction by fire forms another enormous item of economic waste. Most buildings are examples of what Mr. Atkinson 2 calls " combustible architec- ture," and progress in slow-burning or fire- proof construction has been very slow. The methods of insurance companies have frequently put a premium upon incendiarism, while ignorant or willful carelessness 1 Sec Atkinson, The Science of Nutrition; Atwatet:, Pood Waste in American Households. 2 See Atkinson, Slow-Burning Construction, <'ur Enormous Loss by Fire ; also, Thomson, Waste by Fire. SAVING AND INVESTMENT. 107 often enough completes the work of destruction. In 1886 the property destroyed by lire in the United States was valued at #100,000,000. Eight years later, Mr. At- kinson found that " the masters of combustible architec- ture " had improved upon their own work, and that the " last year's ash heap of the United States " represented property worth $150,000,000. Further illustrations are not needed to show the possibility of vastly increasing the satisfactions enjoyed by our people without increas- ing the production of wealth in any degree. § 68. Having treated of spending, the first use which can be made of acquired wealth, we now come to a con- sideration of saving, the second use to which wealth may be put. Saving involves much more than the mere act of spending less than one re- ceives, and its ultimate consequences require considera- ble explanation. Saving may take the form of merely setting aside or storing up either money or useful commodities in such a way that they remain idle. This is called two forms hoarding, and may or may not be a useful ofsavin &' and necessary way of providing for the future. In early times, or in periods when property has been insecure, this has been the principal way in which saving has been effected. Hoarding may be carried to such an extent as to lead to scarcity of the goods offered in the market. But in modern times, most saving takes a second and very different form. Nowadays people save wealth mainly by investing it in some productive enter- prise. With security of property assured, men prefer to 108 PRINCIPLES OF ECONOMICS. invest their savings in productive industry rather than to hoard surplus wealth. The reason is that a perma- nent income may be secured in this way. The invest nient may be made directly by the person, or indirectly through a bank, to which the work of investing savings may be intrusted. Investment, evidently, is the very opposite of hoarding. It does not withdraw goods from use, but invests them where they may aid to increase future production; While to some extent hoarding still takes place, for the most part saving means useful in- vestment, and not withdrawal of wealth from use. Let us compare the results of saving and spend- ing. The French economist Leroy-Beaulieu has con- saving and trasted the two as follows : " The man spending. w ] 10 saves, in case he invests his savings directly or indirectly, spends as much and makes as much work as the prodigal, or the man who spends his entire income. But the object and the result of the spending and the work are different." Saving, " in place of making work for upholsterers, hair dressers, lace makers, meat cooks or pastry cooks, makers of fine carriages, etc., makes work for masons, ballasters, vine- dressers, machine builders, and other workers of the same sort." Saving, then, usually means spending; but it means spending for the future, not for the present. Saving means, therefore, not a decrease in the demand for commodities ; but usually a demand for future goods instead of present goods, for the tools and materials necessary to future production rather than for the prod- ucts of present or past industry. SAVING AND INVESTMENT. 109 Our analysis of the results of saving enables us to see at once the absurdity of the idea that reckless and wasteful expenditure can be approved be- "spending cause it makes trade good. Saving makes mo f ey *° D ° make trade trade good and causes a demand for prod- good." nets just as truly as does spending. But spending inconsiderately leads to the destruction of utilities ; saving, to the ultimate increase of production. Yet many intelligent people and many important news- papers often excuse extravagance and profusion on the ground that they make trade good, and give employment to labor. Two reasons make saving a desirable habit in any people. First, it cannot be repeated too often that the first economic duty of every man is to make Desirability himself a self-supporting, independent mem- ° f saving, ber of society. In order to do this it is necessary to save the means for supporting one's self in times of sick- ness or lack of employment, and also to make provision for old age. Saving may also be necessary in order to maintain the unity of the family upon the death of the father. But a second powerful reason makes saving a desirable thing. Modern economic life depends upon the extensive use of capital in production. Through the means of capital, man is gradually subjugating nature and substituting natural forces for human labor. Eco- nomic progress demands the constant creation of new capital, and capital-formation involves a willingness to prefer future goods to those which contribute alone to present enjoyment. 110 PRINCIPLES OF ECONOMICS. VI. Demand. § 69. We have seen that human wants are the cause of man's economic activities. Human wants create a demand for certain commodities and services Demand. which can be secured only through labor or sacrifice of some sort. In order to meet such a demand for commodities and services, all economic activities are directed. It will be well to close this chapter by a general statement of the law of demand. Since human wants are satiable, a single unit of any commodity will possess for any person or group of per- sons a degree of utility that constantly de- Demand and satiable creases as the supply of the commodity is increased. At any moment, moreover, the importance which men will attach to any single unit of the supply will depend upon the utility of the last or marginal unit. Men will demand first those commodi- ties whose marginal utility most exceeds the cost or sacrifice necessary to obtain them. They will cease to demand any commodity as soon as its marginal utility ceases to exceed its cost. In obtaining desired commodities we are commonly called upon to sacrifice money, and we need to base our L statement of the law of demand upon this 'V, measured fact. Money confers upon its possessor a by money. . , . f general purchasing power, and a unit ot money has to each individual a certain importance based upon its ability to procure satisfactions of all sorts. A man with an annual income of $500 knows that one DEMAND. Ill dollar represents one five-hundredth part of his total power each year to purchase commodities. The signifi- cance of a dollar to a rich man is generally much less than its importance to a poor man. As a person's supply of money increases, the marginal utility, or want- satisfying power of the marginal unit, of money con- stantly tends to become smaller. Nevertheless, every one has a certain general idea of the importance to himself of the general purchasing power represented by a dollar ; and every one is constantly called upon to estimate the sacrifice which the expenditure of a dollar may involve. We may say, therefore, that demand is determined by a comparison of the marginal utility of commodities with the marginal utility of money. Men purchase those commodities whose marginal utility most greatly exceeds the marginal utility of the money required to purchase them. § 70. We call the demand for a commodity large or small as the number of units of that commodity demanded by the public is larger or smaller. J r ° The general Now the extent of demand will vary accord- law of de- ing to changes, (1) in the marginal utility of the commodity, (2) the money cost, and (3) in the means or wealth of the purchasers or consumers. This may be illustrated by the three following cases : — 1. If the price of sugar remains unchanged, say ten cents per pound, then the number of pounds that will be demanded will depend solely upon the utility of sugar. At one time it may be that consumers will use 10,000 pounds of sugar before the marginal utility of a 112 PRINCIPLES OF ECONOMICS. single pound falls so low that no one would care to sacrifice ten cents in order to purchase an additional pound. Now if tastes change, it may happen that con- sumers will buy 15,000 pounds before the marginal utility of a single pound falls below ten cents. 2. On the other hand, let us suppose that the utility of sugar remains unchanged. At a price of ten cents a pound, we have seen that 10,000 pounds will be demanded by the consumers. Now if the price Jdo reduced to five cents a pound, the number of pounds demanded may increase to 15,000. The reason for this increased demand is that the reduction in the marginal utility of a pound of sugar, caused by the increase of the supply to 15,000 pounds, is offset by the reduction in cost or sacrifice. The reduced cost leaves a surplus of utility over sacrifice, although the marginal utility has decreased. 3. Suppose, finally, that both the marginal utility of sugar and the price remain the same, but that the wealth of the consumers is increased. Then the marginal utility of the five cents required to purchase a pound of sugar will decrease for the majority of the consumers. Under such circumstances more than 15,000 pounds may be purchased before the marginal utility of a pound of sugar falls below the marginal utility of five cents. Thus the increase in the wealth of the consumers may serve to increase the demand for sugar to 20,000 pounds at the price of five cents a pound. It would have exactly the same effect as a decrease in the price. § 71. The law of demand may be summed up. First } DEMAND. 113 the demand for any commodity will vary directly as its marginal utility, the cost being assumed to . ~ . Summary, remain the same. /Second, assuming the utility to remain the same, demand will vary according to the price. Third, changes in the wealth of the con- sumers act exactly like changes in price. An increase of wealth lowers the marginal utility of money and increases demand, while a decrease of wealth has precisely the contrary effect. 114 PRINCIPLES OF ECONOMICS. LITERATURE ON/ CHAPTER IV. General References : Andrews, Institutes of Economics, 79- 82, 190-199; Ely, Outlines of Economics, 219-246; Laveleye, Political Economy, 243-263 ; Marshall, Economics of Industry, 71-101, Principles of Economics, 159-213; Roscher, Political Economy, I. 51-58, II. 183-269 ; "Walker, Political Economy, 292-329. Special References : Hearn, Plutology, 12-23. A suggestive treatment of the subject of human wants. Jevons, Theory of PoliticalEconomy, 28 et seq. Treats of law of diminishing utility. Compare with Jevons either Wieser, Natural Value, 3-36, or Smart, Introduction to Theory of Value, 9-33. Patten, The Consumption of Wealth ; Dynamic Economics, 39-49. These books are difficult to read, but are very suggestive. Consult them especially on the subject of the economic order of consumption. Say, Treatise on Political Economy, Bk. III. One of the earli- est discussions of consumption. Seventh Annual Report of the United States Commissioner of Labor, II. 860-865; Gould, Social Condition of Labor. These -works give statistics of the actual consumption of families. Atkinson, The Science of Nutrition ; Slow Burning Construc- tion ; Our Enormous Loss by Fire. Mr. Atkinson has given much attention to wastes in cooking and by fires. Atwater, Food Waste in American Households. Thomson, Waste by Fire. PRODUCTION. 115 CHAPTER V. THE PRODUCTION OP WEALTH. I. Production in General. § 72. The production of wealth does not mean the creation of material things which did not previously exist. Human powers are unable to create D efillition of matter, and the utmost that man can do production, is to produce utilities. Production, therefore, means changing the form or the relations of matter so that it becomes better able to satisfy human wants. Wood or iron may be changed into the form of houses or ma- chines ; seeds may be placed in the ground where natural forces act upon them and result in the growth of plant life ; Dakota wheat may be transported to Liverpool, gaining increased utility by the change of place ; but in all such cases material objects and natural forces are merely so adjusted that they acquire a new power to satisfy wants. Production may be defined, therefore, as " the creation of utilities by the application of man's mental and physical powers to the physical universe, which furnishes materials and forces." 1 Every increase of utilities, however, is not the result of human activities directed expressly for that purpose. 1 See Ely, Outlines of Economics, 90. 116 PRINCIPLES OF ECONOMICS. We have seen that changes in human wants and tastes may increase the want-satisfying power of goods, or may destroy it. The utility of a piece of tion which is land may be increased by the natural growth ' of the community, when no labor is exerted directly to increase the usefulness of the particular tract of ground. Various accidents which in no way result from human effort may suddenly increase the utility of many kinds of wealth. All such ways of creating utilities are not to be considered economic production. It has sometimes been thought that some forms of industry are more productive than others. But our analysis of the nature of production has Productivity r of various shown us that the farmer, the manufacturer, the railroad employee, and the merchant are all alike engaged in rearranging or adjusting mate- rials in such a way that an increase of utility results from their labors. The manufacturer and the railroad engineer are assisted by natural forces to the same extent as the farmer. Moreover, such workers as teachers, doctors, lawyers, judges, policemen, soldiers, domestic servants, and the like, directly contribute to the increase of utilities, and should be considered pro- ductive laborers. All useful labor is productive of increased enjoyment, that is, of increased utilities. Only misdirected or inefficient labor is unproductive. § 73. The labor of production involves a certain Production amount of toil which may be more or less and sacrifice, disagreeable, or even painful, according to circumstances. Some kinds of labor, as the labor of the PRODUCTION. 117 scholar or of the artist, may appear to be pleasurable in themselves. But in most such cases it will be found that the pleasure comes from the results of the labor, rather than from the bodily and mental exertion. For the majority of producers, labor involves bodily fatigue or even pain, and also the sacrifice of desired leisure and enjoyments. So true is this that it is claimed with reason that, if the fear of starvation and want should be removed, most men would not feel any incentive sufficient to induce them to carry on the labor of pro- duction. It should be emphasized that a certain amount of well-directed labor is a necessary discipline for man- kind, and that " an idle brain is the devil's workshop." When all is said, however, the fact remains that pro- duction necessitates sacrifice. On account of this, men are constantly seeking to produce wealth with less labor. This effort to economize labor is one of the principal forces that lead to economic progress. Practically all production requires a certain amount of time. Many weeks have to elapse between seed- time and harvest, several months may be pro,^^ required to convert trees into a house, while requires time, many years may pass before the construction of a rail- road or a canal can be completed. § 7-4. A treatment of economic production should include a discussion of the production of each of the two kinds of economic goods, namelv, mate- ° - The produc- rial goods and personal services. Yet a few tionofper- i ■, 11-t • i sonal services, words only need be said concerning personal services. The first wants which any society must sat- 118 PRINCIPLES OF ECONOMICS. isfy are the wants for subsistence and shelter. At an early period certain personal services will be desired ; and soldiers, lawgivers, priests, and domestic servants may appear in any society. The demand for personal services will be likely to increase as fast as the industry of any people becomes more productive, so that a smaller proportion of the total population has to be employed in the production of material goods. The general ten- dency of economic progress is to enable a smaller number of workers to produce the material wealth necessary for civilized life, and to set free a larger number of people to render personal services of all sorts. II. The Factors of Production. § 75. Economists have recognized three factors of The three production, — nature, man or labor, and factors. capital. Man and nature are original or primary factors, while capital is a secondary or derived factor. § 76. In a general way nature may be said to assist in production by furnishing man with standing-room, with materials, and with chemical and physical Nature as a factor of forces. Tho motor forces of nature have been production. ulili/cd by man principally in the forms of the muscular strength of animals, the motive force of winds and streams, the expansive force of steam, and the motive force of electricity. A detailed classification of nature's contributions to production may next be presented. First, all productive FACTORS OF PRODUCTION. 119 industry may be influenced by atmospheric or climatic conditions. These affect not only the animal and vege- table productions of a country, but also „, ,„ „ t r J ' Classification the vigor and character of the inhabitants, of nature's cy , , , , i t i i contributions. /Second, rivers, lakes, and seas should be mentioned. These may facilitate the transportation of persons and products ; and may furnish man with fish, corals, sponges, etc. Rivers may also supply the water power that turns the wheels of many productive indus- tries. Third, we must notice the contributions of the land surface of the earth. The land contributes to production standing-room, plants and animals, mineral treasures hidden for the most part below the surface, and the mineral and vegetable elements that form fer- tile soils. Mere situation is often of the greatest im- portance, as is seen in the case of a city or country located at an important point along the routes which the commerce of the world is obliged to follow. Of the contributions of nature to production some are appropriable, while others practically cannot be reduced to ownership by individuals or by societies, some of na- Land is appropriable, as well as the products D ^ons a^" secured from the land. Air and sunlight are appropriable, for all practical purposes not appropriable, except in so far as the enjoyment of them may depend upon access to certain pieces of land. The waters of the earth's surface cannot be appropriated, except in cases where access to them depends upon the control of land. Inland waters and the borders of the ocean to the extent of three miles seaward are appropriated by the nations that control 120 PRINCIPLES OF ECONOMICS. adjacent territory. The appropriable contributions of nature are actually reduced to private ownership as soon as they become scarce relatively to human wants. When population is scanty, and men lead a nomadic life, land is not held as private property. But as numbers increase, and unoccupied land becomes scarce, the soil is brought under private ownership. Some writers have attempted to explain the whole of man's social as well as his economic life by reference to innuenceof the influence of the natural surroundings of nature upon ^ commim ity. I n this wav it is said that man's eco- J * nomiciife. the inland plains give rise to a pastoral form of economic life, that the seashore causes people to live as fishermen, and that forests produce the tribes of hunters. From the natural affiliation or combination of these three forms of simple economic societies, all com- plex or civilized societies are derived. But such a view exaggerates, as it is very easy to do, the extent to which natural surroundings determine the life of a people ; and it neglects the fact that man in a thousand ways may modify his environment. Man can reclaim land from the sea, can irrigate arid lands, can tunnel the Alps, and can construct a railroad through the Rocky Mountains or across the Andes. The economic development of our own country has been very greatly influenced by natural conditions. The infertility of the soil of New England compelled thai section to utilize its forests for ship build* ing, and its rapid streams for power for manufacturing. The fertile soil of the South marked that section out as an agricultural region. The rivers of the Mississippi FACTORS OF PRODUCTION. 121 Valley helped to extend settlements, and to facilitate the rapid growth of the interior of our continent. In general, it may be said that the tendency of economic progress is to free man more and more from the influence of nature. It took nearly two hundred years for English colonists to advance their settlements from the Atlantic coast to the valley of the Mississippi. But the steamboat and the railroad enabled the people of the United States to spread over the territory between the Alleghanies and the Pacific in three quarters of a century. § 77. Labor is human exertion or effort directed toward the creation of economic goods. It is possible to distin- guish between physical and mental labor. Labor a factor In so doing one should remember that even of P roduc tion. the rudest manual labor requires a certain amount of men- tal effort, however slight ; while mental labor may require the use of the eye, the ear, the tongue, and always of the brain. Between the work of the ditch digger and that of the philosopher there may be endless varieties and degrees of activity ; but all kinds of labor involve both physical and mental exertion, and differ from each other only in the degree in which the mental or the physical elements predominate. It will be found useful to classify the different forms of labor, as follows : — 1. Discovery and invention. 2. Occupation, or the procuring of the gifts Classification of nature; e. q., gathering wild plants, hunting of different ' y ' ° ' p kinds of labor. wild animals, extracting minerals from the earth. 3. Production of materials by utilizing natural forces 122 PRINCIPLES OF ECONOMICS. so as to produce changes of form; e. g., agriculture, stock breeding. 4. Manufacture, or transforming raw materials into useful products. 5. Transportation of commodities and persons. Place utilities are produced in this way. 6. Exchanging products and services. All kinds of com- mercial enterprises are included here. 7. Organizing and superintending productive industries. An efficient organizer and superintendent is the most useful, hence most productive, man in a factory. 8. Prevention of loss; e. g., firemen, lighthouse keep- ers, etc. 9. Rendering personal services of an economic character. This includes domestic servants at one extreme and members of the learned professions at the other. Those persons who make, interpret, and enforce laws are also included. Such services are productive directly of utilities which have an economic significance. Indirectly they may lead to a great increase of material wealth ; e. g., the services of the scientist or educator. The last two censuses of the United States showed that the workers of this country were distributed among the various occupations as follows : — Occupations. Agriculture Personal and Professional Services . . Trade and Transportation Manufacturing, Mechanical, and Mining Industries Total Persons in Gainful Occupations 1S80. 7,070,493 4,074,288 1,810,256 3,837,112 17,302,099 1890. 8,460,251 5,304,829 3,325,962 5,038,619 22,735,061 FACTORS OF PRODUCTION. 12:1 Tlic labor of production involves sacrifice, and even pain. Yet labor is a necessity, for without it " mankind would necessarily perish oft' the face of the _ J L Economic globe even if all soils were fertile and all importance climates temperate." Labor is not, how- ever, an end in itself, but merely a means to the end of satisfying human wants. Many persons often act on the principle that whatever makes work for men to do is a blessing, and whatever lessens labor is an injury. From the point of view of the workman directly affected by it, a labor-saving machine is often regarded as an enemy ; but from the point of view of the general public, cheaper methods of production arc a very desirable thing. The efficiency of a laborer depends, first, upon his indi- vidual characteristics, and, second, upon the wisdom with which his labor is employed and directed, — llie efficiency that is, upon industrial organization. Post- of 1 * 001- - poning for a time the second factor, we will now consider individual endowments and abilities as causes affecting the efficiency of labor. In this particular the most marked differences exist between various groups of laborers. The inherited strength or vigor of the work- man is one important cause of his efficiency or ineffi- ciency. Men of one race may exceed by one hundred per cent men of another race in mere muscular strength or in capacity to endure toil. Acquired knowledge, skill, and dexterity are second causes of efficiency. Many workers show an utter inability to learn to do any- thing in a really thorough manner. Good food and com- fortable shelter arc third requisites of effective labor. 124 PRINCIPLES OF ECONOMICS. Underfed laborers lack vigor and energy, while un- healthy lodgings enfeeble the workman and cause disease. The mental and moral qualifications of the laborer form fourth factors of efficiency. Intelligent and conscientious workmen require less superintend- ence, can be intrusted with work for which any others are unsuited, and prove most effective and least waste- ful. Finally, the social esteem in which labor is held and the social position accorded to the laborer are fac- tors of the utmost importance. Where labor is con- sidered honorable service, and where all opportunities, political, economic, and social, are open to the man who renders most effective service, laborers will display en- ergy and ambition which will vastly increase the value of their work. The contrast between the United States and many other countries is most marked in this particular. § 78. The number of laborers in any country will de- pend upon the growth of population, and the question of The supply of population deserves attention at this point, labor. The natural growth of population depends upon the proportion which births bear to deaths. In a community of 10,000 persons, 300 births or deaths per year will give a birth or death rate of 30 per thousand. If both the birth rate and death rate are 30, then popu- lation will remain stationary. If the birth rate should increase to 35 and the death rate fall to 25, the annual increase of population would be 10 per thousand, or one per cent. In 1892 the birth rates of different European countries varied from 40.3 in the case of Hungary, to FACTORS OF PRODUCTION. 125 22.1 in the case of France ; while death rates varied from 35 in the case of Hungary, to 17.8 in the case of Norway. Thus Hungary's large birth rate was offset by her large death rate, so that the net increase of popula- tion was only 5.3 persons for each thousand inhabitants. On the other hand, Scotland, Norway, and Germany, the countries showing the largest net increase of population in that year, had smaller birth rates but much smaller death rates, as follows : — Country. Birth Rate. Death Rate. Net Increase. Scotland Norway Germany 30.8 29.6 35.7 18.5 17.8 24.1 12.3 11.8 11.6 At the present moment the population of civilized coun- tries is generally increasing. Within one hundred years the population of Europe has increased from 175,000,000 to more than 357,000,000. At the same time the birth rate shows a constant decrease. This has been more than balanced, however, by a large decrease of the death rate, so that the net result has been a gain in popula- tion. In the United States vacant lands have afforded abundant room for millions of immigrants, so that the growth of numbers has been remarkably rapid. Manifestly the increase of population is limited by the ability of mankind to procure from the 1 Limits upon earth necessary subsistence. During the last growth of century the productivity of industry has so increased that the lands of civilized countries are able 126 PRINCIPLES OF ECONOMICS. to support largely increased populations in far greater comfort than smaller numbers formerly enjoyed. Wealth has increased much faster than population. On the other hand, it may be said that the present rate of increase of numbers cannot be maintained forever. If the population of the world should continue to double every one hundred years, as that of Europe has actually done during the past century, there would be ultimately more people in the world than could find mere standing- room, to say nothing of subsistence. Population does not, however, increase indefinitely in any such geo- metrical ratio. In uncivilized countries famine and pes- tilence, if no other cause, keep down numbers to the limits imposed by the available supply of food. The majority of civilized men prudently restrict the growth of population ; so that it may happen, as has been the case during the last hundred years, that wealth of all kinds increases faster than numbers. A word should be said concerning the influences which cause the population of civilized countries to adjust itself The standard *° the ability of the people to increase the of living. production of wealth. Each class of people in any society is accustomed to enjoy a greater or less amount of the comforts or luxuries of life. The amount of comforts or luxuries customarily enjoyed by any class of men forms the " standard of living " of that class. Prudent people will not marry and assume the bur- den of the support of a family until they possess in- comes fhnt will enable them to maintain themselves in the same degree of comfort that they have been accus- FACTORS OF PRODUCTION. 127 tomed to enjoy. In proportion as people are prudent enough to insist on maintaining their customary stand- ard of living, or even to desire to raise their standard, the number of marriages, and hence the numbers of the population, will be adjusted to the limits imposed by the amount of wealth possessed by such persons. The standard of living is not fixed, but may be either raised or lowered. Educational influences which arouse new and higher wants tend to lead people The standard to demand an increased share of comforts or 5*^7*!; may be raised or luxuries, and tend to deter men from assum- lowered, ing the burdens of a family until assured of the means of maintaining the higher standard of living. On the other hand, there are considerable numbers of people in any community who raise families which they have no prospect of being able to support in a manner which will be considered comfortable or decent, even by mem- bers of the social class to which they belong. Such people constitute a large part of our pauper classes, and have no one but themselves to blame for the suffering caused by their own reckless conduct. In other cases, through misfortune or a commercial crisis a family which was once accustomed to a high standard of living may be unable to maintain such a standard, and may suffer want through no fault of its own. When this happens, the great danger is that the family may become accustomed to the lower plane of living, may lose ambi- tion to improve its position, and may remain perrna* nently on a lower level of economic life. 1 1 See Walker, The Wages Question, 81-88. 128 PRINCIPLES OF ECONOMICS. Many interesting facts illustrate the manner in which the growth of population is adjusted to the ease with which the available wealth of the community Illustrations. will permit a family to be supported. Early in this century wages in England were low, and the laboring classes generally expended more than one half of their incomes for bread. Under such circumstances statistics showed that the number of marriages increased when wheat was cheaper, and decreased when it became dearer. Later on, wages increased very greatly, so that the laborers spent a smaller proportion of their incomes for bread, and more for other things. Then it was noticed that the marriage rate no longer fluctuated as the price of bread changed, but that it varied according to the general commercial prosperity of the country. Another illustration may be taken from English experi- ence. Early in the present century, the Poor Laws of England were so unwisely administered as to make it far too easy for families to secure poor-relief. This made it unnecessary for laborers to exercise even the former degree of prudence in contracting marriages, and the result was a very rapid growth of numbers. Moreover, as the laziest and least enterprising people took most advantage of the poor-relief, this increase of numbers occurred in the least desirable elements of the English population. A great deal of other experience confirms the conclusion that it is always dangerous to relieve poverty in any manner which destroys each man's responsibility for the support of his family. Unwisely managed charity merely allows the families of the shift- FACTORS OF PRODUCTION. 129 less and worthless to increase ; and this, too, at the expense of the industrious and enterprising people who are taxed for the support of charitable institutions. Those who have had most experience in managing bonevolent enterprises are the most strenuous in de- nouncing unwise and indiscriminate poor-relief as a crime against society. Economic progress is generally marked by an increase of wealth. Whenever such an increase occurs, a question of the utmost economic importance arises : Economic What will be done with the increased JeSdSd wealth? It may be used to support a of living, larger population at the same standard of comfort which previously existed ; it may be used to support the same population in greater comfort ; or, finally, it may be used partly to increase the standard of living and partly to increase numbers. In the present century the growth of wealth has served to double the population of civilized countries, and to more than double, perhaps, the comfort in which people live. If all increase of wealth is used for supporting a largely increased popu- lation, little or nothing is gained so far as the general welfare of each individual is concerned. Whenever wealth increases, and incomes increase, it is of the utmost importance that a wise use should be made of the new wealth. If it is used to raise the standard of comfort, there will be a permanent gain in economic prosperity. If, on the other hand, it serves merely to increase numbers, society will remain at the same eco- nomic level which it formerly occupied. 9 130 PRINCIPLES OF ECONOMICS. In the United States, highly unusual circumstances have tended to obscure the fact that population has to circumstances be ad 3 usted to the incomes of any people, of the united and that there are ultimate limits beyond States are . Mghiy ex- which at any given time an increase 01 popu- ceptionai. lation is undesirable. Our numbers have been confined to the limits set by income, but the ease of earning a large income has been so great that popu- lation has seemed capable of increasing without limit. We have had a smaller population than was absolutely needed in order to subdue our vast unoccupied terri- tory, and to develop our natural resources to the best advantage. Although the most desirable portions of our arable lands are now occupied, we yet have room for many millions of additional inhabitants. So long as every newcomer could be given a farm, each increase of numbers might mean simply one more laborer engaged in agriculture ; and no increase of population could result in a lower standard of living. But such a condition of things cannot last forever, and population cannot continue to increase as rapidly as it has in the past. In fact, the rate of increase has per- ceptibly declined in recent years. From 1870 to 1880 the percentage of increase was 30.08, a smaller percent- age than was ever before known except during the decade which included' the Civil War. But from 1880 to 1890 the percentage of "increase fell still further to 24.86 per cent. In the older sections of the United States, where population is more dense, there has been a marked decrease in the birth rate. As fast as the other FACTORS OF PRODUCTION. 131 portions of the country become more thickly settled, the same thing will be noticed there. Our population will continue to grow for a long time to come, and our stand- ard of living may continue to rise. But the rate of increase will grow smaller, because the elevation of the standard of living will require prudence in adjusting the number and size of families to available income. § 79. Man and nature are the original factors of pro- duction. But in all labor except the most primitive forms, a third factor, capital, is needed. The ' Capital as a hands of man unaided would hardly be able to factor of do more than to gather wild fruits and nuts, pro uc and to secure a few of the gifts which nature yields to the labor of mere appropriation. Most economic goods cannot be secured by the direct application of man's efforts to his physical surroundings. It is necessary for man to apply his labor in an indirect manner. If he will first fashion for himself fish nets and hunting weapons, he may then secure fish and game that he otherwise would be unable to procure. If he will first devote some labor to the manufacture of shovels and plows, he may place seeds in the ground in such a manner that natural forces will cause them to yield an abundant harvest. If ho will first construct a water wheel or invent a steam engine, he may harness the motive forces of water and steam, and may apply them to the production of results which no amount of unaided human effort could possibly achieve. It is evident that in all such cases men adopt an indirect method of satisfying their wants. They first produce tools and 132 PRINCIPLES OF ECONOMICS. machinery, and then utilize these instruments in their efforts to secure desired want-satisfiers. In this wa}' men first labor to secure various instruments of produc- tion, and then by means of such appliances, are enabled to satisfy their wants more fully than would otherwise be possible. Indirect methods of production are far more efficient than direct methods, because indirect production may indirect or enable man to utilize all the available ma- ™^ d ^ b0, i t terials and forces of nature. Such materials methods of production. a s the useful metals could never be brought into a form adapted to any human use without the aid of instruments and appliances of indirect production. Even such a material as wood could never be reduced to a condition of greatest usefulness without indirect methods. Many of the forces of nature cannot aid very greatly the processes of direct production. Pleat and moisture cannot act most efficiently upon the seeds un- less the soil has been properly prepared by the use of suitable instruments. Air, water, steam, and electricity are powerless to assist in the labor of production unless men construct suitable appliances to bring these forces into operation in the right manner. By an indirect proc- ess, therefore, man can secure the fullest cooperation of nature, and can vastly increase the production of wealth. Capital, then, consists of all the intermediate products Definition of which man creates for the purpose of using capital. them in the production of finished consump- tion-goods. It is produced for the reason that its use FACTORS OF PRODUCTION. 133 serves to economize human labor, and to utilize fully natural materials and forces. The wealth which men produce may, therefore, be divided into consumers' goods, ready for final consumption, and producers' goods, or intermediate products designed to be used in the produc- tion of future wealth. In this chapter we have to con- sider capital as a factor of production merely. Our definition, therefore, must be a definition of productive or social capital, and must explain the part which capi- tal plays in the process of indirect production. § 80. The concrete forms which productive capital may assume are as follows : — ■ 1. Productive improvements upon land, such as fences, drains, fertilizers, etc. The land in itself is a gift of nature, not a product of human industry. It is not 1 f Forms of created by man to serve as an aid to indirect productive production. Productive improvements may be ca P ltal - counted as capital so long as they can be distinguished from the land itself. Fertilizers or drains become, in a shorter or longer time, indistinguishably merged with the land. 2. Buildings, such as factories or workshops, devoted to the purpose of aiding in the process of indirect production. 3. Means of transportation, such as roads, canals, and railways. 4. Raw materials, such as iron, wood, cotton, silk, and wool, which are consumed in the act of production, but re-appear in the product. 5. Auxiliary materials, such as coal, lubricating oils, and bleaching materials, which aid the productive process, but do not re-appear in the product. 6. Tools and machines. Within the last centui'} 7 these have become the most important form of capital, in many respects. 134 PRINCIPLES OF ECONOMICS. 7. Domesticated animals used in production. Breeds of domestic animals have been so improved by scientific breed- ing that they are distinctly a product of human industry. 8. Money, weights and measures, and scales and balances. We shall soon see that these objects are a most important means of carrying on capitalistic or roundabout production. 9. Commercial stocks of finished products or consumers' goods. These do not include consumers' goods in the hands of the final consumers. Strictly speaking, finished products should not be called consumers' goods until they reach the final consumers. Capitalistic production would be impos- sible if capitalist-producers did not produce goods for dis- tant markets and for a future Season's consumption. Wheat must be produced in one season, and a sufficient stock must be carried over to last until the next harvest. Spring dress goods must be produced several months in advance of the season when they are demanded. Agricul- tural implements, made in America and exported to Australia, may be several months in reaching the final consumer. Merchants perform the important social function of carry- ing all such commercial stocks of goods as require weeks or months to pass from producer to consumer. Com- mercial or mercantile stocks of finished products are an indispensable aid to the process of capitalistic production, and fall under our definition of capital. They are really producers' and not consumers' goods. They are materials to which time and place utilities are being added by the merchants who forward them to consumers. 10. Capital used by persons who render personal services. The instruments of the surgeon, and the books and scientific apparatus of the student are examples. A fuller classifica- tion would include at least the following objects under this form of capital: (a) all scientific and professional instru- ments and apparatus; (&) churches, theaters, public halls, and all buildings necessary for rendering personal services; FACTORS OF PRODUCTION. 135 (c) court houses, jails, forts, warships, government build- ings, and all the appliances necessary for public functions. All these are means of producing indirectly services which could not be rendered directly without such appliances. § 81. Something more should be said concerning two things which have been excluded from the above list of the concrete forms of capital. Land was T . M r Land and ac- cxcluded because it is primarily a gift of quired facui- ,. . ties are not nature, and not a product of human Indus- productive try devoted to the purpose of capitalistic capital - production. Yet it should not be forgotten that inde- pendent productive improvements are capital. More- over, such improvements are so common that land often ceases to be a mere gift of nature. Much land owes part of its usefulness to labor expended upon it. Never- theless, certain properties of land are always exclusive gifts of nature, and not the result of human labor ex- pended directly in their production. Some soils are naturally more fertile or more lasting than others. A north slope is less fertile than a south slope. The loca- tion of a farm with respect to the market, or of a city lot with respect to the center of business activity, ip wholly independent of labor devoted directly to that pur- pose. Some economists have included knowledge and acquired faculties among the forms of capital. But this is unnecessary, since all such things are included in the efficiency of labor, another factor of production. More than this, such faculties are a part of man him- self, not a part of his possessions. He may sell the use of his faculties, but cannot part with them. For 136 PRINCIPLES OF ECONOMICS. these reasons knowledge and acquired faculties are not to be considered capital. § 82. Many writers have held that food and clothing, the subsistence of laborers, are to be considered capital, capital and since they enable the workers to produce subsistence. more wealth. But we have already seen that food and clothing in the hands of the laborers are consumption-goods, and that when a consumption-good reaches the consumer it is finally destroyed. Further than this the analysis of the economist need not go. Food and clothing that are in the hands of nmnufactur- ers and merchants, however, form part of the mercan- tile stock of the community, and are to be regarded as capital. Such commodities, although they may be finished products, are more properly to be considered producers' goods, to which time and place utilities are being added by the process of forwarding the goods to consumers. We have already seen that production requires time. In the simplest forms of production, when man merely Mercantile appropriates a natural product, such as capUatistic wild fruits > fish > or g ame > onl y a VC1 T short production, interval may elapse between the exertion of human labor and the attainment of the desired ob- ject. On the other hand, the production of an agricul- tural product may require several weeks, while the construction of a canal may require many years. In all cases where indirect production is carried on, a cer- tain time must elapse before the formation of capital will be rewarded by the increased product of consumers' FACTORS OF PRODUCTION. 137 goods. During the process of production the laborers must have food, shelter, and clothing. They are pro- vided with these things out of the stocks of products which merchants are constantly forwarding from pro- ducers to consumers. Laborers themselves seldom keep on hand any large amount of subsistence-goods. They expect to receive, from time to time, wages which may be expended in purchasing food and clothing out of the mercantile stocks of completed products which exist in all civilized communities. In modern society middle- men, or merchants, perform the important functions of accumulating subsistence-goods and all other com- modities at the seasons when they are produced, and then of distributing them to consumers as fast as demanded. § 83. We may distinguish between fixed and circu- lating capital. Fixed capital consists of objects which serve to assist several acts of production. Circulating capital is consumed in a single cations of the act of production. All raw materials are ducUvfcapi- oirculating capital ; tools, machinery, and taX - buildings are fixed capital. Since the wonderful inven- tions which caused the Industrial Revolution, the use of machinery in all branches of production has increased at a constantly accelerating speed. This has caused the proportion of fixed capital used in modern production to increase at a rapid pace. Another important dis- tinction is between free and specialized capital. Free capital exists in such a form that it may be applied to any one of many industries; specialized capital is in- 138 PRINCIPLES OF ECONOMICS. vested in such a way that it assumes a fixed form, and cannot be withdrawn for investment elsewhere. Coal, lumber, iron, and steel are relatively free to be invested in one or many different kinds of industry. Railroads, canals, blast furnaces, and carpet looms are examples of specialized capital which is nearly worthless for any purpose except one single form of production. § 84. Many reasons make it desirable for us to have a clear conception of what is required for formation of productive capital. The first thins; that is The process l l ° of capital- necessary is that men should perceive that the indirect or capitalistic method of produc- tion will enable them either to produce more goods than would be possible by direct production, or to produce goods which direct methods would never enable them to secure. Obviously, the second step is for men to under- take the labor of collecting the materials and fashioning the tools necessary for the process of indirect production. The production of the various forms of capital is, there- fore, the second step in capital-formation. But this step will not be taken unless men are willing to work for future products, available only after capital has been created and has been used to produce consumers' goods. In other words, it is necessary to labor for future enjoy- ments instead of present, to prefer a greater quantity or variety of future goods to a smaller number of pres- ent satisfactions. Capital-formation requires, therefore, abstinence from present satisfactions and the willingness to labor for products that will be available only in the future. Economists hove expressed this idea by saying FACTORS OF PRODUCTION. 139 that capital is the result of abstinence, as well as of production. All capital is the result of production, but the work of capital production is actually performed under two di (To rent sets of circumstances. First, a „_. „ „ ' Methods of farmer or a mechanic may produce capital capitai- t, .',.,. i i -i t r formation, tor use in his business by building fences, digging drains, and improving fields, or by constructing a workshop and making tools. Second, capital may be produced by laborers who are hired to make it for other people. This takes place when a person saves a portion of his income, and invests the savings in a productive enterprise. Such a person may hire laborers to make tools and machines, or to build and equip a factory. He may buy shares of a business corporation, and thus turn his savings over to be invested by its managers. Again, he may place his savings in a bank, and allow them to be invested by the officials of that institution. In all these cases, what the person really does is to use his savings for the purpose of hiring laborers to produce various forms of productive capital. Savings banks have a peculiar importance, since they accumulate very small deposits from many depositors and secure large capi- tals for investment purposes. In the year 1894 - 95 the savings banks of the United States held deposits amounting to $1,810,597,0^3. This sum belonged to 4,875,519 persons, and represented an average deposit of -1371.36 for each depositor. We have seen that the production of capital will not take place unless a man prefers to labor for future goods 140 PRINCIPLES OF ECONOMICS. rather than for present. Working for future pleasures requires abstinence from present enjoyments. This is Abstinence true whether a person produces capital him- and the jr or saves ou £ f \ x [ s i nc0 me a surplus inducement ' * to saving. with which he purchases productive capital. A controversy has arisen concerning the amount of abstinence that is involved in saving. It is very evident that a person with an annual income of $500 will have to sacrifice the enjoyment of many present pleasures in order to save $100 each year. On the other hand, it has been denied, sometimes with great ridicule, that the savings of the rich man require any real abstinence to be incurred by him. Thus Ferdinand Lassalle, the socialist, wrote : " The ascetic millionaires of Europe ! Like Indian penitents or pillar saints they stand on one leg, each on his column, with straining arms and pendulous body and pallid looks, holding a plate toward the people to collect the wages of their Abstinence. In their midst, towering up above all his fellows, as head penitent and ascetic, the Baron Rothschild ! " But, as we have used the word, abstinence means desisting from some present pleasure in order to procure some future result. It does not imply that a rich man has to live abstemiously in order to save even large amounts of money. It means simply that when a millionaire builds a cotton factory instead of a palace or a yacht, he sacrifices present to future enjoyments. He may save $100,000 more easily than a poor man saves $100, but abstinence from present goods is necessary in the one case as in the other. Since saving does, therefore, FACTORS OF PRODUCTION. 141 require abstinence or the sacrifice of present pleasures, it follows that the amount of saving which people will practice will vary according to the difficulties of, and the inducements to, saving. Security of invested property is the first and most important inducement. Whenever such security is destroyed, little saving is carried on. A fair rate of interest on invested capital is another inducement. Yet it cannot be shown that there is any minimum rate of interest that will absolutely stop all saving. On the other hand, high rates of interest are sure to lead to an increase of the supply of productive capital. A third inducement to saving is the desire to provide for the comfort and integrity of one's family. A very low rate of interest will not deter a father from providing for the future support of his family in case of his death. We conclude that saving capital does involve a certain degree of abstinence, and that the amount of saving will vary directly as the inducements offered. Social, or productive, capital can be maintained only by constant investments of new capital. Raw materials are continually being used up ; tools and ma- . . Capital is chines wear out in the course of time ; fac- maintained tories, railroads, and canals require constant JJJ^ 1 ^^^! 4 repairs. Each year a portion of the savings stant ^vest- of any people must be devoted to replacing capital destroyed during the last productive period. Thus existing capital would rapidly diminish if saving should cease to be practiced. Stocks of productive capital can be increased only by making good the annual loss, and then investing additional capital in new enterprises. 142 PRINCIPLES OF ECONOMICS. LITERATURE ON CHAPTER V. General References : Andrews, Institutes of Economics, 31- 82; Bohm-Bawerk, Positive Theory of Capital, 1-125; Cannan, Elementary Political Economy, 3-25 ; Ely, Outline of Economics, 89-117; Gide, Political Economy, 96-16S; Hears, Plutology, 24-229, 291-331, 382-423; Laveleye, Political Economy, 30-130; Marshall, Principles of Economics, 214-400 ; Mill, Principles of Political Economy, Bk. I.; Newcomb, Political Economy, 70-144 ; Roscher, I. 119-285; Smith, Wealth of Nations, Bk. I., Chaps. 1, 2, 3, Bk. II., Chaps. 1, 2, 3 ; Walker, Political Economy, 33-77. ORGANIZATION OF THE FACTORS. 143 CHAPTER VI. THE PRODUCTION OF WEALTH. {Continued.) I. Organization of the Factors of Production. § 85. A Robinson Crusoe may apply labor and capital to land, and may carry on a purely isolated process of production. But in economic society the prod^on a production of wealth is a social process ; and social process, we have next to consider the social organization of the three productive factors, land, labor, and capital. We shall find that production requires the cooperation of the individuals that compose any economic society ; and that it is a cooperative, therefore a social, process. § 86. The simplest form of cooperative or associated production is seen in the association of a number of per- sons to produce a result which the efforts of simple asso . a single individual could accomplish less ciated effort, easily, or perhaps could not accomplish at all. When all the men in a community join in raising the frame of a house, or in harvesting a field of corn, we have an in- stance of simple associated production. § 87. The division of occupations is a second form of cooperative production. This occurs with- Division of in a family when the men attend to outdoor occupaUons ' work, and the women to indoor work. Or it takes place 144 PRINCIPLES OF ECONOMICS. within a community when certain men devote themselves mainly or exclusively to the trade of the smith, the car- penter, or the shoemaker, and perform all such work for the other members of the society. § 88. A third and more complicated form of associa- tion is seen in what is technically called the division of Division labor. By this is meant the division of the of labor. process of producing a commodity into a number of small parts. Each laborer is intrusted with the performance of some one or two parts of the process. in this way the manufacture of a pair of shoes, a sewing machine, a watch, or a needle, may be divided into fifty or one hundred separate processes. The division of labor has been carried so far in the modern factory that any reader is able to find for himself many illus- trations of this minute subdivision of the work of production. The introduction of the division of labor has had many beneficial effects, which have been discussed by all econ- omists since the time of Adam Smith. It Advantages oftnedivi- assigns to each laborer a single process sion of labor. , . , , mi . j. j rj_ which he is called upon to repeat day after day until he acquires great skill and dexterity in his work. It saves time which would be lost if the work- man should be compelled constantly to change from one process to another. It enables almost every one to find some work which he is able to do, although he may suffer from some physical disability. Finally, it reduces pro- duction to a series of comparatively simple processes, which can be easily studied and often improved. In this .ORGANIZATION OF THE FACTORS. 145 way invention has been greatly stimulated, most inven- tions taking the form of greater or smaller improvements upon details of the productive process. Yet certain disadvantages are sometimes found to grow out of the division of labor. The workman who is confined to a single process often finds his Disadvantages work exceedingly monotonous. Unless he of the division cultivates other interests, his faculties are likely to become narrowed, and he is likely to be less intelligent. Again, the division of labor confines work- men to a few routine operations. Then, if thrown out of the accustomed branch of employment, they often find difficulty in learning another trade. Finally, the employ- ment of women and children in many lines of industry has been made possible by the division of labor. Women and children are able to operate many kinds of machin- ery, and have often displaced men. In factory towns it has happened that fathers have been thrown out of work, while wives and children have taken their places at the mills. The division of labor has been found an indis- pensable condition for the progress of modern industry. A wise policy will seek to diminish all the disadvantages which may arise from it, while retaining its great bene- fits. Opportunities for education and recreation -will counteract whatever monotony of occupation the division of labor produces. The labor of women and children may be abolished in certain cases where it is especially detrimental to the health of the workers or to the welfare of the family, while in other cases it may be permitted under adequate restrictions. 10 146 PRINCIPLES OP ECONOMICS. § 89. The exchange of products underlies the last two forms of associated production. The division of occupa- Exchangeof ti° ns cannot take place unless the smith, the products. farmer, the carpenter, and the shoemaker devise some method of exchanging the products of their respective labors. The division of labor cannot be carried very far until there is an organized system of markets. In these markets merchants bring together the products of all branches of industry in such a way as to enable the men who produce large quantities of various small commodities to find a market for their wares. Modern industry, therefore, is based upon the fact that each man produces large quantities of salable commodities which, he himself could never consume, and then depends upon other producers to furnish him with supplies of consum- ers' goods suited to his wants. This interdependence of all producers upon the markets where they sell their prod- ucts or purchase their supplies has been carried farthest in those industries which have become localized in a few regions. The people of England draw food and raw materials from almost all quarters of the earth, and depend upon distant markets for the sale of their manu- factured products. In the United States the manufacture \ of textiles is concentrated in New England, New York, New Jersey, and Pennsylvania ; while these states de- pend upon the South or the West for their raw materials and breadstuffs. Thus one community is dependent upon the products of others, and a territorial division of labor is carried out. Such a localizing of industries enables each region to devote its labor to those branches ORGANIZATION OF THE FACTORS. 147 of production for which it has the greatest advantages. The total production of the world is enormously increased by such a localization of production. The exchange of products is a part of the process of pro- duction, but it requires detailed treatment in a subsequent chapter. § 90. A fifth form of associated production is seen in the cooperation of the factors of production. The per- sons who control the supplies of land, of 1 * Cooperation of labor, and of capital must cooperate in the the productive establishment of business undertakings or enterprises. Sometimes it happens that one man may own both land and capital, and may perform all the necessary labor of production. This is the simplest way to. secure the cooperation of the three factors of produc- tion, and is very common in the United States, where so many farmers cultivate their own land with their own capita] and labor. On the plantations of the South another form of organization formerly existed. The planters owned their land and capital, and also owned the laborers. In both of these cases the cooperation of the productive factors is secured by simple methods, but the organization of business enterprises is often much more complex. Such a complex form of business organization is re- quired whenever separate classes of persons control the supplies of labor, of land, and of capital re- quired for the establishment of an industrial organization. . . . , , The employer, enterprise. At the present day we have a large class of persons who supply labor but nothing else. 148 PRINCIPLES OF ECONOMICS. Another class supplies capital, while land may be sup- plied by still a third class, the landlords. The work of securing the cooperation of laborers, capitalists, and land- lords has fallen to a class of employers or undertakers of business enterprises. 1 The employer, or undertaker, has become a person of the greatest economic impor- tance. He is constantly seeking for favorable opportu- nities to establish business enterprises, he assumes the responsibility of investing capital and hiring land, while he employs and superintends the work of a number of laborers. On his good judgment and business ability the efficiency of the productive process mainly depends. His function is altogether distinct from that of the capitalist, the landlord, or the laborer. They may cooperate in establishing the enterprise, but upon the employer the responsibility of undertaking and conducting the busi- ness primarily depends. The entrepreneur may own the land upon which the enterprise is established, he may contribute a part or all of the capital used in production, he may even labor with his own hands ; but his function as entrepreneur is wholly distinct from his functions as landlord, capitalist, or laborer. We shall next study the various forms of business undertakings, or the various methods in which entrepreneurs exercise their functions in establishing and managing productive enterprises. § 91. Entrepreneurs may secure the cooperation of land, labor, and capital, by the following methods : — 1 The word rt undertaker " originally meant a man who organized and managed a business on his own responsibility. In. place of " undertaker " the French word entrepreneur has been commonly used. ORGANIZATION OF THE FACTORS. 149 1. The single entrepreneur system. In this a single employer, contributing all of the capital or 1 J ' ° : The forms of borrowing a part, owning or hiring the hind business un- used, and employing a sufficient number of laborers, establishes and conducts a business on his individual responsibility. 2. Next conies the common business partnership. Two or more men divide the work of business man- agement, and jointly assume the risks incident thereto. This form of undertaking is advantageous when the business requires more capital than any partner alone could have contributed, or when the cares of manage- ment need to be divided. The partners agree to divide profits or losses in certain proportions, and are jointly and severally liable for all the debts of the firm to the extent of their entire fortunes. 3. A third form of undertaking is the modern busi- ness corporation. The older corporations were formed generally by a number of persons who were empowered by law to act as an individual for certain purposes, and to maintain a continued existence, beyond the life of the actual associates, by providing for a succession of members. A church, a university, or a charitable insti- tution can best be organized in this way. Such a corpo- ration is in the eyes of the law an artificial person. Its charter of incorporation confers upon it certain spe- cific powers, and within those limitations the members of the corporation act as one person. Thus they may acquire or sell property, may sue and be sued. Beyond the specific powers conferred by its charter, however, no 150 PRINCIPLES OF ECONOMICS. corporation has a right to go. Such an action would be declared by the courts to be ultra vires, that is, beyond the powers conferred upon the corporation. Moreover, the charter might be declared to be forfeited on account of such a violation. The modern business corporation is regularly a joint-stock company. Its capital is divided into shares, often of $100 each, which are transferable at the option of each shareholder. Only the owners of the shares of the capital stock are members of the corporation. Such a joint-stock company is a convenient form of business undertaking when a large capital is required. Many men may be willing to invest small amounts of money in an enterprise in which no one of them would wish to risk his entire fortune. Many of the earliest joint-stock companies were not incorporated, and were merely a form of partnership. Such com- panies have now become the most important kind of corporations. They may be formed by a special act of legislation, or by complying with a general law author- izing groups of persons to form themselves into cor- porations, organized for certain purposes, under certain conditions. Their charters are either perpetual or lim- ited to a term of years. Where corporations are given valuable privileges, it is very important that the charters should end after terms of thirty or forty years. The modern joint-stock company, therefore, is regularly a corporation, and has become the most common kind of corporate organization. One important feature of such, business associations distinguishes them in a marked manner from other forms of business undertaking. The ORGANIZATION OF THE FACTORS. 151 members of joint-stock companies were originally liable for the debts of the companies to the full extent of their fortunes. In modern times their liability has often been li mited to th e amount of money that they invest in the stock of the company. Under this system of limited liability, if a thousand persons contribute $100 each to form a capital stock for a business corporation, each one is liable only to have the $100 contributed by him seized for the debts of the business. The stockholders lose, if the business is unsuccessful, all the money invested ; but they do not risk their entire fortunes by entering into such an enterprise. Sometimes the stockholders are liable for double the amount of their investment. Thus, the stockholders of one of our national banks are liable, in case of the failure of the bank, to be assessed for a sum equal to the par value of the shares which they hold. Joint-stock companies with limited liability are well adapted to undertake large enterprises, espe- cially when there is considerable chance of failure. In- dividual employers or partners would seldom take the risks which their unlimited liability would compel them to assume if they invested their capital in many business enterprises. Moreover, as the capital of a joint-stock company becomes larger and the number of stockhold- ers increases, any single stockholder has little influence in the management of the enterprise, and has less knowledge of the affairs of the company. It is, there- fore, unfair to hold him liable for the debts of the cor- poration to the full extent of his fortune. Furthermore, the capital needed for many large enterprises cannot be 152 PRINCIPLES OF ECONOMICS. obtained unless the liability of the investors is limited to the amount of their investments. During the last fifty years the growth of business corporations has been marvelous. Enterprises that require large investments of capital almost invariably assume corporate form. Many simple business partnerships have been converted into corporations, partly in order that the partners may cease to be liable for firm debts to the full extent of their fortunes. Great abuses have undoubtedly attended the growth of corporations, but they have been on the whole a useful and necessary form of economic organi- zation. The great need of the times has been for the large capitals required to build railroads, to construct huge steamships, and to equip giant factories. This need the joint-stock companies have supplied. More- over, they have possessed the further merit of making it possible to invest small sums in one or more shares of corporation stock, so that small savings have been accu- mulated in a manner which has made them available for the largest enterprises. One more point should be noted. Adam Smith, writing in 1776, argued that cor- porations could never be managed as efficiently as busi- ness partnerships, since the hired managers of corporate enterprises controlled, not their own money, but the cap- ital of other people. For this reason he argued that they would generally be wasteful and negligent. In this criticism Smith undoubtedly put his finger upon a real difficulty, but a difficulty, nevertheless, which has been in large part overcome. Corporations have learned to select managers from tried and faithful servants,. who ORGANIZATION OF THE FACTORS. 153 have often acquired a professional pride in the success of the business. They offer large salaries as rewards for efficiency ; while the managers may own stock of the company, and thus have a direct interest in the business. Yet many corporations incur heavy losses through wasteful management, and no remedies have been found for many of these cases. 4. A fourth form of undertaking is seen in what is technically called cooperative production. Cooperation, in this limited, technical sense, is an effort to dispense with the employer, and to leave the management of a business to the workmen. Laborers have sometimes combined to supply their own capital, and to establish business enterprises on their own responsibility. Work- men acquire in this way the same interest in the success of the undertaking which partners have in the success of their business. This often leads them to do more and better work, and thus increases the efficiency of the organization. On the other hand, the success or failure of a modern business depends as much upon able man- agement as upon faithful workmanship. Cooperative enterprises are usually managed by the workmen them- selves, or by committees chosen from their number. Such a divided direction has so far proved less effi- cient than the business partnership or the corporation, in which the management can more easily be concen- trated in the hands of one man or a small number of men. 5. A final form of undertaking is the management of business by the State. The United States Government 154 PRINCIPLES OF ECONOMICS. manages the postal business, many of our towns own their systems of water works, while a few own and man- age gas and electric-lighting works. Government en- terprise will require discussion in a subsequent chapter. § 92. A sixth form of associated activity underlies all the forms of productive enterprise which have been pre- viouslv described, and marks the process of Participation of the state in production as a distinctly social process. pro uc on. rpj ie importance of the part which the State takes in the production of wealth can be most clearly shown by an enumeration of some of the cases in which governmental activity is exercised. 1. The State endeavors to protect its citizens against external violence. Unless security from external attack is assured, life and property are not safe, and the pro- ductive resources of a nation cannot be developed. England's immunity from invading armies during the great Napoleonic wars enabled her to outstrip by fifty years' development all her European rivals. 2. The State aims to maintain order, and to protect persons and property from domestic violence. Between the thirteenth and eighteenth centuries, the King's peace was maintained in England firmly enough to enable her wool-raising industry to become the greatest in the world. In the other countries of Europe lawlessness was so common as to make it almost impossible for such an industry to be carried on. 3. The State makes possible and regulates the hold- ing, exchange, inheritance, and bequest of property. The right of property is the right of exclusive disposal ORGANIZATION OF THE FACTO lis. 155 over a thing, within certain limits fixed by the laws of the State. Many people are inclined to regard it as a " natural right," that is, an absolute, inalienable right, not to be questioned for any reason whatsoever. As a matter of fact, the right of property can be shown to be an historical product, gradually developed and constantly modified as men have emerged from barbarism to a con- dition of civilized life. There was a time in the history of all European peoples when practically all possessions belonged to the clan or tribe, not to the individual. Private property was developed first in the case of per- sonal belongings and the products of man's labor. Gradually, and within times of which we have historic record, the right of private ownership was extended to land. The exchange of property between individuals, and the rights of inheritance and bequest, have been narrowly limited by law, and have varied widely among different peoples. In all places property rights have been defined, limited, and finally protected by law in such a manner as has seemed most expedient. Private property has been so long established among us that it is easy to commit the error of mistaking it for something that has always and necessarily existed, and in its pres- ent form. While it has proved, on the whole, a highly desirable and useful institution, we must not shut our eyes to the facts that it has always been limited by con- siderations of social expediency, and that it has often been modified. A few instances will show to what ex- tent a man's right of disposal over his property is limited by law. First, all property is held subject to the right 156 PRINCIPLES OF ECONOMICS. of the State to take a part of it in the form of taxes. Second, property is limited by the State's right of emi- nent domain, under which the State may take property for public purposes, compensating the owner for its loss, however. Third, the owner of property may not use it in such a manner that it becomes a public nuisance, or for a purpose opposed to public policy. Finally, prop- erty may be forfeited to the State, or a portion of it taken in the form of fines. In many ways the rights of transfer, of bequest, and of inheritance of property are clearly defined and limited by law. We are now ready to consider the economic importance of private property for the production of wealth. It has been found that men will not engage in production in any efficient man- ner unless they are secure in the enjoyment of the prod- ucts of their labor. Through the establishment and protection of property rights, the State furnishes men with the greatest incentive to diligent effort. Only through cooperation of various sorts can production be made at all large and copious. The division of labor, the exchange of products, and the voluntary cooperation of landowners, capitalists, and laborers in forming a business undertaking, all presuppose the recognition and' protection of the property rights of individuals. In defining and safe-guarding property rights, the State creates the indispensable conditions of all effective production. 4. The State determines the conditions and the man- ner of making contracts, and then enforces the faithful performance of such agreements. The exchange of prod- TEE ECONOMIC STAGES. 157 ucts and the organization of business enterprises by landlords, capitalists, employers, and laborers could hardly be carried on, and could never have reached their present state of development without a strict en- forcement of contract agreements between buyers and sellers, or between employers, on the one hand, and laborers, capitalists, and landowners, on the other. 5. The State performs many services indispensable for the production of wealth, which private individuals never would perform in a satisfactory manner. The coinage of money, the regulation of weights and meas- ures, and the construction of roads, lighthouses, har- bor improvements, and ocean and river dikes are a few examples of such services. II. Stages in the Development of Production. § 93. We can distinguish five stages in the develop- ment of the process of wealth-production. 1. The hunting and fishing stage. In the lowest grade of economic development, wealth is produced mainly by hunting or fishing, by labor of Thefiveeco _ mere occupation. Little capital is used, nomic sta e es - and it consists of a few simple tools and weapons. Famine is of frequent occurrence whenever supplies of fish and game become scarce. Population is sparse, since much land is required to furnish fish and game sufficient to support a single person. Slavery seldom or never exists, since slaves could be made useful only by putting weapons in their bands, a process dangerous to the masters. Fishing tribes, when situated on the 158 PRINCIPLES OF ECONOMICS. shores of navigable waters, may develop into com« mercial peoples. The American Indians were mostly hunters and fishermen at the time of European colo- nization. In pioneering the way for the advance of civilization, the European settler often had to adopt the same method of securing a living. 2. The pastoral stage. The second period of eco- nomic development is marked by the fact that men learn to rear and domesticate herds of animals, and to depend chiefly upon their herds for food and clothing. The production of economic goods increases ; and some per- sons acquire considerable wealth, which consists mostly of sheep and cattle. Slavery appears, and captured ene- mies are often employed in the peaceful labor of pas- toral industry. Pastoral peoples are usually nomadic, wandering around in search of the best pastures. In the United States cattle raising has long been a typical frontier industry, which gradually makes way for agri- culture and manufactures. 3. The agricultural stage. The next advance is made when men learn to raise plants as well as animals. More capital is used in production, and the cooperation of nature is secured to a much greater extent. When the cultivation and improvement of the soil begins, people settle down on definite tracts of land, and cease to live a wandering life. Private property in land then originates. The production of wealth increases, so that a given area of land can support a largely increased population. Slavery often assumes large proportions, since men prefer to impose upon slaves the hard labors THE ECONOMIC STAGES. 159 of agriculture. Subordinate to agriculture and cattle raising, hunting and fishing may be pursued. In agri- cultural communities some division of occupations may be found, particularly in the case of wood and metal workers. 4. The manufacturing and commercial stage. At this point greater attention is given to manufacturing into highly finished products the raw materials secured by the hunting, fishing, pastoral, agricultural, and min- ing industries. This work requires a much larger amount of capital, and leads to a separation of trades. The division of labor may also be introduced ; but manufactures are carried on mainly by hand, aided only by the motive power of animals, wind, and water. Commerce now becomes an industry of prime impor- tance. When men live by agriculture each community is self-sustaining, and requires few commodities pro- duced in other places. With the growth of hand trades, communities begin to show different capabilities for producing various kinds of goods ; certain industries become localized in regions that have the greatest ad- vantages for producing them; and an exchange of prod- ducts begins on a wider scale. The growth of commerce leads to the extended use of money to facilitate ex- changes, which had previously been carried on by barter. At the same time the rise of manufactures and com- merce stimulates the growth of cities, which now become manufacturing and commercial centers. In antiquity the most flourishing states of Greece and Italy reached the manufacturing and commercial stage. In 1750 the 160 PRINCIPLES OF ECONOMICS. leading countries of Europe were in this period of de- velopment, as were also the largest and most populous of the English colonies in America. 5. The industrial stage. This stage was reached in the time of the Industrial Revolution. England led the way, followed by the United States and various Euro- pean countries. It is characterized by the vast increase of power manufacture ; first steam, then electricity being- utilized. Transportation facilities are revolutionized by the use of steam, and international commerce rapidly increases. Exchanges are effected as much through the means of credit as of money. The employment of power in manufactures vastly increases the use of capi- tal, while business is conducted on a much larger scale. Household manufacturing industries are replaced by fac- tories ; small factories tend constantly to be replaced by gigantic enterprises ; and the business corporation becomes the common form of industrial organization. As we are now living in the industrial stage, the remain- der of this book will be devoted mainly to an explana- tion of its characteristics and tendencies. III. Freedom in the Establishment of Productive Undertakings. § 94. In modern economic society, employers, capi- talists, landlords, and laborers are, to a large extent, Freedom of free to cooperate in establishing productive JabofaT* ° f undertakings. In the absence of legal re- capitai. straints, labor and capital are freely invested in those lines of business which promise the largest FREEDOM OF INDUSTRY. 161 returns. It" any profession or trade is not adequately supplied, remuneration will he so high as to induce a sufficient number of new enterprises to he estahlished to meet the demand. On the other hand, when any line of business becomes over-supplied, capital and labor will sooner or later seek investment elsewhere. In this manner the productive forces of society are distributed among different branches of production in proportions roughly corresponding to the needs of the public. In European countries such freedom of investment did not exist at the close of the last century. In France, up to the Revolution of 1789, governmental restrictions and oppressive regulations made by exclusive corporations rendered it almost impossible for any save a privileged few to carry on manufactures or commerce. In Eng- land, until the Industrial Revolution, the investment of labor and capital was restricted by guild regulations and by laws that hindered the movement of laborers from one parish to another. In general, it can be said that individual enterprises or business partnerships were freed from restrictions earlier than corporate under- takings. Until the last forty or fifty years, both in England and the United States, corporations were char- tered only by special acts of legislation. The bestowal of charters became an act of legislative favor or of political privilege. Members of one political party often found it impossible to secure a corporation charter when the other party was in power. A great advance was made when general laws were passed making it possi- ble for any persons, upon complying with necessary 11 162 PRINCIPLES OF ECONOMICS. requirements, to associate themselves in a corporation. At the present time some of our states allow charters to be granted only under general laws, and the tendency is everywhere to restrict the granting of special charters. In a few instances the establishment of productive enter- prises is still limited by law. The United States pre- vents private parties from engaging in the postal business. In towns and cities such enterprises as gas. electric lights, and water works are carried on either bv the cities or by private corporations which have received exclusive franchises and privileges from the municipal governments. IV. Cost of Production. § 95. It will be useful for us to make a careful analy- sis of the different elements that may enter into the . . . cost of production of a commodity. Since Analysis of ' J cost of pro- we are now considering production as a social process, we must analyze the cost to society of producing various kinds of wealth. This can be done by asking, What does society sacrifice in order that the productive process may be carried on ? The different elements of sacrifice that may enter into the social cost of production are : — 1. The destruction of natural agents. Many kinds of production may be carried on without appreciably lessening the number or usefulness of the natural agents that assist the process. A windmill or a water wheel may be used in such a manner. But in many cases some gifts of nature are consumed during the pro- COST OF PRODUCTION. 163 ductive process, and in such a way that the number or usefulness of the available natural agents is lessened. This occurs, for instance, whenever coal is consumed in generating steam or electricity. The industries of Eng- land each year consume a very appreciable portion of the coal supply of the country. In agricultural indus- try the principal natural agent, land, may be improved by careful cultivation ; but in some cases the fertility of the soil is decreased. In the United States our great staple crops of tobacco, cotton, corn, and wheat have taken from the soil a far larger amount of the vegetable and chemical elements necessary for the growth of plant life than has been restored to the land in the form of fertilizers. In general we can say that mining indus- tries gradually lessen man's available supply of natural agents. Agriculture, fisheries, and forestry may be rationally conducted in such a manner that our supply of natural agents will not be lessened, and may even be increased. 1 2. The destruction of capital. Practically all pro- duction necessitates the destruction of a certain amount of capital, both fixed and circulating. The cost to society of the capital consumed in production is made up of two elements, labor and abstinence. When capi- tal is consumed, society loses first of all the labor expended in producing the materials or tools thus destroyed. Second, it should be noticed that absti- 1 Read Marsh, " The Earth as Modified by Human Action," for a noble plea for economy in the use of all natural agents. See also Jeyons, " The Coal Question." 164 PRINCIPLES OF ECONOMICS. nence, or waiting, was necessary for the formation of the original capital, and will be necessary for its replacement. 3. Labor. Not only is labor required to produce capital, but also it must be exerted in using capital for the purpose of further production. The social cost of labor will depend upon two elements : (a) the charac- ter and intensity of the labor, whether intellectual or physical, skilled or unskilled ; (7>) the length of time during which labor is exerted. V. The Investment of Labor and Capital upon Land. § 96. In productive industry it is necessary to invest labor and capital upon land. Now it is a common fact of experience that in certain industries, The law of ' _ ' diminishing agriculture, for instance, much less labor and capital can be invested upon each acre of land than in other industries, such as manufactures and commerce. We have next to investigate this ques- tion of the extent to which it is possible to invest labor and capital upon a definite tract of land. § 97. First we will consider agricultural industry. At any given time every farmer knows that there is a point The law of beyond which it will not pay him to invest diminishing ] a | )or an( j ca pital upon each acre of land. returns in r r agriculture. An investment of five dollars per acre may yield a return of twelve bushels of wheat. Possibly an investment of ten dollars might have resulted in a prod- uct of twenty-four bushels. But the crop secured from a single acre of land cannot, at any given time, be made LABOR AND CAPITAL UPON LAND. 1G5 to double indefinitely by doubling the investment of labor and capital. To continue our illustration, suppose that fifteen dollars had been invested upon the given acre of land instead of ten dollars. Then it is probable that the crop would have been increased, but it is not likely that it would have amounted to thirty-six bushels. Sup- pose the investment of fifteen dollars to yield a crop of thirty bushels. Then the results of investing the three different amounts of capital upon the given acre of land would have been as follows : — Investment. Crop. Average Yield to each Dollar of Labor and Capital. $5 $10 $16 12 bushels 24 bushels 30 bushels 2.4 bushels 2.4 bushels 2.0 bushels It is evident that, on the piece of land in question, an investment of fifteen dollars will secure a larger yield than an investment of ten dollars ; but that the average yield secured by each dollar of labor and capital is less than it would have been had the investment been limited to ten dollars. It would have been better if the third five-dollar investment had been made upon another piece of land. This is an illustration of the method in which a law of diminishing returns operates in agricul- ture. As the investment of labor and capital upon an acre of land increases, a point is finally reached beyond which an increased investment would yield a larger aggregate but a smaller proportionate return. If this 166 PRINCIPLES OF ECONOMICS. were not true, we should continue to raise all our agri- cultural produce from a few acres of land, and would never have taken the trouble to reduce other fields to a condition suitable for cultivation. It will be noticed that care was taken to say that the law of diminishing returns is true at any given time. In any season, when labor and capital are in- The effect of . . improvements vested in the cultivation of land, agricul- magnc e, ^ ura ] methods and skill have reached a certain stage of advancement, and will not be materi- ally changed during that season. They are, therefore, relatively fixed ; so that the economist can say that, at any given time, investments of labor and capital can be carried only to a certain point before they will begin to yield a diminishing return. On the other hand, if we compare one season with another, or compare one period of years with another, no law of diminishing returns may be found to hold true. Scientific agriculture is each year making it possible to invest more capital upon land without encountering a point of diminishing re- turns. Continuing our illustration, we may suppose that improved methods of cultivation are originated, and that these improvements make it possible to invest fifteen dollars upon each acre of land, and to secure an average yield of thirty-six bushels per acre. The law of diminishing returns, therefore, is true only at a given time. At one season it is possible to invest only ten or fifteen dollars in cultivating each acre of wheat before arriving at a point of diminishing returns. Improved methods of farming may, however, after a period of LABOR AND CAPITAL UPON LAND. 167 years make it possible to invest fifteen or twenty dollars on each acre, and to secure a proportionately increased return. Bearing these considerations in mind, we can state the law of diminishing returns as Professor Mar- shall has formulated it : " An increase in the capital and labor applied in the cultivation of land causes in general a less than proportionate increase in the amount of prod- uce raised, unless it happens to coincide with an im- provement in the arts of agriculture." We have seen elsewhere that the population of civi- lized countries is increasing, and is likely to increase for a considerable time to come. This fact will T ,. „ Implications make it necessary to raise more agricultural of the law of products as fast as numbers increase. The returns in ag- law of diminishing returns has sometimes "^t^"" 6, been considered to imply that, when all lands now vacant shall have become occupied, men will secure increased supplies of agricultural products only by ap- plying more and more capital and labor to land that will yield a constantly diminishing return. Such a con- clusion is wholly unwarranted. From year to year the progress of agriculture is making it easier than ever before to secure the products of the soil. There is reason for thinking that scientific agriculture is only in its infancy, and that in the future its progress will be much more rapid than in the past. § 98. It is often overlooked that manufactures are subject to a law of diminishing returns. If capital is constantly invested on a single acre of land, a point is finally reached where it will lie more profitable to in- 168 PRINCIPLES OF ECONOMICS. vest further capital elsewhere. Suppose a factory to cover an acre of ground. On each story of the build- ing only a certain number of laborers and diminishing machines can be employed. If the invest- returnsin ment of capital is increased, additional manufactures. stories will have to be added to the building. Xow there are definite limits to the number of stories that can be used economically in a factory building. The older factories are four or five stories high, but modern factory construction favors one or two story buildings. In such a low building it is found that the largest return can usually be secured from each dollar of invested capital. The expenses for elevators, heavier walls, and greater fire risks, combined with the reason that the factory can be less conveniently arranged and managed, make high buildings less desirable for manu- facturing purposes. The law of diminishing returns, therefore, applies to manufactures. When a certain amount of labor and capital has been invested on a single acre of land, a larger return can be secured for future investments by placing them on a new piece of ground. Manufacturing industries, however, permit a much larger investment to be made on each acre of land than can be made in agriculture. It is easy to invest several hundred thousand dollars upon an acre of land devoted to manufacturing industry before the point of diminishing returns is reached. In most kinds of agricultural industry only a fraction of one per cent of this amount can be invested. § i>(>. In other industries the greatest differences exist LABOR AND CAPITAL UPON LAND. 169 in respect to the amounts of labor and capital that can be invested before the point of diminishing _, . , 1 ° The law of returns is reached. Mining is most decid- diminishing ,,..... returns in edly an industry of diminishing returns. 1 other As surface deposits are exhausted, shafts must be driven further into the earth, at greater expense and with a rapidly diminishing return. In commercial industries very large investments can be made upon each acre of land. In cities, buildings that cost several million dollars are built upon land that costs hundreds of thousands, or even more than a million, dollars per acre. Such investments frequently amount to $2, 000,000 per acre. Yet, even here, the point of diminishing returns is ultimately reached. The tallest office build- ings cannot be raised above a certain height except at a rapidly' increasing expense. When such buildings are placed close together, very large areas have to be left vacant in order to secure the necessary amount of air and light. At the present time our tall buildings are usu- ally isolated, and secure sufficient air and light because they tower above neighboring structures. If all the office buildings of the business portion of a city should be constructed on this plan, large areas would neces- sarily be left vacant to serve as air spaces. As the height of the buildings increased, the open area would have to be larger, and would finally more than counter- 1 Ultimately, of coarse, a point of exhaustion is reached. In agricul- ture no such condition need be reached, but land may improve after hun- dreds of years of careful cultivation. The law of diminishing returns has nothing to do with the exhaustion of the soil. 170 PRINCIPLES OF ECONOMICS. balance any gain of space secured by constructing addi- tional stories. The necessity of providing prompt elevator service is another force that tends to the same result. The number of elevators must be largely in- creased as the height of the building increases. The increased room devoted to elevators tends finally to counterbalance the gain of space secured by construct- ing higher buildings. It appears that a point of diminishing returns is reached ultimately in all productive industries located upon a given area of ground. Sooner or Summary. . . later there comes a time when a larger re- turn can be secured by investing labor and capital upon other tracts. In agriculture the point of diminishing returns is reached with much smaller investments than in manufactures or commerce, but all these industries differ merely in the degree to which they admit of an intensive investment of labor and capital. Again, the law of diminishing returns is true only at a given period of time ; and, from year to year, inventions and dis- coveries increase the amount of labor and capital that can be invested on each acre of land without causing a decrease in the return to each unit of investment. VI. Large-Scale Production. § 100. During the present century there has been a remarkable concentration of productive industry, concentration Formerly the amount of capital and labor in production, combined in the average business enter- prise was far smaller than it is to-day, while the concen- LARGE-SCALE PRODUCTION. 171 tration of production in large establishments is more marked at the present moment than ever before. A few statistics will show how greatly the size of the average business establishment has increased. First may be presented the census statistics of all manufac- tures of the United States from 1850 to 1890. 1850. 1860. 1870. 1880. 1890. Average Product of each Manufactur- ) Average Capital of each Manufacturing | Average Number of Employees in each 1 Manufacturing Establishment . . J $8,280 $4,330 7.7 $13,420 $7,190 9.3 $13,420 $6,720 8.1 $21,100 $10,960 10.6 $28,070 $19,020 13.8 This process of concentration is much more marked in the textile industries, as shown by the statistics of the last five census years : — 1850. 1860. 1870. 1880. 1890. Number of Establishments . . . Average Product of each Textile 1 Average Capital of each Textile 1 Average Number of Employees of 1 each Textile Manufactory . . J 3,025 $42,560 $37,190 48.5 3,027 $70,940 $49,580 64.1 4,790 $108,640 $62,140 57.4 4,018 $132,570 $102,710 95.6 4,114 $175,480 $179,860 124.4 Again, the iron and steel industries show even a greater decree of concentration : — 1870. 1880. 1890. Number of Establishments .... Average Product of each Iron and Steel ( Manufactory . . 1 Average Capitol of each Irou and Steel | Average Number of Employees of each 1 Irou and Steel Manufactory . . . ) 808 $256,440 $150,700 95.9 792 $374,410 $265,030 177 7 719 $665,760 $575,860 244.1 172 PRINCIPLES OF ECONOMICS. § 101. Modern production tends to become concen- trated in large establishments for the reason that it can be carried on most economically in Reasons for J the growth of that manner. Large-scale production may production , ,. . , . on a large secure the following economies : — scale • 1. Economy in fixed capital. Modern machinery is expensive, and requires expensive factory buildings. Machine production, therefore, necessitates a very large outlay for fixed capital ; and this element of investment tends to increase each year. The statis- tics just presented show that, in the United States, the average amount of capital invested in a manufacturing establishment was about four and a half times as great in 1890 as it was in 1850, while at the same time the average number of laborers employed is less than twice as large. In the textile industries they show that, while the amount of capital invested in the average establish- ment has increased to five times the figures for 1850, the average number of laborers employed has increased less than three times. In the iron and steel industries it appears that the average investment of capital is nearly four times as large as it was thirty years ago, while the average number of employees is only two and one half times as large. It is evident, therefore, that the cost of fixed capital is an increasing element in the cost of production. Now the cost of the fixed capital often docs not increase proportionately as the product of the factory increases. For this reason such costs are termed the " fixed charges" of a business, since within certain limits they do not vary much, as the amount of LARGE-SCALE rilODUCTION. 173 business is larger or smaller. One large building may cost less than two small ones, while it may furnish room for the same amount of machinery. Generally a smaller expenditure for engines and other machinery will enable one large factory to turn out as large a product as two small ones. This is because no machine is needlessly duplicated in the large factory, while in the two smaller factories some of the machinery may be only half util- ized for a considerable portion of the time. This often happens when costly machinery is required to perform some short operation, and would remain idle much of each day in a small factory where the product is not large enough to keep the machine constantly employed. Steam railroads, gas and electric-light works, and street railways are the most common illustrations of businesses that require very large outlays of fixed capital. In these industries one company can, manifestly, supply the same territory with very much less unnecessary reduplication of tracks, gas pipes, electric wires, etc., than two companies would require. But the same thing is true, although sometimes to a less extent, of giant factories in which hundreds of thousands or even several millions of dollars are invested in land, buildings, and expensive machinery. In general, it may be said, that the larger the outlay of fixed capital, the greater are the economics that result from the concentration of production in a small number of large establishments. If the annual expenses for interest and replacement of fixed capital are $300,000 in any business, and the product is $1,000,000, then the costs of the fixed capital 174 PRINCIPLES OF ECONOMICS. will be thirty cents for each dollar of product. Now if the output of the business be increased to 81,500,000 by merely utilizing the machinery to the greatest degree possible, then the costs of the fixed capital will be only twenty cents. 2. Economy may also be effected in the circulating capital. Less coal or lubricating oil may be required in one large factory than in two small ones. A large store need not have on hand at all times twice the stock of finished products that two small stores may require in order to enable them to meet any probable demand of their customers. 3. In experimenting with new methods and invent- ing new machinery, a large concern has a great advan- tage over a small one. Invention and experiment are often expensive processes which only a business pos- sessed of large capital can afford. Some large concerns keep scientists and inventors at work endeavoring to improve the processes by which production is carried on. 4. Large-scale production often results in an econ- omy of skill. Labor can be much more efficiently sub- divided in a large business undertaking. Out of a great number of employees men of exceptional talents can be selected for the particular lines of work for which they are best fitted. A high specialization of work and a greater efficiency in the application of labor can lie secured in this way. Sometimes an absolute saving may be effected in the amount of labor required to do the same work. It is said that a steamer of two hun- dred or three hundred tons' burden needs one sailor for LARGE-SCALE PRODUCTION. 175 every 19.8 tons of cargo carried, while a steamer of eight hundred to one thousand tons requires only one sailor for each 41.5 tons. In many departments of production only a portion of the raw materials can be used for the purpose of producing the main products of each business. A considerable part of the raw material becomes waste unless some means can be found to utilize it. In a large business the amount of waste material is very great, and the incentive for saving it is correspondingly increased. In refining petroleum, material which was formerly wasted is now utilized for the production of lubricating oil, naphtha, and paraffine. So in the business of beef and pork packing, a more complete utilization of every part of the animal is effected in large establishments than could be secured in any other way. Hides, hoofs, horns, bones, blood, bristles, hair, are utilized in the production of leather, glue, fertilizers, etc. 5. Large business establishments can effect savings by carrying on for themselves allied or subsidiary prof- esses. Large oil refiners make their own barrels, tin cans, tanks, pumps, sulphuric acid, etc. Large sugar refiners import their own raw sugar, own their own wharves and warehouses, and make their own barrels and boxes. § 102. But we should not overlook certain very im- portant facts which have a tendency to diminish the ad- vantages of large over small-scale production, counteract- 1. In not a few industries a factory of "^ forces - moderate size will secure the maximum efficiency of both buildings and machinery, so that little or no saving of 176 PRINCIPLES OF ECONOMICS. fixed capital is effected by increasing a business beyond this point. Professor Marshall mentions cotton spin- ning and calico weaving* as examples of this sort of industries. 2. Power is sometimes distributed from factory to factory from a central engine and boiler house. This is often done in the case of steam power, and will be done to a still greater extent when electricity comes into more general use. Such a device places the small producer nearly on a plane of equality with the large so far as the cost of power is concerned. 3. New processes and improved machinery are often given publicity at the present day. Trade papers make a business of disseminating such information. The most improved machinery often can be bought by the small as well as by the large producer. 4. Small establishments of the same sort may often be located in the same vicinity. When this happens, smaller producers may cooperate to secure many of the advantages which large-scale production gives. They may and do combine to own pipe lines, by which crude petroleum is carried from the oil fields to distant refin- eries ; they may cooperate in collecting and utilizing waste products, as the independent oil refiners often do. 5. Finally, it must be admitted that large business establishments often cannot be as carefully superin- tended in all their brandies as a small business which is under the eye of the individual proprietor. There is a great deal of truth in Adam Smith's remark that the hired superintendent who manages other people's capital LARGE-SCALE PRODUCTION. 177 is generally less watchful and alert than business part- ners who manage their own property. G. In conclusion, it must not be forgotten that large- scale production docs not necessarily mean monopoly, — that is, the concentration of the production of the entire supply of a commodity in the hands of one group of pro- ducers. This has often been the result in the case of steam and street railways, or of gas and electric-light companies ; but in other cases the result has been to replace a multitude of small undertakings by a few large enterprises. It is sometimes claimed that the economies secured by large-scale production are so great that the final result will be the concentration of all production in the hands of giant monopolies. This is a question which will be discussed elsewhere. § 103. The combination of small enterprises into large was first noticed in the case of those industries which furnish commodities or services that Large produc- can be consumed only in immediate con- ^"branches nection with the business plants. Gas, elec- of industry. tricity, water, and transportation facilities are examples of such goods. Men were not long in finding out that one gas company can furnish gas more cheaply than two companies can afford to do, and that between two cities one railroad can give cheaper and better service than two roads. A tendency to large-scale production was next noticed in manufactures, wherever large plants or large investments of land, buildings, and machinery were required. It is possible to concentrate economi- cally a great deal of capital upon each acre of land 12 178 PRINCIPLES OF ECONOMICS. devoted to manufacture. In agriculture, large-scale production has been much less successful. It is claimed, with apparent reason, that the largest crop can be secured from each piece of land only by studying carefully the peculiarities of every acre of soil. Each five-acre tract may be best suited for raising a different crop. Only on a small farm can a proprietor study with sufficient care the varying capability of the soil, and so secure the greatest possible product from each acre. In the United States the tendency in recent years has been to cut large farms up into small ones. Yet there have been, and are still, some instances of large-scale farm- ing carried on successfully with heavy investments of capital. U LITERATURE. 179 LITERATURE ON CHAPTER VI. General References as in the last Chapter. On the Forms of Business Undertakings: Lalor, Cyclopaedia of Political Science, "Corporations;" Johnson's Cyclopaedia, "Partnership," "Joint-Stock Companies;" Robinson, Elemen- tary Law; Holland, Jurisprudence, 84-85, 288-297, 257, 258; Nicholson, Political Economy, 131-137; Hadley, Economics, 1 13-146. On the Economic Functions of The State : Wilson, The State, G37-G40; Ely, Outlines of Economics, 257-300; Earrer, The State in its Relation to Trade. Upon the right of private property, see Holland, Jurisprudence, 175 et seq. ; Robinson, Elementary Law, 22-34; Mill, Political Economy, Bk. II., Chaps. 1 and 2 ; Gide, Political Economy, 430-455 ; Hadley, Economics, Chap. 2. On the Law of Diminishing Returns : See, besides general references, Commons, The Distribution of Wealth, 116-159. On Large-scale Production : See, besides general references, Hadley, Economics, Chap. 6; Hobson, The Evolution of Modern Capitalism, 1-142. 180 PRINCIPLES OF ECONOMICS. CHAPTER VII. THE THEORY OF EXCHANGE. I. Exchange in General. § 104. The process of exchanging products has not always been as important and as widely extended as it is Development m the life °f the most advanced modern of exchange, nations. Among uncivilized or semi-civil- ized peoples, who live in the hunting, the pastoral, or the agricultural stages, each family produces all or nearly all the goods which it consumes. Commerce is confined to the exchange of easily transportable articles, which have large value in small bulk, such as precious stones and metals, ivory, spices, fine fabrics, etc. Prior to the present century, when Europe was in the trades and commerce stage, most of the products of industry w r ere consumed in the places where they were produced ; and bulky or perishable commodities had not become objects of exchange between distant places. Then began the era of canals, steamships, and steam railroads. This made possible wide-spread exchanges of all products, even the most bulky and perishable. Before the con- st rncf ion of railways in the United States, most commu- nities that were not situated along navigable water courses were self-sustaining economic units; and were EXCHANGE. 181 hound to neighboring communities by few ties of com mercial intercourse. § 105. The idea was once common that an exchange of products could profit only one of the two parties effecting- it, and that what one gained the Advantages other must necessarily lose. The falsity of of exch ange. this view will be made clear by considering the reasons why men desire to exchange the products of their labor. 1. Individuals, communities, and even nations differ most widely in tastes and customs. One man or one community may prize most highly a commodity which will possess little value for another person or another community. Under such circumstances, an exchange will place each commodity where it will have the great- est utility. Such an exchange results in an increase of utility. 2. Both individuals and communities have different aptitudes for the various kinds of productive labor. These differences may be either original or acquired, but at any given time they are very marked. Now the exchange of products makes it possible for each person to devote himself to that line of production for which his natural ability or his training best fit him. By doing this, both individuals and communities can increase the productivity of their labor. 3. Again, it happens that persons and communities have different natural environments. Arable lands, pas- ture lands, forests, mineral wealth, sea fisheries, water powers, or navigable waters are either not available for all communities, or not available in equal degree. By 182 PRINCIPLES OF ECONOMICS. exchanging cotton cloth for wheat, Massachusetts has been enriched by the fertile prairies of the West; while Kansas and Iowa have had the benefit of the water powers of the New England rivers. To quote from Professor de Laveleye, " The poorest workman con- sumes the products of two hemispheres. The wool for his clothes comes from Australia ; the rice for his pudding from the Indies ; the wheat for his bread from Illinois ; the petroleum for his lamp from Pennsylvania ; his coffee from Java ; the cotton for his wife's dress from Egypt or from Alabama ; his knife from Sheffield ; the silk of his necktie from France." 4. In all these cases it is apparent that both parties to an exchange may and do profit thereby. It is possi- ble, of course, that in many exchanges one person may be cheated ; but such is not the case in the majority of the exchanges which are effected each day in the world of commerce. As a matter of fact, we have seen that the exchange of products is a necessary and indispensable part of the modern process of wealth production. § 106. An elaborate mechanism has gradually been developed for the purpose of facilitating the The median- ' ism of ex- exchange of products. 1. There has grown up a separate class of middlemen, who devote their entire time to the work of exchange. 2. Means of transporting persons and products have been developed largely for the purpose of aiding the process of exchange. From the caravan to the steam railroad, systems of transportation have in view chiefly VALUE. 183 the needs of commerce. Even the post office, the tele- graph, and the telephone are used chiefly for this pur- pose ; and they have facilitated in a wonderful manner the commerce of the world. 3. Systems of weights and measures were instituted by private individuals, but their importance in the ex- change of products is so great that governments have assumed the work of regulating them in such a manner as to secure greater certainty and uniformity. In time a single system of weights and measures is likely to prevail in all civilized countries. 4. Money and credit are institutions called into being by the needs of trade. They are so important as to require consideration in a separate chapter. 5. Finally, modern commerce requires a great deal of legislation and commercial administration by all the governments of the world. Laws relating to debts, to bankruptcy, to the regulation of railroads, and to the inspection of certain products are instances of this sort. Governments maintain consular services in foreign coun- tries largely for the purpose of promoting commercial interests, while they collect and publish information concerning the commerce of the world. II. Value. § 107. In the course of trade, commodities exchange for each other in certain definite proportions. A bushel of wheat may be exchanged for two bushels value and of oats, or two tons of pig iron may be prIce - required to purchase one ton of steel rails. When 184 PRINCIPLES OF ECONOMICS. this occurs, wheat is said to be twice as valuable as oats, and the value of steel rails is said to be twice as great as the value of pig iron. It appears, therefore, that the word " value" refers to the proportions in which commodi- ties exchange for one another. For this reason it has often been called "exchange value," and we may define it as the power of a commodity to command other com- modities in exchange. The value of all kinds of mer- chandise is commonly expressed in terms of money. We say that wheat is valued at seventy cents a bushel and oats are valued at thirty-five. Values thus ex- pressed in money are termed prices. Money offers us in this way a very convenient method for comparing the values of all commodities. Suppose that wheat ex- changes for seventy cents in money, oats for thirty-five cents, and corn for fifty cents. Then, without making comparisons of wheat and oats, or of oats and corn, we can determine the relative values of those commodities by merely observing what their prices are ; that is, by observing in what proportions they exchange for money. § 108. Whenever we say that the price of pig iron is, for instance, thirteen dollars a ton, we refer to its price Definition of m a certain market, and at a certain time. a market. Between two different markets Iherc may be differences in the prices at which pig iron sells, while from one time to another prices may vary widely. But it is necessary to have clear ideas of just what consti- tutes a market. A market exists when purchasers and sellers of a single commodity come together in such freedom of intercourse that they establish a single price VALUE 185 at which the commodity exchanges. It is evident, there- fore, that each commodity has a separate market; and that we may speak of the iron market, the wheat mar- ket, eic, since the dealers in iron and wheat do not compete with each other in the establishment of a single price for both commodities. In the second place, it will be evident that some markets will be far more extended than others. Wholesale dealers generally take pains to secure knowledge concerning prices not only in one city, but in a large extent of territory ; while they are ready to place their goods in distant markets whenever a differ- ence in prices makes it possible to do so. The result is that wholesale markets are often as wide as an entire country, and sometimes even international. Europe and the United States form almost a single market for such a commodity as wheat, since, for instance, the wholesale markets of the United States respond quite quickly to changes of prices in the English market. Retail dealers on the contrary, seldom compete for custom in distant markets, and Know far less about the movement of prices outside of their immediate neighborhood. The result is that retail markets are limited to a single lo- cality, sometimes to a portion of a single town or city; while retail prices may vary from one town to another, and even from one store to another. § 109. The existence of a market in which the same products exchange at a single price generally presup- poses the existence of competition. In its widest sense, competition denotes a struggle •)f conflicting interests, in which each person endeavors 186 PRINCIPLES OF ECONOMICS. to accomplish his own ends, or to secure some advan- tage to himself, in the face of similar efforts on the part of his rivals. In a market, competition may mean two things. It may mean the endeavors of rival sellers to exchange their goods or services for the money of the buyers; and, on the other hand, the efforts of rival buyers to purchase goods or services at the lowest pos- sible figure. In the second place, it may mean the proc- ess of bargaining between buyers and sellers, in which the first set of persons attempts to buy as cheaply as possible, while the second endeavors to secure the high- est prices that can be obtained. When there are many competing sellers and many competing buyers, there is little occasion for any bargaining between buyers and sellers. In a market, therefore, the first form of compe- tition is generally sufficient to establish a single price at which commodities sell. Opposed to competition and competitive prices are custom and customary prices. The force of custom may often prevent a seller from charging the full competitive price, or may lead a buyer to pay more than a competitive price. Competition may also be hindered by combinations of either sellers or buyers. When sellers combine and cease to act in rivalry, they may charge more than would be possible if they should compete. On the other hand, combina- tions of buyers may depress prices. III. Market Value. § 110. We must consider next the causes that deter- mine the value of commodities. In so doing, we shall MARKET VALUE. 187 be obliged to raise a number of difficult questions upon which economists have as yet failed to reach a general agreement. The subject may be most read- s j j Definition ily approached by studying first the prob- of market lems of market value. During 1895 the price of a bushel of wheat in New York varied from fifty-six to eighty-three cents, and was seldom the same on any two successive days. These changes of price form the market fluctuations, and the actual value in the market each day is called the market value. An investigation of the manner in which these market values are determined will show us that they depend upon the forces of demand and supply. § 111. By demand is meant the amount, or the num- ber of units, of any commodity that consumers are ready to purchase at a given price. In the chapter Demand, devoted to the consumption of wealth, it was shown that the amount of any commodity demanded by purchasers in any market will vary according to, (1) the marginal utility of the commodity, (2) the price re- quired in order to purchase it, (3) the wealth of the purchasers. Persons who enter any market as buyers commonly sacrifice money in order to secure commodi- ties. Knowing the extent of their annual incomes, such persons can and do estimate roughly the marginal utility which a unit of money, a dollar, has for them. When they learn that the price of a commodity is a dollar, they can and do compare the marginal utility of the commodity with the marginal utility of a dollar. They will select, or demand, those goods whose marginal util- 188 PRINCIPLES OF ECONOMICS. ity most greatly exceeds the marginal utility of the money required to purchase them. When the utility of any good offered in the market increases, the sur- plus of utility over costs is greater, and the demand for that good will tend to increase ; and vice-versa. When the price of the commodity rises, the surplus of utility over costs is smaller, and the demand decreases ; and vice-versa. Finally, when the wealth of the purchaser increases, the marginal utility of money to him will fall, the surplus of utility over costs will rise, and demand will increase ; and vice-versa. § 112. The supply of commodities offered in the modern market is controlled by producers or middle- men who desire to dispose of their entire Supply. stocks of goods at the highest prices which it may be possible to secure. We must distinguish care- fully between the terms " supply " and " stock." The stock of goods is the absolute amount or number of com- modities at the disposition of the sellers. The supply is the amount or number of commodities which the sellers will offer for sale at a definite price. The supply will generally be larger when prices are high, and will usually become smaller as prices fall. The stocks of goods controlled by merchants have been produced almost solely for the purpose of exchanging them for money, and the merchants have no possible use for any con- siderable part of such goods as articles of personal consumption. § 113. Within any market at any given time prices will be fixed at a point where demand and supply will MARKET VALUE. 189 be equalized. Let us suppose that the sellers in a wheat market control a stock of 1,000,000 bushels of wheat. At a price of eighty cents per bushel, all of this stock might be thrown upon the mar- ,. , 1 Equalization ket, and the supply would be 1,000,000 of demand bushels. At a price of seventy cents, only 800,000 bushels might be offered, since some sellers might prefer to hold their stocks, amounting to 200,000 bushels, for sale at a future time when they believe that better prices could be secured. Again, a price of sixty cents might bring into the market a supply of only 600,000 bushels, since a larger number of sellers might think it worth while to hold their stocks for sale at a future date. On the other hand, let us suppose that the buyers will demand 1,000,000 bushels of wheat at a price of sixty cents, 800,000 bushels at a price of seventy cents, and only 600,000 bushels at a price of eighty cents. Then seventy cents is the price that will make demand and supply equal, and the market price will be fixed at seventy cents for the time. The competition of buyers and sellers will make no other result possible. If the bidding should raise the price to seventy-one cents, the demand would straightway fall off, say to 780,000 bushels. Then some of the sellers who would be willing to sell at seventy cents would find that they had lost a chance to sell 20,000 bushels. t At the same time, the higher price might tempt into the compe- tition some of the sellers who had refused to sell for seventy cents. This would raise the supply of wheat offered for sale, say to 820,000 bushels. It is evident, 190 PRINCIPLES OF ECONOMICS. therefore, that a price of seventy-one cents would de- crease the demand and increase the supply. The result would be to stimulate competition among the sellers, none of whom would want to lose their chances of effecting sales, and to cause some of the sellers to lower their prices to seventy cents. For similar reasons, the bidding could not lower the price to sixty-nine cents. At that price the demand would increase to 820,000 bushels, while the supply would fall to 780,000 bushels. Competition among the buyers would at once raise the price to seventy cents. § 114. This process of the equalization, through com- petition, of supply and demand is illustrated perfectly M _, , by the actual transactions of the Berlin Illustration of J this principle Stock Exchange. In this exchange the stock Ex- persons who buy and sell stocks do not change. make their bargains directly with each other. Each day they submit to a committee their bids for the purchase of stocks or their offers of stocks for sale, in all cases specifying the prices and the amounts of the bids or the offerings. The committee examines all the bids, or demands, for securities, and all the offerings, or supplies, of securities. Then it establishes a settling price which will allow the largest number of exchanges to be effected. In such an exchange let us suppose that the bids and offerings of a certain stock are represented by the fol- lowing table : — MARKET VALUE. 191 Demand. Supply. Bids. Numbe share r of „ . Price. Offers. Number of shares. Price. 1 10 sha res $100 1 10 shares $92 2 10 ' 99 2 10 " 93 3 20 ' 98 3 10 " 94 4 20 ' ' 97 4 20 " 95 1 6 20 ' 96 5 30 " 96 6 30 ' 95 6 30 " 97 7 30 ' 94 7 30 " 98 8 40 ' 93 8 30 « 99 9 40 ' 92 9 40 " 100 10 50 ' 91 10 40 " 101 Then the committee would settle upon 896 per share as the price which would make possible the larg- An assumed est number of transactions. At that price case * the first five bidders stand ready to buy a total of eighty shares ; while the number of shares offered by the sellers is also eighty. A price of $97 would reduce the demand to sixty shares, while a price of $95 would reduce the number of shares offered to fifty. 196 is the price which will equalize demand and supply, and at the same time allow the largest number of purchases to be made. § 115. While the demand for any commodity will tend to vary inversely as the price at which it is offered, various commodities differ very widely in Fluctuations °f the degree in which the demand for them market values, varies as market prices fluctuate. Certain articles, such as cotton and wheat, supply the more necessary bodily wants. People buy just about so much of these goods each season, without stopping to inquire whether 192 PRINCIPLES OF ECONOMICS. prices are a little higher or a little lower. If the prices fall somewhat, consumption cannot be greatly increased ; while if prices rise slightly, people will still purchase these necessities, and spend less for other things. The demand for wheat will not decrease very rapidly until " famine prices " are reached, while the consumption of wheat will not increase very much until a very low price is offered. The result is that, when the supply of these commodities varies, the change of price required to produce a corresponding variation of demand is very great. Therefore sharp fluctuations often take place in the prices of necessaries before the demand can be made equal to the changed supply. On the other hand, luxuries and articles of relatively voluntary con- sumption do not show such great changes in price when- ever the supply changes. If the supply of silk increases, a slightly lowered price will stimulate consumption, and lead to an increased demand. Similarly, if the supply decreases, consumption is quickly checked ; and the demand decreases before prices rise very high. § 116. Illustrating the equalization of demand and supply, we assumed that the sellers were able to hold back a portion of their stocks of wheat, if Forced sales. they considered that at a future date they would be able to secure a higher price. They were able, therefore, to make the supply of wheat as small or as large as they might find it for their interest to do. Whenever merchants are selling grain, or lumber, or iron, they can usually hold back a certain portion or all of their stocks; and on any market day can make the MARKET VALUE. 193 supply offered at any given price larger or smaller. If, for instance, there comes a report of a shortage in the wheat crop, dealers will probably conclude that the visible stocks of wheat are likely to decrease, and that the supply offered in the market in the near future will probably be smaller than it is at the present time. The result will be a prospect of higher prices, and this pros- pect will induce dealers to reserve at least a portion of their stocks for future sales. When this happens, the present supply of wheat will diminish and prices will begin to rise. In many cases, however, merchants are unable to hold back any considerable portion of their stocks. This is most clearly seen in the case of perish- able fruits and vegetables. On a Saturday night a merchant may have to dispose of his entire stock at whatever price it will bring, or he will have it spoil on his hands. Under such conditions he is obliged to make a forced sale at any price that will be low enough to induce consumers to take the goods off the market. 1 And this may occur in the case of other than perishable goods. It often happens that the supply of a commodity is increased so greatly that it cannot be disposed of at the former paying prices within a reasonable length of time. At other times a business crisis will throw men out of employment, and make it impossible for them to buy the former quantity of goods at the old prices. Here again the supply of some goods becomes excessive relatively to the demand. Tn all such cases the exces- 1 Commodities which arc likely to become worthless hy reason of changes in style or fashion are similar to perishable goods in this respect. 18 194 PRINCIPLES OF ECONOMICS. sive stock has to be disposed of finally at any price which will induce consumers to take it out of the market. IV. Normal Value. § 117. Although market values are constantly chang- ing, an underlying force controls all such fluctuations. Normal value Experience shows that an unusually high and price. price is not likely to be maintained for a very long time, and that an exceptionally low price is equally unstable. Moreover, if we compare average market prices for a considerable period, we shall find that the relative values of different commodities remain tolerably constant, so long as no important changes occur in the character of the demand or in the condi- tions of production. Some force sets a limit to the fluctuations of the market, and restores prices con- stantly to what the business world considers a normal level. In other words, there is a certain point around which market prices continually play. If prices rise above this point or fall below it, some force sooner or later operates to restore them to the old level. That price around which the market fluctuations play may be called the normal price of a commodity ; and, in this way, we arrive at the concept of normal value and price. It is important to notice that the normal price of a commodity is not necessarily identical with the average Normal price price. There is no reason why the fluctua- nt necessarily t j ong Q £ p r j ccg m one di rec tj n may not be, an average ' •> price. during any particular year or scries of years, much greater and much more frequent than the NORMAL VALUE. 195 fluctuations in the opposite direction. In such a case an average of the market prices would be much more or much less than the normal price level. § 118. We must next investigate the nature of the force which determines the normal point around which market prices play. Commodities are pro- 1 r J r The force gov- duccd by capitalists and laborers who desire erning normal to secure the largest possible returns for the sacrifices or costs incurred in the work of produc- tion. In the modern business world this return takes the form, as a rule, of money secured from the sale of the products of industry, since production for one's own consumption is relatively unimportant. In so far as they have the 'power of choice, laborers and capitalists alike will endeavor to invest their labor and capital in those occupations which offer the largest return for a given amount of sacrifice. Here, then, we find a force that tends to increase or restrict the supply of goods brought into the market, and to affect the movement of prices. If two commodities that require the same amounts of sacrifice for their production command different values in the market, producers will in- crease the supply of that commodity which happens at the time to be more valuable and offers the larger return for a given outlay. This increased supply will lower the value of this commodity to the level of the other one representing the same expenditure of labor and capital. The operation of this force which leads men to adjust the supply of commodities to the demand may be clearly 196 PRINCIPLES OF ECONOMICS. seen if we imagine a case in which a single producer labors to provide for his own wants. Here the rnargi- uiustration na * u tility of each good for this person's andexpia- own consumption would determine the de- nation. mand. The producer would then simply make an estimate of the sacrifices necessary for the attainment of each commodity, and would expend his labor and capital in the production of those articles which would yield the largest surplus of utility over cost. In the modern business world, with its complex labor system and complicated industrial organization, the truth is not ecmally .obvious. But, even here, the same principle must operate. The competition of the market fixes market prices, and determines the amount of the returns that the producers of different commodi- ties may expect to receive. The entrepreneurs who control the production of goods constantly estimate the labor and capital that must be invested in order to secure a given quantity of each product. They know that, out of the total income of the business, laborers and owners of capital must receive shares that corres- pond to the sacrifices incurred in production; for these persons, as well as the employers, will endeavor to secure the largest possible earnings for their invest- ments of labor and capital. So far as they have the power of choice, entrepreneurs will regulate the output of each branch of industry in such a way as to secure the greatest return for a given outlay. Large profits in any one business are certain to attract new investments of labor and capital and to call forth an increased NORMAL VALUE. 197 supply, while a low rate of profit or the prospect of loss will in the long- run decrease production. § 119. The competition of the market, by which mer- chants determine market prices from day to day, has been called " commercial competition." To industrial the competition of entrepreneurs or invest- competition, ors, who endeavor to regulate production according to the demand of the market, the term " industrial com- petition " has been applied. 1 It is important for us to examine the actual processes by which this industrial competition operates. In case of the prospect of large profits in any industry, many employers engaged in that branch of production are stimulated to enlarge or ex- tend their existing plants. Then, too, other capitalists may be induced to establish new enterprises. In a pro- gressive country there exists in every prosperous year a mass of accumulated profits that seeks favorable oppor- tunities for investment. Sometimes, also, old capital can be withdrawn from one line of production, and in- vested in another that promises a larger return. On the other hand, let us suppose that the market value of a certain commodity has fallen to such an extent that producers are confronted with the prospect of small profits or actual loss. Then employers will begin to run their factories only a part of each week, or will close their doors and wait for better times. Some of them may fail, and thus be forced out of business. A few may find it possible to transfer their capital to some more profitable enterprise. We shall learn in a subse- 1 See Hartley, Economies, 87 198 PRINCIPLES OF ECONOMICS. quent section that the cost of producing a commodity is seldom exactly the same in any two establishments. It follows, therefore, that a slight fall of prices would merely force out of business those employers who are producing at the greatest cost. In all of these ways the supply of any commodity is usually decreased as soon as a decline in the market value makes its production unprofitable. Whenever producers work only or chiefly upon orders, the adjustment of the supply to the needs of the market is tolerably exact, and temporary fluctua- tions of market values are less likely to occur. § 120. Just as the marginal utility of commodities determines the demand, so the cost of production is a force that governs the supply that producers Analysis of ° ri J r cost of produc- will be willing to place in the market. We must now make a careful analysis of the different elements that enter into the cost of production. In a previous chapter (§ 95) the process of production was considered from the point of view of an entire society or community, and we enumerated the sacrifices that society is required to make in order that production may be carried on. Thus we arrived at the concept of the social cost of production. But in studying the problem of normal value, it is necessary to adopt an- other point of view, aud to ascertain what sacrifices are incurred by individual producers in their efforts to supply the market. It is the cost of production to indi- vidual investors, or the producers' cost, that governs normal values ; and it is this cost that must now be analyzed into its constituent parts. NORMAL VALUE. 199 In order that production may be carried on, the materials offered by nature must be appropriated, and natural forces must be controlled and applied. Natural agents But all these elements are the bounty of not an j eleme , nt J in producers nature, and they are not factors influencing cost. the cost incurred by individual producers. If any of these natural agents are monopolized, then the owners of the monopoly privileges may exact payments for their use, and producers must incur this expense be- fore industries can be established. But in such a case, we are dealing with an element of monopoly value ; whereas the normal values which we are studying are determined by competition. The entire problem of monopoly values will be discussed in a subsequent chap- ter. For the present we are assuming the existence of competition ; and, in the absence of monopoly privileges, it is evident that natural agents do not form an element in producers' costs. Such costs are not incurred until producers commence to apply their labor and capital in the utilization of the materials and forces of nature. The first element in producers' cost is the labor ex- pended in production. This may be exerted indirectly in the manufacture of the capital needed for Laborane ie- the prosecution of the productive process, mentincost. or directly in the application of capital and natural agents to the work in hand. In both cases the amount of the costs incurred will depend upon : (a) the charac- ter and intensity of the labor, whether intellectual or physical, skilled or unskilled ; and (b) the length of time during which the exertion must continue. Some- 200 PRINCIPLES OF ECONOMICS. times certain other circumstances affect the situation. Work that is held in low social esteem may be consid- ered to involve an additional element of sacrifice on the part of the laborer. The same is true of occupations that involve considerable risk of failure or even of per- sonal injury. The second element in producers' cost is involved in the expenditure of capital. Buildings and machinery Abstinence mus ^ continually be repaired, and materials the second and fuel must be replaced. We have seen element. that the production of all the capital thus consumed requires labor, and have assigned a place to this element of cost in the previous paragraph. But, as has been explained elsewhere (§ 84), the formation and constant renewal of capital require abstinence, or wait- ing, as well as labor. This abstinence, or waiting, con- stitutes an independent element of sacrifice, and is a second factor in determining producers' costs. The reader should be reminded at this point that, while every unit of capital is the result of an abstinence from present enjoyments and a choice of future goods instead of present, the various portions of our actual supply of capital represent very different amounts of sacrifice on the part of investors (§ 84). Millionaires may accumu- late large masses of capital far more easily than persons of moderate means can save small amounts, and men who are anxious to provide for the future may practise saving with much more ease than people of a less prov- ident disposition. But the modern business world requires an enormous mass of capital, and its needs NORMAL VALUE. 201 cannot be supplied by these accumulations that repre- sent little actual sacrifice. There is a large class of what may be called marginal investors, whose savings are needed for the establishment of industrial enter- prises, for whom the formation of capital entails very real acts of sacrifice. So long as this continues to be the case, every unit of capital will represent to the minds of producers a degree of abstinence that corre- sponds to the sacrifices experienced by the marginal investors ; and abstinence will form a necessary element of producers' cost. It must be understood that the cost of producing a commodity includes more than the expenditure of labor and capital on the farm, in the mine, or at the factory. Tools and materials capital re- must often be transported from distant J l ^ ired *° r 1 transporting: places to the establishment where the products and cf lectin (r s&lcs direct work of production is carried on. Then the completed product must be carried to the markets where the consumers are to be found. All this work of transportation calls for heavy outlays of labor and capital. Moreover, it is frequently necessary to advertise extensively and to employ travelling sales- men in order to dispose of the commodities produced. In many cases this work adds greatly to the producers' expenditure of labor and capital. Some economists have included risk as an independ- ent element in producers' cost, 1 but an accurate analysis does not justify such a view. Risk undoubtedly at- 1 See Cairnes, Leading Principles of Political Economy, 75. 202 PRINCIPLES OF ECONOMICS. tends the work of production, but it cannot be sepa- rated from the labor and abstinence that constitute the Risk is not two elements that determine cost. First a separate eie- j e ^- ug cons i(j er the investment of labor. ment in pro- ducers' cost. We hare seen that, if any particular indus- try entails unusual risks of failure or of personal in- jury, workmen will consider that a given amount of labor in this occupation represents a greater sacrifice than an equivalent quantity of labor of a different kind. This element of risk is inseparably connected with laborers' estimates of the sacrifices involved in different branches of employment. The same thing is true of the investment of capital. In devoting their property to the establishment of industrial enterprises, capitalists are obliged to assume two classes of risks. There may be danger, in the first place, of the destruc- tion of the invested capital by fire, explosion, or ship- wreck. The result of such losses is simply to increase the amount of capital required to produce the goods which the market demands, and to make a greater amount of labor and abstinence necessary for the production of a given quantity of product. Investors are able, by means of the device of insurance, to dis- tribute actual losses over a large number of insurers; but this does not alter the nature or effect of these risks, which are inseparable from an investment of capital. In the second place, the investor's prospect of finding a remunerative sale for his product may be rendered unusually precarious by the character of the market or the difficulty of forecasting the probable NORMAL VALUE. 203 demand. In such cases labor and capital arc mis- applied in the production of commodities that are not in demand, and such a waste of resources merely adds to the cost of supplying the goods that consumers are desirous of purchasing. Thus risks of this class merely increase the cost of producing the articles that are demanded in markets that prove to be of such a pre- carious nature. In all cases risk serves merely to increase the labor and abstinence that are necessary for the work of production, and it is impossible to find here a third and independent element of producers' cost. § 121. The problem of normal value is complicated by the < fact that the costs of production are seldom exactly the same in any two establish- Different costs ments of the same class. Now does nor- of vr^nctxon. mal value depend upon the highest, the lowest, or the average cost ? The answer to this question may be first stated, and will then require further explanations. Normal values vary according to the cost of produc- ing the most costly portions of the necessary or cus- tomary supply. If in any market the consumers have been accustomed to purchase about 1,000,000 bushels of wheat, and if they require about that quantity, the value of wheat will have to be high enough to make it profitable for producers to cultivate the poorest land that has to be utilized in order to raise 1,000,000 bushels. If the value should fall so low as to leave an inadequate return for the labor and abstinence expended by the cultivators of this poorest land, these 204 PRINCIPLES OF ECONOMICS. producers would cease to raise wheat ; and the supply offered in the market would become less than 1,000,000 bushels. Competition among the consumers, who are assumed to need 1,000,000 bushels, would straightway raise the value of wheat sufficiently to make it profit- able to cultivate these poorest lands. For this reason the value of a commodity at any given time must be sufficient to compensate those laborers and capitalists who produce the most costly portion of the necessary or customary supply. This portion may be called the marginal unit of the supply, and we may speak of marginal producers. The difference between the highest and the lowest cost will be greater in some industries than in others. Extent of ^ n agriculture or in mining, the amount of possible product secured from any tract of land can- differences .... in cost of not, at any given time, be increased very production. g rea tly before the point of diminishing re- turns is reached (§ 98). When this condition is en- countered, it is more profitable to invest additional capital upon other land. The result is that, if the need for agricultural produce or for minerals is so great that the best lands or the richest mines cannot supply all that the consumers require, then inferior lands and poorer mines must be utilized. If the needs of con- sumers increase very greatly, il is possible for a great many different grades of land or mines to be used in production; and there may be very great differences between the cosl of production upon the best land and that incurred upon the poorest. On the other hand, in NORMAL VALUE. 205 manufactures and commerce larger amounts of capital can be invested before the point of diminishing returns is reached. The result is that the stock of goods pro- duced upon a given piece of land can be greatly increased if market conditions make it profitable for producers to adopt such a course. For this reason the more efficient manufacturing establishments, which pro- duce at the lowest cost, are constantly increasing their output, and are driving the less productive factories to the wall. There is, therefore, less room for a great difference between the costs of production in the best factories and in the poorest that manage to continue in operation. If the inferior establishment produces at a very much greater cost, its owner is likely to find that better equipped and better operated factories will supply the entire demand at prices that make it impossible for him to continue in business. For this reason some economists have thought that manufacturing industry is governed by a different law from that which prevails in agriculture and mining, and that the lowest cost of production controls the normal value of manufactured products. If a long period of time is considered, it is undoubtedly true that the most efficient factories set the standard to which others must conform. But it is none the less true that, at any given point of time, normal value must be governed by the cost of production in the least efficient establishments that are able to maintain themselves in business. § 122. It has been shown that market values de- pend primarily upon the marginal utility which a given 206 PRINCIPLES OF ECONOMICS. quantity of goods has for consumers, and that they constantly fluctuate according to temporary changes in normal demand or supply. It is now evident that values market fluctuations are limited, and normal depend . upon a values are determined by the operation opposing* °f ^ ie cost °f Production. Normal value, forces. therefore, depends upon a balancing of marginal utility, the force that governs demand, against the cost of production, the force that controls supply ; and it may be said that a normal value is one that will tend to make production equal to consumption. Value, says Mr. Marshall, " rests, like the keystone of an arch, balanced in equilibrium between the con- tending pressures of its two opposing sides. The forces of demand press on the one side, those of supply on the other." From the point of view of society it is undoubtedly advantageous to have the values of commodities propor- tionate to the outlays of labor and capital an adjustment necessary to produce them. If two articles costs of represent the same cost of production while production. Qne Q f ^hem has a smaller value in the mar- ket, it follows that society is securing a product of smaller marginal utility from the labor and capital invested in producing the commodity that possesses the lower value. Under such circumstances a product of greater utility could be realized by withdrawing some capital from the less profitable industry and investing it elsewhere. The student must be reminded that, in this study of NORMAL VALUE. 207 the theory of value, we have been supposing that buyers and sellers, consumers and producers, are conducting their business affairs with a fair knowledge of the Competition demands of the market and the conditions is often of production. We have assumed, further- mpe more, that absolute freedom of competition has prevailed in all these transactions. It is needless to say that these assumed conditions are seldom, if ever, perfectly realized in actual business. Buyers and sellers usually have im- perfect knowledge of market conditions, and producers are not often able to act with perfect foresight and com- plete freedom in the choice of fields for investment. Under such circumstances the determination of normal values cannot take place with anything like the preci- sion for which our theory calls, and actual prices must often be the result of haphazard or arbitrary methods of procedure. Nevertheless we may affirm that our theory of normal value possesses the highest theoretical and practical importance. It is based upon a study of -, ■% • c i-i . Importance underlying iorces which no economist or of theory practical man of business can afford to neg- of value * lect. Every entrepreneur, although his foresight may be imperfect and his freedom of choice limited, is obliged to study most carefully and searchingly the probable demand for his products ; while the closest attention must be devoted to every circumstance that affects the cost of production. It follows that, in spite of all hin- drances to their full operation, the marginal utility and cost of production of a commodity are real forces which 208 PRINCIPLES OF ECONOMICS. constantly exercise a controlling influence upon the de- termination of values. Reason and experience furnish ample confirmation of this conclusion. The practical operation of these great forces that govern supply and demand may be advantageously iuustrative studied by considering certain important facts. facts in the history of the copper and the steel industries. Since 1890 the annual production of copper has risen from 271,000 to more than 412,000 tons, an increase of more than fifty per cent. Yet in the face of this larger output, the price of copper was rather higher at the opening of 1899 than it was nine years earlier. This is a most interesting phenomenon, and its explanation is to be found in the fact that the increased demand for copper for use in our growing electrical industries has kept up the marginal utility of a greatly increased supply sufficiently to prevent any fall in value. In the steel industry, the operation of the cost of production may be observed. During tho last forty years improved processes of manufacture have greatly reduced the expenditure of capital and labor required for the conversion of pig iron into steel, and this change has caused a corresponding movement in the values of the two commodities. In 1860 a ton of pig iron was worth from twenty to thirty dollars, and steel bars sold at prices that ranged from two hundred and fifty to three hundred dollars per ton. In 189G pig iron suitable for the manufacture of Bessemer steel sold for about twelve dollars per ton, and steel billets could be bought for about eighteen dollars. In 1860, NORMAL VALUE. 209 therefore, the value of steel was ten or twelve times as great as that of the material out of which it was made. Since that time a decreased cost of production has cheapened steel so greatly that its value is but fifty per cent more than that of pig iron. V. Exceptions to the Theory of Normal Value. § 123. It is now necessary to consider a number of important cases in which values do not conform to the laws which have just been explained, custom and Custom often tends to deter producers or values - consumers from insisting upon exact competitive prices. In retail trade particularly this influence is very strong. Personal relations existing between buyers and sellers frequently prevent competition from fixing values at the normal point. § 124. Especial importance must be attached to a second class of exceptions. Our theory of value pre- supposes the existence of competition, and Fa ii ures0 f assumes that producers have a practical competition, freedom of choice in the investment of their labor and capital. These conditions are often enough not ful- filled, especially in the case of the laborers. Skilled laborers are restricted in their choice of occupations to the trades to which they have been trained. The sup- ply of such operatives in particular employments may become excessive, and competition between the laborers may compel men to accept a smaller remuneration than equivalent sacrifices would command in another trade. Among unskilled workmen nothing is commoner than 14 210 PRINCIPLES OF ECONOMICS. a lack of perfect freedom in selecting occupations. Poverty, which limits freedom of movement in search of the best opportunities, ignorance of the localities where better conditions may be found, and the concen- tration of large masses of unskilled laborers in great centres of population, are the usual causes of this absence of freedom of choice. In all such cases there may arise, and probably will arise, a disproportion between the remuneration received by the workman and the exertions that he is compelled to undergo. Thus it happens that even the most disagreeable forms of labor may command the lowest rate of return. The existence of such conditions affects the values at which commodities exchange. Normal value cannot Such failures De proportioned exactly to the cost of pro- affect value, duction unless producers are able to insist upon receiving remunerations that are proportionate to the sacrifices incurred. When the men who produce any commodity are compelled, by the absence of any practical alternative, to accept less than equivalent exertions secure in other occupations, the article in question may exchange for less than it would otherwise have to command in order to insure a continuance of the supply. In all such cases we have a failure of per- fect competition, and we are compelled to recognize that an arbitrary and anomalous element has entered into the determination of values. § 125. Taxes arc often the cause of a third class of exceptions. If taxation affected all industries equally, in such a manner, for instance, that live per cent was NORMAL VALUE. 211 added to the cost of placing each unit of product in the market, values would not be affected in the least by such a burden. But taxes are not levied * Taxes and in any such way, and they often affect the the value of rates at which commodities exchange. When comm taxes are imposed upon the production of a few com- modities, as upon tobacco, whiskey, and patent medicines in the United States, the effect is to increase the out- lays that must be incurred by producers of these arti- cles, and to raise the prices above the normal point fixed by the actual costs of production. This result must always follow when taxes fall unequally upon the production of commodities, or when they are levied exclusively upon certain articles. § 126. Producers are obliged under modern business conditions to produce commodities for sale, at a distant season, to customers of whom they know Mistakes in very little. It is very easy for such pro- P roduction ' ducers to make mistakes, and to supply the market with the wrong kind or the wrong amount of goods. Further- more, even if each business man had an exact knowl- edge of the probable future demands of his customers, it would be impossible for him to know just what supplies of goods competing merchants would be likely to bring to market. In this respect, producers are said to work " at cross purposes," and production is said to be " plan- less." Whenever mistakes are made by those who supply commodities to distant markets, there is a disturbance of the normal relations of demand and supply ; and the supply of commodities may be either excessive 212 PRINCIPLES OF ECONOMICS. or deficient. In such cases prices will fluctuate tempo- rarily, and will not correspond to the cost of production. § 127. The investment of vast amounts of fixed capital in modern industrial enterprises has introduced into business a new cause of disturbance of The effect of large fixed prices. A large fixed capital usually is a specialized capital ; and is an investment that cannot, without great or even total loss, be with- drawn from the particular line of business to which it is expressly adapted. Consequently, whenever prices fall below a figure which will pay all the costs of production and leave a fair profit, the managers of such large specialized capitals find themselves in a peculiar position. They find it impossible to go out of the business without incurring enormous loss. At the same time it is difficult to curtail production without incur- ring an almost equal loss, a fact which requires further explanation. Specialized capital in the form of buildings and costly machinery requires constant attention and renewal. Oftentimes machinery depreciates very rapidly when it is allowed to remain idle. The expenses for interest and replacement of fixed capital continue about the same whether an establishment does a large business or remains idle. Finally, the salaries of the most valu- able, and therefore the most highly paid, employees may also be nearly the same, since trained superintendents and highly skilled mechanics are not always discharged even if business is temporarily suspended. The princi- pal "variable expenses," which will depend upon the amount of the product turned out, are the expenses for NORMAL VALUE. 213 the less valuable kinds of labor and the expenses for materials. The result is that when prices fall below a point at which they yield a fair profit to the producer, the managers of very large establishments will not promptly reduce the product which they turn out. They know that the fixed expenses of their establishments will not be greatly decreased by running for shorter hours or by temporarily suspending production. Each manager will be likely to calculate that if he can sell his product for anything more than enough to cover the cost of materials and of common labor, he will have just so much toward paying the fixed charges. If, on the other hand, he refuses to produce at the lower prices, he will not be earning any part of the fixed expenses. Now, if such producers form a combination^ it is easier for them to agree to stop producing any further stock of goods until prices rise. But, without such an agreement, each producer will assume that the others are going to continue production, and that he cannot appreciably diminish the future supply of the commodity by decreasing his own output. The result is that, wherever large plants exist, a fall of prices will not promptly check the output of commodities. Each producer may endeavor to secure something towards paying his fixed expenses, even if he is obliged to sell at a price which little more than covers the cost for materials and common labor. Prices may remain below the full cost of production for a long time whenever such a condition of affairs exists. Professor Hadley 1 has 1 See "Railroad Transportation," 7i>. 214 PRINCIPLES OF ECONOMICS. called attention to a striking illustration of this fact. Between 1870 and 1873 an exceptionally high price for pig iron attracted a great deal of capital into that industry, and served to increase the annual product from 1,900,000 tons to 2,868,000 tons. Then followed a rapid fall in the price of pig iron from fifty-three dollars to twenty-four dollars, and finally to seventeen dollars. But the immense amount of new capital that had been specialized in the form of iron furnaces could not be as quickly withdrawn. Production remained about as large as before, and for several years manufac- turers were glad to produce millions of tons of iron for anything more than enough to pay for materials and common wages. Only after the weaker establishments had been bankrupted and forced out of business, did production become adjusted to the normal demands of the market. It will be noticed that in this instance the influence of the cost of production finally operated to restrict the supply, but that several years were required to produce this result. Prices were restored to a profit- able level by a decrease in supply caused by the final bankruptcy of the weaker producers. It is possible that the policy pursued by managers in such a case as this is really a short-sighted one. Longer experience may make it evident that, in the end, it will be more profit- able for all concerned to restrict production when prices fall below a normal point, and to incur the expenses entailed by an idle plant. Such a policy would make it possible for prices to recover sooner, and this fact might compensate for any losses incurred in the item of fixed NORMAL VALUE. 215 expenses. Professor Marshall thinks that trade moral- ity is inclined to condemn a man who "spoils a market" by continuing to produce for any price that will barely cover the expenses for materials and common labor. § 128. We must consider another case in which it is difficult to trace the relation between value and costs. This occurs in its simplest form when an Products ^ industry has one chief product upon which b y-P ro <*ucts. efforts are mainly concentrated, but also turns out a by- product. Thus cattle may be raised for the purpose of securing beef ; but hides, horns, hoofs, and bones may be secured as by-products. Similarly, wheat is a main product, and straw a by-product ; or illuminating gas is a principal product, and coke a by-product. Under such circumstances how will the values of the main products and of the by-products be adjusted ? The general prin- ciple is that the combined value of the main product and the by-products will approximate the total costs of carrying on the business. Now, producers will endeavor to regulate the production of joint products in such a way that the largest total return can be secured from the sale of all the products. Usually this can be done by producing all the principal product that can be sold at good prices, and then selling the by-products at any prices that will induce consumers to take them out of the market. If the price of the principal product rises, production will be increased, larger stocks of by-products will be secured, and their price will usually have to be lowered in order to dispose of them. It sometimes happens that changed market conditions raise the price 216 PRINCIPLES OF ECONOMICS. of a former by-product so as to make it worth while to regulate production according to the price of that prod- uct. In all cases, however, the total prices of all products will conform to the total costs of the business ; while the relative prices of the different products will be determined by the relative demand of the market for each commodity, in the quantities furnished by the business. § 129. In a large business which has many different branches it is often difficult to determine exactly what are the expenses of each branch. It is Difficulty of l determining especially difficult to determine the exact proportion of the fixed expenses chargeable to each branch, and to each different product. Some- times this is done in quite an arbitrary manner. Occa- sionally some one commodity is used as a means of advertising others. It may be sold for less than its entire cost, in the hope that new customers may be attracted, and the sale of other goods may be increased. It is understood that grocers in the United States have often used sugar in this manner. § 130. Whenever the supply of a commodity comes under the control of a single person or group of persons, Monopoly competition among the sellers is no longer value. active in determining prices. Such a power to control supply is called a monopoly, and we shall find in a subsequent chapter that monopoly values and prices differ in important respects from competitive values and prices. LITERATURE. 217 LITERATURE ON CHAPTER VII. General References: Andrews, Institutes of Economics, 83- 117; Ely, Outlines of Economics, 111-139; Gidk, Political Economy, 169-182; Hadley, Economics, 6-1-96; Lavei.eye. Elements of Political Economy, 180-188; Macvane, Political Economy, 17-34, 86-119; Marshall, Principles of Economics, 401-565; Roscher, Political Economy, I. 289-339; Walker, Political Economy, 78-110. Special References : Mill, Principles of Political Economy, Bk. III., Chaps. 1-6 ; Cairnes, Eeading Principles of Political Economy, 11-146. These authors present in best form the older theories of value. Smart, Introduction to the Theory of Value ; Bohm-Bawerk, Positive Theory of Capital, 129-234; Wieser, Natural Value, 3-113 ; Jevons, Theory of Political Economy, 37-166 ; Clark, Philosophy of Wealth, 70-106. These writers present the newer theories of value. 218 PRINCIPLES OF ECONOMICS. CHAPTER VIII. MONEY. I. Development of Metallic Money. § 131. The earliest exchanges were effected by barter. Each man exchanged goods which had little utility to him for other goods which had more. In this direct exchange of one commodity for another there are serious disadvantages. A horse can- not be bartered for a cow unless each party to the ex- change desires to obtain exactly the commodity offered by the other. Very often such a coincidence of desires does not exist. In the second place, many commodities are not divisible into fractional parts. Three hats may be exchanged for a coat, but it is impossible to secure one hat by bartering a third of a coat for it. Again, if one hundred different commodities are continually bar- tered for each other, they may exchange in any one of 4,950 combinations. Traders must know all of these 4,950 market values if they would avoid being cheated. § 132. Gradually men devised a method of avoiding these difficulties. They saw that, while some commodities The origin were demanded only upon certain occasions of money. or un( j er certain conditions, other goods wen almost invariably in demand, and were acceptable to nearly all persons. Among hunting tribes skins of ani- DEVELOPMENT OF MONEY. 210 mals were always in demand, since they were the princi- pal product of labor, were durable, and useful for many purposes. Among pastoral peoples cattle and sheep possessed this quality, since they were useful in very- many ways, and any person could without trouble add them to his herds. So, among the American Indians, strings of wampum were objects of. general desirability, since they served to gratify a universal desire for orna- ment. When it was found that furs, or cattle, or wam- pum, or any other commodity was always in demand, a way was opened by which the difficulties of barter could be avoided. If a man possessed corn and desired to ex- change it for clothing, he need no longer find another person who desired to exchange precisely the right kind of clothing for the exact amount of corn offered. He would find it advantageous to accept furs, or cattle, or any universally desirable commodity in payment for his corn ; and then he could easily find many persons who would be willing to exchange clothing for the furs or cattle. As soon as all persons recognize that certain commodities are usually in demand and usually ex- changeable, then those commodities become a general medium of exchange. The exchange of product A for product B becomes broken up into two processes : first, the sale of A for some universally acceptable medium of exchange ; and second, the purchase of B with this medium. In this way the universally acceptable com- modity acquires a new and distinct use. Hitherto it was valued simply as an object of personal consumption ; now it is demanded also as a means of facilitating exchanges. 220 PRINCIPLES OF ECONOMICS. Formerly it was a common commodity: now it is a pecul- iar commodity possessing a special function, — namely, the function of serving as a general medium of exchange. Whenever a commodity acquires this function, it hecomes money. Historically, money originated in this way. Among any people some commodities possess greater ex- changeability than others, and the most convenient of these finally serve as money. A list of the commodities that have in various times and places served as money can be indefinitely extended. Besides cattle and furs, may be mentioned rice, tea, salt, tobacco, dates, cocoa- nuts, grains, cowry shells, and many different metals. Traces of such usage still remain in our language. The Latin word pecunia, money, isirompeeus, a herd of cattle or sheep ; and from it we have derived our word pecurir iary. So, too, the English word/ee has a probable etymo- logical connection with the German word Vieh, cattle. § 133. Copper, iron, and zinc, as well as gold and silver, have served as money ; but gradually the precious metals have displaced the baser. Gold and The precious metals as silver have become distinctively the money money. metals, while copper has retained a place as small change. This predominance of gold and silver has come about for the following reasons : — 1. Their beauty has made them universally desired for purposes of ornamentation. Probably Ibis is the pri- mary reason why they attained such universal currency as commodities. At the present, the amount of gold used annually in manufactures and the arts is valued at not less than fifty or sixty millions of dollars. DEVELOPMENT OF MONEY. 221 2. They are durable, and can be easily distinguished from baser metals. 3. They are difficult to procure, and therefore have a high value. Small amounts of them can be exchanged for large amounts of most other goods. Hence they are portable, and since early times have been able to seek distant markets. The cost of producing iron, copper, or zinc has so cheapened, on the other hand, that the sup- ply has become very large. Hence they have decreased in value, so that they are too bulky to serve conveniently as money. 4. They are highly divisible. Both gold and silver are divided without loss into small units. With them it is easy to make the right payment for any commodity, whether of greater or of less value. 5. They can be converted easily into coins of uniform quality and weight. 6. They have been extremely uniform in value. The world's stock of gold money and bars is valued at about 14,000,000,000. This is made up of the accumulations of centuries, and the annual product averages only from two to five per cent of this amount. Consequently the annual product has little influence upon the marginal utility of gold. In the case of most other commodities the annual product furnishes the greater part of the available stock, and the marginal utility will regularly vary with every change in the yearly output. People have always been able to receive the precious metals in payment for com- modities or services, with confidence that the medium of payment would remain relatively stable in value for years. 222 PRINCIPLES OF ECONOMICS. Furthermore, the demand for both metals is extremely expansive, so that it increases rapidly as their value falls. This is truer of gold than of silver. 7. They are uniform in value the world over. Possessing high specific value in small bulk, they are transported cheaply to any portion of the globe if a temporary difference of value makes it profitable to do so. § 134. The precious metals circulated at first in the form of gold and silver bars, gold dust, and nuggets. Coins and They passed by weight, and those who re- comage. ccivecl them had to provide means for weigh- ing them, and sometimes even for testing their genuine- ness or purity. So far the development of money was the result exclusively of the acts of private individuals seeking to facilitate the work of exchange. The disadvantages of weighing and testing the money metals were next reme- died by coinage. The first step was to stamp a bar, or ring, or wire of gold or silver, in order to certify its weight and fineness. This has been done commonly by governments, but sometimes goldsmiths of recognized standing have stamped pieces of gold and silver, which have been received without question. Such a certifica- tion of the weight and fineness of metal saved exchangers from an immense amount of trouble. Improvements in the art of coining have led coiners to stamp both sides of the coin, and to mill the edges. This prevents clipping the coin or otherwise tampering with it, since such attempts deface the coin and can be oasily detected. Moreover, the designs impressed upon coins are madq DEVELOP MEM' OE MONEY. 22J* delicate and intricate in order to make counterfeiting difficult. A well-developed coinage makes it possible for money to pass by tale, that is, by count ; and exchangers no longer need to resort to weighing in order to avoid being cheated. Professor Jevons has defined coins as " ingots of which the weight and fineness are certified by the integrity of designs impressed upon the surface of the metal." Free coinage of any metal exists whenever any owner of bullion has the right to take it to the mints and have it coined into money. The United States at Free coinage, the present time allows free coinage of & r . atmtous i ° coinage, gold, but the coinage of silver has been re- brassage, stricted. Gratuitous coinage is a different thing. The work of converting bullion into coins requires a consider- able outlay for labor, machinery, etc. In the case of larger coins the expense may be less than one third of one per cent, while in the case of small coins it may amount to three or four per cent. If the government makes no charge for coining money, and bears this ex- pense itself, coinage is gratuitous. England, since 1666, has made no charge for coining money. The United States also, except for the period 1853 to 1875, has made no charge for converting standard bullion into money. When coinage is gratuitous, the amount of bullion coined into an eagle or a sovereign will equal exactly an eagle or a sovereign. If, however, a mint charge is made, bullion will be worth just so much less than coins con- taining the same weight of pure metal. Most governments oblige persons who bring bullion to the mints to bear 224 PRINCIPLES OF ECONOMICS. the expense of coining it into money. Such a charge, if it is merely sufficient to cover the expenses of coinage, is called brassage. Oftentimes governments retain more metal than is required to cover the costs of coinage. Such a charge is called seigniorage. Until recent times manv Seigniorage. sovereigns repeatedly debased the money ot their countries by abstracting a seigniorage of ten, twenty, and sometimes eighty or ninety per cent. When this was done, the weight of the coins was kept up by increasing the amount of alloy. Modern civilized countries usually debase the small coins used for fractional currency, and deduct seigniorage in this way. For instance, since 1853 the fractional silver coins of the United States have been debased. They have been coined exclusively from silver bought by the government, and have contained less than 50, 25, 10, and 5 cents worth of silver, although the gov- ernment has paid them out at those values. It is impor- tant that the larger coins should not be debased, but such a policy is wise in the case of fractional currency. It pre- vents people from uselessly melting up these coins, which are worth less as bullion than as money. Many facts in the history of coinage systems give evidence concerning the history of money. Both in Origin of coin- Athens and in Rome the earliest coins age systems. sccm to have been stamped with the figures I of oxen, a fact which probably points to the earlier use of cattle as money. In the date country of Persia, where dates once served as a medium of exchange, the smallest silver coins had the form of a date. The names DEVELOPMENT OF MONEY. 225 of many coins can be traced back to the time when the precious metals circulated by weight. The Hebrew shekel was a weight. The Roman as was originally an ingot of copper supposed to weigh an as, or pound. The French livre, the Spanish yeso and peseta, the English pound, the German mark, were all originally names of weights which were used to denote coins. Constant debasement by European kings finally reduced these coins far below the original weight. These facts make it clear that money was a commodity which circulated by weight precisely like other commodities. § 135. The notion is still common that money origi- nated in some act of government, and is therefore a creation of law. Historically there can be Governments no doubt that money originated solely by and money, acts of individuals, and that governments for a long time had nothing to do with the establishment or regu- lation of a medium of exchange. At a later date, how- ever, the action of governments began to affect the institution of money. On the one hand, they instituted systems of coinage. On the other, they imposed lines payable in money, and received money in payments to the public treasury. They selected the commodity which had long passed as money between individuals, and made it the means of payment in the case of fines and public dues. This extended the usefulness of money, but did not originate it. The work of coinage was left in the hands of private individuals until com- paratively recent times. Gradually the need of uni- formity and absolute security forced governments to 226 PRINCIPLES OF ECONOMICS. make coinage an exclusively public function, and to pro- hibit by severe penalties coinage by private individuals. After establishing public systems of coinage, govern- ments have taken a further step in developing the insti- tution of money. They have declared that Legal tender. their coins shall be received in payment of private debts. In this way, coins are made a legal ten- der which must be received in discharge of debts, except when persons are allowed in special contracts to agree upon some other commodity as a means of payment. Thus, in the United States, gold coins, the silver dollar, greenbacks (or United States notes), and treasury notes are legal tender ; but courts will enforce contracts which call for the payment of gold. § 136. Money was originally a mere commodity which, on account of its superior desirability and convenience, obtained general currency as a medium of Summary. exchange. Hereby it acquired a new use distinct from its other uses as a consumption-good. Men began to demand gold and silver, not merely for use in manufactures and the arts, but also for a medium of exchange. We may therefore speak of a demand for the precious metals for employment as money, and a demand for them for employment in the arts. Upon this combined demand their utility depends. Gold and silver were useful and valuable commodities before they were ever used as money ; and they would remain valu- able commodities even if people should no longer employ them as a medium of exchange. Yet their value is increased by the money demand for them, and it would THE VALUE OF MONEY. 227 fall if they should cease to be demanded as money. At a late period in the history of money, the influence of governments was felt. Fines and public dues were made payable in the commodity which served as money, and legal-tender laws enabled it to perform more per- fectly its work as a medium of exchange. II. The Value of Metallic Money. § 137. Gold and silver as commodities have a certain marginal utility which depends upon their usefulness as consumption-goods. When they are used . . . . . The marginal as money, their marginal utility for this use utility of is simply the utility of the quantity of goods money * which they will buy. When prices are high, a great deal of money is required to purchase commodities ; and when prices are low, a large quantity of goods can be bought with a little money. The marginal utility of money will be high, therefore, when general prices are low ; and will be low when general prices are high. We must now consider the causes which determine whether the purchasing power of money (that is, its marginal utility) shall be high or low. § 138. Prices are the values of commodities expressed in terms of money. It is possible for commodities as a whole to exchange at one time for very dif- ferent amounts of money from what they com- the^enerai mand at another. Between 1850 and 1873 levelof prices, prices rose gradually all over the world, while since 1873 they have gradually fallen. It is not easy to determine whether the general level of prices is 228 PRINCIPLES OF ECONOMICS. rising or falling, because the prices of all commodities and services do not move in the same direction at any one time. The simplest method of determining varia- tions in general prices is the system of index numbers. The prices of a large number of commodities are deter- mined in some year, and these prices are then called 100 as a basis of comparison. If one hundred commodities should be taken, the index number for the first year would be 10,000, that is, the sum of the prices of all the commodities. Suppose that at the end of the next year it is found that ten commodities have risen, on the average, 10 per cent ; that forty commodities have fallen, on the average, 10 per cent ; and that fifty commodities remain unchanged in price. Then, by adding the prices of all the commodities reduced to this scale of 100, we should get 9,700 as the index number for the second year. A comparison of the index numbers for the two years shows an average fall in prices amounting to three per cent. In order for this method of index numbers to be satisfactorily used, a large number of commodities must be examined; and the price of each one should be given importance in the final result in proportion to the quantity regularly marketed and consumed. Thus wheat, corn, and pig iron should be given more weight than drugs, spices, and platinum. During the last twenty years all methods of computation show a gradual decline in prices. § 130. We may explain variations in general prices in the following manner. We may regard the amount of money in a community as an important factor in THE VALUE OF MONEY. 229 determining the prices that people will be able to pay for commodities. In the words of Mr. Mill, kt Money acts upon prices in no other way than by ,.,-, i • , c -..,. Explanation being tendered m exchange tor commodities. f changes The demand which influences the prices of i* 1 general prices. commodities consists of the money offered for them." As the amount of money in the hands of con- sumers increases, the marginal utility of each piece of money will decrease ; the surplus of the marginal utility of commodities over the marginal utility of their money cost will increase ; and the same number of commodities will he in demand at higher prices, or a larger number of commodities will he demanded at the same prices. On the other hand, we may regard the commodities pro- duced for sale in any community as a stock of goods which producers desire to exchange for money. These commodities, as a rule, have no utility for the producers except as they can be sold. Then we can say that the demand for money will depend upon the amount of goods offered by sellers. Now the ratio at which com- modities will exchange for money (that is, the general level of prices) will depend upon the conditions of the demand for money and the supply of money. This can be shown by assuming the following cases: — ■ 1. Assume that the number of commodities offered for sale remains unchanged, but that the amount of money in the community is increased, as it was in this country after the discovery of the Californian gold mines. Then the increased stock of money will tend to stimulate the demand for commodities; and producers 230 PRINCIPLES OF ECONOMICS. will, as a rule, be enabled to sell their stocks of goods for higher prices. Conversely, if the mines become exhausted, as occurred during the later years of the Roman Empire, and the stock of money decreases by gradual waste, then the demand for commodities will gradually decline, and a lower level of general prices will be the result. It is apparent, therefore, that, when the stock of money increases, the purchasing power of each piece of money will tend to be less than it formerly was. On the other hand, a decrease in the stock of money tends to increase the purchasing power of each piece. Prices will tend to rise, therefore, when the stock of money increases ; and they will tend to fall as it decreases. 2. Next we must study the effect of changes in the amount of commodities produced for sale. We will suppose that the stock of money remains unchanged. Now, in a progressive country improvements in produc- tion continually increase the number of commodities that can be turned out with a given expenditure of labor and capital. Furthermore, every increase of population may have a tendency to increase the productive forces of a country, and so to increase the production of commodities. If the number of commodities produced for sale increases, while the amount of money remains the same, producers will have to dispose of a larger stock of goods in markets where the general demand for commodities remains unchanged. Competition between producers will tend to become sharper under such cir- cumstances, and commodities will exchange for less THE VALUE OF MONEY. 231 money than they formerly commanded. This means that general prices will be lower. Conversely, if the production of commodities is decreased so that fewer goods are brought to market, prices will tend to rise. 3. We conclude, therefore, that prices tend to vary directly as the amount of money which consumers take to market to exchange for commodities, and that they will tend to vary inversely as the number of commod- ities which producers bring to market to exchange for money. But it is important to notice that both the supply of money and the supply of commodities may vary/ at the same time. Thus an increased supply of money may coincide with an increased production of commodities, or a decreased supply of money may coincide with a decreased supply of commodities. In such cases one change tends to offset the other. On the other hand, a larger supply of money coinciding with a smaller supply of commodities, or a smaller supply of money coinciding with a larger production of commodities, would produce greatly intensified effects. § 140. Of the world's stock of gold and silver, only a part is in the form of money. A considerable portion exists as bullion or as manufactured com- Bullion and modities. But gold and silver in the form mone y- of bullion or of manufactured goods can be melted up readily and converted into money, if free coinage is allowed, while gold and silver coin with equal ease can be melted into bullion. It follows that the marginal utility of the precious metals as money can never be very different from their marginal utility as bullion. If 232 . PRINCIPLES OF ECONOMICS. a change of fashion or of taste increases the marginal utility of bullion, gold or silver coins will be melted up. «is will continue until the increase in the supply of bullion will lead to such a decrease in its marginal utility that people no longer care to convert money into bullion. On the other hand, if money commands mote commodities than formerly, bullion will be con- verted into coin, and the supply of money will be increased. Finally, the existence of a large demand for gold and silver in the arts tends to make their value stable. If the value of money increases (that is, if prices fall), the supply of money will tend to increase through the melting up of bullion. Conversely, a fall in the value of money (that is, a rise of prices) will tend to be checked by a greater use of the precious metals in the arts. § 141. General prices depend upon the demand for The supply of money and the supply of money. But it is money and necessary to consider all the elements that the demand J for money. determine demand and supply. 1. The number of commodities which producers bring to market is not the only element that influences the de- mand for money. A commodity may be produced by a farmer or a manufacturer, then sold to a wholesale dealer, then sold by the wholesaler to a retail merchant, then sold by the retailer to the person who is to consume it. The greater part of the goods produced for sale changes hands at least three times in passing from the original producers to the consumers. If one thousand commod- ities are produced for sale in any community, we may THE VALUE OF MONEY. 233 assume that at least three thousand exchanges will have to he effected hefore these thousand articles reach the final consumers. Evidently the demand for money will be three times as great as it would be if the goods passed directly from the farmer or manufacturer to the con- sumer. It appears, then, that the demand for money depends upon two factors, (a) the number of commodi- ties produced for sale, and (6) the average number of times each commodity changes hands on its way from producer to consumer. 2. The supply of money does not depend solely upon the number of pieces available for the purchase of com- modities. Suppose that one thousand commodities are exchanged three times each, so that three thousand exchanges are effected. Now one thousand pieces of money may suffice to effect all these exchanges, if each piece passes from one person to another three times during the time that the thousand commodities are being exchanged. As a matter of fact, the amount of money in any country falls far short of the volume of business to be transacted in any season or year. On July 1, 1895, the amount of money in circulation among the people of the United States was about 11,602,000,000, an average amount of $22.93 for each person in the country. In the course of the year 1895 each piece of money served to effect a considerable number of exchanges, so that the total amount of commodities exchanged for money vastly exceeded the amount of money in the country. Manifestly, $1,600,000,000 cir- culating from one person to another on the average one 234 PRINCIPLES OF ECONOMICS. hundred times in the course of a year, will do as much money work as $16,000,000,000 each piece of which changes hands only ten times during the same period. Evidently the supply of money depends upon the two fac- tors, (a) the number of pieces of money, (b) the average rapidity with which they circulate. It will be well to explain clearly what is implied by the phrase " rapidity of circulation " tvhen applied to money. If the mem- bers of a community are prosperous, they will be able to purchase commodities freely. The demand for both con- sumers' and producers' goods will be active. Whatever incomes consumers receive will be quickly expended for consumers' goods ; or will be invested, and so will be exchanged for producers' goods. Merchants will find their stocks of goods in active demand, and commod- ities will pass quickly from producer to consumer. Under such circumstances, a given stock of money will circulate much more rapidly than when trade is dull and people are less prosperous. There are, of course, limits beyond which the rapidity with which money circulates cannot be increased ; and, further- more, it will be greater in some communities than in others. The rapidity" of circulation will regularly be great in proportion to the activity, enterprise, and pros- perity of each community. 3. While this statement of the various elements that determine the demand for money and the supply of money complicates the theory of general prices, the dif- ficulty is not so great as it might seem. In the United States at any given time, the rapidity with which money THE VALUE OF MONEY. 235 circulates is fixed within quite narrow limits, and it can- not change to any great extent. So, also, the average number of times that commodities pass from one person to another before they reach the final consumer is some- thing that is fixed quite definitely at any given time by the habits and customs of our people. If the number of pieces of money in the United States increases, it is safe to assume that rapidity of circulation will not vary greatly, and that the supply of money will be increased. Similarly, if the production of commodities increases, it is safe to assume that there will be no considerable change in the average number of times that each com- modity changes hands ; so that an increase of commodi- ties will be practically equivalent to an increase of the demand for money. § 142. If we assume the world's stock of the pre- cious metals to be fixed, then their values will depend simply upon the supplies of gold and silver The cost of available for money and for use in the arts, the precious and the demand for both metals. The prob- metals finaU y 1 influences lem becomes, under such circumstances, their value, exactly similar to the problem of market prices. But, as a matter of fact, gold and silver are produced, like any other commodities, by men who desire to make a profit out of the operation of their mines. If the value of money is high, the profits of mining gold and silver will be large, and the output will begin to increase. Conversely, a low value of money will decrease profits and reduce the production of the precious metals. Gradually the supply of money will be increased or de* 236 PRINCIPLES OF ECONOMICS. creased as the output from the mines slowly changes. Several years may be required before a change in the world's output of gold or silver will appreciably affect the value of the enormous stock of the precious metals. But, in the long run, changes in the production of gold and silver will make their value approximate the mar- ginal expenses of producing them. Let us consider in greater detail the manner in which the cost of producing the money metals affects their Detailed ex- value. Suppose that prices are low. Then pianations. ^ lQ monev cos t f doing all business will tend to decrease, and the expenses of mining gold and silver will become smaller. At the same time, the low level of general prices means that the purchasing power of the money metals is increased. The lower cost of production will make mining very profitable, and will increase the annual output. Thus a fall of prices tends to cause an increase of the supply of the money metals. Ultimately the increased supply will lower the value of money, and so restore a higher level of prices. Again, suppose that an increasing supply of gold or silver, or any other cause, produces a decline in the value of money and a rise of prices. Then the higher level of prices will increase the expense of doing business, and will therefore increase the money cost of mining. The lower value of money will gradually cause a decrease in the production of gold and silver. This takes place in the following way. Sonic mines are much richer than others, and from them gold can be produced at a smaller expense. "When prices rise and the expenses of THE VALUE OF MONEY. 237 milling- increase, the poorer mines can no longer be operated at a profit and will cease to be worked. The general level of prices, therefore, will help to determine what mines can be operated profitably, and what mines cannot be worked. Rising prices will gradually shut off the supplies of metals secured from the poorer mines. The adjustment of the money metals to the expenses of producing them is effected slowly by a 1 . ° J J The value of gradual increase or decrease of the supply, money is ad- For long periods of years there may be no fectiy t^uie" correspondence. But, in the long run, the C0St ° f P r <>- 1 ' . duction. cost of producing gold and silver from the mines that form the sources of supply will exert an influence upon their value. § 143. In applying this theory it should not be for- gotten that hitherto the production of the precious metals has been conducted in a haphazard . . , 1 Actual condi- manner. By mere accident rich mines tionsoftne have been discovered in South America, f gold and California, Australia, and South Africa ; s ver ' and the world's stock of gold and silver has been in- creased suddenly without any special reference to the existing level of general prices. Yet, even in these cases, two things have ever been true : First, the search for the precious metals is always most active when their purchasing power is high. Second, when- ever sudden discoveries of the money metals have in- creased the stock of money and raised prices, the poorer mines have had to be abandoned ; and in this manner production has been checked. At the present time gold 238 PRINCIPLES OF ECONOMICS. and silver are mined in a far more systematic manner than ever before, and the principles laid down will oper- ate more promptly. The rise in the purchasing power of gold during the last twenty years has stimulated gold mining in a wonderful manner. Formerly gold was produced by crude methods, mainly from rich placer deposits or from very rich ores. The placer deposits are limited, and have been discovered and worked in a very haphazard manner. But within recent years the methods of mining gold-bearing ores have been vastly improved. Ores which formerly could not be worked at a profit are now handled by new methods in such a way as to yield very large returns. In the future the busi- ness of gold mining will be conducted in anything but a haphazard manner. Silver has always been produced by a more systematic process of separating it from the ores in which it usually occurs. Its production has not depended upon the chance discovery of rich surface deposits, for it seldom occurs in its native state. In recent times the production of gold and silver has been quite regular from year to year, increasing or decreasing in a gradual manner. For the future, we have a right to anticipate a systematic production of both metals in such quantities as shall be commercially profitable. § 144. At the opening of the Christian Era, large amounts of gold and silver, accumulated bv History of the & . J production the conquered nations of the lands adjoin- siiver. aD ing the Mediterranean Sea, had been seized by the Romans and thrown into circulation throughout their empire. A rise of prices hindered THE VALUE OF MONEY. 2^'J further mining of the precious metals, while wasteful methods of operation caused a rapid exhaustion of the richest mines. Gradually the production of the precious metals ceased, the existing stocks were dissipated, and a fall of prices set in throughout the Roman world. From the fourth century to the sixteenth there was a positive money famine. For several centuries practically no ad- ditions were made to the world's stock of gold and silver, and the art of mining seemed to be lost. Toward the close of the Middle Ages, mining was commenced m Austria, Hungary, and Germany ; but prices continued at a very low level until some years after the discovery of America. After 1545 the Peruvian mines poured a flood of silver into Europe, and finally prices began to rise at a rapid rate. After 1700 the Brazilian gold mines turned out large quantities of gold, while later in the same century the Mexican mines began to yield large amounts of silver. The combined effects of these dis- coveries of gold and silver were to cause a rise of prices of three or four hundred per cent between the years 1600 and 1800. In 1848 came the discovery of gold in Cali- fornia, and three years later the Australian production became very large. About 1800 the average annual pro- duction of gold was 571,000 ounces. In 1850 it suddenly increased to four times that amount. By 1860 it had in- creased to nearly 6,500,000 ounces, and prices had begun to rise again all over the world. After 1860 the gold production gradually declined, but it is probable that prices rose at least twenty per cent between 1850 and 1870. During the decade, 1860 to 1870, the production 240 PRINCIPLES OF ECONOMICS. of silver began to increase, particularly in the United States, where the mines of Nevada were being opened. Prior to 1860 the world's annual production had never equaled 30,000,000 ounces, but between 1871 and 1875 it averaged 03,000,000 ounces. Since 1875 the silver out- put has constantly increased, amounting to 169,000,000 ounces in 1895. This is more than five times the average annual production at any period previous to 1860. During the last five years the world's product of gold has largely increased. In 1890 about 5,749,000 ounces were produced. For the year 1895 the production was about 9,688,000 ounces. § 145. It will help us to avoid misunderstanding if we note that this explanation of the relation of money to prices concerns general prices, and explains and prices of on ^y ^ ne well-known fact that money will individual Vj U y m0 re commodities at some times than at commodities. J others. Independently of changes in general prices, the prices of wheat, or corn, or iron may rise and fall according to the particular conditions of the demand for such commodities and the supply of them. When general prices are rising, it is possible for the prices of a minority of goods to fall, on account of special causes affecting their supply and demand ; while, in a period of falling prices, some few commodities may remain station- ary in price, or may even rise. § 146. Historically the earliest function of money was The functions ^° scrvc as a medium of exchange. For this of money. purpose it originated. But money has come to perform other functions. It serves, in the second THE VALUE OF MONEY. 241 place, as a value denominator, a common denominator in which the exchange values of other commodities are ex- pressed. Not only commodities, hut also wages, salaries, rents, and all kinds of puhlic and private payments are expressed in terms of money. This function is distin- guishable from the first function of money. It has hap- pened that one kind of money has served as a medium of exchange, while another has served as a value denom- inator. In the American colonies the values of all com- modities and services were expressed in terms of English money (that is, in pounds, shillings, and pence), while the actual circulating medium was composed almost entirely of Spanish, Portuguese, or Dutch coins. Money which serves as a value denominator, but not as a medium of exchange, is called money of account. Closely connected with this second function of money is a third, the func- tion of serving as a standard for deferred 'payments. In renting lands, or in agreeing to pay interest and princi- pal of mortgages or bonds for a long period of time, per- sons are constantly entering into contracts to pay debts at future dates. These long-term contracts may extend over u period of five, twenty, or even one hundred years. In such cases money usually serves as a standard for deferred payments. But other commodities have been used. Colleges of the English universities, Oxford and Cambridge, have for centuries leased their lands for corn rents. These corn rents have varied far less than money rents would have varied during the centuries that they have been in force. Revolutionary changes in the value of money make it an imperfect standard for long- 242 PRINCIPLES OF ECONOMICS. deferred payments. Finally, money performs a fourth function, that of serving as a legal tender for all debts. Historically, this has been a function which governments have conferred upon money at a late stage in its develop- ment. The precious metals served as a medium of ex- change for centuries before legal-tender laws were even thought of, while gold would serve as money at the present day even if all legal-tender laws should be re- pealed. Silver also would circulate readily in some countries without being made a legal tender, but in Europe and the United States its use would be consider- ably restricted. The wholesale trade of civilized coun- tries requires the use of gold. The superior convenience of gold for large payments has caused the commercial world to show a marked preference for that metal. Until 1861 many foreign gold and silver coins, even when our government refused to make them legal tender, cir- culated in the United States. Certain well known coins, such as the English sovereign, have obtained currency in many parts of the world where they have not been a legal tender. III. Debased Money. Gresham's Law. § 147. Governments have often declared various gold and silver coins to be full legal tender in payment of Debased debts. When this has been done, it has money. frequently happened lhat the legal-tender power of two different coins has been made the same, while one coin has contained metal of considerably DEBASED MONEY. 243 greater value in the bullion market than the other lias possessed. For instance, in 1895 the average market value of the line silver in one of our silver dollars was about one twentieth of the market value of the gold bullion contained in a ten-dollar gold-piece, or eagle. In other words, ten silver dollars were given by law the same power as the eagle possessed in the matter of pay- ing debts ; while the silver bullion contained in them had about one half the market value of the gold bullion contained in the eagle. Whenever a coin is given a legal- tender power greater than the market value of the gold or silver bullion which it contains, it becomes a debased coin. We have now to consider the results of giving equal legal-tender power to coins that have different bullion values. § 148. At any given time a community or a nation will need a certain number of pieces of money in order to carry on its exchanges at the existing The quantity level of prices. Suppose that commodities ^^ to the value of $1,000,000 are produced nation needs, annually, and that they change hands three times in passing from the producers to the consumers. Then 13,000,000 of exchanges will need to be effected each year. Suppose that the community possesses a stock of money amounting to $60,000, and that each dollar cir- culates with a rapidity sufficient to cause it to pass from one person to another fifty times during each year. Then the stock of money will be just sufficient, during the course of the year, to effect all the $3,000,000 of ex- changes ; and the general level of prices for the year 244 PRINCIPLES OF ECONOMICS. will be one dollar. Now, if the production of com- modities remains unchanged, the community will need $60,000 of money to effect its exchanges at the existing level of prices. If the production of commodities de- creases, less money will be needed to maintain the existing level of prices ; while, if production increases, more money will be needed, assuming in both cases that all the conditions of exchange remain the same. § 149. Now suppose that the nation's stock of money has consisted hitherto of gold dollars, each of which has contained 23.22 grains of fine gold. 1 Sup- Circulation ° ° * of debased pose that the government decides to allow any person to bring 371.25 grains of fine silver 2 to the mints, and to have this quantity of silver converted into a coin which is called a dollar. Suppose that this silver dollar is allowed by law to have the same power to pay debts which the gold dollar possesses, while the market value of the bullion contained in each silver coin is only one half as great as the value of the bullion contained in each gold coin. 3 We should then have an example of the influence of bad or debased money in driving out good money. With other things 1 This is the weight of the pure contents of the gold dollar, which was coined in the United States from 1849 to 1890. It is one tenth of the weight of the present eagle. 2 This is the weight of the pure contents of our silver dollar. 8 This corresponds closely to the average price <>f silver bullion for 1895. The readers will remember that, at any moment, the market value n|' gold or silver bullion will depend upon the supply of cither metal and tlie demand for each for money and for use in the arts. In the long run, however, the market value of gold and siher bullion will depend upon the marginal expenses of production. GRE SEAM'S LAW. 245 it often happens that superior commodities drive in- ferior out of the market, but with legal-tender money the case is different. If the law allows the debtor to pay a debt of ten dollars with ten silver dollars whose bullion value is only one half the bullion value of a ten-dollar gold-piece, many debtors will make payment with the cheaper money. As a rule, the dearer money will go out of circulation as fast as cheaper money is allowed to take its place. Even when coins are not actually declared legal tender, the force of custom, or the ignorance of many persons concerning the actual bullion value of the coins, may serve to give currency to the inferior money. It will then tend to displace better money precisely as if it had been legal tender. Economists call this principle " Gresham's Law," after Sir Thomas Gresham, who long ago formulated the statement that bad money tends to drive out good, but good money cannot drive out bad. The operation of Gresham's law does not depend necessarily upon the action of the mass of the people in picking over various coins in order to se- Manner in lect the cheapest for the purpose of paying ^resha^s their debts. This is done by money dealers, law operates. Goldsmiths select the heaviest and most valuable coins for the purpose of melting them up into bullion. Bunkers and gold brokers constantly pick over gold money to secure the heaviest coins for shipments to foreign countries. When American gold coins are sent to England, they pass as so much gold bullion. Bankers who ship bullion naturally select the heaviest coins for 246 PRINCIPLES OF ECONOMICS. paying foreign debts, and turn back into circulation those that have been worn lighter by longer use. So with the silver dollars in the case which we have assumed. They will be used for paying domestic debts, while the gold coins, on account of their superior bullion value, will be used in paying foreign debts. § 150. But there are limits to the power of inferior money to drive out superior. If there is a large amount of silver bullion available for coinage pur- Limitations & r to the poses, and the law allows any amount to be Gresham's brought to the mints, a large number of law " silver dollars will be placed in circulation. In the bullion market 371.25 grains of silver are worth only one half of 23.22 grains of gold ; but the law gives to the 371.25-grain silver dollar the same power in paying debts that the 23.22-grain gold dollar possesses. Under such circumstances the gold dollars will be melted up for use in the arts, or will be shipped to foreign countries to pay foreign debts. If the silver money comes into circulation gradually, the disappear- ance of gold will be gradual. But if every one knows that an unlimited amount of silver is sure to be put into circulation in the near future, a general scramble for gold may ensue. Many people will hasten to get as many gold dollars as possible while the supply of gold in circulation holds out, and the disappearance of gold will be rapid. The power of the inferior money to dis- place the superior will be limited by the fact that the country needs $60,000 of money to effect its exchanges at the existing level of prices. If gold dollars disappear DEBASED MONEY. 247 faster than silver dollars can be coined and placed in circulation, then the stock of money will become inade- quate and the value of money will rise. This rise in the purchasing power of money will attract some gold dollars back into circulation, and they will remain in use until new silver dollars are ready to take their places. Assuming that the nation's demand for money remains unchanged, and that the rapidity with which each dollar circulates is unaltered, then the gold coins could not all disappear until $60,000 of silver coins should be placed in circulation. If the government should limit the coinage of silver to $30,000, then $30,000 of gold would disappear from circulation, and the nation's stock of money would consist of equal amounts of gold and silver. On the other hand, if the nation is prosperous and progressive, its demand for money will increase from year to year as its volume of business increases. Suppose it to need each year an increase of $2,000 in its money supply in order to trans- act its increased business at its old level of prices. Then two thousand silver dollars could be placed in cir- culation annually without displacing any gold money. Finally, if any cause should decrease the amount of business transacted in any year, and should decrease the nation's demand for money, a certain amount of gold would disappear from circulation. It is important not to overlook one possible result of placing debased money in circulation. The Less demand mere threat of a debasement of the cur- formone y- rency may check business activity and diminish the 248 PRINCIPLES OF ECONOMICS. amount of business transacted. Men will not make contracts for the future, and will not be inclined to invest capital freely, when they consider it probable that money will be debased. When debasement actu- ally occurs, a business panic is likely to ensue. This greatly contracts the volume of business transacted, and diminishes the demand for money. Such a lessening of the demand for a medium of exchange will enable the cheap dollars to supply the entire demand for money more quickly than would be possible otherwise. § 151. We must consider now the result of placing the inferior silver coins in circulation side by side with Effects of the superior gold coins. If the nation's debasement, demand for money remains unchanged at $60,000, the result of placing 60,000 of the silver dollars in circulation will be merely to drive the 60,000 gold dollars out of circulation. If the coinage of silver dol- lars should be stopped at that point, so that the supply of money would remain at $60,000, there would be no change in the general level of prices. The nation's stock of money and its demand for money would both be unchanged, and general prices could not be altered. If, therefore, the supply of the cheaper silver dollars should be absolutely limited to $60,000, the silver money would perform all the business of the nation as well as the gold ; and the purchasing power of 371.25 grains of fine silver in a dollar would be twice as great as the purchasing power of 371.25 grains of silver in the form of bullion. But ibis would hold true, be it remembered, solely upon the condition that the coinage DEBASED MONEY. 249 of silver dollars should bo absolutely limited to $60,000. As a mutter of fact, there is very little likelihood that the nation could limit its coinage in this manner. Three causes would in all probability lead to an increase of the silver coinage : — (a) The government could make a large profit by buying silver bullion, converting it into silver dollars, and using these dollars to pay debts. Whenever the sovereigns of Europe debased their coinages, this mo- tive almost always led them to continue to put debased money into circulation long after the demand had been satisfied. (5) Owners of silver mines might continually urge the government to open its mints to the free coinage of silver dollars, since these mine-owners could, at the start, carry 371.25 grains of silver bullion to the mints, and have it coined into dollars which would exchange for as many commodities as 742.50 grains of silver bullion would command in the market. In the United States the owners of silver mines have incessantly urged Congress to allow free coinage of the 371.25-grain silver dollar, and have expended large sums of money in fur- thering political agitation for the free coinage of silver. (c) In all countries there are many debtors who would welcome the opportunity to pay off their debts in money which is worth less than that in which the debts were contracted. If the amount of money in the country should be increased much beyond $G0,000, then its purchasing power would surely begin to decline. A.8 money becomes less and less valuable as compared 250 PRINCIPLES OF ECONOMICS. with commodities, the burden of all debts is lessened. It is for the apparent interest of debtors, therefore, to have the amount of money as large as possible. When- ever coins are given a legal-tender power greater than their bullion value, then it is easy to increase or inflate the currency with cheap money. Human nature is likely to succumb to such a temptation as cheap money holds out to debtors. In the United States we have been cursed by an agitation in favor of cheap money for the last two centuries. Any one of these three forces, still more two of them combined, would in many cases be sufficient to cause the passage of laws opening mints to the free coinage of the cheaper money. Let us now trace the effect of increasing the coinage of silver dollars beyond 60,000, the limit set by the real mjJ demands of trade at the old level of prices. Ultimate r results of It is clear that, if the number of silver dol- lars should increase to 70,000 within the space of a year, the purchasing power of each coin would tend to decline ; since it is not likely that the demand of any country for money could increase cor- respondingly within a period of twelve months. If the number of dollars should increase to 80,000, the fall in the value of money would be more rapid, and the rise of prices would be very marked. Now what limit, if any, will there be to the increase of such a silver coin- age ? Manifestly there will be an inducement for per- sons to carry silver to the mints to be coined just as long as the money value (that is, the purchasing power) of the silver dollar remains greater than the purchasing DEBASED MONEY. 251 power of 371.25 grains of pure silver. When prices rise so that 371.25 grains of fine silver will purchase no more commodities when coined into a dollar than it will purchase when in the form of silver bullion, the coinage of silver will cease. In other words, when the purchas- ing power of a silver dollar falls to the level of the pur- chasing power of 371.25 grains of fine silver bullion, then there will be no inducement for any one to bring any more silver to the mints. This amounts merely to saying that the money value and the bullion value of silver will always tend to be the same, when people are left free to convert bullion into coin and coin into bullion. A final point now demands attention. Is it not possi- ble that the increased demand for silver as money, since it leads to the conversion of bullion into __ The value of coin, may diminish the supply of silver silver bullion, bullion and raise its marginal utility ? Manifestly such a thing is conceivable. If the silver mines should be- come exhausted, or the production of silver should be stopped, then the conversion of bullion into coin would "very rapidly raise the marginal utility of silver bullion. If the marginal utility of the limited stock of bullion should increase rapidly, then the fall in the purchasing power of the silver dollar could not be so great. The fall in the purchasing power of the dollar would be met sooner or later by the rise in the value of the silver bullion. Whenever this should happen, equality would be restored between the money value and the bullion value of silver. The coinage of silver would then cease, 252 PRINCIPLES OF ECONOMICS. and prices would rise no longer. But, on the other hand, suppose that the production of silver cannot be limited. Then the supply of silver bullion will contin- ually increase. If production remain large, the mar- ginal utility of silver bullion would not be increased by reason of the demand for silver as money. All would depend upon whether the new demand for silver as money should prove to be greater or less than the ad- ditional supply of silver which could be put out of the mines. This additional supply would probably be pro- duced at a greater marginal expense from ores which could not be worked profitably when the value of 371.25 grains of bullion was only fifty cents. If the supply could be increased very largely with only a slight in- crease of the marginal expense, then the coinage of sil- ver would rapidly become excessive, and the purchasing power of each coin would fall greatly. If the marginal expense of producing the larger supply increased very rapidly, the supply of silver dollars, hence the deprecia- tion of each coin, could not be so great. In any case, the supply of silver dollars would increase until the decline in the purchasing power of each coin should make the value of a dollar equal the marginal expenses of production. IV. Inflation and Contraction. § 152. The use of debased coin opens the door for a sudden increase, or inflation, of the supply InflaUon. _ of money. When the weight or fineness of existing coins is arbitrarily reduced, it is easy to INFLATION AND CONTRACTION. 253 increase their number. When the money consists of gold alone, it is easy to inflate a currency by giving legal-tender power to silver coins that have a smaller bullion value than the gold coins. Similarly, if silver is the standard money, inflation may be produced by cir- culating legal-tender gold coins which have a smaller bullion value than the silver coins. This was attempted in the colony of Massachusetts in the last century. But if, on the other hand, only coins of an equal bullion value are allowed to serve as legal tender, inflation can- not take place unless sudden discoveries of gold and silver, or improvements in the art of mining, increase the supply of money faster than the needs of trade. Even when this happens, a rise of prices will increase the expenses of mining the precious metals, and will have a tendency ultimately to check their production. Evidently the difficulty or the cost of producing the precious metals generally proves a bar to an increase of gold or silver money beyond the needs of trade. It is clear that any sudden rise of prices caused by such a rapid inflation will work injustice in the case of all long- term contracts. If prices suddenly rise, debtors are enabled to pay old debts in money which will command fewer commodities than that in which the debts wore contracted. Such a change in the purchasing power of money is unjust to the creditors. § 153. On the other hand, it is possible for the world's stock of metallic money gradually _ . * Contraction. to decrease. Each year a certain amount of coin and bullion is lost by accident or by abrasion 254 PRINCIPLES OF ECONOMICS. while in use. Now, if the gold and silver mines do not furnish enough to make good this loss, the supply of bullion and of money will gradually decrease. Besides this, it is possible that the total amount of money needed by the civilized world increases in prosperous years. Now, if the mines do not yield enough gold and silver to provide for this increased demand for money, as well as to make good the yearly loss of the precious metals, then the supply of money will undergo a relative de- crease. Contraction of the money supply may, there- fore, take place either by an absolute decrease of the stocks of gold and silver, or by a failure of the stocks to increase as fast as the demand for money and bullion increases. Now, a contraction of the money supply tends to lower all prices, and to oblige debtors to pay long-standing debts in money which purchases more com- modities than were commanded by the money in which the debts were originally contracted. This is exactly as un- just as it is to cheapen money, and to enable debtors to pay debts with money of inferior purchasing power. § 154. We must conclude, therefore, that a sudden increase of prices is unjust to creditors, while a sudden EvUsof fall of prices is unjust to the debtors. If changes in the changes take place slowly, less harm is volume of ° * J ' currency. done ; but it is hard to see how one party or the other can fail to suffer. Recognizing this fact, some persons have proposed to maintain without change a fixed level of prices. They have desired to accomplish this by having governments take steps to increase or decrease the amount of money in circulation whenever INFLATION AND CONTRACTION. 255 general prices begin to fall or to rise. Another plan is to allow contracts for future payments to be made in units of a tabular standard of value. This tabular standard would be formed by adding together the prices of definite units of as many articles of common con- sumption as can be secured for the purpose. Whenever the total prices of these commodities should rise, the money value of long-term contracts would be increased accordingly ; and when the tabular unit should fall, less money would be required to discharge such contracts. Both of these plans present a number of practical diffi- culties which make them impossible of adoption in the near future. There is at present no practicable method of avoiding the evil effects of inflation or contraction. It is possible, however, to insist that the supply of money shall not be increased or decreased in an arbitrary or artificial manner. Certain forces tend to diminish the injustice done to creditors or to debtors by changes in the value of money. It has been shown that an appreciation of changes in money is partially offset by a decline in the £^2J£ rate of interest in those cases where the such injustice. appreciation is gradual and regular enough to be fore- seen. On the other hand, depreciation of money leads to higher rates of interest in cases where it can be fore- seen. Yet, when all allowance is made for the influence of these changes in the rate of interest, there remains " a net loss alternating between debtors and creditors," according to changes in general prices. 1 1 See Fisher, Appreciation and Interest, 80. 256 PRINCIPLES OF ECONOMICS. It is sometimes said that it makes no difference whether the amount of money in a country is large or other con- small. If the supply is large, prices are high, siderations. an( } \^ takes more money to exchange the same commodities ; while if the supply is small, prices are low, and the same commodities are transferred by means of a smaller amount of money. There is some truth in this claim, provided that it is remembered that changes in the amount of money are harmful. Also, the statement should be qualified by noticing that a country may have so little money that people may be driven to barter, and industries may be greatly injured. In con- cluding this subject, it will be well to consider certain other effects of contraction and expansion. 1. Contraction tends to depress productive industry. Most debts are owed for capital borrowed for use in pro- ductive enterprises. The managers of business under- takings form a most important part of the debtor classes. Now, suppose that a producer borrows $ 10,000 in order to help build a factory or to buy a farm, and suppose next that the value of money begins to increase on account of a contraction of the supply. Then prices will fall as fast as the value of money rises, and the borrower will have to produce a much larger amount of cloth or farm prod- uce than would be necessary otherwise in order to pay the debt of $10,000. Under such circumstances, which are as a matter of fact very common, falling prices caused by currency contraction have been well called a millstone around the neck of productive industry. 2. On the other hand, it has been thought that a GOVERNMENT PAPER MONEY. 257 gradual rise of prices tends not only to lighten the burden of debts owed by producers, but also to encourage all productive industry. Higher prices mean more pros- perous times for all producers. In this claim one fact is overlooked. Rising prices are sure to stimulate spec- ulation. If the rise is long continued, multitudes of new- enterprises will be established. Some of these may be wisely planned and managed, others are sure to be estab- lished unwisely. Many of them will be founded by means of borrowed capital, which is easier to secure in times of prosperity. These causes lead to the establishment of too many enterprises in some lines of business. Over- production of such commodities will ensue, and the prices of these particular commodities will fall below a paying point. Then comes failure and widespread business disaster, which may not be confined to the particular industries where over-production occurred. Such results are likely to come about even when prices are not raised by means of an expanding currency. Inflation simply intensifies forces which are only too likely to come into operation without such a stimulus. V. Government Paper Money. § 155. Government paper money consists usually of pieces of paper upon which a government prints its promises to pay. Usuallv no time of pavment 1 . Nature of is specified, and the payment or ultimate government redemption of such notes depends solely upon paper the desire and ability of the government to keep its promises. In a few cases such paper has been redeemed 258 PRINCIPLES OF ECONOMICS. at its face value ; but much oftener it has been repudiated, or has been redeemed only in part. In some cases gov- ernment paper has not borne upon its face the promise of the government to pay, and has consisted simply of pieces of paper that the government has declared to be legal tender in the payment of all debts. § 156. Manifestly it is very easy for a government to pay a debt by issuing paper promises to pay, and such a History of course has often been resorted to. In the f^rSe United states the colon y of Massachusetts united states, made an issue of " bills of credit," in the year 1690, for the purpose of paying the expenses of a disastrous military expedition. Some years later other colonies followed her lead, and during the eighteenth century issues of bills of credit were often resorted to by most of the colonies. In the Revolutionary War, and again in the Civil War, similar issues were made by the United States. It is evident that the people of this country have had sufficient experience with such currency to enable them to learn from their own history how gov- ernment paper actually works. § 157. The advocates of government paper money have advanced the following claims in its favor: — The arguments 1. (Government paper is cheaper than government S ^ or silver. By its use a nation saves the paper money, expense of procuring and maintaining a stock of the precious metals. This is certainly true so far as it goes. Yet in foreign trade the precious metals would have to be used, as one nation does not accept the legal-tender paper issued by another. GOVERNMENT PAPER MONEY. 259 2. It is said that government paper may be used as a medium of exchange with perfect safety and conven- ience, so long as means are taken to prevent it from being issued in excess of the demands of trade. One scheme to secure such a limitation is to give the holders of such notes the right to convert them into government bonds that bear interest. It is said that so long as the notes are needed in business they will remain in circula- tion, while so soon as the amount of government paper becomes too great and prices begin to rise, the note- holders will begin to find it advantageous to exchange the notes for government bonds. In this way the issue of paper could never be excessive. In answer to this claim we must admit that such paper money could keep its value and need not depreciate if the bars to its over- issue could be maintained. But this is precisely the trouble. Various causes, which will be explained later, make it difficult, if not impossible, to enforce any limita- tion upon the issues. It is possible to say that, if a nation needs $60,000 of money to effect its exchanges, then 60,000 paper dollars may be used, and the general level of prices will remain at its former figure. But if it is practically impossible to limit the paper to 60,000 dollars, then it is idle to speculate about what might be if things were only different from what they are. 3. The least intelligent advocates of government paper say that any kind of money depends for its ex- istence solely upon the action of a government in declar- ing it to be legal tender. Therefore, if a government makes paper a legal tender, and obliges creditors to re- 260 PRINCIPLES OF ECONOMICS. ceive it in payment of debts, the paper will be just as good money as gold and silver. All money exists by reason of the " fiat " of the government ; hence, anything that the law declares to be money is just as good as any other kind of money. Since we have explained the origin of money, it is not necessary to do more than remind the reader that this claim of the " fiat money " advocates is false in every way. Gold and silver were used as money long before legal-tender laws were ever thought of, and before governments even thought of coining money. § 158. It is necessary to admit that paper money might be used for domestic exchanges if only its quan- tity could be limited. But the chances Objections to " government always are that such limitations will not be observed. The same influences that lead to an excessive coinage of cheap metallic money almost inevitably lead to an excessive issue of paper. First, the needs of the government are likely to increase, and to lead to increased issues of paper in order to pay public expenses. In almost every case in our history when governments have issued paper in order to pay extraordinary expenses, they have issued ultimately much more than they originally intended. Thus the Continental Congress began by issuing $3,000,000 of paper in the summer of 1775, but issued $241,000,000 before it ceased to depend upon such means. Second, the debtor classes are likely to favor a large issue of paper currency, and f A, B, and the 2G6 PRINCIPLES OF ECONOMICS. amounts of the checks drawn by them, while he will credit B, C, and D with the amounts of the checks which they present. The net result will be that the deposit of A will be decreased by fifty dollars, the deposits of B and C will remain the same, while the deposit of D will be increased by fifty dollars. In this way the three debts may be paid without the actual use of any money. Now, if the four men have accounts with different banks in the same city, the banks will settle their accounts with each other through a clearing house. The cus- tomers of each bank deposit with it all checks received by them, and they are credited with the amounts of money represented by such checks. Then each bank takes to the clearing house all of these checks which are drawn upon other banks. At the clearing house it will find that other banks have received checks drawn upon itself. If a bank sends to the clearing house checks to the amount of $ 10,000, while it finds there checks drawn against itself to the amount of $12,000, the bank will be indebted to the clearing house for $2,000, which balance it will have to pay in money. On the other hand, if the checks drawn upon this* bank had amounted to $8,000, the bank would have received the balance of $2,000 from the clearing house. In this manner different banks very conveniently settle all their mutual obligations by merely paying the balances against them, or receiving balances due them, at the clearing house. Banks located in different places settle their accounts with almost equal ease. Banks in country districts have agents, or corresponding banks, in the nearest clearing CREDIT. 267 /nuse city, so that every clearing house performs this work of settling accounts for the banks of the adjacent territory. Then the New York clearing house acts as a central clearing house for the banks of the entire coun- try, since every important city bank corresponds with some New York bank that is a member of the clearing house. In 1895 the total transactions of the clearing houses of the country amounted to $ 51, 11 1,591 ,928. The New York clearing house effected $28,264,379,126 of these transactions. The following diagram, taken from President Andrews' " Institutes of Economics," page 152, illustrates the operations of a national clear- ing system : — Providence New Orleans ABC DEP GUI JKL Chicago San Francisco MNO PQR STUVWX 1st Nat'l 2d Nat'l 3d Nat'l 4th Nat'l 5th Nat'l 6th Nat'l 7th Nat'l 8th Nat'l Bank Bank Bank Bank Bank Bank Bank Bank Metropolitan New York Clearing House Banks Chemical Stuyvesant Manufacturers New York Clearing House § 164. A bill of exchange, or draft, is a written order by which the person who draws the bill orders a second person, the drawee, to pay a specified sum of money 268 PRINCIPLES OF ECONOMICS. to a third person. Such bills may be payable at sight or after a specified time. They are made payable to a specified person, but by indorsement may (4) Bills of f K 5 J J exchange and be transferred to other persons. When this is done, a single bill may serve to pay sev- eral debts before the drawee is called upon to make final payment. Bankers are willing to buy bills of ex- change drawn by responsible persons upon their debtors. Also, they are willing to sell drafts to persons who wish to make payments in distant places. These drafts the bankers draw upon the banks with which they corre- spond in distant cities. Then the bills of exchange and the drafts bought and sold in one city may be set off against bills and drafts bought and sold by correspond- ing banks in other cities. Money need be sent from one city to the other only when the obligations incurred by one bank exceed the obligations incurred by its corre- sponding banks. Even then only the balances need be paid by forwarding money. Foreign bills of exchange require special explanation. Private banking-houses having branches in several coun- Foreignbms tries ma ^c a business of dealing in foreign of exchange, exchange. Such bankers are sometimes called exchange brokers. A person who wishes to make any payment in a foreign country can procure from an exchange broker a draft on that country. Men who wish to invest capital in a foreign country, to pay for goods bought from foreign merchants, or to travel abroad, can purchase such drafts with which to make the necessary payments. Again, any merchant who CREDIT. 2GP ft sells goods to a foreign customer can draw a bill of exchange upon that customer, and sell it to an ex- change broker. Thus it happens that brokers find a constant demand for drafts upon other countries, and a constant supply of bills of exchange offered for sale. Now, suppose that the New York branch of a firm of exchange brokers sells drafts on London to the amount of $100,000 during a week, while it buys Settlement of bills of exchange drawn on London to the foreign ex- changes with- amount of $200,000. Then it will owe the out the use London branch of the firm $100,000 for ofmone y- the drafts, and will have $200,000 owed to it by the London branch after the bills of exchange have been presented to the English merchants for payment. One of these accounts can be used to offset the other, and the accounts of the two branches with each other can be settled if the London branch merely sends $100,000 in money to New York. But probably this will not be. necessary. During the same week the London branch of the firm may sell drafts and buy bills on New York in such an amount that a balance of $100,000 will be owed by the New York branch. One of these balances will offset the other, so that all the transactions may be settled without the actual payment of any money. But now suppose that the course of business is such that many Americans are called upon to make large payments to English creditors, while few . ; Money may be Englishmen arc owing money in America, needed to set- Then it will happen that the New York branch will be constantlv selling; drafts on London. 270 PRINCIPLES OF ECONOMICS. while few bills of exchange on London are offered to it. Also the London branch will be selling few drafts on New York, but will be buying many bills of exchange drawn by English merchants on American customers. The result of such a condition of business will be that the American branch will owe each week a considerable balance to the London branch. The managers of the two branches may believe that in two or three months the course of business may turn the other way, so that they will let the accounts run until a turn in the ex- changes causes them to balance again. In this manner the expense of shipping money will be avoided. But during the time that the balances are running against the New York branch, the price of drafts on London will be raised, while bills of exchange drawn on London will command a premium. This is because the many drafts on London sold by the New York branch cause an excessive drain on the ready money of the London branch, while the few bills of exchange drawn in New York upon London debtors are insufficient to replenish this money supply. The increased charge for drafts in New York tends to decrease the demand, while it com- pensates for the additional trouble to which the firm is put to make payments in London. On the other hand, the premium paid for bills drawn on London tends to increase the supply offered, and to furnish the money that is needed in London. The rate of Now, there arc limits to the extent to which exchange. ^ IC p r j cc f or drafts c;in be raised, and also limits to the amount of the premium which the brokers CREDIT. 271 can afford to pay for bills of exchange. The English pound sterling is equal to 14.866 of our money, and the expense of paying freight and insurance on a corre- sponding shipment of gold across the Atlantic, amounts to about two and one half cents. Now, exchange brokers could not charge much more than $-4,866 -f- $.025 for drafts of a pound sterling on London ; otherwise the people who desire to make payments there would find it cheaper to send gold than to buy "exchange," that is, to buy drafts. Similarly the brokers would not pay much more than $4.89 for each bill of exchange on London for the sum of a pound sterling, because it would be cheaper to ship gold from New York to the London branch. Conversely, let us suppose that business conditions are such as to make the demand in England for ex- change on New York much greater than the An nthfiT* C21SC. demand in New York for exchange on Lon- don. Then the New York branch would find that the London branch was selling many drafts which were being presented in New York for payment, while few bills of exchange were being drawn by London mer- chants and sent to New York for collection. Also there would be little demand in New York for drafts on London, but many bills of exchange on London would be offered for sale. Then the managers of the New York branch would sell drafts on London for two or three cents less than $4,866 for each pound sterling, since this would be a cheaper method of replenishing the money of that branch than the actual shipment of gold from London to New York. Furthermore, the Z(V PRINCIPLES OF ECONOMICS. price at which the New York branch would buy bills of exchange on London would be less than $4,866. The excessive supply of such bills offered for sale by Ameri- can creditors would depress their market value. The price could not fall more than three cents below $4,866, since it would then be cheaper for American creditors to instruct their English debtors to make their payments by sending gold. In these ways the prices at which bills of exchange sell in New York, and the prices at which drafts on London can be bought will depend upon the state of the exchanges between the two points. The cost of shipping gold will always determine the extreme limits within which exchange will fluctuate. But by means of drafts and bills of exchange, actual shipments of gold will be avoided in most cases ; so that the great mass of foreign transactions will be settled without the use of money. It will be well to add here that the same principles which apply to foreign exchanges apply to domestic exchanges. § 165. Bank notes are another form of instruments of credit, and serve to lessen the amount of metallic (5) Bank money used in effecting exchanges. A bank notes. no £ e j g s j ni p] v a promissory note issued by a bank, and is supposed to be payable at the demand of any holder. When banks redeem such notes promptly, bank notes circulate readily from one person to another in payment of debts. Then they lessen the demand for metallic money. But we shall have to notice that a bank cannot issue such notes safely without maintaining a certain " reserve " of specie. CREDIT. 273 II. Banks as Institutions of Credit. § 166= A bank has been defined tersely as " a manu- factory of credit and a machine of exchange." It is important to have some knowledge of the The bank, manner in which a bank carries out its functions as an institution of credit. § 167. Historically the earliest function exercised by banking institutions was that of receiving for safe keep~ ing deposits of money and bullion. In almost The deposit all times such institutions have existed. function - Modern banking did not originate distinctly in the estab- lishment of banks of deposit, but all modern banks exercise the deposit function. Bankers receive deposits, and hold them subject to the demands of the depositors. Originally they were paid for keeping such money in a place of security ; now they make a profit by investing the money, in some cases even paying interest to deposi- tors. This change has taken place on account of the exercise by banks of the function of discount. § 168. The principal form in which banks lend money at the present day is the form of discount. In bank discount the bank deducts interest on its The discount loans at the time the money is borrowed, function. Money lenders have, of course, existed in all times and places ; but banking institutions, because they com- bine the functions of deposit and discount, became the principal money lenders of the modern world. They received surplus money for safe keeping ; and so easily utilized the idle moneys of a community by loaning them 274 PRINCIPLES OF ECONOMICS. to persons who desired to borrow. Depositors could not object to having a banker lend part of their deposits to responsible persons, so long as he managed the transac- tion in such a way as to be able to meet all their demands. By utilizing deposits in this manner, bankers could afford to receive deposits without charge for keeping them in safety, and in some cases could offer interest as an inducement for people to deposit money, which could be loaned at a higher rate of interest. § 169. In combining the functions of deposit and dis- count the bank becomes distinctively a " manufactory of credit." Suppose a banker to start in busi- IUustration of banking ness with a capital of $o0,000, and suppose that he receives deposits from two hundred customers. His capital serves as a guarantee for the safety of these deposits. Now, some of the depositors will continually draw out a portion of their deposits, while others will increase theirs. As a result, the banker finds that he has usually about $100,000 left in his keeping. He concludes that his customers have about that amount of idle capital which they will prefer to leave on deposit as long as they have confidence in his honesty and business ability. He concludes that, since he always has on his hands about $100,000 of deposits, and $50,000 of his own capital, he can safely lend the larger part of these sums to reliable persons who can furnish adequate security. Now, the persons who bor- row money may prefer to leave the money borrowed on deposit with the banker, subject to their drafts by check. If this occurs, a bank creates a deposit when it makes a BANKS. 275 loan. The deposits in banks regularly increase when their loans and discounts are increased, and vice-versa. After receiving 1100,000 of deposits, the Detailed accounts of the banker would be as follows : operations. Liabilities. Capital . . . $50,000 Deposits . . 100,000 Resources. Cash . . . $150,000 $150,000 $150,000 Now suppose that the banker lends to fifty customers $100,000 for ninety days at six per cent interest. Then he will deduct $1,500 for interest, and credit the bor- rowers with deposits to the amount of $98,500. His account will now stand as follows : — Liabilities. Resources. Capital. . . . $50,000 Cash $150,000 Deposits . . . 198,500 Loans and discounts . 100,000 Profits .... 1,600 $250,000 $250,000 Suppose next that various depositors draw out $50,000. Then the accounts of the bank will stand as follows : — Resources. Cash $100,000 Loans and discounts . 100,000 Liabilities. Capital .... $50,000 Deposits . . . 148,500 Profits .... 1,500 $200,000 $200,000 Now the banker may conclude that he can safely increase his discounts by $80,000. If he lends $80,000 276 PRINCIPLES OF ECONOMICS. for ninety days at six per cent interest, and the bor- rowers draw out only half of the $78,800 with which they are credited after $1,200 has been deducted for interest, the accounts of the bank will stand as follows : Liabilities. Resources. Capital .... $50,000 Cash $60,600 Deposits . . . 187,900 Loans and discounts . 180,000 Profits .... 2,700 $240,600 $240,600 ■ We may summarize these transactions in a few words. The banker used the $100,000 originally left on deposit with him, and the $50,000 which he had for his original capital, as a reserve on the basis of which he incurred liabilities for $177,300 advanced to borrowers in the form of loans and discounts. He now owes deposi- tors $187,900, and has a cash reserve of only $60,000. Manifestly, if all of his depositors should demand pay- ment at once, he would have to fail. On the other hand, at the end of ninety days he will receive $180,000 in payment of the notes that he has discounted. He will then be able to pay his depositors in full, besides having back his capital of $50,000 and profits of $2,700 from his business. How is he able to keep his depositors from demanding all their deposits atone time? Simply by using his credit carefully. He is careful to ascertain just how much money his customers prefer to leave con- tinually on deposit with him, he confines his loans and discounts within the limits set by the probable demands of his depositors, and he lends money only to responsible BANKS. 277 persons who can furnish adequate security. Long expe- rience has shown that a reserve of from fifteen to twenty- five per cent of the deposits is suflicient to meet all demands which depositors are likely to make at one time. § 170. Deposit and discount are the general and necessary functions which an institution must exercise in order to be a bank. But banking institu- ° Other func- tions perform a number of other functions tions. wote- of which we shall discuss one only. In some countries banks have had the privilege of issuing bank notes. We have seen that these are simply the banks' promises to pay money on the demand of the holders. It remains to show that they are exactly similar to bank deposits so far as they affect the financial condition of the bank. If, in the case we have supposed, the banker had paid out $20,000 of his notes to his depositors when they demanded money, he would have avoided paying out $20,000 of cash ; and would have incurred liabilities of $20,000 for the notes outstanding. Then his accounts would have stood as follows : — Liabilities. Resources. Capital .... $50,000 Cash $80,600 Deposits . . . 187,900 Loans and discounts . 180,000 Notes outstanding 20,000 Profits .... 2,700 $260,600 $260,600 If bank notes are to be kept strictly convertible into coin at the demand of the holder, it is necessary at the very least that banks should keep on hand a reserve of j 278 PRINCIPLES OF ECONOMICS. money adequate to redeem all notes presented for re- demption. In this country much stricter measures have been taken. III. Advantages and Disadvantages of Credit. § 171. Credit has many advantages, of which the Advantages of following are the most important : — credit - 1. It economizes the supply of gold and silver. Probably one half of the exchanges of modern civilized nations is carried on through the means of instruments of credit. Moreover, payments of large sums of money and payments between distant places could not be made conveniently in any other way. 2. Credit enables small sums of money to be accu- mulated by banks, and the large capitals thus gathered to be used in productive industry. 3. Credit tends to place the capital of a community at the disposal of men who are able to employ it most productively. Under normal conditions the man who can employ capital most efficiently is the man who can afford to pay the highest rates of interest, — the man, therefore, who will probably be best able to secure loans. § 172. On the other hand, credit has certain disad- vantages. 1. It leads to indebtedness on the part of the poor for the necessities of life, and often encourages extrava- Disadvantages gancc in consumption. When money is bor- of credit. rowed for purposes of personal consumption, and not for productive enterprises, credit may be- an evil. DISTRIBUTION OF THE PRECIOUS METALS. 279 2. It enables doubtful enterprises to be established with borrowed money. This has been particularly true ill the case of railroads. Rascally or incompetent man- agers of such enterprises borrow money with too much ease from people who know very little about their investments. 3. Credit promotes speculation, and sometimes leads to a too rapid growth of certain lines of industry. When this happens, a business panic may be caused through the failure of such speculative enterprises. IV. Territorial Distribution of the Precious Metals. § 173. We have seen that gold and silver, the money metals, are in general demand the world over. Gold and silver bullion may be sold in all countries as General useful commodities ; while either gold coins ^^^^ or silver coins, and sometimes both, can be metals, used in paying for purchased commodities. As a medium for the payment of debts, gold has been given decided preference by the commercial world within recent years ; but silver is still in general demand as a useful commodity. § 174. Whenever, for any reason, the supply of the money metals increases in any region, the coinage of money will increase and the money supply Gold and sllver will become larger. This must happen be- distributed . . . through cause, otherwise, the increasing supply of changes in bullion would lower the value of each unit prices ' below the value of coins containing; the same amount of 280 PRINCIPLES OF ECONOMICS. gold and silver, something which cannot take place so long as people are allowed to take bullion to the mints for coinage. Now, as the increased supplies of gold and silver get into circulation as money, prices will tend to rise. When such a rise takes place, more commodities will be imported from other countries for sale at the higher level of prices. On the other hand exports will begin to decrease, because rising prices will increase the money cost of production and will prevent some ex- porters from competing in foreign markets. Hence the rise of prices will increase imports and decrease exports, until finally imports exceed exports very greatly. Then the large excess of imports cannot be paid for by bills of exchange drawn against sales of exports ; but payment must be made by exporting gold or silver, as the case may be. This exportation of gold or silver cannot con- tinue indefinitely. As the supply of precious metals begins to decrease on account of continued exportation, prices will begin to fall. Such a fall in prices will cut off imports and increase exports, until the former no longer exceed the latter. Then the drain of gold and silver will cease automatically. It is clear, then, that high prices tend to lead to exportation of gold and sil- ver, while low prices tend to check such exportation of the precious metals. If prices fall far enough, exports will be greatly increased, imports will be greatly de- creased, and gold and silver will flow into the country to pay for the excess of exports sold to foreigners. It appears, therefore, that money lends automatically to move away from any region where it becomes cheap on DISTRIBUTION OF THE PRECIOUS METALS. 281 account of high prices, and to move toward regions where it is dearer on account of lower prices. § 175. Since the precious metals tend to flow away from countries where prices are high, and toward coun- tries where they arc low, it follows that Relative dis- ., , , , i tribution of there is a constant tendency toward an go id and sii- equalization of general levels of prices in ^ f ^^ t een all countries. The purchasing power of countries, money cannot remain permanently very much higher in one country than it is in others. Each country will need a certain amount of money in order to effect its exchanges at the same level of general prices that pre- vails in other countries. If any country has less than the amount needed for that purpose, prices will fall in that country, and gold or silver will begin to move thither. Conversely, if any nation has more than this amount, prices will rise, and the money metals will flow elsewhere. It follows, therefore, that the world's stock of the precious metals will constantly tend to he distributed among different countries in proportion to their relative demands for the money needed in order to maintain the same general level of prices. § 176. Most of the great nations of the world do not produce large quantities of gold and silver. In the few countries where large amounts of the money situation of metals are produced, there is a constant ten- produce the dency for the value of gold and silver to fall. moaey metals - This means, of course, a somewhat higher level of prices, an excess of imports over exports, and a constant expor- tation of the precious metals. The result is that gold 282 PRINCIPLES OF ECONOMICS. and silver tend to move away from the countries where they are produced, and toward countries where their value is not continually lessened through a large pro- duction. Of the $2,000,000,000 of gold mined in the United States since 1848 less than one third or one fourth remains in circulation in the country at the present day. The same is true of all the other gold or silver producing countries. V. Summary of the Theory of Money. § 177. We have seen that, originally, money was any commodity winch acquired such universal exchange- wnat is ability as to fit it to serve as a medium of money? exchange; and that gold and silver gradu- ally displaced all other commodities in this function. In course of time, bills of exchange, checks, bank notes, and government paper money were used as means of paving debts. We saw that bills of exchange and checks can be safely utilized in payment for commodi- ties and services. Bank notes are merely promises to pay money, and are safe only so long as bankers are obliged to keep them strictly convertible into money. Government paper is generally a dangerous' medium of exchange, and can be used safely only under the strict- est provisions for keeping the notes at a parity with gold or silver. It appears, then, that all these forms of so called " credit money " arc based upon promises or obligations to pay gold and silver ; and that they become exceedingly harmful as soon as they cease to be immediately convertible into standard gold or silver SUMMARY. 283 money. Standard coins of gold or silver cannot be artificially and arbitrarily increased or decreased, and they are accepted as final payment for debts. They are, therefore, the only perfect form of money. All other instruments of exchange are more or less imper- fect, and maintain their credit and acceptability only as they are finally convertible into perfect money. We may call all such media of exchange " representative money," while reserving to gold and silver alone the name of money proper. In common usage all media of exchange are spoken of as money, and there is no harm in this so long as one takes care to distinguish money proper from representative money. § 178. In discussing the value of metallic money, we assumed that all exchanges are effected solely by means of money. But we have now seen that a T _ J Influence of very large part of the business of the world credit upon prices (perhaps even more than sixty per cent) is carried on without the actual use of anything but instruments of credit. How does this fact affect our conclusion that the value of metallic money is deter- mined primarily by the demand for such money and the supply, while the cost of production exercises an ultimate influence ? It merely obliges us to take account of the influence of instruments of credit in determining the demand for gold and silver and the effective supply of such money. § 179. In the words of Mr. Mill, credit " is purchas- ing power ; and a person who, having credit, avails himself of it in the purchase of goods, creates just as 284 PRINCIPLES OF ECONOMICS. much demand for the goods, and tends quite as much to raise their price, as if he made an equal amount of purchases with ready money." A bill of The general ' J J effects of exchange or check or bank note or book credit is an instrumentality by means of which there is carried on a credit transaction that increases the demand for commodities. Therefore the total de- mand of a community for commodities depends upon, first, the volume of money, second, the number of credit transactions, or the volume of credit. Any cause that contracts or expands the volume of credit will surely tend to lower or to raise prices of commodities. The limit to which credit may be extended depends largely upon the confidence of investors and possible creditors that business prosperity will enable debtors to make repayment, and upon confidence that public and private honesty will enforce the fulfillment of lawful obligations. It is truthfully said, therefore, that the basis of modern business is confidence. Without the confidence upon which credit is built up, probably sixty per cent of the transactions of the modern business world would be impossible. In times of commercial crises, the visible cause of disaster is a violent contraction of credit which greatly lessons the demand for commodi- ties, and leads to a sharp fall of prices. § 180. Credit transactions are all alike in that they Detailed ex- furnish means of payment to purchasers who pianationof ne |„ j. Q } ncrcasc the demand for commodi- the Influence l c f credit. ties. But they differ in the exact manner in which they accomplish this result. SUMMARY. 285 1. Book credits, bills of exchange, and promissory notes merely serve to effect a large number of ex- changes without the use of money. They diminish the amount of metallic money needed to effect the ex- changes of a community or a nation. They may be con- sidered either to increase the amount of the medium used for exchange, or to decrease the demand for metallic money. 2. Checks can be used only by persons who have claims on bankers for certain sums of money. In order to meet such claims of depositors, bankers have to keep a certain reserve of actual money. So also with bank notes. They must be issued against a reserve sufficient to insure their convertibility into coin. Bank reserves are used as the basis for the issue of a much larger amount of representative money in the form of checks and bank notes. Each coin of the reserve enables many more exchanges to be carried on than could be effected if the coin were itself in circulation. Checks and bank notes, therefore, merely increase the efficiency of a given number of coins, and virtually increase the supply of metallic money to that extent. 3. The late President Walker summed the matter up as follows : " While thus, through the operation of the Credit System, the occasion for the use of money is largely reduced in modern industrial society, and thus the demand for money is diminished, the efficiency of a given body of money is continually being heightened by improvements in the art of banking, and thus the supply of money is practically increased." 286 PRINCIPLES OF ECONOMICS. § 181. Under modern conditions, metallic money serves, (1) as a medium of exchange in those trans- credit limited actions where credit instruments cannot be by volume use d, or are not used; (2) as a reserve for of metallic ' v J money. the circulation of representative or credit money. But the amount of representative money that can be issued against a definite reserve is quite strictly limited, and cannot be increased safely beyond a certain point. Hence it can be stated that, as the volume of metallic money increases, there may be a considerable increase in the volume of representative money ; and conversely. In the case of book credits and bills of exchange used to pay debts, there may be no such nar- row limits to the increase of credit instruments. Yet the habits and business customs of a people set final bounds to the increase of such credit transactions. We conclude, therefore, that modern business needs a large amount of metallic money for a medium of exchange ; and that the volume of credit is, at any time, limited by the volume of metallic money available for use as a reserve. § 182. The general level of prices depends, therefore, upon the value of metallic money. The value of metallic money depends primarily upon the demand, Summary. as decreased by the use of credit substitutes, 1 and upon the supply, as increased by the heightened efficiency of money when it is used as a reserve for the circulation of checks and bank notes. The money value 1 It may ho well to point out that barter has the same effect as credit in diminishing the demand for money. LITERATURE. 287 and the bullion value of gold and silver will always be the same when free coinage is allowed. Ultimately, the cost of production must exercise an influence upon the supply of the precious metals ; and will, in the long run, tend to make their value approximate the cost of produc- ing the marginal portion of the supply. LITERATURE ON CHAPTER IX. General references as in the last chapter. For Detailed Treatment of the Credit System, including Banking: Bagehot, Lombard Street; Bolles, Practical Bank- ing ; Carroll, Principles and Practice of Finance ; Dictionary of Political Economy, "Banks"; Dunbar, Theory and History of Banking ; GOSCHBN, Foreign Exchanges ; Macleod, Elements of Banking ; Report of the Monetary Commission of the Indianap- olis Convention, 159-386 ; White, Money and Banking; Conant, Modern Bank of Issue. 288 PRINCIPLES OF ECONOMICS. CHAPTER X. MONETARY HISTORY OF THE UNITED STATES. BIMETALLISM. I. Monetary History of the United States. § 183. In 1792 Congress established a national coin- age. Silver and gold coins were made legal tender at a Coin currency ratio of fifteen grains of silver for one grain I792-I862. f g ](j Soon afterward silver cheapened so that 15.61 grains were required in the bullion market to purchase one grain of gold. As a result, gold went out of circulation ; and the country was thrown upon a silver basis. In 1834 and 1837 Congress changed the legal ratio of the two metals by reducing the fine con- tents of the gold coins. The silver dollar was given a gross weight of 412.5 grains, and pure contents of 371.25 grains. The gold eagle was reduced to pure contents of 232.2 grains, and to a gross weight of 258 grains. This gave a legal ratio of 371.25 grains of silver for 23.22 grains of gold, or 15.088 to 1. The weights of the coins, hence the legal ratio, have remained unchanged since 1837. This new ratio of nearly 16 to 1 overvalued gold so decidedly that silver coins began to disappear from cir- culation. In 1850 the silver dollar was worth $1.02 in gold, and had entirely disappeared from use. Three MONETARY HISTORY OF THE UNITED STATES. 289 years later the discovery of gold in California cheapened gold still more, so that Congress had to debase the frac- tional silver coins in order to prevent them from being melted up and sold for bullion. Our small silver coins have been debased ever since. The legislation of 1834 and 1837 threw the United States upon a gold basis. The gold dollar was the sole standard of value in prac- tical use after 1834. § 184. In 1862 Congress issued legal-tender paper money, after unwise action by the Treasury Department bad forced the banks of the country to sus- Thegreen- pend specie payments, that is, to refuse to backs of I862 - meet their obligations in coin. These United States notes, or " greenbacks," immediately depreciated. Gold went out of circulation, and could be secured only by paying a premium. Paper money or currency prices rose as fast as the greenbacks depreciated. In 1864 each note was worth only 49 per cent of its face value. The United States had the privilege of paying higher prices for everything that it bought, so that the cost of the Civil War was fully one billion dollars more than it would have been otherwise. In 1875 Congress author- ized the Secretary of the Treasury to sell bonds in order to procure enough gold to enable him to begin to redeem the greenbacks in coin after January 1, 1879. In 1878 Congress decided to leave 8346,000,000 of greenbacks in circulation, and directed that the notes should be reissued from the Treasury whenever they should be redeemed or paid in for taxes. The greenbacks, therefore, still cir- culate, and the government endeavors to maintain a l» 290 PRINCIPLES OF ECONOMICS. reserve of $100,000,000 in order to redeem them when- ever desired. § 185. Between 1789 and 1860 many banks were estab- lished in the various states. At first they were con- ducted recklessly and dishonestly. Large The national J J ° banking quantities of notes were issued by banks that had no intention of redeeming them. In 1814, 1837, and 1857 there were general bank sus- pensions throughout the country. The first and second Banks of the United States issued notes which were kept convertible into coin. Gradually, in the older and more conservative states, restrictions were placed on the issue of bank notes ; and the banking business began to be honestly conducted. In 1860 it had been placed on a sound and honest basis in the northern and eastern states. In 1863 and 1864 Congress established the national banking system, and allowed national banks to issue notes upon the following conditions : — 1. A Comptroller of the Currency was placed in charge of the administration of the banking laws. Each bank was required to report its condition to him five times annually, while examiners were appointed to examine the affairs of each institution. 2. Each national bank must have a capital of not less than $25,000, and stockholders are liable for the debts of the bank to double the par value of their stock. 3. A certain proportion of the capital of each bank must be invested in registered interest-bearing bonds of the United States, deposited in the national Treasury. 4. On the security of these bonds a bank may issue MOM: 'TAR Y Iff STORY OF THE UNITED STATES. 291 notes to an amount not exceeding the par value of the bonds; but the Comptroller may require additional security if the bonds ever fall below par. 5. These notes are not legal tender ; but are receiv- able for taxes, except for duties on imports, and arc receivable for payments to any national bank. Eacb bank must redeem its notes on demand in legal-tender money. 6. Banks must deposit in tbe Treasury a fund equal to five per cent of their outstanding circulation. Thus the United States undertakes to redeem notes presented at ,the Treasury ; and would do so even if the fund proved insufficient, having adequate security in the bonds and in a first lien upon the assets of a bank. Consequently the notes are practically guaranteed by the government. 7. Each bank must keep a reserve of lawful money. In smaller cities a reserve of fifteen per cent of the deposits is required. In the "reserve cities" a reserve of twenty-five per cent is necessary. Banks in smaller cities may deposit sixty per cent of their reserves with banks in reserve cities. Banks of reserve cities may deposit fifty per cent of their reserves with banks in "central reserve cities," that is, in New York, Chicago, and St. Louis. 8. Banks are taxed one-half of one per cent on their circulation. The notes formerly issued by state banks have been taxed out of existence by a tax of ten per cent, which made such issues unprofitable. National bank notes have possessed the virtue of 292 PRINCIPLES OF ECONOMICS. being thoroughly uniform throughout the country and absolutely safe. Moreover, a strict enforce- the national nient of the law has secured an honest tanking management of the national banks, as a system. rule. State and private banks have had to make their methods equally safe, under penalty of losing business. Undoubtedly the banking business in the United States has been greatly elevated as a result of the national banking laws. § 186. In 1870, with a view to the future resumption of specie payments, Congress began to consider the The "Act question of revising the coinage laws. The of 1873." silver dollar had then been out of circulation for more than a generation, and was worth $1,027 in gold. A committee of experts submitted the draft of a bill recommending that the coinage of the obsolete silver dollar should be stopped. After considering the subject during five successive sessions, in the course of which the bill was printed thirteen times, Congress passed an act which dropped the silver dollar from the list of authorized coins. This provision of the measure aroused no opposition, and members of Congress repeatedly stated that the intention was to establish legally the single gold standard. Yet it has been wrongly charged that this measure passed Congress, " secretly," or " in- advertently," or even with absolute fraud. § 187. After 1873 silver began to fall in value The "Biand- rapidly. In 1876 the gold value of 371.25 Aiuson Act." grains of fine silver was only eighty-nine cents. At the same time preparations were being made MONETARY HISTORY OF THE UNITED STATES. 293 for redeeming the greenbacks in gold, and bringing the country back to a gold basis in 1879. Then people saw that, if the coinage of the silver dollar had not beeju-. fitopjjfid by the law passed in 1873, the cheapened dollar might have come back into circulation and driven out gold. ' Thus arose a demand for the free and unlimited coinage of the silver dollar, and the cry was started that silver had been "demonetized" fraudulently in 1873. Yielding to this agitation, Congress in 1878 passed the "Bland-Allison Act." This provided that the United States should purchase monthly not more than $4,000,000 worth of silver bullion and not less than $2,000,000 worth. The bullion was to be coined into the old 371.25- grain silver dollars, and such dollars were made full legal tender. Under this act the Treasury always pur- chased the minimum amount, and placed $378,166,793 in circulation between 1878 and 1890. Contrary to the expectation of many people, this amount of silver proved to be no more than the business of the country could use without driving gold out of circulation, especially since the volume of bank notes decreased about $170,000,000 between 1882 and 1890. On the other hand, the law failed to raise the value of silver, contrary to the claim which had been made for it. In 1889 the value of the bullion in the silver dollar was only seventy-two cents. § 188. The United States issues gold and silver cer- tificates upon deposits of gold and silver coins. The gold certificates are of large silver certifi- denominations, the silver are of denom- inations as small as one dollar. These certificates are 294 PRINCIPLES OF ECONOMICS. not legal tender, but are receivable for taxes, and may be held by national banks as part of their reserves. § 189. In 1890 the friends of silver pushed the "Sherman Act" through Congress, and repealed the " Bland-Allison Act." The new law re- The " Sher- man Act" quired the Secretary of the Treasury to purchase monthly 4,500,000 ounces of fine silver bullion at the market price, which was not to exceed $1 for 371.25 grains of fine bullion. The pur- chases were paid for by issuing Treasury notes, which were redeemable in coin at the Treasury, and could be reissued. These notes were also made legal tender. Even these increased purchases of silver failed to raise its price, which, after a brief rise, fell to sixty cents for 371.25 grains of bullion in 1893. The effects of the " Sherman Act " were wholly disastrous. Between 1890 and 1893, Treasury notes to the amount of $155,931,000 were placed in circulation. During the same period the net exports of gold exceeded 8150,000,000, in spite of the fact that our exports of merchandise exceeded im- ports very greatly. Apparently the country, by 1890. had absorbed about all the silver it could use, so that the Treasury notes merely drove an equivalent amount of gold out of the United States. In any event, the act caused considerable fear that the United States would be driven onto a silver basis. Immediately after its passage, the banks began to hoard gold, and to pay their obligations in paper or in silver. The government's revenues were paid almost entirely in paper or in silver money, instead of being paid largely in gold as was the MONETARY HISTORY OF THE UNITED STATES. 295 case prior to 1890. Moreover, the holders of green- backs and Treasury notes began to present them at the Treasury, and ask for payment in gold. When this was done, the government feared to refuse gold and to at- tempt to redeem the notes in silver, since such a course would have discredited both its silver and its paper money. Thus it was compelled to pay out large quan- tities of gold, while its revenues were composed chiefly of paper and silver. In 1893 such an acute stage of panic was reached that the " Sherman Act" was finally repealed. § 190. The United States now has the most hetero- geneous currency that can be found in any civilized country. On July 1, 1899, the stock of Heterogeneous gold in this country was estimated at character of 1963,000,000,— a figure which may be some- ourcurrency - what too large. Of this amount, 8283,760,334 was in the Treasury. At the same time there were in circula- tion or in the Treasury the following amounts of debased money : — United States notes, or greenbacks $346,681,000 Standard silver dollars or certificates represent- ing dollars 602,215,000 Treasury notes of 1890 93,518,000 Subsidiary silver coins 74,866,000 Total $1,017,280,000 In addition to this, the notes issued by the national banks amounted to #241,350,000. In order to prevent this mass of debased money from depreciating, two things are necessary: first, the volume 296 PRINCIPLES OF ECONOMICS. of debased currency must not exceed the quantity which the people of the country are prepared to keep in circu- Recent lation ; second, the Treasury must always be legislation. j n a p OS ^j on to redeem promptly in gold the $441,199,000 of greenbacks and Treasury notes that represent its demand liabilities. If this can be accom- plished, the business of the country can probably absorb the existing quantity of silver and paper money. The "Act of March 14, 1900," is intended to make our monetary system more secure. It declares that the present gold dollar is the standard of value in the United States, and that all other forms of money are to be maintained at a parity with gold. Then it sets aside $150,000,000 in gold, as a fund for redeeming the green- backs and Treasury notes ; and authorizes the Secretary of the Treasury, in case of need, to sell bonds in order to maintain this gold reserve. So far, the enactment is worthy of all praise. It has been thought that this law will put a stop to the reissue of notes that have once been redeemed, and will thus gradually effect the retire- ment of our government paper. But a careful reading of the somewhat obscure provisions of the law upon this point does not justify such a belief. On the contrary, it would seem that the law authorizes the reissue of redeemed notes for any "lawful purpose the public interests may require," except " deficiencies in the cur- rent revenues." * 1 See Sound Currency, vii. 42, 47. Up to March 14, 1900, tlie Treasury had redeemed $546,470,914 <>f the notes, and nearly all <>f these had heen reissued. BIMETALLISM. 297 II. Bimetallism. § 191. Prior to the present century most civilized countries made gold and silver legal tender in pay- ment of debts. Each nation, by independent n a a on ai action and often with an independent legal bimetallism. ratio, sought to keep both metals in circulation, and to give to debtors the option of paying debts with either gold or silver coins. The usual result of such attempts was that one metal or the other went out of circulation as often as a change in the market ratio of silver and gold bullion cheapened one kind of coin or the other. The experience of the United States after 1792 or 1834 illustrates the usual results of " national bimetallism," the term applied to such attempts of individual nations to make both gold and silver circulate at a fixed ratio. § 192. In 1816 England debased her silver coins, made them legal tender only for small payments, and made gold the sole legal-tender money. In G oidmono- 1871 and 1873 Germany established a na- »etaiiism. tional gold coinage, and withdrew most of the old silver coins that had formerly circulated in the various Ger- man states. In 1873 the United States relegated silver to a position as subsidiary currency. Meanwhile the world's annual production of silver was increasing from about 30,000,000 ounces in 1860 to 78,775,602 ounces on an average for the period 1876-1880. At this time France and a few other countries, which formed the Latin Monetary Union, still held their mints open to the 298 PRINCIPLES OF ECONOMICS. free coinage of silver at the ratio of 15.5 to 1. Silver cheapened so greatly that it began to flow in large quantities to the French mints, and France became afraid that all her gold would be soon replaced by the cheaper silver coins. In 1876, when the market ratio of silver to gold had fallen to 17.88 to 1, the French mints were closed to silver ; and the coinage of the white* metal ceased. Since then, Austria has passed from a depreciated paper currency to a gold basis, and other countries have shown a desire to adopt gold monometallism. The present century, therefore, has seen a decided drift toward the adoption of a single gold standard by civilized countries. § 193. Most of the countries of Asia and of South America have the single silver standard. Since 1893, however, the mints of India have been closed Silver monometai- to the further coinage of silver. At the present writing news comes of the practical acceptance of the gold standard by Japan, through the adoption of a legal ratio of 33.33 to 1. § 194. Within the last thirty years the scheme of international bimetallism has often been proposed. Its international advocates have usually admitted that na- bimetaiiism. tional bimetallism is impossible, and results in the exclusive use of the cheaper metal. But they claim that, if the principal nations of the civilized world should'agree to make both metals legal tender at a fixed ratio, and should allow free coinage of both under such conditions, it would be possible to keep both metals in concurrent circulation. On this proposition scientific BIMETALLISM. 299 authorities are divided at the present time. It will be necessary to review the arguments advanced for and against international bimetallism. § 195. It is claimed that bimetallism is desirable because it would give a more stable unit of money than either gold or silver monometallism could The desira- secure. The world's stock of both of the wutyof , i i ii . i • bimetallism. \\ precious metals is so large that a change in \\ the production of one would not greatly affect the value of the whole mass. Under monometallism, a change in the production of the money metal more quickly affects the value of that metal. Moreover, with bimetallism, an increase in the production of one metal might be offset by a decrease in the production of the other. This claim is correct, p?'ovichd that it can be proven that it is possible to hold the two metals together at a legal ratio. Bimetallists call attention to the fact that there has been a general fall of prices in all gold standard countries since 1873. This was once denied, Bimetaiiist but is now admitted by all. 1 This fall, £ g ^f fall bimetallists say, has injured debtors by of prices, increasing the burden of debts; moreover, it has de- pressed industrial enterprises, and will do so as long as it continues. The bimetaiiist attributes this fall of prices to the fact that since 1873 silver has been 1 For the index numbers from which the fall of prices is ascertained, see Fisher, Appreciation ami Interest, 98-100 ; Taussig, Silver Situation, 91-92; Atkinson, Bimetallism in Europe, 602, 633. Also a Bulletin on "Movement of Prices, 1840-1894," published by the Bureau of Statistics, Treasury Department, Washington, 1895. 300 PRINCIPLES OF ECONOMICS. " demonetized " in many countries. The principal com- ^ mercial nations now have the single gold standard. Gold monometallism has increased the demand for gold, and has raised its value, ^"f Gold monometallists attribute the fall of prices to improvements in production that have decreased the cost of producing commodities. But this gold mono- docs not change the fact that the ratio in metaiiists. w hi c h gold exchanges for commodities has altered, and that the purchasing power of gold has risen. It does, however, make it probable that falling prices have been due to an increasing supply of commod- ities more than to an absolute decrease in the supply of gold money. Gold has become more scarce, not absolutely, but relatively to the larger production of commodities. This diminishes the injury that can be done to debtors. Prices may have fallen, but new methods and appliances turn out a larger product ; so that about the same money return can be secured from a business enterprise. This consideration has force when applied to industries where new methods have been introduced, but docs not lessen the burden laid upon a debtor whose business has not been affected by improvements. Finally, monometallists say that debts are contracted in money, not in commodities nor in general purchasing power. From 1850 to 1873 prices rose ; since 1873 they have fallen ; in a few years they may rise again. Such changes arc a part of the risk incurred by persons who enter into long-time contracts. They might occur under bimetallism. In any case, we BIMETALLISM. 801 ougnt not to interfere with past contracts. We may admit this, and yet may insist that it is advisable to lessen the risks of changes in prices that may affect future contracts. Bimetallists urge that the world's stock of gold is not sufficient for the money demand of the world, and that gold monometallism must lead to a con- Arguments tinned fall of prices. Geological conditions from the are such that " we must expect in the future ^sufficiency a scarcity of gold and an abundance of of the world '« J D stock of gold. silver, and that the extension of the gold standard to all civilized states is impossible." Between 1870 and 1890 the annual production of gold averaged hardly more than 5,200,000 ounces, with a value of about $108,000,000. The annual consumption of gold in the arts in civilized countries has never been estimated at less than $60,000,000. Besides this, a large quantity, estimated by the highest authority as not less than $20,000,000, is exported annually to the semi-civilized countries of Asia and Africa, where it is hoarded or used for ornaments. This leaves only about $25,000,000 of gold for making good the loss of existing coins by abrasion, and for supplying the needs of increased trade. 1 The force of this argument of insufficiency in supply is weakened by the phenomenal increase of Kecent old the gold output since 1890, as shown by the production, following table, on page 302 : — 1 For statistics on these points, see Soetbeer's tables, in Atkinson, Bimetallism in Europe, 504-528. 302 PRINCIPLES OF ECONOMICS. Year. Fine ounces produced. Value of product. 1890 1892 1894 1895 1896 1897 5,749,000 7,094,000 8,704,000 9,041,000 9,817,000 11,489,000 $118,848,000 140,051,000 181,175,000 199,304,000 202,950,000 237,504,000 '""vFor 1898 a preliminary estimate shows a product valued at about ^80,000,000. The prospect is that the next few years will see equally large outputs. The largest average annual product ever before known was 6,486,000 ounces, produced between 1856 and 1860. The value of the gold output alone is larger now than the combined values of the annual gold and silver out- put from 1871 to 1875, when silver was " demonetized." This is shown in the following table, in which the silver product is valued at the ratio of 16" ounces for 1 ounce of gold : — Year. Silver Gold. Total. 1871-1875 1 Annual average j 1896 1897 $81;864,000 $115,577,000 202,956,000 237,504,000 $197,441,000 Improvements in the art of producing gold from poorer ores, stimulated by the recent appreciation of gold, are likely to make the product large for many j BIMETALLISM. 303 years. In the remote future it may decrease again ; but, for the present, arguments drawn from the scarcity of gold have very much less force than they possessed before 1890. The question may arise, Why does not the increased production of gold lead to a rise in prices ? The explanation probably is that several years are required for a change in the annual output to affect the value of the world's large stock of gold. Bimetallism is declared to be desirable because it would establish a fixed par-of-exchange between all countries. An English merchant trading Arguments with a silver standard country has to sell fora * lxed •> par-of- at silver prices. He receives payment in exchange, bills drawn in terms of silver, and the gold value of these silver bills may vary between the time that goods are sold and the time that they are paid for. Such fluctuations introduce an element of uncertainty and speculation into legitimate trade between gold and silver standard countries. If gold and silver were held together at a fixed ratio by international bimetallism, then this element would be eliminated from the trade with silver-using nations. This may be admitted to be desirable. § 196. The crucial consideration concerning bimetal- lism is the question of its practicability. Bimetallists urge the following arguments : — 1: If the principal nations of the commercial world should agree to allow free coinage of gold and silver at a fixed ratio, say 16 to 1, both metals could be kept in concurrent circulation. If either should cheapen, there / / 304 PRINCIPLES OF ECONOMICS. would be a general tendency for debts to be paid in that metal. The demand for the cheaper metal for coin- age purposes would be as large as the entire Is interna- . tionai bimetal- demand of the commercial nations for cabie P on Ctl " money. This demand would raise the value economic f the cheapened metal. On the other grounds ? hand, the demand for the dearer metal would fall in proportion as the demand for the cheaper increased. World-wide changes in demand would, there- fore, restore the parity of the two metals at the legal ratio. 2. This plan differs from national bimetallism since, under the latter policy, the dearer metal could be exported to either gold or silver standard countries where it would be in demand ; while the cheaper metal would gradually flow from the countries that produced it to the mints of the nation that overvalued it. With international bimetallism, if gold should become dearer than silver at the legal ratio, it could not be exported to any countries where the demand for it would maintain its higher value. This is because all the principal com- mercial nations, now on the gold standard, are supposed to be in the bimetallic league. If one or two should refuse to enter, they would have to maintain the value of gold by their individual demands. 3. Bimetallists assert that the experience of France from 1803 to 1874 illustrates the practicability of their policy. During that period France admitted both gold and silver to free coinage at the ratio of 15.5 to 1. From 1803 to 1850 silver was usually slightly cheaper BIMETALLISM. 305 than gold at that ratio, while from 1850 to 1873 the case was reversed. In every year but one, both metals were offered at the French mints for coinage; although the silver coinage exceeded gold from 180G to 1850, and gold exceeded silver from 1850 to 1873. Conditions at the present day would not be so favorable for another experiment with national bimetallism. Prior to 1873 some countries of Europe used silver and others gold, so that the strain on the French system was lessened. § 197. Gold monometallists have often showed that national bimetallism has regularly proved a failure, — even France feeling obliged to change her The position policy in 1876 on penalty of losing her gold, monometai- But such arguments fail to touch interna- Usts - tional bimetallism. More pertinently, monometallists argue that international bimetallism means, at the present day, the attempt to make gold and silver legal tender at some such ratio as 15.5 to 1, 16 to 1, or 20 to 1. These ratios all overvalue silver, for the actual market ratio is now 31 to 1 or 32 to 1. Monometallists say, therefore, that the results of international bimetal- lism can be determined by asking, What would happen if the governments of leading nations should attempt to make gold and silver legal tender at a ratio that over- valued silver? Their answer is that gold, the dearer metal, would quickly cease to be used as legal-tender money; and silver would become the sole legal-tender money in circulation. They deny that gold would fall in value the moment it ceased to be demanded as legal tender. It would be used first as a commodity, in 20 306 PRINCIPLES OF ECONOMICS. which use its utility would be unaltered. Second, it would circulate in payment of debts at a premium over the legal value placed upon it at the mints. Mono- metallists recognize that governments can compel cred- itors to receive cheap silver money for past debts, but deny that the commercial world can be forced by law to use it in future payments. Gold has gradually dis- placed silver as the medium for the largest commercial transactions because of its superior convenience. At the present time the commercial world dislikes and dis- trusts silver, and would refuse to make future contracts in that money. Consequently gold would be demanded for future payments, and future contracts would be made in terms of ounces or grains of gold. In other words, monometallists insist that the commercial world would choose its own money ill future payments, with- out regard to legal-tender laws. They assert that the laws making gold legal tender have little power to affect its value, since it would be used as money by the com- mercial world without such legislation. The law should recognize this fact. In any case legal-tender laws would, in the end, prove powerless to overcome this preference. Thus international bimetallism would fail at the outset. § 198. The practicability of bimetallism turns finally on this last point raised by the gold monometallists. If concluding an international agreement should induce considerations. f.] ic i )US ; llcss world to make future contracts in either gold or silver at a fixed legal ratio, then it ia probable that the changes in the demand for the two BIMETALLISM. 807 metals would maintain them at a parity for a long time, at least. But, if the commercial world should refuse to make future contracts in the bimetallic standard, the outcome would depend upon whether this demand of business circles should prove sufficient to maintain gold at a ratio higher than that fixed by law. It seems im- probable, however, that there should be sufficient dis- crimination against silver to produce such a result. International bimetallism could hardly be adopted un- less the commercial interests of leading countries should favor it. In the nature of the case, therefore, there would hardly be sufficient discrimination against silver to maintain the value of gold above the legal ratio. § 199. It is necessary to add that the political diffi- culties in the way of an international bimetallic agree- ment are considerable. It is doubtful whether _ „ . . Political such an agreement could be secured in any obstacles to near future. More than this, the outbreak of war between two of the states of a bimetallic league might lead each of the contending nations to make a sudden attempt to secure gold, the metal in which most reliance could be placed. As a matter of fact, political considerations, especially those of a military nature, have been partly responsible for the movement of Euro- pean countries toward the single gold standard. 308 PRINCIPLES OF ECONOMICS. LITERATURE ON CHAPTER X. References on the Monetary History of the United States : Andrews, Institutes of Economics, 200-217 ; Atkinson, Bimetal- lism in Europe ; Bolles, Financial History of the United States ; Coinage Laws of the United States; Conant, History of Modern Banks of Issue; Dunbar, Theory and History of Banking; Dun- bar, Laws of the United States Relating to Currency, Finance, and Banking ; Knox, United States Notes ; Laughlin, History of Bimetallism in the United States; Muhleman, Monetary Sys- tems of the World; Report of the Director of the Mint, 1895:, Statistical Abstract of the United States, 1895 ; Sumner, History of American Currency; Sumner, History of Banking in the United States ; Taussig, The Silver Situation in the United States; Upton, Money in Politics ; Noyes, Thirty Years of American Finance ; Report of the Monetary Commission of the Indianapolis Convention, 138-145, 197-223, 398-490, 491-582 ; Watson, History of American Coinage ; White, Money and Banking. References on Bimetallism : Atkinson, Bimetallism in Europe ; Ely, Outlines of Economics, 150-156 ; Fisher, Appreciation and Interest ; Giffen, The Case against Bimetallism ; IIadley, Eco- nomics, 206-231; Helm, The Joint Standard; Horton, Silver in Europe; Laughlin, Bimetallism in the United States ; Macvane, Political Economy, 165-181 ; Muhleman, Monetary Systems of the World ; Nicholson, Money and Monetary Problems; Report of the Director of the Mint, 1895; Reports of the Monetary Conferences of 1878 and 1892; Statistical Abstract of the United States, 1895; Taussig, Silver Situation in the United States ; Walker, Inter- national Bimetallism, Political Economy, 463-475, Money; Wells, Recent Economic Changes, 114-259 ; White, Money and Banking; Darwin, Bimetallism; Nicholson, Principles of Political Econ- omy, II. 148-163. MONOPOLIES AND MONOPOLY VALUE. 309 CHAPTER XI. MONOPOLIES. I. The Nature of Monopolies. Monopoly Value. § 200. A monopoly exists whenever one person or a combination of persons acquires control of the supply of a commodity. This control may be secured Definition of temporarily by buying up the available sup- monopoly, ply, or more permanently by gaining the exclusive or nearly exclusive power to produce. A monopoly of the first kind will be a temporary affair, because producers will increase their outputs in order to profit by the higher prices usually fixed by monopolists. With the second class of monopolies permanent success is more probable. 1 § 201. When a single person or combination of per- sons controls the supply of any commodity, it is possi- ble to control the price. This can be done Monopoly by increasing or decreasing the supply so value - as to induce the public to buy at prices that shall make the business as profitable as possible. With freely 1 Sonic monopolies have been the sole purchasers of the raw materials used by them. Their influence, therefore, has extended to a control of the prices at which the producers of the raw materials must dispose of their products. Such monopolies have a substantial control of the demand for the raw materials. 310 PRINCIPLES OF ECONOMICS. produced commodities no person is able to control the supply, hence the price, in this manner. If he reduces his output, other producers will extend their sales at his expense. He must sell as many goods as can be disposed of at prices that leave a profit after paying expenses. Thus in competitive industries producers will make the largest profits by extending production until prices approximate the marginal expenses of pro- duction. Now the monopolist acquires the power to control the supply. Monopoly prices, therefore, will not be governed by the forces that control prices of freely produced commodities. A person may acquire power to fix the price of a commodity without controlling all the supply. Re- Monoponsts peated instances have shown that control of teoftheVntire ovcr na ^ the su PPty ma J enable a monopo- suppiy. list to dictate prices. As Mr. Sidgwick says, " a partial control may render possible and prof- itable an artificial rise in the price of the commodity, even though the remainder is supplied by several sell- ers freely competing ; if only the proportion controlled is so large that its withdrawal would cause a serious scarcity, and thus considerably raise the competitively determined value of the uncontrolled remainder." Monopoly prices tend to be adjusted so as to yield the monopolist the largest net income. In determining Monopoly what price will vield the highest net return, prices are ■ J ° fixedatthe the following principles may be recognized: est net return. 1- -^ s the monopolist decreases the sup- ply, he tends to increase the marginal utility of his MONOPOLIES AND MONOPOLY VALUE. 311 product ; and vice versa. The rapidity with which mar- ginal utility varies with changes in supply depends upon the character of the demand. The demand for luxuries is far more elastic than the demand for necessaries ; so that changes in supply affect the marginal utility of necessaries more rapidly than they affect the utility of luxuries (§ 116). 2. Certain expenses of production will increase or decrease nearly proportionately with each increase or decrease of the product. 1 Expenses for raw materials and common wages are of this character. 3. Other expenses remain nearly the same whether the product is larger or smaller, within certain limits. These are fixed expenses (§ 127). 4. The intelligent monopolist, desiring to secure the maximum net revenue, will disregard any expenses that are fixed ; and will consider, first, the quantity of his product demanded at various prices, and second, the variable expenses for each unit of supply. Suppose that the fixed annual expenses of a street railway com- pany for interest on borrowed capital, for salaries of principal officials, and for other outlays that do not vary with the amount of business transacted, are $40,000. Suppose that the variable expenses amount to two cents for each passenger carried. Then suppose 1 In some cases these expenses will increase more than proportion- ately when the supply is increased beyond a certain point. This is true of industries in which the point of diminishing returns is quickly reached, so that the increased supply of raw materials has to be produced on new lands that offer poorer advantages. Sometimes a supply can he some- what increased without increasing the variable expenses proportionately. 312 PRINCIPLES OF ECONOMICS. that, at a fare of ten cents, 600,000 passengers will be carried in the course of a year ; and that each reduc- tion of fares brings a larger traffic, as represented in the table given below. The effect of each change of fare upon the net revenue of the company will be as follows : — Passengers Total Variable Net Fixed Net Carried. Earnings. Expenses. Earnings. Expenses. Revenue. 10 600,000 $60,000 $12,000 $48,000 $40,000 $8,000 8 800,000 64,000 16,000 48,000 40,000 8,000 6 1,400,000 84,000 28,000 56,000 40,000 16,000 5 2,000,000 100,000 40,000 60,000 40,000 20,000 4 2,500,000 100,000 50,000 50,000 40,000 10,000 3 4,000,000 120,000 80,000 40,000 40,000 5. The intelligent monopolist will not charge the highest prices that he could compel any consumer to pay. He will lower prices whenever the increased de- mand will more than counterbalance the reduction of rates and the increase of variable expenses. In our illustration, five cents is the fare that yields the largest net returns. Furthermore, the fixed charges have no influence upon the prices. If a fixed tax, say of $10,000 a year, should be exacted, the fare would not be raised ; for such a course would diminish the net earnings out of which all fixed charges must be paid, and the tax would come out of the net monopoly revenue. On the other hand, a variable tax, say of one cent for each passenger, would increase the variable expenses so that a fare of six cents would yield the largest net returns. Taxes on the net revenue of monopolies cannot be shifted. CLASSES OF MONOPOLIES. 313 II. Classes of Monopolies. § 202. A monopoly may originate in the possession of rare personal faculties and acquirements. Every free person has exclusive disposal of his i. personal natural or acquired powers ; but if many ablllUes - other people possess the same faculties in an equal de- gree, no one can have a monopoly, that is, a control of the supply of the services that his personal abilities enable him to render. On the other hand, exceptional ability that very few other people possess confers upon a person a substantial monopoly in the field in which his talents lie. A famous singer, an exceptional physician, an author of peculiar talent, or a business manager of unusual ability may enjoy a partial or nearly complete monopoly of the supply of valuable services. § 203. Other private monopolies arc created by law. Formerly kings granted to private individuals monopo- lies of many trades and manufactures in 2. Legal return for payments to royal treasuries. At ™°private the present day patents and copyrights are monopoues. forms of legal monopolies. These are intended to pro- mote invention and the arts by securing to inventors and authors exclusive rights to their products for a limited period of time. Giant monopolies have been created behind patent rights, as the telephone monopoly in the United States. Governments may create public monopolies of certain industries for the purpose of deriving revenue from such sources. Fiscal monopolies of this character still exist 314 PRINCIPLES OF ECONOMICS. in Europe, where the manufactures of tobacco, salt, Legal and matches are carried on exclusively for ™ ptiMic eS * ne profit 0I " various governments. The monopolies. United States has a monopoly of the postal business, — a monopoly, however, which is not made a source of revenue. § 204. The use of land, of mines, or of water privi- leges, is necessary to production. Some of these nat- ural agents are narrowly -limited in sup- 3. Natural , , ., . ■, monopolies. W > hence it is easy, so long as private a. Monopolies ownership is allowed, to monopolize them. of location. ^ ' r Practically all of the anthracite coal of the United States is found in a small area in Pennsylvania, and it has been possible for the ownership of these coal fields to pass into the hands of a monopoly. Similarly, the petroleum fields are in process of monopolization. Water powers, facilities for irrigation, and docks giv- ing access to navigable waters are often monopolized. Steam railroads sometimes possess terminal facilities in large cities that cannot be duplicated, and therefore tend to create monopolies. In some instances street railroads have been granted locations in peculiarly desirable streets, so that they monopolize the larger part of the business of their cities. Steam railroads, when granted rights of way through mountain passes or narrow river valleys, possess practically exclusive channels; of communication between different sections of a country. In these cases, monopolies control the supply of commodities or services on account of exclusive advantages of location. A second group of natural monopolies originates in CLASSES OF MONOPOLIES. 315 the necessity of consuming products or services in con nection with the plants from which they are Natural supplied, das, water, and electric light can "^ono^ues be supplied to consumers only bv extending duetocon- . sumption of pipes and w T ires to places where the coin- products in modities are used. Such things can be se- ^"uT^ 011 cured only from companies owning plants plants. in the immediate locality where consumers live. The same is true of steam and street railroad facilities. Such services cannot be supplied by all producers, and cannot be imported from another city except by exten- sion of the plants. It follows that, if two gas or electric- light or water companies attempt to compete for the trade of a particular locality, a large part of the capital fixed in the rival plants will be needlessly duplicated One company can supply the entire demand of a city far more cheaply than two can do. The same is true when parallel lines of railroad compete for the traffic between two cities. Between such points one company can give better and cheaper service than two. Whenever compe- tition is tried in these businesses, the rival companies combine sooner or later to form a monopoly. It will be difficult for readers to find cases where effective compe- tition has been maintained permanently in the water, or gas, or electric-lighting business. The same is true of the telegraph or telephone business, while parallel rail- roads have usually been combined. In these natural monopolies, it has generally proved that competition re- sults in economic waste through needless duplication of plants; that competing companies cannot give as cheap 316 PRINCIPLES OF ECONOMICS. and satisfactory service as a single company ; and that the usual outcome is the formation of a monopoly. § 205. During the last twenty years the business world has been startled by the growth of giant monopo- 4. capitalistic l' es m many industries that do not ap- monopoues. parently fall under any of the classes of undertakings previously described. There is hardly an important industry in which attempts have not been made to establish combinations. 1 The simplest attempts to form monopolies consist of agreements between a number of producers to limit the product, to maintain fixed prices, or to ap- Forms of I l l organization, point common selling-agents. These agree- .A. 2X6 &m 6H t s pools, and ' ments are seldom lived up to, and mutual trusts. suspicion among the members generally breaks them up. Yet a " friendly agreement " between four large beef packers in Chicago has sufficed to build up a practical monopoly of the cattle and meat business of the United States. In other cases, where the number of parties to the agreement has been small, this form of combination has created virtual monopolies. A second and more formal organization is the " pool." This is established by a formal agreement to maintain prices, in which the parties agree to divide the territory, to divide the business, or to divide the earnings. Pools have been common in the railroad business, but have existed else- where, as in cases where nominally competing gas cora- 1 See Von Halle, "Trusts." 328-337 ; Lloyd, " Wealth against Com- monwealth," Appendix, — for partial lists giving about four huudred at- tempts to form monopolies. CLASSES OF MONOPOLIES. 317 panies agree to servo separate districts in a city, and not to encroach upon each other's territory. Pools have often enough been broken up by the mutual distrust of the members ; for, if one party to the pooling, agreement breaks it while the others keep their promises, he may make large profits. This difficulty is intensified in this country because the courts have refused to enforce pool- ing contracts, regarding them as in restraint of trade and opposed to public policy. In a third form of com- bination, the trust, monopolists finally secured perma- nent understanding and union of interests among all members. Trusts were formed by having competing corporations place a majority of all their stock in the hands of a board of trustees. These trustees managed the business of the several corporations, and secured harmony of action. The original stockholders received trust certificates in exchange for their stock, and re- ceived dividends proportionate to the certificates. The Standard Oil Trust, formed in 1882, was the earliest and most successful trust. Courts finally decided that cor- porations had no right to surrender their stock to trus- tees, such action being ultra vires. Between 1888 and 1892 many states passed " anti-trust laws," and Congress placed such an act upon the statutes of the United States. This hostility of the courts and of public opinion led to a formal dissolution of trusts. But dissolution meant simply a change of form. In some cases, one large cor- poration bought out the smaller corporations composing the trust. In others, a few large corporations were formed, in each of which the original monopolists owned 318 PRINCIPLES OF ECONOMICS. a majority of the stock. The Standard Oil Combination now operates in this form. The formation of monopolies in nearly all industries has been attributed to the influence of modern capital- istic production ; hence the name capitalistic Nature of r 1 capitalistic monopolies. The striking facts of modern monopo es. mismess are the growth of large capitals- and the concentration of production (§ 100 to § 103). It is alleged that the formation of monopolies in industries where large fixed capitals are required is the natural re- sult of the forces that have led to the replacement of small establishments by large enterprises. III. General Considerations Concerning Modern Monopolies. § 206. Combinations of various sorts, enjoying partial or nearly complete monopolies, are attempting to control _ . . . the national markets for sugar, matches. Extent of & ' ' monopoly starch, beef, flour, alcohol, tobacco, crackers, coal, petroleum, cotton-seed oil, linseed oil, glass, paper, rubber, leather, steel rails, wire nails, tacks, shovels, chains, anthracite coal, and other products j while local monopolies exist in many other industries. In the field of the natural monopolies there are tele- graph, telephone, and express monopolies, organized on a national scale ; while the gas, street railway, water supply, and electric-lighting industries are given up to local monopolies or operated as municipal enterprises. The consolidation of railways is rapidly throwing tho control of the national highways into the hands of a few CLASSES OF MONOPOLIES. 319 great railroad systems. We must realize, therefore, that monopoly is one of the common facts of modern busi- ness, and that its influence for good or for bad reaches into nearly all branches of economic activity. § 207. Most of these combinations possess several of the elements that produce monopolies. The Standard Oil Combination claims to have valuable Complexity patents that have cheapened and improved of these its products, and possesses elements that monopo ^ make it a legal monopoly. Also it claims to have real- ized all the economies that come from production on a large scale, and so would be considered a capitalistic monopoly. Again, it has been greatly aided by its ex- clusive control of the pipe lines that conduct oil from the oil fields. Since the oil fields are limited natural agents, the possession of the pipe lines introduces elements of natural monopoly. These features are common to most monopolies. § 208. Many natural monopolies have been given ex- clusive franchises that make them legal monopolies as well as natural. It has been denied that the __, . _.^ Denials of the other combinations are monopolies, since existence of they do not possess any legal grants of ex- clusive privileges. But such a denial rests upon a nar- row definition that confines monopoly to the meaning of a legal monopoly. Even then, a patent right would be admitted to be a monopoly privilege ; and most combina- tions are intrenched behind patents. But the real test of a monopoly is the power to control the supply, and this originates in other causes besides exclusive legal grants. 320 PRINCIPLES OF ECONOMICS. § 209. An absolute monopoly, or absolute control of supply and prices, seldom or never exists. The power Absolute mo- of the monopolist is limited, first, by the fact sn£e in most" tna * ^ s °^ en possible for consumers to find cases. substitutes for the monopolized commodity. The possibility of using oil limits the power of the gas monopoly, and the alternative of using other foods would limit the power of a flour monopoly. If the article monopolized is not a necessary, people might cease to use it at all, and thus an increased price might be un- profitable. Finally, every monopoly is threatened con- stantly by investments of new capital in the business which it controls. As prices are raised, inducements for outsiders to invest capital are increased. It often pays better to keep prices from becoming so high as to tempt outside capitalists. IV. The Problem of Natural Monopolies. § 210. Disinterested writers practically agree that permanent competition is impossible in industries that impossibility are natural monopolies. The reasons have of competition | jccn ma( j e c | ear an( j it remains to refer in natural monopolies, to the public policy that should be pursued in respect to these undertakings. § 211. Persons interested in water, gas, street railway, electric lighting, and railroad companies sometimes urg0" Private own- * ina * P r ' vaTC ownership generally works well, ershipand and is flic best policv for the future; that public control. the law should leave private companies alone, since it is for the interest of the owners of such property NATURAL MONOPOLIES. 321 to give the best service at reasonable prices. But tlia. public lias found that these industries usually become monopolies, and that there have been many abuses in their management. Such enterprises prove very profit- able in the long run, and become more valuable with every increase of population and public wealth. Expe- rience shows that private companies usually keep rates at the point that yields the highest net returns, and conceal the large profits by means of stock waterings Now, such monopolies depend upon franchises secured from the public, and people are inclined to hold that companies receiving valuable privileges should not exact monopoly prices and realize enormous profits at the I expense of the public that confers the right to use streets, to lay pipes, etc. Municipalities have begun to regulate natural monopolies. The present tendency is to require reasonable prices and good service, to prevent stock watering and the concealment of profits, and to oblige private corporations to pay for valuable franchises. This tendency is of recent development, and too often valuable franchises have been given away to private companies that have oppressed the public. § 212. Many authorities favor public ownership of natural monopolies. Such writers call attention to the notorious corruption of city and state officials 1 • The policy by private corporations desiring to secure of public franchises. They demonstrate that enor- mous wastes have occurred through allowing rival companies to duplicate business plants, and that usually the competing companies have consolidated and formed 21 322 PRINCIPLES OF ECONOMICS. monopolies. They show that the monopoly prices charged by private companies are often excessive, and form a public burden. Therefore, they hold that sound policy requires that we should recognize competition to be impossible in these industries ; that municipalities should assume ownership of these enterprises as fast as possi- ble ; and that such a policy would diminish the political, corruption that threatens the governments of all the municipalities of the country. To this the advocates of private ownership object that public ownership is socialistic ; that city governments Arguments cannot manage business enterprises success- private™ fully ; and that poor and expensive service ownership, would result. The charge that municipal ownership is socialistic is as true as the charge that municipal ownership of streets, parks, and sewers is socialistic. The public cares nothing about the name used to characterize municipal ownership, but will con- sider the results. Many cities own water works, parks, public libraries, and many other institutions that are socialistic ; and find such a policy beneficial. The second charge is important. Under inefficient methods that often prevail in our city, state, and national govern- ments, public ownership would prove less efficient than private ownership at its best. Yet there is no need of municipal management proving inefficient if people seriously desire to secure efficient municipal governments. Many European cities manage successfully local mo- nopolies. In this country hundreds of municipalities own NATURAL MONOPOLIES. 323 their water works, and manifest a desire to extend public ownership. Gas works are owned by a few Experiments cities, while municipal ownership of electric- municipal lighting plants is more common. The results ownership, of public ownership of gas and electric-lighting plants have been that some undertakings have been very successful, others have proved fairly satisfactory, as much so as average private ownership, while some have been poorly conducted. Success or failure has usually depended upon local conditions, generally upon the possibility of securing honest local government. In cities where municipal offi- cials are allowed to plunder the public, it is probable that municipal ownership would prove less successful. It has been demonstrated that natural monopolies are usually enormously profitable when private companies are allowed to fix rates, while municipal ownership furnishes lighting facilities at lower prices than private companies usually charge. Little has been done in the direction of public operation of street railways in this country. Advocates of public ownership hold that at present it may be advisable for municipalities merely to limit franchises for street railroads to periods of twenty or thirty years, and to make private companies pay a fair return for the privi- leges granted them, or reduce fares to about a three-cent basis. Large cities could undoubtedly pay a large part of their expenses out of the receipts from public franchises, or could insist upon material reductions in the prices charged by natural monopolies. 1 1 For the experience of municipalities with the ownership of such monopolies, see: Shaw, Municipal Government in Great Britain, Muni- 324 PRINCIPLES OF ECONOMICS. Steam railroads are natural monopolies, since they enjoy monopolies of location, and since their services must be used in connection with their plants. The case of steam Competition is possible only at competing raUroads. . , 1 j 1 j_i v c points reached by more than one line 01 road. But railroads possess also the characteristics of capitalistic monopolies since they require heavy invest- ments of fixed capital, and therefore make it possible to effect savings by combining small roads. Public owner- ship of railroads presents many more difficulties than municipal ownership of local monopolies. But experi- ence shows that private ownership results in serious evils. The chief of these have been, dishonest manage- ment by a ring of speculators, stock watering and over- capitalization so great as to make it impossible for many roads ever to pay interest and dividends on their excess- ive capitalization, and discriminations in rates that have ruined individuals and localities in the interest of favored shippers or localities. Realizing these evils, the public has insisted that the states and the national government shall exercise control over the transpor- tation business. This control has constantly increased, and is certain to be enlarged in the future. Apparently, the people of the United States intend to try all other methods of public control of the national highways be- fore attempting national ownership. cipal Government in Continental Europe ; Roskwatek, Cost Statistics of Public Electric Lighting ; Bbhis, Municipal Ownership of Gas in the United States; Jamks, Relation of the Modern Municipality to the Gas Supply; Review of Reviews, vii. 61-70. CAPITALISTIC MONOPOLIES. 325 V. Capitalistic Monopolies. § 213. Capitalistic monopolies are so numerous and powerful that they must be considered a Reasons for common feature of the economic life of to- ^X£ of day. Different reasons have been assigned monopolies, for their growth, and we must consider the explana- tions advanced. § 214. It is said that modern competition has become fiercer than ever before. The growth of large capitals narrows the competing parties down to a The wastes few large competitors. Enormous sums are ^ f e C ^ J " f nous spent in advertising and selling goods, so competition, that competition produces great wastes in effecting sales. A union of competing firms saves these expenses, and enables goods to be sold at lower prices. Competition docs not mean lower prices, for the wastes incurred under it oblige prices to be kept at a higher level. Furthermore, competition between large enterprises often becomes commercial warfare. Competing firms sell goods for less than cost in order to crush out com- petition and to extend their markets. This cut-throat competition sometimes lasts for mouths or even years. In the end smaller concerns are forced to the wall, and the large companies remaining combine their forces in order to prevent ruinous competition in the future. Undoubtedly the desire to stop these enormous losses lias led to the formation of many combinations. Finally, whenever large fixed capitals are invested in a business, it is difficult for independent establishments to reduce 326 PRINCIPLES OF ECONOMICS. their outputs whenever the supply becomes so great as to lower prices below the point where they cover expenses of production (§ 127). Such conditions favor the forma- tion of combinations, which can reduce the output of each establishment, and restore paying prices. § 215. A second explanation of monopolies is that a combination can secure all the economies that come Economies in from production on a large scale. Some of production. ^ ie g rea test monopolies claim that they have cheapened the cost of producing commodities. This subject has been discussed elsewhere (§ 100 -§ 103). Experience proves that large-scale production does lead to more economical production ; but it has not yet proved that a complete monopoly can secure many material advantages in production over independent enterprises large enough to secure full efficiency of plant. Some of the great combinations have effected economies in pro- duction. l Yet, independent establishments compete with the largest monopolies so effectively that they are crushed only by foul means. We have not enough data at present to enable a final decision to be formed on this question. Whenever the great combinations shall be able to make a profit from selling at prices so low as to make it impossible for independent producers to compete on equal terms, then all will have to admit that monopo- 1 Monopolies may combine their patents, so that every process i-s per- formed with the most approved appliances. Yet large i ndepend ent enter - prises may at any mojoeut^secure new inventions-. ; Monopolies niayBuy ( their raw materials symcii'hjtt cheaper, since they can order very large" quantities at a time. The student will find these questions discussed in the works referred to^at the eud_of the chapter. CAPITALISTIC MONOPOLIES. 327 lies possess greater advantages in the mere work of production. Manifestly, however, the possession of supe- rior facilities cannot be proven by the fact that monopo- lies crush independent producers by selling at a loss until the smaller competitors are ruined. It must be admitted that the day of production on a small scale is past. But the question is concerning the greater economy of mo- nopolies over independent large-scale production. § 216. The growth of the greatest capitalistic mo- nopolies has been aided by alliances with natural monopolies, especially with railroads. The Alliances of Standard Oil Combination has always had ^naTurai the aid of railroads in crushing competitors, monopolies. Independent refiners were charged higher freight rates at first, and the excess over the normal rates was paid to the Standard Oil Combination. This was exposed, and the contracts with the railroads were ostensibly can- celed. But a continuous line of evidence, extending to the very month in which this is written, shows that the oil monopoly has always received assistance from the railroads. So with the dressed-meat combination. A Congressional investigation showed, in 1888, that freight rates west of Chicago encouraged shipments of cattle to that city. After reaching Chicago, the trunk-line asso- ciation refused to haul cars of private shippers to New York, so that the cattle had to be unloaded at the stock yards controlled by the four great packing houses. Then the meat combination received a mileage allow- ance of nearly $200 per annum on each car used in shipping their products to the East. Finally, some of 328 PRINCIPLES OF ECONOMICS. the railroads refused to carry cattle for local butchers who would not sell the dressed beef of the great com- bination. These are by no means exceptional instances, and they show how alliances with natural monopolies have served to build up combinations. § 217. The opponents of a protective tariff have declared that trusts in the United States have been Relation of due to the exclusion of foreign competition thrprotictive h y our tariff - The formation of a monopoly tariff. is easier when the possibility of foreign com- petition is excluded ; and it is possible to show that some combinations have profited in this way. But the underlying causes of monopolies reach deeper than the tariff, which has been merely one circumstance that may have favored their growth. § 218. Much of the opposition to monopolies has been due to their unscrupulous and criminal methods of crushing competitors, and securing nrivi- EvU methods , n % of some leges from the government. Some of them monopo es. jj ave conspired with railroads to prevent competitors from using the national highways on equal terms. Some have hired agents to destroy the property of their rivals. Some have corrupted city officials, state legislatures, and courts for the purpose of accomplish- ing their ends ; and their sinister influence has been felt repeatedly in Congress. Furthermore, the stocks and bonds issued by the corporations composing some mo- nopolies have been "listed "upon the stock exchanges. In many such cases, the managers of the combinations have indulged in the very worst practices known to the FINAL CONSIDERATIONS. 329 exchanges, in order to make money by manipulation of the stock market. Managers frequently have gambled in their stocks to the extent of neglecting the real interest of their companies, and have caused infinite demoralization in the legitimate work of the exchanges. Many honorable men have been connected with combina- tions, and it must be distinctly stated that the charges above enumerated cannot be brought against all monopo- lists. But the evil practices l of many of the largest monopolies have been so flagrant that honest men find it ditlicult to form deliberate and impartial judgments con- cerning the economic aspects of combinations. But the student of economics must put aside all prejudices, how- ever natural and justifiable ; and must consider, coolly and impartially, the purely economic advantages or weaknesses of monopolies. VI. Final Considerations Concerning Monopolies. § 219. While it is impossible to forecast the future with accuracy, it is possible to emphasize certain facts concerning our experience with capitalistic Ca itali ti monopolies up to the present moment. It monopolies is certain that most attempts in this direc- had absolute tion have failed. The unsuccessful monop- contro1 - olistic enterprises have outnumbered the successful, while the latter have constantly been confronted with 1 Readers will find in the Congressional ami state investigations of trusts, cited at the end of this chapter, an enormous amount of evidence relating to these abuses. Every good citizen should read II. I). Lloyd, " Wealth against Commonwealth," for an account, supported by detailed evidence, of the criminal methods of some monopolies. 330 PRINCIPLES OF ECONOMICS. new independent enterprises. Only in a minority of instances have combinations acquired an effective con- trol of prices, while they have never been able to drive all independents out of business. This has been due largely to the pressure of new capital seeking for investment. This is a mighty force in the United States. A monopoly must not The pressure of capital for only control a majority of the supply at the investment. ^ mQ y. j g f ormec i ? k u t m ust deal with dozens of future competitors. Whenever prices have been main- tained by a combination at an unusually profitable level, new capital has invariably flowed into that business. Many of these new enterprises are established with the purpose of forcing the monopoly to buy them up at good prices. Others find it profitable to sell their products at the high prices established by the monopoly, but are likely to join the combination in the end. Many of the attempted monopolies have aimed solely to limit the supply and to raise prices. Such have fallen under attacks from new competitors attracted by excessive prices. § 220. The successful combinations have been those that endeavor to effect savings in producing and market- Monopolies m £ t ne ' r products, and to sell at prices that and prices. ff cr i ess inducement for attacks by outside capital. The Standard Oil and the Sugar Refining Combinations have reduced the prices to consumers, and exhibit statistics to prove this. The student needs to remember, however, that the prices of all commodities have fallen dining the last twenty years, and that the FINAL CONSIDERATIONS. 331 charges for refining oil and sugar have decreased very slightly since the formation of these monopolies. On the whole, combinations have prevented their products from falling in price as fast as the great mass of com- modities. They sell at monopoly prices, that is, prices that yield the largest net returns, except when forced to lower prices in order to meet or prevent competition. § 221. Some of the opponents of monopolies declare that they limit production and raise prices various views through the artificial scarcity which they ^SjSSSc create. These opponents consider monopo- monopoues. lies to be artificial obstructions to competition, which the law should sweep away. Other writers hold that capitalistic monopolies arise mainly by alliances with natural monopolies. If natural monopolies should be controlled by govern- r J . fo Capitalistic ment so that the rest of the field of industry and natural should be open to all on equal terms, these monopo writers believe that other monopolies could not be maintained. Other economists take a more favorable view. They admit the abuses that arise from alliances of capitalistic and natural monopolies, but hold that the a more favor- explanation of the growth of combinations is ablevlew ' that they avoid the wastes of competition and secure economies in production. These savings represent a gain to society ; and a wise policy will preserve this gain, while minimizing the evils of monopolies. Finally, socialists believe that monopolies are superior forms of organization that are destined to prevail in all 332 PRINCIPLES OF ECONOMICS. industries. Competition is no longer possible. When The view of a ^ industries fall into the control of giant socialists. monopolies, the government will assume the ownership of these combinations. This will mean complete socialism. These conflicting views present the most difficult prac- tical problem that confronts economists. There can be Difficulty of no doubt of the impossibility of competition me problem. m natural monopolies. Therefore, the ques- tion of the future of capitalistic monopolies raises the entire question whether competition will he possible in any part of the business world. This problem is be- ing pushed to the front by every new combination of capital. § 222. No one denies that a monopoly places im- mense power in the hands of the monopolist. Capital- istic monopolies have proved objectionable that monopoly because they lead to gross abuses, and the power win public has as vet no guarantee that monopo- not be abused. * " *■ lists will not abuse their power in the future. For this reason many people favor the immediate aboli- tion of all such combinations by law. Other writers hold that combinations offer the most economical organization of production, and that it is . , , unwise and useless to attempt to suppress Legal regula- * ■ ■ tionofmo- them. Society has, however, the right to regulate monopolies and to prevent irrespon- sible abuses of their power. Legal regulations may oblige all combinations to furnish a satisfactory supply of commodities at reasonable prices. FINAL CONSIDERATIONS. 333 Again, it is argued that no combination can suppress competition permanently, and prevent it from assuring to society good service at fair prices. A J 6 ' The persist- COmpletc monopoly would not destroy the enceofcom- potential competition of new capital at any ** time when high prices offered a prospect of large profits. In the pressure of capital seeking investment we have a force that will guarantee society from abuses. This argument gains force when one reflects that monopolists constantly seek opportunities to invest their savings. If we conceive of all industry as under the sway of fifty gigantic monopolies, then the earnings of each monopoly would menace every other with competition the moment that prices should be raised unduly. Monopoly earnings must be invested in some enterprise that supplies social wants ; and the pressure of capital for investment might prevent monopolistic abuses. At the present, monopo- lists are entering each other's fields of industry. One monopolist is investing in match factories, and attacking the match monopoly. The leader of the oil combination is entering the iron and steel industries. It is urged that this pressure of one monopolist upon another will surely increase from year to year. § 223. The following conclusions, in the judgment of the author, are all that can be safely affirmed from our present experience of capitalistic mo- Concluslons as nopolies : — t0 the erovth and nature of 1. Capitalistic monopolies are usually capitalistic t . , , j • monopolies. complex m character and possess various elements that produce monopoly. The Standard Oil 334 PRINCIPLES OF ECONOMICS. Combination has certain elements of natural monopoly. Patent rights and other elements of legal monopoly are to be found in the majority of modern combinations. Then, alliances with railroads and other natural monop- olies have assisted the growth of some of the largest and most powerful capitalistic monopolies in the United States. 2. Looking at the wastes of modern competition, it seems clear that combinations save many expenses, and more easily contract production whenever prices fall. But this does not justify the inference that capi- talistic monopolies are inevitable. It merely warrants the conclusion that combination offers one method of avoiding the wastes of competition. There may be other methods of ending these wastes. A higher standard of commercial morality, a more moderate business policy, and a development of trade statistics that shall make possible an accurate forecast of the market would change the nature of competition considerably, and would terminate many of its worst features at the present moment. Monopolies are undoubtedly one rem- edy for the present wastes of competition, but it is alto- gether premature to conclude that they are going to prove the only remedy available in all future times. But it is not likely that business conditions and methods will undergo any marked change in the immediate fu- ture. For this reason we are liable, for some time to come, to see capitalistic combinations resorted to as a means of avoiding the evils of disordered competition. 3. Monopolies may realize some economies in produc- FINAL CONSIDERATIONS. 335 tion, but they also entail heavy expenses for supervi- sion of their immense interests, while they are likely to incur the wastes to which great corporations are subject (§ 91). The student must remember that we are com- paring monopolies with large-scale independent enter- prises, not with small-scale production. It is decidedly not proven that the economies in production realized by monopolies are so great as, of themselves, to assure to combinations future control of all markets. 1 1 Since the beginning of 1898 the formation of industrial combinations has been phenomenally rapid. On April 8, 1899, a financial paper com- puted the capitalization of new combinations formed since the first of the preceding January at $1,526,325,000. A recent writer states that in March, 1899, there were in this country 353 trusts capitalized at $5,832,000,000. These include nearly all important branches of manufacturing industry. These combinations are greatly over-capitalized, and have been created largely for the purpose of disposing of their securities at the high prices that have recently prevailed in the stock, markets. Usually the issues of bonds or of preferred stock have represented all the capital actually invested, and sometimes more, since the value of the plants has been estimated at a very liberal figure. The common stock represents nothing but the " good will " of the businesses, or what is generally known as "water"; and in many of these combinations its holders will never be likely to receive any divi- dends. In the combinations formed between January 1 and April 8, 1899, the bonds and preferred stock amounted to $603,850,000 ; while the issues of common stock reached the figure of $922,475,000. See " Commercial and Financial Chronicle," Jan. 7, 1899, March 4, 1899, and April 8, 1899; " Bradst reefs," Feb. 11, and 18, 1899; "Commercial Year Book of New York Journal of Commerce/' 1898. 336 PRINCIPLES OF ECONOMICS. LITERATURE ON" CHAPTER XI. General References: Andrews, Institutes of Economics, 112- 113; Ely, Economics, 210-217, 295-307; Gunton, Social Eco- nomics, 397-114 ; Hadley, Economics, 150-179 ; Marshall, Principles of Economics, 532-547 ; Newcomb, Political Economy, 230-240 ; Sidgwick, Principles of Political Economy, 348-365. Special References : Adams, The Relation of the State to In- dustrial Action, 47-61; Clark, Theory of Economic Progress; Clark and Giddings, The Modern Distributive Process, 1-34; Dodd, Combinations, Their Uses and Abuses ; Cook, The Cor- poration Problem ; Ely, Problems of To-day, 107-146 ; Farrer, The State in Its Relation to Trade, 57-119; Foote, Law of Com- panies Operating under Municipal Franchises; Hadley, Railroad Transportation, 63-145; Hobson, Evolution of Modern Capital- isms, 88-166 ; Jeans, Trusts, Pools, and Corners ; Johnson's Universal Cyclopaedia, "Monopolies;" Lalor's Cyclopsedia of Political Science, " Monopolies ; " Lloyd, Wealth against Com- monwealth ; Spelling, Treatise on Trusts and Monopolies ; A t on Halle, Trusts and Industrial Combinations; Bemis, Municipal Monopolies; Ely, Monopolies and Trusts; Gunton, Trusts and the Public. References to Official Investigations of Monopolies : Report in relation to the Sugar Trust and the Standard Oil Trust, by Committee on Manufactures, H. of 11. ; Report of New York Sen- ate Committee on the Investigation Relative to Trusts; Testimony Taken by Select Committee of the U. S. Senate on the Transpor- tation and Sale of Meat Products. References to Economic Journals: Andrews, "Trusts accord- ing to Official Investigations," Quarterly Journal Economics, III. 118-152; "The Lute Copper Syndicate," Q. J. E., ITT. 508-518; DwiGHT, "The Legality of Trusts," Political Science Quarterly, III. 592-632; Gunton, "Economic and Social Aspects of Trusts," P. S. Q., III. 592-632; Jenks, "Development of the Whiskey Trust," P. S. Q., IV. 296-319; " Capitalistic Monopolies," P. S Q., IX. 486-509. FOREIGN TRADE OF THE UNITED STATES. 337 CHAPTER XII. INTERNATIONAL TRADE. I. The Foreign Trade of the United States. § 224. The foreign commerce of this country is smaller than the domestic, although it usually receives far greater attention. Yet our commerce Magnitude of with foreign countries is surpassed only by theforei s 11 1 J J commerce of the foreign trade of England, France, and the united Germany. The following table shows the exports and imports of merchandise of the United States for fiscal years ending June 30 : — Year. Exports. Imports. Total. 1894 1895 1896 1897 1898 1899 $892,140,000 807,538,000 882,606,000 1,050,993,000 1,231,482,000 1,227,205,000 $654,994,000 731,969,000 779,724,000 764,730,000 616,049,000 697,116,000 $1,547,135,000 1,539,508,000 1,662,331,000 1,815,723,000 1,847,531,000 1,924,321,000 § 225. The principal exports from the United States have always been agricultural products. In 1899 these formed sixty-live per cent of the _ • , J r Character of total, while manufactured goods made up the export • i . ^ mi r trade, twenty-eight per cent. Ine exports ot man- ufactured products show a gradual increase from yeai 338 PRINCIPLES OF ECONOMICS. to year. The most important articles exported in 1899 were as follows : — Commodity. Value. Commodity. Value. Breadstuffs . . . Haw cotton . . . Meat and Dairy ) Produce . . . ( Iron and Steel and / Manufactures . \ Mineral Oils . . Wood and Manu- ) factures ... J Live Animals . . $273,999,000 209,564,000 175,508,000 93,715,000 51,070,000 41,679,000 37,880,000 Copper and Manu- ) factures . . . J Tobacco and Man- 1 ufactures . . . J Manufactures of j Cotton . . . . j Leather and Man- ) ufactures . . . ) Oil-Cake and Meal $35,983,000 30,646,000 23,567,000 23,466,000 14,531,000 § 226. Of the commodities imported into the United character of States in 1899 fifty-one per cent came from our import . . , . trade. Europe. I he principal imports were : — Commodity. Value. Commodity. Value. Coffee . . . . o Vegetable Fibres and | Manufactures . . f Chemicals, Drugs, | and Medicines . . \ Hides and Skins . . Raw Silk .... Cotton Manufactures $94,964,000 55,274,000 45,423,000 42,668,000 41,988,000 32,479,000 32,053,000 India Rubber and ^ Gutta Percha . [ Manufactures of I Silk . . . . ) Fruits and Nuts . Jewelry, etc. . . Wood and Manu- I factures . . . J $31,876,000 25,105,000 18,317,000 17,649,000 14,499,000 Our imports consist mainly of food products and raw materials which we are unable to raise at all, or unable to raise in sufficient quantity. The imports of wholly or partially manufactured goods amount to less than $200,000,000. This is only a small frac- tion of the product of domestic manufactures. INTERNATIONAL COMMERCE. 339 II. The Nature of International Commerce. § 227. Merchants sell commodities in foreign coun- tries, or import goods from abroad, whenever differences between domestic and foreign prices make international it profitable to do so. The exporter or the trade seems to 1 * be an exchange importer sells goods for money, or buys of commodities foreign merchandise with money. From this point of view, international trade consists in the exchange of commodities for money. § 228. The shipment of money from one country to another entails considerable expense, so that an elabo- rate mechanism of credit has been developed The mechanism i • i of interna- to enable international trade to be carried tionai pay- on with as little money as possible. Drafts ments - and bills of exchange serve to pay most international debts, so that money is used merely to pay balances (§ 1G4). When the exports of a country exceed the imports, then foreign debtors cannot secure enough bills of exchange to pay for their purchases, and money may be sent to settle the balance of indebtedness. An excess of exports over imports is said to create a " favor- able balance of trade." When imports exceed exports, money may be sent abroad to pay for the excess, and the balance of trade is said to be " unfavorable." The exports from a country pay for the great bulk of the commodities imported. The statistics of Exports pay the foreign commerce of the United States for Unports ' show how little money is used in foreign trade : l — 1 Since 1890, disturbances in our currency have caused exports and im- ports of gold not strictly due to the condition of international commerce. 340 PRINCIPLES OF ECONOMICS. Tear. Total Exports and Imports of Commodities. Total Exports and Imports of Gold and Silver. 1886 1887 1888 1889 1890 §1,314,960,000 1,408,502,000 1,419,911,000 1,487,533,000 1,647,139,000 $111,057,000 96,168,000 105,752,000 125,604,000 86,124,000 § 229. The foreign exchanges of any country include many other international transactions besides the pur- ine foreign chase or sale of merchandise. The follow- excnanges. } U g transactions give rise to international indebtedness : 1 — 1. Investment of capital in foreign countries. This gives rise at first to a debt owed by the country whose citizens make the investment. Then it causes an an- nual debt owed to foreign capitalists by citizens of the country where the capital is invested. At least $2,000,000,000 of foreign capital is invested in the United States, and this amount is increased in pros- perous years. Thus the United States owes about $90,000,000 annually for interest on foreign capital. 2. English ships do a large part of the ocean carry- ing trade of the world, and receive payments for freight- age. Of the foreign trade of the United States only about twelve per cent has been carried in American vessels in recent years, so that we have owed a balance of freight charges to foreigners. The inward freight 1 For a full account of such transactions, see Goschen, "The Foreign Exchanges." Space permits merely a mention of the most important here. INTERNATIONAL COMMERCE, 341 charges paid to foreign ship owners may amount to about #75.000.000 annually. 3. Citizens who travel in foreign countries incur in- debtedness there. Americans spend about -1-17,000,000 in foreign travel each year. This figure greatly exceeds the expenditures made by foreign travelers in this coun- try ; so that we owe abroad many million dollars annu- ally for the excess. 4. London serves as a world's clearing house for the settlement of international debts. The charges made for such services create debts owed by all nations to London bankers. As a result of all such international obligations, Eng- land is the creditor of many nations each year for freight charges earned by English ships, for Comparative interest on several billion dollars of capital positions of , . . . . , r England and invested in various countries, and tor com- the united missions, etc., of London bankers. As a states - result, she is able to import merchandise that vastly exceeds her exports, and does not have to pay for the " unfavorable balance of trade " by shipping gold to other countries. The United States, however, owes about $150,000,000 annually to foreign creditors for the various items enumerated. Consequently our exports of merchandise may exceed our imports largely without making it necessary for foreign buyers to ship gold to this country. In prosperous years, however, it is prob- able that foreigners constantly invest capital here ; so that the volume of our indebtedness is decreased. § 230. In a majority of cases international payments 342 PRINCIPLES OF ECONOMICS. for all forms of indebtedness are made indirectly indirect through London. Tea imported from China, settlement of • ii_ ■ j. -i r m • ± i-\ international or silks imported from h ranee, into the debts. • Tj n ited States may be paid for by bills of exchange drawn by American creditors against exports of wheat or cotton sold to English merchants. § 231. Money is shipped from one country to another when needed to settle a balance of indebtedness for int ai mi P or ^ s °f merchandise, for freight charges, movements for interest on foreign investments, for trav- elers' expenses, etc. Many errors are made by comparing the exports and imports of money with exports and imports of merchandise. Money is needed merely to settle net balances of indebtedness of all sorts. The United States has had a considerable surplus of exports of merchandise (a " favorable balance of trade ") every year since 1876 with only three excep- tions. Yet our imports of gold and silver have exceeded exports in only five years during this period. The explanation is that our other foreign debts plus the debt owed for imports, exceeded usually our exports of merchandise and the other debts owed us by for- eigners. On the other hand, Great Britain has each year an enormous excess of imports over exports of merchandise, but this " unfavorable balance of trade " is not paid by exports of money. It comes as payment for other debts owed by citizens of foreign countries. Eliminating all disturbances originating in the money supply, and supposing that a country has a sound cur- rency, then imports or exports of money will be regu- INTERNATIONAL COMMERCE. 343 lated automatically. Suppose money to flow into the United States in settlement of a net in- . . .. Automatic debtedness of foreigners. Continued im- limits to ports of money will raise prices here, and imports of tend to lower them in the countries whence money - the money comes. The rise of prices will make this a good market to sell in and a bad market to buy in. Thus imports will increase and exports decrease, until our increasing imports create a debt to foreigners that will balance the debts that caused shipments of money. When imports of merchandise increase to this extent, the inflow of money will cease. Conversely, if money continually leaves the country, prices tend to fall ; exports increase and imposts decrease. A growing excess of exports of merchandise will finally turn the balance of indebtedness the other way, and check exports of money. A nation that produces as much gold and silver as the United States may export some gold and silver continually, without lowering prices materially. The international movements of money are affected by the action of international banking houses. When- ever the rate of interest on call loans or The action short-time paper is very low in London, for of banking: instance, these banking houses are likely to ship part of their reserve of money to New York, or Berlin, or Paris, in order to take advantage of higher rates of interest in those cities. § 232. It was thought formerly that foreign trade was beneficial when it led to an excess of exports over 344 PRINCIPLES OF ECONOMICS. imports, and hence to imports of the precious metals. This idea has been abandoned by economists since it has been seen that a continued importa- The advantages of interna- tion of money merely tends to raise prices and to check itself. A country cannot sell to other countries unless it also buys. This year it may be possible to check imports and to stimulate exports. But next year or the following year continued importations of gold will raise prices, make it more difficult to sell in foreign countries, and make it easier for foreigners to sell commodities here. The real advantages of foreign commerce are : — 1. It enables a country to procure commodities that cannot be produced at home. 2. It enables a country to produce those products for which it has the greatest advantages, and to exchange them for products which cannot be produced as cheaply. III. International Values § 233. International trade is profoundly influenced by the fact that capital and labor do not move from one country to another as readily as between Imperfect mo- bility of labor different localities in the same country. an capi . Distance, language, religion, political insti- tutions, and customs all tend to hinder international movements of labor and capital. Undoubtedly some of these causes impede the movement of labor and capital within such a vast country as the United States. In so far as this is true, trade between the Atlantic and Pacific coasts, for instance, resembles international trade INTERNATIONAL VALUES. 345 in this particular. Modern conditions favor the move- ment of labor and capital between different countries, yet this immobility still exists. Within any area where labor and capital are practi- cally free to move where they desire, all commodities will be produced in those places where the Result of this absolute advantages for producing them are " nmot)lllt >' of ° l ° labor and greatest. The localities that offer the great- capital, est advantages will become the exclusive seats of pro- duction of each commodity. These advantages include all elements that tend to make the social cost of pro- duction low, and include the important element of accessibility to the market. The products of such an area will tend to have a value proportioned to the mar- ginal expense of producing them. On the other hand, between two countries, all labor and capital will not flow to the places in either country where the absolute advan- tages for production are greatest. Each country will invest its labor and capital so as to make the best of the advantages which it has. Only the surplus labor and capital of older nations seek investment in other coun- tries where the natural opportunities for investment are not so fully utilized and developed. It follows that a bushel of wheat may be produced in one country with twice the expenditure of labor and capital required to produce a yard of cotton cloth ; while, in a second coun- try, the two commodities may be produced at exactly the same social cost. This would be impossible if labor and capital moved freely from one country to another. 310 PRINCIPLES OF ECONOMICS. § 234. Money tends to move to countries where its general purchasing power is greatest, and so to reduce international the S eneral purchasing power of an ounce movements of f gold to the same level in all places money tend to equalize (§§ 173-176). But this does not mean that general prices. the pQwer of money tQ buy wheat Qr ^^ or steel is the same in all countries. Within each coun- try the prices of individual commodities will be propor- tional to the marginal expense of producing them. This may give different relative prices for individual com- modities in every country. § 235. The manner in which relative prices vary in Differences of different countries may be illustrated by the relative prices. f n ow i n g table of assumed prices for various commodities in two countries, say England and the United States : — Commodities. Prices in England. Prices in United States. One ton steel rails . . One pound wool . . . One yard carpet . . . One yard cotton cloth One bushel wheat . . One bushel corn . . One pound leather . . One pound pork . . $14.00 .15 1.20 .12 .90 .70 .20 .15 $20.00 .20 2.00 .15 .60 .50 .15 .07 We assume the first four commodities to have a smaller money cost in England, and the last four to be cheaper in the United States. But the power of a dollar to command the entjre group of commodities in the quantity usually consumed, might be about the same INTERNATIONAL VALUES. 347 in both countries. Finally, this tabic of prices would tell us nothing concerning the absolute social costs of producing any one of these commodities in the two countries. Less units of labor and capital might be required to produce a ton of steel rails in the United States than in England. But if the money cost of labor and capital is much less in England, the money price of steel rails might be less in that country. Labor and capital do not now from one to the other freely enough to insure to each unit of the two factors of pro- duction the same money returns in both countries. § 236. Now, an American exporter of wheat will send wheat to England whenever the difference in the prices of wheat is sufficient to pay the cost of T t 1 J International transportation and leave a profit on the trade based transaction. Similarly, American importers encesinreia- will examine the English prices of steel tive P nces - rails, carpets, and cotton cloth ; and will import them if they can pay transportation charges and yet make a profit by selling at American prices. Now, it might seem that, under the circumstances assumed, England would supply the United States with all the rails, wool, carpets, and cotton cloth consumed here ; and that the United States would furnish England with all her supply of wheat, corn, leather, and pork. But this would not be the case. Suppose England to begin to export to the United States the four commodities of which the English prices are lower, and the United States to export to England the four commodities of which the American prices us PRINCIPLES OF ECONOMICS. are lower. Such a trade could continue until one country had an excess of exports and the other had Actual course an excess of imports. Exports and imports of trade be- WO uld not balance each other permanently, tween the r J two countries. Suppose the United States sends to England money to pay for an excess of imports. As this expor- tation of money continues, prices begin to rise in Eng- land and to fall in the United States. Suppose the change of prices to be twenty per cent. Then we should have an altered scale of prices as follows : — Commodities. English prices. American prices. Steel rails . . $16.80 $16.00 Wool - . . .18 .16 Carpets . . . 1.44 1.60 Cotton cloth . .144 .12 Wheat . . . 1.08 .48 Corn .... .84 .40 Leather . . .24 .12 Pork . . . .18 .056 Evidently the changed prices have made it impossible for English merchants to sell anything but carpets in the United States ; while American merchants can export increased quantities of wheat, corn, leather, and pork, and might even begin to export wool and cotton cloth to England. This change in the course of trade would finally oblige England to ship money to the United States to pay for an excess of imports. This money would raise prices in America while English prices would fall, until some American exports would be shut off and some English exports would increase. INTERNATIONAL VALVES. 349 From this illustration we draw the following conclu- sions, which are valid explanations of the characteristics of international trade : — 1. Shipments of money in payment of balances of indebtedness constantly cause changes in , , , i • ji , Conclusions, prices, and check exports in the country receiving the money, while increasing exports in the country that makes the shipments. 2. Changes in prices caused in this manner cut off the exports of those commodities in which there is the smallest difference between domestic and foreign prices. 3. Those commodities in which there is the greatest difference between domestic and foreign prices will be continuously exported in spite of changes in prices. 4. The normal result will be, in the long run, that each country exports mainly those commodities that show the greatest difference between domestic and foreign prices. Exports of other goods can be merely intermittent. Now, those commodities that can be pro- duced at the greatest advantage in price over foreign producers are the ones for the production of which the country offers the best advantages at the time being. ^iher commodities are produced at a less advantage as compared with foreign producers, precisely because labor and capital are less efficient in producing them. To apply this principle practically, we may say that the wheat, cotton, meats, oils, iron and steel, cattle, wood, tobacco, leather, copper, and manufactured cottons that form the principal exports from the United States at the present time are the commodities which our merchants 350 PRINCIPLES OF ECONOMICS. can sell in the markets of the world at the greatest advantage over foreign producers. The coffee, sugar, wool, hardware, cotton and woolen manufactures, and the silk that we import are goods for whose production our advantages are not so great. We might produce all our woolen and cotton goods in this country, instead of importing a part of them as at present. But our capital and labor can do other things more advantageously, and so flow naturally into the production of those commodi- ties for which we have unparalleled advantages. § 237. Movements of money from one country to another tend to make exports and imports of commodi- The determi- ^ es equal in the long run. When other nation of international obligations make a country a values in in- ternational debtor to foreign nations, exports may ex- exchange. CQQ ^ imports by the amount of this debt. Conversely, when a country has foreign debtors, imports may exceed exports proportionately. A country's exports represent the demand of other countries for her products, while the imports represent ,. . her demand for the products of foreign Equalization r ° of internation- countries. The course of business tends constantly to equalize a country's demand for foreign products and the foreign demand for her own products, through changes in prices caused by shipments of money. An increased demand for foreign products, causing an excess of imports, will start ship- ments of money to foreign countries, and lower domestic prices. Exports will increase on this lower level of prices until they equal imports again. An increased! RESTRICTION OF INTERNATIONAL TRADE. 851 demand for foreign products tends to lower the prices of exports ; that is, it tends to render less favorable the terms on which foreign products are paid for. Conversely, an increased foreign demand for a nation's products tends to produce an excess of exports, and shipments of gold from foreign countries. This lowers prices in foreign countries so that they can pay for the larger quantity of goods demanded by exporting more goods on the lower level of prices. Foreign trade is more or less profitable to a nation in proportion as its demand for foreign products is less strong than the foreign demand for its products. A country that exports principally raw materials will have to incur heavier expenses for freightage than a country whose exports consist mainly of J r J The burden manufactured goods. These heavier freight of freight charges for raw materials raise the prices that must be asked in foreign countries ; hence, tend to decrease the demand for the products of the country that exports raw materials. Freight charges on manufactured goods affect prices less, and tend less to decrease the foreign demand. IV. Restriction of International Trade. § 238. International trade is restricted to a greater or less degree by imposing customs duties upon goods that cross the borders of any country. Cust0 m8 taxes Duties imposed upon goods leaving a coun- orduties - try are called export duties, and are not very common at the present day. But goods brought into a country 352 PRINCIPLES OF ECONOMICS. are often taxed by import duties. Import taxes are specific or ad valorem according as they are assessed proportionately to the bulk of the commodities or to the value. § 239. Sometimes import duties or tariffs are imposed solely to secure revenue for the government. When a revenue * a ^ ^ or * ne sole purpose of revenue, the tariff. duties are made high enough to secure the maximum revenue, but not so high as to discourage im- portation more than is inevitable. The English revenue tariff aims, as far as possible, to tax only commodities that do not come into competition with products of home industries. This is done with a view to interfering as little as possible with business conditions. Such a revenue tariff will normally raise the price of the arti- cles taxed by about the amount of the duties. Importers who bring tea into England pay the government about $17,000,000 annually in customs duties, and then in- crease proportionally the prices charged for the goods. Indeed, the increase will usually be rather more than this, since, in order to pay duties, importers* must have larger capitals invested in the business ; and the inter- est on these increased capitals must also be paid by consumers. When duties, laid for the main purpose of raising revenue, are imposed upon imported commodities that do compete with products of domestic in- Revenue tariff * ' with inciden- dustrv, a customs tariff gives "incidental protection" to domestic producers. Mer- chants cannot import competing foreign products with- RESTRICTION OF INTERNATIONAL TRADE. 353 out having to pay the customs tax besides the price paid the foreign producer. Thus imported articles can be sold only at higher prices than formerly, and domestic producers may profit by increased prices of competing foreign products. The earliest tariffs imposed in the United States were revenue tariffs that purposely gave to domestic producers " incidental protection." § 240. The restriction of foreign commerce that fol- lowed the embargo in 1807, and then the War of 1812, cut off most imports until the year 1815. protective This removal of foreign competition led to tarms - a rapid growth of textile manufactures. Many of these textile establishments were poorly conducted, and when foreign competition began again in 1815, there arose a demand for more highly protective duties. In 1816 customs duties were raised, particularly upon cottons and woolens ; and the tariff became a distinctly protect- ive tariff. From that time to the present the tariff laws of the United States have maintained a strong pro- tective character, although from 1846 to 1861 duties were reduced toward a revenue basis. In 1861 the Morrill Tariff Act restored duties to about the level of 1845, but increased the duties on iron and wool. Then ensued the Civil War, in which the United States was obliged to lay its hands upon every source of revenue. In 1862 and 1864 " war tariffs " were passed imposing duties upon every possible import, and raising the rates. Moreover, very heavy internal taxes had been placed upon most important domestic manufactures ; and for this reason " compensatory " increases of duties were 354 PRINCIPLES OF ECONOMICS. placed upon imports. 1 After the Civil War the ex- penses of the government decreased, and a reduction of taxes began. Most of the internal taxes were re- pealed, but the war tariff was not lowered. Even the heavy " compensatory " duties on imports were retained after the repeal of the internal taxes that had caused them to be imposed. In 1867 a moderate reduction of duties was voted by the Senate, and received a majority vote in the House, but failed to pass the latter body because a two thirds vote necessary to suspend the rules could not be secured. For nearly twenty years the war tariff of 1864 remained unchanged in important particu- lars. In 1883 some duties were lowered, but others were raised, and the general character of the tariff re- mained the same. In 1890 the McKinley tariff removed revenue duties on raw sugar and some other articles, but increased, on the whole, the protective duties on articles that competed with domestic products. Then, in 1894, the Wilson tariff placed wool, copper, and lumber upon the free list ; re-imposed a revenue duty upon raw sugar ; and reduced irregularly the duties upon protected com- modities. Finally, in 1897, the Dingley tariff was enacted. This left copper on the free list, and lowered the duty on steel rails; but it increased considerably most of the other duties. Wool and lumber were put back into the dutiable list, and a tax was placed on hidos which had long been admitted free of duty. In some cases, as with wool, the duties were made higher than ever before. This law also substituted many specific duties in the place of ad valorem. Upon the RESTRICTION OF INTERNATIONAL TRADE. 355 average, it imposes upon dutiable imports a tax of about fifty per cent of the value of the goods. § 241. The general effect of a protective duty has been staled by a leading protectionist journal in such a clear manner as to command the entire assent The general of one of the leading free-traders of the p ro e t C ec u V e United States : " A protective duty . . . has dut y- for its object to effect the diversion of a part of the capi- tal and labor of the people out of the channels in which it would run otherwise into channels created or favored by law." l Before considering what is involved in thus diverting capital from one industry to another, the stu- dent must be reminded that there is often a difference between the immediate and the permanent results of economic causes. Both need to be considered, but it is easy to lose sight of the things that hold true in the long run. § 242. The immediate effect of levying a protective duty (say of fifty per cent) upon a foreign product is to increase by that amount the expense of Detalled importing the commodity. This normallv effects of a . . n protective increases the price at which the foreign prod- duty. net must be sold. If the foreign product establishment formerly sold at one dollar, the protective of a particular J industry, duty will regularly raise its price to about one dollar and a half. This increased price is intended to induce domestic capital to enter this industry. Man- ifestly if domestic producers, before the duly was imposed, could have made a fair average profit from manufacturing 1 From Philadelphia American. See Sumner, Protectionism, 16, 17. 356 PRINCIPLES OF ECONOMICS. and selling the commodity at one dollar, no duty would have been needed to insure the investment of capital in this industry. The prospect of securing more than one dollar for the commodity may make it profitable for capitalists to undertake to produce it at home. The establishment of such a " protected industry " adds nothing to the total amount of labor and capital 2. Does not permanently invested in the country. It add to the merely diverts capital and labor from old total industry - * of the country, industries or from the establishment of other new industries that would have been profitable without protection. A slight exception to this principle occurs when a protective duty invites foreign capital which ivould not have come to the country otherivise. But the amount of foreign capital brought to the United States by the tariff has never been more than a very small per cent of the new capital invested in industry each year. The immediate effect of establishing, by a protective duty, an industry that would not have been profitable otherwise, is to attract into a less produc- immediateiy tive industry capital that would have been less productive mves t cc i m more productive channels. "What Industries in l place of more j s it that makes it possible for some Ameri- can producers of wheat, corn, cattle, iron and steel products, cotton and cotton goods, leather, boots and shoes, tobacco, and oils to sell their products in foreign countries at prices that enable them to compete with any producers in the world, while other American producers cannot do so ? Simply the fact that the first RESTRICTION OF INTERNATIONAL TRADE. 357 class of producers enjoys exceptional facilities. A pro- tective duty upon articles that we cannot as yet produce as cheaply as certain foreign producers, simply invites capital away from industries where we have unparalleled advantages into industries where our facilities are not so good. Its immediate effect, therefore, must he to decrease the productivity of the capital invested in the protected industry, and to cause economic loss. But it may happen that the industry established by the protective duty will prove to be one for which our pro- ducers have first-rate facilities. Inexperience 4 . Mayexer- or other initial difficulties may have been cise a "2* ent J permanent the only causes that prevented capitalists effect, from making a profit by producing the product at the price of one dollar. It may happen that, in a few years, the domestic producers can overcome these difficulties, and make a profit by selling the commodity at as low a price as the foreign producers. When this occurs, the industry would prove self-sustaining if the duty were removed ; and it would become a more profitable instead of a less profitable industry. Then the eco- nomic loss would cease, and the ultimate result of the protective duty would have been to hasten the establish- ment of the industry. The word hasten is italicized because such an industry would be one for which the country had good advantages, — one which would have been quite sure to be established without protection, as the labor and capital force of the country increased. Protective duties may hasten the growth of such enter- prises ; but the economist must insist that they cause 358 PRINCIPLES OF ECONOMICS. a less productive use of capital, hence an economic waste, until the industry becomes self-supporting. Then the duty should be removed, and the economic waste would cease. It is possible that experience under a protective duty may show that the protected industry does not enjoy 5. May fan such great advantages that producers can seSusfiLg afford t0 sel1 at the P rices charged by for- industries. eigners (in this assumed case, one dollar). This is merely a demonstration that the industry does not enjoy such superiority over foreign producers as other industries of the country possess. A protected industry that does not become self-supporting causes a permanent economic waste. The labor and capital in- vested in it could have been employed more profitably in some other industry. The disadvantage of the domestic producer over the foreigner may not be as great as the duty of fifty per cent imposed upon the foreign product. Domestic producers may be able to produce the protected commodity at a price of -$1.25. If there is effective competition among producers, the price will be fixed at that figure. Then the protective duty of fifty per cent will have the ultimate effect of raising the price of the commodity only twenty-five per cent. In all cases, pro- tective duties raise the price of the commodity by the increased money expense at which domestic producers turn out the article. If domestic producers could afford to sell the protected commodity as cheaply as the foreign producers, no protective duty would be needed to estab- lish or to maintain the industry. But it has happened that domestic producers in the United States have com- RESTRICTION OF INTERNATIONAL TRADE. 359 bincd to raise prices behind the barriers of the protective duty. Thus, in the case assumed here, the domestic producers might be able to sell the commodity profitably at a price of $1.25. If they form a combination, they can maintain the price at $1.45 or $1.49, because the duty excludes foreign competition at any price under $1.50. As a matter of fact, a number of important pro- ducts are regularly sold to foreign customers at prices lower than those charged to American consumers. All agree that when a revenue duty is imposed upon a foreign product that is not produced by any domestic industry, importers add practically the whole * ' ' ' J 6. Effect upon duty to the price charged domestic consum- the foreign ers. The exceptions to this principle are not important enough to require mention here. But there is a dispute as to whether the foreign producer or domestic consumer bears the burden of a protective duty laid on competing foreign products. The principles laid down in the preceding paragraphs enable the question to be answered briefly. A protective duty can be deemed necessary to maintain an industry only so long as domestic producers are unable to produce the com- modity as cheaply as foreigners. If foreigners can sell the protected article for one dollar, and domestic pro- ducers cannot afford to sell it for less than $1.25, then the price will be $1.25 if the domestic producers are able to supply practically all the domestic demand, and if they do not combine to raise prices to $1.49, the limit set by the liftv-per-cent duty on the foreign product. In such a case domestic consumers bear a burden of twentv- 860 PRINCIPLES OF ECONOMICS. five cents on each commodity bought. Foreign producers, moreover, will be unable to sell their goods in the domes- tic market unless they reduce the cost of production or adulterate their products, so that they can sell at $1.25 after paying the duty. If they have other markets, they will cease to sell their products in the country that lays the duty. If they cannot find other markets for all their goods, they will try to cheapen their products in some way or other, or may temporarily sell at a lower margin of profits. It may happen that a part of the burden of a protective tax can be thrown temporarily upon the foreign producers in this manner, but domestic consumers are sure to bear a burden proportioned to the greater money expense at which the domestic product is produced. This burden on consumers ceases only when the domestic money cost of production becomes as low as the foreign cost. But then the protective duty is no longer necessary to maintain the industry. Finally, if the protective duties laid in America may throw part of their burden upon the foreign producers, it is also true that protective duties imposed by France, Germany, and other foreign countries may throw part of their burden upon the American exporter. If one or two industries only are given protection, 7. one protect- ^ ie y wi\\ profit by the increased prices that ive duty may can ne sccure( j f or their products. But if neutralize the J advantages protective duties are extended to many in- that domestic i . • , i , , i • r i producers gain dustrics, so that the prices ot many commod- from others, jfies are increased, then the duties conflict with each other. One industry may be given protec- RESTRICTION OF INTERNATIONAL TRADE. 361 tion. Then other protective duties are almost certain to increase the prices of the materials or products necessary to build and equip the plants u r .ed in the first industry. Most American producers pay more for some i the materials and products used in equipping aud running their industries than would be necessary without the protective duties. They arc placed at just so much of a disadvantage as compared with English producers, who are able to buy all necessary materials in the cheapest markets. This increased expense of establish- ing and running a business has prevented many Ameri- can industries from becoming able to compete success- fully with foreign producers. § 243. The cost of producing a commodity is seldom exactly the same in any two establishments. Within any industry there may be ten or fifty differ- Dif f erent cort8 ent costs of production. Some establish- of production, ments barely manage to pay expenses, while others make large profits from selling at the same prices that the first establishments receive. In protected industries some establishments may be self-supporting and able to sell at as low prices as foreign producers can offer, while others would be crushed by_ foreign competition if the protective duty should be removed. This is true of most of the protected industries at this moment. § 244. Protective duties can divert capital and labor from one industrv to another, but the} 7 can- _ 1 What protect- not do many things that they are believed to ive duties , . , cannot do. accomplish. Protective duties do not increase the wealth of the 302 PRINCIPLES OF ECONOMICS. country, as long as they are needed to maintain pro- tected industries in existence. Until the They do not increase protected industry becomes able to produce at as low money cost as foreign indus- tries, there is a constant loss. It may happen that a protective duty may hasten the establishment of an industry which becomes self-supporting and exceedingly profitable. In such a case the protective duties cause an initial loss that may be counterbalanced by the ulti- mate gain of creating a very productive, self-sustaining industry earlier than it would have been established otherwise. In_ other cases, protective duties divert capital from more productive to less productive channels of investment, and cause a distinct loss. Protective duties cannot increase permanently the total industry of a country, as we have seen (§ 242). They do not It is sometimes said, for instance, that if we ^Tl^L, had not imported 131,206,000 of silk goods total industry l ° of a country, in 1895, we should have given just so much more employment to domestic labor and capital. But the labor and capital needed to produce those silk im- ports would merely have been diverted from some other industry in which they would have found investment sooner or later. In such a year as 1895, when uncer- tainty as to the future of our currency was paralyzing all business, it is probable that we had considerable un- employed labor and capital, some of which might have found investment in the silk industry. But, even in this case, increased protective duties would merely havo caused this amount of labor and capital to be invested RESTRICTION OF INTERNATIONAL TRADE. 363 earlier than otherwise. It would have caused no perma- nent increase of business. Moreover, these #31,200,000 of silk imports were paid for by an approximately equiv- alent amount of exports. If a protective tariff cuts off suddenly $31;206,000 of imports, it will not instantly decrease exports; for foreigners will buy and Americans will sell as long as prices make it profitable. But in the long run a decrease of #31,206,000 in imports will cause exports to exceed, imports by just that amount from year to year. Foreigners will be unable to pay for this excess of exports by bills of exchange drawn against silk goods sold to Americans, as they used to do. Sooner or later they must pay for the excess in money. The inflow of money will ultimately tend to raise prices and so to cut off the export of goods that are now being ex- ported on a narrow margin of profit. A country cannot export unless it will also import. A reduction of imports by protective duties will ultimately lead to a decrease of exports. Finally, protective duties may lead to retalia- tory legislation by other countries, as the tariff of 1890 probably did. If foreign countries increase the duties charged on the articles that we sell them, or impose other restrictions, then the decrease in our exports may happen immediately, instead of coming more slowly through changes in prices. It is said sometimes that we may keep our money at home by discouraging imports of foreign products. It is possible of course to diminish imports by protective duties; and sometimes such action may cause exports to exceed imports, and lead to a net importation of gold. 364 PRINCIPLES OF ECONOMICS. But such a condition can be merely temporary. The movement of money from country to country is auto- matic, depending upon comparative prices. They do not ,, \ increase per- If we continually import gold, we tend to neTamount of raise prices. Higher prices diminish ex- money re- ports. If the first decrease of exports docs ceived from * * foreign not stop the excess of exports over imports, then prices will continue to rise until ex- ports fall to the level of our diminished imports. A country will secure from the world's stock of money enough currency to enable its business to be done at the general level of prices that prevails in other countries. Nor can it permanently retain more than this amount. Wages in the United States are somewhat higher than in England. The American wage earner not only They cannot receives more money than the English increase the worker, but also he secures with his money general rate of wages in a greater amount of commodities. The im- a country. p rtant thing is that the American worker receives more food, clothes, shelter, books, etc., than the English laborer, on the whole. Now, it is self-evident that American wages, expressed in terms of commodi- ties, cannot exceed English wages unless there are more commodities produced for the laborer to receive. Real wages, we repeat, cannot be greater in this country, unless our industry, as a whole, is productive of more commodities, of more consumable wealth. Now, a pro- tected industry, until it becomes self-supporting and no longer needs protection, is not as productive as the RESTRICTION OF INTERNATIONAL TRADE. 365 unprotected industries which always have hccn self- sustaining. Consequently, a protective duty lessens production, and decreases by just so much the commodi- ties available for the support of laborer and capitalist alike. 1 § 245. In this country certain industries have always been phenomenally productive, that is, they have yielded an unusually large product for each unit of Relation of the invested labor and capital. Money wages J^eunTtef 8 in these industries, particularly in agricul- states, ture, have always been higher than in Europe. 2 Em- ployers could afford to pay higher wages because the labor was so productive that the money cost of produc- ing each unit of product was small. Now, other em- ployers could not induce laborers to work for them unless their industries were productive enough to en- able them to pay wages sufficient to induce men to keep out of agriculture and other self-sustaining indus- tries. The wonderful natural resources of our country, which are unsurpassed ; the energy, intelligence, in- genuity, and excellent industrial character of our labor 1 Of course this presupposes that the share or proportion of the total product that goes to the laborers is not affected permanently by the pro- tective duty. It would hardly be claimed seriously that such is not the case, and that the tariff permanently enlarges the share of the laborers in the total product. Least of all could tin's be true of the United States, where interest and profits arc generally higher than in most European countries. Neither would any one claim that manufacturers who favor protection do so because protective duties increase the proportion of the product paid to laborers, and decrease the proportion received by the employers. 2 Evidence ou this point runs back to the year 1645. See § 1G and §33. 366 PRINCIPLES OF ECONOMICS. force, — these are the causes that have made the prod- uct of our total industry large, and have raised the amount of commodities received by our laborers above the level of wages secured in foreign countries. There is no possible way by which the industrial population of one country can secure more commodities than foreign peoples except by producing more. Prior to 1789 wages were high without protective duties ; since that date they have remained higher than foreign wages, in spite of the fact that protective duties have diverted some capi- tal from more productive to less productive investments. The fundamental fact for the student to consider is that employers in unprotected industries have always paid higher money wages than foreign em- unprotected ployers, but have enjoyed such advantages in natural resources and efficient labor that they could afford to pay more money wages, and yet sell their products as cheaply as the foreign producer. In the protected industries our natural advantages and the efficiency of our labor have not given employers so great advantages over foreign producers as our unpro- tected industries have enjoyed. Therefore they have been unable to establish business enterprises and to pay laborers as high money wages as unprotected employ- ers could offer, without having the price of their prod- uct increased by a tariff duty. This increase of price merely enabled them to pay the high rate of money wages that had always prevailed in ihe unprotected industries. The removal of all protective duties would not affect permanently the general rate of wages. It RESTRICTION OF INTERNATIONAL TRADE. 367 would close up some of the protected establishments, and the laborers employed there would be thrown out of employment. These unemployed laborers would tem- porarily cause an over-supply of labor, and their com- petition might reduce money wages in some other industries. But sooner or later these displaced labor- ers would find employment in new self-sustaining in- dustries, and money wages would rise again. The result would be like the invention of a labor-saving machine that throws thousands of laborers out of em- ployment. Temporarily these unemployed laborers fend to depress wages in other industries. Ultimately they find employment in new industries made possible by the invention of the machine ; and wages do not per- manently remain depressed. In this country the relative number of laborers whose employment in protected industries depends directly upon the protective tariff is usually exag- The number of ge rated. In 1880, it appeared that there laborers **" ° rx fected by pro- were 7,299,000 farmers who were not af- tective duties fected directly by the tariff. 1 Further, tiv^iyinuie 5,884,000 producers, engaged in trade or United states - transportation, or in professional and personal services, were not affected directly by the tariff, since their work has to be done in this country and cannot be done abroad. Finally, 3,837,000 producers were em- ployed in manufactures, mining, and mechanical pur- 1 This figure excludes ouc half the agricultural population of Maine, New Hampshire, Vermont, and New York as possibly affected by Cana diaii competition. See Laughlin, iii Shaw, National Revenues, 181-184 368 PRINCIPLES OF ECONOMICS. suits. But of these, 2,216,848 were employed as bakers, blacksmiths, carpenters, masons, etc., — whose work must be done in this country and cannot be done elsewhere, — ■ or were employed producing goods that were exported to foreign markets and sold at prices as low as any in the world. This made about 15,400,000 workers who were not directly dependent upon the tariff for their employment, and only 1,990,000 laborers whose posi- tions could be directly affected by protective duties. 1 Even of these 1,990,000 laborers in the so-called pro- tected industries it is probable that many were em- ployed in establishments of superior efficiency which would not be obliged to close by a withdrawal of pro- tective duties. These figures show the absurdity of supposing that the wages of less than 1,990,000 pro- tected laborers were able permanently to keep the wages of 15,400,000 unprotected laborers fifty per cent above the wages paid in foreign countries. § 246. While protective duties do not add perma- nently to the invested capital or the total industry of The advisaMi- a country, and while they do cause an ity of i mpos- . , . . . -i • ing protective economic loss as long as the protected m- duties. dustries are not self-supporting, it is some- times possible to favor them on other grounds. The economic waste of sustaining by protection an industry 1 The Census of 1890 shows the following results : agriculture, 8,406,251 persons; professional and personal services, 5,304,829 persons; trade and transportation, 3,325,962 persons; manufactures, mechanics, and mining, 5,638,619 persons. By consulting Extra Census Bulletin, No. 99, May 18, 1895, the student can make the necessary deductions from Class i. and Class iv. RESTRICTION OF INTERNATIONAL TRADE. 369 that is not self-supporting should be frankly admitted, but it may be fairly argued that sometimes this economic loss is counterbalanced by a greater gain. Political reasons make it very advisable that a nation should be able to produce its own military armaments and materiel of war. Also, it may be polit- Protective duties may ically advisable for a nation to produce its be justified principal necessities of life, in order to be ™ unds lcal independent of other nations in case of war. Military and political considerations often must outweigh con- siderations of a purely economic character. In a new country, such as the United States a cen- tury ago, capital is often scarce, as compared with the demand for it ; the labor force is insuffi- Protection to infant cient and high-priced ; and the money ex- industries, penses for capital and labor are high. These greater expenses retard the development of industries where unusual natural resources cannot be utilized immedi- ately, where the greater efficiency of labor and capital does not compensate immediately for their greater cost. In the infancy of a country's industrial development it may be wise to aid a few industries by protective duties. These duties raise the prices more or less, but they enable the employer to overcome the initial disadvan- tages that confront him. Such protection should be extended for a reasonable time only, until the infant industry can get upon its feet and support itself. But each case in which protection is demanded should be considered very carefully upon its own merits. Moreover, such protection can be extended only to 370 PRINCIPLES OF ECONOMICS. a few industries. If protective duties are levied on all possible competing products, one tends to neutral- ize the advantage conferred by another. Protective duties must, so long as they are needed to support an industry, give that industry encouragement at the ex- pense of all who pay the higher prices. If the protected industry soon becomes self-supporting, then the duty may be abolished, and the industry may be thenceforth advantageous to all interests. The danger with protect- ive duties designed to foster infant industries is that the infants are seldom willing to give up the protection once accorded to them. In this ccimtry, after eighty years of protection, our " infant industries " oppose the removal of the protective duties. At the present time the infant- industry argument has little force when applied to the conditions existing in the United States, for this coun- try is no longer in its industrial infancy. It is impossible to discuss in this chapter all of the arguments advanced in favor of protective duties, but other argu- the student should examine them in the mentsfor ijp-ht of the principles explained in the pre- protective c r r i i duties. ceding paragraphs. 1 One of these is con- nected with the infant-industries argument. It is claimed that a young or an undeveloped country needs protection in order to diversify its industry. Without protective duties, the young country will devote all its energy to the production of a few raw materials for which it has great advantages ; it will not utilize its 1 See Smith, Wealth of Nations, Bk. iv. Chap. 2, fur a few other cases where protective duties may be justified. RESTRICTION OF INTERNATIONAL TRADE. 371 other natural resources ; and will give no opportunity for the development of the skill that its population may possess for manufacturing pursuits. In a country possessed of few natural advantages, whose inhabi- tants have little energy, self-reliance, or progressivencss, it might be advantageous to resort to a few protective duties in order to give labor and capital the initial im- pulse toward a diversification of industries. This policy would cause loss, and would be expensive ; but it might have certain advantages in the long run. In the United States such considerations have very little force. Our natural resources are too numerous and varied to make it possible for us to be shut up to the production of raw materials. In the eighteenth century, in spite of English competition and in the face of Parliament's prohibitory legislation, we established several lines of manufactures. After 1789 our capital and labor were invested in foreign commerce, until we did a large part of the carrying trade of the world. This was accomplished, not " by protection and bounties, but by unwearied exertion, by extreme economy, by unshaken perseverance, by that manly and resolute spirit which relies on itself to pro- tect itself." l Since 1816, there have been periods when protective* duties may reasonably be claimed to have hastened the growth of manufactures, but it cannot be shown that manufacturing industries would not have continued to develop, even without temporary protection. It can be seen that differentiation of industry would 1 See Webster's speech of 1824, State Papers and Speeches ou the Tariff, 330. 372 PRINCIPLES OF ECONOMICS. have taken place without protection, if we merely look at what has happened in the internal trade of the coun- try. The Constitution assured us freedom of trade throughout the length and breadth of our land. Now, have the newer sections been unable to diversify their industries in the face of the competition of the further- developed industries of the Northeast ? From the very start hand-trades and mechanical pursuits, that must be carried on in the locality where needed, grew up beside agriculture. Then began the manufacture of coarse products, such as coarse cotton goods in the South, and coarser leather, iron, and woolen goods in the West. Gradually the manufacture of coarser products has moved from the East to the West and South, while the older states have had to devote themselves to the pro- duction of finer goods of all sorts. No one doubts that the West and South will gradually develop these finer grades of manufacture, as their population and capital increase ; but meanwhile they have very wisely devoted much energy to agriculture and other pursuits in which they have unparalleled advantages. With its energetic and intelligent labor force, with various and unrivaled natural advantages, diversity of occupations in the United States was as sure to occur as the subjugation of our territory to the uses of civilization. In the economic development of our country the tariff has been a factor of minor importance. § 247. The limits of this chapter do not permit more than a brief treatment of the fundamental facts and principles that underlie the tariff question. The student RESTRICTION OF INTERNATIONAL TRADE 373 should be reminded, however, that our protective tariff has existed for a long time, and has diverted a great deal of labor and capital into invest incuts „ . „, „ .„,., 1 Our present that would be ruined by a sudden abolition tariff is an . , historical of protective duties. At least five per cent product, and of the labor force of the country (certainly ^eatedM not more than ten per cent) is now en- sucn - gaged in business enterprises which could not continue to exist if protection should be removed entirely. To compel this portion of our labor force, and a cor- responding amount of capital, to find immediate in- vestment elsewhere would cause great hardship to all interests. In most of the so-called protected industries many establishments, perhaps a majority in such indus- tries as the manufactures of cotton and steel, would prosper under free trade ; but the less efficient establish- ments would have to be closed up. Nevertheless, it is desirable and feasible to effect a gradual withdrawal of labor and capital from enterprises that cannot become self-sustaining. 1 1 In the words of Adam Smith, " the equitable regard " for the inter- est of the protected industry requires that changes of this kind should never be introduced suddenly ; but slowly, gradually, and after a verv long warning." " The legislature . . . ought, upon this very account, perhaps, to be particularly careful neither to establish any new monopolies of this kind, nor to extend further those which are already established. Every such regulation introduces some degree of real disorder into the constitu- tion of the state, which it will be difficult afterwards to cure without oc- casioning another disorder." 374 PRINCIPLES OF ECONOMICS. LITERATURE ON CHAPTER Xlly General References: Andrews, Institutes of Economics, 92-101, 113, 114, 121; Bastable, Theory of International Trade; Bastable, The Commerce of Nations; Cairnes, Leading Prin- ciples of Political Economy, 297-406 ; Ely, Outlines of Economics, 280-285; Ely, Problems of To-day, 1-86; Goschen, Theory of Foreign Exchanges; Hadley, Economics, 421-445; Macvank, Political Economy, 323-363, 381-386 ; Mill, Principles of Political Economy, Bk. III. Chaps. 17, 18, 19, 20, 21, Bk. V. Chap. 10; Roscher, Political Economy, Appendix, II. and III.; Smith, Wealth of Nations, Bk. IV.; Walker, Political Economy, 111- 120, 448-463, 505-517; Nicholson, Principles of Political Econ- omy. IT. 235-328 ; Clare, The A B C of the Foreign Exchanges, A Money Market Primer. Special References on the Tariff History of the United States : Grosvenok, Does Protection Protect? Hill, First Stages of the Tariff Policy of the United States; Rabbeno, Amer- ican Commercial Policy ; Statistical Abstract of the United States, 1896; Sumner, History of Protectionism in the United States; Shaw, The National Revenues; Taussig, Tariff History of the United States, Sta,te Papers and Speeches on the Tariff; The Existing Tariff upon Imports; Young, Report on Customs Tariff Legislation of the United States. Special References in Favor of Protection : Bowen, Ameri- can Political Economy; Carey, Manual of Social Science; Gunton, Social Economics, 320-361 ; List, National System of Political Economy; Patten, Economic Basis of Protection; Roberts, Government Revenue; Thompson, Social Science and National Economy. Special References in Favor of Free Trade : Bastiat, Sophisms of Protection; Perry, Principles of Political Economy; Sumn BK, Protectionism. Special References on the Financial Aspects of Customs Taxes: Bastable, Public Finance, 489-509; Ely, Taxation, 79-93; Plehn, Public Finance, 182-207. DISTRIBUTION OF WEALTH. Sll CHAPTER XIII. THE DISTRIBUTION OF WEALTH. I. Social Income. § 248. The wealth of a society at any time consists of all its accumulated material goods, whether more or less durable, whether capital goods or consum- _ . , r ° Social wealth able wealth, and all personal services that and social . . . income. it has at its disposal. It is impossible to measure and compute the various personal services that form part of the social wealth at any moment ; so that the common conception of social wealth is limited to the material possessions of a community. The monthly or animal income is to be distinguished carefully from the wealth of a society. The social income depends chiefly upon the use that is made of the social wealth. It depends upon the degree in which the natural resources of a country and the personal faculties of its inhabitants are utilized for the production of material goods or personal services ; upon the manner in which capital is employed in creating new wealth ; and upon the extent to which durable con- sumers' goods, the products of past industry (for example, dwelling houses, works of art, books, etc.), are made to yield the satisfactions that they have the power to confer, 376 PRINCIPLES OF ECONOMICS. Jn this way the social income for any month or year may be divided into four constituent parts : — 1. The satisfactions derived from durable consumable goods, the product of past industry, that still remain in the possession of the community and add to its material enjoyments. 2. The personal services at the disposal of the society during the period for which the income is computed. 3. The material goods of a consumable character that are the product of the current industry for the period considered. 4. The producers' goods, or capital, created by the current industry of the period, and available for the pro- duction of economic goods during following periods. If we conceive of social wealth as an accumulation or fund of economic goods, then social income should be conceived as a continual flow of personal Social income J ^ r afiowofeco- services, consumable material wealth, and nomic g s. p ro( j ucers ' g 00( j s r capital. National pros- perity depends less upon the amount of wealth than upon the utilization of the national possessions in deriv- ing the annual income. In this chapter we shall study the methods by which the social income is distributed among the individuals, or classes of individuals, that compose the society. § 249. The general causes that determine the amount causes that of the social income have been discussed in determine tbe the c h a pter treating of the production of amount of the ' v social income, wealth. But the following facts need to be mentioned here : — SOCIAL IS COME. 377 1. Of the four constituent parts of social income, as enumerated in the preceding section, the first is quite, independent of the enterprise and the labor of society > in the period during which the income is estimated, and depends upon past production. The last three parts vary with the productivity of the labor of society during the period under consideration, and depend upon current production. 2. Considering now simply these last three parts of social income, which are the output of current industry, we know that they arc produced by capitalistic methods of production. This is especially true of the consumable material goods and the capital goods that form the last two parts of social income. 3. The use of capital in production has increased marvelously during the last century, so that the effi- ciency of the labor of any society depends very largely upon the amount and kind of capital utilized in produc- tion. An increase of the labor force or a gain in the efficiency and energy of the present laborers would re- sult in a considerable increase in the productivity of the industries of any society. But without an increase of capital there would be strict limits to the increased pro- ductivity caused in this way. Capital now performs such a large share of the work of production, and is re- sponsible for such a great proportion of the efficiency of modern industry, that the social income of consumers' goods and producers' goods cannot be increased very greatly unless the amount of capital is first increased. In other words, that part of the social income which is 378 PRINCIPLES OF ECONOMICS. * composed of the products of current industry depends at any period very largely upon the capital used in produc- tion. It follows, therefore, that the social income of the people of the United States during the year 1896 de- pended very largely upon the capital that had been accumulated and applied to production prior to that year. More labor or more efficient labor might have increased^ the year's income considerably, but the product of our \ industry was profoundly dependent upon capital pro- duced by the labor of previous years. ^V § 250. All private incomes, whether of capitalists, « laborers, landowners, or employers come out of the social income of the society. The income of Private In- J I comes and one class may increase at the expense of social income. ,i , , ., . • , •, ? ,-, others ; but it is possible tor the incomes of all classes to increase only when the general social income is enlarged. In so far as the amount of the social income is dependent upon the capital employed in productive industry, the incomes of all classes of society are dependent upon the capital produced by the industry of the past. II. Private Income. § 251. The income of an individual may be considered to be a certain portion of the material goods or personal services that make up the social income. Real and l money In this sense economists speak of real in- come, as opposed to money income. The latter consists of income expressed in terms of money. This distinction is important. It is possible to increase PRIVATE INCOME. 379 money incomes without increasing real incomes. If the currency of the United States should be doubled in any year, money incomes of many persons might be increased, but the simultaneous increase of prices would wholly or partially offset the increase of money incomes. Mani- festly an increase in money incomes due to such a cause as this does not affect the real income of the country in any particular. So, in comparing the money incomes of laborers in one country with those of another, it is neces- sary to compare the relative purchasing power of money in respect to those commodities which the laborer con- sumes. Higher money wages may or may not indicate higher real wages and a greater degree of prosperity of the laboring classes. § 252. Private incomes are regularly expressed and measured in terms of money. A money income may be considered a <_emand upon the current prod- Money in- uct or past accumulations of society for any comes further -,.,. • ,i . ,, • p considered, commodities Oi services that the receiver of the income desires to purchase. Money incomes are regularly expended for the commodities or services that constitute the real income of the receiver. Only in a few cases are money incomes hoarded. When money is de- posited in a bank, the depositor of the money really lends to some other person the right to demand commodities in the present, in return for the right to receive at some future time an equivalent income. Money incomes are expended for the following things : — 1. Services or consumable commodities, the product of current industry. 380 PRINCIPLES OF ECONOMICS. 2. Durable consumable goods, the product of past in- dustry, as in the purchase of a house or book produced in previous years. 3. Producers' goods or capital, the product either of current or of past industry. § 253. In treating of the distribution of the real income of a society among its individual members, we have to consider primarily the causes that affect The distribu- l J tion of money the money incomes received by individuals. Within any social group, the real income of one individual will be larger or smaller than the real incomes of other individuals roughly in proportion as his money income is larger or smaller. Between different groups prices may be so different that this will not hold true. III. Primary and Secondary Distribution. § 254. Considering now the money incomes received by individuals, we must notice that the first process Primary by which private money incomes are deter- distribution. m ] ncc [ j s fae sale of products and services in the market. Material goods and services are sold for money, then the necessary expenses of production are paid, and a net income is secured. This is the primary fact in the distribution of money incomes among indi- viduals, and may be called the primary process of distribution. Suppose a farmer to own his land, buildings, live stock, machinery, and tools. Suppose him to perform all the labor of carrying on the farm. Then suppose that the PRIMARY AND SECONDARY DISTRIBUTION. 381 sales of the products from the farm amount to $2,500 annually, while the expenses for purchasing seed, re- newing the land, repairing buildings, and PrImary keeping the stock and implements in good distribution ' ° illustrated condition, amount to $1^500 each year, by the case Then the farmer will have a gross income ° * armen of $2,500 and a net income of $1,000. For him the distribution of wealth means simply the sale of his products and the payment of the expenses of running the farm. 1 Assume other cases. A physician may own all the capital used in his profession. He gets his gross in- come by selling his services, and receives a other net income proportioned to the excess of his mus tration». gross income over the expenses of carrying on his busi- ness. So with a shoemaker, a tailor, or a proprietor of a small store, who may own his capital and land and do all his own work. § 255. Now, if all production were carried on by men who owned all the land and capital used in business, per formed all the necessary labor, and carried on Wee d of a the enterprises on their own responsibility, processof the distribution of wealth would comprise distribution, nothing but the simple process of primary distribution. 1 Commonly a farmer gets a part of his income by consuming some of his products on the farm. Here he receives his real income directly, with- out receiving a money income that must be expended fur the real income. Yet, if the farmer should keep Ids luniks carefully, he ought to esti- mate the market value of all products consumed on the farm, and add this sum to the money income secured from the sale of products in the market 382 PRINCIPLES OF ECONOMICS. But in modern business, we find two distinct classes of income receivers : — 1. Persons who secure a primary income from man- aging business on their own responsibility, and selling products or services for more than the expenses of producing them. 2. Persons who have business relations with the re- ceivers of primary incomes. These persons may be laborers who agree to work for other men who bear the responsibility of furnishing capital and of assuming the risks of management. Second, they may be investors of capital who do not desire to assume the risks and responsibility of investing in a business that they must manage for themselves. Such capitalists often lend their capital to active business men. Third, they may be landowners who own land which they do not desire to utilize, and prefer to rent to men who do wish to use it. These three classes, hired laborers, lenders of capital, and landlords, receive secondary, or derivative, or dependent incomes from the persons who carry on industry on their own responsibility. § 256. The distribution of secondary incomes depends primarily upon the legal relations that exist between Thepositionof the independent employers, the responsible Insecondaxy managers of business enterprises, on the distribution. onc hand, and the dependent capitalists, landlords, and laborers, on the other. An employer, or a responsible manager of a business enterprise, usually has some capital of his own that he invests in the business undertaking. If he fails to PRIMARY AND SECONDARY DISTRIBUTION. 383 sell his products for more than the expenses of pro- ducing them, he must-meet all expenses con- _ ° l The employer tracted, even if this has to be done out of his or responsible capital. The fate of the business depends upon his ability ; and, if he incurs a loss, he alone is re- sponsible. In a common partnership each member risks all his property for the debts of the firm, while the limited liability of the business corporation limits the risk of the investors to the amount of the capital invested by them. On the other hand, the employer or manager secures all the profit when the business is successful. Capitalists and landowners who lend capital and land to the active managers of business enterprises, agree to place their capital and land at the disposal of _ , . . i « r The dependent the managers for a definite period of time, capitalist P . . P and landlord. in return for interest or rent paid out of the gross income of the business. If the manager is unable to pay interest and rent, or to return the capital when the time for repayment comes, out of the gross income of the business, then he must draw upon his own capital for the necessary sums. The lenders of land and capital avoid much of the risk which the active manager as- sumes. The lenders can lose only when the business fails so badly that the capital loaned, or interest and rent due, cannot be recovered out of the assets of the enterprise. The capital of the manager serves as a buffer to protect the lenders from loss. On the other hand, lenders of capital and land receive only fixed payments, and have no share in any unusual profits that may come from the business. 384 PRINCIPLES OF ECONOMICS. The employer must also pay the hired laborers the wages agreed upon, even if this has to be done out of The hired n ^ s capital. In many states the hired laborer. laborer has a " mechanics' lien " upon the product of the business, and is almost in the position of a preferred creditor. At the same time he regularly has no share in the profits that may be realized. § 257. There is still a third process by which private incomes are determined. Men who own dwelling houses, Tertiary or ^ an( ^ f° r residence sites, or some other distribution. d uraD l e good, may derive an income from renting them to other persons in return for stipulated payments. Such goods are not used in what is technic- ally called productive industry. They are durable con- sumption-goods, for whose use other people are willing to pay money to the owners. The persons who agree to make such payments may be independent employers, or dependent capitalists, landowners, and laborers. In other words, the interest or rent paid for the use of durable consumption-goods may come out of either pri- mary or secondary incomes. The owners of such dura- ble consumption-goods consider them to be a part of their private capital, since they derive an income from them. In everyday speech, such goods may be called capital. But the student must notice that they are private, acquisitive capital merely ; that is, they are the means by which private individuals secure a share of the social income. These durable consumption-goods are not used in what the economist defines technically as the production of wealth. CLASSIFICATION OF PRIVATE INCOMES. 385 IV. General Classification of Private Incomes. § 258. From another point of view, it is possible to classify private incomes as follows : — 1. Incomes received by responsible man- _ _ J ' Profits, wages, agers of business enterprises. These are interest, and commonly called profits. 2. Incomes received by laborers for their personal ex- ertion in producing material goods or services. These are called wages or salaries. 3. Incomes received by owners of productive capital loaned to managers of enterprises, or by owners of dura- ble consumption-goods loaned to other persons. These incomes are termed interest. 4. Incomes received by owners of land rented for business enterprises, or rented for use as residence sites, and for purposes that are not connected with the technical process of wealth production. Such an income is called rent. § 259. Suppose a manufacturer to own an acre of land and 120,000 capital. He invests $20,000 in build- ing and equipping a factory, of which sum . he borrows $10,000 at six per cent interest, of these forms This will leave him $10,000 of his own cap- ital, which he invests and re-invests in hiring laborers and buying materials. Suppose that he rents an addi- tional acre of land for use in the business, agreeing to pay an annual rental of $400. Then he hires twenty laborers at annual wages of $600 each. Each year he is obliged to spend $2,000 for repairing his buildings 386 PRINCIPLES OF ECONOMICS. and keeping his machinery in good condition ; while his taxes and insurance amount to $600 annually, and mis- cellaneous expenses to $ 400 more. In the course of the year he turns out a product for which he receives a gross return of $30,000. In so doing he spends $10,000 for raw materials, etc., so that he has $20,000 available for meet- ing his other expenses. These expenses are, first, $2,000 for repairs, $600 for insurance and taxes, and $400 for miscellaneous expenses. This leaves an income of $17,000 available for meeting his other obligations. These are : $12,000 for wages, $600 for interest, and $400 for rent. After paying these last expenses he has a gross profit of $4,000 on the year's business. But it is often customary to divide these gross profits into cer- tain constituent parts. The manufacturer has $20,000 invested in the business, on which he could have secured six per cent interest without incurring the risks and trouble of establishing and running the enterprise. Therefore he will estimate that $1,200 of these gross profits represents interest on his invested capital. Sim- ilarly he owns an acre of land which could have been rented for $400. Consequently, he will estimate that $400 of the gross profits represents merely the rent of his land. His net profits, therefore, due to his enter- prise in establishing the industry will be $4,000 — ($1,200 -f- $400) = $2,400. We shall now proceed to consider the causes that affect the terms upon which a manager hires laborers, borrows capital, and rents land, and the causes that make it possible for him to derive a net profit from his business. INTEREST. 387 V. Interest. § 260. In studying the production of wealth, we saw that social, or productive, capital is an important factor, and we defined capital as the produced instru- Private or incuts of indirect production. In studying acquisitive the distribution of wealth, we have seen that Mpi * men secure incomes, not only from those forms of pro- ductive capital that are reduced to private ownership, but also from durable consumers' goods, such as houses, etc. 1 In popular speech, every possession of an individ- ual that is a means of securing a money income is called capital. 2 The economist needs, therefore, to recognize that capital in distribution plays a different part from what it does in production. In distribution, we consider methods by which private individuals acquire incomes. Capita], therefore, must be viewed as a means of private acquisition, not as a means of producing social wealth. We define private or acquisitive capital as any product of human industry that serves as a source of income to individuals. It includes : — 1. Those forms of social or productive capital that are subject to private ownership, and serve as sources of income to individuals. Land is not included here, and must be considered separately. 1 Carriages rented by liverymen, and books rented by a circulating library, are otlier examples of consumers' goods, used as means of secur- ing money incomes. - Even land is included in tbe popular conception of private capital. This should not lie included by the economist, however, since laud is not produced, and the income received from it differs from the income secured from other forms of private capital. 388 PRINCIPLES OF ECONOMICS. 2. Those durable consumers' goods that can be " rented " to others, and serve as sources of private income to their owners. § 261. Interest is paid, first of all, for the use of pro- ductive capital. Now such capital is worthless in itself, but is very valuable when used in the pro- The value of J l productive duction of economic goods. What deter- capit " mines its value ? For instance, what deter- mines the value of a machine or a factory ? The value of capital, like that of any other product of industry, is determined 'primarily by its marginal utility. In the case of capital, the marginal utility depends upon the utility of its marginal product. But if competition is free, then the expenses of production will exert an in- fluence on the supply. Ultimately the price received for a machine, or any other form of productive capital, will be such as equalizes the utility of the marginal prod- uct with the marginal expenses of production. On the other hand, when some element of monopoly, such as a patent right, prevents competition from operating, the price of the capital good will be fixed at the point of highest net returns. Interest is also paid for the use of durable con- sumers' goods such as dwelling houses. The question of The value of ^ ne va ^ uc °f such goods needs no further durable goods, explanation. § 262. In the case of a long-time loan, such as a mortgage loan on real estate for a term of years, or an investment in the bonds of a corporation, interest is paid for the use of capital. Many errors spring from a INTEREST. 389 failure to perceive that such a long-time loan is really a loan of productive capital in the form of r f Short and machinery and buildings, and not a loan of longtime money. The loan may be made in money, but the money is immediately invested by the borrower in some form of productive capital. Money serves merely as an instrument for effecting this loan of capital. Such loans, and the rate of interest upon them, are not affected by the amount of money in cir- culation, as will be shown. Short-time loans are somewhat different. They are usually made by bankers, and may be either call loans, payable on the demand of the lender, or snort-time thirty-, sixty-, and ninety-day loans, which loan s are more J ' J ■ J J nearly loans bankers make by discounting commercial of money, paper. Short-time loans are required by merchants who have contracted debts in buying raw materials or stocks of finished products, and must make payment for them before the goods can be sold again. Such mer- chants continually borrow money on call or for thirty, sixty, or ninety days. They desire immediate means of payment, and expect in a few weeks to return the money borrowed when they dispose of their products. Short- time loans constitute a demand for means of paying- debts. They are affected, therefore, by temporary changes in the money market. § 263. Productive capital is valued in terms of money. When a man borrows productive capital, the loan is commonly expressed in terms of money, and a certain per cent of the principal is agreed upon as the rate of 390 PRINCIPLES OF ECONOMICS. interest. Two questions must now be examined : First, The rate of Why is it that the person who lends pro- Tckhictive ductive capital can secure this interest or capital. premium for the loan ? Second, What deter- mines the rate of interest that such a person can secure ? The payment of interest for a loan of capital is not explained by simply showing that capital serves to in- crease production, to improve the quality of Interest arises r * L J from differ- the product, and to secure products that ence between i-ii i j • i i ,1 • T » the vaine of would be unattainable otherwise. It men present and wou id be willing, without receiving interest, future goods. °' 05 to accumulate enough capital to carry on the business of the world, then no one could secure interest. But this is something that cannot be ex- pected. If a person has 81,000, he can expend it for consumers' goods that are available immediately. If he invests it in capital, he can secure a return only after some time has elapsed. When he invests $1,000 in productive capital, he converts a present available in- come into such a form that it is available only in the future. Now, persons will not exchange a present in- come of 81,000 for a future income of only 81,000. This is for two principal reasons : First, the future is always more or less uncertain, and " a bird in the hand is worth two in the bush." Second, even when the uncertainty and risk of the future are reduced to a mini- mum, most persons underestimate or undervalue future pleasures and pains. But many people are willing to invest 81,000 of income in capital so that it will be un- INTEREST. 391 available for a year, in return for $1,050 at the end of that period. The $50 premium would be interest in this case. It would be a premium added to the princi- pal of the loan, available only at the end of the year, in order to make it equivalent to a present income of $1,000. Interest is paid, therefore, as a premium to equalize future goods or future income with present goods or income, in the estimation of possible investors. Capital formation implies a willingness to invest pres- ent income in producers' goods that are available only in the future. Interest is the inducement necessary to insure the formation of enough capital to meet the needs of business. Capital may be furnished by three classes of persons. First, it may come from rich persons with large incomes, who can easily save large amounts of income J ° The supply and invest them in capital. Second, it may of productive be supplied by persons of moderate means capl who wish to provide for the future, and would do so even at very low rates of interest. Both of these classes of investors do not require large premiums in order to induce them to convert part of their present incomes into capital. In the third place, we have mar- ginal investors, who will furnish more or less capital according to the inducements offered for its investment. These may be wealthy persons, or may be people of moderate means, who would save and invest a portion of their incomes even at low rates of interest. But they will save more, and furnish more capital, if the premium offered for investments is high. 392 PRINCIPLES OF ECONOMICS. The demand for productive capital comes from all the industries that are needed to meet the wants of the society. The demand will be large in The demand for productive proportion to the energy and enterprise of capital. ^ e p p U i a ti on m a n branches of economic activity. In the second place, the demand will be stim- ulated by the natural opportunities offered for favorable investments. Both of these causes have made the de- mand for capital very active in the United States. The rate of interest is really the rate of annual income that will equalize future income with present Tnerateof in the minds of those persons who furnish in ^ res ^ on the marginal portion of the supply of capital capital. needed to meet the demands of the business of a society. In other words, we have merely another case of the equalization of the supply and the demand through changes in price, — in this case " price" meaning the premium offered for future goods or income. Prices of commodities must be high enough to enable the mar- ginal investors of capital to secure a premium, a rate of interest, that will induce them to furnish the amount of capital required. The demand for capital comes from business men, the Tneequaiiza- managers of industrial enterprises. They an°ddemand ly usually invest considerable capital of their accomplished wn, and desire to invest more when the in the loan market. prices of their products are such as to make it profitable to put more capital into their businesses. Therefore they desire to secure loans from persons who have surplus incomes to invest, but who do not desire INTEREST. 393 to enter into active business life. In an advanced stage of economic development, a large number of investors, having no active part in business, and a large number of active managers of enterprises, form the market for loans. 1. The demand for loans varies. Business men de- sire to borrow when they calculate that they can secure from additional investments of capital enough to pay the required rate of interest, and to leave some profit besides. When business is active, and the probable profits of business are high, more business managers will desire to borrow. On the other hand, a higher rate of interest tends to discourage borrowing. 2. The supply of loans comes partly from persons or institutions that are unwilling to engage in active busi- ness, or incapacitated from doing so. Retired business men, managers of trust funds, banking houses, univer- sities, and similar institutions belong to this class of investors. The supply of capital furnished from such sources does not vary quickly as the rate of interest on loans increases or decreases. In the second place, loan- able capital is furnished by people who might engage in active business if the rate of interest should become so low as to leave large profits to active managers of indus- trial enterprises. The supply of capital secured from such persons varies rapidly as the rate of interest changes. The combined supplies of loanable capital secured from these two sources show, on the whole, a tendency to vary directly as the rate of interest seemed from loans. 394 PRINCIPLES OF ECONOMICS. 3. The competition of borrowers and lenders in the loan market is the efficient force that determines the current rate of interest. Capital owned and invested by active business managers does not come into the loan market, but it exercises an influence upon the competi- tion for loans that takes place there. If managers have a large amount of capital of their own, the demand for loans is less ; while a smaller amount in the ownership of managers increases their demands in the loan market. Thus the rate of interest that equalizes future income with present is determined primarily in the market for loans. When loans of productive capital become common, and a market rate of interest is established, then all interest may capital invested in productive enterprises is be computed cons idered to be earning interest, whether on aU produc- ° tive capital, such capital is owned by the manager of the business or is borrowed from other persons. Thus an employer who has 120,000 of his own capital invested in his business may not estimate that he has made any net profits until he has charged $1,200 of his income to the account of interest on his capital at the market rate, say six per cent. So far, we have assumed that the risk attending the Risk as a investment of capital is the same in all factor in cases. But (his is far from true. Of course, determining interest. a certain element of risk attends nearly all exchanges of present for future incomes. A business manager may lose all the capital that he invests, and may lose that which he borrows. Again, borrowers INTEREST. 3 ( Ji> may prove dishonest, and may defraud the lenders, sometimes in spite of legal restrictions. But these risks are not the same in all investments, and there- fore the rate of interest varies. Manifestly a larger premium is necessary to equalize future income with present when there is a risk that the promised future income may never be secured. An unusually high rate of interest regularly points to an unusual risk. In progressive countries the rate of interest tends to decline. For this the following reasons may be assigned : In such countries an increasing number of Tendency of people possess capital, and are unwilling or ^! rat !f unable to engage in active business. The decline, supply of loanable capital is greatly increased, and the interest rate that equalizes demand and supply is low- ered. In the second place, business becomes less specu- lative as a country develops, and the risk attending investments is lessened. Finally, in such countries the laws do more to facilitate the prompt payment or collec- tion of debts, thereby further diminishing risks and tending to lower the rate of interest. § 264. The case of loans of durable consumers' goods requires little special explanation. A person interest on who invests 15,000 in a house that he rents durable , consumers' to another person for a year is exchanging goods. a present income of §5,000 for a future sum of $5,000, ] 1 This assumes that allowance is made for repairs and for the depre- ciation in the vain;' of the house. The so-called "rent," of a dwelling house includes repairs and depreciation, so that the owner of the prop- erty may receive back the original value of the house with interest at the current rate. 396 PRINCIPLES OF ECONOMICS. plus an annual interest of $300. He exchanges $5,000 of present goods for $5,300 of goods available a year hence. The rate of interest on such loans is deter- mined by the laws of demand and supply. § 265. Short-time loans command interest for the same reasons as loans of productive capital for a longer period. But the rate of interest is generally higher interest on on short-time loans. This is because capital short-time j en ^. f or s ] lor £ periods of one, two, or three loans. r months must be continually re-invested, and may lie idle for a part of the time. The rate of interest on short-time loans fluctuates with changes in the money market. If money becomes " tight," banks find that their reserves diminish, and they are obliged to contract their loans and discounts. This can be done by raising the interest on short-time loans. When the stringency is over, the banks find that their reserves increase, and they extend their discounts in order to utilize their resources as far as possible. Discounts can be increased by offering them at lower rates of interest. The margin of fluctuation is very great in the case of these short loans. On October 29, 1896, the rate of interest on call loans in New York was ten per cent at the opening of the day's business. By noon it had risen to fifty per cent annual interest, and before night rose to eighty and one hundred per cent. On the other hand, money on call may occasionally be in little demand at one or two per cent. § 266. For some purposes it is useful to speak of a general loan market, in which loans of productive cap- INTEREST. 397 ital for permanent investments or for short periods of time, and loans of durable consumers' goods The loan are offered and demanded. Unquestion- market. ably there is a connection between the three. If the normal rate of return on one kind of loans exceeds the return on others, the supply of capital offered for that purpose will increase, and the rate will fall to the general level. This may be a gradual process, however. If the rates secured by banks on their short-time loans are unusually high, the profits of bankers will be larger, and more capital will flow into the banking business sooner or later. 1 § 267. It is an old fallacy that an increase in the supply of money lowers the interest on permanent investments, while a decreased supply of The rate of money raises the rate. This may be true ^manent temporarily of short-time loans, but is false investments . is not affected when applied to more permanent invest- by the supply ments. The demand for loans means a ofmoney - demand for various other forms of productive capital, not a demand for money. So, too, the supply of loans is a supply of loanable capital, not a supply of money. If the amount of money is increased and prices are raised, there will be an increase in the money value of the sup- ply of capital goods, but the money expression of the 1 In the general loan market two other kinds of loans might he men- tioned. First, a few people, either from imprudence or from misfortune, horrow funds to relieve personal necessities. But such loans are insigni- ficant in amount when compared with the general mass of loans. Second, governments borrow large amounts for public purposes. The demand of a government for loans iu war times may greatly raise rates of interest. 398 PRINCIPLES OF ECONOMICS. demand for capital will be increased also ; and the con- ditions of demand and supply will be unaltered. If it costs twice as much to establish productive enterprises when the prices of products are doubled, then the money value of the capital needed to build a factory will in- crease, and the money demand for capital will increase proportionately to the increased supply of money. § 268. From antiquity until comparatively modern times the justice of interest-taking was attacked by phi- losophers, statesmen, and theologians. Dur- The justifica- l ' ' ° tien of interest- ing the Middle Ages both the Roman Church and the civil authorities of Europe prohibited the practice. This opposition to interest, for the most part, rested r,pon the assumptions that a loan was a loan of money, and that money was sterile and unable to pro- duce more money. For this reason interest-taking was viewed as robbery. In modern times, however, it has *\ been seen that most loans are loans of productive cap- ital, and that producers need a large supply of loanable capital. Three centuries ago, the growing need of the business world for capita] broke down the mediaeval prohibition of interest. It is the present social impor- tance of a large supply of capital that has led modern peoples to justify interest-taking. At the present time usury laws are quite common. Most of our states attempt to fix a maximum rate of interest. Such laws declare the exaction of more than a certain rate of interest to be usury ; they make such contracts void at law ; and some- times inflict penalties for charging usurious interest. It RENT. 399 has been found that the commercial world manages to evade these usury laws in one way or another, so that they are practically inoperative in the general loan mar- ket. When applied to commercial transactions these laws are beyond question unwise. On the other hand, our usury laws have helped poor people who sometimes borrow to meet personal necessities to keep out of the hands of money sharks, who make a practice of victimizing such ignorant or helpless borrowers. It would be wise to remove such restrictions from the loan market, and to leave the rate of interest to be determined by the forces of supply and demand in the commercial world. A high rate of interest tends to remedy itself by attracting an increased supply of capital. On the other hand, the interests of the poor who may have to borrow to re- lieve their personal necessities may be safeguarded by leaving to the courts the work of deciding when interest contracts are usurious, and ought not to be enforced. VI. Rent. § 269. Rent, in the economic use of the word, is the return that is secured by the owner of any natural agent. The most common case is the rent secured The nature from land, but the rent of water privileges, of rent - dock facilities, etc., is an income of the same sort. Natural agents are reduced to private ownership when they become scarce relatively to the demand for them. Land became private property only when nomadic peo- ples settled down to agricultural life, and arable land became scarce. 400 PRINCIPLES OF ECONOMICS. § 270. Natural agents are used in production and serve to satisfy human wants. Thus far they resemble capital. But they differ from capital in that natural they are not produced, and their supply is Agents. fixed by nature. They become economic goods only when the demand for them increases so as to make them scarce, instead of free goods. What determines the value of natural agents that become rela- tively scarce ? Manifestly their value depends upon their scarcit}', and is not affected by expenses of pro- duction. The owner of a scarce natural agent, such as a piece of land, can secure from it an annual income, or rent, say of $600. Then, if the market rate of interest on capital happens to be six per cent, the value of the piece of land will be such a principal sum as will yield $600 annually with interest at the current rate. In this case the land would be worth $10,000. Now it is neces- sary to explain the causes that determine the annual income or rent obtainable from land. But first it is necessary to explain that improvements upon land or upon any natural agent are capital, and improvements liave a valuc proportioned to their marginal upon land or expenses of production. Land is in itself a upon other natural agents natural agent, but fences, ditches, dikes, are capit . wa H s> an( i fertilizers are capital ; and are \ alued according to the expenses of producing them. A wnler power is a natural agent, but a dam and a canal constructed for the purpose of utilizing the power are capital. A piece of land or a water power, upon which no labor and capital have ever been expended, i;/:\r. 401 may be leased or sold at prices that depend solely upon scarcity. § 271. The income received from natural agents may be explained by considering its most common form, the rent of land. Such rent arises out of dif- The income ferences in the desirability of various tracts from natural of land, due to differences in location or in natural fertility. For agricultural purposes the natural fertility of land is important. Nature does much more to make some lands fertile than it does for others. Temperature and rainfall favor some lands. Some soils are far stronger than others, and can be used continually without deteriorating in the same degree. A plain has certain advantages over the slopes of a mountain, and land with a southern exposure is superior to land that slopes to the north. When land is once brought into cultivation, then the condition of the soil depends also upon the methods employed to preserve its fertility ; but natural differences still remain very im- portant. The location of a tract of land is important in determining its desirability for any purpose whatever. Agricultural land must be accessible to the market, and the rent secured from it will depend partly upon this consideration. Land used for residence purposes will be more or less desirable according to its accessibility, its healthful ness, and the beauty of its surroundings. Land used for the location of manufacturing or com- mercial enterprises must, above all, be accessible to the market, to means of transportation, and to the labor supply. 402 PRINCIPLES OF ECONOMICS. § 272. The causes that determine rent can be illus- trated well by studying the rent from agricultural lands. In new countries land is sometimes super- The rent of l agricultural abundant. The settlers occupy first those sites which offer the best immediate advan- tages either for defense or for securing a quick return from the soil. Produce is raised from the land with little expenditure of capital and labor. Suppose that the average investment on each acre of wheat land is five dollars, 1 and that the average return per acre is fifteen bushels of wheat. Now suppose that population grows and that the demand for wheat increases so that the price rises. How will this increased demand be met ? Wheat-raisers can either invest more capital on the land already cultivated, and secure a larger aggre- gate but a smaller proportional return ; or they can apply the additional labor and capital to new lands, which may not be as fertile as the old, but may give as large returns as could be secured by additional invest- ments on the land formerly cultivated. Suppose that, by investing five dollars more on the old lands, the yield could be increased to twenty-five bushels, while the new investments on the poorer lands would have yielded ten bushels. Then producers would with equal profit invest the additional five dollars on old land or on new but poorer land. If, however, the additional investment would have increased the yield of the old lands to 1 We will suppose that this covers not only all expenses for labor and materials, hut also the expenses for interest on capital, so that it will leavo the producer both interest mi liis capital ami lair wages for his work. RENT. 403 only twenty-four bushels, then producers would have preferred to take the poorer lands into cultivation. Now, as soon as the demand for wheat had increased so that the investment of five dollars per acre on the most available lands could not satisfy it, Diminishing returns in- crease the prices would rise. This would continue until prices became high enough to make it prof- marginal * ° x expenses of itable to invest more labor and capital, say production, five dollars more per acre, either upon the old lands, sub- ject to a diminishing return, or upon new and poorer lands. The increased supply would be produced at an increased marginal expense, and prices must rise high enough to cover this expense, if the demand is to be satisfied. The former expense of raising wheat was five dollars for fifteen bushels, or thirty-three cents per bushel. The increased supply of ten bushels per acre required an increased outlay of five dollars, whether raised on old lands by more intensive cultivation or on new lands. The marginal expense of raising wheat has risen therefore to fifty cents per bushel, and prices must rise to that point before the supply will be increased. When increasing demand forces up the price of wheat and enables an increased supply to be furnished at a greater marginal expense, rent will appear. In the case just assumed, the producer of wheat on the older and better land can now invest five dollars per acre, pro- duce fifteen bushels worth fifty cents per bushel, and can secure a surplus of two dollars and a half. Or he can invest ten dollars per acre, produce twenty-five bushels worth fifty cents a bushel, and can secure a sur- 404 PRINCIPLES OF ECONOMICS. plus of two dollars and a half. On the other hand, before the increasing demand raised the price of wheat Rentisasur- from thirty-three to fifty cents, such a wheat plus secured ra j ser invested five dollars per acre, pro- on more * ' * productive duced fifteen bushels worth only five dol- investments of capital lars, and secured only enough to cover his and labor. expenses. But the rise in the price of wheat may have led some producers to resort to poorer lands, investing five dollars per acre and securing ten bushels of wheat worth five dollars. Such producers receive no surplus, and could pay no rent for their lands. Now, the owners of the better lands can secure the surplus of two dollars and a half that is received from those lands as soon as wheat rises to fifty cents per bushel. This surplus is economic rent. In the case just assumed, the second investment of five dollars per acre, either upon the old and better Economic land or npon the new and poorer, yielded rent is a surplus of income over expense. A rent differential l L return secured W as secured from the more productive moreproduc- investments of labor and capital which menteupon yielded a surplus. Rents are measured land. always in this way, and are a differential return secured from investments that arc more produc- tive than the marginal investments that receive only enough to just pay for making them. These marginal investments may be made on new and poorer land, in which case rent is measured by the superiority of ihe better land over the poorer. On the other hand, the marginal investments may be made on the older lands RENT. 405 because they will secure there a larger return than could be gained from poorer lauds. In the first case economists speak of an extensive margin of cultivation, that is, an investment on the marginal lands from which producers secure just enough to cover their expenses. In the second case, there is an intensive margin of cul- tivation, that is, a more complete but more expensive utilization of old lands, which is made possible by increased prices. In a new country settlers are seldom able to cultivate the richest soils first. They select those that promise the largest immediate return. As time The0 p enill g goes on, richer soils may be utilized. The up of new lands may result is to increase the supply of produce, throw less , i . i . ,, , p ■>,. fertile soils to lower prices, and to throw out ot cultiva- outof tion the poorest lands that formerly were in cultivation - use. The demand may be satisfied, under such circum- stances, by a less intensive investment of labor and capital upon better soils, and by a less extensive invest- ment upon poorer soils. Such a change in methods of production will decrease the difference between the marginal investments and the more productive invest- ments of labor and capital. This will lower the surplus, or rent, secured on the superior investments. § 273. Land utilized in manufacturing or commercial enterprises is valued according to its location, both in respect to the market and to the labor supply. 1 In- 1 Of course location is an important element in determining the desira- bility of agricultural land. Proximity to the market, or to railroads; and canals, decreases the cost of placing wheat in the market. 406 PRINCIPLES OF ECONOMICS. creasing demand for products will raise prices so that producers will push their marginal investments on to t a more distant and less desirable lands, or will The rent of landusedfor invest more intensively upon land already other purposes. . ■■ -, . . . . , occupied, fcometimes there may be no act- ual increase of price, but rather a failure of prices to fall as fast as they might otherwise. The principles governing the rents of such lands are the same as those that determine agricultural rents. § 274. Rents do not raise prices, but are caused by high prices. The prices of freely produced commodi- _ ., ties tend to approximate the marginal ex- Rent is not a l 1 ° cause of nigh penses of production. Now, in the cases assumed, rent did not appear until increas- ing demand had raised the price of wheat and made it possible to invest five dollars additional, for which an additional return of only ten bushels was secured either upon the old lands or upon the new and poorer lands. Therefore the rent of two dollars and a half per acre was a surplus caused by the rise of prices, and not a cause of high prices. If the landlord should have charged no rent, prices would not have fallen below the marginal expenses of producing the increased supply ; and the profits of the farmers on the better lands would have been increased without any possibility of a change of prices. The enormous rents paid for land in the business center of a large city are due to the exceptional facilities offered by such tracts for doing a large busi- ness, by investing large amounts of capital that secure surplus profits before the marginal investment is made, RENT. 407 say the last story of the building, at which point the returns received only just pay for the expense of mak- ing the outlay. Demand for products and services forces prices up so that the supply can be increased by more intensive investment on city lands, or more exten- sive investment in the suburbs. Economic rent is a result of this more intensive or more extensive invest- ment, and not a cause of higher prices. Of course this applies solely to economic rent, not to the so-called rent of buildings and improvements, which is really interest on capital. Sometimes it J r limitations is said that " rent does not enter into prices." upon this Such a statement means merely that rent is not a cause of higher prices. Manifestly, part of the price secured from more productive investments goes to pay rents. The statement that rent is an effect, not a cause, of high prices needs one important qualification. Land will normally be rented for such purposes as will enable the tenant to pay the highest rental possible. It may happen that lands otherwise available for use in one branch of business may yield a higher rent when used for some other purpose. When this happens, the supply of the product of the first industry can be in- creased only by applying capital more intensively upon lands formerly used or by resorting to newer and poorer lands. Under sueh circumstances the marginal ex- penses of producing that product would be greater than they would have been if it had been practicable to invest capital upon the land that yielded a higher rent when utilized in some other industry. Of course this means 408 PRINCIPLES OF ECONOMICS. that prices must rise higher than would have been neces* sary otherwise before the supply can be increased. These higher prices will be the result of the impossi- bility of utilizing the land rented for other purposes. In the rents of desirable city lots this is a very impor- tant consideration. Probably no land available for wholesale business, for instance, would fail to bear some rent when used for other purposes. And this necessi- tates more intensive investment of capital upon the land actually utilized by wholesale dealers, in order to supply a given demand. 1 § 275. Moreover, actual rents differ sometimes from true economic rents. This economic law of rent pre- Actuai rent supposes competition. It assumes that aland- frequenuy dif- i ov & w in eject a tenant the moment that he fers from the true economic finds another who can pay more rent, and that tenants will give up their locations the moment the rent rises above the true economic rent. These conditions are only partially fulfilled, as compe- tition is often imperfect. Landlords often do not exact full competitive rents from old tenants. Farmers who cultivate land for subsistence may be forced to pay more than full economic rents, since they may bo more likely to accept the heavier burden than to look around for other land. On the other hand, competition is much more active among business men, and tends to make actual rentals approximate the true economic rents throughout the commercial world. § 276. It has been claimed that the tendency of eco- 1 See Marshall, Principles of Economics, 478-485. RENT. 409 nomic progress is to cause a decided increase in rents. In agriculture, it is said, the law of diminishing returns drives producers constantly to cultivate The alleged poorer lands. This increases the differential rentsTcT ° f rents secured from better lands. In the increase, case of town lots, it is urged that every increase of population raises rentals in a marked manner. All such increases of rents, it is thought, are due solely to the growth of society, not to the activity of the particular landowners whose rentals are raised. Hence the ex- pression " the unearned increment " has been applied to this growth of rent produced by social development. Those who speak of the unearned increment com- monly overlook the losses that many landowners suffer. Large sums spent in developing city real Losses of land- estate have been entirely lost, as the enter- ow ^, rsar L J ' usuaUy over- prises have often proved failures. Changes looked. in the location of street railways or in the movement of fashion or business from one section to another, lower rents in some sections of a city nearly as much as they increase them in another. The development of facilities for rapid transit tends to decrease the demand for city lots for residence purposes. In the case of agricultural lands, rents have been lowered repeatedly over large sections of country. In England, agricultural rents have been lowered greatly by the competition of cheaper wheat, beef, and pork produced in the United States. In the eastern portion of this country agricultural rents have been lowered by the opening up of the wheat lands of the West. Many farms in New England cpjinot be 410 PRINCIPLES OF ECONOMICS. rented for enough to pay interest on buildings and im- provements on the land. If we set off these decreases against the increases of rent that have been caused by social development, the net unearned increment received by landowners, as a class, is very much smaller than is usually represented. Only in the case of landowners who own particularly desirable tracts of land can it be claimed that there is a Yet the un- great unearned increment. Some favored earned incre- situations in the business centers of cities, ment is very large in indi- some sites available for docks, for terminal facilities for railroads, etc., have become enormously valuable, so that a large unearned increment has been received. 1 VII. Wages. § 277. Primarily, wages are the reward received by hired laborers. The term is extended sometimes to in- Definition of dude the independent incomes received by wages. workers who carry on any sort of produc- tive activity upon their own account ; but for the present we shall investigate the laws that determine the reward, the dependent income, secured by hired laborers. Nominal wages are the amounts of money received Real and nom- hv laborers during any specified time. Real inai wages. wages are the "necessaries, comforts, and luxuries" that the laborer is able to command as 1 In the case ut' city Iota the increment of land values is partly offset by assessments Eor a large pari of the expense Eor improvements, such as sewers, street paving, etc., that benefit the property directly. WAGES. 411 remuneration for his labor. If one laborer receives higher nominal or money wages than another, hut is obliged to pay more for most of the commodities that he is accustomed to buy, then his real wages may be no higher. Furthermore, two laborers may receive the same money wages, but one may receive house rent or board free, or may be given various privileges, that enable him to make his money go further in supplying his wants. In such a case, the real wages of the two men would not be the same. § 278. Persons who work for hire sometimes receive returns that are called salaries, not wages. It is impor- tant to distinguish between the two forms -wages and of income. The first difference is that a salaries, salary continues as long as the person receiving it is in the employ of the entrepreneur who pays it. On the other hand, wages generally stop the moment work is interrupted. Second, salaried employees are usually engaged for more definite terms that sometimes are of long duration ; while the wage earner has a less secure tenure of his position. Third, persons who receive sal- aries generally stand in closer personal relations with their employers, and are more likely to occupy equal social positions. § 279. Time wages are wages paid according to the time that a laborer works. Piece wages are paid accord- ing to the quantity of work that is done. ° l j Time wages Men employed on time wages have less and piece direct interest in making their product as large as possible ; so that piece workers often do more 412 PRINCIPLES OF ECONOMICS. work in a given length of time, and may earn more money each day. But it usually holds true that men producing the same commodity receive about the same wages for each unit of product, whether paid by the day and But labor-cost T .. ,. tends to be the week or by the piece. In other words, the same under i aDor _ cos t of each unit of a commodity tends both methods J of remunera- to be nearly the same. Competition among employers can produce no other result. An employer who produces at a much higher rate for the labor expended upon each unit of product, will be likely to be driven out of business unless he possesses some advantage that compensates for this greater labor- cost. Finally, the student needs to be reminded that there is no necessary connection between high rates of daily or weekly wages and a high labor-cost for each unit of output, or between low earnings and low labor-cost. Efficiency of the labor as well as the daily or weekly wages must be considered in determining whether the labor-cost is high or low. 1 In general it may be said that laborers receiving higher time wages are more efficient than those whose wages are low. But this greater efficiency is not always proportioned to the dif- ference in the rates of wages. Sometimes it has been shown to be less, at other times more, than this difference. § 280. The person who does not possess the capital necessary to enable him to undertake production on his 1 On the subject of efficiency, see § 77. See Hohson, Evolution of Modern < !apitnlism, 261-284 ; Brassbt, Work and Wages ; Walker, The Wages Question ; Schoenhof, The Economy of High Wages. WAGES. 413 own account must become a hired laborer by selling bis services to some employer. The wages contract is made before work is undertaken, and wages must „ ° General con- be determined some time in advance of the siderations , „ ,. , , r ,, concerning sale oi the product. Moreover, the cm- wages of the ployer is obliged by law to pay the stipu- Mred laboren lated wages whether the product prove salable or unsalable. Evidently he has to estimate carefully the probable future value of the goods produced. There- fore wages have been called " the discounted product of industry," and defined as " what capitalists are ready to advance on the expectation of a future return." When- ever the process of production is so long that weeks or months elapse before the product is completed and marketed, then laborers receive weekly or monthly wages a considerable time before any money return is received from their work. Under such circumstances, employers cannot undertake enterprises unless they have at their disposal sufficient funds to enable them to advance weekly or monthly wages, during the time that must elapse before any return is secured from the sale of the product. § 281. The question of wages must be studied in two aspects : First, we must investigate the forces that determine whether the entire laboring class General and of a country or a section secures a larger or relatlve wages, a smaller quantity of real wages, of the " necessaries, comforts, and luxuries of life." Why is it, for instance, that the wages received by the entire class of wage- earners have been greater in the United States than in 414 PRINCIPLES OF ECONOMICS. Europe ? This question is the problem of general wages. Secondly, we may inquire into the causes that determine the various rates of wages that are paid to different individual laborers or groups of laborers within a country. On what grounds, for instance, can we explain the differ- ent wages paid to various classes of laborers within the United States? This is the question of relative wages. General wages must be first considered. § 282. General wages, or wages considered as the share of the social income received by the entire class of hired laborers, are a varving share of a General wages, or varying product. If the productivity of the industry of a society is great, then the social wages as the snare of the class of hired income will be large, and the quantity of laborers in D ' i J the national commodities or services received by laborers may be large. In the second place, the share or portion of the social income received by the laboring class will be larger or smaller in proportion to the advantages or disadvantages under which the hired laborers make wage contracts with their employers. Wages may possibly increase somewhat at the expense of the share of the product that goes to employers, or they may increase as a result of increased productiv- ity without decreasing the shares of the employing classes. § 283. General wages find an upper limit beyond which they cannot absorb a larger share of the social income. They cannot claim permanently so large a por- tion of the product that employers will be discouraged from undertaking or carrying on business enterprises. WAGES. 41.5 If they should ever rise so high, the number of indus- tries would diminish, the general demand for labor would decrease, and wages would necessarily fall sooner or later. Neither can wages absorb per- ° > L The limits to manently so much of the product that inter- me increase est cannot be paid to capitalists. If this ° wage8, should happen, the supply of capital would diminish and the demand for labor would gradually fall off. Moreover, wages cannot absorb the share of the product that goes to landowners in the form of rent. This share is received on account of differences in the advantages offered by various tracts of land, and cannot be absorbed by wages. Assuming that contracts between employers and labor- ers have determined the gross money wages _ ° jo General (hence the general wages) of the wage- wages limited , , ,, n . ■ somewhat by earning classes 01 the country tor a certain pas tindus- period, then we may notice a further limi- try " tation to general wages. Laborers may dispose of their money wages in four ways : — 1. In the purchase of consumable commodities that have recently been completed. Thus from sixty to eighty per cent of a laborer's income is expended for food, clothes, fuel, light, and a few luxuries. 2. In the purchase or hire of consumable commodities that may have been completed many years previous. Thus laborers spend from twelve to fifteen per cent of their income for house rent. Some buy the houses in which they live. 3. In the purchase of personal services. This is a 416 PRINCIPLES OF ECONOMICS. small item in the expenditure of the majority of hired laborers. 4. Finally, part of the income may be saved. This means that it is invested in capital either directly or indirectly. In this country the deposits in the savings banks in 1894 amounted to $1,810,000,000, the larger part of which belonged to wage-earners. In so far as the laborers spend their wages for consum- able commodities, — and such expenditures form sixty or eiditv per cent of the total, — they are This is be- ° J * ' J cause indus- dependent upon the supplies of consumable tosomjfex 16 ' 1 goods now in the markets. But these con- tent by sumable goods in the market are the prod- capital. uct of capital and labor invested in the past, and are only slightly increased out of the product of the week or month for which the laborer is paid. There- fore, the amount of consumable commodities that laborers can buy with their money wages depends chiefly upon past, not upon current industry. Modern capital- istic production requires time, and the goods in the market this week or this month are largely the products of the industry of past months or even years. If laborers expend their incomes for house rent or for houses or for capital goods, they may draw to a very large extent upon the products of industry for two or three decades past. But money wages expended for such goods as food, clothing, fuel, etc., can command merely the products of the last few months or the last year or so. Therefore, the quantity of such goods secured by the entire laboring class of a country cannot WAGES. 117 be increased beyond the limits set by the productivity of the industry of the immediate past. It is possible for them to increase gradually as the productivity of a country's industries increases. § 284. Economists have recognized that the laborers' "standard of living" sets limits below which general wages cannot fall. The standard of living me limits of the wage-earning classes is the quantity J^7^ es of the necessaries, comforts, and luxuries of cannot fan. life that laborers are accustomed to enjoy. We have already seen that this is a force that limits the growth of population, hence the supply of labor ( § 78). A sudden increase of the labor supply makes the conditions unfavorable for the hired laborers when they make their wages contracts, while a decrease in the supply will make the conditions more advantageous. Changes in the supply of labor tend to adjust general wages to the standard of living. But the laborers' standard of living cannot influence general wages permanently except as it affects the sup- ply of labor. Now the supply of labor But the sup- changes slowly, and a whole generation may change 1 ^ be needed to effect a considerable change, slowly, unless emigration or immigration take place. Leaving these last forces out of consideration for the moment, it is apparent that if wages fall below the present standard of living, the supply of labor will not decrease quickly. Therefore the standard may be lowered temporarily. When this occurs, there is danger that the rising genera- tion of laborers may be brought up on a lower plane of 418 PRINCIPLES OF ECONOMICS. comfort ; and, becoming accustomed to it, may not limit their numbers. Then the standard may be lowered permanently. If laborers are able to migrate to other places where wages are higher, then it is easier to maintain the The influence standard of living. If wages fall below of emigration ^ ne accus tomed standard, emigration will and inunigra- ° tion. decrease the supply of labor more quickly and will make it easier to restore wages to the former level. On the other hand, if immigration brings into the country a supply of laborers having a lower stand- ard of living, then it will be harder to maintain the existing standard. In the United States it has often proved true that immigrants have desired to improve their standard of living, and have not tended so much to depress the standard of American laborers. But of many of the immigrants that have crowded into our large cities this has not proved true. Whenever there is an abundance of free land, hired laborers find it easier to maintain a high standard of The effect of living. In this country it has been so easy free land. £ or i aoorer s t acquire fertile land and to engage in farming on their own account, that the supply of hired laborers has been reduced quickly and easily whenever wages have fallen below the income that could be secured from agriculture. In the future, American wages will be less affected by this influence. Some writers, especially the socialists at the present time, have assumed that the standard of living must WAGES. 419 necessarily be low; and that wages tend normally to fall to the very lowest point where the laborers can possibly keep themselves alive and main- The standard of tain the supply of labor. But this is en- ^SLuy^ tirely false; for the standard of living has raked, steadily advanced during the past half-century, and may do so in the future. Its advance depends upon forces that are partly within the control of the la- borer. Public education, that broadens the outlook and the interests of the laborer, tends to make him demand broader opportunities, and to refuse to bring into the world children for whom he cannot provide a fair start in life. Moral elevation, and everything that tends to make him more of a man, elevates the standard of his living. The same causes enable the laborers to combine in order to secure by intelligent action all the wages that are their just dues. These facts are ap- preciated by the working classes as never before, and we may expect a continued rise of the standard of liv- ing. Finally, increased wages secured in this manner would not be gained at the expense of other classes in the community. Greater efficiency is a natural result of an improved standard of living, and such an advance in the condition of the laboring classes increases the social income out of which the higher wages must come. § 285. We must now consider why the wages re- ceived by hired laborers differ in various Relative employments. Manifestly, Laborers compete wages, with. one another as far as possible for the most desir- 420 PRINCIPLES OF ECONOMICS. able positions ; and it is necessary to explain why this competition does not produce the same rate of wages in all employments. Laborers in their rivalry with each other compete for those positions that offer the greatest net advantages. Other things besides the nominal money in- Competition ■* among labor- come make the competition for any place ers is directed ■, . , r> • 1 ^i 1 toward occu- m °re or less intense. Besides the nominal pations off er- wao -es offered, laborers may consider the ing highest s ' J "netadvan- question of the continuity or the certainty of employment, preferring lower wages with constant employment. Also they may consider the chances for failure or success in their work. If success is doubtful, competition will be less intense. Furthermore, laborers may consider the agreeableness or disagreeableness of the employment, preferring agreeable work. Natural tastes and inclinations affect their decisions on these points. The varying social esteem in which different employments are held is an- other important consideration. Finally, the intensity and duration of the exertion, both physical and mental, affect laborers' judgments in such matters. 1 Any em- ployment will appear more or less desirable according to the net advantages offered after all these considera- tions are taken into account. § 286. It is easy to show that all laborers are not able to enter into competition for the same positions, even if all should estimate the net advantages in pre- 1 Bead Adam Smith's account of the causes of differences in relative wages, " Wealth of Nations," Bk. I. Chap. 10. WA GES. 421 cisely the same manner. Hired employees are divided into non-competing groups, among whieh Non-competing .... . » . . ,. ,, groups among competition is very imperfect or is altogether laborers, lacking-. These groups are based upon at least five sets of causes : — 1. Differences in intellectual ability. Some men are unlit for responsible positions, and unable to compete for positions requiring any high degree of intellectual ability. 2. Differences in moral characteristics. In many positions of responsibility the fitness of the employee may depend largely upon his moral character. 3. Differences in training and education, both general and special. General education may increase a man's fitness for many positions, while special training of a technical character must be possessed by all who desire to secure employment as skilled workmen. 4. Differences in physical health, strength, and en- durance. 5. Poverty and ignorance. These render laborers unable to learn where better opportunities for employ- ment may be found, and make it difficult or impossible for them to move to the place where more favorable openings might be secured. Among non-competing groups of laborers a certain competition may exist in the long run, because it may be possible for the children of one group to fit ' . Further themselves for positions in others. Tben, if considera- • i j . tions. any group enjoys special advantages, more young persons will strive to enter that trade or pro- fession. Public education is of great importance in 422 PRINCIPLES OF ECONOMICS. making possible this indirect competition among dif- ferent groups. 1 Improved means of transportation and facilities for spreading intelligence tend to increase competition among those persons already located in particular industries. Yet, when all these allowances are made, there remain well-defined, non-competing groups. The lowest groups are the largest, and include almost all unskilled laborers, who are not protected from the competition of their fellows by the possession of special training or skill. Such laborers often have no choice whatever in their work, and must accept whatever comes to hand. Even in the most unhealthy and dis- agreeable occupations wages are often low because the workers have no alternative open to them. Above these, come groups of skilled workmen separated from each other by the difficulties of changing from one trade to another. Then come the lower grades of persons engaged in labor of a more intellectual character. Finally, there are small groups of responsible brain- workers, possessing unusual abilities and enjoying exceptional training. § 287. We are now ready to explain differences in relative wages. The first thing to notice is that society The causes of must pay for a given supply of any commodity irrelative or services a price high enough to cover the wages. marginal expenses of producing it. These marginal expenses include the cost for labor, so that we 1 Trade unions sometimes try to restrict the number of apprentices that enter particular trades. In ho doing they tend to obstruct this indirect competition among different groups. WAGES. 423 may say that the price of any commodity or service must be high enough to enable employers to pay suffi- cient wages to secure the highest-priced laborers needed to produce the required supply. Then, leaving the employer out of consideration, we may conclude that the supply of any commodity or service will be so regulated that its price, or its marginal utility to society, will balance the expense of securing the most expensive, or marginal, portion of the labor needed to produce the supply. Relative wages, therefore, are de- termined by a balancing of the forces of demand and supply. In the chapter on value, it has been shown that demand depends upon the marginal utility of the com- modity or service to society. It remains to Forces that explain briefly the operation of the forces d emandaii roflts - are called " pure profits " by some economists. It is the prospect of these extra, unusual gains that leads men to prefer the greater risks and cares of business management to the smaller risks and cares of lending their capital to active managers. The amount of these differential profits depends upon the extent of the ad- vantage which these superior entrepreneurs have over the marginal producers. This advantage may arise from the following causes : — 1. It may come from superior personal ability. The success of a business depends upon able management even more than upon efficient labor. Bad judgment in the purchase of materials or in the sale of the product may make all the difference between success and failure. Thorough supervision and efficient organization of all branches of the business have much to do with success in producing at a low cost. Superior personal ability of 428 PRINCIPLES OF ECONOMICS. the employer accounts for part of the differential profits secured by some enterprises. 2. The possession of patents may enable an employer to produce at less than the marginal expense, and so to secure a differential profit. In the words of Mr. Mill, " If the value of the product continues to be regulated by what it costs to those who are obliged to persist in the old process, the patentee will make an extra profit equal to the advantage which his process possesses over theirs." 3. Mere chance or good fortune sometimes enables some employers to secure differential profits. Differential profits are likely to be of a temporary character. The personal ability of the entrepreneur may General con- enable the differential profit to continue siderationson during his iif et i me , but at his death it is differential ° profits. likely to cease. We have notable instances of great organizers who have earned immense personal profits that were not secured from the businesses after the founders died. Moreover, such personal profits are likely to disappear as soon as other producers succeed in producing at the same cost. This is happening continu- ally. The marginal cost of production steadily falls, and the advantage possessed formerly by superior em- ployers is lessened. In general it can be said that pure profits consist " of wealth created by the powers of given undertakers over and above what would have been pro- duced by the same application of labor and capital under l<'ss efficient leadership or management." They are a surplus that does not affect prices, since they are deter* PROFITS. 429 mined by the marginal expenses of production under the least efficient employers that arc able to keep in business. " Anger at the great captains of industry on account of the pure profits which they acquire is not only groundless but insane. Rather it is the stupid and unsuccessful undertakers who deserve blame, sinking capital and starving laborers." § 292. The profits secured by managers of monopo- listic undertakings differ from the profits gained in com- petitive enterprises. The causes that enable Monopoly entrepreneurs to secure the power to fix prices P rofits - at the point of highest net returns have been discussed in a previous chapter. These are rare personal abilities, exclusive legal rights and privileges, the monopoly of natural agents, or capitalistic organization. The amount of the profits gained by the monopolist will depend upon two circumstances : — 1. It will depend upon the amount of his product that he can sell before he reaches the point of highest net returns, at which an increased product would lower prices so that the net profits from his sales would be decreased. This can be expressed in another way. Monopoly profits will depend upon the amount of capital that can be in- vested in the business before the product becomes so great as to oblige the monopolist to sell it at a lower price than that which yields the highest net returns. 2. It will depend upon the surplus of price above cost on each unit of supply, on the product of each unit of invested capital. When a monopoly arises, not from rare personal abili- 430 PRINCIPLES OF ECONOMICS. ties, but from legal rights and franchises, from rare natural agents, or from capitalistic organi- profitsmay zation, the monopoly profits may be of a permanent permanent character. It is true that new character. inventions and new business methods may destroy such a monopoly, yet the profits secured from such a business are not personal, and are not due to the skill of one man. For this reason they are sufficiently permanent in character to make it possible to capitalize them and transfer them to other persons. Suppose that patents, rare natural agents, or capitalistic organization enable an employer to realize annually a net profit that exceeds by $30,000 the necessary profits secured by all employers. Then these monopoly profits may be capital- ized at the current rate of interest, say six per cent, and the business may be sold for $500,000 more than the actual capital invested in it. There have been many instances in which monopolistic undertakings have been capitalized at from two to five times the actual investment of capital. When the enterprise is of a quasi-public character, such as a gas company or a railroad, monopoly profits are often capitalized in order to conceal the ex- cessive profits realized on the capital actually invested. Since monopoly profits are realized by limiting the supply so that its price can be fixed at the point of high- Conciuding est net returns, it follows that they are a considerations r \ • i • t n on monopoly ca,isc of hl 8' n P n ces. All consumers pay profits. more than if prices were fixed at the point where they covered the marginal expenses of production, as I hey are in competitive undertakings. When monopoly LITERA TURE. 43.1 profits arc capitalized and the business sold on the basis of such capitalization, consumers will continue to pay a monopoly price, while the managers of the enterprise will secure only an average rate of profit on their inflated capitalization. LITERATURE ON CHAPTER XIII. General References : Andrews, Institutes of Economics, 158- 189 ; Boiim-Bawerk, Capital and Interest, Positive Theory of Capital ; Ely, Outlines of Economics, 16G-217 ; Gide, Political Economy, 473-552; Gunton, Social Economics; Hapley, Eco- nomics, 26 1— 335 ; Marshall, Principles of Economics, 5G6-790, Economics of Industry, 250-411 ; Mill, Principles of Political Economy, Book II. ; Ricardo, Principles of Political Economy and Taxation ; Roscher, Political Economy, Book III. ; Sidg- wick, Principles of Political Economy, 269-398; Smith, Wealth of Nations ; Walker, Political Economy, 187-291 ; Wieser, Natural Value. Special References : Clark, Capital and its Earnings ; Com- mons, The Distribution of Wealth; Patten, Dynamic Economics; Taussig, Wages and Capital ; Cannan, History of Theories of Production and Distribution ; Davidson, The Bargain Theory of Wages ; Spaiir, The Present Distribution of Wealth in the United States. 432 PRINCIPLES OF ECONOMICS. CHAPTER XIV. THE WAGES SYSTEM. I. General Considerations on the Labor Contract. § 293. The hired laborer sells his labor to an em- ployer for a stipulated wage. The legal theory is that The nature of labor is property, and that the laborer sells the labor l r J contract. his property to an employer, — just as the owner of any commodity may dispose of his property in a market. In this way labor is called a commodity, and the hired laborer is said to dispose of his commodity, labor, in return for stipulated wages. In theory, the modern labor contract is a free con- tract, voluntarily entered into by employer and em- Freedom of ployee. In this country the courts are inclined to insist that this theoretical free- dom shall be maintained, and that the law shall not interfere in the purchase and sale of labor more than in dealings in other commodities. They often declare laws unconstitutional that attempt to prevent certain contracts from being made by employers and laborers. Few people realize, however, that the freedom now claimed for the labor contract has not always existed. To consider merely the case of England, it is easy to THE LABOR CONTRACT. 433 show that this has been developed largely during- the last century. The Statute of Apprentices aimed to pre- vent employers from hiring laborers who had not served a seven-year apprenticeship and become connected with some guild, while it prevented laborers from choosing freely their occupations. Acts of Parliament attempted to regulate rates of wages, intrusting the assessment of wages to justices of the peace. These acts were not repealed until 1813 and 1814, although they had been nearly obsolete for some time before. In other words, the modern labor contract is an historical product; it has been modified in the past as it has assumed the present form, and it may be modified in the future. § 294. Labor is bought and sold in the labor market in much the same way as any other commodity. But it is possible to show that labor differs Labor is a special com- from most other commodities in important modity, with. respects, several of which are here given. 'f it?^" First, it is evident that the laborer and his work are inseparable. The seller of other commodities parts with them when he effects his sale. " It matters J he laborer is nothing to the seller of bricks whether they from Ms are to be used in building a palace or a ^X™ ^* 7 ' sewer ; but it matters a great deal to the seller of labor, who undertakes to perform a task of given difficulty, whether or not the place in which it is to be done is a wholesome and a pleasant one, and whether or not his associates will be such as he cares to have." Since the worker is inseparable from his work, he is concerned in the conditions of his employment. The person who 434 PRINCIPLES OF ECONOMICS. buys has to exercise necessarily some control over the person who sells labor. The buyer determines the question of residence and the place of work, to a very large extent. He has more or less control over the companions and all the surroundings of the laborer dur- ing working hours. This extends to circumstances that affect the health of the worker, such as sanitary condi- tions, and to those that may affect his safety, as in the case of machinery that endangers both body and life. Finally, the labor contract involves a large degree of control by the employer over the length of the working day and the time of beginning and ending work. In the second place, labor resembles a perishable com- modity which the seller is likely to be obliged to dispose Labor of in a forced sale. The hired laborer corn- perishable* nionly has small reserve funds upon which commodity. ne can depend for support, and is obliged to sell his commodity at once for whatever price may be secured. 1 " The seller of any other goods, by the very fact that he has them to sell, has some capital upon which he can live while he is trying to make a satisfac- tory contract." Even if the goods are perishable, the seller has his labor to fall back upon as a means of support, while the laborer has merely his labor between him and starvation. Since the individual laborer is normally in the position of a man obliged to make a forced sale, he is at a disadvantage in making the labor 1 Moreover, tho laborer who loses a single day's employment is usually tillable ever to recover that lost opportunity. This is often true of capital, however, so that this peculiarity is not confined altogether to labor. THE LABOR CONTRACT. 435 contract. Furthermore, poverty, and sometimes igno- rance, may prevent him from seeking the most favor- able markets. A laborer, especially if he has a family, finds it difficult to take his commodity, labor, to distant markets where wages are higher. A third peculiarity is connected with the one first mentioned. The supply of labor changes very slowly, and only through changes in the number of The supply of laborers. The supply of other commodities inapecuiiar can be decreased by stopping production. mjUmer - But it is far less easy to decrease the number of la- borers when falling prices lead to a partial suspension of productive industry, and throw many men out of em- ployment. When a decreased demand for labor causes both low wages and lack of employment, then large numbers of unemployed laborers press into the market and bid for work. Thus a decreased demand may bring an increased supply of labor into the market. On the other hand, when demand begins to increase after a period of hard times and low wages, a " reserve army " of certain unemployed laborers, " which the poor-houses at the expense of the whole population had supported ... as long as dullness in the business continued," presses into the labor market and increases the supply. The price of labor cannot rise greatly as demand increases until this army of unemployed has been taken back into the ranks of industry. § 295. Although in theory the labor contract is a voluntary agreement freely entered into by employer and laborer, the economist finds reasons for believing 436 PRINCIPLES OF ECONOMICS. that this freedom is often more nominal than real. He finds that the peculiarities of the commodity, labor, are such that the individual seller is likely real freedom ^° ^ e at a disadvantage as compared with in the labor the buyer, so that there may be no real free- contract. dom or equality in contracts for the sale of labor. An extreme instance of this is found in the case of a demand made that certain English mines should be inspected in order to prevent the recurrence of terrible accidents. The representative of the mine owners asked, " Is it not at the pleasure of the miners whether they go into the mines or not ? " " Certainly," was the answer of the witness, " but it is not at their pleasure not to starve if they do not go into the mines." When laborers have to make a forced sale of their labor, their freedom of contract is more nominal than real. When women and children stand individually before the man- ager of hundreds of thousands of capital, it is possible that there may be little freedom and less equality in the contract by which they sell their services. The public has become dimly conscious that between two parties of such unequal knowledge, resources, and strength as a single laborer and the employer of a hundred workmen, the wage contract cannot be entirely equal and free. As a matter of fact, the character of the contract has been appreciably altered in several directions, in order to secure greater equality of conditions between the con- tracting parties. In legislation and in actual practice alike we have realized that " there is no greater in- equality than the equal treatment of unequals." LABOR LAWS. 437 II Labor Laws and The Labor Contract. § 296. When the Industrial Revolution necessitated the repeal of the old regulations by which English in- dustry had been restricted, employers and Restriction of individual laborers were left free to settle f» e ^ con " tract by their mutual relations by a labor contract legislation, that was legally free. But such unrestricted freedom of contract soon produced some of the most terrible effects recorded in economic history. Women and children were forced to work in factories and mines under condi- tions that proved destructive of body and soul. Hours of labor were prolonged beyond the most extreme powers of human endurance, and no care was taken to protect the operatives from the most dangerous acci- dents. In 1802 Parliament passed the first of a series of Factory Acts, which gradually restricted the freedom of the labor contract. These laws were consolidated and systematized in 1878, and have been extended since that date. They have restricted the hours and condi- tions of employment of women and children, prohibiting the employment of children under a certain age, and preventing both women and children from contracting to work under improper conditions. Suitable ventila- tion and sanitation of factories have been required, and employees have been protected to some extent from injury by dangerous machinery. These laws applied at first only to women and children directly, not to adult males. At the present day there is less interference with labor contracts made by men. Yet acts prohibit- 438 PRINCIPLES OF ECONOMICS. ing lt truck" payments, 1 regulating the payment of sea- men's and miners' wages, and the employment of all workers in certain dangerous trades, have seriously re- stricted labor contracts of adult males. In the United States there has been, on the whole, less restriction of the labor contract. Still many states, particularly in the Northeast, where man- tioninthe ufactures are further developed, have passed united states. ^^ ac ^ ^ Q have laws requiring proper sanitation, ventilation, and protection of employees from bodily injury. " Truck " payments have often been prohibited. The employment of children under a suit- able age has been prevented in some cases, while the hours of employment of women and children have been limited to eight or ten in certain states. In this move- ment Massachusetts has taken the lead. § 297. The student should be reminded, first of all, that many of the evils at which these laws are directed General con- existed before the present era of capitalistic S^rST Production. The growth of the factory ive legislation, system served partly to bring them to light, although it certainly did a great deal to intensify some of them. It will be seen that the fewest regulations have been placed upon labor contracts made by adult males. This has been because men have been considered to be better able to make equal contracts with employers, while women and children have been thought to need 1 "Truck" payments are made in commodities supplied usually by stores kept by employers. They have of ten been resorted to as a means of robbing laborers by charging exorbitant prices that virtually reduced the real wages received. LABOR LAWS. 439 more protection. These restrictions have been based upon the principle that wage-earners are not able to contract with their employers on entirely equal terms concerning those conditions of employment that re- strictive laws have sought to regulate. As a matter of fact, we must admit that the nominal freedom of the labor contract has been decidedly abridged as a result of this legislation. In this country the courts have often declared these labor laws to be unconstitutional, sometimes upon the ground that they have infringed upon the Varyin g de . right of free contract. But there has been cisiousof ..... „ the courts. a lack of agreement in the decisions of the courts of the various states. Some courts uphold laws that others have declared unconstitutional, and judges in different states have declared the same laws unconstitutional on totally different grounds. Only a part of these conflicting opinions can be explained by differences in state constitutions, and the layman is rather driven to the conclusion that these particular questions of judicial interpretation depend largely upon latitude and longitude. In the long run it seems proba- ble that the courts will uphold as much of this legis- lation restricting the labor contract as proves to be necessary to obviate evil results that are seen to occur from the practical inequality of the individual laborer and employer. Here, as in other cases, the courts will find ways by which they can uphold the consti- tutionality of legislation that experience shows to be necessary. 440 PRINCIPLES OF ECONOMICS. III. Labor Organizations and the Labor Contract. § 298. Modern labor organizations are combinations of hired laborers. They have developed naturally out „ , of the sharp separation of the laboring and Development x l ° of labor employing classes caused by modern capi- talistic production. As the distance between the employer and the hired worker widened, it was in- evitable that laborers should realize the need of combin- ing to protect and advance their interests as a class. In England the growth of labor organizations was more rapid than in this country, and the English trade unions are much further developed than the American. The earlier organizations, or trades unions, were com- posed chiefly of skilled workmen, and were organized in separate trades or crafts. Thev seldom Two types l J of labor acted together, and had little sympathy for organizations. -■ i -n i 1 1 i unorganized or unskilled laborers as a class ; but sought rather to further their own immediate inter- ests. The more recent organizations are represented in this country chiefly by the Knights of Labor, and in Eng- land by the " new trade unionism." They seek to unite all hired workers, skilled or unskilled, and to improve the condition of the entire class of wage-earners. Per- haps they show, also, more of a disposition to institute political movements in behalf of their class. More recently still, in this country, the trades unions and Knights of Labor have copied each other's policy to some extent. The trades unions have formed central labor unions in cities, in which unions of different crafts LABOR ORGANIZATIONS. ■ 441 liavc joined in common action. Then they have estab- lished the American Federation of Labor, a national combination of trades unions. Meanwhile the Knights of Labor have formed district assemblies composed of ^ laborers organized by separate crafts. The American Federation of Labor and the Knights of Labor have not as a rule worked in harmony. The number of organ- ized laborers in the entire country is seldom estimated at less than one million. § 299. The objects of labor organizations may be classified in the following manner: — Objectsof 1. By regular assessments upon their labor organ- J & x izations. members they raise large sums for the purposes of the 'associations. These funds often are employed in insurance and benefit schemes, by which sick, injured, or unemployed members are assisted. In 1893 it appeared that 682 English trades unions dis- bursed 110,928,076, of which sum fully one half was employed in this manner. The possession of this prop- erty makes these unions more conservative and more responsible organizations. 2. They aim to educate laborers in various ways, and to promote culture and social intercourse among their members. In their debates and the administration of their affairs, members often secure valuable training. 3. They frequently encourage cooperative enterprises among their members, and desire to promote self- employment. 4. They sometimes enter into political movements, and thus influence much labor legislation in their favor. 442 PRINCIPLES OF ECONOMICS. 5. Finally, they aim to secure practical as well as nominal freedom and equality in the labor contract. For this purpose they seek to control the supply of labor in two ways : First, they assist laborers to move to less crowded labor markets when the supply becomes excessive. Second, they may try to control the future supply of labor in particular crafts by restricting the number of apprentices admitted into each trade. More than this, they seek to secure collective bargaining with employers. This subject requires more detailed treatment. § 300. Perhaps the most important single feature of labor organizations is their effort to substitute collective couective bargaining between employers and associa- bargaifling. tions of employees for contracts between employers and individual laborers. They believe that a single worker is usually at a disadvantage in making a contract with his employer, while an organization of laborers can drive a more equal bargain. Experience has shown that this is so. Organized laborers can refuse to make a contract on terms deemed unjust, because they can fall back upon the funds of their unions in case they lose an opportunity to work. This makes it less necessary to sell their labor at a forced sale, for it enables them to hold out for better terms. Secondly, labor organizations can prevent their own members from taking the places of those who refuse to accept the terms offered by employers, while often they dissuade outside laborers from doing so. This has compelled employers to offer better terms. LABOR ORGANIZATIONS. 443 Organized laborers can, therefore, utilize the strike as a means of securing better terms. Manifestly, strikes are evil in themselves, since they cause loss strikes and both to employers and laborers; while they b °y cott8 - arouse bitter contests of strength, and often incon- venience the public. They may be defended only when they are the sole alternative to yielding to unjust terms offered by employers. Many strikes have been unwise and unjust ; many others have been thoroughly justi- fiable. They are most likely to succeed in prosperous times, " upon a rising market." Sometimes, if employ- ers have engaged to complete large amounts of work within a certain time, the laborers may force a con- tract in which the employers are at a positive disad- vantage. From January 1, 1881, to June 30, 1894, it appears that 14,390 strikes, involving 69,167 establish- ments, occurred in the United States. In 44.49 per cent of these establishments the strikes succeeded, in 11.25 per cent they were partially successful, while in 44.23 per cent they failed. 1 Even when strikes fail, the knowl- edge that the employees are able to strike again may secure more favorable terms to laborers, without the necessity for future occurrences of this sort. The boy- cott is a second weapon. It is " an organized attempt to coerce a person into compliance with any demand, through a combination pledged to abstain, and pledged further to compel others to abstain, from having social intercourse with him or to trade with him." Boycotts 1 Bulletin of Department of Labor, i. 10, 20. Washington, Nov 1895. 444 PRINCIPLES OF ECONOMICS. are more objectionable than strikes, because they are more likely to cause interference with the rights of per- sons who are not directly connected with the original dispute. Yet if producers can be induced to place union labels upon their goods voluntarily, there is no reason why laborers, or any other consumers, should not pur- chase such products by preference. Mr. Stimson thinks that strikes, in themselves, have never been illegal in the United States. 1 Laborers have had the right to combine to raise The legality ° of strikes and wages by lawful means. But when they have combined to perform illegal acts, or when the primary motive of their combination has been to inflict personal injury, then they have been held guilty of conspiracy. In the case of the boycott, the courts have been inclined to hold that the primary pur- pose is to interfere with the business of others rather than to raise wages. Probably most people will agree that " the boycott is not the remedy to adjust differences between capital and labor," at least when enforced by coercion. In general it can be said that the law now leaves laborers free to combine to enforce their demands by any methods that do not conflict with the rights of others. Those who criticise labor organizations so freely for their use of strikes and boycotts, commonly overlook the fact that other classes of society use pre ) 1 In England the case was different. Early in this century legislation and the courts were opposed to the simplest combinations to raise waf their benefit funds, in which a dis- obedient member loses bis .share if he leaves the association. LABOR ORGANIZATIONS. 447 § 302. Labor organizations have often made mistakes and pursued short-sighted policies, as willing critics are fond of pointing out. Some of the criti- r ° Other aspects cisms commonly passed upon them need to of labor . , , organizations. be considered. 1. They are called monopolies, and this is often true. For unions frequently seek to limit the number of apprentices in particular crafts, and to limit the supply of labor. Such measures may injure laborers in other trades by causing an oversupply there. These regula- tions may be considered legitimate methods of industrial warfare whenever employers seek to get all their work done by apprentices, by discharging a workman as sooi? as he completes his apprenticeship, or when they try to keep large numbers of unemployed workmen in reserve in order to keep wages down. 2. Labor unions sometimes limit the amount of work that their members may perform in a day. This is done with a view to making work for a larger number of laborers. Such action is very short-sighted, because a limitation of production simply decreases the social income available for all persons, laborers included. It may be compared with the action of monopolies in decreasing production, in order to cause scarcity and raise prices. 3. The members of labor organizations often treat non-union men harshly and even cruelly, and interfere with the undoubted rights of laborers who are not mem- bers of unions. It is natural that members of unions should feel resentment at outsiders when they play into 448 PRINCIPLES OF ECONOMICS. the hands of employers, but this does not justify inter- ference with the rights of persons that do not desire to join labor organizations. On the other hand, employers frequently discriminate against members of labor unions, and have combined to boycott them on a large scale. A favorite method of breaking down labor organizations is to discharge the men who take prominent parts in them. Labor organizations act within their undoubted rights when they resist by lawful means the replacement of their leading members by non-union men. 4. Finally, it is said that labor organizations are based upon the principle of strife and cause industrial warfare. " In the minds of a large section of the public, labor unions are chiefly associated with strikes. It is believed by many who ought to know better that such organiza- tions exist for the purpose of striking, and that if the organizations were suppressed, industrial peace would be secured." l The truth is that labor organizations exist primarily to equalize the terms of the labor contract. In the early history of any union the strike has been used frequently as a means of accomplishing this end. In the long run, however, labor organizations grow more conservative and less disposed to strike, while their power and influence increase so that employers are more inclined to offer fair terms, thus making strikes unneces- sary. So long as the labor contract depends rather upon the relative strength of the contracting parties than upon considerations of exact justice, there is bound to be more or less strife between laborers and capitalists. 1 Hadlky, Economics, 353. RELATION OF LABORERS TO THE PRODUCT. 449 This is not an entirely satisfactory condition of affairs, but only half of the responsibility for it rests upon the laborers. In the future, collective bargaining may re- duce this strife to a minimum. IV. The Unfavorable Relation of Laborers to the Prod- uct of their Labor. § 303. Experience has shown that laborers receiving time wages are likely to have little interest in turning out a large product, except what comes 01 l Time wages from the knowledge that they will lose their and piece positions if they are too inefficient. Piece wag s wages may give the employee a greater incentive to dili- gent work. But they have often been used by employers as a means of getting employees to do more work, and then the rate of wages per piece has been reduced ; so that laborers have had to do more work in order to se- cure the same wages that they formerly received under a time wage. Such experiences have inclined workers to look with suspicion upon the proposal to adopt piece wages, and have led them to refrain from increasing their efficiency under the system. It is not too much to say that, under the average conditions of time or piece wages, laborers do only seventy or ninety percent of the work that they could reasonably do, if furnished with a sufficient incentive. § 304. Some employers have realized that their labor- ers did not work up to their highest efficiency Pr0&ressive under the ordinary methods of paying wages, wa ff es - and have adopted various systems of progressive wages. 450 PRINCIPLES OF ECONOMICS. Under these methods the employees have been guaran- teed a minimum time wage ; and have been offered a premium for attaining more than a certain degree of efficiency, — that is, for exceeding a certain amount of work each hour or day. It is impossible to present here the details of these experiments with progressive wages ; but, when they have been introduced in good faith by employers, it has been found that the average product of each worker has increased largely, occasionally as much as eighty or one hundred per cent. § 305. Progressive wages have served to increase the laborer's efficiency, but they have not avoided entirely Profit disputes between employers and employees. sharing. Profit sharing is a plan for giving the laborer an inducement to work efficiently, and for securing greater harmony of interest between employers and workmen. Under its provisions hired laborers are given shares in the profits of the business, the share of each workman being determined beforehand upon some equi- table basis. The purpose of such an arrangement is to induce laborers to increase their output, improve its quality, and thus contribute toward the creation of extra profits in which they may share. In some instances ex- periments in profit sharing have had this result, and have proved at least moderately successful. But in many cases they have proved unsuccessful, and have been given up. A common reason for such failure is that there have been very small profits to divide, or even no profits at all ; so that laborers have had little interest in the scheme, and have not hesitated to strike if there RELATION OF LABORERS TO THE PRODUCT. 4ol was any prospect of immediate advantage resulting from such a course. Experience has shown that profit sharing does not do away with strikes, although in some cases it has pro- moted a better understanding and feeling ° fo Merits between employer and employed. Concern- of profit ing its merits as a plan for distribution, the s g ' following points may be noticed. If the share of profits received by laborers is created by increased efficiency and exertion on their part, then it may be as favorable to efficient production as systems of progressive wages, but hardly more so. Unfortunately, however, the profits actually realized by a business depend so much upon good management by the employer that their amount may not vary proportionately with the increased zeal and efficiency of the workers. Laborers may increase their product ten per cent, but bad business management may result in an actual loss on the sales. In such a case profit sharing may be unjust to the employee. On the other hand, if the profits received by the laborers are merely a gratuity from the employer, then the system is unfair to him. For laborers would be made to share in any profits earned by the business, while they would bear no share of the losses. In conclusion it may be said that profit sharing has accomplished less than its more ardent supporters have expected. § 300. Cooperation, in the technical sense, has had two distinct forms. First, consumers have combined to conduct the exchange of prod- ucts, that is, wholesale and retail trade, in order to save 452 PRINCIPLES OF ECONOMICS. the charges made by middlemen. In England many successful cooperative stores have been established, but in this country they have been less numerous and impor- tant. To this form of cooperation the name consumers' or distributive cooperation has been given. The second form is productive cooperation. Workmen have com- bined to establish and conduct productive enterprises upon their own account. They may contribute nearly all the capital, or may borrow a part ; but they become their own employers and form a collective undertaking. Productive cooperation has had little success in England, but rather more in France ; while a few such enterprises have succeeded in the United States. Manifestly, productive cooperation is a radical change from the present organization and supervision of in- dustry by individual entrepreneurs employ- The merits J J l l J of productive ing large numbers of hired laborers. In coopera on. gome f ew cases where it has succeeded, its advantages have been very great. It has made impos- sible strife between employing and laboring classes. Self-employed workers have shown activity and zeal in their labor that hired laborers do not exhibit. It has encouraged frugality, since it furnishes a strong induce- ment to saving. Finally, the responsibility and experi- ence of proprietorship have had an excellent moral influence upon the cob'perators. In cooperative production the place of the entrepre- neur is taken by a manager elected by the workmen. Now, it is all-important for the success of the enterprise that the manager shall have the same skill that indi- CONCILIATION AND ARBITRATION. 453 vidual entrepreneurs possess. If lie fails to show sufficient ability, the business will prove a failure. Cooperators arc not inclined to pay enough to keep the Difficulty of most able men in their service, so that if a cooperative successful manager is found they are likely production, to lose him. Moreover, differences of opinion among cooperators are likely to cause dissensions that lead to divided counsels and inefficient management. Coopera- tive production has succeeded best when the business has not been of a complex character, when skillful man- agement has counted for less, and efficient workman- ship has availed more. Finally, laborers have seldom had sufficient capital and credit to enable them to secure the means of establishing large enterprises. These difficulties have generally circumscribed narrowly the field where cooperative production could prove a success. The conclusion seems warranted that cooperation is an ideal system when possible, but that the difficulties at- tending it are so great as to make it impossible for us to expect very much from it in any immediate future. The entrepreneur will continue to organize and direct the large majority of business enterprises, for he seems able to insure to society the most efficient direction of its productive forces. V. Conciliation and Arbitration. § 307. In contracts for the sale of ordinary commoai- tics, disagreements between bargainers seldom lead to conflicts between the contracting parties. But the labor contract is peculiar in that the person of the laborer 454 PRINCIPLES OF ECONOMICS. and his work are inseparable. Human interests are involved in an especial degree in changes of the supply The labor of labor, and in all the conditions of em- industrial ployment subsequent to the conclusion of an warfare. agreement between employers and laborers on the matter of wages. Hence it is easy for the con- flict of interests to become serious when differences arise between the parties to the labor contract. La- borers resort to strikes and boycotts ; employers adopt the lockout and the blacklist. When such disputes oc- cur they are settled usually by a trial of strength between employer and employees ; and, since might, not reason, is appealed to as the usual arbiter, conflicts between laborers and capitalists are justly described as " industrial warfare." § 308. Few persons are satisfied with appeals to force as the principal method of adjusting the relations of industrial laborers and employers. One remedy for conciliation. fh e p resen t unsatisfactory relation has been found in boards of conciliation voluntarily established in various trades. Employers and laborers in the same trade have selected representatives to form a committee, or board, before which all differences shall be brought for calm and fair consideration before they can lead to serious disputes. When this expedient has been fairly tried in good faith, it has been found that nearly all disputes can be settled by the boards to the ultimate satisfaction of both parties. Both employers and la- borers have taken care to avoid mistakes, and a fair settlement, even of questions of wages, has usually been CONCILIATION AND ARBITRATION 455 possible. Strikes or lockouts have often been avoided for long periods of years. Voluntary boards of concili- ation have demonstrated that it is not impossible to reconcile conflicting claims of laborers and employers on a basis of reason and justice, without appeals to trials of strength, that is, appeals to force ; they have proven that most labor controversies are unnecessary, arising in misunderstanding and distrust, rather than in the desire of either party to wrong the other ; while, finally, they have shown that mutual respect, confi- dence, and good-will may prevail between employers and employed, in place of the mutual distrust, and even class hatred, that too often characterizes their relation at present. § 309. When disagreements between employer and employee lead to an open rupture, such as a strike or lockout, disputes have sometimes been sub- Voluntary mitted to arbitration by unprejudiced judges. Sometimes when boards of conciliation have failed to agree on a certain subject, it has been submitted to the decision of some umpire or arbitrator. In this country several states have established boards of conciliation and arbitration, which are generally authorized to in- vestigate any dispute between laborers and employers, and to offer their services in securing a settlement. In Massachusetts this method has been found quite success- ful in settling many disputes ; but the board has done its best work in the field of conciliation, where it has secured the settlement of many questions that might have led to strikes and lockouts. Arbitration voluntarily accepted 45G PRINCIPLES OF ECONOMICS. by the parties to the dispute is the wisest and most ad- vantageous method of settling differences when a strike or lockout has actually occurred. But it is altogether desirable to prevent, by conciliation, the disturbance of friendly relations between employers and laborers. § 310. It has been proposed to compel by law the adjustment of labor controversies by arbitration. Com- compuisory pulsory arbitration of this character presents arbitration. se rious difficulties. The first is that, while it is easy to enforce the decision of the arbitrators upon the capitalist, it is generally impossible to compel the laborer to abide by it permanently. 1 To remedy this difficulty it has been proposed to have labor organiza- tions incorporated, so that judgments can be enforced against them. But this proposition is not at present widely favored by laborers. In the second place, if laborers could be compelled to work at wages fixed by arbitration, it is questionable whether they would render willing service, and whether their labor would not prove as inefficient as slave or prison labor. Finally, it is claimed that capitalists would not invest their capital under any such condition as compulsory arbitration of labor disputes. This is a favorite answer to any pro- posal for limiting the powers of capitalists. Capital must be invested, and only a small portion could flow out of the country. It is possible, however, that com- 1 It is easy to find enough property belonging to the employer to enable (lie judgment of the arbitrators to be enforced upon him. With laborers this is seldom possible, while imprisonment would probably be an inipos' iUr punishment for a refusal to work under unsatisfactory conditions. LITERATURE. 457 pnTsory arbitration might be enforced in an unjust man- ner that should prove destructive to the interests of employers. This would discourage the growth of capital and check the development of industry. If, on the other hand, compulsory arbitration should be fairly adminis- tered, there is no reason to fear that the capital of society would be impaired. Most people will agree that compulsory arbitration would be such a serious limita- tion upon the labor contract that it must be considered undesirable as long as there are other possible methods. LITERATURE ON CHAPTER XIV. General References : Brentano, The Relation of Labor to the Law of To-day ; Bulletin of the Department of Labor, Nos. 1 and 2 ; Ely, Outlines of Economics, 187-197, The Labor Movement in America; Gilmax, Profit Sharing; Hadley, Economics, 336-369, 104—421 ; History of Cooperation in the United States; Hobson, Evolution of Modern Capitalism; Holyoake, History of Coopera- tion in England; Howell, Conflicts of Labor and Capital, Handy Book of the Labor Laws ; Jevons, The State in its Relation to Labor; Jones, Cooperative Production; Lowell, Industrial Arbi- tration and Conciliation ; McNeil, The Labor Movement ; Mill, Principles of Political Economy, Book IV. Chap. 7, Book 11. Chaps. 12, 13, 14; Potter, Cooperative Movement in Great Britain ; Price, Industrial Peace; Rae, Eight Hours for Work ; Rogers, Worfc and Wages, Chaps. 14 and 18; Schloss, Methods of Indus- trial Remuneration ; Stimson, Labor in its Relation to Law, Hand- book of the Labor Law of the United States; Taylor, Profit Sharing; The Adjustment of Wages to Efficiency: Walker, Polit- ical Economy, 375-394, The Wages Question; Webb, History of Trade Unionism ; WRIGHT, Industrial Evolution of the United States. 231-320, Report on Conciliation and Arbitration ; Lloyd, Labor Copartnership ; Webb, Industrial Democracy. 458 PRINCIPLES OF ECONOMICS. CHAPTER XV. LAND NATIONALIZATION. SOCIALISM. I. Land Nationalization. § 311. About 1870 a movement in favor of land nationalization started in England. The Land Tenure The English Reform Association advanced the proposi- SrmAsS- tion that the State sll0uld take b y taxation ciation. all, or nearly all, of the future increase of the rent of land. Present landowners were to have the option of " relinquishing their property to the State, at the market value which it might have acquired at the time when this principle may be adopted by the Legis- lature." The Association claimed that its proposal was just and desirable because the growth of ground rent (the economic rent of land in the strictest sense, apart from improvements made upon it) is due to "the growth of population and wealth," " without any effort or out- lay by the proprietors." § 312. More recently, Mr. Henry George has started an agitation in favor of the seizure by the State, not merely of the future "unearned increment " Henry George and the single of laud rentals, but of the entire economic rent of land. He would accomplish this tin I by imposing upon land a single tax equal to its LAND NATIONALIZATION. 459 annual economic rent ; that is, its rental value apart from all improvements. Moreover, he has denied the justice or necessity of compensating landowners by allowing them to sell to the State their lands at the market value. It is evident that such a plan is equiva- lent to national ownership, or nationalization of land. § 313. Mr. George is not a socialist. He believes that men should have the right of property in all prod- ucts of their labor. But he denies that the The arguments economic rent of land is the product of any advanced by activity of the landlord, and claims that it is ' orge ' due entirely to the growth of population, which increases the demands made upon the land, and raises rents. His arguments depend upon this fundamental proposition, and we may present them in the following manner. 1. All social progress increases the demand for land. The law of diminishing returns 1 drives investments of labor and capital onto poorer margins, and increases rent. Thus the tendency of progress is to give land- lords more, leaving less for all other people. There- fore, progress will always cause poverty as long as land remains in the hands of private owners. There are two fallacies in this argument. First, all social progress does not increase the demands made upon land. The improvements in manufactures of the last century have 1 Mr. George formally denies the law of diminishing returns (see "Progress and Poverty," Bk. II., Chaps. 3 and 4). But he undertakes to demonstrate the invariable connection between progress and poverty by means of Ricardo's law of rent, — a law based npon the assumption of the law of diminishing returns, and meaningless upon any other assumption. 460 PRINCIPLES OF ECONOMICS. increased enormously the product secured from each acre. Improvements in agriculture constantly enable the supply to be produced from better grades of lands, throw poorer grades out of use, and decrease rents. Improved means of transportation enable the best grades of lands in all parts of the world to be utilized, and they have reduced rents on older lands. The progress of the last century has notably increased rents only in the case of land especially desirable for use in commerce and transportation, and this mainly in large cities. The second fallacy is that of supposing that, in any case, the demand for land can increase indefinitely, and can throw most of the product into the hands of land- lords. The growth of population, which is the principal cause of an increased demand for land, is limited by the desire of men to maintain their standard of living, or even to raise it. Beyond the point set by the standard of living, population, and hence this principal demand upon land, will not increase. 1 Our first conclusion was that progress does not necessarily increase, on the whole, the demands made upon the land, although it may enor- mously increase the demands made upon favored situa- tions. Our second conclusion must be that population, hence the principal demand upon the land, can never 1 This point is worked out more fully in Ely, " Outlines of Economics," 175-176. Furthermore, Bohm-Bawbrk has called attention to an equally important fact. "Just as effectually as the claims of the worker may and do prevent cultivation hcing extended to a point at which labor does not ohtain even its own costs of subsistence, may the claims of capita] prevent an excessive extension of the limits of cultivation, and actually do prevent it." See " Capital and Interest," 93-94. LAND NATIONALIZATION. 461 increase beyond the point set by the claims of capital and by the desire of laborers to maintain their standard of living. Nothing could be more incorrect than tho theory that rents paid to landowners are a necessary cause of poverty, attending all social progress. 2. Mr. George holds that a single tax, equal to the rental value of all land, apart from improvements, would yield more than enough to support the government, and would make all other taxation unnecessary. His scheme would secure for the uses of society that part of the product of industry that landowners now acquire as a result of social growth and development. He holds that all other taxes discourage capital and labor, but that the single tax on land would not discourage indus- try. It is impossible to determine exactly how much the single tax would yield in the United States, and we cannot say certainly that it would yield more or less than enough to cover the expenses of our govern- ments, national, state, and local. But on financial grounds, which cannot be enlarged upon here, any single tax is highly objectionable, and is condemned by all authorities. 1 3. Mr. George urges very strongly that it is unjust to allow any persons to own the land, which is a free gift of nature to all men. All people should have an equal opportunity to use the land, and landowners infringe upon this natural right. Since private ownership of land 1 SeeBASTABLE." Public Finance, "31 2-3 10 ; Pu.nw" Public Finance," 105-110; Ely, "Taxation," 88, S9 ; Ski. I*. man, "Essays in Taxation," 73-75, 462 PRINCIPLES OF ECONOMICS. is wrong, it is not necessary to compensate present own- ers, especially since so many existing titles to land were based originally upon violence and robbery. Modern writers, however, have practically given up the attempt to define " natural rights." They hold that all of a person's rights are based upon considerations of social utility, and, therefore, consider the justice of landowner- ship to be a question of social utility. As a matter of fact, most of Mr. George's arguments aim to show the injurious effects of landownership. § 314. In studying Mr. George's plans for land na- tionalization, the following considerations are important: «™^oi™„ 1- Iii one sense of the word, economic special con- ' siderations ren t may be called an unearned income ; yet concerning land nation- it accrues mainly to people who incur the risks of investing in land, and cannot be secured without the exercise of foresight. Now, Mr. George assumes that such investors never lose, but al- ways gain. This is far from true, as has been pointed out (§ 276). At present, investors run the risk of loss when they purchase land and improve it. This risk is counterbalanced by the prospect of an increase in eco- nomic rent. Mr. George would have the State appro- priate all such increments of economic rent, while investors would bear all the losses on improvements that should become unprofitable on account of changes in the direction of the growth of the community. The late President Walker said, justly, " Heads I win, tails you lose, is not a game at which the State can, in fair- ness or decency, play a part." If the State takes from LAND NATIONALIZATION 4G3 an investor all increments of rent due to social causes, it should guarantee him from losses on capital invested in improvements, provided that those losses result from social "causes over which he has no control. 2. As a revenue measure, the single tax would often prove a disappointment. In England, for instance, the rents of practically all agricultural lands have steadily- fallen for more than twenty years. If the English gov- ernment had bought out all owners of agricultural lands at the time when The Land Tenure Reform Association proposed such a course, it would have made a decidedly bad investment. In many states of our Union the same thing is true of agricultural rents, while it has occurred repeatedly in cities. 3. We must admit that a large unearned increment of ground rents is secured by the owners of specially favored lots. No one would question the justice of im- posing a part of the burden of taxation upon such an income ; 1 but we should not forget that there are other unearned incomes besides those secured from some pieces of land. When a monopoly of any sort develops an unusually profitable field of investment, part of the monopoly profits are an unearned income, and should 1 Most writers favor heavier taxation of economic rent, and lighter taxation of improvements, particularly in cities where the two things can be separately estimated with ease. The common practice of taxing un- improved laud for only a very small percentage of its market value is bad. It places a premium upon withholding land from use, and waiting for a rise in its value. It discourages the improvement and use of such land, because the assessment of the laud itself is raised as soon aa im pro^emeuts are made. 464 PRINCIPLES OF ECONOMICS. be taxed also. As a simple matter of fact, all those persons who have the good fortune to be favorably affected by each actual turn of social development are likely to receive unearned incomes. It is just to tax all of these incomes whenever they can be reached with certainty ; but to tax them all away is quite a different matter. Finally, in the United States, there are practi- cally no restrictions upon the purchase or sale of land. Any unearned increment is likely to be distributed quite widely, because landownership is widely extended. 4. Mr. George's plan of confiscating the value of land without compensating present owners does not appeal to the conscience of the average American as just. Society has allowed private landownership in this coun- try ever since English settlement. The present owners have invested in land in good faith. If it should be decided inexpedient to continue our present system, the burden of the change should not be thrown upon the single class of landowners. II. Socialism. § 315. " Socialism is that contemplated system of in- dustrial society which proposes the abolition of private property in the great material instruments Definition and l ' & explanation of of production, and the substitution therefor of collective property ; and advocates the collective management of production, together with the distribution of social income by society, and private prop- erty in the larger proportion of this social income." 1 1 Ely, Socialism and Social Reform, p. 19. SOCIALISM. 465 Four important features common to nil socialistic schemes are contained in this definition of Prof. Ely's. 1 1. Socialists desire common or social own- The four car- ership of land and productive capital, the dinai elements . . • i £ l c i i- of socialism, important material factors ot production. This would require the abolition of private ownership of these forms of property, as allowed by our present laws. Some socialists have favored the compensation of present owners of land and productive capital ; others deny the justice or necessity of doing so. 2. Socialism means, in the second place, the organi- zation and management of productive enterprises by society. This means, of course, management by gov- ernment, either as constituted at present or as reformed under the socialistic rSgime. Mr. George, who favors the nationalization of land, would leave the management of industrial enterprises to private individuals. Social- ists hold that private management of industry leads to disastrous results. Under socialism, persons engaged in productive industry would become practically govern- ment employees. 3. In the third place, socialism means that the social income shall be distributed among individuals by the authority of the government, and according to some plan that will secure a just distribution of wealth. 4. Finally, socialism would allow private property in the incomes received by individuals from the govern- ment. Part of the income of society would be reserved 1 It must be understood that this explanation aims at essential features merely, and has special reference to the modern forms of socialism. 466 PRINCIPLES OF ECONOMICS. by the government for public purposes, as is done at present by our systems of public revenues. In our high- ways, parks, libraries, and schools, individuals receive at the present a considerable portion of their real incomes out of a common fund. It is possible to call any form of governmental activity socialistic. Our post-office is a socialistic institution in this sense of the term, and any person Ambiguous use of the term who prefers national to private ownership of soc sm. ^ e p og j. ^ ce j g a socialist, to that extent. Municipal ownership of water works is socialistic, and hundreds of our towns and cities have adopted this form of socialism. Those who are properly called socialists differ from the rest of us, who oppose their projects, sim- ply in the extent to which they favor social ownership and management of industrial enterprises. The term "socialist" is ignorantly or dishonestly applied as a term of reproach to any one who proposes that the govern- ment shall assume control of any new classes of enter- prises. People have ceased to be scared by the mere name of socialism. In the broad sense of the term, we are all socialists. Technically, however, socialism should mean the proposal to adopt social ownership and man- agement of all important productive enterprises, leaving practically nothing to private initiative. Few people in this country favor such a policy at the present time. 1 1 Iii order to avoid the reproach considered to accompany the word " socialist," i lie name of " nationalist " lias been adopted by many persons in this country who i'avor socialism. In Europe the word " collectivism" is used. SOCIALISM. 4G7 Socialism must not be confounded with anarchism. The anarchist believes that all control or coercion of one individual by another is wrong ; that Socia u sm a^ government implies such control, and is anarchism, necessarily a bad thing ; and that the worst traits of human nature have been caused by the repressive in- fluence of government. Therefore anarchists desire to overthrow all governments. With these abolished, anarchists profess to believe that men would voluntarily cooperate in some manner to effect such purposes as could not be secured by individual action. The socialist, desiring to place the control of all industry in the hands of the government, cannot well be an anarchist at the same time. As a matter of fact, socialists and anarch- ists have antagonized each other most bitterly. § 316. Some socialists have desired to secure their ends by sudden revolutionary measures. Such ideas have generally been given up, and intelligent ° J fo ' ' fo Revolutionary socialists now look forward to a more or and evoiution- i j i • t • t ii e ary socialism. less gradual socializing ot the means or pro- duction. At the present time evolutionary socialism takes one of two forms : First, it is looked upon merely as a gradual extension of existing governmental institutions. Governments already carry on many more branches of activity than people usually realize. One class of socialists, 1 therefore, looks forward to the as- sumption by the government of one branch of industry after another, as fast as the public can be convinced that i This class is represented by the English socialists of the Fabian Society. 4G8 PRINCIPLES OF ECONOMICS. such a course is desirable and necessary. The second group is represented by the German socialists, the fol- lowers of Karl Marx. They hold that socialism will be the inevitable result of known forces that operate in the economic world. These are the forces of modern capi- talistic production. The growing importance of capital in modern machine industry has replaced small-scale by large-scale production. At the present moment trusts and industrial combinations are alleged to be replacing individualistic production on a large scale. In the future all branches of production will be concentrated in the hands of a few monopolies ; and then governments will interfere to assume the ownership and direction of all industries. § 317. Socialism is not new, but is a very old theory that has reappeared constantly in one form or another, at least since the time of Plato. It has Socialism a very old been advanced often when a sharp separa- tion between the classes of rich and poor has brought the problem of poverty to the front. Ideals of political or social equality have been another cause of socialistic theories. 1 Plato's " Republic," with its pro- posals for the extremest subordination of individual life to the direction of the State, has for its background a sharp separation of classes, and a bitter conflict between rich and poor, that occurred not only in Athens but in most of the Grecian cities. In the sixteenth and seven- teenth centuries, the social distress caused by widespread 1 See ROSCHER, T. 237-239, for an interesting statement of the condi- tions favorable to the growth of socialism. SOCIALISM. 469 economic and political changes led to such works as Sir Thomas More's "Utopia" and Campanula's "City of the Sun." Again, in the eighteenth century, the misery existing in France before the Revolution furnished a fruit- ful field for socialistic speculations. Finally, since the Industrial Revolution, the increased importance of capi- tal has caused a sharper separation of capitalists and laborers, and has furnished the ground for the growth of modern socialism. This movement has been strength- ened by the growth of democratic political ideals. 1 § 31 8. Socialists criticise severely our present methods of producing wealth, and hold that production could be much more efficientlv managed under social- . . Critical exam- ism. Ihey urge that competitive methods ination of sc- are "planless." Producers now work at SuSitotta cross purposes ; mistakes are common ; and production . . , . of wealth, our industry is far less productive than it would be if managed on the largest possible scale, in accordance with comprehensive general plans. Sec- ondly, our present competitive methods cause a great deal of waste. Not only have we much unnecessary reduplication of plants, but also needless expenses for 1 The student would find it interesting to read Plato's " Republic"; see JowettIs " Dialogues of Plato," III. There is hardly a better criti- cism of socialism than that passed by Aristotle upon Plato's schemes ; see Aristotle's " Politics." Rk. II., Chaps. 3 and 5. Plato's " Republic" has been called " the fruitful parent of modern Utopias ; " and, after studying it, the student might read the socialistic romances contained in Morley's " Ideal Commonwealths." especially Moke's "Utopia" and Camf.vnella'? "City of the Sun." Then Mr. Bellamy's " Looking Rackward," the best known of the romances representing modern socialism, might be read in connection with these earlier writers. 470 PRINCIPLES OF ECONOMICS. advertising, traveling salesmen, and similar purposes. Thirdly, producers have a strong inducement at present to increase the value of their commodities by restricting the output, as is done by the anthracite coal monopoly. Society is poorer on account of the artificial scarcity created in this way. Again, socialists show that there is great waste in our methods of exchanging products. Many more people are engaged in wholesale and retail trade, especially in the latter, than are really needed. We must admit that there is a great deal of truth in all of these criticisms. But such an admission does not objections to necessarily lead to the acceptance of social- sociaiism as a - sm> For t ^ e wea k ness f socialism is even scheme for production, greater than that of the present system. 1. First of all, will socialism lead men to exert them- selves as actively as they do at present under the desire for pecuniary gain ? Socialists urge that the desire for social esteem is a powerful motive at present, and would prove still more so under their system. But while many people are influenced by the desire for social esteem, others, apparently, are not deeply affected by this motive. Moreover, social esteem of one kind or another can be gained at present by many actions that do not conduce to the real welfare of society; and it is not clear that, under socialism, public opinion would so change that men could not gain notoriety in ways that would be thoroughly harmful. Also socialists claim that altruistic motives may be expected to have greater force under a socialistic rigime. But we have no expe- rience that justifies us in assuming that the majority of SOCIALISM. 471 men will, in any immediate future, exert themselves as actively under the influence of such motives as they do at present under the stimulus of self-interest. Of course, the socialistic State might compel men to work. But would such labor be more effective than that of slaves or convicts ? 2. The difficulties of organizing and managing all industries on a national scale arc enormous. These difficulties would be especially great in industries like agriculture that do not lend themselves readily to large- scale production. Moreover, governmental management presents serious problems, chiefly the difficulty of secur- ing as honest and efficient administration as can be secured by private enterprise, at its best. Doubtless our methods of public administration can be improved, and would be further improved before the government should assume the control of industry. But we have no reason to believe that the government could avoid errors, or that, on the whole, it could carry on manu- factures and agriculture more successfully than they are conducted at present. 3. Another difficulty that socialism would encounter would be the determination of methods for distributing the labor force among the various employments. Some are much more pleasant or are esteemed more highly than others. Will it be possible for the government to apportion the more important or more desirable positions in such a way as to cause less dissatisfaction than at present? A very important question arises here. By eliminating incompetent persons from the 472 PRINCIPLES OF ECONOMICS. field of competition we manage fairly well at present to secure able management of industries ; and we offer the prospect of exceptional profits as a Be ward for special efficiency. Will the mass of people living under a socialistic government consent, by their votes or other- wise, to adequate methods of securing able business management ? Taking men as we find them at present, this may well be doubted. § 319. The main argument in favor of socialism has always been that it would secure a more just distribution , . of wealth than can possibly be brought about Socialism con- L J ° sideredasa by competition. Socialists have no difficulty distribution in showing that present methods fall far of wealth. sn0 rt of securing satisfactory results in many cases. But they have not always agreed as to what constitutes justice in distribution. At present, however, socialists are inclined to hold that equality of income would secure at least approximate justice. Without discussing the principles of distribution accord- ing to merit, which were advanced by earlier socialists, it is sufficient to say that equality of income would be the only practicable plan in a socialistic regime. The difficulties of having public authorities decide whose merit or whose need is greatest, to say nothing of the difficulty of inducing the majority of the people to assent to such decisions, is a fatal weakness in any plan except that of equality in distribution. Now, from a social point of view, equality in distri- bution is not desirable. Some men have far greater natural abilities than others. Society suffers a sei-i- socialism. 473 mis loss when a gifted person fails to secure the menus of developing- his special talents. For this reason it is socially desirable that people possessing / i i r © Equality in superior faculties should have the means of distribution is gratifying them; and this implies that they ^ esira e * must receive more than less talented persons secure. Our present distribution of wealth may be fairly criti- cised because it fails to secure to many talented persons the means of developing their faculties, so that they may render the highest service to society. But socialism, with its plan for equality of income, would be still more objectionable. 1 Finally, equality of income would be likely to remove that stimulus to invention and enter- prise to which we owe so much of our present economic progress. Socialists might conceivably secure an equal distribu- tion of social income by allotting to all individuals pre- cisely the same amounts of all kinds of _.„ _,_ . J Difficulty of commodities. But this would be an imprac- finding a value , . , , -li 11 denominator ticable arrangement, since all persons would under not want to secure exactly the same things. S0CiaUsm - Accordingly socialists declare that equality of incomes should mean equality of values. Then arises the question, How shall these values be determined and expressed ? 1 Some socialists urge that, under socialism, production would be so large that all men would be able to gratify every rational desire. But nothing could be further from the truth. Our present production, if evenly distributed, could not do more than secure a comfortable, but frugal, living to all. Under socialism there is abundant reason to question whether production would be even as large as it is under our present system. 47-4 PRINCIPLES OF ECONOMICS. Socialists say that value should depend upon the " aver* age labor time " required to produce a commodity. Each person should receive his income perhaps in the form of " labor checks " that should entitle him to goods representing so much labor time. We will grant that such a computation of the value of all commodities in terms of units of labor time has been made, although it would be possible to show that the differences between different grades of labor make it impossible to reduce all grades to terms of common unskilled labor. But, assuming that the labor unit is atta^nja&le, it could not work as a means of distributing incomes. For two goods may represent exactly the same amounts of labor, and yet one of them may be in much greater demand among consumers. If both are procurable at the same price expressed in terms of labor time, then the supply of the most desirable one will be exhausted immediately. Supply and demand cannot be equalized by fixing prices on the basis of labor time. Market prices must depend upon the marginal utility of the products to con- sumers. It is impossible to see how supply and demand can be equalized except by changing prices. Labor time is an impossible unit in which to express values. 1 § 320. Socialism, therefore, has fatal weaknesses, concluding whether considered as a scheme for the pro- considerations, duction or for the distribution of wealth. Those who favor it are often persons of the highest 1 This subject cannot he elaborated hero. See Ely, Socialism and Social Reform, 244-247; Hadlby, Economics, 93-90 ; Schafflb, Quintessence of Socialism, 77-89. SOCIALISM. 475 character, who are influenced by the desire to remedy the admitted evils of our present system. They believe that socialism would have beneficial moral effects, and that it would favor the growth of many of the best and highest elements of our civilization. But, if socialism is an impossible plan for the production and distribution of wealth, we shall have to reject it, although in many other respects it might offer an attractive programme. It may be well, furthermore, to suggest that socialism would probably endanger liberty of thought and action in important respects. With all branches of production ill the hands of the government, it would be difficult for any one to criticise the policy of the public authorities. Government officials would have extreme powers of annoying those who criticised their measures. It is doubtful whether a socialistic State would permit an agitation to be carried on against socialism, for instance. At present, people can find in private business a vantage ground from which they may freely criticise men and measures. Would a socialistic government furnish the paper, printing presses, postal facilities, and public halls necessary for free speech and public discussion hostile to itself? In conclusion, it may be said that socialists have often shown themselves to be useful critics of the existing economic order. The student should weigh carefully the criticisms advanced by such writers. While he may have to reject their principal proposals, he should not overlook the useful portions of their writings. Few people, it' any, would care to assert that existing methods of production arc above criticism, or that our 47G PRINCIPLES OF ECONOMICS. present methods of distribution secure exact justice. But this much can be affirmed : private enterprise has „ . „„ been able to increase in a marked man- The justifica- tion of private ner the production of wealth, and holds out individual a prospect of continued improvement ; the enterprise. present distribution of wealth has subserved fairly well the highest interests of our civilization, while the laborers, who make up the most numerous social class, have been able to improve constantly their posi- tion. Moreover, our present system secures reasonable opportunity for criticism and freedom for experimenta- tion ; so that it is possible to try to improve any features that are shown to be unsatisfactory. Rational criticism, enlightened public opinion, and resolute self-reliance in overcoming economic difficulties seem to offer the most practicable method of reforming and reshaping existing institutions. In some directions reform may best be secured by extending the activity of government. Such cases can be dealt with as they arise. We should feel glad to have socialists, or any other persons, point out the weak places of the existing economic order, or offer methods by which improvements can be effected. LITERATURE. 477 LITERATURE ON CHAPTER XV. On Land Nationalization : Ely, Economics, 365, 3GG ; George, Progress and Poverty; Hadley, Economics, 469-474; Pleiin, Public Finance, 106-109; Seligman, Essays in Taxation, 64-91-. Single Tax Debate, Journal of Social Science, XXVII. ; Walk eh, Political Economy, 407-433, Land and its Rent. On Socialism : Andrews. Institutes of Economics, 20-24 ; Bellamy, Looking Backward; Bohm-Bawerk, Capital and In- terest, 315-392 ; Dawson, German Socialism and Ferdinand Las- salle; Ely, Outlines of Economics, 308-315, French and German Socialism, Socialism and Social Reform ; Gide, Political Economy, 398-169 ; Graham, Socialism, New and Old ; Gronlund, The Cooperative Commonwealth ; Kirkup, Inquiry into Socialism, History of Socialism ; Laveleye, Socialism of To-day ; Marx, Capital ; Mill, Principles of Political Economy, Book II. Chaps. 1, 2, and 3; Morley, Ideal Commonwealths; Rae, Contemporary Socialism ; Roscher, Political Economy, I. 235-267 ; Schaffle, The Quintessence of Socialism ; Walker, Political Economy, 517- 524 ; Wools ey, Communism and Socialism. 478 PRINCIPLES OF ECONOMICS. CHAPTER XVI. THE ECONOMIC FUNCTIONS OF GOVERNMENT. I. Economic Functions Performed by Governments. § 321. Many times in the preceding chapters it haa been necessary to explain that the government plays an importance important part in our economic life, or to oi }^ e . discuss the advisability of having the gov- action of J ° ° governments, ernment perform some economic function rather than leave it to private enterprise. Most prac- tical economic questions involve directly or indirectly the question of governmental activity in economic affairs. This subject cannot be avoided by the economist, even if he desires to do so, and it will be desirable to con- sider this topic at this point before commencing the study of public expenditures and revenues. The economic § 322. It will be well to summarize the functions actu- Yar j ous economic functions which we have ally performed by government, found to be exercised by governments at the present time. First, governments aim to protect persons and to maintain older. Then they define and protect the Fundamental rights of property and contract. Personal rights. freedom, private property, and the right of contract are fundamental elements in our economic life. ECONOMIC FUNCTIONS OF GOVERNMENTS. 4 7'.) In order to secure the best results in industrial life, modern governments guarantee individuals the enjoy- ment of certain privileges. Patent rights, Guaranteed trade-marks, and copyrights are privileges P rivile e es - granted in order to stimulate the general activity of the people. Moreover, governments allow individuals to enjoy much freedom in the establishment of industries. This privilege is restricted when the government as- sumes the management of any enterprise, or regulates the conditions upon which individuals may carry on any business. In the third place, the government regulates the terms of competition in some cases where evil results would be produced on account of the unequal strength Regulation or of different individuals. Laws regulating equalization of ° D tie terms of the labor contract, regulating rates of inter- competition, est, regulating freight rates, or providing for the inspec- tion of food products, are examples. These laws limit nominal freedom, but may increase the real freedom of individuals in many cases. Oftentimes governments participate in private enter- prises. Such participation occurs when subsidies or bounties are bestowed by the government on participation private enterprises. These have taken the of government 11 in private form of gifts of land and money, as in the enterprises. United States, where millions of acres of land and mil- lions of dollars of money have been given to aid railroads. Sometimes the subsidy may take the form of a loan. Pro- tective duties are another case where the government gives aid to private enterprises. Again, for works of a 480 PRINCIPLES OF ECONOMICS. semi-public character, in which private enterprises must use public streets, or must secure a right of way through private property, the government grants franchises to individuals, i V Finally, governments carry on many useful public works, designed wholly or in part to promote industry. Roads, sewers, parks, harbor improvements, Administra- . . tion of useful consular services, collections of statistics, pu cwor . jjo-litliouses, dikes, coinage of money, sanitary provisions, educational facilities, postal facilities, water works, gas and electric lighting works, street and steam railways, and telegraph and express facilities are impor- tant examples. Some of these enterprises could not or would not be carried on by private individuals, because the benefit to the public is intangible or indefinite, and no sufficient return could be secured. Others might be left to private enterprise, and actually are conducted by private individuals in many cases. § 323. Prior to the present century, the governments of Europe had long endeavored to control nearly all ow and mod- branches °f economic activity in an extreme ern views of degree. 1 This was done from the theory the economic . . functions of that private enterprise is unable to accom- government. ^[[^ man y things that society needs to have done, or from the theory that there is a necessary antagonism between private and public interests. Thus it was thought, in the first case, that a nation could 1 Nearly the same thing was true in most of the American colonies. The economic life of the people, as well as their social and moral, was thought to need continual regulation. ECONOMIC FUNCTIONS OF GOVERNMENTS. 481 secure a sufficient stock of money only by regulating foreign commerce so as to make exports exceed imports continually. In the second case, it was believed that business men arc likely to make their profits at the expense of the community, and that restrictive laws are necessary to prevent this. 1 In the year 1776 Adam Smith published his " Wealth of Nations," combating vigorously the restrictive policy of European governments. He showed that Adam smith's private individuals could acquire large profits views - by supplying some real social need ; and that men, in pursuing their own personal interests, were commonly increasing the wealth of the society. Moreover, he proved that many of the restrictions placed upon private enterprise resulted, not in furthering social interests, but in preventing men from serving each other. He argued most ably that the desire of men to promote their indi- vidual interests, by establishing business enterprises and trading with their fellows, would usually produce results beneficial to society. He urged that the true way for a nation to become rich is to leave its citizens free to con- duct business as they desire. Partly through the influence of Adam Smith, partly through other causes, modern thought has favored the view that individuals, in seeking their own economic interests, are regularly promoting the welfare of society. 1 These theories form a body of economic doctrines known as mercan- tilism. They have sometimes been condemned too absolutely by modern economists. See Schmoller, The Mercantile System (edited by Ashley), for a more favorable view of mercantilism. 482 PRINCIPLES OF ECONOMICS. For this reason many of the old restrictions upon the establishment of industries, upon foreign commerce, upon the movements of money, upon the rela- Modern . views of tions oi laborers and employers, •were abol- f^c™ ntal ished dm ' in g the first half of the present "Laissez century. Many people were led to the belief f aire. " that government should have as little to do with economic matters as possible ; and held that " Laissez /aire, laissez passer" or " leave things free to take their own course," expresses the policy that should be followed. But the old restrictions upon industry were no sooner removed than people felt obliged to resort once more to governmental action to remedy disorders Reaction from the "Laissez which were found to exist in modern eco- po cy. nom | c j-£ e _ Factory acts and laws regulating corporations are instances of such action. More recently governments have begun to assume the management of enterprises that are natural monopolies, while the demand is made that more industries shall be brought under governmental control or ownership. This raises one of the most pressing economic problems. II. Examination of Modern Theories of Governmental Functions. § 324. To the question of the proper policy for Difference government to follow in respect to industry, of views many different answers arc given. It will on this ques- J ° tion. be helpful to classify the various views advanced. THEORIES OE GOVERNMENTAL FUNCTIONS. 483 § 325. Here, as elsewhere, the anarchists answer that government means control, and control is evil, in and of itself; so that the onlv proper policy is to Anarchism, abolish all government, and to leave indus- try to the voluntary actions of individuals. But no anarchist has ever been able to picture a society organ- ized without any control of one person by others. For all anarchists admit the necessity of securing common action by groups, or voluntary associations ; and when- ever conflicts of interest should arise between groups, the stronger must control the weaker. Therefore anarchism is as illogical as it is impossible. § 326. Extreme individualists resemble the anarchists in considering government an evil. But they regard it as a necessary evil ; necessary because of the Extreme ^ imperfections in man's moral nature. Men dividuaiism based upon should be left free to do as they please, so "natural long as they do not interfere with the equal ng rights of others. Government should do nothing ex- cept prevent such interference by one person with the equal rights of others. If men ever become moral enough to refrain from molesting each other, government will no longer be necessary. For the present, govern- ment should protect persons and property, and enforce contracts voluntarily made by sane adults. Beyond these "police powers" no wise government should go. Extreme" individualism is said to be based Criticismof upon the "natural rights" of man. The extreme indi- vidualism, principle that " every man is free to do that which he wills, provided he infringes not the equal 484 PRINCIPLES OF ECONOMICS. freedom of any other man " is said to be a revelation of what is naturally right. But men's ideas of what is nat- urally right differ so widely that most people have come to distrust the reliability of such revelations. Nearly all competent writers agree that our notions of rights are based upon considerations of the good or evil effects of our actions on society, that is, upon social utility. As- serting that a thing is a natural right is merely one way of advancing a personal opinion of what is socially desirable, without supporting the claim by arguments, Therefore we conclude that extreme individualism can be defended solely by showing that it leads to the best results when put into practice. Now, as a matter of fact, nobody has ever been able to put it into actual practice ; and we are justified in claiming that it is an impossible theory of governmental action. § 327. Most individualists have recognized that the rights of individuals and the functions of government individualism can be determined solely by considering general wei- what is most usef ul to society. Most econo- fare of society. m j s |- s a ^ t] ie present day hold such a view. They believe that the general good of society is the end of all economic organization, and that government should extend its functions into any field of economic activity where the best results can be secured from such a policy. But they believe that in most cases the gen- eral welfare is best promoted by leaving to the individ- ual a large measure of freedom. They believe in indi- vidual enterprise as the rule for economic activity, but favor governmental action whenever it can secure bet- THEORIES OF GOVERNMENTAL FUNCTIONS. 485 ter results in the long run. Views of this sort can be characterized as moderate individualism. They are well stated by Mr. Mill in the following words : — " But enough has been said to show that the admitted functions of government embrace a much wider field than can easily be included within the ring-fence of any restrictive definition, and that it is hardly possible to find any ground of justification common to them all, except the comprehensive one of general expediency ; nor to limit the interference of government by any uni- versal rule, save the simple and vague one, that it should never be admitted but when the case of expe- diency is strong." Individualists of this class support their claim that individual freedom leads to the best results in most cases by the following arguments : — tw„-,^ J D ° Detailed con- 1. They urge that private individuals are siderations of the arguments likely to know their best interests better f individuai- than the government can know them, and lsts ' that there is usually no antagonism between private and social interests. Whenever this is found not to hold true, governmental action is proper. Many cases can be enumerated in which individuals do not know their true interests, while in many instances there may be a direct opposition between private interest and public welfare. But individualists hold rightly that the rule is the other way. 2. Individualists argue that a private entrepreneur has a greater personal interest in the success of his undertaking than government officials often feel in pub- 486 PMNCIPLES OF ECONOMICS. lie enterprises. Furthermore, corrupt administration is liable to creep into public affairs. This argument is easily exaggerated, and it is to be expected that im- proved political methods may continually decrease the abuses of public administration. Yet something must be conceded to the stronger interest and greater in- ducements to efficiency experienced in much private industry. 3. Individualists notice that when governments carry on business undertakings, they may fall back upon taxa- tion as a means of making up possible deficits. If a private enterprise is poorly managed, the undertaker will incur constant loss, and will be driven out of busi- ness finally. But government enterprises, if badly ad- ministered, may fall back upon taxation, in some form or other, to make up the deficits. Hence an inefficient public undertaking which incurs constant loss may not be eliminated from the field of industry, as is the case with private enterprises. 4. Finally, individualists believe that freedom in eco- nomic affairs lias a great educational influence upon the people of a country. The experience of private busi- ness management often furnishes a valuable training in many important directions. Moreover, it is highly de- sirable that a people should be vigorously self-reliant, and should not be habitually dependent upon govern- mental action in too many things. Two quotations from Mr. Mill will serve to emphasize these points: "A people among whom there is no habit of sponta- neous action for a collective interest, who look habit- THEORIES OF GOVERNMENTAL FUNCTIONS. 487 aally to their government to command or prompt them in all matters of joint concern — who expect to have everything done for them, except what can be made an affair of mere habit and routine — have their faculties only half developed ; their education is defective in one of its most important branches." " It is therefore of supreme importance that all classes of the community, down to the lowest, should have much to do for them- selves ; that as great a demand should be made upon their intelligence and virtue as it is in any respect equal to ; that the government should not only leave as far as possible to their own faculties the conduct of whatever concerns themselves alone, but should suffer them, or rather encourage them, to manage as many as possible of their joint concerns by voluntary cooperation ; since this discussion and management of collective interests is the great school of that public spirit, and the great source of that intelligence of public affairs, which are always regarded as the distinctive character of the public of free countries." Among the economists who might be called individ- ualists of this class there are considerable differences concerning the exact extent of the functions Differences that they desire to see exercised by govern- amon? ment. Some of them approve of govern- individualists, mental action in many more cases than others. A second point of difference is found in the terms used to describe governmental action. Those who are inclined 60 restrict it often refer to "governmental interference in industry," and speak of it as a necessary evil rather 488 PRINCIPLES OF ECONOMICS. than a positive good. On the other hand, those econ- omists who favor a certain extension of State activity, do not hesitate to affirm that government is a necessary and beneficent factor in economic as in other depart- ments of social life. § 328. The views held by socialists concerning the functions of government do not need detailed discussion The views of m * n ^ s chapter. In general, socialists hold the socialists, that individual freedom and enterprise in economic affairs usually lead to harmful results, so that the socializing of all branches of industry is the true policy for the government to pursue. Socialists aim at the same end that the second class of individualists have in view, the general good of society. They differ from the individualists in the methods of securing their desired end. III. The Several Functions of Government Considered from the Point of View of Individualism. § 329. The author's belief has been that individualists are right in affirming that, in most economic affairs, Point of view individual enterprise and freedom secure of this work. resu it s tliat are most beneficial to society. But, in those cases where individual enterprise is impos- sible, or where freedom produces evil results that can be obviated by social action, there is a large and Important field where governmental activity is bene ficent. Governments should be viewed, therefore, as a useful and necessary agency for accomplishing purposes for which individual freedom or initiative is inade- THEORIES OF GOVERNMENTAL FUNCTIONS. 489 quate. From this point of view it is proposed to examine briefly the differences of opinion existing among individualists concerning eacli class of functions exercised by governments. § 330. In our classification of the economic functions of government, the definition and enforcement of the rights of persons, property, and contract I tic III ST CI3SS were placed first. Economists agree con- ofgovemmen- j.i j.«i»i cji e i- r tal functions, cerning the utility or these functions of government. It will appear, however, in the following paragraphs that there are differences of opinion in regard to the extent to which property and contract rights should be recognized. § 331. Concerning the general expediency of govern- mental grants of such privileges as patents, trade-marks, and copyrights, economists are substan- Thesecond tially agreed. Yet a very large number of class of functions. writers have called attention to abuses con- nected with these rights, and have desired a more careful definition or restriction of such privileges. General freedom in the establishment of industries is not called in question except in special cases. These exceptions are, first, industries where it is important that persons entering them should have an adequate preparation, such as professions and skilled trades ; and second, natural monopolies where attempted competition results in needless duplication of plants. § 332. Few will deny that government should equal- ize the terms of competition, when there is very serious inequality between the contracting parties, and when it 490 PRINCIPLES OF ECONOMICS. is clear that governmental regulation will remove the evils that arise from such inequality. Economists hold The third class different views concerning the expediency of functions. f some legislation in regulation of com- petition, because they differ as to the extent of the inequalities between the two parties, or because they doubt the efficiency of the remedies proposed, or because they believe that the contemplated restrictions will have worse social effects than the evils which it is desired to cure. Wise factory legislation and a reasonable control of railroads and local monopolies are favored by most economists. § 333. Economists are not inclined to favor bounties, subsidies, and protective duties. Such measures mean aiding some industries at the expense of all The fourth ° r class of taxpayers or consumers. This can be justi- fied only when the public necessity or social utility of the favored industry is extremely great. More- over, such a policy tends to corrupt politics, and to produce many abuses. On the other hand, many busi- ness men who stoutly oppose governmental regulation of corporations, of the labor contract, or of freight rates, on the ground that government ought not to meddle with private business, are very willing to favor bounties, subsidies to railroads, and protective duties. Concerning the question of franchises, it may be said that economists hold that valuable privileges of this sort should be paid for by the individuals who receive them, while the public should be guaranteed good service at reasonable rates. THEORIES OF GOVERNMENTAL FUNCTIONS. VA § 334. The last, class of governmental fund ions includes, as was shown, two fairly separate classes of useful public works. Roads, sewers, harbor The fifth class improvements, the publication of statistics, of f unctions - the maintenance of light-houses and dikes, the coinage of money, sanitary precautions, and public education are undertakings in which private enterprise has been proven to be inadequate or productive of bad results. No one but anarchists and extreme individualists would object to the policy of our present government in pro- viding these public works. But there is a doubt as to the expediency of having the government undertake other works that might conceivably be left to private enterprise. It is said that the gas and electric light industries, steam and street railroads, and the telegraph and ex- press businesses are suitable fields for private Governmental enterprise, and that governments should industrial not interfere with them. The student will ^"takingi. understand that the question of the advisability of pub- lic or private management of these industries is solely a question of social utility. This will be made clear by con- sidering that many people who oppose public ownership of these enterprises favor the national ownership of the post office and municipal ownership of water works. Those who favor public enterprise in these fields do so because experience has shown that all these industries inevitably become monopolies, and they prefer public to private monopoly. Those who oppose such a policy must admit the tendency to monopoly in these lines of business, and 492 PRINCIPLES OF ECONOMICS. must show that private management, either with or without governmental control, can assure the best re- sults to society. As a matter of fact, all arguments consciously or unconsciously come to precisely this posi- tion sooner or later. LITERATURE ON CHAPTER XVI. General References : Andrews, Institutes of Economics, 14-22 ; Adams, Relation of the State to Industrial Action ; Bastable, Public Finance, 37-53 ; Cairnes, Essays on Political Economy, 232-264 ; Ely, Economics, 249-307, Socialism and Social Reform, 253-354; Farrer, The State in its relation to Trade; Hadley, Economics, 8-23, 390-403 ; Hoffman, The Sphere of the State ; Jevons, The State in its relation to Labour ; Mill, Principles of Political Economy, Book V. Chaps. 1 and 11, On Liberty; Sidg- wick, Political Economy, 404-497, Elements of Politics, Chaps. 4, 9, 10 ; Smith, Wealth of Nations, Book IV. Chap. 9, end of chapter, Book V. Chap. 1, especially Part III. ; Willoughby, The Nature of the State, 309-350; Wilson, The State, 637-668. References on Extreme Individualism: Donisthorpe, Indi- vidualism, A System of Politics ; Mackay, A Plea for Liberty, A Policy of Free Exchange ; Spencer, The Man versus the State; Sumner, What Social Classes Owe Each Other. References to Discussion of Doctrines of Economists : Cohn, History of Political Economy; Cossa, Introduction to the Study of Political Economy; Ingram, History of Political Economy. PUBLIC EXPENDITURES. 493 CHAPTER XVII. GOVERNMENTAL EXPENDITURES AND REVENUES. I. Public Expenditures. § 335. In order that governments may exercise the functions that have just been described, it is necessary that they should be able to command the Public Finance. men and the commodities that are con- stantly required for the public service. In modern countries governments supply these needs by collecting sums of money that can be used for hiring public offi- cials and purchasing commodities. The economist is obliged to study with care the manner in which personal services or material objects are thus secured for the satisfaction of the public, or collective, wants of society. This branch of study is of such importance that it has often been accorded almost the position of an indepen- dent science, and the name Public Finance has been ap- plied to that department of economic investigation which deals with governmental expenditures and revenues. § 336. The objects of governmental expenditure are so multifarious that it is extremely difficult to group them in a simple and logical classification, „, „ „ r ' Classification but a brief survey of the various functions of public ex- enumerated in the last chapter will indicate the chief items of public expense. In the limited space 494 PRINCIPLES OF ECONOMICS. at our disposal it will be advisable to attempt nothing more in the way of general classification, and to devote our attention to the expenditures of our national, state, and local governments in the United States. mj _. In 1890 the federal census stated the Total expend- itures in the total expenditures of our national, state, and United States. . . ., ,, local governments as follows : — National government, including postal service . . States and territories, except for public common schools Counties, except for public common schools . . Municipalities, except for public common schools Public common schools Total $352,218,614 77,105,911 114,575,401 232,988,592 139,065.537 §915,954,055 It will be seen that the expenditures of the federal government formed thirty-nine per cent of the total, and that those of the states and territories amounted to only nine per cent ; while local expenditures, includ- ing those for public schools, made up fifty-two per cent of the total cost of government. In 1850, the expenses for national purposes amounted to forty-nine per cent of the total outlay, and it is evident that there has been a marked increase since that time in the demands which local governments have made upon the public resources. The same tendency can be observed in other countries, and such a preponderance of local expenditures is due to the increasing number and cost of the services which the local political units render to their citizens. The states occupy a position of relatively minor financial importance ; but, in some cases, there has been a marked PUBLIC EXPENDITURES. 495 increase in their expenditures in recent years. Thus, in New York, the state government expended $13,070,881 in 1890, and .1520,020,022 in 1898. This increase has been due to the assumption of new branches of public administration, such as the care of the insane ; and other states arc manifesting a disposition to enlarge their spheres of activity. During the fiscal year 1897, 1 the net ex- Federal ex- peuditures of our federal government were as follows : — Interest on public debt Pensions Departments of War and Navy 2 Deficiency of postal revenue and other postal expenses All other expenses Total $37,791,110 141,053,165 72,104,497 13,621,274 101,204,113 $365,774,159 During this year the Post Office Department spent 196,286,000, but $82,665,000 of this amount was met by the postal revenues. Only the deficiency of $13,621,000 is included in this statement of the net expenditures. The first three items in our table represent almost en- tirely our expenses for military purposes, past and pres- ent, 3 and they amount in the aggregate to $250,948,000. 1 This year was selected in preference to 1898, since the conditions then prevailing were more nearly normal than those attending the period of the war with Spain. - This is exclusive of $13,682,000 expended under the War Department for improvement of rivers and harbors. This sum is included in the last item of the table. ;i Of course a part of the public debt has been contracted in recent years for other than military expenses, and the interest thus accruing 496 PRINCIPLES OF ECONOMICS. This is more than twice the total expenditures of the federal government for all other purposes. 1 The amount paid, in 1897 for pensions alone was greater than the entire cost of our public schools in the year 1890. Reckless pension legislation has increased the outlays for this purpose from $80,288,000 in the year 1888 to $147,452,000 in 1898. The last item in our table repre- sents the expense of administering justice, improving rivers and harbors, maintaining Congress and the presi- dent, and. conducting the departments of the Treasury, Interior, State, Justice, and Agriculture. In 1890 the total expenditure of the state and local governments was placed by the census at about state and local $569,000,000. The principal objects of cx- expenditures. p ense were as f H ows : — All educational purposes Roads, bridges, and sewers Construction and maintenance of public buildings and works Interest on public debt Charities and gratuities Police Judicial expenses Fire Penal and reformatory institutions Lighting $145 72, 52. 46. 39, 23 18, 16, 12, 11, ,583,115 262,023 463,197 649,139 958,816 934,376 721,383 423,820 381,425 363,780 should be deducted from any estimate of military outlays. Also the ex- penditures attributed to the War and Navy Departments include some minor items that are not military expenses. But it is not possible to separate these from the other expenses of those departments. 1 In this respect the United States does not differ from other countries, for a very large proportion of national expenditures is everywhere re- quired for military purposes or for interest on public debts contracted principally for the prosecution of wars. PUBLIC EXPENDITURES. 497 The student can most advantageously supplement these general data taken from the federal census, by a study of the financial reports of his town, county, or state. Indeed, such investigation should accompany class-room work with both public expenditures and public revenues. § 337. In all countries governmental expenditures are increasing in a marked degree. Between 1830 and 1890, the national expenditures of the various _ _ uu ^ 1 The growth of states of Europe rose from four to eleven public ex- dollars per capita, and the rate of growth was even more rapid in the later than in the earlier decades of that period. In the United States federal expenditures rose from $1.42 to $5.07 per capita between 1840 and 1890, and the budgets of our local political units have shown a constant tendency to increase. This world-wide phenomenon has been viewed with great alarm by many persons, who have attributed it to profusion or corruption in governmental Its causes. affairs. But two considerations need to be borne in mind by the student of financial problems. First, even if per capita expenditures have become larger, it is certain that wealth also has increased ; so that the greater public outlay may not represent an in- creased burden relatively to the resources of the people. In the United States, at any rate, it is quite probable that such has been the case. In the second place it is certain that the larger expenditures are, in considerable measure, the result of an enlargement of the functions that governments have been called upon to perform. 32 498 PRINCIPLES OF ECONOMICS. This fact can be most clearly seen in the case of local expenditures, where the increase has been very marked. Nevertheless it cannot be denied that probably all gov- ernments are imposing upon their citizens heavier bur- dens than would be required under a wiser or more honest management of public affairs. II. Public Revenues. § 338. Public revenues are as difficult to classify as public expenditures have proved to be, 1 but it will classification suffice for our present purpose to recognize enues. six main branches of income. § 339. The first branch of income includes revenues derived from domains and industries. Public domains i. Revenue are lands that are retained in the posses- from domains s j on f ^ ne government. Many European and public in- ° J l dustries. states possess agricultural lands that are cultivated under public management or leased to citizens. Mines, also, sometimes form a part of the domain, and are operated in a similar manner ; while the need of a careful husbanding of forest resources has led to the public ownership and management of forests. In some of the states of the German Empire the income from domains and forests forms from seven to fifteen per cent of the total revenues. In the United States a different policy has been followed. Our federal 1 For the most recent suggestions upon the subject see Seligman, Essays in Taxation, 265-304 ; Plehn, Public Finance, f>9-82 ; Adams, Science of Finance, 219-229 ; Hapley, Economics, 447-449. PUBLIC REVENUES. 499 government has possessed an enormous public domain (§ 7), but this has been allowed to pass largely into private ownership, upon the theory that the resources of the country would be most rapidly developed in this way. Receipts from the sale of public lands now form but an insignificant item in the federal revenues. Governments conduct many kinds of public industries, such as water works, gas and electric-lighting plants, street and steam railways, and postal and p U Mic indus- telegraph systems. In some cases these trles - are operated at a loss, as is the case with the postal service of the United States, where there is an annual deficit of ten or twelve million dollars (§ 336). In other instances a profit is derived from these industries, as in Prussia, where the railroads yield a surplus of about $ 30,000,000 annually, or in England, France, and Germany, where a substantial net revenue is secured from the post office. In general it may be said that these industries were not brought under public man- agement primarily for the sake of revenue, since vari- ous social or political considerations contributed to bring about this result. Sometimes it was desired to avoid the evils of private monopoly, at others the purpose was to extend the facilities offered by these industries more widely than private enterprise could or would do. When it has seemed desirable to encourage the widest possible use of any of these commodities or services, all thought of revenue has been deliberately renounced, and the prices exacted have been reduced to the lowest possible figure. This is true of the water 500 PRINCIPLES OF ECONOMICS. supply of large cities and of the postal service in the United States. In general there is a strong tendency on the part of the public to demand lower charges rather than a large revenue from these undertakings. In a few cases governments conduct business under- takings purely as a means of raising revenues. Such Fiscal mon- enterprises are called fiscal monopolies, and opoiies. are f oun( j i n S ome countries of Europe. Thus France monopolizes the manufacture of tobacco, and endeavors to derive from this source the largest possible monopoly profits. This, however, is merely a substitute for internal taxes upon tobacco, which, it was found, could not be made equally effective as a source of revenue. In such cases, therefore, we are dealing with what is really a form of taxation. In many American towns and cities the work oi supplying the people with water, transportation, and semi-pubiic in- lighting facilities has been left to privato dustries. corporations, which have been given fran- chises to use the streets in the conduct of their enter- prises. All of these industries, we have seen (§ 204), are certain to prove natural monopolies ; and, as a rule, are likely to become very profitable. Moreover, they are virtually performing a public function, which the municipality concedes to them instead of reserving to itself. In all such cases, therefore, the same ques- 1 tions arise that confront any government when it un- dertakes a similar enterprise : Shall a large revenue be secured by requiring the private corporations to make adequate payment for the valuable franchises PUBLIC REVENUES. 501 granted to them ; or shall the companies be compelled to fix prices at a low rate that will encourage the widest possible use of the services supplied? In the past, American municipalities have failed to attain either of these ends, and have given away franchises without exacting any adequate return for the privilege of ex- ercising these semi-public functions. Such a policy amounts to a shameful squandering of public resources. If a wiser course is followed in the future, our cities can defray a large part of their expenses out of the receipts from public franchises. § 340. Fees constitute a second form of public rev- enue. Governments are constantly performing many services for particular individuals who re- ceive thereby a special benefit. It is con- sidered just to demand from such citizens the payment of a part or the whole of the expense which is incurred in the performance of such services, and fees are charged upon such occasions. We may, therefore, define a fee as " a payment to defray the cost of each recurring service undertaken by the government pri- marily in the public interest, but conferring a measur- able special advantage on the fee-payer." 1 Probate fees, court charges, fees for recording deeds and mort- gages or for issuing marriage licenses, are common examples of this form of public revenue. If the sums exacted exceed the cost of performing the service, then the surplus over the cost is theoretically a tax upon a special class of persons, viz.: those who are 1 Seligmax, Essays in Taxation, 304. 502 PRINCIPLES OF ECONOMICS. called upon to pay the fees. In practice, however, revenues of this class are called fees irrespective of the precise relation between the alnount collected and the cost of the service. § 341. A third branch of revenue comprises receipts of a very miscellaneous character. Fines and penal- 3. Misceiiane- ties form & small item of income. Some- ous revenues, tirues property reverts to the government upon the failure of heirs. In a number of countries public lotteries are still maintained, and are made to yield considerable income. In 1898 Italy secured about $13,000,000 from this source. Finally, govern- ments are occasionally the recipients of gifts. These usually are for some specific purpose, as a park, a library, or a schoolhouse, and do not form a part of the general public revenues. § 342. A fourth form of revenue has become very important in the finances of American municipalities, 4. special as- but has been less often utilized in other sessments. countries. This is the special assessment, which may be defined as 1 "a compulsory contribution, levied in proportion to the special benefits derived, to defray the cost of a specific improvement to property undertaken in the public interest." When new streets are opened or old ones are paved, when drains and sewers are constructed, or when public squares or parks are laid out, the owners of adjoining real estate, which is enhanced in value as a result of such improvements, may justly be called upon to pay a part or even the whole of 1 Seligman, Essays in Taxation, 283. PUBLIC REVENUES. 503 the cost of such public works. The entire community may be interested in such improvements ; and, accord- ingly, commonly defrays a part of the expense out of its general revenues. But the owners of abutting real estate derive a special, measurable benefit from such public works, and should in justice bear a part of the burden thus incurred. Special assessments have become an important and probably a permanent feature of American municipal finance, since they have proved well adapted to the needs of young and rapidly growing cities. In 1891 the statistics of twenty-five of our larg- est cities showed that receipts from special assessments amounted to 119,780,000, which was slightly more than eighteen per cent of the sums raised by general taxes for that year. § 343. Public loans must be included in any state- ment of the forms of governmental revenue. Of course the receipts secured by public borrowing s p,,,,^ are of a temporary character, and carry with loans - them the necessity of ultimate repayment. But genera- tions and even centuries sometimes elapse before such debts are extinguished, so that loans may assume a rela- tively permanent character. The forms of public bor- rowing are many, and it will be possible to mention here only those which are of most importance in the United States. Treasury notes are often issued to meet tem- porary deficits. These notes are to remain outstanding until they can be redeemed out of the proceeds of cur- rent taxes or from the sale of bonds. Government bonds are obligations that run for a term of years, 504 PRINCIPLES OF ECONOMICS. being redeemable at a certain fixed date. They meet the demands of lenders who desire to secure a relatively permanent investment. When such bonds mature, they are often re-funded, i. e. redeemed by contracting new loans, frequently at a lower rate of interest. Finally, governments may contract forced loans by issuing a paper currency, as was done during our Civil War. By this means the property of citizens is seized and applied to the public service. It is said that governments may advantageously borrow in this manner without having to pay interest upon their debt. But any possible sav- ing in this direction is many times outweighed by the disastrous results of a paper-money policy (§ 158). Public loans are contracted for various purposes. In cases of great emergency, as, for instance, the outbreak The objects of a war, governments have resorted to for which borrowing in order to secure the large sums loans are con- ° ° tracted. that are suddenly demanded. Such a course throws the immediate burdens upon the people who in- vest in public securities, and taxpayers are for the time being relieved. The ultimate burdens devolve upon future taxpayers, who are called upon to supply the funds required for paying the principal and interest of the debt. A second occasion for borrowing arises when some public work is to be undertaken or a public indus- try is to be established. For these purposes funds can be secured most easily by borrowing, since great hard- ships would arise from the attempt to raise all the nec- essary money by current taxation. In case the proceeds of the loans are invested in some productive industry PUBLIC REVENUES. 505 that will yield a clear income sufficient to pay both in- terest and principal, the debt contracted is offset by valuable assets, and forms no real burden. With all other public works, which yield either no money income or less than is sufficient to make complete provision for the debt, it is highly important to remember that such undertakings constitute a real financial burden, even though they are plainly seen to be beneficial to society in the highest degree. Finally, governments have re- sorted to borrowing when the existing taxation has failed to supply the funds needed for current expenditures. When such a deficit is due to accidental and temporary causes, the loans thus contracted may be repaid out of the surplus revenues of subsequent years, and no harm may be done. But sometimes governments have con- tinued to make up recurrent deficits by means of con- tinued borrowing. Such a policy merely postpones the evil day when either bankruptcy or heavy increases of taxation will become inevitable, and throws upon the future a burden that ought to be borne by the present. § 344. Taxes constitute the final and most important branch of public revenue. They may be defined as compulsory contributions exacted by govern- 6. Taxes. ments from persons within their jurisdictions, for the purpose of defraying general public expenses. The at- tention of the student should be called to the important points of difference between taxes and some of the forms of revenue previously described. It was seen that a fee is exacted only from persons for whom the government performs some special service, and that special assess- 506 PRINCIPLES OF ECONOMICS. ments are collected from people whose property has been directly and measurably enhanced in value as a result of some public improvement. In both cases the reason and justification for such exactions are to be found in the direct and measurable benefits conferred upon par- ticular persons. In the case of taxes, however, the cir- cumstances are entirely different. The actions of the government in protecting persons and property and in ministering to the general public welfare in other ways do not confer upon any particular citizen a distinct and measurable benefit. They are of the highest importance to all people ; but they confer a common benefit upon all, and it is impossible to compute the precise advan- tages that accrue to individual citizens. For this reason all persons within the jurisdiction of the government may be called upon to contribute to its support, and taxes are properly defined as compulsory contributions designed to meet the general public expenses. In former times governments were expected to depend upon other means of support, and to call for taxes only Position of in cases of special emergency. The king was S^v? su PP osed " to live of his own " that is > to nues. support his establishment with the revenues from his domains and from certain fiscal prerogatives. Only in case of war, or upon some other extraordinary occasion, was he expected to call upon his subjects for contributions of a part of their property. Long after taxation had become a usual and regular source of reve- nue, writers upon finance continued to speak of it as an extraordinary and occasional expedient. In this coun- PUBLIC REVENUES. 507 try, the Assembly of Pennsylvania, as late as 1755, ad- vanced the following theory of taxation in that province. Originally the government was expected to find support from the proceeds of quit rents from the lands of the province, which belonged, of course, to the proprietors. Then licenses and fees were " pitched upon " for a second means of support. " But Governors, a Sort of Officers not easily satisfied with Salary, complaining that these were insufficient to maintain suitably the Dignity of their Station, occasional Presents were added from Time to Time ; and those at Length came to be expected as of Right, which, if conceded to, and established by, the People would have made a third Support." But in all countries taxation has now become the chief source of public revenue ; so much so, in fact, that we are inclined to forget or neglect the other forms of income. The justification for the action of government in com- pelling its citizens to contribute to its support is to be found in the necessity of maintaining some . . ° The justifica- agency through which collective aetion for uonof public purposes may be secured. If the necessity and usefulness of having a government are ad- mitted, then the duty of maintaining it is established ; and experience has shown that taxation is an indispen- sable means of support. As a government may properly, in certain circumstances, demand the lives of its citizens, so also may it command their fortunes for the public ser- vice. But this justification of taxation can be urged only in behalf of taxes levied for useful and necessary objects of expenditure, and applied economically and honestly to 508 PRINCIPLES OF ECONOMICS. such purposes. Unless these conditions are fulfilled, taxation becomes virtually robbery, even though prac- tised under the guise of law. § 345. From the beginning to the end of his study of this subject the student is confronted by the question, What constitutes "justice in taxation ? A What consti- J tutes justice in commonly accepted theory in the United States has been that the taxes demanded from each citizen should be proportioned to the benefits that he derives from the protection and other services rendered by his government. But this answer is wholly unsatisfactory because it is impossible to measure in any tangible way the benefits that any individual receives from most forms of governmental activity. Whenever such a calculation of benefits is possible, the persons who receive a special benefit are called upon to defray a part or the whole of the cost of the service rendered, as is the case with fees or special assessments. But taxes are levied for defraying general expenses, in which no meas- urement of particular benefits is possible. Moreover, if such a calculation could be made, it might be found that the poor, the weak, and the defenceless receive greater benefits than the rich and the strong derive from the action of the government in protecting persons and prop- erty ; so that this theory would necessitate such an apportionment of taxes as would throw the burden of public expenditures upon the weakest members of society. A more satisfactory theory is that each citizen should share in the public burdens according to his ability to PUBLIC REVENUES. 509 bear them, and that faculty should be the basis for the apportionment of taxes. Within a family, a church, or a fraternal organization this principle is fol- The "faculty lowed ; and each person is expected to con- Xhtor ^ : ' tribute according to his ability whenever the attempt is made to apportion common burdens upon a just basis. But this theory gives us merely a very general principle whose application is somewhat difficult, for it is not easy to determine a perfect method of measuring each person's faculty, or ability. Such a measure cannot be found in a person's expenditures, because the possessors of large incomes do not consume proportionately more than peo- ple of moderate means. What a person consumes may be a measure of his necessities instead of his ability, as can be seen by considering the case of a man who has a family to support out of a moderate or small income. Property is often considered a fair practical criterion of a taxpayer's ability, and is certainly a better standard than expenditure can ever be. But such a measure is far from perfect. All property is not equally productive, and some of it may be unproductive or even a positive burden upon the owner. Besides this, many men who have little accumulated wealth receive wages and salaries from their labor or professional services, and are able to pay much heavier taxes than their property would in- dicate. Finally, revenue has been suggested as the proper measure of faculty. This is probably superior to property, but is not entirely unexceptionable, because revenue, like property, is not a uniform and invariable test. In the first place, an income derived wholly from 510 PRINCIPLES OF ECONOMICS. personal exertions does not indicate the same ability that an equal revenue derived from invested property repre- sents. An income of the first kind terminates when the ability to labor ceases, so that its recipient must save a part of it in order to provide for the future ; while the man who possesses a funded income is under no such necessity. In the second place, ability varies with the demands made upon each person's resources. Two in- comes may be equal, but the recipient of one may be a single man, while the recipient of the other may have an expensive family to support. Under such circum- stances equal incomes do not indicate equal ability. But even if a perfect measure of faculty is difficult of attainment, it is possible to secure approximate justice in apportioning the burden of taxation. Rev- The practical £ r ° measurement enue is a better measure of ability than any other that has been suggested, and some- thing may be done to correct the inequalities that may result from such a standard. Funded incomes may be taxed more heavily than those derived from personal exertions. This can be accomplished by imposing taxes upon property in addition to taxes upon incomes. Fur- thermore a certain minimum sum may be exempted from the operation of taxes that are levied directly upon rev- enue, and a rough allowance can in this way be made for the demands which the maintenance of a family makes upon the possessors of small incomes. § 346. Associated with the problem of justice in tax- ation is the question whether the tax-rate should be proportional or progressive. A tax is proportional when PUBLIC REVENUES. 611 it imposes a fixed. rate, say two per cent of the value of all objects assessed, irrespective of the total amount of the property or income of each tax-payer. Taxes are regressive when the rate in- and progres- , P . . sive taxation. creases as tiie amount 01 property or income taxed decreases. Thus a fixed business license tax of twenty dollars upon all retail storekeepers would be regressive, since the rate of taxation would increase as the size of the business decreased. Finally, taxes are progressive when the rate increases as the taxable prop- erty or income increases. Thus a progressive income tax may impose a rate of one per cent upon incomes of $1,000 or less, and may levy higher rates upon larger incomes. The injustice of a regressive tax must be evident to all, but there is a difference of opinion concerning the merits of proportional and progressive tax- conflict of ation. The opponents of a progressive rate °^ iaion - denounce it loudly as a measure of confiscation ; but it seems probable that a progressive tax, if it can be rigidly collected from the larger incomes, corresponds more nearly than a proportional tax to the demands of justice. This is because, as income increases, ability to bear pub- lic burdens probably increases at even a more rapid rate. A tax of two per cent may mean the sacrifice of articles of decency and necessity for a man who must support a family out of an income of $500, while a man who en- joys an income of $10,000 will feel but slightly the pay- ment of a tax of the same rate. More than this, the possession of a large income gives a person a great 512 PRINCIPLES OF ECONOMICS. advantage in the acquisition of future riches, because it is the first thousand dollars of a fortune that is hardest to acquire, since wealth begets wealth. Such considera- tions seem to justify a moderate increase of the rate of taxation as fast as the property or income increases. But this is true only upon the condition that the tax is well administered and rigidly collected. Great practical difficulties are encountered at precisely this point. In this country proportional taxes upon property or income are poorly enforced, and fall with undue weight upon persons of small or moderate means. Until we have administrative machinery that will enable us to reach large fortunes with certainty, progressive taxation would probably serve only to increase the inequalities that in- here in our existing tax systems. 1 § 347. Writers upon finance have commonly made a distinction between direct and indirect taxes. The Direct and in- former are said to be levied directly upon direct taxes. £ ne p erson w ho has to bear the burden of them ; while the latter are collected in the first instance from people who add the amount of the tax to the prices of commodities, and thus shift the burden upon the ultimate consumers of the articles taxed. Income, poll, property, and inheritance taxes are called direct ; and customs and excise taxes are considered to be in- direct. In some cases this distinction is easily drawn. Poll or inheritance taxes are clearly borne by the very 1 Tii the case of inheritance taxes it may ho possible to enforce with reasonable certainty a progressive rate, since we have, as will he explained later, fairly satisfactory methods of reaching the larger estates. PUBLIC REVENUES. 513 persons who arc called upon to pay them, and most of our customs and excise taxes ultimately fall upon other people than those from whom the government collects them. But other cases present considerable difficulty. If I import goods for my own use, without resorting to any middleman, the customs duty will fall directly upon me. Again it is often difficult to determine who will ultimately bear the burden of such a direct tax as that upon property. In some cases the tax can be shifted from the landlord to the tenant, as will be explained in another place. Such facts as these seem to deprive this distinction between direct and indirect taxes of strict scientific validity. § 348. If taxes are honestly and wisely expended, each citizen secures a large return for the sums that he contributes for the support of the govern- The "magic 11 to fund" de- ment. But it should always be remembered lusion. that a tax is a deduction from the wealth of the com- munity and a burden upon the taxpayers. In a New England town-meeting the truth of this statement is keenly realized whenever public expenditures are author- ized. But when the operations of government are further removed from the scrutiny of the people, and revenues are raised by customs and excise duties which are con- cealed in the prices of commodities, or by corporation and inheritance taxes which are less felt by the mass of the citizens, there is danger that this fact may be overlooked. Some ten years ago the federal govern- ment annually collected surplus revenue that amounted to even more than one hundred million dollars, and the 33 514 PRINCIPLES OF ECONOMICS. evils of such a condition were not clearly recognized by the people. The thoughtful student hardly needs to be told that taxation can furnish the government with no " magic fund," out of which lavish expenditures can be made without cost to anybody. Yet it sometimes appears that this delusion is more commonly entertained than it is pleasant to believe. The only result of popu- lar error upon this point must be extravagance and cor- ruption in the management of public expenditures. The correct principle for the guidance of all governments in matters of taxation was finely stated in Pennsylvania's first constitution, which was adopted in 1776. Here it is declared that " the purpose for which any tax is to be raised ought to appear clearly to the legislature to be of more service to the community than the money would be, if not collected." III. Taxation in the United States. § 349. Our federal government has always derived a very large part of its revenues from customs duties, customs These are taxes imposed upon commodities taxes - that are imported into a country or exported from it. Since the Constitution of the United States provides that no " tax or duty shall be laid on articles exported from any State," the federal customs duties have been imposed only upon imports. 1 Prior to the 1 In official terminology our customs revenues include tonnage duties imposed upon shipping. These duties brought in only $844,095 in 1898, and will require no further discussion. But see § 41. TAXATION IN THE UNITED STATES. 515 Civil War these taxes had usually furnished in times of peace nearly the whole of the national revenues. In 1860, for instance, the customs receipts amounted to 1*53,187,000, while the total revenues were only 156,054,000. Other taxes now occupy an important place in our federal budget, but customs duties still yield about half of the ordinary receipts from taxation. We have already seen that customs duties may be either specific or ad valorem (§ 238). The latter are open to the objection that they sometimes specific and ad valorem lead to undervaluation of imports, and facili- rates, tate frauds in the collection of revenues. This danger is a real one unless the imports are of such a character that the customs-house officials can readily ascertain their true values. Specific duties have the advantage of being easier to administer and more difficult to evade, but they too are objectionable in one important respect. Goods of the same general character differ widely in value, and a specific duty imposed upon an entire class of imports falls with undue weight upon the cheaper articles. Sometimes attempts are made to avoid such regressive taxation by classifying commodities of the same kind according to their value, and grading the duties accordingly. But this classification can be only of a rough character, and it introduces the principle of ad valorem taxation. Our present tariff laws employ both kinds of duties, but the measure passed in 1898 greatly increased the use of specific rates. If customs taxes are to yield a large revenue, the duties must be imposed upon articles of general con- •516 PRINCIPLES OF ECONOMICS. sumption. The bulk of our customs receipts has always come from a few such commodities. Thus, in 1897, the operation of duties on sugar, molasses, and tobacco yielded customs taxes. $62,300,000, or more than one third of the total customs revenues. With each commodity taxed there is a certain rate of duty that will bring in the largest returns to the treasury. If the demand is elastic, as in the case of luxuries, the rate that yields the largest revenue will be relatively low, because a higher tax diminishes the consumption more than it increases the receipts from the goods actually imported. 1 Articles of common and necessary use, however, can usually bear higher rates. But tariffs that impose high duties upon necessities are objectionable because they burden many industries by taxing heavily the raw materials used, and because they rest with unequal weight upon the masses of the people. A family with an income of $10,000 cannot consume twenty times as much of these commodities as twenty families with incomes of $500 each. Therefore a tariff constructed upon this principle is a form of regressive taxation. When the chief purpose of the tariff is to protect certain industries, duties are sometimes placed at such Protective a m S^ figure as to prove almost prohibitory. duties. Such a policy sacrifices revenue for the sake of protection. In this country most of our protective duties have not been raised sufficiently to prohibit all 1 The student who lias read ( 'hapler XII. will understand that customs taxes, although collected from Importers, are regularly added to the prices of commodities and paid l>y consumers. For exceptions to this principle, .sec that chapter. TAXATION IN THE UNITED STATES. 517 importations, but they have often served to decrease the receipts from certain commodities. Another effect of protective duties is that they tend to take from the consumer more than the government receives in the form of a tax. The prices of the goods supplied by domestic producers arc usually increased somewhat by the imposition of such duties, and the consumer must pay these higher prices as well as the duties collected at the custom-house. Customs revenues are often called inelastic because their amount cannot be readily changed to suit the needs of the government. A tariff can- These taxes not be revised every year without injury to are uielastic - business ; and, when the rates have once been deter- mined, the receipts will depend upon the volume of goods imported into the country. In 1893 the customs revenue of the United States amounted to $203,355,000 ; but in the following year it fell to $131,818,000, largely as a result of the prevailing industrial depression. In time of war these receipts are likely to decrease at the very time when the government is most in need of revenue, as we learned to our cost in 1812 and 1861. It will be evident that, considered by themselves, customs duties are open to grave objections as a sole source of revenue, but some of these diffi- culties disappear when such taxes form onc uslons ' merely a part of a general revenue system. It is cer- tain that the tendency of this form of taxation is to throw a disproportionate burden upon those people who are least able to contribute to the support of the govern- 518 PRINCIPLES OF ECONOMICS. ment. But this difficulty may be partly remedied by imposing other taxes that will oblige persons of large resources to pay in proportion to their means. Then the difficulties that arise from the inelasticity of cus- toms revenues may be obviated by levying other taxes whose yield can be easily increased whenever there is need of a larger income. In conclusion it may be said that the financial needs of all governments are so great that it will be impossible, for a long time to come, to renounce entirely the large revenues now derived from customs taxes. § 350. Excise duties are a form of internal taxation, and are levied upon commodities produced within a country. These were first employed by the Excise taxes. _ United States in 1791, when duties were imposed upon distilled spirits in order to aid the govern- ment in its efforts to provide for the Revolutionary debt. They were extremely unpopular, since there existed then and long afterward a widespread dislike of in- ternal taxation by the federal government. Accord- ingly, all internal taxes were repealed in 1802 ; but the War of 1812 compelled Congress to levy excise duties on spirits and sugar. These were expressly declared to be "temporary war taxes"; and they were repealed, with all other internal revenues, in 1817. From this date the government depended exclusively upon exter- nal taxation until the outbreak of the Civil War. Then it became necessary to resort to excise taxation upon an unprecedented scale. Congress finally levied taxes upon the manufacture of almost every conceivable arti- TAXATION IN THE UNITED STATES. 519 cle, and the receipts from such sources rose to about $190,000,000 in 1866. After the war, taxation was reduced, and most of these excise duties were repealed. But the necessary expenses of the government had been increased so greatly that internal taxation had to be continued in order to provide for pensions, the public debt, and other expenditures resulting from the war. In this manner excise duties on spirits, beer, and tobacco became a permanent feature of our revenue system. In 1897 such duties yielded 1 $146,688,574; and the war revenue act of the following year added new duties, such as that upon patent medicines, which will add to the revenue from this source. In the collection of our excise taxes a very convenient and effective method is now employed. Producers are required to affix stamps to all packages con- Me thodof taining the articles taxed, and this must be collecti on. done in such a way that the stamps will be broken when the packages are opened for consumption. Some eva- sion exists, especially in the case of whiskey, which can be distilled with simple and inexpensive appliances. In some large cities and in the mountainous districts of the South a force of revenue officers is constantly employed in suppressing illicit distillation. When the excise sys- tem was developed during the Civil War, the rates of duty were so high as to make the temptation to evasion exceedingly strong; and it was found that "there exists an intimate relation between the rate of the tax and the 1 This included the small receipts from oleomargarine, playing cards, and some other sources. 520 PRINCIPLES OF ECONOMICS. extent of fraud and evasion." Thus in 1868 the tax on whiskey was $2.00 per gallon, which was more than ten times the original cost of production. This high rate of duty stimulated wholesale frauds, and the receipts were only $13,419,000. But then the rate was lowered to $0.50 per gallon, and the receipts for 1869 rose to more than three times the figures for the previous year. Although the excise taxes are collected from pro- ducers, they are, like customs duties, usually borne by character of consumers, who have to pay higher prices these taxes. f or ^ ne commodities. They resemble cus- toms revenues also in point of inelasticity, since they cannot be readily adjusted to the needs of the govern- ment. Thus the " hard times " prevailing in 1893 and 1894 reduced the receipts from internal revenue from $161,027,000 to $143,421,000, because the consumption of tobacco and liquors had fallen off. Finally, excise taxes resemble customs in that, in order to be produc- tive, they must be levied upon articles that are widely used. Their burden is consequently distributed un- equally, and they become regressive in their operation. It is sometimes said that both excise and customs duties are voluntary taxes, since citizens can avoid They are not ^he necessity of paying them by refraining voiuntaiy. from the consumption of the articles taxed. This is manifestly false when necessities of life are selected. With articles like beer, whiskey, or tobacco, it may seem to be more nearly true. But if men want these commodities, they can avoid the tax only by giv- TAXATION IN THE UNITED STATES. 521 ing up desired and customary enjoyments. This is all that the payment of any tax necessitates. This ques- tion was much discussed in this country when England attempted to tax the American colonies. The advo- cates of such taxation argued that the tax on tea was not imposed without the consent of the colonies, because it was a voluntary affair and could be avoided by any one who was unwilling to pay it. But the opponents correctly insisted that the alleged voluntary nature of the tea duties was wholly illusory. One writer disposed of the question as follows : " The same logic would demonstrate that a duty on beer, candles, or soap, would be no tax ; as we are not absolutely obliged to drink beer — we may drink water; we may go to bed before it is dark ; and we are not forced to wash our shirts." Excise duties have been increased by the legislation of the last few years, and are sure to remain an impor- tant source of federal revenue for a long ^wai consid- time to come. This permanence will be due erations - chiefly to their productiveness, to the need of such rev- enues, and to the comparative ease with which they are collected ; but they will be favored by many people who wish to tax liquor and tobacco heavily in order to dis- courage their consumption. The revenues secured from excises are superior to those collected in the form of customs duties in the point of reliability in time of such a national emergency as a war with a powerful foreign nation. Finally, whatever injustice may result from the inequality of our excise duties may be partially cor- rected by developing other sources of revenue that shall 522 PRINCIPLES OF ECONOMICS. be drawn from those classes who pay less than their just share of the taxes levied upon consumption. § 351. Many kinds of transactions have been taxed by governments, but revenues derived from such sources Taxes on have usually been of secondary importance, transactions. The f amous Stamp Act of 1765 was an at- tempt to tax transfers of real estate, suits at law, inheri- tances, various commercial transactions, and marriage licenses, by requiring that stamps or stamped paper should be used for all such purposes. In 1794 the United States levied taxes upon sales at auction, and three years later stamp duties were imposed upon many kinds of legal and commercial instruments. These taxes, as well as the other parts of the internal revenue svstem, were repealed in 1802 ; but similar ones were reintroduced in 1813, only to be abolished again in 1817. During the Civil War a most extensive system of stamp duties was imposed upon almost all kinds of business and legal transactions where legal instruments were used, and snM&it auction were again taxed. No inconsiderable reWnue was secured from this source, JSrt' "the taxes were repealed at the close of the war period. Finally the war revenue act of 1898 has re- cently imposed stamp taxes on bills of exchange, trans- fers of stocks and bonds, bills of lading, bank checks, telegraph messages, and some other transactions. These taxes may be a convenient and legitimate source of revenue if the rates are moderate, and do not obstruct business or legal transactions. This last- mentioned danger is a real one. Taxes on receipts, TAXATION IN THE UNITED STATES. 523 for instance, lead to the neglect of a necessary business form where only small amounts are concerned. The stamp tax recently imposed on bank checks operation of is objectionable because it tends to discourage tnese taxes - the use of checks in small, every-day transactions, and will retard the development of deposit banking in coun- try districts where it is especially desirable. In a majority of cases transaction taxes are borne by the con- sumer or purchaser, since they increase the expense of supplying him with the commodity or service rendered. This is the case, for instance, with the tax of one cent on express receipts and telegraph messages, imposed by the law of 1898. But the result is sometimes different. The tax of one cent on parlor-car tickets has been borne by the transportation companies, perhaps because it forms but a very small percentage of the prices charged to patrons, and the companies can afford to neglect it. § 352. Many of our American commonwealths levy poll or capitation taxes. These are imposed at a uni- form rate, as two dollars per poll, upon all PoUtaxes males between the ages of 20 or 21 and 45 or 60. They are poorly collected, and are usually evaded by all persons who do not have to pay taxes upon property. The total receipts, therefore, are small. In a few states payment of a poll tax is made a condition precedent to voting, with the result that each political party pays the taxes of many of its voters. Corruption necessarily follows from such conditions. The poll tax has been abandoned in most civilized countries, and 524 PRINCIPLES OF ECONOMICS. must be viewed as an antiquated financial expedient. It is, moreover, unjust in its operation, since it exacts equal contributions from all, regardless of tbe different abilities of taxpayers. § 353. American states, counties, and towns have long derived most of their revenue from the general The general property tax, which is supposed to be levied property tax. U p 0n a n the property, both real and per- sonal, in the possession of taxpayers. In the census year 1890, the total amount of our state and local revenues was placed at $584,835,000 ; and of this sum, taxes on property yielded #443,096,000, or about seventy- five per cent. It appeared, furthermore, that all the taxes other than that on property which were raised in this country, by federal or local authorities, brought in about $453,000,000 ; so that the property tax was nearly as important as all other forms of taxation combined. While there are some differences in the methods pursued, the laws of the various states provide that assessors shall be empowered to make an Its assessment * and apportion- exhaustive enumeration of all kinds of tax- able property. In this work of assessment, taxpayers are often called upon to make detailed state- ments of their possessions, and this usually must be done under oath ; but the assessors have the power to correct these declarations, whenever there is reason to suspect that a full disclosure has not been made. Finally, taxpayers may appeal to higher officials or to the courts for rectification of erroneous assessments. The property is supposed to be rated at its true value, TAXATION IN THE UNITED STATES. 525 and the tux rate is a certain per cent of the assessed valuation. Local taxes are levied upon the assessment rolls of each town or county ; but the tax for state pur- poses, after the amount to be raised has been deter- mined, is apportioned among the various local units upon the basis of the respective valuations of their taxable property. In this way the amount finally col- lected from each taxpayer is the sum of the rates levied for state purposes and for local. In its actual operation the general property tax causes great inequality in the distribution of the tax levied for state purposes. Each board of local unjust appor- assessors has a strong inducement to under- ^ onment °* ° the property value the taxable property found in its own tax. district, because, by such a course, the amount of the state tax apportioned to the locality will be reduced. The result is that property is almost never rated at its full value ; while the assessed valuation may be only ten or twenty per cent of the true valuation in some sections, and as high as eighty or ninety per cent in others. In one state the valuations of real estate in different coun- ties have ranged from five to one hundred per cent of the actual selling price of the property. It follows neces- sarily that the burden of state taxation is distributed most unjustly among the various local units. To remedy this difficulty state boards of equalization have been formed, and authorized to correct these inequalities of apportionment. But this could be done only by an actual revaluation of all the property of the state ; and the boards of equalization, at the best, can merely pro- 526 PRINCIPLES OF ECONOMICS. ceed by rough guesswork. In many cases unseemly contests ensue between city and country interests, each seeking to control the boards and to increase the other's share of state burdens. A second cause of the grossest injustice is the failure of this tax to reach personal property. A large part „ „ „ of the wealth of a modern community con- its failure to J reach personal sists of corporation stocks and bonds, mort- gages, notes, book accounts, and other forms of intangible personalty that easily escape the sharpest investigation of the assessors. Moreover, these officials are usually elected by the votes of the men whom they have to assess, and they are not inclined to adopt very vigorous means of discovering the less tangible property of the voters. Most of the personal property that is actually reached consists of stock in trade, machinery, and live stock or other farm capital. In 1896 nearly two-thirds of the personalty taxed in Massachusetts consisted of tangible goods of this character. In 1850 the total assessed valuation of personal property in all the states was 82,125,000,000, while real estate was valued at $3,899,000,000. In 1890 the personalty was assessed at only $6,516,000,000 while realty was assessed at $18,956,000,000. It will be noticed that in forty years the assessed valuation of personal property had increased by only $4,391,000,000; while that of real property increased by $15,057,000,000. Now it is a well known fact that during this period there has been a very great increase of personal property, especially in its less tangible forms. Yet its assessed valuation now forms a TAXATION IN THE UNITED STATES. 527 smaller proportion of the total property taxed than was the case in 1850. In the State of New York the propor- tion of personal property has constantly decreased, until nine-tenths of the burden of taxation falls upon real estate. In the City of Brooklyn, in 1895, personal property bore less than two per cent of the total tax. In New York the richest men in the country are assessed for only a few hundred thousand dollars of personal property, when their known investments in corporate securities yield annual incomes that amount to millions. It may be stated as a general principle, therefore, that the taxation of personal property " is in inverse ratio to its quantity " ; and that " the more it increases, the less it pays." An inevitable result of this is that state taxa- tion falls with undue weight upon the country districts, where there is little intangible wealth, and personal property exists in the form of household goods, live stock, and farm implements, all of which cannot hope to escape the assessor. One other kind of abuses arising from the present property taxes must not be overlooked. While all real estate can easily be found by the asses- J J Unjust valua- sor, the valuations of different properties tionsofreai are often most unequal. As has been seen, undervaluation is the general rule ; and it is probable that, throughout the country, the assessment of real property does not exceed one-half of its actual value. The systematic undervaluations that prevail open the door to gross abuses in some of our large cities, where the most valuable lots and buildings arc sometimes 528 PRINCIPLES OF ECONOMICS. assessed much more lightly than smaller properties. Thus in Chicago, a few years ago, it was found that seventy of the choicest pieces of real estate were assessed at less than nine per cent of their true value ; while eighty small estates, worth $4,000 and less, were assessed at almost sixteen per cent of the actual selling price. But we cannot stop even here in our statement of the evils that attend the present administration of the prop- erty tax. Existing laws offer to taxpayers Demoralization . caused by the terrible inducements to commit frauds. When each citizen is compelled to declare under oath the full value of his property, perjury is the usual result. An honest man, who desires to pay all that is justly due from him, knows that, if he tells the whole truth, he will have to bear two or three times his fair burden. Thus our present laws punish honesty with a double load of taxes, and allow the dishonest and unscrupulous tax-dodger to escape. It is extremely difficult to present in a few paragraphs an adequate discussion of the incidence of the general incidence of property tax. We must realize at the outset ta^-T^n 7 tliat We arG 110t dealing with one tax > uut land. rather with a group of diverse taxes, which may be classified as follows : (1) a tax on land ; (2) a tax on consumable goods in the hands of their owners ; and (3) taxes on investments of private capital. 1 The incidence of the tax on land will be first considered. This tax is levied in this country upon the selling price of the land, and it is virtually graded according to the 1 " Private capital" is used strictly in the sense explained in § 260. TAXATION IN THE UNITED STATES. 529 amount of rent that each tract yields, since the selling price is the annual rental capitalized at the current rates of interest. Now a tax levied upon economic rent must be borne by the landowner, and cannot be shifted. The rent of land is determined by the superior advantages that one tract furnishes for the investment of capital over the opportunities offered by the poorest tracts util- ized. The landlord will, if competition is active, exact from the tenant all that the superior situation or quality of his land enables him to demand. The imposition of the tax will not alter the situation so as to change the economic rent and enable the landlord to shift the bur- den onto the tenant by charging a higher rental. But it is important to notice that the land tax in this country is a burden mainly upon the original owner of the prop- erty at the time that a new tax is first laid, or an old one increased. This is because a prospective purchaser will make allowance for the tax when he determines how much he can afford to pay for the land. Invest- ments in corporation securities and many other things largely escape taxation under our present methods. A man will not purchase land unless he can obtain from it the same return that can be secured from these untaxed investments ; and he will, accordingly, offer a smaller price than he would be willing to pay if the land were untaxed. 1 Thus, if a tract of land yielded an annual rent of $5,000, and the rate of interest on equally secure investments was five per cent, its selling price 1 If all forms of investment were taxed with the same certainty as land, the case would be otherwise. 34 530 PRINCIPLES OF ECONOMICS. would be 1100,000. Now if a tax of $500 should be im- posed, prospective purchasers would deduct $10,000, the capitalized value of the tax, from the price that they would be willing to pay ; and the burden would fall en- tirely upon the original owner. The property tax, in the second case, reaches many kinds of consumers' goods in the hands of their owners, 2. on consum- Sll(m as dwelling-houses inhabited by own- ers' goods. ers> household furniture, and the like. All these goods are not kept for sale or for hire, but solely for the owners' use. Consequently the tax cannot be shifted onto tenants or purchasers, and must be borne by the owners of the property. In the third case, the general property tax is sup- posed to fall upon all kinds of private capital invested for the sake of income. If the purpose of 3. On invest- ments of the laws were actually accomplished, so capital. ^at a jj p 0SS } D i e f ie lds of investment were taxed equally, the tax could not be shifted, and would be borne by the owners of capital. This is for the reason that shifting can take place only when capital can be withdrawn from an industry that is taxed, and invested in others that are free from taxation. When this can be done, the taxation of capital invested in a few industries results in a readjustment of prices, which will finally enable the taxed investments to yield the same return as those which are untaxed. Now the wholesale evasion of our property tax leaves a large part of the field for investments virtually untaxed, so that it is frequently possible for shifting to take place. TAXATION IN THE UNITED STATES. 531 Rome of the more important kinds of investments need to be examined separately. (.1) Taxes upon dwelling- houses that arc built for hire arc in large measure shifted onto the occupier, since capitalists will not make such investments unless the same rate of return can be obtained as can be secured in untaxed enter- prises. In case, however, a lessened demand for lodg- ings makes the supply of houses greater than the number actually required, then rentals will have to be lowered and the tax will fall upon the owners. This is because the capital invested in the form of houses cannot be withdrawn and applied elsewhere in new enterprises. (B) Taxes upon buildings, machinery, and stocks of goods used in commerce or manufactures would also bo shifted if competition were perfect. But these investments, when once made, are highly special- ized, and trade conditions often make it difficult to shift such taxes upon consumers. Thus, for instance, competition by foreign producers, or by producers more advantageously situated in some other part of the country, may render it impossible for merchants or manufacturers to raise prices and shift the tax. ( (?) The same considerations apply to taxes on buildings, live stock, and implements used in agriculture, and with added force. American farmers sell a large part of their products in foreign markets where prices arc determined by international competition. Moreover, they arc slow to adjust themselves to new conditions, so that competition acts very imperfectly upon agri- cultural industry. It seems reasonably certain that 532 PRINCIPLES OF ECONOMICS. taxes upon farming capital arc borne by the farmers themselves. (D) Taxes upon mortgages operate very differently. The capital invested in this manner is more free to seek the most profitable fields of invest- ment. It can in a few years leave any state or com- munity where unusual burdens are placed upon it, and has repeatedly done so. The result is that, where our tax laws actually reach mortgage investments, the tax is surely shifted upon the borrower, in the form of a higher rate of interest. In many states mortgages practically evade all taxation ; but when they are reached, as in California, the rate of interest is higher than that asked for other equally safe investments, and higher by something more than the amount of the tax. (E) Finally, we may mention taxes upon corporation stocks and bonds. For the most part these escape taxation, but, when they are reached, the probability is that shifting often takes place. (F) The results of the foregoing discussion need to be qualified in the case of taxes that reach enterprises of a monopolistic character. These cannot be shifted if they arc fixed in amount, or if they are proportioned to monopoly profits. This has been explained in a previous chapter (§ 201). Our general property tax has been shown to be largely a tax upon real estate, since most personal „ , . property, except that of a tangible form, Conclusions r r j 7 i o concerning the escapes the assessors. In its apportion- propertytax. . . . ... . ment there arc the grossest inequalities between different towns and counties, while between TAXATION IN THE UNITED STATES. 533 individual citizens its burdens are often distributed without the remotest approach to justice. More than this, it lias become a fruitful source of demoralization, and is systematically educating our people in habits of fraud and perjury. In theory the tax is unjust as a main source of public revenue, since property is not the best measure of ability ; and in practice " the gen- eral property tax as actually administered is beyond all doubt one of the worst taxes known in the civilized world." : It has been abandoned in most other coun- tries as a principal form of taxation, and is condemned by practically all students of finance. § 354. The stocks and bonds of business corpora- tions have been taxable under the theory of the gen- eral property tax, and our states have corporation undertaken to find and assess corporate taxes * securities in the possession of their citizens. But these efforts have met with little success, and the general property tax has utterly failed to reach such intangible forms of personal property. Accordingly, various states have adopted a more successful expedi- ent, — the taxation of the corporations themselves ; and these special taxes upon corporations have assumed increasing importance as the number of corporate enterprises has increased. It is almost needless to add that the states have found it much easier to deal directly with a corporation than to discover and assess its stocks and bonds in the hands of individual holders. 1 Seligman, Essays in Taxation, Gl. All students of the subject have failed to fiud words strong enough to do justice to the iniquities of the tax. 534 PRINCIPLES OF ECONOMICS. The development of special corporation taxes in many states has taken the form of the taxation of banks, insurance companies, railroads, telegraph ciai corpora- and express companies, and some other cor- tions. . _ porate enterprises. Banks are commonly taxed upon their capital stock, the corporation usually being required to pay the tax and to withhold the amounts from the dividends received by the share- holders. This method of collection is called " stoppage at the source ; " and by means of it private incomes may be found and taxed with entire certainty at the source whence they arise. In addition, banks pay the regular property tax on their real estate. Insurance companies are usually taxed upon their premiums, or gross receipts, but sometimes net receipts are made the basis of assessment. Railroads are taxed in a great variety of ways. In many states the gross earn- ings are taxed ; in others the tax is levied upon the value of the outstanding stocks and bonds. When a railroad operates in different states, the tax in any single state is usually levied upon an amount of gross earnings or outstanding securities that corresponds to the proportion which the mileage of the railroad in that state bears to the total mileage of the system. Sometimes this special tax takes the place of all other forms of taxation ; in other cases, the roads are sub- ject to local taxation of their real estate. Telegraph companies, finally, are taxed upon their gross receipts or their mileage. In some states a general corporation tax has been TAXATION IN THE UNITED STATES. 535 established, and made applicable to all corporations except those otherwise provided for. Thus Pennsyl- vania imposes a tax of five mills on each ^ r The general dollar of actual value of the capital stock corporation of all corporations doing business within its boundaries, besides a tax of four mills on each dollar of interest paid on corporation bonds or certificates of indebtedness. This takes the place of all local taxation. While New York is the only state that has gone as far as Pennsylvania in developing a general corporation tax, a number of others have taxes that apply to domestic corporations. The diversity of practice in different states makes it difficult to describe corporation taxes in a few para- graphs, and the student should supplement The future of this statement by a careful study of the sys- ttese taxes - tem employed in his own locality. It seems certain that the constant increase in the number and importance of corporate undertakings will result in a corresponding development of this form of taxation. In some cases more revenue is now collected for state purposes by means of corporation taxes than by the general property tax. 1 It is to be hoped that the old and futile attempts to make the tax on property reach corporate securities 1 In 1896 Massachusetts collected for state purposes $3,317,291 by cor- poration taxes, and $1,745,340 by the tax on property. The same year Pennsylvania collected $0,945,899 from corporations, and $2,710,207 from a tax on personal property, real estate not being taxed for state purposes. Vermont in 1894 collected $343,090 from the tax on corporations, and $2G4,097 from that on property. In 1890 the census showed that all of the States received $21,837,866 from taxes upon corporations. This amount is much larger today. 536 PRINCIPLES OF ECONOMICS. in the hands of the holders will be entirely superseded by taxes assessed directly upon the corporations. This will make it possible to collect taxes from the companies themselves, and will make evasion difficult. In the taxation of corporations the chief difficulties encountered are of a legal character. Citizens of one other consid- state may charter a company in another erations. state for the purpose of carrying on busi- ness in a dozen others. Under such conditions, the work of framing a state corporation tax is very difficult. A tax upon the gross receipts of a corporation chartered in another state is invalid if that corporation derives its income, even in part, from interstate business, be- cause it is held to be a restraint upon interstate com- merce, which is beyond state control. Again, a state in which a company is chartered cannot tax corporate bonds owned by non-residents, because such a tax would extend to property and interests beyond its jurisdiction. If the federal government possessed constitutional au- thority to tax corporations and distribute the proceeds equitably among the states, all these troubles could be easily removed. As it is, the situation is a difficult one ; yet much has already been accomplished. Recent au- thorities favor a tax upon that part of the net receipts of corporations which is derived from business transacted within the state levying the assessment, provided that the traffic is of such a character that this proportion can be ascertained, and provided further that the courts will uphold such a system. If, however, the courts should decide otherwise, it would be best to levy the TAXATION IN THE UNITED STATES. 537 tax upon that part of the market value of the capital stock plus the bonded debt which is employed within the state. § 355. License taxes upon various business and pro- fessional pursuits have often been employed in the United States. In 1794 and 1813 the federal gov- License taxes. eminent imposed such taxes on some classes of liquor dealers, but these imposts were not permanent. During the Civil War a most extensive system of license taxes was imposed on merchants, bankers, brokers, and professional men. In some cases these were fixed sums, in others they were roughly graduated according to the amount of business transacted. In general they were regressive in their operation, and bore heavily upon the smaller dealers. After the war we retained only the federal license taxes upon dealers in tobacco and liquors, but the war revenue act of 1898 imposed taxes on bank- ers, brokers, proprietors of places of public amusement, and pawnbrokers. Practically all of our cities and many of the states make use of license taxes upon certain occupations. These are usually fixed sums, but are some- _.. ., , J ' State and local times graduated in a manner that roughly license tax- corresponds to the abilities of the taxpayers. In the cities of the South a very extensive system of taxes on business and professional pursuits is often em- ployed. In one city licenses were required a few years ago for fifty-six classes of occupations. Such taxes tend to restrict competition from new enterprises, and they bear with very unequal weight upon the smaller estab- 538 PRINCIPLES OF ECONOMICS. lishments. In other parts of the country license charges are imposed only upon a few occupations, such as the business of liquor dealers, peddlers, pawnbrokers, and the like. Taxes upon the sale of liquors usually yield far more revenue than all the rest of these license taxes. But Pennsylvania has a system of mercantile licenses on peddlers, merchants, stockbrokers, theatres, etc., from which the state government derived a revenue of 6541,870 in the year 1897. In some states the receipts from liquor licenses are divided between the state and local governments. Thus Massachusetts, in 1896, re- ceived 6737,000 from this source ; and turned over to the towns and cities the remaining three-fourths of the tax. New York now derives from taxes upon the sale of liquors a very large revenue, which amounted to $4,215,860 during the year 1898. These license taxes are employed partly for the purpose of regulating and restricting the traffic, especially in the case of the tax upon the sale of intoxicating liquors. But the liquor tax is an important source of revenue to most cities and to some of the states. § 356. The inheritance tax, as it is popularly called, is imposed " on the devolution of property, whether real Theinheri- or personal, whether by will or by intes- tancetax. tacy." It is extensively employed to-day in Great Britain, Switzerland, and Australia; and has been introduced, in some form, in fifteen or more of our states. In most of these commonwealths only collate- ral inheritances are taxed, but in some cases direct inheritances arc also included. The tax has met with TAXATION IN THE UNITED STATES. 539 such general favor that its adoption in other states seems merely a question of time. In levying the inheritance tax a certain minimum amount of property is exempted from its operation. Thus in Massachusetts no estate is taxed Methods of unless its value, after all debts are paid, assessment- exceeds -$10,000. In that state, also, bequests for edu- cational, charitable, or religious purposes are exempted. In Ohio, Illinois, and Missouri the rate of the inheritance tax has been made progressive. When this is done, the rate should not only be higher on large estates than upon small, but also higher for collateral inheritances than for those in the direct line. In theory inheritance taxes are just, since the receipt of an inheritance of $10,000 or more is certainly a good indication of ability to bear public burdens. „ J L Operation of In practice the taxes imposed by our States inheritance have worked well, since they are easily col- lected and are subject to much less evasion than many other forms of taxation. Most estates have to pass through the probate courts because it is difficult other- wise to determine the assets, settle the debts, and effect a just distribution among the heirs. Thus publicity is ensured, and the collection of the tax is fairly certain and very inexpensive. While it might be possible to increase the rates of inheritance taxes sufficiently to check the growth and transmission of large fortunes, no such consideration is involved in the imposition of a moderate tax, which can be easily defended as a most just method of raising public revenue. Even a moder- 540 PRINCIPLES OF ECONOMICS. ately progressive rate can be justified, since it cor- responds better to the abilities of the taxpayers and can be collected with certainty (§ 346). Of course, this tax falls wholly upon the recipient of the inheritance, who has no way in which he may shift the burden. Some states already find the tax on inheritances an impor- tant branch of revenue. In 1898 New York received $1,997,210 from this source ; while Pennsylvania, in 1897, received $894,741. The extension of the tax to all inheritances in excess of $10,000, whether direct or collateral, and the imposition of a reasonably high rate would enable most of the states to collect a large re- venue with little expense. The war revenue act of 1898 established a federal tax upon inheritances of personal property whenever the „ , , estate exceeds $10,000. The law follows Federal tax- ation of inheri- correct principles in making the rate lighter tfllftCfifl upon property passing to direct relatives than upon that passing to distant heirs, and in gradua- ting the tax according to the size of the estate. The highest rate imposed would be fifteen per cent upon es- tates exceeding $1,000,000 that pass to the most distant collateral relatives or to " strangers in blood." It is to be hoped, however, that this tax will not be retained as a permanent feature of our federal revenue system. Many states are already taxing inheritances with the best of results, and others are sure to adopt this form of taxation in the absence of the complications that may arise from a similar federal tax. All the revenue that can be properly derived from this source is needed by TAXATION IN THE UNITED STATES. 541 the states in order to enable them to effect the most necessary reforms in their tax systems. The needs of the federal government can be met by other means, and a federal inheritance tax will probably tend to check this desirable movement toward the general adoption of this form of taxation by the states. § 357. Income taxes are levied in proportion to the income of the taxpayer. Great Britain has employed a tax of this character continuously since The income 1842, and now derives about $75,000,000 **• from this source. Italy, Prussia, Saxony, and other Ger- man states also tax incomes ; and within recent years similar taxes have been established in Holland and New Zealand. In this country the taxation of incomes was formerly practised by some of the states ; but the tax was poorly administered, and has been abandoned in most cases. Only Virginia retains a general income tax, but a few other states have taxes on certain kinds of incomes. The revenues secured in this manner, how- ever, are unimportant. During the Civil War our government levied a gen- eral income tax, which yielded $72,982,000 in 1866. After that time, however, the law was modi- Federal taxa- fied by reducing the rate and exempting tionofin- incomes of less than $2000, so that the re- comes ' eeipts declined until the tax was abandoned after 1872. In 1894, in order to provide needed revenue, another income tax was established ; but this was declared un- constitutional before it had gone into operation. The Constitution requires that representatives and direct 542 PRINCIPLES OF ECONOMICS. taxes shall be apportioned among the several states " according to their respective numbers." Congress has attempted to levy such an apportioned tax only three times, and the results have been very unsatis- factory. At the present day the various sections of the country differ so widely in point of wealth that any tax levied according to numbers would be absolutely repug- nant to all ideas of justice ; and the experiment will probably never be tried again. The income tax of 1862 was not apportioned among the states, but was levied as an indirect tax upon incomes wherever they might be found. The law of 1894 followed the same method ; but the Supreme Court decided that the tax was a direct tax within the meaning of the Constitution and could be levied only by the rule of apportionment. This decision was reached by a divided bench, and reversed all precedents ; for it had been held previously that poll and land taxes were the only direct taxes contem- plated by the Constitution. Its effect is to make federal taxation of incomes practically impossible, since an apportioned income tax would be a shameful mockery of all justice. Although this decision has been ac- cepted as final by the tax-dodgers who attacked the law of 1894, it is not certain that it commended itself to the best thought of the country. Lowell's words, written concerning the Dred Scott decision, are de- cidedly pertinent here : " With history before us, it is no treason to question the infallibility of a court; for courts are never wiser or more venerable than the men TAXATION IN THE UNITED STATES. 543 composing them, and a decision that reverses precedent cannot arrogate to itself any immunity from reversal." An income tax, if it can be well enforced, is one of the most just forms of taxation, since income is a better test of faculty than any other single crite- The theor ^ of rion. If it is a general tax upon all forms the income of income, it cannot be easily shifted, as has been explained in a previous paragraph. If some forms of income are exempt, or if the tax is partially evaded, it then operates like a tax upon special forms of invest- ment, and is likely to be shifted. But in any case, wherever it reaches the rent from land or the income from monopoly privileges, it probably rests upon the persons upon whom it is assessed. In framing income taxes it is usual to exempt small incomes, of less than $500, for instance. This can be justified upon two grounds. The recipients of such incomes, in the first place, are certain to bear a disproportionate share of the taxes levied upon consumption ; and the exemption of this minimum amount serves to equalize the whole burden of taxation. In the second place, a tax upon such small incomes costs as much to collect as it brings into the public treasury ; and is, therefore, not an economical measure. Unless the best methods are employed, the income tax is difficult to collect. The tax levied during the Civil War was not framed as wisely as it ^ J The adminis- might have been, and was subject to a great tration of in- deal of evasion, especially after the war had come to an end. It encountered bitter hostility in 544 PRINCIPLES OF ECONOMICS. some quarters, as did the tax established in 1894 ; hut this opposition was largely confined to a single locality, where the richest men of the country are gathered in large numbers. In England and other countries income taxes have been constantly improved, and operate more satisfactorily the longer they remain in force. The English laws divide incomes into five classes, and at- tempt to reach revenue at its sources, whenever that can be done. This method is capable of extensive application. Taxes on incomes derived from corpora- tion securities can be collected from the corporations, and the same thing can be done with the salaries of the employees of such companies. The rent of real estate can be easily ascertained, and can be collected from the occupier, who can deduct it from his rent, if he be a tenant. If the land is mortgaged, a proportional amount can be deducted from the interest payments. Salaries of public officials can, of course, be taxed readily at the source. This leaves only three kinds of incomes un- provided for, viz., profits from the cultivation of land, the profits of unincorporated manufacturing or mercan- tile enterprises, and the earnings of professional men. In these cases it may be necessary to employ personal declarations of the taxpayers ; 1 but the tax officials can secure various external criteria by which to test the accuracy of the statements returned, so that gross 1 Tn England tho tax on agricultural profits is fixed at a certain per cent of the annual value of the property, and declarations of the taxpayers are not required. Professor IT. C. Adams has recently suggested a plan for taxing professional incomes without resorting to declarations. See Science of Finance, 505. TAXATION IN THE UNITED STATES. 545 evasions can be prevented. One final matter should be noted. The methods of assessment just outlined, which are the best yet developed, presuppose that the rate of the income tax will be proportional. With these methods the whole amount of a person's income is not determined, and the government must content itself with merely ascertaining the particular sources of rev- enue. It is manifestly impossible to impose a progres- sive rate under these conditions. The ascertainment of each taxpayer's entire income and the imposition of a progressive rate would be more just, if such a thing were practicable. But a proportional tax strictly en- forced and collected is preferable in all respects to a graduated tax that is subject to wholesale evasion. The experience of many countries shows that the taxation of income finds increasing favor as a just and lucrative source of public revenue. It seems conclusions probable that public opinion in. the United £° c ^2a- States will show a similar tendency, so that ti°n. income taxation may become a live issue in the near future. Some writers favor the imposition of income taxes by the states, especially since the recent decision of the Supreme Court makes a federal tax impossible for the present. But it would probably be impossible for the states to operate successfully a system of income taxation. The principal reason for this belief is that wealthy persons can so easily move out of a state that taxes incomes into another that imposes no such burdens. New Jersey, Delaware, and other states would certainly hold out inducements for people who wished to avoid 85 546 PRINCIPLES OF ECONOMICS. their just public obligations ; so that New York and Pennsylvania, for instance, could not establish satisfac- tory income taxes. A second reason is found in the legal difficulties that would attend such taxation if con- ducted by the states. These are of the same nature as those which attend our state corporation taxes. A final reason is that a state could not apply the best methods of collection in many cases, because the stoppage of incomes at the source could not be applied to corpora- tions chartered in other states. Federal taxation of incomes would be the only satisfactory plan, and it is sincerely to be hoped that the constitutional difficulties that now prevent such action may be ultimately re- moved. The federal government would be free from the legal difficulties that would beset the states in a similar effort, and citizens would not leave the country in order to avoid their obligations. Finally, the federal officials would administer the tax far more strictly than the local assessors could possibly do under the pressure that would be brought to bear upon them. § 358. In concluding this subject it will be desirable to present a brief survey of the entire field of American summary taxation, and to show in what directions im- attontaaf" P rovement i s desirable and possible. 1 In united states, order to gain a rational view of this subject it is necessary for the student to treat all state, local, or federal revenues as parts of one system, and to con- 1 The only comprehensive treatment of this entire subject is to be found in Adams, The Science of Finance, 400-516. With respect to the income tax the author's views arc not in accord with those of Professor Adams. TAXATION IN THE UNITED STATUS. 547 aider each tax in its relations to this general system of finance. Any other method of procedure results only in confusion. Customs taxes are practically reserved for the use of the federal government by the Constitution, which forbids any state to " lay any imposts or Federal Tax . duties on imports or exports." Excise tax- ation - ation also can be practised only by the federal author- ities, since no state could undertake to tax the production of commodities without driving manufacturing industries into other states. Thus two great branches of revenue arc already marked out for the exclusive use of the national government. Federal taxes on transactions, such as were established by the revenue act of 1898, should be employed with great moderation, since they are likely to obstruct commercial or legal proceedings. It would probably be wise to resort to this form of taxa- tion only as an emergency measure. Two other branches of revenue would complete a satisfactory scheme of federal finance. One of these is the taxation of inter- state commerce, which could be made very productive. This is advocated strongly by Professor Adams. 1 The other is the taxation of incomes, whenever the present constitutional difficulties may be removed either by constitutional amendment or by another change in the attitude of the Supreme Court. In times of great emer- gency both of these taxes might be needed ; but, under ordinary circumstances, either one would suffice. If a choice is to be made between the two forms of revenue, 1 The Science of Finance, 494-496. 548 PRINCIPLES OF ECONOMICS. a federal income tax would, in the judgment of the author, be decidedly preferable. The bulk of our national income will be derived, for a long time to come, from excise and customs taxes, which cannot be made to operate justly, since expenditure is one of the worst possible tests of a taxpayer's faculty. An income tax that should exempt all incomes of less than $600 would be the best available means of correcting the inequalities of the other parts of our federal revenue system. Moreover, it would be an elastic tax, which could be easily and quickly increased in cases of emer- gency. Such a feature is sadly lacking in the present inelastic taxes upon which the national government now depends. The worst features of existing methods of state taxa- tion are found in the operation of the general property state taxa- tax, which is productive of the worst enor- tion - mities and demands immediate reform. Ex- perience has shown conclusively that personal property cannot be reached by this means, and that gross under- valuation of real estate cannot be prevented so long as a state tax is apportioned among the towns and counties upon the basis of the valuations made by the local assess- ors. The only method of remedying these evils is to abandon the futile attempt to tax personal property in this way, and to leave the taxation of real estate exclu- sively to the local political units. 1 Personal property can 1 So far as t lie fax on real estate is concerned, it is conceivable that the existing difficulties <>f undervaluation could lie remedied by creating Ktato boards of assessors. But this is probably a political impossibility. TAXATION IN THE UNITED STATES. 549 be reached much more satisfactorily by other methods, and the states can secure sufficient revenues without the tax on real estate. Corporation, inheritance, and license taxes have already become important branches of state income ; and much larger receipts can be secured from these sources. Pennsylvania some years ago ceased to tax real estate, and gave this resource up to the local authorities. Its revenues are now derived from corpora- tion, inheritance, and license taxes, together with a tax on some forms of personal property. 1 New York, Massa- chusetts, and some other states are now securing more income from taxes on corporations, inheritances, and licenses than from the state tax on property ; and there is a growing tendency in many places to draw an in- creasing amount of revenue from the three taxes just mentioned. 2 It will be seen that personal property is reached in a considerable measure by inheritance and corporation taxes. Such other forms of personalty as 1 For the year 1896 the income of the state was derived from the fol- lowing principal sources : corporation tax, $6,945,000 ; inheritance tax, $925,000 J license taxes, $1,379,000; tax on personal property, $2,716,000. 2 In 1898 New York received $8,700,000 from corporation, inheritance, and license taxes; and $8,036,000 from the tax on property. In 1896 Massachusetts derived $4,329,000 from the first three taxes, and $1,745,000 from that on property. In fourteen other states the census of 1890 showed that the receipts from corporation and license taxes varied from thirty- three to seventy-five per cent of the total receipts from all taxes separately reported. The inclusion of inheritance taxes would raise the percentages in some cases. Vermont illustrates especially well the productivity of corporation taxes in a state where there are located hut few large corpor- ate industries. The state now levies a tax on property only in alternate years. In 1892 and 1893 corporation taxes yielded $643,476. Daring this period only $272,858 was raised by a state tax on property, which was levied only in 1892. See Wood, Taxation in Vermont. 550 PRINCIPLES OF ECONOMICS. household effects, stock in trade, machinery, live stock, and farm implements can be readily found by assessors, and may be made the objects of a special tax. 1 This resource could be used by the states, if it should be needed-after the taxation of real estate had been aban- doned ; it could be employed by the local governments ; or its proceeds might be divided between state and local authorities. The only important forms of personal property that would not be reached by such a scheme of taxation as is above outlined would be mortgages, promissory notes, and book credits. Mortgages can be found if rigorous methods of registration are required ; but the last two of these items are almost certain to escape the assessor, and no attempt should be made to reach them. Under present conditions, which permit mortgages to escape taxation in many states, it is cer- tain that a tax on mortgages is surely shifted onto the borrower ; and is not a burden upon the lender. The exemption of mortgages from taxation would surely result in a lower rate of interest on such loans, and would work no injustice. Our various local governments should derive much more revenue than is secured at present from public Local taxa- franchises and all other public privileges. tic-n. There are many indications that this will be done in the near future, because the pressure of taxation has forced upon the attention of property owners the fact 1 For household effects it has often been proposed to assume that these are equivalent to two or three times the rental value of the premises, and to assess them upon this basis. This lessens the inquisitorial features of the tax. LITERATURE. 551 that valuable franchises are now given away without adequate compensation. The receipts from such sources would supply a considerable portion of the revenues re- quired by our cities. License taxes arc also available for local purposes, especially those upon the sale of liquors, from which large receipts already accrue. Other license taxes should be employed with moderation. What other revenues might be needed could easily be provided by the exclusive right to tax real estate. In 1890 our state and local governments raised $443,090,000 by the taxation of real and personal property. Real property made up 74.4 per cent of the total assessed valuation, and furnished consequently 8329,500,000 of the entire receipts from this tax. It is evident, there- fore, that real estate can supply all the revenue needed for local purposes after other resources have been prop- erly utilized. Moreover, local assessors would be under no external compulsion to undervalue taxable property, and this tax could be assessed much more equitably than at present. LITERATURE ON CHARTER XVII. General Economic Treatises : Andrews, Institutes of Eco- nomics, 218-222; Ely, Outlines of Economics, 316-372; Hadley, Economics, 447-184; Mill, Principles of Political Economy, Bk. V. (haps. 2-7; RiCARDO, Principles of Political Economy, Chaps. 8-18; Smith, Wealth of Nations, 15k. V. ; Walker, Political Economy, 475-505. Treatises on Public Finance: A.DAMS, The Science of Fi- nance; BA8TABLE, Public Finance ; Coii.v, The Science of Finance; 552 PRINCIPLES OF ECONOMICS. Cossa, Taxation ; Daniels, Elements of Public Finance ; Plehn, Introduction to Public Finance. Special Treatises : Adams, Public Debts ; Cooley, Treatise on the Law of Taxation ; McCulloch, Treatise on Taxation ; Ross, Sinking Funds; Rosewater, Special Assessments; Selig- man, Essays in Taxation ; Seligman, Progressive Taxation ; Seligman, The Shifting and Incidence of Taxation ; Walker, Double Taxation ; Wells, Principles of Taxation ; West, The Inheritance Tax. See also the following articles in Lalor's Cyclopaedia of Political Science: " Budget " ; " Customs " ; "Debts"; "Excise"; "Finance"; " Revenue, Public " ; "Tar- iffs " ; " Taxation" ; " Treasury Department." Works Relating Primarily to American Financial History : Adams, Taxation in the United States, 1789-1816 ; Bolles, Fi- nancial History of the United States ; Bryce, The American Commonwealth, Vol. I. Part II. Chap. 43; Durand, The Finances of New York City; Ely, Taxation in American States and Cities ; Hollander, The Financial History of Baltimore; Howe, Tax- ation in the United States under the Internal Revenue System ; Kearney, Sketch of American Finances, 1789-1835 ; Plehn, The General Property Tax in California ; Scott, The Repudiation of State Debts; Taussig, Tariff History of the United States; Urdaiil, The Fee System in the United States; Wood, History of Taxation in Vermont ; Worthington, Historical Sketch of the Finances of Pennsylvania. See also the article "Finance, American," in Lalor's Cyclopaedia of Political Science. References to Financial Statistics : Statistical Abstract of the United States; Eleventh Census, Report on Wealth, Debt, and Taxation ; Annual Reports of the Secretary of the Treasury; Seligman, Finance Statistics of American Commonwealths. BIBLIOGRAPHY. 553 BIBLIOGRAPHY. This bibliography is limited to the works that possess im- portance for the general student. The first part of it is confined to English and American works, or to translations from French, German, and Italian writers. For more complete accounts of economic literature, see Cossa, Introduction to the study of Political Economy ; Bowker and Iles, The Header's Guide to Economic, Social, and Political Science. I. ENGLISH AND AMERICAN WORKS. Adams, H. C. Public Debts. (New York, 1887.) . The Relation of the State to Industrial Action. Publica- tions of American Economic Association. (Baltimore, 1*S7.) . 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(New York, 1866.) 36 562 PRINCIPLES OF ECONOMICS. Morley, H. (Editor.) Ideal Commonwealths. (London, 1S93.) Muhleman, M. L. Monetary Systems of the World. (New York, 1S95.) Newcomb, S. Principles of Political Economy. (New York, 1885.) Nicholson, J. S. Money and Monetary Problems. Third edition. (London and New York, 1S95.) . . Principles of Political Economy. (New York and London, 1S93.) Nimmo, J. Report on the Range and Ranch Cattle Business of the United States. ("Washington, 1S85.) Noyes, A. D. Thirty Years of American Finance. (New York, 1898.) Oldmixon, J. The British Empire in America. (London, 17-41.) Palgrave. R. H. I. (Editor.) Dictionary of Political Economy. (London, 1894 .) Patten, S. N. The Consumption of Wealth. Publications of University of Pennsylvania. (Philadelphia, 1S89.) . The Economic Basis of Protection. (Philadelphia, 1890.) . Theory of Dynamic Economics. Publications of Univer- sity of Pennsylvania. (Philadelphia, 1S92.) Perry, A. L. Principles of Political Economy. (New York, 1891.) Plehn, C. C. Introduction to Public Finance. (New York, 1896.) . The General Property Tax in California. Economic Stud- ies of American Economic Association. (New York, 1897.) Pollock, P. The Land Laws. (London, 1SS3.) Poor, H. V. and W. H. Manual of the Railroads of the United States. (New York.) See especially, number for year 18S1. Potter, B. The Cooperative Movement in Great Britain. (Lon- don, 1891.) Price, L. L. Industrial Peace. (London, 1887.) . A Short History of Political Economy in England. (Lon- don, 1S91.) Probyn, J. W. (Editor.) Systems of Land Tenure. (London and New York, 1881.) Rabbeno, U. American Commercial Policy. Second edition. (London and New York, 1S95.) DIBLIOGRAPnY. 563 Rae, J. Contemporary Socialism. (London, 18S4.) . Eight Hours for Work. (London, 1891.) Rand, B. Selections Illustrating Economic History since the Seven Years War. (Cambridge, 1888.) Report in Relation to Sugar Trust and the Standard Oil Trust. Committee on Manufactures. II. of 11. (Washington, 1889.) Report of the Monetary Commission of the Indianapolis Convention. (Chicago, 1898.) Report of New York Senate Committee on the Investigation Relative to Trusts. (Troy, 1888.) Report of Proceedings of the International Monetary Confer- ence of 1878. (Washington, 1879.) Report of the Director of the Mint upon Production of Pre- cious Metals in the United States. (Washington, 1895.) Report on the Foreign Commerce and Navigation of the United States for the Year 1895. (Washington, 189G.) Report on the Internal Commerce of the United States for the Year 1895. (Washington, 1896.) Report of the International Monetary Conference of 1892. OVashington, 1893.) Reports of the Chicago Board of Trade. (Chicago.) Reports of the New York Produce Exchange. (New York.) Reports of the United States Commissioner of Labor. (Wash- ington, 1886 .) Resume of Fremont's Expedition. Century Magazine, XLI. 759-780. Ricardo, D. The works of Ricardo. Edited by J. R. McCulloch. (London, 18S6.) Roberts, E. H. Government Revenue. (Boston, 1884.) Robinson, W. C. Elementary Law. (Boston, 1882.) Rogers, J. E. T. Six Centuries of Work and Wages. (New York, 1881.) . Industrial and Commercial History of England. (New York, 1892.) . The Economic Interpretation of History. (New York, 1888.) Roosevelt, T. Life of Thomas H. Benton. (Boston and New York, 1887.) 564 PRINCIPLES OF ECONOMICS. Roosevelt, T. The Winning of the West. (New York, 1889 ) Roscher, W. Political Economy. (New York, 1878.) Rosewater, V. Cost Statistics of Public Electric Lighting. Pub- lications of American Statistical Society. (Boston, 1893.) . Special Assessments. Columbia University Studies in History, Economics, and Public Law. (New York, 1S93.) Ross, E. A. Sinking Funds. Publications of American Econo- mic Association. (Baltimore, 1892.) Salmon, D. E. Report on the History and Present Condition of the Sheep Industry of the United States. (Washington, 1892.) Sato, S. History of the Land Question in the United States. Johns Hopkins University Studies. (Baltimore, 1886.) Say, J. B. Treatise on Political Economy. Third American edition. (Philadelphia, 1827.) Schaffle, A. The Quintessence of Socialism. Third edition. (London, 1S91.) Schloss, D. F. Methods of Industrial Remuneration. Third edition. (London, 1898.) Schonhof, J. The Economy of High Wages. (New York, 1893.) . History of Money and Prices. (New York, 1896.) Schouler, J. History of the United States of America. (Wash- ington, 1880.) Schwab, J. C. History of the New York Property Tax. Publi- • cations of American Economic Association. (Baltimore, 1890.) Scott, W. A. The Repudiation of State Debts. (New York, 1893.) Scribner's Statistical Atlas of the United States. (New York, 1883.) Scrivenor, H. Comprehensive History of the Iron Trade Throughout the World. (London, 1811.) Seligman, E. R. A. Essays in Taxation. (New York, 1895.) . Finance Statistics of American Commonwealths. Publica- tions of American Statistical Association. (Boston, 188!).) . Progressive Taxation. Publications of American Eco- nomic Association. (Baltimore, 1891.) — — . The Shifting and Incidence of Taxation. Second edition. (New York, 1899.) BIBLIOGRAPHY. 565 Senior, N. W. Political Economy. Fourth edition. (London and Glasgow, 185S.) Shaler, N. S. American Highways. (New York, 1896.) . Kentucky. (Boston and New York, 1885.) . (Editor.) The United States of America. (New York, 1894.) Shaw, A. Municipal Government in Great Britain. (New York, 1895.) . Municipal Government in Continental Europe. (New York, 1895.) . (Editor.) The National Revenues. (Chicago, 1SS8.) Sidgwick, H. Principles of Political Economy. (London, 1883.) . The Elements of Politics. (London and New York, 1891.) Smart, W. Introduction to the Theory of Value. (London and New York, 1891.) Smith, A. An Inquiry into the Nature and Causes of the Wealth of Nations. Edited by J. E. T. Rogers. (Oxford, 18S0.) Smith, R. M. Emigration and Immigration. (New York, 1890.) . Statistics and Sociology. (New York, 1895.) . Statistics and Economics. (New York, 1899.) Smyth, J. F. D. A Tour in the United States of America. (London, 1781.) Spahr, C. B. The Present Distribution of Wealth in the United States. (New York, 1896.) Speed, T. The Wilderness Road. Filson Club Publications. (Louisville, 1886.) Spelling, T. C. A Treatise on Trusts and Monopolies. (Boston, 1893.) Spencer, H. The Man versus the State. (London, 1881.) Statistical Abstract of the United States. Published annually. (Washington.) Steiner, B. C. History of Slavery in Connecticut. Johns Hop- kins University Studies. (Baltimore, 1S93.) Stimson, F. J. Handbook to the Labor Law of the United States. (New York, 1S9G.) . Labor in its Relations to Law. (New York, 1805.) Sumner, W. G. A History of Banking in the United States. (New York, 1S96.) 566 PRINCIPLES OF ECONOMICS. Sumner, W. G. Andrew Jackson. (Boston and New York, 1882.) . History of American Currency. (New York, 1874.) . Lectures on the History of Protection in the United States. (New York, 1884.) . Protectionism. (New York, 1S85.) . What Social Classes Owe Each Other. (New York, 1883.) Swank, J. W. History of the Manufacture of Iron in All Ages. (Philadelphia, 1884.) See Tenth Census, IT. 731-900. Taussig, F. W. The Tariff History of the United States. (New York, 1889.) . (Editor.) State Papers and Speeches on the Tariff. (Cambridge, 1892.) . The Silver Situation in the United States. Publications of American Economic Association. (Baltimore, 1892.) . Wages and Capital. (New York, 189G.) Taylor, E. W. C. History of the Factory System. (London, 18S6.) Taylor, S. Profit Sharing. (London, 1884.) Tenth Census of the United States. (Washington, 1880-1888.) Testimony Taken by the Select Committee of the United States Senate on the Transportation and Sale of Meat Pro- ducts. (Washington, 1889.) The Adjustment of Wages to Efficiency. Economic Studies. American Economic Association. (New York, 1S9G.) The Existing Tariff on Imports. (Washington, 1888.) The First Century of the Republic. (New York, 1876.) The Statesman's Year Book. (London, 1895.) Thompson, R. E. Social Science and National Economy. (Phila- delphia, 1875) Thomson, C. Waste by Fire. Forum, September, 1886. Thwaites, R. G. The Colonies. (New York and London, 1891.) Toynbee, A. The Industrial Revolution in England. (London, 1887.) Tremain, M. Slavery in the District of Columbia. University of Nebraska Seminary Papers. (New York, 1892.) Tucker, George. Progress of the United States in Wealth and Population. (New York, 1813.) BIBLIOGRAPHY. 507 Turner, F. J. The Character and Influence of the Indian Trade in Wisconsin. Johns Hopkins University Studies. (Balti- more, 1891.) . The Significance of the Frontier in American History. (Madison, 1891.) Also contained in Proceedings of American Historical Association. (Washington, 1894.) Upton, J. K. Money in Politics. (Boston, 1884.) TJrdahl, T. K. The Fee System of the United States. (Madison, 1S9S.) ■Walker, P. Double Taxation in the United States. Columbia University Studies in History, Economics, and Public Law. (New York, 1895.) "Walker, F. A. International Bimetallism. (New York, 189G.) . Land and its rent. (Bostou, 1883.) . Money. (New York, 1877.) . Money, Trade, and Industry. (New York, 1889.) . Political Economy. Third edition. (New York, 1888.) . The Wages Question. (New York, 1876.) Waltershausen, 1 A. S. F. von. Die Arbeitsverfassung der En- glischen Kolonien in Nordamerika. (Strassburg, 1S94.) Watson, D. K. History of American Coinage. (New York, 1S99.) Webb, S. and B. The History of Trade Unionism. (London and New York, 1894.) . Industrial Democracy. (London, 1S97.) Weeden, W. B. Economic and Social History of New England. (Boston and New York, 1891.) Wells, D. A. Recent Economic Changes. (New York, 1890.) . Principles of Taxation. A series of articles in Popular Science Monthly, Vols. 48 et seq. (New York, 1895-1899.) West, M. The Inheritance Tax. Columbia University Studies in History, Economics, and Public Law. (New York, 1S93.) White, H. Money and Banking. (Boston, 1895.) Whitney, J. D. The United States. (Boston, 1889.) Wieser, F. von. Natural Value. (London and New York, 1893.) 1 This Gorman work is included hero since it is the only work of the kind, and is an Important reference for the first chapter of tins book. 568 PRINCIPLES OF ECONOMICS. Willoughby, W. W. The Xature of the State. (New York and London, 1896.) . Government and Administration in the United States. Johns Hopkins University Studies. (Baltimore, 1891.) Wilson, W. The State. (Boston, 1889.) . Division and Reunion. (New York and London, 1S90.) Winsor, J. (Editor.) Narrative and Critical History of America. (Boston and New York, 1889.) Wood, T. A. History of Taxation in Vermont. Columbia Uni- versity Studies in History, Economics, and Public Law. (New York, 1893.) Woolsey, T. D. Communism and Socialism. (New York, 1880.) Worthington, T. K. Historical Sketch of the Finances of Penn- sylvania. Publications of American Economic Association. (Baltimore, 1887.) Wright, C. D. Report on Industrial Conciliation and Arbitration. (Boston, 1881.) . The Industrial Evolution of the United States. (Chautau- qua Press, 1895.) Wynne, J. H. General History of the British Empire in America. (London, 1770.) Young, E. Special Report on the Customs Tariff Legislation of the United States. (Washington, 1877.) II. PERIODICAL LITERATURE. The following economic periodicals and series of mono- graphs are important for the student: — Annals of the American Academy of Political and Socia^ Science. (Philadelphia, 1890 .) Economic Journal. (London, 1891 .) Journal of Political Economy. (Chicago, 1892 .) Political Science Quarterly. (New York, 1886 .) Publications of the American Economic Association. (Balti- more or New York, 1886 . ) Publications of the American Statistical Association. (Bos- ton, 1S89 .) BIBLIOGRAPHY. 569 Quarterly Journal of Economics. (Boston, 1887 .) The following commercial and financial papers or journals are also of great value : — Banker's Magazine and Statistical Register. (Xew York, 1S4G .) Bradstreets. A Journal of Trade, Finance, and Public Economy. (New York.) Commercial and Financial Chronicle. (New York.) Economist. (London, 1843 .) New York Journal of Commerce and Commercial Bulletin. (Xew York.) III. FRENCH AND GERMAN" WORKS. For the guidance of readers who may desire to commence the study of French and German works on economics, the following references are suggested: — I. French Works on Economics. Say, J. B. Traite d'Economie Politique. Eighth edition. (Paris, 1876.) This work was translated and published in this country early in tin; century. For many years it was widely used and had great influence. The American translation is referred to above. Cherbuliez, A. E. Precis de la Science Economique. (Paris, 18G2.) One of the best presentations of French economic thought of the middle of the century. Chevalier, M. Cours d'Economie Politique. Second edition. (Paris. lSfi5.) LaMonnaie. (Paris, 18G6.) Chevalier favored monometallism. One of his works has been translated under the title, " The Probable Fall in the Value of Gold." (New York, 1859.) Wolowski, L. De la Monnaie. (Paris, 186S.) L'Or et L' Argent. (Paris, 1870.) Wolowski was an able bimetallist. Leroy-Beaulieu, P. Traite de la Science des Finances. Fifth edition. (Paris, 1892.) The most valuable French treatise on 570 PRINCIPLES OF ECONOMICS. public finance, and one of the best in any language. Traite d'Economie Politique. (Paris, 1896.) This is one of the most important recent works on economics. Gide, Ch. Principes d'Economie Politique. Third edition. (Paris, 1891.) The American translation of this work has been referred to constantly in this book. Block, M. Les Progres de la Science Economique depuis Ad. Smith. (Paris, 1890.) An interesting book, the result of wide reading, but sometimes one-sided in its judgments. Say, L. (Editor.) Nouveau Dictionnaire d'Economie Politique. (Paris, 1891-1892.) A valuable work for reference. If. German Works on Economics. Rau, K. H. Lehrbuch der Politischen Oekonomie. Eighth edi- tion. (Leipzig, 1868.) The earliest edition of this work appeared in 1826, and it served as the leading text-book in Germany for forty years. Rau was, in a general way, a fol- lower of Adam Smith ; but he presents in systematic form the results of contemporary investigations. Hildebrand, B. Die Nationalukonomie der Gegenwart und Zukuuft. (Frankfurt, 1848.) An effective and readable state- ment of some of the views of the German historical economists. Knies, K. Die Politische Oekonomie vom Standpunkte der ges- chichtlichen Methode. Second edition. (Brunswick, 1883.) This book is the best presentation of the views of the historical school, but the style is cumbersome and difficult. Roscher, W. System der Volkswirthschaft. I. Grudlagen. Twentieth edition. (Stuttgart, 1892.) For the American translation, see above. III. Nationalbkonomik des Handels und Gewerbfleisses. Sixth edition. (Stuttgart, 1890.) IV. Finanzwissenschaft. Third edition. (Stuttgart, 1889.) All these works are mines of information, but not so im- portant from the point of view of economic theory. Schmoller, G. Ueber Einige Grundfragen des Kechts und der Volkswirthschaft. (Jena, 1S75.) Schmoller is the present leader of the German historical economists. A portion of one of his works is translated in Ashley's " Mercantile System." BIBLIOGRAPHY 571 See also Schmoller's article on " Volkswirthschaft, Volkswirth- schaftslehre und methode," in Conrad's Handwbrterbuch. Colin, G. System der Nationalbkonomie. I. Grundlegung. (Stuttgart, 1885.) One chapter of this volume has been translated under the title, " History of Political Economy." See above. II. Finanzwissenschaft. (Stuttgart, 1889.) Of this volume all * the chapters but one have been translated. See above. Both of these works are readable and suggestive rather than very profound. Wagner, A. Grundlegung der Politischen Oekonomie. Third edition. (Leipzig, 1892.) This book gives a comprehensive survey of the fundamental concepts and facts of economics from a juridical point of view, and should be read by every thorough student. It forms the first volume of a great " Lehr- und llandbuch der Politischen Oekonomie," to which Wagner has contributed several important volumes on public finance. Menger, C. Grundsiitze der Volkswirthschaftslehre. (Vienna, 1871.) This is a rare but extremely valuable treatise. Menger is in some respects the leader of the Austrian school of econo- mists, lie has a notable article entitled " Geld " in Conrad's Handwbrterbuch. Important works by Bohm-Bawerk and Wieser, two of Menger's pupils, have been translated. See above. Eisenhart, H. Geschichte der Nationalokonomik. Second edi- tion. (Jena, 1891.) A brief history of economics. Schonberg. G-. (Editor.) llandbuch der Politischen Oekonomie. Third edition. (Tubingen, 1890-1891.) An invaluable collection of monographs by eminent economists, covering quite com- pletely the field of economic science, and presenting the latest results, especially of German investigations. Conrad, J. (Editor.) Handw.orterbuch der Staatswissenschaften. (Jena, 1890-1895.) An indispensable work of reference upon almost all subjects, and much more valuable than any of the French or English dictionaries of political economy. INDEX. THE REFERENCES ARE TO PAGE NUMBERS. Act of March 14, 1900, 296. Act of 1873, relating to coinage, 292; false charges concerning, 292. Agriculture, history of in America, 35-43 ; extensive cultivation a feature of American agriculture, 42 ; land tenures and American agriculture, 41. American Federation of Labor, 441. Anarchism and anarchists, 467, 483. Andrews, E. B., on illustration of the clearing system, 267; on pure profits, 428-429. Arbitration, voluntary, 455-456 ; compulsory, 456-457. Atkinson, E. , on cotton industry, 70; on wastes in consumption of food, and wastes by fire, 106-107. Banks, and the check system, 265- 267 ; bank notes, 272 ; the de- posit function, 273; the discount function, 273-274; illustration of banking functions, 274-277; the issue function, 277-278 ; state banks in the U. S., 290 ; the na- tional banking system, 290-292. Banks, savings, important in pro- cess of capital formatiou, 139 ; statistics of in U. S., 139. Barter, disadvantages of, 218. Bills of exchango and drafts, 268. Bimetallism, national, 297; and monometallism, 297-298 ; inter- national bimetallism, 298-307 ; desirability of, 299-303; practica- bility of, 303-307 ; the experience of France, 304-305; political ob- stacles to, 307. Birth and death rates, 124-125; birth rate in the U. S., 130. Blacklist, 445. Bland- Allison Act, 292-293. Bohm-Bawerk, on limitations to the demand for land, 460. Bonds, government, 503-504. Boycotts, 445. Bullion and Money, 231-232. Canals, projected by Washington, 60-61; the Erie Canal, 61; other canals, 61; relations to railways, 61. Capital, social, as a factor of pro- duction, 131-141; definition of, 132; relation to indirect produc- tion, 132; concrete forms of, 133- 134; land and acquired faculties are not capital, 135; subsistence not capital, 136; fixed and circu- lating capital, 137; fire and spe- cialized, 137-138; formation of, 138-139; abstinence necessary for capital formation, 140; induce- 574 INDEX. ments to saving, 140; maintenance or increase of, 141; an element in cost of production, 163-164, 200; importance of in determination of social income, 377-378 ; private or acquisitive, 387-388; the value of productive capital, 388. Cattle raising, as a frontier indus- try, 34; in the colonies, 35; in later times, 35; stock raising as a part of American agriculture, 40-41. Cereals, production of, 35-37; im- portant exports, 36. Clearing house system, 266-267. Coal, production of in U. S. , 44-55; concentration of iron production in vicinity of coal supplies, 74. Coins and coinage, defined, 223 ; history of, 222-223; free and gra- tuitous coinage, 223 ; brassage, 224 ; seignorage, 224 ; origin of, 224-225. Competition, defined, 1 85-186; tends to equalize price of goods that rep- resent the same cost of production, 195 ; commercial and industrial competition, 197; is often imper- fect, 207. Comptroller of the Currency, 290. Conciliation, 454-455. Constitutionality of labor legisla- tion, 438-439. Consumption of Wealth, definition of, 87; consumption and produc- tion, 88; laws of, 88-99; eco- nomic order of, 91-95 ; productive and final consumption, 98; statis- tics of consumption, 99-101 ; economy in consumption, 101- 109 ; the law of demand, 1 10-113. Cooperation, or cooperative produc- tion, defined, 153; results of, 451-453. Corporations, few in number in England in 1776, 54 ; nature of, 143-153; advantages of, 150-152. limited liability of shareholders, 151-152; weakness of, 152-153. Cost of production, social cost, 162; elements of, 162-164 ; social and employer's cost, 198 ; elements of employer's cost, 199-203; differ- ent costs of production, 203-205. Cotton, production of in TJ. S., 38- 39 ; importance of cotton as arti- cle of export, 39. Cotton industry, developed rapidly after 1807, 69; largely concen- trated in New England, 69 ; rapid growth in South, 69-70 ; charac- ter of, 70-71. Credit, definition of, 264; book credits, 264-265 ; promissory notes, 265 ; checks, 265-267 ; bills of exchange, 267-268; for- eign exchanges, 26S-272; hanks as institutious of credit, 273-278; advantages and disadvantages of credit, 278-279; influence of credit upon prices, 283-285 ; credit lim- ited by volume of money, 286. Cumberland Road, 60. Custom, and competition, 186 ; ob- scures normal value, 209. Customs taxes, 343-344 ; see "Tariff." Demand, the law of, 110-113; a factor in determining markel value, 187-188 ; equalization of international demand, 350-851. Distribution of wealth, 375-431 ; the process of primary distribu- tion, 380-381 ; secondary distri- bution, 381-384 ; profits, wages, interest, and rent, 385 ; the law of interest, 387-399 ; the law of INDEX. 575 rent, 399-410 ; the law of wages, ■110-42-1; the law of profits, 424- 431 ; justification of the present distribution of wealth, 476. Division of occupations, 143 ; of labor, 144-145. Dollar, contents of gold, 244 ; of sil- ver, 244 ; history of in U. S., 288- 289; coinage of silver dollar stopped, 292; limited silver coin- age renewed, 292-293. Domains, revenue from, 498-499. Duties, see "Taxes." Economics, definition of, 79. Ely, R. T., on definition of produc- tion, 115; on definition of checks, 265; on limits to the demand for land, 460 ; on definition of social- ism, 464. Eminent domain, 156. Employer, position of in distribu- tion, 382-384. Engel's Law, 99-100. English manufactures and com- merce, condition of in 1760, 53- 64; changed by Industrial Revo- lution, 55-57. Entrepreneur, see " Undertaker." Escheats, a source of public revenue, 502. Exchange of products, a form of associated activity, 146-147 ; de- velopment of, 180-181; advan- tages of, 181-182; mechanism of, 182-183; value, 183-216; foreign exchanges, 337-373; pri- mary distribution, 380-381. Excise, see " Taxes." Exports of the U. S., 337-338. Factors of production, 118-141 ; organization of, 143-157 ; coop- eration of, 147. Factory Acts, 437-438. Fees, 501-502. Fines and penalties, a source of pub- lic revenue, 502. Fisheries, early importance of, 43 ; development of shore and inland fisheries, 43-44 ; U. S. Fish Com- mission, 44. Flax and hemp, production of in U. S., 38. Foreign exchanges, method of set- tling, 26S-269; the rate of ex- change, 270-271 ; of the U. S., 337-338 ; nature of international exchanges, 339-344 ; comparative positions of England and the U. S., 341 ; international move- ments of money, 342-344 ; ad- vantages of foreign trade, 344 ; international values, 344-351 ; immobility of labor and capital, 344-345 ; international trade based upon differences in relative prices, 346-350 ; restriction of foreign exchanges, 351-373. Foreign trade of the U. S., 337-338. Freedom in establishment of pro- ductive undertakings, 160-162. Freight charges and the foreign exchanges, 340-341; burden of, 351. Functions of money, (1) medium of exchange, 240; (2) value de- nominator, 241 ; (3) standard of deferred payments, 241 ; (4) legal tender, 242. Fur trade, in the colonies, 33 ; later history of, 34 ; economic impor- tance of, 33. GEORGE, Hknky, proposals for land nationalization, 458-464. Gifts, a source of public revenue, 502. 576 INDEX. Gold and silver, production of in U. S. prior to 1848, 44; since 1849, 45 ; have displaced other metals as money, 220-222 ; world's stock of gold money and bars, 221 ; conditions of produc- tion of gold and silver, 237-23S ; history of production of gold and silver, 238-240 ; territorial distribution of, 279-282 ; fall in value of silver, 292-293, 297- 298 ; gold and silver certificates, 293-294; increase of gold pro- duction in recent years, 301-303. Goods, free and economic, 85 ; economic goods usually ex- changeable, 86 ; durable and perishable, 87 ; present and fu- ture goods, 97. Governments, did not originate money, 225 ; hut have regulated coinage, 225-226 ; and have passed legal-tender laws, 226 ; economic functions performed by, 478-480 ; old views of gov- ernmental functions, 480-481 ; modern thought, 481-482 ; mod- ern theories of governmental functions, 482-488 ; considera- tion of the several functions of government, 488-492. Government paper money, 257- 263. Grass and hay crop, importance of in U. S., 37. Greenbacks, or U. S. notes, 263 ; issued in 1862, 289 ; history of, 289-290. Oresham's Law, 245-247. Guilds, in England in eighteenth century, 54. IIadlky, A. T. , on effect of large fixed capitals in disturbing prices, 213 ; on wages, 413 ; on purpos of labor unions, 448. Hamilton, Alexander, on American manufactures, 51-52. Hewitt, A. S., on iron industry of the U. S., 75 ; on the obligations of great riches, 104. Housekeeping, importance of, 105 ; wastes in, 105-106. Immigration, statistics of, 19-20 ; character of, 20. Import trade of the U. S., 338. Income, social, 375-378. Incomes, private, 378-380 ; classifi- cation of, 380-385. Indented servitude, 22-23. Index numbers, 228. Individualism, 484-488. Industrial Revolution in England, caused by inventions, 55-56 ; marked by growth of factory system, 56 ; intensified competi- tion, 57. Industrial Revolution in the U. S., 57-58. Interest, defined, 385 ; social and private capital, 387-388; value of productive capital, 388; short and long time loans, 388-389; rate of interest, 390-395 ; interest arises from difference in value of present and future goods, 390-391; risk and interest, 394-395 ; tendency of rate to decline, 395; rates for long and short loans, 396 ; tho general loan market, 397 ; the rate of interest and the supply of money, 397-398 ; justification of interest, 398; usury laws, 398- 399. International banking houses, 343. International payments, 339-340 ; various forms of indebtedness, INDEX. Hi 340-341; indirect payments, 341- 342; movements of money, 842- 344. Investment of labor ami capital upon land, and law of diminish- ing returns in agriculture, 104- 107; implications of the law, 1(37; in manufactures and other indus- tries, 16S-170. Iron, production of in U. S., 44-46; iron and steel industries, 74-7(5; growth of production, 75-70; man- ufactures and exports of, 70. Jefferson, Thomas, on slavery, 25. Jevons, \Y. 8., on iron trade in U. S., 75; on definition of coins, 223. Knights ok Labor, 440-441. LABOR, scarcity of labor force in colonies, 22; systems of in U. S., 22 et seq.; definition of, 121; different kinds of, 121-122; eco- nomic importance of, 123 ; effi- ciency of, 123-124 ; the supply of, 124-131 ; an element in cost of production, 164, 199; a com- modity, 43 - 2; peculiarities of as a commodity, 433-436; relation of to product, 449-453. Labor contract, nature of, 432-436; restriction of by legislation, 437— 439; and labor organizations, 440- 449; industrial warfare, 453-457. Labor organizations, two types of, 4 10; objects of, 441-442; desire collective bargaining, 442; strikes and boycotts, 443-445; 'have mod- ified the labor contract, 445-446; various criticisms of, 447-449. Lnissczfairc, 482. Land nationalization, 453-464; Land Tenure Reform Association, 458; I proposals of Henry George, 458- 459 ; Mr. George's arguments, 450-462; general considerations, 462-404. Land tenures, in Europe, 14; in the U. S., 14-15. Large-scale production, 170-171; secures economy of capital, 172- 174; encourages experimentation, 174 ; secures economy of labor, 174-175; also economy in subsid- iary processes, 175 ; yet certain advantages attend production on smaller scale, 175-177; huge-scale production not necessarily mo- nopoly, 177; in different branches of business, 177-178. Lassalle, Ferdinand, on abstinence, 140. Laveleye, on advantages of ex- change, 182. Law of diminishing returns, see ' ' Investment of labor upon land." Legal tender, 226, 242. Leroy-Beaulieu, P., on economy, 102; on saving and spending, 108. Loans, public, 503 ; tbeir forms, 503-504; tbeir objects, 504-505; their effects, 505. Loans, short and long time, 388- 389; supply ami demand, 391- 394; rates for short and long time loans, 396. Lockout, 445. Lotteries, public, 502. Lowell, J. R., on Dred Scott deci- sion, 542. Lowell, F., constructs fully equipped factory, 58. Luxury, 102-105; does not "make trade good, "108-1 09. " MAGIC fund " delusion, 513-514. Manufactures, colonial, 48-52; 578 INDEX. England's attitude, 50, 57 ; do- mestic industries, 43 ; production for markets, 49 ; high wages an obstacle to, 51 ; condition of in 1791, 51-52. Market, defined, 184-185. Market value, 186-194. Marshall, A., upon law of diminish- ing returns, 167 ; upon value, 206; upon trade morality, 215. Marx, K., evolutionary socialist, 468. Military expenditures, 495. Mill, J. S., on relation of money to prices, 229 ; on influence of credit upon prices, 283-284; on value of patent rights, 428 ; on individu- alism, 485. Mining industries of U. S., 44-46. Money, purchasers measure sacri- fices in terms of, 110-111 ; mar- ginal utility of, 111 ; development of metallic money, 218-227; prim- itive money, 218-220 ; precious metals displaced other forms of money, 220-222; coinage, 222- 225 ; governments and money, 225-226 ; value of metallic money, 227-238; supply of money and demand for money, 232-235 ; value of money and marginal cost of production, 235-238 ; functions of money, 240-242; debased money, 242-252; inflation and contraction, 252-257; changes in volume of money, 254-255 ; ap- preciation and interest, 255; gov- ernment paper, 257-263 ; govern- ment issues in the U. S., 258 ; arguments for and against gov- ernment paper, 258-262 ; conver- tible government paper, 263-264; territorial distribution of, 279-282; representative money, 283; credit and prices, 283-287 ; money prob- lem in the U. S., 295-296. Monometallism, 289-299. Monopolies, fiscal, 305-306, 500. Monopoly, is power to control sup- ply, 216, 309 ; monopoly value, 309-312; legal monopolies, 313- 314; natural monopolies, 314— 316 ; capitalistic monopolies, 316-318; extent of monopoly influence, 318; complexity of monopolies, 319 ; absolute monop- oly seldom possible, 320 ; problem of natural monopolies, 320-324; growth of capitalistic monopolies, 325-328; criminal methods of some monopolies, 328-329 ; final considerations, 329-334. KATiONALbanking system, 290-292. Nature, a factor of production, 118— 121; contributions of, 118-119 ; appropriability of natural contri- butions, 119-120; man and na- ture, 120-121. Non-competing groups among labor- ers, 421. Normal value, 194-209. Occupations, statistics of, 122. Partnership, 149. Pensions, expenditures for, 496. Personal services, are economic goods, 84-86 ; production of, 117— 118. Piece wages, 449. Pools, 316-317. Population, see "Supply of labor." Population of the U. S., statistics of, 18 ; mixed character of, 18, 20; natural increase of, 19 ; mobil- ity of, 20-21 ; concentration of, 2i-22. INDEX. 579 Precious metals, see " Gold and silver." Price, defined, 184; changes in gen- eral prices, 227-228; general and individual prices, 240 ; credit and prices, 283-287; recent fall of, 299. Production of wealth, defined, 115; productivity of various industries, 116 ; production and sacrifice, 116-117 ; of personal services, 117-118; a social process, 143; stages in development of, 157— 160; freedom of, 160-162; large- scale production, 170-178. Profits, defined, 385; profits and risks of investment, 424-425 ; necessary profits, 425-427 ; dif- ferential profits, 427-429 ; mo- nopoly profits, 429-431 ; capital- ization of, 430-431. Profit sharing, 450-451. Progressive wages, 449-450. Public expenditures, 493-498 ; their classification, 493 ; in the United States, 494-496 ; the growth of public expenditures, 497-498. Public industries, revenue from, 499-501. Public lands, management of, 15 ; public domain of U. S., 15-17 ; policy of U. S. , 17. Public revenues, 498-514 ; from domains, 498-499 ; from public industries, 499-501 ; from fees, 501-502 ; from miscellaneous sources, 502 ; from special assess- ments, 502-503 ; from loans, 503- 505 ; from taxes, 505-514. Railroads, construction of in U. S., 61-63 ; subsidies to, 63 ; over- construction of, 63 ; trunk lines, 64 ; competition and combina- tion, 64-65. Rent, defined, 385, 399 ; value of natural agents, 400 ; income from natural agents, the rent of land, 401-410 ; rent not a cause of high prices, 406-408 ; actual rents and economic rent, 408; alleged ten- dency of rent to increase, 409-410; the unearned increment, 410, 459. Rights of contract, determined and enforced by the State, 155-157. Rights of inheritance and bequest, 155. Rights of property, defined, 154 not natural rights, 155 ; always limited by law, 155-156. Risks, not an independent element in cost, 201, 203 ; and the rate of interest, 394-395. Roads, in the colonies, 58-59; built by local governments in U. S., 59 ; bad roads of U. S., 59. Saving and investment, 107-109 ; two forms of saving, 107-108 ; saving does not injure trade, 108- 109 ; desirability of, 109. Seligraan, E. R. A., on definition of fees, 501 ; on definition of special assessments, 502 ; on the property tax, 527, 533. Sherman Act, 294-295. Shipbuilding, early growth of, 65- 66 ; remarkable history of our marine until 1860, 66-67 ; decline of merchant marine, 67-68 ; iron and steel construction, 68 ; illib- eral navigation laws, 66-67. Sidgwick, H., on power of monopo- lists, 310. Silk industry, 73. Silver, see "Gold and silver." Slater, S., erects cotton mill in 1790, 58. 580 INDEX. Slavery in the U. S., origin of, 24 ; the slave trade, 24 ; geographical distribution of, 24-25 ; unprofit- able in the North, 25 ; profitable in the South, 25 ; its effect upon the South, 26. ■ Smith, A., on corporations, 54; on division of labor, 144 ; on cor- porations, 152; on protective tariffs, 373 ; on causes of differ- ences in wages, 420 ; on private enterprise, 481. Socialism, defined, 464 ; cardinal elements of, 465-466 ; ambiguous use of the term, 466 ; revolu- tionary and evolutionary social- ism, 467-468 ; an old theory, 468 -469 ; as a scheme for production, 469-472 ; as a scheme for distri- bution, 472-474 ; final considera- • tions, 474-476. Special assessments, 502-503. Specific and ad valorem duties, 352, 515. Stages in development of produc- tion, the hunting and fishing stage, 157; the pastoral stage, 158; the agricultural stage, 158-159 ; manufacturing and commercial stage, 159 ; industrial stag* 1 , 160. Stages of westward expansion, 11- 13. Standard of living, define d. 126 ; affects growth of population, 127- 129 ; may be raised or lowered, 127 ; relation of economic prog- ress to, 129; in the U. S., 130; sets limits to the fall of wages, 417 ; may be constantly raised, 419. Standard Oil Company, 317, 318, 319, 330, 333, 334. State, participates in process of production, 154-157. Stimson, F. J., on the legality of strikes, 444; on collective bar- gaining, 446. Strikes, 443, 448. Sugar cane, cultivation of in U. S., 39-40. Supply, defined, 188; a factor in determining market value, 188— 189; of labor, 435. Supply of labor, in relation to birth and death rates, 124-125; in rela- tion to the standard of living, 126-130. Tabular standard of value, 255. Tariff on imports, 351-352; revenue tariffs, 352-353; protective tariffs in the U. S., 353-354; detailed effects, 355-361 ; different costs of production, 361; what protective tariffs cannot accomplish, 361- 365; tariffs and wages, 364-368; the advisability of adopting pro- tective tariffs, 368-373; protec- tion to infant industries, 369-370; diversity of industries, 370-372; our tariff an historical product, 372-373. Taxes, on monopoly earnings, 312, 532; taxes defined, 505-506; their position among public revenues, 506-507; their justification, 507- 508; justice in taxation, 508-510; proportional, progressive, and re- gressive taxes, 510-512; direct and indirect taxes, 512-513; cus- toms taxes, 343-314, 514-518; excise taxes, 518-522; taxes on transactions, 522-523: poll or cap- itation taxes, 523-524; the general property tax, 524-533; incidence of the property tax, 528-532; cor- poration taxes, 533-537; license taxes, 537-538; inheritance taxes, INDEX. 581 538-541; the income tax, 541-546; taxation in the United States, 546-551. Textile industries, see " Cotton," " Woolen," and "Silk industries." Time wages, 449. Tobacco, cultivation of in U. S., 40. Treasury notes, 503. Truck payments, 438. Trusts, 317. Turner, F. J., on the development of industries in the U. S., 32. Undertaker, definition of term, 148; functions of, 147-148; forms of business undertakings, 149- 154; single entrepreneur system, 149; position of in distribution, 382-384, 424-425; attempt to dispense with, 452-453. Unearned increment, 410, 459-464. Utilities, include material objects or personal services, 84 ; elemen- tary, place, form, and time utili- ties, 86; production of, 115. Utility, definition of, 84; the law of diminishing utility, 88-91; total and marginal utility, 91 ; importance of a good depends upon marginal utility, 95-96. Value, defined, 183-184; the de- termination of market value, 186—194 ; the equalization of sup- ply and demand, 189-191; fluctu- ations in market values, 191-192; forced sales, 192-193; determina- tion of normal values, 194-209 ; analysis of cost of production to the employer, 1 98-203 ; normal values are adjusted to the cost of production, 195-198 ; differenl costs of production, 203-205 ; normal value depends upon bal ance of opposi::g forces, normal value obscured by various causes, 209-216; monopoly value, 309-312; theory of international values, 344-351. Wages, free land a cause of high wages, 28 ; evidence of high wages in colonial times, 28 ; high wages in the U. S., 364- 368 ; defined, 385, 410; real and nominal wages, 411 ; wages and salaries, 411 ; time and piece wages, 412 ; labor cost, 412-413 ; wages the discounted product of industry, 413; general and relative wages, 413-414 ; general wages, 414-419; limits to the increase of wages, 415-419; the standard of living, 417-418; rela- tive wages, 419-424. Wages system, nature of, 432; freedom of contract, 432 ; pecu- liarities of the commodity, labor, 433-436; labor legislation, 437- 439 ; labor organizations, 440- 449; unfavorable relation of laborers to product, 449-453; con- ciliation and arbitration, 453-457. Walker, F. A., on relation of credit to prices, 285 ; on proposals of Henry George, 462. Wants, human wants the starting point of economies, 79; origin of, 80-81 ; development of, 81 ; cul- ture and existence wants, 82-83 ; satiability of, 88. Waste, in consumption of food, 105-106 ; by fire, 106-107- Water transportation, 60. Wealth, production of, 115; and progress, 129; social wealth, 375. Wilson, Woodrow, on westward expansion, 13-14. W.i. leu industry, 71-73. UNIVERSITY OF CALIFORNIA LIBRARY Los Angeles This book is DUE on the last date stamped below. — MAR 2 o - ■; : OCT 01 1986 Form I.:i-Hi,„iii.'56(C2477s4)444 I1I1II11111 111 I ' 3 1158 00454 5587 ii?ffirlir ,l ' TV IJllIIIIilll A * 001 157 530 ! HB 171.5 B87i