,,^»;>,vl,^ tiff;,/; ■;• • .;,;■; '•; ■.^* ^;%v Stbm. 7 i ■ ^ A SYSTEM OF POLITICAL ECONOMY. BY JOHN LANCELOT SHADWELL. LONDON: TlltTBNr^R AND CO., LUDGATE IT ILL. MDCCCLXXVII. \ All rights rc,iervc(l.'\ LONDON : PRINTED AT THE "INDUSTRIAL PRESS " PRINTING WORKS, 59, GREEK STREET, SOHO. u mmzm of SDUiifflni cauformia. \mm PREFACE. I co:^DiENCED studying Political Economy at the time when the pubhcation of Mr. Thornton's work on Labour had just given so rude a shock to the common belief that the science, so far as it dealt with the subjects of Value and Wages, was complete. The late Mr. J. E. Cairnes, whose lectures I had the privilege (for such I must always consider it) of attending, particularly directed the attention of his pupils to the conflict between Mr. Thornton's views and those commonly held on these subjects, and expressed his own opinion that the commonly received theory required thorough revision. His own views ^^•ere after^vardg given to the world in his " Leading Principles of Political Economy," published only a year before his untimely death. My attention having been by him directed to the subject, I have found reason to be dissa- tisfied with the common theory, \nth his own modification of it, and vdth. that which ]Mr. Thornton would substitute in its place. I now aWsIi to lay before the public my theories of Value and Wages, which I believed to be new when I adopted them, but in which I have since found that I have been forestalled, in the former case by Adam Smith and Mr. Cazenove, and in the latter by Mr. Jevons. I have thought that the theories would be likely to receive more attention if worked into a System of Political Economy, and I have, therefore, in the folloAV- ing pages, discussed most of the questions commonly dealt with in treatises on the science. Having ])ecn frequently obliged to refer to 192S7U5 IV PREFACE, sums expressed in the money of dift'erent countries, I have thought it most convenient to reduce all statements to a common denomination, and have employed the French system, both for money, weights, and measures, as being in all respects the best with which I am acquainted. JOHN L. SHADWELL. 21, Nottingham Place, Londok, W. Januari/, 1877. CONTENTS. INTRODUCTION. Chapter I. — General View of the Science. Object of the science Objections considered popular Moral .. Scientific Laissez faire PAGE 1 2 5 6 7 Chapter II. — History of Political Economy. Early theory of wealth 9 The mercantile system .. 10 The Economists .. 12 Adam Smith 13 Malthus .. 16 Ricardo .. 17 Tooke .. 18 Mill .. 18 Longe .. 19 Thornton .. 19 VI CONTENTS. BOOK T.— PRODUCTION. Chapter I. — Wealth. Nature of wealth Desire for wealth Aversion to labour Fallacy of over-production Means of estimating wealth Elements of production Chapter II. — Labour. Productive and unproductive laliour Constancy Division of labour . . Machinery Scale of production . • Progress of improvement Freedom of labour . . Chapter III. — Capital. Definition of capital distinguished from money Large and small capitals Machinery Commodities and services . . Workhouse and prison labom' Fallacy of over-accumulation Freedom of industry Chapter IV. — Population. Increase of population Malthus Steuart Over-population Pauperism Emigi'ation Population in ancient times France . . England Ireland Population in the future Natural advantages . . Differences of fertility Systems of landed tenure Chapter V -Land. 82 84 85 CONTENTS. vu BOOK II.— DISTRIBUTION. Chapter T. — Value. Importance of the subject . . Meaning of the term Malthus and Ricardo Controversy respecting the measm-e of value Page 89 90 9ti 99 Chapter II. — Cause of Value. General cause of value ..105 Manufactured goods . . .. Ill Eaw produce . . .. 113 Market value . . ..121 Supply and demand . . . . 124 Utility -.128 Competition . . ..131 Chapter III. — Wage^d. General cause of wages Other theories considered . . Advantages of some employments Skill Certainty of employment . . Wages in different places 133 137 145 148 153 154 Chapter IV. — Profit. Cause of profit Eate of profit in different trades Permanence of the rate of profit Profit in different countries Monopoly Socialism 157 160 164 173 183 184 Chapter \. — Rent. Definition of rent Cause of rent . . Rise of rent with the progress of society 186 188 196 Chapter VI.— Reci^xt Fall in the Value of Gold. Proofs of the fact Cause of the fall Its consequences 200 208 218 Till CONTENTS. Chaptee YII. — Trades' Unions and Co-operation. Objects of trades' unions Their organisation Extent of their power Their utility . . Co-operation . . Industrial partnership General reflections Page 227 229 230 242 243 247 249 BOOK III.— EXCHANGE. Chapter I. — Money. The use of exchange . Medium of exchange Standard of value Coin State coinage . . The British Mint Chapter II. — ^Value of Monet. Quantity of money . . Amount of business done Efficiency of circulation Proportion of coin to paper Slowness of a change of value Price of bullion Accessibility of the mint Seigniorage Prohibition of melting Payment by tale Inconvertible notes . . 2.51 254 256 261 263 267 270 271 272 273 27."^ 276 277 280 286 287 290 Chapter III. — Single and Double Standard of Value. Gold standard . . Silver standard Double standard Subsidiary coins Chapter IY. — Credit. Use of credit . . Bills of exchange Bank notes Cheques Clearing house Cheque banks , . 291 294 297 311 315 321 324 328 331 332 CUXTK^T;^ IX Chapter V. — Value of a Papeh Currency. Effects of credit on prices . . Inconvertible treasiuy notes Inconvertible bank notes Convertible bank notes Page 334 338 343 353 Chapter VI. — Eestriction ox Banking. Free trade in banking • • • • • 357 Privileged banks . 361 Joint-stock banks • • • • • 366 Issue of notes . . • • • • • 370 The Bank of England ; 372 Country banks • • • • • 381 Scotland and Ireland • • • • • 385 Chapter VII. — Foreign Trade. Domestic and foreign trade . Exports and importa . . Foreign exchanges . . International values . . Foreign competition . . Advantage of foreign trade , , 387 389 400 405 409 412 Chapter VIII. — International Coinage. Advantage of an uniform coinage Paris monetary conference . . International coinage commission The franc and the sovereign Other schemes 417 420 427 432 434 Chapter IX. — Rate of Interest. Prohibition of usury . . . . . . 436 Interest on stocks . . .. 441 Eate of discount . . • • . . . . . • . . 451 Stock Exchange speculati ou .. 4G0 Foreign investments . . • • •• t- •• •• « Chapter X. — Colonies. . . 466 Colonial dependence . . •• •. .. .. .. * .. 4G8 Colonial trade . . .. .. .. .. .. • .. 174 Emigration . . .. 480 Transportation . . .. 489 Protection in war . • . • • • ■ * > . . .. I'.)l Local sell-go vcrumuut . . . . 192 CONTENTS. Chapter XI. — Protection. Object of protection . . Bounties Navigation laws. . Protection in America United States tariff . . Exceptional cases Foreign competition . . Page 495 503 50.3 505 520 523 528 BOOK IV.— TAXATION. Chapter I. — Government. Functions of government Education . . Charity . . Conveyance of letters Telegraphs Railways Necessity of taxation Chapter II, — Direct Taxation. Principles of taxation Legacy duties. . Income-tax . . . . Taxes on houses Taxes on luxuries License duties. . Taxes on commercial transactions 534 541 546 549 555 558 565 569 572 577 584 586 588 589 Chapter III. — Indirect Taxation. Customs Excise . . Duties on stimulants Tithes . . Financial policy Chapter IV. — National Debts. Necessity of niitioual debts . . Methods of funding . . Eeduction of debt 590 598 603 605 609 612 618 621 ERRATA. Pag( B 10, line 29, for commission rea d permission. j> Last line >) throws !) throws away, i; 11, line 35 ); confined )5 confine. >> 43 „ 6 !! Diaks J? Dyaks, 1) 61 „ 13 )> loosing » losing. )> 55 note )) Jevon's !> Jevons. » 76 line 3 from bottom „ 10,000,000 of 11 10,000,000. J) 114 „ 16 J> fell 11 rose. )) 120 ,, 32 )> ways 11 wages. )» 197 „ 14 )) Rowe 11 Ran. >! 207 „ 22 and 27 ;) Chevallier 11 Chevalier. » 241 title » labour 11 power. )» 266 line 36 )S their 11 there. )5 388 „ 18 >? Cairns 11 Cairnes. :? 527 title ?^ Foreign competition „ Exceptional c 1) 529-533 titles )) United States tariff 11 Foreign compi ); 554 line 27 !> Spenser 11 Spencer. jj 564 ,, 21 )! New Zealand 11 Queensland. J) 684 „ 34 !) taxpayee's 11 taxpayer's. >) 599 „ 19 J) execu 11 execution. J) 606 ,, 32 » now 11 which now. \ SYSTEM OF POLITICAL ECONOMY, INTRODUCTION. CHAPTER I.— GENERAL VIEW OF THE SCIENCE. OBJECT OF THE SCIENCE — OBJECTIONS CONSIDERED : POPULAR — MORAI^ — SCIENTIFIC — LAISSEZ-FAIRE. Political Economy is the science of wealth. It investigates the laws which regulate the conduct of human beings when engaged in the production, distribution, or exchange of wealth. Its primary data are furnished by universal experience, or common sense, and these it collects and arranges in such a way that their appli- cation to the facts of common hfe may be easily perceived, and often in such a way that they seem to be at variance with the teachings of experience, although in reality in perfect harmony with them. It does not undertake to teach individuals how to get rich, but by pointing out the general causes which promote the accumulation of wealth, it teaches legislators and admmistrators in what manner their laws and acts promote or impede the mdustrial prosperity of their subjects. Every Government is obliged to interfere more or less with the conduct of its subjects in relation to the accumulation of wealth, and rulers must therefore have some theory, both as to the nature of wealth and the way in which it is amassed, in order to guide their conduct. Pohtical Economy cannot, indeed, dictate to rulers what they ought to do, but it can show them what the effect of their acts will be, and leave them to draw their own inferences. Thus, it may show that a particular law or tax will diminish the wealth of a community, but it is unable to decide whether that law or tax ought to be maintained ; for the ruler may consider that an increase of wealth would injure the morals of the people, or that their wealth should be sacrificed for some temporary political object. In like manner physiology teaches us that suspension by the neck will produce death, but cannot tell us whether capital punishment ought to be maintained or abolished. As physiology is useful in teaching us 2 POPULAR OBJECTIONRI. wliat are the functions of the body, and warning us to avoid whatever interferes with their due discharge, so Political Economy is useful in teaching us the nature of the social mechanism, and warning us to avoid whatever interferes with its action, unless we have some more important object than wealth in view. Though the generalisations from which the science starts are so simple and ob^dous, that every one accepts them in theory and in practice in the management of his own afPairs, yet in dealing with the affairs of others, people are apt to lose sight of them, and to act in such a manner as they could hardly do if they had meditated long over these simple truths, and learned how they apply to actual circumstances. That money is of no use unless it can be spent— that people cannot live without food — that it is convenient to save trouble — are propositions which every one admits where his oa^ti business is concerned ; yet statesmen often act, and philosophers often reason, in a manner which is quite inconsistent with the recognition of these truths. As very few statesmen have either the time or the inclination to pursue abstract studies, it is necessary that another class should devote themselves to the task of tracing out the laws which govern human conduct, and sho\^dng how they apply in different cases, so that statesmen may avail themselves of the results of their labour. It is thus that Political Economy has grown up from the necessity which men experienced of having a correct theory by which to guide their conduct. It is not in the nature of things that a large number of people should devote themselves to this one science, and there is no reason to complain that the great majority are indifferent to it ; but it is much to be regretted that there is in many minds a positive hostility to it. This is to some extent the fate of every science which comes into collision with popular prejudices; and the astronomer and the geologist have had to encounter the charge of sapping the foundation ot religion, because their discoveries were opposed to some portion of a particular creed. Astronomy and geology have now trimnphed, and compelled their opponents to admit either that the particular creeds are altogether false, or that the portions which were attacked are not essential parts of them. Political Economy is doubtless destined to triimiph over all its adversaries, but they are at the present day so numerous, and there are amongst them so many men whose opinions are entitled to the highest respect, that an examination of the principal objections which have been urged against it ynO. form a fitting introduc- tion to a detailed exposition of the science. They may be di\dded mto three classes : The popular, the moral, and the scientific, and will be discussed in this order. A common objection is that it is of no use. Now, the use of it is to POPULAR OBJECTIONS. 3 point out to statesmen the consequences of their own acts, and to say that it is of no use is to say that it does not matter whether they know what they are doing, when they enact a law. When a Government imposes a high tax on foreign manufactures, it generally defends its conduct on the ground that it thereby increases the wealth of its subjects. Now, the question whether it has this effect is an economic question, and the Government proceeds quite as much on a scieutifio theory, when it assumes that it has this effect, as the advocates of Free Trade do when they contend that it has not. The only question is, which is the right theory ; and the use of deciding it is to prevent the Government from committing an error which wiU have the effect of diminishing the wealth, which means the comfort of many of its subjects. Again, many Governments levy taxes for the purpose of relieving poverty, and the aid of science is required to show whether these measures tend to diminish poverty or rather to increase it. By levying these taxes rulers show that they wish to diminish it, and if they do so, it must be useful for them to know whether their measures are likely to secure their object. To give particular instances : In 1810 public attention was called to the fact that the notes of the Bank of England would not purchase as much gold coin as they nominally represented. Lord King informed his tenants that he would no longer receive a twenty pound note as a payment of £20 rent, and Parliament was obhged to decide whether bank notes should be made legal tender in payment of debts contracted when they were on a par with gold. If they decided wrong, they must have injured either debtors or creditors, and they wished to do justice to both. It was an economic question, for it was a question whether gold or notes had altered in value, and it could not be solved without reference to abstract principles. In fact, two eminent economists, Ricai'do and Tooke, were induced to undertake a long course of abstract reasoning and laborious research, by their desire to arrive at a right conclusion on this practical question, which excited much interest at the time, but Avhich might now have been forgotten if it had not been for their writings. In the last generation a controversy was originated by "Wakefield relative to the best means of disposing of waste land in our colonies. Here, again, a reference to science was necessary, iu order to ascertain whether low wages conduce to the increase of wealth, and whether putting a high price on land promotes either or both of these objects. More recently a Royal Com- mission was appointed in 18G8, to consider a proposal made by the French Government, that tlie quantity of fine gold iu the sovereign should be reduced, so as to make it contain exactly tlie same quantity as five five-franc pieces. The objection was instantly raised that the b2 * POPULAR OBJECTIONS. reduction would lower the value of the sovereign, and that much incon- venience would be caused if all debtors were obliged to add 1 per cent, to all their debts, however small ; and it is the task of Political Economy to decide whether such a measure would actually change the value of the sovereign. But rulers are not the only people who need the aid of this science. All who "wish to dispense charity may profitably consult it, for it will help them in judging how far the efiects of a particular mode of dis- pensing it is likely to prove beneficial or injurious. Sociahsts and all who desire social reforms ought to consult it, in order that their plans may he well devised and meet with success. Unfortunately, these are the very classes which profess the greatest hostility to the science. They generally find some doctrine in the -wTitings of economists which is opposed to their particular scheme, and they suppose that Political Economy is worthless because they object to this particular doctrine. But this ie not the jjroper way to treat science. Science makes no demand on the faith of its votaries, and is not bound up with any doctrine, but only requires men to beheve what has been proved to be true. If socialists can prove that free competition among capitalists and workmen retards the production of wealth in general, or reduces the earnings of the labourers, economists will cheerfully and gratefully accept this addition to their knowledge, and admit that they have been mistaken, but not that the science is useless. Alphonso the Tenth, King of Castile, said that tlie Ptolemaic system was a crank machine, and that it was a pity that its inventor did not take advice. We now know that the system was erroneous. But we should not give the king credit for much sagacity if he had said that astronomy was a crank machine, and our belief in its utility is stronger than ever. So the time may come when the world will adopt Mr, Ruskin's* plan of fixing a rate of wages for every kind of work, and of paying the same to all workmen, whatever their skill. But Mr. Ruskin himself considers that the rate should be fixed every year, and that they should be difibrent in different employments, and Political Economy would still be needed to explain these differences and fluctuations. The science is often taunted with its impotence. Comte complained that it was unable to point out a remedy for the distress occasioned by the introduction of a new process, which prevents men from working in the manner to which they are accustomed. Mr. Ruskin complains that it is unable to establish harmony between employers and employed. * See " Unto this Last." Four Essays on the First Principles of Political Economy. By John Ruskin. 1862. MURAL OBJECTIONS. 5 But though it is not able to cure all existing evils, it may fairly lay claim to some attention if it explains their causes. It is interesting to know the causes of echpses and earthquakes, although such knowledge gives ns no power to prevent them. The nmnber of historical works which are pubhshed every year evinces the interest which people take in the liistory of past times, although they do not expect to turn their know- ledge to practical account. Economic discoveries have already thrown great light on history, and cannot fail to throw much more, and as intellectual culture becomes more widely diffused there will be found more and more minds to derive pleasiu'e from a knowledge of the laws wtiich govern the universe, and among these the laws which govern the growth of society will always receive their share of interest. There are some who base then objections on moral grounds. It is said that the science looks only to the accumulation of wealth, but that the accumulation of wealth is not a good thing, or is not the only thing to be desired. This objection perhaps arises fi'om a misapprehension of terms. Wealth, in the sense in which it is used by economists, does not mean large fortunes, but commodities which are useful or agreeable to man, and it includes the food and clothing of the poorest labourer. The very persons who denounce a science of wealth complain the loudest of the poverty which still afflicts a large number of our countrymen; but without understanding the causes of the production of wealth, it is impossible to discover a way of increasing the comfort of these classes. It is often said, as this science is only concerned with wealth, it sanctions any means which are employed to obtain it. Thus Mr. Ruskin says, that a master is acting on strict economical principles when he gives a servant the lowest wages, and extracts from him the gTcatest amount of work that he can -without inducing him to quit his service, but that in ]\Ir. Ruskin's opinion, the servant would work better if kindly treated. Now, in the first place. Political Economy does not recommend the pro- duction of wealth at the expense of morality, but only points out how its production may be carried on ! And, ui the second place, it points out that men do much less work when they are ill, than when they are well treated. JMr. Frederick Harrison objects to it, on the ground that it only inquires, "What are the rules which now regulate human conduct? whereas these rules are very faulty, and we ought rather to endeavour to induce mankind to adopt higher and better rules, and that a social reformer finds the science useless, because it only seeks to explain a state of things which it is the reformer's aim to abolish. Thus while on the one side the science is ridiculed for its inability to recognise existing facts, it is attacked on the other for merely concerning itself with existing facts, and not discussing what human conduct might be if men were C SCIENTIFIC OBJECTIONS. dilTerent to what they arc. But the science is no more pledged to the maintenance of our present social institutions, than astronomy is pledged to uphold the perfection of the solar system. The solar system and English society are matters for scientific investigation, because they exist; but astronomy and Political Economy would still have work to do if all the other planets should cease to exist, or if England were depopulated. Abstract principles are best explained by illustrations drawn from actual practice, and economists therefore prefer to cite examples from societies wliich exist, or have existed; but they are perfectly willing to discuss the schemes of socialists, or other reformers, and if they make any preten- sions to effect a larger production or a better distribution of wealth. Hostility to the science frequently takes the form of objection, not to the science itself, but to the method by which it is at present pursued. Thus Mr. Ruskin admits that its conclusions follow from its premises, but says that it is inapphcable, because it takes no account of the social affections. He compares it to a science of gymnastics, which should assmne that men had no skeletons, and should recommend that the pupUs should be rolled up into pellets, or other impossible things, and says that such a science Avould not be more useless than one which assmncs that men are guided solely by their interests. There is certainly some force in this objection, and great caution is always necessary in predicting the consequences of economic laws. A margin must always be left for the effect of the motives of affection, ignorance, or prejudice, but there arc two circumstances which deprive the objection of much of its force. The first is, that these motives, when they act in opposition to self-interest, frequently counterbalance one another where large nmnbers are concerned, and thus do not affect the general result ; the second is, that the interests of all men are in harmony with one another, and therefore the path of interest is the path of duty. If the time should ever come when men will desire to live for others rather than for themselves, their motives will be changed; but their conduct will be, to outward appearance, much the same as at present. Those who are engaged in dangerous occupations now receive high pay, in order that self-interest may induce them to run the risk. If hereafter men ydW. engage in them, from a sense of duty to society, society will feel bound to give them high pay in order to comjiensate their sacrifice. Comte objects to the method which is followed by economists of tracing the consequences of one set of motives, and declares that, though this method is appropriate to physical science it cannot be applied to the phenomena of society, on account of their peculiar solida- rity, lie however gave no reason for such a distinction. It is perfectly LAISSEZ-FAIRE. 7 true that human conduct is regulated by a great complexity of motives, but this is equally true of the phenomena of the physical world, in both cases there are many causes acting at once, and the effects are very complex ; but this complexity has been unravelled in physical science by examining the different causes separately. The discharge of a gun gives rise to sound, heat, mechanical motion, and chemical decomposition, but neither Comte or anyone else ever gave this as a reason for uniting acoustics, thermology, mechanics, and chemistry in one science. All phenomena appear very complex before they are submitted to scientific analysis, and Comte's argument amounts to this, that the separate investigation of different causes enables us to understand complex physical phenomena, but that this method is inapplicable to social phenomena, because they are complex. It is true that an economist may derive advantage from an acquaint- ance Trith other sciences, but this is equally the case with a chemist, and furnishes no argument against the method of tracing out separately the effects of different causes. It is but fair to mention, that Mr. Harrison considers that Comte merely meant to say that Political Economy is only a branch of sociology, just as selenology is a branch of astronomy, and that it is not of sufficient importance to be considered a science. If this be all Comte meant, then there is nothing to discuss ; for it ■would be as profitless to dispute whether it is to be called a science or a branch of a science, as whether a particular plant is to be called a distinct species or a mere variety. There is one objection which has not yet been noticed, but which is put forward more often and more vehemently then any which have been discussed, and which in reality hes at the root of all the hostility which is evinced towards the science. Comte, Mr. Ruskin, Mr. Carlyle, and a host of less eminent persons desire to induce governments to do much more for their subjects than simply protect their lives and property, and ^^sh them to provide for their material, moral, and intellectual welfare, and they object to PoUtical Economy, because they believe that it recommends governments to let alone all things which are not implied in the protection of life and property. They regard it as bound-up with the doctrine of Laissez-Faire, and if it were not for this, it is probable tliat none of the objections already recited would ever have been made, or at all events sanctioned by such eminent names. Now, strictly speak- ing, it is not more true that Political Economy, than that physiology is identical with Laissez-Faire, or let alone. Physiology teaches us that the health of children is promoted by eating sugar, and injured by eating fat; and those persons who desire that their children should enjoy good health, may draw the inference that their likes and dislikes furnish the 8 LAISSEZ-FAIRE. best guide in the matter. In the same way PoHtical Economy shows that the wealth of a country is promoted by Free Trade with other countries, but it cannot decide whether it is advisable to sacrifice this advantage in order to make Avar to avenge some injury or insult, any more than physiology can decide whether parents would act Avisely in thwarting their children's inclinations in order to teach them obedience, self-sacrifice, or any other moral quality. All these are questions for the moralist, and if the result of scientific inquiry is to show that men can accumulate more wealth when left to follow their own inclinations, unchecked by compulsion and unassisted by the direction of Government, it remains for morahsts to decide whether such accimiulation ought to be sacrificed to some other object, or whether we ought to let people alone, that they may obtain as much comfort as possible. If morality decides for the former alternative, the advocates of paternal government have nothing to complain of, and if for the latter, their ojiponent is not Political Economy, but morality. Let alone is not a precise expression, and has sometimes been used so as to include leaving undisturbed the power which some classes receive from the laAV of interfering with the liberty of others. If it is to have any consistent meaning, it must mean leaving every individual equal liberty of action, and this implies curbing their actions whenever they interfere with the liberty of others. In this sense it must be admitted, that the tendency of scientific inquiry is to show more and more convincingly that Laissez-Faire is the best maxim for governments to adopt Avlien they desire to see the material comfort of their subjects increased, and as the moral standard of the human race is gradually raised they will feel more and more convinced that it is their duty to abstain from all acts which interfere A\ith individual liberty. Thus science and morality go hand-in-hand, and while the one indicates a line of action as the most conducive to happiness, the other indicates the same line as the path of duty. While prepared to examine any arguments which may be brought forward in its favour. Political Economy must oppose the same uncompromising resistance to those who prefer paternal government to truth, as natural history to those who prefer the book of Genesis to truth, and can appeal with equal confidence to the judgment of posterity. CHAPTER II.— HISTORY OF POLITICAL ECONOMY. EARLY THEORY OF "WEALTH — THE MERCANTILE SYSTEM — THE ECOXO- MISTS : ADAM SMITH, MALTHUS, SAY, RICARDO, TOOKE, MILL, LONGE, AND THORNTON. Eyery science is slowly built up by the labours of many thinkers. The first steps arc ahvays difficult, and many failures precede every success. A rude theory is first consti'ucted, which embraces a few facts. Then more facts are collected, and are explained by this theory, until at length they become too numerous and too various to be explained in the old way, and after numerous attempts have been made to fit them to it, some thinker, renouncing the attempt in despair, is driven to question the truth of the theory. Then he frames a new one, which embraces the facts known to him, and more facts are collected, until the new one is, in its turn, found to be insufficient, and is, in its turn, superseded. The fi'amer of a new theory is anxious to destroy the old one, and naturally regards it as an obstacle in the path of progress, which, indeed, it is when the new one is proposed. But it is a mistake to suppose that obsolete theories, at the time when they were generally believed, materially impeded the progress of knowledge. Men must generalise the result of their knowledge, however imperfect, and without doing so they would neither care to collect information, nor be able to arrange what they had collected. In this way theories, which we now regard as most absurd, have served to guide the industrious toilers who have collected the materials on which the great thinkers have founded their grandest discoveries. No man of genius, though he be a Newton or a Darwin, is able to construct a science in its entirety. He can only add the snpcrstructuro to the foundations which others have laid, and would be unable to frame his theory if he were not possessed of the information collected by men who believed that the sun went round the earth, or that the forms and habits of animals were given them by their Creator, in order to fit them for the life which they now lead. The sketch of the progress of Political Economy which I am about to give will show " Tliat men may rise on stepping stones 01 their dead selves to higher things " in this and all other departments of knowledge. It will be the more usefid, because iu loarning the science every 10 MERCANTILE SYSTEM. individual passes through the leading stages of thought which economists, as a body, have passed through, in bringing the science to its present state. The first idea which every one entertains respecting wealth, is that it consists of money, and this is the earliest of all economic theories. Looking at a few facts, we observe that tradesmen are always anxious to obtain money in exchange for their goods, and that labourers are always anxious to obtain money by their labour. Naturally enough, they concluded that the object of aU men was to obtain money ; and, as the wealth of indi\dduals is always estimated by comparing the quantity of money which they possess, it was supposed that money alone consti- tuted wealth. The early rulers of England regarded it as their duty to prevent their kingdom fi'om being impoverished ; and, as they never thought of dis- puting that wealth consisted of gold and silver, they held themselves bound to prevent, as far as possible, the exportation, and to encourage the importation of these metals. To obtain this latter object, they prohibited their subjects from selling their Avares on the continent, except in a few specified towns, where they appointed officers to see that in every bargain the English merchants received gold or silver, in exchange for commodities of English growth or manufacture. Thus, foreign wares could not be imported by Englishmen, and when foreigners imported them similar precautions were adopted to compel them to take English goods m exchange, and prevent them from taking away more money than they might require to pay their travelling expenses back to their own country. When the East India Company was established in 1600, they found it profitable then, as now, to export silver to India and China, and they received / oomjiiiocW to export foreign coin and bullion to the amount of £30,000, on condition of importing a larger quantity from other countries. This practice of theirs led to a controversy which gave the first shock to the primitive theory that wealth consisted of money alone. The company were charged with impoverishing the country by sending silver out of it, and some of their servants felt it incumbent upon them to defend their conduct. The only argument that occurred to them was, that though they sent silver to India, they obtained in exchange Indian goods, which they sent to other countries, and fi'om these latter received a much larger quantity of the precious metals than they had previously exported. One of the ablest of them, Thomas Mun, com- pared the transaction to the operations of agriculture, saying that, as the ploughman throws, seed in order to obtain a much larger quantity MERCANTILE SYSTEM. 11 ■wlicu the harvest arrives, so the company took something from the wealth of the country, only in order to return what it had taken, together with a large addition. He constructed on this basis what has been called the mercantile system, which recognises that it is often necessary for a country to pai't with a portion of its stock of the precious metals, but which teaches that trade ought to be carried on in such a way that in the long run the imports of bullion should exceed the exports. It is to this that we owe the terms which are still in use, favourable and unfavourable balance of trade. The balance was said to be un- favourable when gold was passing out from a country, and favourable when it was coming in. Though we no longer believe that wealth consists of the precious metals alone, these terms are still retained, and, as Mr. Goschen points out, an unfavourable state of the exchanges is really such to bankers and merchants, as it compels the former to restrict their advances and the latter to pay a higher rate of interest ; and it is generally at such times that commercial crises occur. The difference was but slight between the old system, which the late Mr. Jones* called the balance of bargains, and the new one of the balance of trade. Both assmned that the precious metals alone con- stituted wealth ; but whereas the former taught that all exportation of buUion was a national loss, the latter allowed that it was sometimes profitable. Having advanced thus far, the next step was to show that exportation never took place unless it was profitable, and this the supporters of the East India Company in time proceeded to do. Towards the end of the 17th century a new controversy arose, in which the company were charged with impoverishing the country in two ways — first, as before, by exporting bullion, and, secondly, by importing silk goods of Indian manufacture. Then, as now, it was said that foreign competition was ruining our manufiictures, and the supporters of the company were obliged to inquire into the nature of wealth in order to defend themselves. As soon as they seriously asked themselves what wealth was, they perceived that it did not consist of the precious metals alone, but of all commodities which are the objects of human desires. If we confined our observation to a single hour, we see that a tradesman is desirous to part with his cloth, and obtain money; but if we look a little longer, we see that he is anxious to part with his money to obtain bread, meat, clothing, and other commodities Avliicli he finds useful or agreeable. All men desire to obtain money, but it is * See an interesting^ fiketch of tlic Early Political Economy of England, in the Literary KemainB of the llev. It. Jones. Edited by Dv, Whewcll. 1B6W. 12 THE ECUXOMISTS. only that they may exchange it for other things, and if they could not so exchange it, they would not care to possess it. Some people had pointed this out even so long ago as the time of Aristotle,* and he in siding with them illustrated his argument by a happy allusion to the legend of Midas. Midas was said to have prayed to the gods for the power of turning everything which he touched into gold, but as even his food and drink turned into gold as soon as they touched his lips, he would have starved if he had not been relieved fi'om his uncomfortable privilege. The company contended that they increased the wealth of England by bringing in the silks which the people wanted, and sending away the bullion which they did not want. Their opponents argued, that it was better for England to manufacture things at home which she could import more cheaply fi'om abroad, and induced Parliament to prohibit the importation of Indian sUks. Their successors at the present day asked Parliament to provide for the education of workmen, in order that we may make at home what we can import more cheaply from Germany. But although the company did not obtain their object of convincing the Legislature, they convinced many thoughtful men that wealth was a different thing from money, and this was kept in mind by a succession of English wi'iters fr'om Dudley North to Hmne and Adam Smith. The English began to study the science of wealth in order to defend commerce ; the French were prompted by a desire to reform their system of taxation. Guilbert towards the end of the 17th century, and Yauban in the beginning of the 18 th, ably exposed the unequal and oppressive character of the French system, and suggested various remedies. In the middle of the 18th century, Quesney based a new scheme of taxation on a peculiar theory of wealth. He saw that all wealth was originally obtained either fi'om the land or the water, and from this he inferred that no labour was productive of wealth except that employed in agriculture, fisheries, and mines. He admitted that the manufacturing and commercial classes were useful, but denied that they added anything to the wealth of the country. He saw that farmers paid rent to their landlords, Avhile manufacturers and merchants did not, and this seemed to him a furtlier proof that agricultural labour alone was productive, since it alone yielded a surplus, while those engaged in other occupations consumed all that they produced. Hence he argued, that all taxes must fall on the landlords, for if anything were taken fi'om the productive labourers it would diminish their powers of production, and consequently the surplus paid to the landlords, and as all the unproductive * See his '• Politics." Book I., Chap. 9, Mr. Congreve's Edition. ADAil SMITH. 13 labourers wore maintained by the productive ones and the landlords, whateyer was taken from them must be hkewise taken from the land- lords. From this he drew the natural inference, that it would be much better to raise the whole revenue of the State by one simple tax on the landlords. Quesney committed a great mistake when he supposed that manufacturers did not increase the wealth of a country. In reality, everyone increases wealth who gives to matter a new form, or places it in a position which makes it useful to man. Xo one can create matter, but the man who brings iron from the bottom of the mine to the surface places it where it will be of more use, and the same thing is done by the man who heats iron in the furnace and makes it into knives, and the J labours of both are equally productive. Quesney was also mistaken in supposing that taxes could not fall on labourers, for this is impossible only if they are already reduced to such poverty that they have but just enough to support life, a state of thmgs "uhicli nowhere exists and is never likely to exist, and which is inconsistent with the existence of any government. But although the fundamental principles of his theory were unsound, it attracted considerable attention at the time, and he became the founder of a school known by the general name of the Economists, who were principally distinguished by the zeal with which they advocated the abolition of all restrictions on the fi-eedom of industry, whether in the form of protective tariffs, monopolies, or limitation of the number of apprentices. It may be here remarked, that the science has received the name of Political Economy, because many of its earliest students desired rather to teach governments what they ought to do, and regarded their inquiries into the natm-e of wealth as a means to this end. The science of wealth was definitely founded in 1776, when the Scotch philosopher, Adam Smith, published his " Inquiry into the Nature and Causes of the Wealth of Nations," a book which Buckle went so far as to pronounce the greatest work ever written. Much, as has been seen, had been already done to explain the phenomena of wealth, but Adam Smith raised the study to the rank of a science ; that is, he selected what was good from the works of previous writers, and arranged it in such a manner as to show that all followed logically from a few simple principles, and he did this with the object of discovering the laws which govern human conduct, not of prescribing rules for governments to act upon. He, indeed, pointed out in a most forcible manner the injury which was done by the foolish meddling of governments in the affairs of their subjects, and he enumerated the advantages and disadvantages of different modes of raising a revenue. But he introduced many of his arguments on these subjects for the sake of illustration merely, and his object was truth, and not efficient administration. His work has been 14 ADAM SMITH. quoted, edited, and translated until there is scarcely an educated person who has not some acquaintance with at least its general nature. This popularity is mainly due to the illustrations with which the work abounds, and which are of the most varied and interesting description, furnished either by the author's own experience, or by his extensive course of reading. The explanation Avhich he gives of historical focts, and of the condition of his own and other countries, would be sufficient in themselves to make the work valuable ; but it is the method which secui'es for it a high rank as a scientific treatise. He took a few principles and traced out their consequences, and only introduced facts in order to make his argument clearer, so that it remains unshaken, whatever mistakes he may have coimnitted in collecting his facts, or whatever alterations may have taken place since his time. He shrank from no consequence to which his principles led, but said boldly whatever he believed to be true, no matter how much it was opposed to the political institutions of his time. Very many changes which he recommended have now been adopted, but many are still waiting to be made, and his arguments still remain unanswered and unanswerable. Adam Smith showed, in opposition to the economists, that manufac- turing as well as agricultural labour is productive of wealth, which, like them, he declared to consist of useful commodities produced by labour, and not simply of money. He gave the coii}] de grace to the mercantile system, which has not since his time been openly maintained by any economist, although the belief that wealth is identical with money still lingers among commercial men who have not found time for theoretical studies. Smith himself could not avoid some errors which are du-ectly traceable to the old belief, and later economists, even doA^ii to the present time, have sometimes been unable to distinguish clearly between money and wealth ; and to do so on all occasions requires the most constant vigilance on the part of the student. It having been settled what wealth was, the next subject for inquiry was the nature and cause of value. Smith pointed out the difFerence between " value in use " and " value in exchange." The former expresses the utility of an article which satisfies any human wants, while the latter expresses the esteem in which a thing is held which is capable of being bought or sold. Wlien philosophers wished to ascertain the cause of value, it naturally occurred to them that there was a class of men whose business consisted in settling and in foreseeing changes of value, and that this class were most likely to be provided with some theory to account for the facts with which they were so familiar. It is to this, the commercial class, that Adam Smith owed the theory that value is regulated by supply and demand. It is to them that we owe the theories that wealth is money, ADAM SillTH. 15 that the iise of commerce is to proyide a market for exports, that cheap labour is necessary for the production of wealth, and many others which, though useful in their time, are vitiated by the narrow \iews which traders take of their o^^^l interest, and have done much to give to Political Economy somewhat of the air of a system drawn up in the interests of one class. When a tradesman says, for instance, that the value of flour is determined by supply and demand, he simply generalises the sellers in the word supply, and the buyers in the word demand, and means that floiu' exchanges for gold at such a rate as the bakers and millers can agree upon. This is, in substance, the explanation of value which Tm-got gave in his essay on the production and distribution of wealth, published a few years before " The AVealth of Xations." Smith pointed out that commodities have a natural value wliich depends on then- cost of production, and towards which their market value is always approximating. In a simple state of society, he thought the natural value would depend solely on the amount of labom* required to produce the article. "Where all labourers work on their o\mi account, a coat which has required the laboiu* of two days to produce will exchange for two knives, each of which is produced in one day. But in a more advanced society he considered that the value of an article must be sufiicient to reimburse the rent of the landlord, the profit of the capitalist, and the wages of the labourers who produced it, because if the producers do not, in the long run, get this amount, they will cease to produce. Such was his explanation of natural value ; but he also endeavoured to explain market value, which is not always sufiicient to compensate the cost of production, and sometimes greatly exceeds it. To explain it he had recourse to the theory of demand and supply; but he found that these terms were not sufiiciently precise. Demand could not be simple desu-e, for the desire of a beggar to possess a diamond had no effect on its price ; and he, therefore, substituted " effectual demand," signifying desire backed by ability to purchase, and said that the market value of an article settled at such a point that the effectual demand was just equal to the whole supply actually brought to market. In the same way he showed that there was a minimum rate below which wages could not fall ; that, namely, which was necessary to enable the labourers to provide themselves and their fomilies with the neces- saries of life, or with what they consider such. The actual rate of wages was, ho thought, determined by two factors, the demand in the shape of the capital in the possession of the employers, and tlie supply in the shape of tlie number of labourers. If the demand for labour — that is, the capital out of which the labourers are paid were increased 16 MALTHU.S — RICARDO. — the Bupply, that is, population, would be increased also, because the labourers would be better off and better able to bring up their families. This last suggestion received confirmation in 1798 by the publication of Malthus' essay on population, an able work, which was afterwards much enlarged and improved, and which clearly demonstrated that in all countries the fertility of the himian race would produce a much more rapid multiplication, if it were not for the difficulty of obtaining food and other necessaries. The French economist, J. B. Say, published in 1804 a treatise on Political Economy, in which he arranged, m a much more convenient form, the substance of the "Wealth of Nations," but added very little to it. The first edition was soon exhausted, but Napoleon prohibited the publication of a second, which did not make its appearance till 1814, since which time several have appeared, and it has always enjoyed a high reputation, especially in France. The greatest work ever contributed to the science was Ricardo's ** Principles of Political Economy and Taxation," which was published in 1817. Two works can hardly differ more from each other than that of Ricardo from that of Smith. "While the latter never lays doTvii a principle without adducing a fact in accordance with it, the former lays do'^ii abstract principles generally without any illustrations, and never with any which are more than imaginary. By proceeding on this plan Ricardo was able to grasp principles, the operation of which is very much obscured in actual practice, for by never appealing to facts, he avoided encountering any which conflicted with his views, and saved himself from being bewildered by their complexity. But his method has this disad^-antage, that a mistake committed at the beginning is not detected at the end ; but he enunciated the theory with the same confid- ence as a school-boy shows up his sum in which he has made a mistake of one figure at the beginning. Thus he has been ridiculed for saying that the interests of landlords were opposed to agricultural improvements. So preposterous a conclusion would have induced an ordinary man to doubt the soundness of the reasoning which led to it, but it followed fi'om his premises, and he put it forward without hesitation. His principal contribution to the science was an extension of Smith's theory of natural value. Smith, as has been already mentioned, showed that in a single state of society the exchange value of commodities was in proportion to the labour necessaiy to produce them. Ricardo showed that this was the case in all states of society, but that we must reckon the labour which is indirectly as well as that directly applied. The value of cloth in proportion to corn depends on the labour employed in growing the cotton, and in making the macliines, as well as RICARDO. 1 7 that actually employed in the cloth factory. He admitted that tho relative value of two things, which had required equal quantities of labour to produce, was affected by the longer or shorter time dm'ing which the capitalist had to wait for his recompense, but he denied that rent Imd any efi'ect upon value. He showed that many articles, and in particular corn, were produced in different places with different quantities of labour ; but that theii" value depended on the labour employed in the least favourable circumstances, in which the demand for tho commodity made it necessary to expend it, and that rent was the surplus obtained by those who worked in better circmnstauces. Thus rent was explained, and instead of showing, as Quesney had thought, that agriculture was the only productive industry, it simply showed that agriculture was less productive in some places than in others. This theory of natural value is now recognised as one of the fundamental principles of the science, and those who refuse to adopt it are shut out from the comprehension of the more involved Economic problems. Ricardo added nothing to Smith's theories of market value and wages. He gave the name of natural rate of wages to that which gave the labourers that amount of comfort which they considered necessary, and without which they would refuse to propagate their race. The defect of his method appeared wiien he endeavoured to exi^lain actual facts. His first work, " The high price of bullion, a proof of the depreciation of bank notes," was published in 1810, in order to explain the difference between the value of notes and gold, which was then attracting public attention. He had decided, on theoretic grounds, that the value of money varied inversely as its quantity, and from this it followed, that if a G-overnment were to force into circulation a number of notes not convertible into coin, the value of money would be lowered and gold would be exported. It followed also that, if when all the coin had been exported, the Government maintained in circulation a greater nominal amount of notes than there had formerly been of coin, the price of buUion measured in notes w^ould rise. He found that the notes of the Bank of England were not then convertible into coin at the pleasure of the holder, that gold had been exported, and that it bore a premium, and he concluded that the fii'st of these facts was the cause of the other two. It was in vain that he was told that gold was frequently exported on the occasion of a bad harvest, without having fallen in value. It was not included in his theory, and he denied its possibility. It was in vain that he was told that the Bank had not issued more notes than were required by the trade of the country. He saw that they were not on a par with gold, and decided that their excessive issue must be the c IS TOOKE — :jiill. canse. Very different was the Bpirit in which his friend Tooke entered on the investigation of the subject. A patient examination of the Bank returns convinced him that there was no connection between the number of notes in circulation and the price of bullion, or of other commodities. His experience convinced him that gold was frequently exported to pay for an unusually large importation of com, without suffering any fall in value, and he refused to shut his eyes to these facts. He lacked the power of generalising, by which Ricardo was so eminently distin- guished, and consequently the earlier volumes of his "History of Prices" are simply a record of facts, which he is unable to explain ; and it was not till he published his fourth volume, many years after he had taken up the subject, that he was able to show the essential difference between inconvertible notes issued by Government, and those issued by a bank, consisting in the fact that a Government can issue as many as it chooses, while a bank can only issue as many as its depositors require. On this account bank notes can never fall in value to any great extent, unless peculiar circumstances of commerce require a very large export of gold, and in this case it is gold which has altered in value. Of all treatises on the science, the late Mr. Mill's "Principles of Political Economy " is probably that which is best known to the reader. His arrangement, which is based on that of Say, is extremely con- venient ; and the interesting discussions of political and social questions, with which the work abounds, have secured for it a great and lasting popularity among a much larger class of readers than could be interested in merely scientific expositions. He has acted towards Ricardo some- what the same part Playfair acted towards Hutton : he has been his interpreter to the public. He has taken Ricardo's abstract principles, and found facts to illustrate them, so that even where he has not proved Ricardo to be in the right, he has enabled us to see what he meant, and how the error may be detected. Mill objects to Adam Smith's theory of supply and demand, that there can be no equality or any relation between things so different in kind as a desire and a quantity of goods. He therefore defines demand as the quantity of goods desired by persons able to purchase them ; and says, that the market value, or price of an article, is such that the quantity which men are willing to pur- chase at that price is just equal to the quantity which is offered for sale at that price. In like manner, he says that wages do not depend upon the proportion between the whole number of labourers and the capital of the country, but between their number and that portion of capital which is devoted to the payment of wages, called, for shortness, the wages fund. During the last twenty years there has been much con- LOXGE — THORNTON. 19 troverdy respecting the ability of trades unions to raise the rate of wages. Those who hare denied their power to do so, have appealed to Political Economy in general, and the theory of the wages fund, in particular, in support of their views. "Wages, they say, can only rise if the fund be increased, and as a trades union produces nothing, it cannot increase the fand, nor the rate of wages. Those who contend that trades' unions can raise wages, adduce numerous instances in which they have actually risen after a strike, and say that facts prove them to be right, whatever theories the closet-student may choose to adopt. Thus there have been occasional muttermgs against the wages fund theory; but they did not take a definite shape until Mr. Francis D. Longe published, in 1866, his "Refutation of the Wage Fund Theory," in which he showed that the theory, when closely examined, amounted either to a truism or to a falsehood. It either meant that the average rate of wages was the total amount paid, divided by the number of persons who received them, which is a truism, or it meant that the average rate was the total amount divided by the number of persons who offered themselves for hire, which is a falsehood.* A second edition of the pamphlet appeared in 1869, but it never attracted much attention ; and the credit of overthrowing the theory has been engrossed by Mr. W. T. Thornton, who, as so frequently happens in the progress of science, made the same discovery independently and simultaneously, having fii'st propounded it in the "Fortnightly Review" in 1866, and Bubsequently embodied it in his work on labour in 1869. His work was better fitted to attract attention by the more interesting nature of its subject, which is an account of the various means which had been adopted for raising the condition of the Avorking classes ; but it is also superior to Mr. Longe's pamphlet, from a scientific point of view, for it attacks the whole theory of supply and demand, which Mr. Longe accepts. Mr. Thornton, being unable to reconcile the theory of the wages fund with the fact that wages had often been raised after an actual or threatened strike, set himself seriously to work to examine the whole theory of supply and demand, and the result of his inquiry is, that he has proved the theory to be utterly unsound. He has sho\ni that far from agreeing with the theory, the actual facts of trade are wholly at variance with it, and it scarcely ever happens that an article is sold at a price which equalises the demand and supply in the sense which Mill has given to those terms. His work has been the subject of much criticism, and he has availed himself of the circumstance to restate his argument in a second edition, in such a form as to defend it against all objections. * Pages 19—24. C 2 20 THORNTON. He has now fairly clenched it, by showing that every tradesman fixes a price at which he will sell either a single article or the whole of his stock, but that the quantity demanded is only in very exceptional cases equal to the quantity offered for sale. In the same way, there are always many men who are willing to work at the rate of wages which others are receiving, but the rate is not lowered to the sum which would enable them all to receive a share of the fund. In its rise, progress and decline, the theory of supply and demand, has exhibited the same phases as a theological doctrine. Papal infallibility was accepted by Catholics, who never thought about its meaning; but as soon as it was strictly defined and formally enunciated, it encountered vigorous opposition. Supply and demand, in the mouths of commercial men, is a mere phrase which saves them the trouble of thinking, and as it conveys no idea, it encounters no resistance. Mill has done the work of the ecumenical council, and Mr. Thornton that of Dr. DoUinger. Thus we arrive at a negative conclusion, for Mr. Thornton has not offered any explanation either of market value or of wages. I shall endeavour, in the following work to contribute something to a more correct explanation of the sub- ject of value, and more particularly of wages ; but it will fii-st be necessary to devote a few chapters to the subject of production. Of course I have been unable in this sketch to detail all the contributions which different ■writers have made to different branches of the science, many of which I shall acknowledge in their proper places, but the subject of value forms such a fundamental part of the science, that no great step can be made in advance without some improvement in this department, and the object of the foregoing narrative is to enable the reader to comprehend the position at which it has now arrived. BOOK I.— PRODUCTION. CHAPTER I.— WEALTH, NATURE OF "WEALTH — DESIRE FOR WEALTH — AVERSION TO LABOUR — FALLACY OF OVER PRODUCTION — MEANS OF ESTIMATING WEALTH — ELEMENTS OF PRODUCTION. Before explaining the laws wliich govern the production of wealth, it is necessary to explain what wealth is. The subject is so familiar that an explanation is hardly needed; but it is necessary to caution the reader against some mistakes which are liable to occui" when the term is used without much thought being bestowed on its meaning. Wealth consists of all articles, the possession of which affords pleasure to anybody. It is sufficient to enumerate food, clothing, houses, carriages, books and pictures, to show what is meant, but a complete catalogue would be almost infinite. Some winters are of opinion that the air we breathe ought not to be considered wealth, and some think that the skill of artificers ought to be considered such, but there is in reahty no difference of opinion between those who take opposite sides in this controversy, and it is not worth while to discuss it here, for a strict definition of a term in popular use seldom conduces to clearness of exposition. Mr. Ruskiu, indeed, contends that a strict definition of wealth is necessary to a proper comprehension of the science, and says that to omit it, is as fatal a mistake as it would be in astronomy to omit to define the difference between fixed and wandering stars. But even his own illustration fails him, for no line can be dra^\Ti between these two kinds of stars. Many of those which are called fixed are known to move, many others are supposed to, and, as some astronomers think that the whole stellar system revolves round a centre, it may hereafter be decided that no stars are really fixed, without in the slightest degi-ee diminishing either the truth or the importance of astronomy. I shall never, when I can help it, give to a word a different meaning than that which it usually bears, because it is sure to create confusion in the reader's mind, and the definition of Avealth given above will be sutlicient for my purpose. But there is so much confusion in regard to the question whether money is wealth, that a few remarks on the subject may 22 NATURE OF WEALTU. not be deemed out of place. In tlie first place, it is necessary to say that money alone does not constitute wealth. I have described in the last chapter how the contrary belief was once universal, and how it has gradually lost ground. The rulers of England, who prohibited their subjects from exporting gold or silver, committed the mistake of suppos- ing that men only produce food and clothing in order to obtain money, but in reality men only desire money in order to exchange it for food, or clothing, or some ^othcr article. They desire food in order to satisfy hunger, clothing to keep them warm, and other things for various purposes. So far as gold and silver are of use in making watches, spoons, or other useful articles, they are desired, for their own sakes; but when made into coin they are only wanted in order to be exchanged for other things. Hence arises the important distinction between money and other kinds of property ; but while an increase of the quantity of any other thing is always a benefit to the world, an increase of the quantity of money is no benefit at all. I shall endeavour to show hereafter that the gold discoveries in Australia and California have reduced the value of gold in England by about one-third, and this is only a benefit in so far as it enables us to obtain plate and watches, etc., by a smaller expenditure of labour. In so far as it obliges us to use a greater number of corns in paying labourers or tradesmen, it obliges us to carry greater weights, and is a disadvantage. Mr. Seyd, in a work* to which I shall often have occasion to refer, speaks as if the wealth of France had been increased by the substitution of gold for silver in her coinage, which was the consequence of the gold discoveries in California and Australia. But though gold is more precious than silver, it by no means follows that the total value of the currency was increased by the change, the simple eflTect of which was that the French used a small quantity of gold to do the work which had been done by fifteen times the weight of silver. It was more convenient for the French to have their coin in a less bulky form, but their coinage was estimated at about 2^ milliards before the change, and was probably about the same after- wards ; and, even if it was greater in amount, the increase was in no way an increase of wealth. Mr. Seyd also supposes that the wealth of England would be increased by the adoption of a double standard, that is, by making silver coin as well as gold legal tender to any amount, which would, he thinks, increase the quantity of coin in circulation. This is open to the same objections ; first, the total value of the coin would not be increased, for no more could be struck than were required by the extent of our trade, and, secondly, if it were increased, our * " Bullion and Foreign Exchanges." Effingham Wilson. 1868. DESIRE FOR WEALTH. 23 comfort would be in no way increased. Humboldt lias fallen into the opposite error of supposing that the precious metals are not wealth at all, and writes as if it was a delusion on the part of the people of Mexico, to believe that they could obtaui wealth by working their silver muies, instead of developing agriculture and manufactures. The mistake lay in overlooking the flict that Mexico exported silver, and obtained in exchange manufactured articles, which increased its wealth. It would not have done so unless it had found it more profitable than manufactur- mg at home. The fimdamental proposition on which I shall base most of my arguments, is that every one desires to obtain wealth by the least possible amount of labour. This is an induction from experience, which testifies so strongly and so frequently to its truth that it can hardly be disputed. Food is one of the elements of wealth ; and all persons desire food except those who arc about to commit suicide, who may be safely left out of account. Nor is food the only thing which is an object of universal desire. Although clothing is dispensed with in some parts of the world, shelter is always required, and houses of some sort are constructed, unless there are natural caves which can fulfil the same purpose. If we reflect at all on the conduct of the men and women whom \ye see around us, we see that the greater number of them are engaged in some trade or profession which they have adopted in order to obtain a living. If we look at the much smaller number who are entirely supported by the labour of others, without performing any themselves, we see that they too desire many comforts and luxuries, which they think themselves fortunate in being able to procure in exchange for their money, as well as some others which they regret they are not aljle to purchase. There are, indeed, a few who do not desire an increase of their fortune, and Avho give away the larger portion of what they jwssess ; Init even they like to enjoy some moderate amount of comfort, and their wealth aflFords them the pleasure of being able to benefit others. There are some who regard it as a duty to forego the enjoyment of Avealth, but even they desire so mucli of it as is necessary to satisfy the simplest wants of nature. The fact that numerous monas- teries exist, and have existed, in no way militates against the truth of the proposition. In the first place, the monks are careful to provide themselves with food, clothing, and shelter, and with such articles as they recpiire for the performance of religious ceremonies. In the second place, history furnishes innumerable instances in which they have indulged their desires for comforts and luxuries which wero forljiddcn by their vows. In the third place, where their vows ha\c been 24 AVERSION TO LABOUR. kept, the fact has always been regarded as a proof of the enormous power of rehgion, thus sho-Nnng that men always believe the desire of wealth to be active and powerful, although it may be overcome by other motives. Those who profess to despise wealth use the term in contradistinction to poverty, and do not mean they do not desire any of those things that satisfiy the primary wants of nature. There is scarcely an individual in the world who does not form some wish which he is unable to gratify, on account of his being unable to afford the expense, or because the means of satisfying it have not yet been discovered. When we say that individuals or races have no desire to obtain wealth, all that we mean is that they do not care to labour for it, but every one likes to enjoy the fi'uits of the labour of others. The pain of hunger and thirst is so intolerable as to overcome the unwillingness to labour in all who are unable to obtain food and drink without working for them, but no one will labour even to procure these if he can persuade or compel others to do it for him. With regard to other objects, which it is less painfiil to be deprived of, we are always obliged to balance the pleasure anticipated from their possession against the inconvenience of working to obtain them, and to decide whether they are, as we say, worth the trouble. In civilised countries men commonly work for a longer time and more constantly than is usual among unci\'ilised races, but this is not because the latter do not desire wealth, but because they object to labour. The Dyaks of Borneo can hardly be induced to labour for many hours together, but they have no objection to making their women labour all day at the most fatiguing operations, such as grinding corn, and carrymg heavy weights for their husbands and brothers. Uncivilised races in general show an incurable fondness for pilfering anything that comes in their Avay, and this trait forms the common subject of complaint with civilised travellers in all parts of the world, and shows that it is not because they object to wealth, but because they object to labour, that they do not produce these comforts and luxuries for themselves. This aversion to labom^, which is common to all mankind, produces good and evil effects according to the variations of personal character. On the one hand, it is constantly urging men to discover new methods of abridg- ing labour, and thus greatly increasing the stock of human enjoyment ; but, on the other hand, it is always urging men to appropriate the products of the labour of others, either by making them slaves, or robbing, or even murdering them. But whether for good or for e^il, the feeling undoubtedly exists ; and as the desire of wealth is also universal, it follows that all men desire to obtain wealth by the least labour possible, and this proposition may be safely taken as a basis for the science of Political Economy. FALLACY OF OVLIM'KOUUCTIUX. 25 From the fact that tliis aversion to labour is universal, it follows that there ca'n be no such thing as permanent o^•er-production. If -we look at a single trade, we find that those who are engaged in it frequently produce more than they can sell at remunerative prices, and that the market is consequently " glutted," and many traders ruined. This has frequently happened in England when the harvest has been unusually abundant ; the farmers have found themselves unable to dispose of their corn at such prices as will allow them to pay their rents, and have been obliged to use wheat for feeding cattle. The cotton manufactures of the North of England frequently exhibit similar phenomena, as do also the shipbuilding and other trades. The most celebrated instances have been those which liave followed on the opening of a new trade between two distant countries. When, in 1806, the English were for the first time able to trade direct Avith Buenos Ayres, they formed the most extravagant expectations of its capacity for purchasing their goods. Not merely did they send skates, stoves, and warming-pans to a country where they were never required, but they sent such enormous quantities of all sorts of goods that they were unable to warehouse them, and were obliged to leave them on the beach. After the discovery of gold in Australia in 1851, the high prices which prevailed there gave rise to a large exportation from Europe of all sorts of goods, which continued long after it had ceased to be profitable, and on sucli a scale that large quantities of brandy were sold in Melbourne for one-tenth of the price which they had cost in London, and many cargoes were unable to meet with any warehouse accommodation, and Avere spoilt by exposure in the open air. By such facts as these, some ecduomists liave been led to suppose tliat there is a natural tendency to over-production in all trades, and that there is some danger that an enterprising people AviU produce more of all sorts of goods than they can use ; but this is to suppose that men will work without an object, wliile, in fact, they only produce in order to gratify their wants, and will soon leave off producing when they have got more than enough. Wheat may l)e superal^undant for a single year, because farmers cannot tell l)eforehand how great the product of their labour will Ijc ; Ijut if tliey find that for two or three years running they produce more Avheat than is required, they soav less of that grain and more of something else. The case of Buenos Ayres has been cited by M. Louis Blanc as proving that Eugland Avas suffering from over- production, and as showing the shifts to Avhich we were obliged to resort in order to find a market for our surplus produce. But Ave did not send our goods to Buenos Ayres l)ecause avo did not knoAv liow else to get rid of them ; Ave produced thorn in order to send them tiiero, 26 MEANS OF ESTIMATING WEALTH. because we thought that we could obtain in exchange the various comforts for ourselves. If we had known that we could not do so, we Biiould have produced at home the things which Ave wanted. Since 1806 our wealth has increased enormously, and we are still as far as ever from being able to produce all that we want. M. Louis Blanc himself di'aws a melancholy picture of the poverty which prevails among the lower classes in France and England ; and, so long as such continues to be the case, it is idle to talk of our having produced more than we "want, and if the time should come when there were no human wants unsatisfied, then human beings Avould cease to labour ; and, in either case, over-production is impossible. Although this fallacy has been frequently exposed, it is perpetually re-appearing in different forms, among which may be here specified the belief that our colonies are useful because they provide a market for our exports ; as if we had more goods on hand than we kncAV how to dispose of, and were obliged to beg other countries to take them off our hands. If we wish to know which is the richer of two individuals living at the same time and place, we have only to ascertain the quantity of money which each possesses or can command. If we find that one has twice as much money as the other, we may safely infer that he can procure as much material wealth as the other, and an equal quantity in addition. But when two persons live in different countries, or at different periods, it is not so easy to make a comparison, because the same amount of money would exchange for different amounts of other things in India and England, or in the time of Henry VIII. and the present tune. We could ascertain their relative powers of obtaining any one commodity; but if one commodity is cheap in the one case and dear in the other, and if the case is reversed in regard to some other commodity, we have no satisfactory test by which to decide between them. If we wish to knovf whether a man who has 4,000 francs a year and lives in London is richer than one who has 3,000 francs a year at Newcastle, we have to take into account the prices of numerous articles which vary in opposite directions. If we fhid that coals are cheaper at Newcastle, but that London is better provided with shops for the sale of silk goods and of jewellery, it is difficult to decide between their relative advances. We can see that if the Londoner went to Newcastle, and took his money with him, he would be richer than the other, but not which is the richer in the case supposed. Still more difl[icult is it to say which is the richer of tw© countries such as France and England. We know which has the larger population, and perhaps this is the best test which we can adopt; but we ought to know, in addition, the quan- tity of wealth possessed by each individual. We might form an ELEMEXTS OF TRODUCTION. 27 estimate of tlie money income of all the inhabitants, but as the value of gold is not the same in both countries, this would not tell us the amount of their wealth. The agricultural population forms in France a much greater proportion of the whole than it does in England, but this does not prove that France has a smaller surplus to dispose of after supplying herself with the necessaries of life. Much of the agi'icultural industry of France has for its object the production of wine for exportation, while in England we export cloth and other manufactures, and import corn and wine and other things which France produces for herself, while she obtains manufactm'ed articles from abroad. Wealth makes more impression on the eye when concentrated in large towns, but there may be quite as much dispersed through the rural districts of France as is collected in the towns of Lancashire and Yorkshire. Of course, a greater density of population is attainable in a manufacturing than in an agricultural country; Init in comparing two countries we must look to the actual numbers of the inliabitants, and not to the proportion which they bear to their extent. The amount of foreign commerce which a country possesses is but an imperfect test of its wealth. The commerce of Bremen is made to appear very large, because Bremen is a partially independent state, and whatever it buys or sells in the adjoining country is reckoned amongst its imports and exports, while no statistics record the trade between Liverpool and the rest of Lancashire. When a country is very extensive, and contains, like the United States, every variety of soil and climate, it may supply by internal trade many Avants which smaller countries can only do by foreign commerce, which may explain why the protective tariff inflicts so little injury on that thriving country ; for it in no way restricts the freedom of intercourse between the different states of the Union. As the commerce of America is made to appear smaller, so that of England is made to appear larger than it ia, because the gi'eater facilities for warehousing goods which are afforded in English ports induce merchants to deposit goods in our warehouses which are not intended for our consumption, but are merely left here until a favourable opportunity arrives for shipping them to the Continent. Thus it is difficult to aiTive at a certain conclusion; but for practical purposes our best course is to obtain a comparison between the degrees of comfort enjoyed by the labouring classes, and if these be equal or unknown, to assume that the more populous country is the more wealthy. In order to produce wealth three things are necessary. There must be labourers to work, ibod to maintain them Avhile working, and materials for them to work upon. These may be briefly summarised as labour, capital, and land. 28 ELEMENTS OF PRODUCTION. Ifc is hardly necessary to say that labour is necessary, for, -with the exception of air, there is nothing which we can attain "without effort. Continuous exertion is required in order to collect wild fi'uits in sufficient abundance to support life, or to catch fish in the sea, or wild animals in the forest. This exertion will only be made in the hope of gaining a reward, and if the person who makes it does so in order to supply food for others, they must offer him a reward for his labour ; or, in other words, must pay him wages. If labour is undergone for some other object than procuring food, or if, though that be the object, it is carried on for many days before any food is procm'ed, it is necessary that either the labom-ers themselves, or some one else, should save up a stock of food to support them until the Avork is completed. This stock is called capital, and the person who saves it receives a reward, which is called profit. Under the third head, of land, are included all materials and natural forces which are placed at the service of man, without having been produced by him. The earth provides us with forests, from which we can obtain timber without more labour than that of felling trees ; with wild animals, which we have only to catch ; and with soil, which Avill multiply six or twenty fold the seed which we bury in it. The rivers supply us with motive-power, which enables us to work our mills with a very slight expenditure of labour, and they greatly facilitate our means of locomotion. It frequently happens that an indi-vidual has appropriated a portion of the earth, Avhich possesses some qualities which make the production of wealth more easy in that than in other places. When this is the case, he receives a share of the product, which is called rent. The income of every individual is either rent, wages, or profit, unless it be derived fi'om taxation ; but ahnost all taxes are derived from one or other of these sources. The laws of the distribution of rent, wages, and profit will be discussed in the second book, while the present will be occupied with remarks on labour, capital, and land, which are the elements of production. CHAPTER II.— LABOUR. PRODUCTIVE AND UNPRODUCTIVE LABOUR — CONSTANCY — DIVISION OF LABOUR — MACHINERY — SCALE OF PRODUCTION — PROGRESS OF IMPROVEMENT — FREEDOM OF LABOUR. There are few human wants which can be supplied without labour. There are some substances which may be obtained in great abundance by the simple labour of collecting them, such as wild ft-uits, sticks, and water, but there are others which require that more labour should be bestowed upon them before they become fit for our use. Man can create nothing, but can only move portions of matter into different positions, in which they become more useful than in those in which they are found. This has been admirably illustrated by Mill, who tells us that man simply moves the axe through the tree, and the force of gravitation makes it fall down; that he moves the saw through the wood, and the force which compels a soft substance to give way before a hard one makes the wood split into planks; that he moves the seed into the gTound, and the force of vegetation makes it germinate. Much of the labour of mankind is thus constantly employed in moving substances into such positions that they can be used as human food. The farmer sows the wheat, and the forces of vegetation make it yield a greater quantity, which is removed fi-om the place where it is gro'wn, and separated from the plant to which it was attached. It is then taken to a mill to be ground into flour, then the flour is taken to the bakery, mixed with water and other substances, and made into bread; and, lastly, the bread is taken to the houses of those who are to eat it. The whole may be considered as one operation, the object of which is to place particles of oxygen, carbon, &c., in a place where they can be used to satisfy hunger, and it is futile to enquire which part of it is the most useful. The sowing is of no use without the reaping, nor the reaping without the thi-cshing, nor the threshing without the grinding, nor the grinding without the baking, nor the baking without the delivery to the consumers. But there has always existed a prejudice against retail dealers, Avhich regards their labour as useless, because they add no additional quahty to the things which they receive before they again part with them. This prejudice appears in Aristotle in the somewhat curious form of the proposition that retail dealers desire, not material wealth, but money; and a desire for money being insatiable, and not like 30 TRODrCTIVE AND UNPRODUCTIVE LABOUR. the desire of wealth, limited by our capacity for enjoyment, retail dealers can never be satisfied, and are not labouring for a proper object. In a diflFerent form it appears in Mill's remarks on co-operative societies. Although he says in one place that the labour of the carrier is useful, because he confers upon goods the quality of being in the jjlace where they are wanted, yet he subsequently speaks of producers as being more useful than distributors. "Distributors," he says, "differ from producers in this, that when producers increase, even though in any given depart- ment of industry they may be too numerous, they actually produce more, but the multiplication of distributors does not make more distributions to be done, more wealth to be distributed ; it does but divide the same work among a greater number of persons, seldom even cheapening the process."* Now, in what does the difference consist ? If producers are too numerous in any trade, some goods must be jiroduced which are not required, and this cannot be considered as an advantage, though it may be called an increase of wealth. If distributors are too numerous, some goods will be distributed which are not required, and this is no advantage either. How is it better that corn, which nobody wants, should be placed in a stack than that it should be stored up in a corndealer's warehouse ? If when producers are spoken of as being too numerous, it is meant that there are a large number employed in doing what could be done by a smaller number, then their case is exactly similar to that of distributors, and a better organisation of industry would have the same advantage in both cases. Every now and then some new scheme is devised for sa^ang the expense of the tradesman's profit, but when the excitement has cooled do^vn, people find that they can only dispense with the tradesman's labour on the condition of performing more labour themselves, or of suffering some other inconvenience. In the few instances in which co-operative societies sell things cheaper than private tradesmen, it ■will be found they require their customers to carry the goods home, or they refuse to give credit or to call for orders. There does not appear to be the slightest probability that they will ever supplant private shops, because there will always be a large number of people who will rather submit to a slight increase of price than to an increase of trouble. It is not the function of Political Economy to decide what kinds of labour are useful, and what useless. There is no labour, from that of writing a poem to that of working a treadmill, which does not afford gratification, either to the person who performs it, or to the person who causes it to be performed. But there has been considerable discussion * Polit. Econ. rV. 7, 6. Von IL, p. 372. 6th Edition. CONSTANCY. 3l as to wliich kinds of labour ought to bo called productive, and which unproductive. The question is not one of much importance, but it appears to me that the idea conveyed by the words would be best expressed by applying the term productive to all labour which is employed in producing the necessaries of life. If we thus regard the farmers, butchers, bakers, etc., as supporting the whole population, it may enable us to understand how they can bear the severe burthens of a war or large Govermnent expenditure. We may regard them as producing enough to support themselves and a large number of landlords, literary men, doctors, and artizans engaged in manufacturing articles of luxury. "When a Avar breaks out, they have to support a large number of soldiers, and many of the artizans who were employed in producing articles of luxury, but are now employed in making guns and other weapons. AVlien a large Grovernment estab- lishment is kept up, the productive classes have to support a large number of clerks, instead of supporting others engaged in some occu- pation not directly connected with the supply of food. Thus, when France was invaded in 1870, the productive labourers were obliged to support the French armies, amounting to a million men, and, to some extent, the German armies as well. But they escaped the burthen of sujiporting a number of landlords, stockliolders, journalists, and other persons, who fled to foreign countries, and many of those who served in the army during those fearful months had been previously supported while pursuing some peaceful occupation, or none at all. This may explain how the people were able to bear their burthens, which, even after these deductions had been made, were still very great. Though the burthen of the productive classes was not so liea\7' as might at first sight be supposed, the unproductive classes were exposed to terrible privations by the stoppage of dividends on shares in public companies, by delays in the payment of rent, by the destruction of their chateaux, etc. We may justly speak of a large staff of Government officials as a burthen to a country; but it will be well to bear in mind that, if there were no Government at all, the productive classes would still have to support a large immber of unproductive consumers, and that the change from tlic country gentleman to Government clerks is rather one of form tlian of substance. There are striking differences between the efficiency of labour in different countries. These are due to differences in two circumstances, viz., the constancy and the knowledge with which it is ap})lied. In the matter of constancy English workmen enjoy an honourable i)re-eminence. The late Mr. R. Jones tells us that the labour of two Englishmen was considered equal to that of six Russians, or four Irishmen, lie accounted 32 CONSTANCY. for this by saying that Enghshmen had to work under a master, who insisted on their working contmnously; but tliis is a very unsatis- factory explanation. In the first place, the superiority of Englishmen to Russians is quite as marked in those occupations in which the latter have to work under a master, as m those in which they work for themselves. ]\Ir. Longe mentions that he has heard the owugy of a large factory in Russia say, that he would rather employ one English mechanic, at much higher wages, than seven Russians. In the second place, there is no reason why men should work harder for a master than for themselves. If it were so, the most efiicient labour would be that of the slave, which is kno"\ni to be the least so. Although the slave can bo made to work for a great length of time, he cannot be made to do so when the overseer's eye is not on himj and the same may be said, though to a less extent, of prison, workliouse, and even hired labour. The most powerful motive for industry is not the fear of dismissal, but the hope of remuneration; and while hired workmen strike for a reduction of hours to ten or nine a day, mdependent workmen mil work for twelve or thirteen. Employers can only obtain the customary amount of work from their men ; and Russian capitalists would be as powerless to obtain more as English employers would be to prevent drankenness among their men, even if custom and education did not teach them to regard the ordinary amount of work done as the natural one. The difference must be accounted for in some other way, and I should be inclmed to say that the Irish and Russians had not yet imbibed a taste for many comforts which the Englislmian regards as indispensable, and that they will not work more than enough to satisfy the pressing wants which they already feel; but they Avill, in time, acquire fresh tastes, and will then work long enough to earn the means of gratifying them. In an uncivilised country, men have few wants so imperative as to overcome their aversion to labom-. As new methods are discovered of making their labour more productive, they become acquainted with new articles which create new wants, and they work harder in order to satisfy them ; as production is still further improved, they are enabled to satisfy their wants with less labour, and at the period at which we are now arrived, they choose rather to reduce the hours of labour than to acquire fresh luxuries. Wakefield supposed that in a colony men could not be induced, with- out some form of compulsion, to labour with the constancy requisite for the construction of a railway, or other great public work, because if left to themselves they would frequently leave their employment in order to begin farming on their own account. He defined a colony as a country receiving emiigrants, and expressly included the United States in the category. He had no difiiculty in DIVISION OF LABOUR, 33 showing that slavery existed in many colonies, and that in others its place was supplied by convict labour, and other forms of compulsion. But there was one fact which was fatal to his theoiy, viz., that great public works were executed in the northern United States without com- pulsion in any form. Instead, however, of abandoning his theory, he endeavoured to escape the logical conclusion by saying that these works were executed by negroes and Irishmen, and that " The freed negroes and their descendants of some of the States of North America, which either never permitted or have abolished slaveiy, are virtually a sort of slaves, by means of their extreme degradation in the midst of the whites, and the hordes of Irish pauper emigrants who pour into North America, British and American, are in a considerable proportion, virtually slaves, by means of their servile, lazy, reckless habit of mind, and their degra- dation in the midst of the energetic, accumulating, prideful, domi- neering Anglo-Saxon race." * It seems to have been Wakefield's opinion that the most profitable employment for colonists was that of working under a capitalist in the construction of a gi'eat public work, but that they were perverse enough to think that they could do better by setting up as farmers on their own account. In order to prevent them from doing so, he proposed to charge such a price for waste land as would prevent labom*ers from obtaining any until others had come to take their places in their former employment. In order to justify this obstruction to the natural course of things, he said that it was the only alternative to slavery, and as he found that these Avorks were executed in America by free labourers, he said that they were virtually slaves. The fact is, that if these works could not be undertaken without some restriction being imposed on the free choice of the labourers, they ought not to be undertaken at all, and if these consider that agriculture is more profit- able, this is sufficient proof that it is so, and the railway or other work in question ought to be laid aside until its promoters are able to give such a rate of wages as will enable them to obtain as many labourers as they require. It is this preference of hired to independent labour which forms the basis of that strange collection of fallacies which has been called, as if in irony, the Wakefield System. The principal agencies in the improvement of production are the division of labour and the discovery of new means of utilising the forces of nature. When many persons are employed in producing articles which have to undergo many different processes before they are com- l.lcted, it at once occurs to them that they can save time ])y confining one person, or set of persons, to each process. Examples of this division * View of the Art of Colonibation, by E. 0. Wakuficld. 1840. p. 175. D 34 DIVISION OF LABOUR. of labour are furnished by every manufactory, and, indeed, by every place in wliicli large numbers are employed. Take, for instance, the mint. One set of men are employed in melting the metal, and pouring it into the moulds. In another room other men take the bars formed in the moulds, and place them between rollers, which compress them until they are reduced to the required thickness. In another room circular pieces, called "blanks," are punched out of the now thin strips of metal; and, in another, the blanks are annealed or softened, so as to be capable of receiving an impression. They are stamped in another room, where they become complete coins, and they are then taken to another room to be weighed, and all that are above or below the right weight are again melted do'^VTi. It is obvious, that by assigning each process to one set of workers much time is saved which would otherwise be spent in walk- ing from one room to another, and in changing their tools. Adam Smith supposed that men who have to change frequently fi'om one kind of work to another are apt to contract a habit of loitering, but the examples of gardeners and cooks are sufficient to prevent us from attaching any weight to this argument, and even without this, the advantage of division of labour in saving time is so obvious that it is always adopted when- ever many persons have to work together, either in their professional occupation or for temporary purposes of pleasure or necessity. When the division of labour has continued for any length of time in any employ- ment, another advantage presents itself, viz., the increase of skill which results fi'om the confinement of each person to one occupation. Each operation makes a demand on some particular muscles, or on one par- ticular sense, and these are by constant practice so much improved, that the W'Orkman can do, with very little effort, many times as much Avork as the novice can by the greatest exertion. The strength of a blacksmith's arm, the rapidity with which an accountant adds up several rows of figures — the ease with wiiich a porter carries a weight which an ordinary man can hardly lift — are instances which will occur to every one. As every one desires to obtain wealth by the least possible labour, a system which so largely increases the power of production by enabling each individual to produce more, is sure to be maintained wherever a sufficient quantity of an article is required to make it worth wliile for many persons to devote themselves to its production. These two advantages, the saving of time and the increase of skill, were both pointed out by Adam Smith. The late Mr. Babbage* has pointed out another advantage, that it enables us to procure the wdiole * See his " Economy of Machinery and Manufactures," chap. 19. DIVISION OF LABOUR. 35 benefit of each person's skill, whether natural or acquired. There are some processes which are so simple that childi-en are employed to perform them, while there are others in which great skill is required. This is particularly the case in the final stages of production, where error may lead to spoiling of the article, and thus render useless all the work previously done. If the corn be not reaped before it is spoiled, all the labour bestowed on ploughing and sowing is thrown away ; if the coin be not correctly stamped, all the labour of melting, rolling, and punching has been wasted. Babbage considered that this was the most important advantage of the di\'ision of labour, that it enabled those who have sufficient skill to perform the most delicate operations to devote their whole time to them, and to leave the more simple work to those who are fit for nothing else. He grounded this opinion on the different rates of wages which are paid to skilled and unskilled labourers, and I camiot discuss it fully until I have explained the causes which determine the rate of wages. I can only say here, that he seems to me to have fallen into an error, which caused him to exaggerate its importance, but I do not question its truth. It is impossible to say to what extent differences of skill are natural or acquired. It is certain that long practice is necessary in order to acquire proficiency in any art, whether mechanical or intellectual. An appren- ticeship of seven years was formerly thought necessary to qualify a mechanic for becoming a master, and settuig up a business of his ovni. Those who have attained distinction as debaters in Parliament have, in almost all cases, acquired their knowledge of the tastes and feelings of the assemljly they addressed by constantly taking part in the debates. Fox said that during a whole session he spoke every night but one, and only regretted that he had not spoken on that night also. In order tO make a scientific discovery a man must study the works of those who have preceded him, and every artist must execute numerous sketches before he can produce a great painting. But after all allowance has been made for the different amount of practice, there still remain differences between individuals which, as we cannot account for them, we call natural or innate. There are persons who think that genius is only the capacity f jr taking trouble ; but even so, some persons appear to possess this capacity in a gi'eater degree than others. There arc some trades which almost anybody can leam, but two men who spent equal time in learning are not able to do their work with equal neatness or rapidity. Many men can acquire sufficient knowledge of a science to qualify them for a professorship, but not all of these arc able to make important discoveries. As soon as a division of labour commences, it is d2 36 MACHINERY. perceived that some do their v/ork better than others, and that labour Avill be saved if each sticks to that which he does best, and if those Avho fail in one branch try another, until they find one that suits them. Tlius, those who show a greater aptitude for one sort of work acquire by practice a still greater superiority, and those who do not practise it become less and less capable of performing it, and the process which Mr. Darwin has so happily termed natural selection, preserves and exaggerates the slight differences which are all that at first manifest themselves. In every village we may find a butcher, a baker, a black- smith, and the shop. If a Aillage increases in size, the shop is required to furnish a greater quantity of goods, and for some time the shopman manages to increase his store in proportion, but after a time it occurs to some one to set up another shop, and sell, perhaps, only grocery. Those who live nearest to the new shop find it more convenient to go there than to the old one, and the grocer, by concentrating his whole attention on the subject, is able to sell better tea and sugar, etc., than the other tradesman who has so many things to attend to, and gradually draAvs to himself that portion of the business. The same process is repeated; one man setting up as a cheesemonger, another as a draper, and so on, until the bare list of trades in the "London Post Office Directory" would be sufficient in itself to fill a volume. The advantages of divisions of labour are extremely great, and the progress of society is marked by the extent to which it has been carried ; but it also possesses some disadvantages. In some trades continued application is apt to bring on some peculiar disease, which might never attack a person who only worked at it occasionally. The fork-grinders of Shefiield are said, on an average, not to attain a greater age than thirty years; and many other operations connected A^^th the manufacture of steel are extremely dangerous. There is another more general objection to the diAdsion of labour : that it renders every class of society more or less dependent on eveiy other, and that an injury to any one paxt is felt by the whole. The same is the case in the organic Avorld. As a polyp may be cut to pieces and every piece become a perfect animal, Avhile, Avith a man, the loss of a hand impairs the poAver of the whole body, and the loss of a head destroys life, so a tribe of Red Indians may be exterminated without any other tribe feehng the effect of it ; Avhile a disaster in any part of England is felt by the whole country, and the siege of Paris spreads misery into every corner of France. Adam Smith attributed another adA^antage to the division of labour : that it led to the iuA'ention of numerous machines. He thouirht that a man Avhose Avhole attention Avas concentrated in one process Avould be MACHIXERY. 87 more likely to discover a Letter mi:»de of performing it than if he had several to attend to. Certainly, it sometimes happens that a machine is invented by a man engaged in that very work which it is designed to abridge. Thus Mr. Pilcher, the head officer of the weighing-room in the British Mint, invented a file for reducing heavy blanks to the proper weiofht ; and he also effected an imnrovement iu Cotton's weighing machine which enabled it to separate those which were the proper weight from those which were too heavy, as well as from those which were too light. But there is no reason for saying that those who are confined to one operation arc more apt to discover improvements than those who perform a great variety of operations. Adam Smith, indeed, says many machines are invented by " philosophers, or men of specu- lation," and, in admitting this, he abandons his own ground. Agriculture does not admit of much division of labour, because its different pro- cesses must be performed at different times, and yet a great number of tools have been invented to assist the labours of the farmer. The spade, the sickle, and the plough were invented in ages so remote that no record has been preserved of their first introduction, and in our o^m time the plough has received some improvement, and machines have been invented for ploughing, reaping, and threshing by the aid of steam power. The cause of the invention of machines is the desire so universally felt to save labour, which is quite as much felt in those employments where a man has to perform several operations as where he has to attend to only one. A carpenter has to make many different things, and we all know the number of tools which his basket contains, every one of which has been invented in order to save trouble in one or other department of his work. Farmers are constantly at work introducing improvements, but the nature of their employment requires that they should be widely dispersed, and this is one reason why so long a time is required before new processes can come into general use. Another reason is, that it is impossible for the few who are the first to adopt a new method to raise sufficient produce to beat all the others out of the market, because to do BO would require them to cultivate a very large extent of ground, which they are unable to procure, and even if they could, they would be unable properly to superintend its cultivation. In manufacturing industry the wise is dilfcrent, for a factory can be greatly enlarged, aud he who introduces a new process can make so large a quantity of the article in question as very materially to interfere with the business of his competitors, unless tiiey follow his example. Bublnigc, in the work before referred to, has given copious illustrations of the advantages which are conferred on mankind l)y tiie invention 38 MACHINERY. of machines. They enable one man to do what, without them, would require the labour of hundreds. The invention of gunpowder enables one or two men to blast a rock in a day, which it would take many men a long time to remove by breaking it away; and even taking into account the labour expended in making the gunpowder, there is still a considerable saving. Monkeys have been known to throw cocoa-nuts and other hard fruit at men who approached them ; one monkey has been seen to hold a snake with one paw, and with the other take a stone and batter the reptile's head "with it. There was a time when men had no other weapons than stones; but at length some one discovered that by rubbing two stones together they could be furnished with an edge which would render them more useful, either as missiles or for the purpose of striking. As continued practice brought greater dexterity, it became possible to make and use superior weapons. After a time it was discovered that a stone could be thrown with greater force if it were placed in a sling, and whirled round before it was discharged. Then the cross-bow was invented, Avhich enabled a weak man to send a bolt as far as a strong one; and after this, the next step was to introduce the expansive force of gas to do what had been done by the tension of wood and string. This was accomplished in the invention of the musket, and it had by that time been found more con- venient to use lead than stones; and from the time of their invention to the present day, the gun and the bullet have been receiving constant improvements, and are doubtless destined to receive many more. Machines are also very useftil in enabling a great amount of work to be done in a short time which would not be worth doing at all if it could not be done quickly. The ancient EgyjDtians and Peruvians contrived to move enormous stones from the quarry to the place where a temple or a palace Avas building, but it occupied the labour of two thousand men for three years to move a single stone fi'om Elephantine to Sais, in Egypt, in the reign of Amasis. If it had been desired to com2)lete the building in a single year, it could not have been done ; but in our day cranes, rollers, and steam engines would enable us to do in a week what they required years to accomplish. Another advantage of machinery is that it enables us to secure uniformity in the articles produced. Of this an illustration is afforded by the art of printing. It is impossible that copyists should avoid all mistakes in copying a manuscript, and, consequently, when a book has been frequently copied by hand, the manuscripts are found to differ more or less fi'om the original and fi'om one another. These differences are well known to occur in copies of the works of classical SCALE OF PRODUCTION. 30 authors, of the Old and New Testament, and, indeed, of all books which were mdely read before the invention of printing. In printing, these variations are avoided, if only proper care be taken. Instead of a pen, types are used made in the shape of the different letters of the alphabet, and with these the whole work is spelt out. When this has been done, the types are niked, and are pressed upon hundreds or thousands of sheets of paper in succession. By this means every sheet receives exactly the same impression, and whatever errors there are must have been introduced when the types were "composed," that is, arranged in then- order, and must be shared by all copies alike. J\Iauy such errors may occur, and frequently do so, especially in newspapers and other prints which have to be completed in great haste. The difficulty of settling the true text of Shakespere shows how many errors may creep in where no care is taken either to make the first edition a faithful copy of the author's manuscript, or to make the later editions agree ^Yith. the first ; but all the copies of the first folio are exactly ahke, and the various readings are nothing to what they would be if Shake- spere's plays had only come do\m to us in manuscript. Machines also enable us to do many things which we could not do at all witljout them. "Without ships we could not cross the Atlantic, and without telescopes we could never have discovered many thousands of stars which are now kuo^\^l to us. In order that division of labom* may be carried to any great extent, it is necessary that production should take place on a large scale. It is not necessary that the producers should be brought together in large numbers in a single workshop, but only that the number of articles made should be so large that one man can find occupation for his whole time in performing a single process. The business of watch-making is divided among more than a hundred diiferent trades, but those who work at them are not brought together in large factories, but work at their 0"rti homes, and even in the country. The astonishing cheapness of the German toys which are sold in London is due not only to the fact that the wood of which they are made is obtained for but a trifle more than the cost of felling the trees, but also to the extreme division of labour which is practised by those who carve and paint them ; but tlicy li\e, not in large towns, but in the forest where the trees are fjund. The wants of a village are so few, that it would be. impossible fur one man to find constant occupation by selling drapery alone, or grocery alone, and if several persons set up as drapers, grocers, cheesc- luongors, etc., the result would be a great waste of labour, because several person.'; would be employed in doing what could be done by one, and they would be wasting uuicli time which might be spent in producing 40 SCALE OF PEODUCTION. something useful. Nor would they gain the chief advantage of division of labour, that of increased dexterity, for this result is only obtained by constant practice, which is wanting in the case supposed. This is one reason why so many of the conveniences of life can be obtained so much more easily in a large to^Mi than in a snjall village ; but the town also has the advantage of making it profitable to employ more machinery. The expense of making a machine of any great power or complexity is always considerable, and its superiority to unassisted labour only mani- fests itself when, and in proportion as, a large number of articles are produced. It requires less labour to write out a copy of a book than to set up the types for printing it, and very much less than to make a printing-press. Wlien, therefore, but one copy is required, it is found to answer better to have it in manuscript ; but as the number increases, the cost of printing cash one diminishes, because when the types have once been composed, the labour of stamping successive sheets is very small in comparison, and much smaller than that of TVTiting out fresh copies. It is well known how the success of a newspaper depends upon its circulation, and how large an outlay must be incurred on fii'st starting one, before it has attracted sufiicient popularity to enable it to pay the expenses of printing. A higher price is always charged for new novels than for those which have acquired a great reputation, because the publishers do not know what will be the extent of the sale, and wish to secure themselves against loss by charging so much that the sale of a small portion of the edition will bring in enough to pay all expenses. When a work has become so popular that a large sale may be confidently anticipated, the publishers can divide the expenses among the whole number printed, and therefore reduce the price. If a copyi'ight treaty were concluded between this countiy and the United States it might, and probably would, have the eflPect of considerably reducing the cost of books in both countries, because both would be supplied from the same printing house, and the labour of composing the type would be gone through once instead of tvnce, and this saving of labour would be still more marked in the case of works winch were frirnished with costly engra^^ngs. The same principle may be illustrated in any department of industry. For several centuries our coins were struck by hand, one man holding the metal between the dies, while another struck the upper die with a hammer two or thi'ee times until satisfactory impressions were obtained. Now a machine is employed which places the blanks in one die and brings the other down upon it -nith a force of 34,000 kilogrammes, which produces the impression at a single blow. It would not be profit- able to use this machine unless a very large number of coins were made in a year, and it is probable that the method employed by false coiners PROGEESS OF IJIPROYEMENT. 41 does not differ much from the ancient practice of the mint. "Whether a large or small scale of production is preferable in any one trade at a given time and place, is always ascertained, where free competition is allowed, by the simple test of experiment, for if both methods are tried, that wliich is the better will prove itself to be such by enabling those ^^ho practise it to undersell the others. As a large market is required in order to render possible production on a large scale, it follows that small producers can always hold their ground when the market is but small. Some persons have a vague idea that great capitalists will in time swallow up all the small ones, but there is no more reason for such a notion than for a belief that tlie whole world will, in time, be absorbed in one tovn\. A railway is only an advantage when there is an immense amount of traffic along the same route, and can never supersede the use of horses for conveying goods for short distances. When railways were first intro- duced, some people imagined that we should not want horses any more, but though they have superseded stage coaches wherever they have been introduced, they have greatly mcreased the quantity of goods conveyed from one part of the country to another, and a great number of horses are employed to carry the goods to the railway stations and from the stations to the houses where they are wanted. A railway requires high- roads and bye-roads to feed it, just as a to^NH requires farms and villages to feed it, a fact which has been overlooked by the promoters of railways in Brazil and other backward countries, who have discovered by painful experience that there was not enough traffic in the country to fiiruish employment fur them. Steamers in the same way can only be emjDloyed where the traffic is considerable, and sailing vessels are still employed in the less important branches of maritime trade, and rowing boats are still found most convenient where only a few individuals desire to make a short journey. There is still less ground for supposing that large shops will ever supersede small ones, for the very nature of distribution requires that the distributors should be widely dispersed, and it is obvious that the greater the size of the shop, the greater must be the area which it supplies, and the inconvenience to the customers who have to come to it. Shops, moreover, do not admit of nuich division of labour, and the only ad^■antages of a large over a small one are that the men may be more fully occupied, and that large purchases can be effected with very little more labour than small ones, and thus a greater profit may be realised when the goods are sold again. The disadvantage is that it is more difficult to superintend a large shop, and a mim])cr of shop-walkers liave to be employed to see that the others do their work jn-operly. Division of labour and machinery can, as above stated, be carried to a greater extent in those cases only where there is a large market to be 42 PROGRESS OF IMPROVEMENT. supplied, but whether this condition exists or not, there is a perpetual process of improvement going on. For a long time, the inha])itants of these islands had no tools except such as were made of stone, but at length some one discovered that better ones could be made of bronze, and bronze superseded stone, and was in its turn superseded by iron. Every person who makes a tool tries to make it as fit as possible for the use which is to be made of it, and the result is, that out of thousands of cases one occurs in which some slight alteration is introduced which enables it to do its work better. The discoveiy becomes known to others besides the person who first made it, and as every one desires to obtain wealth by the least possible labour, it is gradually adopted by one person after another until its use becomes universal. The spade, the plough, and the harrow, all afford evidence of the gradual improvement which has led to then- adoption, and the same may be said of the knife and the saw, and all tools which are used by carpenters or blacksmiths. Nor is it only in the improvement of tools, properly so called, that the eternal progress of improvement is to be traced. Before the dispersion of the Aryan races, some ingenious person had discovered the advantage of domesticating sheep and oxen, and thus conferred an incalculable benefit on the human race. It enabled them to procure food with much less labour and much greater certainty than hunting had previously done, and it enabled a much larger population to maintain themselves in the same territory. The number of species, from the elephant to the silkworm, which are now employed in different parts of the world in satisfying human wants is very considerable, and is made uj) of contingents from all divisions of the animal kingdom. A few years ago, a market gardener in Australia constructed an apparatus to enable a tame kaugeroo to work an eugme for watering his garden, and it is possible that his plan may be generally adopted in that country, and almost certain that many new species will hereafter be pressed into the service of mankind. He must have been a great genius who first conceived the idea of sowing the seed of the plant, and obtaining a crop Avhere the earth did not supply it spontaneously. The introduction of agriculture enabled a much larger population to maintain itself on the same space of ground than could have done so either by hunting, fishing, tending cattle, or subsisting on the spontaneous produce of vegetation. But its chief advantage was, that it induced men to adopt a more settled life, and thus gradually formed more regular habits of industiy. The Romans were a nation of fiu-mers, and they were able to expel the Celts from the north of Italy, and what they took they kept, because they always colonised a conquered district with farmers who PROGRESS OF IMPROVEMENT. 43 clung tenaciously to the lands which they tilled, while it mattered little to the Celts to what pastures they ch-ove their flocks. But agriculture when it was first introduced Avas of a rude and imperfect character, and yielded but a small product in comparison ^ith what it does at present. Mr. Wallace tells us, in his valuable and entertaining work on the Malay Archipelago, that the D^aks, in Borneo, raise two crops in succession, 1>ScLiC^ and then leave the land fallow for eight, or even ten, years. Until recently, it was the general practice in Europe to let the land lie fallow one year out of tlu'ee, but this is giving way before the system of rotation of crops, which greatly increases the total yield, though, of course, with the expenditure of gi'eater labour. Other discoveries have been made relative to the manuring, drainage, and irrigation of the land, and new plants are constantly brought under and improved by cultivation, until at length the agricultural produce of England is estimated at seven times the amount which it had attained five centuries ago. In every branch of human industry the same progress is eflfectually taking place. That increased kno^'ledge of the laws which govern tlio universe which is denominated the progress of science, is ever pointing out some new method of satisfying our wants with a smaller and smaller exertion of labour. The discovery of Watt enabled us to utilise the expansive force of steam, and has been the parent of a host of discoveries, by which this force has been made to accomplish an amount of work which must otherwise have required an immense quantity of human labour. The discovery of the efPecfc of an electric current on a magnetic needle has enabled us to transmit intelligence with a rapidity which would have appeared incredible to any one who lived before the discovery was made. I have thought it necessary to insist thus strongly on this point, because Adam Smith and other ^vTiters frequently speak of some countries as being in a stationary, or even a declining state. Whatever foundation of truth there may be for such a behef, I contend that every nation is perpetually progi'essing in this respect, that it discovers and adopts new methods of acquiring wealth by less labour. The progress of the Red Indians is so slow when compared with our own tliat we naturally speak of them as stationary, but I cannot doubt that the weapons and orna- ments which they now use are superior to those which their ancestoi"S used thousands of yeare ago. Nor, that if they were left to themselves, tliey would in the course of thousands of years work out a civilisation of their own. Home of the tribes already practise agriculture to a slight extent, and would gradually improve it if left free to do so, but the experiment will not be tried, because another race much more advanced in the arts and sciences is appropriating their country and exterminating them, they 44 FREEDOM OF LABOUR. being unable suddenly to adapt themselves to a new mode of life. Progress must be slow in an early stage of society, but there is no ground at all for the theory which has been made to serve as an excuse for slaveiy and other abominations, tliat some races are incapable of improvement. Still less reason is there for applying the epithets of stationary, or declining, to such countries as Spain, Holland, or China. Spain does not occupy so important a position in the political world as it did three centuries ago, but this only shows that it has not moved on so rapidly as other countries, and not that it has stood still or gone back when compared with itself. The fact that railways and telegraphs have been introduced into it during the present century, would be sufficient in itself to show that the country is maldng progress, and it cannot be doubted that improvements have been effected in every branch of Spanish industry during the last three centuries. If Holland does not produce thinkers of such reputation as Grotius, Spinosa, or Vatel, it has none the less made or adopted discoveries which would have astonished those philosopliers. Their ships are now propelled by steam, in cases where the fleets of De Ruyter would have been unable to move, and they have adopted many other modes of using steam power to shorten labour. Though China has not yet adopted the use of railways, it has received large quantities of English manufactured goods, in exchange for its tea and silk, and as it would not have continued the trade unless it found it profitable, it is evident that the increase of its trade with Europe has enabled it to obtain what it wanted with less labour than before. Travellers inform us that there is a considerable Chinese colonisation now going on both on the northern and western ft-ontiers of the empire, and that this, of course, greatly enriches the districts, which a few years ago were little more than deserts, which proves that the country is advancing in an economic sense, whatever we may think of the decrepitude of the Chinese government. Politicians imagine that it depends chiefly upon them whether a country shall advance or retrograde, but there seems to be no sufficient ground for assigning to them much influence either one way or the other. Previously to the 18 th century the interference of Government in industrial operations was generally regarded as favourable, and even necessary to their efficient management. Quesney and Adam Smith have sho^vii the erroneousness of this view, but they have fallen into the opposite error of exaggerating the evil effects of restriction and regulation. When they wrote, the Governments of France and England prohil)ited any person from engaging in many mechanical trades unless lie had been apprenticed for a certain length of time to a master of that trade. They showed that these restrictions were both unnecessary and useless, because FREEEOM OF 1 ABOUE. 45 if a mechanic did not know his business he would not be employed, and no length of apprcnticesliip could ensure his becoming a good workman. Since their time these restrictions have, for the most part, been swept away, but both here and in France some restrictions are still retained in regard to what are called " the professions." Though the Government no longer thinks it necessary to enquire whether a carpenter or a mason has learnt his trade before he tries to hve by it, it still considers itself bound to see that physicians and la^^ers have acquired some knowledge of medicine and law before it will allow them to practise. It is curious that Say, who generally approved of freedom in this respect, recommended the State to subject physicians and surgeons to an examination, on the ground that mistakes in their profession were dangerous. The objection to all such regulations is that they are useless, and the injury which would result from inefficiency cannot, however great it may be, furnish a reason for adopting useless regulations. It might as well be said that we ought not to nail horseshoes to our doors to keep oif witches becauses witches do not exist, but that we ought to nail them over the Bank of England, because there is an immense treasure stored up in its vaults. A Government examination will not induce more or abler men to enter the medical profession, and much the same set v>i\\ ho admitted as would have entered it if there were no examination. However strict it may be it can furnish no security against the doctor's forgetting what he has learnt, and if it be so strict as to diminish the number of practitioners below that which is required by the public, the deficiency will be made up by unlicensed practitioners, or else many patients will not receive any medical attendance at all. Mr. Matthew Arnold, after saying that in Germany chemists arc required to pass a more strict examination before they are allowed to set up in l)asiness than is thought necessary in England, triumphantly asks if the reader can doubt that the chemists of Germany must be more capable of performing their duties than those of England. I may venture to answer this question in the affii-mative, for it so happens that Dr. Mayo, who was sent out by a British Society to attend the sick and wounded at the commencement of the Franco-German war in 1870, requested that the drags might be sent out Irom England, because it wa.s well knoAvn that they \v(;re better and cheaper here tiiim in Germany. Numerous restrictions have been imposed on persons entering the legal profession. At one time no one could do so who did not accept the doctrines of the Clmrcli of England, at the present time women are altogether excluded, and no man can l)e admitted without eating dinners, paying fees, and giving some proof that he has studied the law. All 46 FREEDOM OF LABOUR. such restrictions are highly objectionable. The exclusion of Dissenters and women shuts out persons who are capable of doing the work well, and it is not necessary to prescribe a certain time which must be spent in studying law. There need be no fear that persons who are ignorant of law will obtain much practice, and if left to themselves, lawyers will be sure to acquire proper instruction. But I would not exaggerate the evil effects of these regulations, for as there is important work to be done, there will always be plenty of men to do it, and no marked effect on tlie character of lawyers could be expected to follow on the removal of any restriction, however narrow. I can only say that all regulations are either superfluous or injurious. CHAPTER III.—CAPITAL. DEFI^'ITIOX OF CAPITAL DISTINGUISHED FEOM MONET — MACHINERY — COMMODITIES AND SEEVICES — WORKHOUSE AND PRISON LABOUR — FALLACY OF OVER-ACCUMULATION — FREEDOM OF INDUSTRY. In order that labourers may engage in any occupation which does not supply them with food day by day, it is necessary that a stock of food should be provided for them, cither by themselves or by some one else. Tills stock is called "capital," and the person who provides it is called a capitalist. The capitahst who provides the food usually provides also the materials wiiich are to be worked up, and the macliines which are to be employed. Common lang-uage regards as capital all the materials and machines wliich are employed in any undertaking as well as all the money which is spent in wages. Adam Smith, in adopting this mode of expression, di^aded capital into two portions, the fixed and circulating. Fixed capital is that which the master keeps \yith. liim, of which he gives the tailor's needles as an illustration, and circulating capital is that which he transfers to others, that is, the wages which he pays to his workmen. Eicardo, ^hilc retaining these terms, gave them a different meaning, and used them merely to denote different degi-ees of durability, so that with him the tailor's needle is circulating capital, because it soon wears out, while a ship is fixed capital, because it lasts a long time. There is a great deal of obscurity hanging about the subject of capital, and Mr. Fawcett, in defining it as that portion of wealth which is devoted to the production of future wealth, expresses himself dissatisfied with his own definition, and merely gives it as one with which the reader must be content until the subject had been more fully elucidated. Mr. Jevons suggests that it would tend greatly to simplifiy matters if we confine the term capital to the food and necessaries of the labourere, " Capital," he says, " as I shall treat it, consists merely in the aggregate of iJiose commodities wliich are required for sustaiiwig labourers of every hind or class eiu/aged in tvorJc."* In adopting this definition I shall regard it as immaterial whether the capital is actually employed iu * Theory of Political Economy, by W. Stanley Jovous, Macmillan, 1871. Page 211. 48 CAPITAL DISTINGUISHED FROM MONEY. supporting persons engaged in productive industry, or persons living in idleness. Thus, the industry of a country is limited by its capital, since there cannot be more persons at work than the country has the means of supporting, but it nowhere reaches this limit, for in every countiy there are at all times a great number of persons, who, for various reasons, are not doing any work at all. By this definition, Mr. Jevons restricts the capitalist to the sole function of maintaining labourers until their work has been completed, and this is ob-viously the case when we regard them as a ^vhole. The miller buys the mill and the corn, but in doing so he merely obtains the result of labour for which other capitalists provided the means of performing, by supplying the maintenance of the labourers. Eegarding industry as a whole, we may say that capitalists only enable labourers to live until their work is finished, and if the capital of the country be large enough to give them time to make a machine and then perform their subsequent operations ■v\dth its aid, we may say that capital has enabled them to wait, and that knowledge has enabled them to economise labour. Food is the only thing which is absolutely necessary at all times and places, and in most countries where labourers are provided with it, they or their families can make and repair their o^^'ll clothes and houses when they are not engaged in their ordinary work. I shall therefore use the term capital to denote simply food, and shall follow Mr. Jevons in altogether rejecting the expression " fixed capital," and in saying not that a railway is fixed capital, but that capital has been raised or invested in it. It is not usual, at least in our age and countiy, for a capitalist to retain in his own custody the store of food with which his labourers are actually fed. It is more convenient to both parties that he should pay their wages in money, and leave them to buy their food as they want it. We therefore commonly speak of a person's capital as consisting, not of so much food, but of so much money. This unfortunately produces much confusion, and leads many persons to speak and "m-ite as if coin possessed the property of being able to feed labourers. Thus M. Leon de Lavergne, in his elaborate and valuable work on the Rural Economy of France, complains that the French Eevolution retarded the progress of agriculture, by causing many estates to be sold to the tenants, and thus inducing the latter to expend on the purchase of the fee-simple much capital which would have been better employed in improving their farms. But the purchase of the land was a mere transfer of coin, and could in no way diminish the quantity of food existing in France and available for the puipose of feeding farm labourers. It is not very likely that a farmer would spend so much on the CAPITAL DISTINGUISHED FROM MOXEY. 49 purchase of his holding as materially to interfere with his power of purchasing stock and hiring labourers, but if he did so, he would stiU bo able to borrow what he wanted by means of a mortgage, for Avhich ho would then be able to give ample security. Almost in the same passage, M, de Lavergne says, that the revolution injured agriculture by bring- ing so many estates into the market as greatly to reduce the price of land. Here again capital is confounded "^ith money. It is true that a piece of land which has been improved by the expenditure of much capital upon it will, other things being equal, sell for more than another piece which has not been so improved, and lowness of price may bo taken as some proof of a small outlay of capital upon land. But the argument altogether fails when the fall of price is occasioned by a glut of the market, or by a feeling of insecurity restraining men from purchasing estates which have been confiscated for fear lest they should bo confiscated agaui. Those who bought the estates of the French clergy or nobles at a low price were not thereby discouraged from laying out capital in improving them, and those estates which the Government was unable to dispose of were not left uncultivated, but were doubtless im- proved, either at the expense of the Govermnent or by the tenants who cultivated them. Every reader of Ricardo must have been startled by his condemnation of probate and legacy duties, on the ground that they fall wholly on capital, and consequently diminisli the capital of the country. In point of fact, capital is precisely what the State must and will have, and what it obtains by taxes of every kind. Either it employs capital in maintaining labourers engaged in the construction of public buildings, or in the manufacture of uniforms or of other articles which the State requires. While the revenue remains the same, there is the same consumption of capital, and as far as this goes it does not matter to the people in what way the State obtains it. It is desirable that the taxes should be levied in the manner most convenient to those who have to pay them, and Ricardo admits that legacy and probate duties are easily collected, and they are certainly imposed at a time when it is most easy to pay them. Ricardo contended that if a person received a legacy of a thousand pounds, out of which he had to pay a hundred to the Govermnent, he would consider the legacy as one of £900, and would not try to save up money to repair the breach made in the principal. This may be true, if the legatee is not engaged in industry, but it is not by tlie savings of such persons that the national capital is or can be increased. This increase can only result from the extension of agi-iculturc to soils ])reviously untilled, or from improvements in the mode of cultivation, and neither of these processes can be prevented, or even mucli retarded, by the course E 50 LARGE AND SMALL CAPITALS. pursued by the Government or the non-industrial classes in the disposal of then- revenues. One of the objections made to the imposition of an income tax in India is, the natives pay it out of capital and not out of income, which is supposed to be very injurious to the country. But on the principle just explained the Indian Government must procure cajDital, and if it consumes it unproductively, it inflicts the same loss on the country in whatever way it obtains its revenue. In saying this, I do not wish to express an opinion on that vexed question of Indian politics, whether the income tax is, on the whole, a proper mode of obtaining the revenue. In the north-west provinces, and probably in other parts of India, the collection of the tax gives occasion to much extortion and oppression on the part of the nati^'e officials ; if it appears to Indian statesmen that these malpractices are encouraged by an income tax more than by any other taxes, or if fi'om some other cause it is more unpopular, these would be sufficient reasons for resorting to some other impost, and the question is one which can only be decided by statesmen. The importation of capital is only an advantage to a country when it is employed in producing some useful commodity, but some persons seem to suppose that a country is always enriched when its Government contracts a foreign loan. Thus, when in November, 1871, the Spanish Government aimounced its intention of taxing the dividends on its external debt, the opinion was expressed in conmiercial circles, that by this act of repudiation the Government would deter foreigners from investing their capital in Spain, . and so prevent the country from making progress. This opinion was most erroneous, for in the first place, Spanish farmers would continue to improve their lands even if nothing were imported fi'om abroad ; in the second place, the repudiation would not deter foreigners from employing their capital ui producing macliines for use in Spanish mines and railways ; and in the third place, the Govenmient employed the capital which the loan enabled it to procure in a foolish attempt to suppress the insuiTCction in Cuba, in which no true fi'iend of Spain could wish it to succeed. The definition of capital given above, will throw some light on the much disputed question of the comparative advantages of farming on a large scale. Those who find fault with the French system of agriculture complain, on the one hand, that too little capital is expended on the land, and on the other, that too many people are employed upon it. The difference is really one of form, and not of substance, for if a large farmer employs fewer men on the same extent of gi'ound, the food wliich he raises is employed in maintaining the labourers who make his steam ploughs and other machines, who provide his manure, and other things which he requires. They are not employed actually on the land, but MACHINERY. 51 they are none the less co-operating to the general result, the production of the harvest, and the question between large and small farms is reduced to this : can the same capital produce a larger crop when it maintains a number of labourers all directly employed on the land, or ^^hen some of them are employed in various mechanical trades, others tending hoi"ses, and others in the actual work of tillage ? The answer to this question can only be furnished by experience, which will soon decide it in each particular case, since those persons who employ their capital most judiciously will be able to undersell the others or to make higher profits, and the better system will gradually supplant the worse. Applying this test to France, we find that in some departments the small ftirmers are able to hold their ground, in others they arc gaining, and in others losing ground. There seems to be no decided tendency towards the extinction of either system, the " Grande " or the " Petite Culture," in the whole of France, and it ^^'ould seem that each has its advantages which make it succeed better with a certain kind of product, the former being better suited for corn and gi-azing land, and the latter for the production of the vine and olive. It is not the object of Political Economy to teach farmers what is the best size for their forms. All that I desire here to point out is, that the capital of a country is just as useful whether it be owiied in large or small masses, and tliat it comes to the same thing, whether the labourers buy their food with money which they have saved, or with wages which they receive weekly. This very obvious consideration was entirely overlooked by "Wakefield. He was incapable of conceiving that a system which prevailed in England could be anything but the most perfect in the world, and as he found that in this country it was usual for farmers to own a large capital and employ a large number of labourers, he wished to introduce the same system into Australia and New Zealand. For this purpose he advised the English Government to charge a high price for land in the colonies, and to spend the money so obtained in sending out labourers from England. In this way he hoped to induce rich capitalists to emigrate, and then to supply them with laljourers. Had lie understood what capital was, he would have seen that South Australia would have been quite as well supplied with it, if it liad offered an attraction to small farmers uniting in their own persons the functions of capitalist and lal)ourcr. By making land cheap the Government of tlic United States offers great inducements to this class of persons to settle in its territories, and lubonr and capital flow into them of their own accoi'd and in great abundance. The introduction of a new process, whether it involves the construction of a macliiue, or whether it is simply a better method of using the same e2 52 MACHINERY. tools, is always a benefit to the community, because it enables the same quantity of labour to produce more commodities, and thus enables every one Avho consumes the particular commodity, whose production has been improved, to obtain it with less labour. But, unfortunately, the change necessitates more or less suffering among those who are already engaged in producing the article on the old plan, for it frequently happens that many of them are unable to find another employment which is so well suited to them, or even any employment at all, and the very fact that the new process effects a saving of labour, causes many of them to be turned off. Hence there has arisen a behef, wliich is widely spread amongst the working classes, that it is contrary to their interests that machines or other improvements should be introduced. Riots were at one time common in the North of England, A\diich had the destruction of machinery for their object, and when Babbage -^Tote forty years ago, the working classes in the Rhenish provinces displayed an hostility to its introduction which gTeatly militated against the growth of manufactures in that district. At the present day, though we no longer hear of riots mth such an object, the rules of some of our trades' unions are e'V'idently designed to obtain a similar end. Some stonemasons' unions, for instance, insist that the stone shall not be cut at the quarry, but at the building where it is to be used. The reason is that stone is softer when fi'esh from the quarry, and that if it is cut there into the shape required, fewer men would be employed to do it than if it is allowed to harden by exposure to the atmosphere before it is cut. The fi'amers of the rule suppose that it *' makes more work," or causes more men to be emiDloyed, but in reality it only causes more to be employed in stone cutting, and thus raises the cost of stone buildings, and thereby inflicts an injury upon all who use them. It in no way increases the stock of food in the country, and therefore cannot cause more labourers to be maintained ; it simply determines that some labourers shall be employed in this particular way, and inflicts an injury on the whole body so far as they are in the habit of using stone houses. It would be hard to censure severely men who are endeavouring to retain the employment for wliich alone their habits have fitted them, and who sacrifice the convenience of others for what is to them a matter of life and death, but there is no excuse for a permanent rule against the introduction of a new process by degrees aa fi'esh hands enter the trade, and it is impossible to insist too strongly that what men want is not work but wages, and that no such rule as that here under discussion can possibly increase the quantity of food or clothing to be distributed among the labourers. The contradiction between the views which are popularly held on this subject can hardly be better expressed than they have been in "Tristram Shandy," where, in a conversa- MACHIXERY. 53 tion respecting the merits of a flyiug-can-iage, wliich can be worked by the wind alone, Dr. Slop says, " It would be excellent good husbandly to make use of the winds, which cost nothing, and which eat nothing, rather than horses, which (the devil take 'em) both cost and eat a great deal." " For that very reason " (replied my father) " because they cost nothing, and because they eat nothing, the scheme is bad ; it is the consumption of our products, as well as the manufacture of them, which gives bread to the hungry, circulates trade, brings in money, and supports the value of our lands ; and though I own if I was a prince, I would generously recompense the scientific head which In'ought forth such contrivances, yet I would as peremptorily suppress the use of them." Though no one would now push the arg-ument to such a ludicrous conclusion, there are many persons who suppose that the introduction of machinery inflicts a temporary injury on the labouring class, and they have found an ally where they could have least expected one, in Ricardo, who, in his chapter on machinery, contends that its introduction may cause much circulating capital to be fixed in a form in which it cannot be used for the maintenance of labourers, and thus cause a diminution of the fund which supports them. In other words, he supposes that the quantity of food in the countiy may be diminished by the employment of some labourers in the production of machines. Now it is evident that the quantity of food cannot be diminished unless some land is allowed to go out of cultivation, and caimot be effected by the use of machines in any other branch of industry than agriculture. Ricardo accordingly puts the case of a farmer who employs some of his men in making a machine instead of cultivating the ground, and says that he may do so because he may receive tlie same net profit, in which ever way he employs his capital. But the sole object of introducing machines into agriculture is to increase the yield, and it is quite impossible that land should be allowed to be uutilled while labourers are making a steam plough. In Ricardo's case it would be apparent to the neighbours that some of the farmer's land was uncultivated, and that the town which he supplied would l)e deprived of part of its daily food, and this would ])C sufficient to induce some other capitalist to set up as a farmer, and supply the deficiency. Thus the simple result would be that a farmer had turned machine maker, and some one else, perhaps a machine maker, had turned farmer. Ricardo, as usual, waa content with a hypothetical case, l)ut later writers have rcfeiTcd to the case of Ireland as an actual illustration of the truth of his argiuncnt. Thus Senior contends that the la])ourers of Ireland have been actually injured l)y the conversion of aral^le laud into pasture, because tlie horses and cattle, which he calls am'mated machines, consume the food wliicli would otherwise be used Ijy men. Because fewer men ixva 54: MACHINERY. employed in proportion to the extent of ground when it is used as pasture than when under tillage, Senior supposes that fewer men are employed in the country when the former system has been substituted for the latter. This hj no means follows, for more land may be occupied, and less left M'aste. If a farmer dismisses some of his men and employs a smaller number, some one else is able to employ more, and as the men are still in want of employment, they ml\ in some way or other meet with that other capitalist. If an Irish farmer had been in the habit of supplying a town with corn, and now finds it profitable to rear horses and cattle, it can only be because the town has found some one else who can supply it with corn, and the same number of people are able to obtain food. It is true that the population of Ireland is diminishing, but this cannot be attributed to any lack of food in the country, for it still exports both corn and cattle to England. It must ])e ascribed to the cause, whatever it may be, which renders it more profitable to carry on manufactures in England than in Ireland, and it does not matter to any Irish labourer '\^'hether English manufactures are paid for Avith corn or with cattle. As the population of England is increasing, though the same process of coiiversion of arable land into pasture is going on in this country, it is clear that the diminution of the population of Ireland cannot be ascribed to this process, which simply shows it is more i)rofitable to rear cattle at home and import corn fi'om abroad. It is the reverse of the truth to say that the investment of capital in undertakings which require a long time to produce their effects, is injurious to the working classes. During the period 1847-50 a great deal of English capital was employed in the construction of railways, the shares of which had been taken up in a time of speculation, and which the shareholders were compelled, much against their will, to complete. But Mr. Newmarch, in his admirable account of the development of railway enterprise,* has shown that the suffering fell, not on the labourers, but on the upper and middle classes, as is evinced by the great falling off in the receipts fi'om the taxes on luxuries. The population increased, and the na\'vies, etc., received good wages, but they were employed in making railways, instead of producing luxuries, the consumers of which suffered accordingly. I am thus brought to the conclusion that labourers, as a body, cannot be ignored by the introduc- tion of machinery. They cannot be effected by its introduction into any other employment than agriculture, and an agricultural improvement which diminishes the crop is a contradiction in terms, and as long as there is the same quantity of food in the countiy, the same nmnber of labourers can find employment. I repeat, hoAA'ever, that eveiy change * See the 5th vol. of the " History of Prices," by Toolie and Newmarch, COilMODITIES AND SERVICES. 55 may injure more or less the persons ali-eady engaged in a particular trade, and it would be harsh to blame them severely if they endeavour to prevent themselves from being ruined, but as all improvements arc beneficial to the whole community, the Goverimient is bound to prevent aU acts of violence against those who introduce a new process. The same reasoning leads me to deny the truth of the theory which has been expressed in the formula that " a demand for commodities is not a demand for labour." Against the use of this latter expression "demand for labour," I must enter a protest, which I am glad to be able to fortify by a quotation from the thinker whose views it is the object of the present chapter to explain and illustrate. " Although labour is the starting point in production, and the interest of the labourers the veiy object of the science, yet Economists do not progress far before they suddenly turn round and treat labour aa a commodity which is bought up by capitalists." * It is most inconvenient to speak of labour being in demand as if anybody wanted work, and as if it were not so distasteful that no one would perform it except to obtain some commodity, or, at least, some gi'atification. After speaking of a demand for labour. Economists come to speak of its being scarce and dear, and then to consider its scarcity as an e\il of the same kind as a scarcity of corn or cotton, while if it means anything, it can only mean that all persons who wish to earn wages can do so. The formula here under discussion means that a person who spends his money in the purchase of commodities only determines the mode in which labourers shall be employed, but that if he spends it in hiring seiwants, these form an addition to the total numljor of persons in the receipt of wages. Mill (followed as usual by Mr. Fawcett) maintains the truth of this proposition, but it has been much disputed, though its opponents have hardly comprehended its meaning. They consider it sufficient refutation to say that a person who purchases velvet causes labourers to be employed in making it, but this Mill docs not deny ; l)ut he contends that if a person who has been accustomed to purchase velvet changes his habits, and spends an equal sum in the wages of servants, all the velvet makers ^\ill Ijc able to live by the same or some other employment, and that the servants will be employed in addition, and must have been previously unemployed. In order to obtain a clear view of the subject I will take an illustration of my own, in preference to following out the cases which are put by Mill. Mr. Carlyle tells us that C-er of gold to purchase silver is a definite idea, and so is its power to purchase copper; but the power of gold to purchase silver and copper means nothing at all. We may, indeed, say that gold has greater power of purchasing than cither silver or cojipcr, because we mean that gold will purchase more of any given connnodity than silver will, and more than copper will; but we cannot say what is the ratio of its power to those of the two other metals. Historians, in speaking of the changes 91 MEANING OF THE TERM. Avhich have taken place in the vahie of the precious metals, endeavour to show that they would formerly purchase more of other commodi- ties than they do at present. Thus Hallam, after mentioning the prices of corn and cattle in England in the 13th century, says: — " We can hardly take a less multiple than about thirty for animal food, and eighteen or twenty for corn, in order to bring the prices of the 13th century to a level with those of the present day. Combining the two, and setting the comparative dearness of cloth against the cheap- ness of fuel, and many other articles, we may perhaps consider any given sum under Henry the Third and Edward the First as equivalent in general command over commodities to about twenty-four or twenty-five times their nominal value at present."* But, in reality, we cannot strike an average of this sort, since we have no standard by which to measure the comparative importance of different articles, and we can only say that the same nominal sum of money would then purchase thirty times as much meat, and eighteen or twenty times as much corn, and that with regard to other commodities diflferent proportions prevail; but to say that the general command over commodities which the same sum gave to its owner was twenty-four times as great as at present, is merely to substitute a guess for an historical fact. Mr. Jevons has been the first to point out that if value be the power of exchanging, it is necessary to mention some other commodity with which the conmiodity in question is compared, but that Economists frequently speak of the value of a thing without mentioning any other thing with which it is compared. " Value of exchange," he says, " expresses nothing but a ratio," and " to speak simply of the value of an ounce of gold is as absurd as to speak of the ratio of the number 17," (p. 83.) The case is not mended, if we use value to exjjress the ratio which a commodity bears to all other commodities, as this conveys no more idea than the ratio of the number IG to numbers in general. The number IG has a certain ratio to the number 8, and another to the number 4, but it has no ratio to the two together, though it is greater than either of them, and in the same way it is half of the number 32, and one quarter of the number Gi ; but no idea would be conveyed to the mind if we were to speak of the ratio which it bears to the numbers 8 and 32, and still less if we were to speak of its ratio to numbers in general. Mr. Jevons, accordingly, pro- poses to give up the use of the word altogether, and to substi- tute the phrase "ratio of exchange," but this is tantamount to giving up the problem as insoluble, an act of despair which no student of * Middle Ages, Vol. III., p. .S68, 2nd ed., 1856. HE AXING OF THE TER:\r. 95 science can willingly submit to. jMankind have found it necessary to coin the word value and to use it without referring to any commodity in which it is to be measured, and they have referred to Political Economy to ask what is the idea which they desire to express by the word, and Pohtical Economy has no right to give up the problem, and to tell them that the Avord means nothing. I have endeavoured to explain the mean- ing which Adam Smith attached to the word, which it appears to me has been completely missed by all writers except Mr. Cazenove, who, accus- tomed to use it in a different way, have supposed that he used it in the same sense as they did. It must be admitted that his language is not so well framed as it might have been for the purpose of preventing such a misconception. The passage w'hich I have quoted above, in which he says that value in exchange is the power of purchasing commodities, has been often quoted, as was very natural, to show that he considered the value of a commodity to be its power of purchasing all other commodi- ties, in the sense in which it is understood by other Aniters. I think, however, that any one who will read the fifth chapter, and will then examine the passage in question, which is placed near the close of the fourth chapter, will see that his meaning was somewhat diflTerent. "What he meant to say was that a thing cannot possess value in exchange unless it has the power of purchasing or exchanging for other things ; but this is not quite the same as saying that the value of a commodity is the ratio which it bears to all other things for which it is exchanged. AVhen, for instance, he says that gold has value, he means that gold will be taken in exchange for silver, or for copper, or for any other commo- dity ; but he does not mean that the value of gold is the ratio in which it is exchanged for silver and copper, and all other commodities ; but he always says that its value is equal to the quantity of labour which it enables its possessor to induce others to perform for him. Although the fifth chapter of the "Wealth of Nations" is one of the most masterly in that masterly work, and although it is marked throughout by a lucidity which has been seldom equalled and never surpassed in the literature of Political Economy, it has yet been as completely misconstrued as the most obscure passage in any Greek or Hebrew mamiscript. This has Ijeen owing to the fact, that all the hundreds and thousands who have read it have come to it already accustomed to use the word value in a certain sense, and that this has prevented tliemfrom seeing that he used it in a totally different one. As he did not foresee the way in which his language would be construed, he has not taken sufficient care to exi)lain the dilferencc between his mode of using the wm'd and ( heirs, iiltlunigli the latter was common even in his time The most unfortunate expres- sion which he allowed himselC to use was that of "value of labour," 96 MALTHUS AND RICARDO. which, though it did not produce any confusion in his own mind, has given colour to the behef that he regarded labour as a commodity to be bought and sold like all other commodities, and has rendered it difficult for other writers to understand on what grounds he held that labour alone never varied in value. The follo\\ing passage explains the reasons AA'hich led him to adopt this opinion : — " Equal quantities of labour, at all times and places may be said to be of equal value to the labourer. In his ordinary state of health, strength and spirits, in the ordinary degree of his skill and dexterity, he must always lay do^wn the same portion of his ease, his liberty, and liis happiness. The price which he pays must always be the same, whatever may be the quantity of goods which he receives in return for it. Of these, indeed, it may sometimes purchase a greater and sometimes a smaller quantity ; but it is their value which varies, not that of the labour which purchases them. At all times and places, that is dear which it is difficult to come at, or which it costs much labour to acquire, and that cheap which is to be had easily, or with very little labour. Labour, therefore, never varying in its own value, is alone the ultimate and real standard by which the value of all commodities can at all times and places be estimated and compared." The obvious meaning of this passage is that a day's labour is esteemed an equal hardship by him who has to undergo it in all times and places, and yet Ricardo has endeavoured to show that the value of labour varies by stating that the labourers sometimes receive a greater and sometimes a smaller quantity of corn and other commodities. The word value is not used by Adam Smith quite in the same way when applied to labour as when applied to commodities, since in the former case it implies an unfavourable, and in the latter a favom-able estimation. Warned there- fore by his example, I shall avoid the use of the expression " value of labour," the more especially as I wish to abstain from treating labour as a commodity, my objection to which is not a merely verbal one, but is founded on the inconvenience of classing in the same category two things so utterly unlike as the material articles which we labour to obtain, and the labour which we expend in obtaining them. Fifty years ago a controversy was carried on between Malthus and Ricardo respecting the fitness of labour to be employed as a measure of value, of which it is necessary for me to give some account, and the arguments in which I must carefully examine, both in order to answer the objections vrhich were then made to the use of such a measure, and in order to bring out more clearly the meaning of Adam Smith. Before doing so, it is necessary to make a few remarks respecting those eminent writers, in order that it may be distinctly understood that I have no intention whatever of impugniing in any way their claim to be considered MALTHUS AND RICARDO. 97 as great masters of the science. Each of them criticised the arguments of the other with the freedom which the subject required, and without in the sHghtest degree diminishing their mutual esteem or personal friendship ; but other writers who have taken part in or referred to the controversy seem to have imagined that they could only show that they were convinced by the arguments of the one by impugning the honesty or the intelligence of the other. My own opinion, the grounds for which will be presently explained, is that neither of them really understood the point in dispute, and I can only compare the controversy to a discussion among a party of bhnd men respecting the best mode of measuring the gradations of colour. But while saying this, I must gratefully acknow- ledge that it is to their writings that I have been in a great measure indebted for the arguments which have led me to this conclusion. If, while standing on their shoulders, I am able to see frirther than they could, it would be the height of folly and ingi-atitude to forget that it is to them I owe the elevation, and to arrogate to myself any superior merit on account of my more extended view. Of Malthus I need say but little, as I have already expressed my regret for the foolish calumnies with which he has been assailed, and his Avritino's, with the exception of the Essay on Population, have not exercised much influence on the progTess of the science, and are but little read at the present day, so that any eiTor which they may contain is comparatively harmless. But the case is far othermse with Eicardo, whose theories have been so generally adopted by succeeding writers that there are even now but few Economists whose views differ materially fi'om his, and every innovation in the science must partake more or less of the character of a revolt against Eicardo. While taking part in such a revolt, I wish at the same time to express my deep sense of the immense service which he has rendered to the science, and the benefits which every student must derive fi'om the perusal of his immortal work. He has been so absurdly attacked by men Avho were unworthy to mend his pens, that some distinguished Economists have been driven into the other extreme, and have extolled as gi'cat discoveries the fallacies and truisms into which he was sometimes led, so that the task of fairly criticising his writings is rendered doubly difficult. The peculiarity of his method Avas that he took no pains to sec whether the facts coincided with the results of his reasoning. Buckle has pointed out that a philosopher who pursues the deductive method may greatly outstrip the knowledge of his time, and may discover principles whose accuracy cannot l)e tested until fresh fiicts have been discovered at a much later time, and this has been exemplified in the case of Eicardo. But he was not singular in the use of the deductive method, which is the only one that is or can be employed in u 98 MALTHTJS AND RICARBO. this science, as has been shown by the late Mr. Cairucs in his "Logical Method of Political Economy," but ho differed from other "^Titers in not adducing facts in illustration of his reasoning, and thus he was often led into serious errors. An economic law cannot be disproved by being shown not to agree precisely with the facts, but if there is a great discrepancy between the theoretic conclusion and the actual fact, this should induce the reasoner to examine carefully every link in the chain of his reasoning, in order to make sure that he has committed no mistake. But Ricardo not only did not bring his theories to the test of fact, but he often ventured Avithout enquiry to assert that the facts were what, according to his theory, they ought to have been. Adam Smith's method was as purely deductive as Eicardo's, but his habit of adducing historical and other facts in illustration of his reason- ing saved him from being led aAvay into any extravagant conclusions, as Iticardo frequently was from the Avant of a similar check. Eicardo's indifference to facts frequently enabled him to grasp a principle Avhose action is much obscured by a host of modifying causes, and thus to enrich the science Avith more discoveries than any other AAriter, but as Mr. Euskin AA'arns the student of art to foUoAV Titian and not Eembrandt, so the student of Political Economy should rather take as a model Adam Smith, in Avhom all the qualities AA'hich make up a great Economist are harmoniously blended, than Eicardo, in whom one alone has been so remarkably developed. E^'cry reader of Eicardo has remarked liis obscurity, and his admirer, De Quincey, has excused it as the infirmity of a great mind, which cannot bear constantly to repeat all the links in the argument, and supposes the reader to be capable of doing ifc for him- self. But the obscurity is really due to the confusion in his own mind, and he has used the Avords value and Avages in tAvo or three different senses, because he did not really understand Avhat they meant. Such obscurity there must alAA'ays be in the early stages of a science, and the popular notions on every subject are at first confused, AA^hile it is the function of science to substitute clearness for confusion, order for chaos. In asserting, therefore, that he Avas sometimes obscure, I do but assert that the science had not in his time attained perfection. The Malays and the Papuans were confounded together by inattentive observers, but Mr. "Wallace, after spending some years in the Malay Ai'chipelago, has shoAAii that they differ from one another as AA'idely as the Englishman differs from the Negro. A foreigner on first landing in England thinks that all the inhabitants of these islands speak the same language, but if he studies the subject as a philologist, he finds that the people of Wales and of the Highlands of Scotland speak languages which are radically different from English, and that Avhat is called the English language CONTROVERSY RESRECTIXG THE MEASURE OF VALUE. 1)0 embraces many dialects which are spoken in different counties, and which differ considerably from one another. In the same way, the more Political Economy is studied the more evident it becomes that such terms as value, wages, and capital include several diflerent things Avhicli it is the task of science to keep distinct, and early "^Titers partake more or less of the confusion which this mvolves. The truisms in which Eicardo sometimes indulged are in like maimer the inevitable consequence of the imperfect state of the science in liis time, for Comte has shown that in every science the metaphysical stage must precede the positive, and Political Economy is no exception to the rule. Although I shall eu- deavom* to show that some of his theories are unsound, and that they do not explain the phenomena, I do not, therefore, think that they have been useless, for they have afforded a means of classifying facts, and the impos- sibility of making them include a large and increasing number of facts has at length led Economists to question the accm'acy of his reasoning. Here, as in every other human undertaking, success can only be obtained after many failures, and his failures have put others on their guard against committing the same, and have di'iven them into the right path by stopping up all the wrong ones. Having thus given my opinion of the merits and defects of Eicardo, I shall proceed without further apology to point out what appear to me to be his errors, and shall give to his opinions nothing more than the respectful examination which is all that he would have expected or desired. Adam Smith wished to take labour as the measure of value, but nothing had been done in his time towards the collection of the rates of wages which were paid at different historical periods, and he therefore proposed to use the price of corn for this purpose, but only provisionally until the want of statistics had been supplied. He had observed that its price bore a tolerably constant relation to the rate of wages when long periods were compared, but he was well aware that it was a very imperfect measure which he only used for want of a better. Malthus, in his "Principles of Political Economy," published in 1820, proposed to take both corn and labour into account when estimating changes in the value of the precious metals or other things, but his opinions were subse- quently modified, and in 1823 he puljlished a pamphlet entitled " The Measure of Value Stated and Illustrated," in which he proposed to take labour alone for this purpose. Both Malthus and Eicardo understood by value the power of purchasing all other commodities, but neither of them was the first to give this meaning to the word. Hallam's work on the Middle Ages, in which it is thus used, appeared in 181 G, before either of them had published a general treatise on the science. As they had observed that a commodity fulls in price when an improvement is U2 100 COKTROVERSY RESPECTING THE MEASURE OF VALUE. introduced which enables it to be produced with less labour, they supposed that the proper standard of value would be some commodity which is always produced with the same labour, but which would exchange for greater quantities of those which were more easy, and for smaller quan- tities of those Avhich were more difficult, to produce. The object of Mal- thus's pamphlet was to show that the value of labour is constant, because it would always exchange for the same quantity of such an imaginary substance supposed to be always produced at the same cost. Thus he used the expression "value of labour" in a very different sense to that of Adam Smith, but the fact which he states is true, and if he had proved it he would have made an important addition to the science. But the argument by which he attempted to establish it proves nothing more than that if any number is subtracted from ten, and then added to the remainder, the sum of the two would always be ten, a fact which, however necessary it may be to impress it on the mind of a child learning arithmetic, throws no light on the matter. To shoAV that this is no caricature, but a simple statement of his argument, I give the table on which he relies to prove his point. Table Ilkistrating the Invariahle Value of Labour and its Besults. 1 2 3 4 5 6 7 8 9 of corn produced men. o be a . O J2 o u u bog fee o.S O 3 S rt o c o o 5 o s ■" 3 o a u 0) > .2'bJ] a ="* 5 dJ U 3 t: « -^ 3 u 5 cr.c o ■" c r, u a C 3 ogg -"3 3 S2c O^ "S "o^S ^T3 ,/, >-a ^ iniw °e-S-^ O rt u o an a 5> 3.^ Is u •2 ti a V o p " « "rt o.S a O" > >- rt a c > > Qrs. Qrs. Per ct. 150 12 120 25 8 2 • 10 8.33 12.5 150 13 130 15.38 8.66 1.34 10 7.7 11.53 150 10 100 50 6.6 3.4 10 10 15 140 12 120 16.66 8.6 1.4 10 7.14 11.6 140 11 110 27.2 7.85 2.15 10 9.09 12.7 130 12 120 8.3 9.23 0.77 10 8.33 10.8 130 10 100 30 7.7 2.3 10 10 13 120 11 110 9 9.17 0.83 10 9.09 10.9 120 10 100 20 8.33 1.67 10 10 12 110 10 100 10 9.09 91 10 10 11 110 9 90 22.2 8.18 1.82 10 11.1 12.2 100 9 90 11.1 9 1 10 11.1 11.1 100 1 ^ 80 25 8 2 10 12.5 12.5 90 ' 8 80 12 5 8.88 1.12 10 12.5 11.25 COXTROVERSY RESPECTING THE MEASURE OF VALUE. 101 It will be seen that Maltlius seeks to illustrate the working of the principle that the value of labour remains unaffected by changes in the rate of profit. In the first line he assumes the rate of profit to be 25 per cent., and tells us that in such a case the cost of producing the wages of ten men will be represented by the wages of eight men, and the profit of the capitalist who employs them, which, at the rate of 25 per cent., is equal to the wages of two men. This is the same thing as saying that the value of the products which constitute the wages of ten men is shared among the capitalist and labourers who produce them, and that if we know the proportion of the capitalist's share to that of the labourers' we can tell how much each class •will receive. In the second line he assumes that the rate of profit is 15.38 per cent., and infers, correctly enough, that the value of the product which constitutes the wages of ten men would be shared between the labourers and the capitalist in the proportion of 8.GG to 1.33. So in all the other lines which make up the table a certain rate of profit is assumed, and it is pointed out that as the capitalist's share varies inversely as that of the labourers', the total sum is always the same, and the number ten is repeated through the whole of the seventh column. This, however, does not prove that the value of labour is constant, and, if it did, a similar course of reasoning would serve to prove that the value of any article is constant. Whatever be the cost of producing ten kilogrammes of gold, it is obvious that the value of the product is shared between the capitalist and the labourers (rent being left out of the account as is done in Malthus's table) and that if the rate of profit be 25 per cent., the labourers would receive eight kilo- grammes and a capitalist two kilogrammes. So, if the rate were 15.38 per cent., the labourers would receive 8.666 grammes, and a capitalist 1.333 grammes, and so on with all the variations of profit imagined by ^Malthus, the total of their receipts being always ten kilogrammes. It hardly needs pointing out that in whatever sense the word value be used such an arrangement could not prove that the value of gold was constant, and yet it would be precisely analogous to tlie argument of Malthus. It is much to be regretted that he did not prove his conclusion, for it was a correct one, and would have been of great use if he had proved it, for, as he points out, the employment of labour as a measure of value might enable us to decide a controversy which excited much interest in his time, and which cannot be said even now to be settled. In the year 1810 a great difference was observed between the ]\Iint price and tlie market price of gold bullion, or in other words, the notes of the Bank of England wliich the Bank was not then bound to cash at the pleasure of the holder, would purchase much less gold coin than they jirofessed to reprc;^ent. The question was whether it was the gold or the notes which had altered UNIVERSITY OF SOUTHERN CALIFORNIA LIBRARY 102 CONTROYERSY RESPECTING THE MEASURE OF VALUE. in value, aud ]\Ialthus suggested that a comparison of the rates of wages which prevailed before and during the time at which the notes were below par would settle the question. If the labourers received the same sum in notes which they had formerly received in gold, this would prove that gold had risen in value, while if they received a larger sum in notes which would only exchange for their former quantity of gold, this would show that the paper had fallen in value. Malthus tells us that he was not in possession of sufficient information of the changes in the rate of wages to decide this point ; but if his reasoning had been such as to satisfy Tooke, the latter might have turned his indefatigable industry to the collection of the necessary statistics, and thus have placed the point beyond dispute. As I have said, Adam Smith and Malthus used the phrase " value of labour " in tvro different senses, but, as if to make confusion worse con- founded, De Quincey has used it in a third sense, and means by it the proportion of the whole product of industry which is received by the labourers, as distinguished from that received by the capitalist. "With him the value of labour is high when the labourer receives a large pro- portion of the product, and low when he receives a small proportion. In the chapter on profit I should have to consider whether in point of fact the proportion of the product of industry which is received by the labourers is really diflFereut in different stages of society, but it is a legitimate hypothesis, and affords an excellent opportunity for showing the difference bet^^'een the meaning which Adam Smith attached to the word value, and that which is commonly assigned to it. De Quincey's argument (that of "X. Y. Z." into whose mouth his opinions are put in his " Dialogues of Three Templars ") is as follows, the figures only being altered for the sake of convenience, but the meaning being pre- served. If the wages of journeymen hatters are 5f. a day, and the rate of profit be 50 per cent., a hat which requires four days to make will sell for 30f., the labourer receiving 20, and the capitahst 10 or 50 per cent. If the value of labour rise, so that the labourers receive four-fifths instead of two-thirds of the product, the rate of wages will then be 6f. a day, and the labourer will receive 2J:f for making a hat with four days' labour, and the capitalist will receive Gf. or 25 per cent., and the price of the hat will stiU be 30f. De Quincey therefore tells us that the hat does not vary in value, and that labour is not fit to be used as a measure of ^'alue, because its o\mi value may vary without any corresponding variations in the value of other things. But here lies the difference between his theory and that of Adam Smith. The hat does not vary in price, and will not exchange for more of anything else, for the fall of profit is supposed to be universal, aud does not affect the relations of commodi- COXTEOTERSY RESPECTING THE MEASURE OF VALUE. 108 ties to one another, but the vahie of the hat does fall In tlie first case, when the rate of wages was 5f., a journeyman had to work six days in order to obtain a hat ; and, in the second case, he has only to work fire days, so that he now considers it not to be worth so much trouble, and in the eyes of the whole people it possesses less value. The radical difference between the meanings which Adam Smith and Ricardo attached to the word value, render it impossible for the latter to under- stand the meaning of the former. He (Ricardo) says, that if corn tails in value in consequence of some improvement in production, the corn wages of labour will fall in consequence, and that it must be labour which has varied in value, and not the things to which it is compared. But Adam Smith only said that a day's labour is always esteemed an equal hardship by him who has to undergo it, and is therefore of equal value to the labourer, and it is no answer to say that it will sometimes procure liiin a smaller and sometimes a greater quantity of corn or other things; a fact which Adam Smith admitted. The very object of a measure is to stand in different relations to the different things with wliich it is compared. To say, therefore, that labour is not fit to be used as a measure of value because it sometimes exchanges for a smaller and sometimes for a greater quantity of corn or of other things, is like saying that a thermometer cannot be used as a measure of heat because the mercury rises when it is plunged into a boiling kettle, and fulls when it is plunged into an ice-pail. What would be thought of a draper who should say that he had given up the use of a measure altogether because all those that he had tried told him that some pieces of cloth were ten metres long, others five, and others twenty? The fact is, that Ricardo, and all those who follow him, do, though without knowing it, use the word value in two different senses. They first use it to mean the power of a commodity to exchange for all other conunodities ; and then, when they find that two things do not stand in the same relation to each other as formerly, they inquire which it is that has altered in value, but the question is unmeaning if value be taken in their sense. If a kilogi'amme of gold would formerly exchange for ten of silver, and will now exchange for fifteen, each is altered in relation to the other, and the question, Avhich is it that has altered ? is as puerile as the cele- brated discussion of the schoolmen, whether a hog which a man carries to market at the end of a rope is carried by the rope or by the man. "When they say that it is gold, for instance, which has varied, they mean that gold is produced with more labour ; but this is not included in their definition of value, but is a very different question. Ricardo, though in perfect good faith, puts a case as an objection to Adam Smith, v^ hich begs the \ery question in dispute, for he says: — (the italics are mine): — " Jf 104 CONTROVERSY RESPECTING THE MEASURE OF VALUE. I have to hire a labourer for a week, and instead of ten shilHngs I pay him eight, no variation Jiaving talcen placo in tlie value of money, 8fc.,'' when the very point in dispute is whether this fall of wages is a rise of one quarter in the value of money. He puts an imaginary case in which a labourer is able to buy more com and less fuel, soap, candles, tea, sugar, salt, &c., and triumphantly asks : — " AVill labour have risen or fallen in value ?" Eisen, Adam Smith must say, because his standard is corn, and the labourer receives more corn for a week's labour. Fahen, must the same Adam Smith say, because the value of a thing depends on the power of purchasing other goods which the possession of that object conveys, " and labour has a less power of purchasing such other goods." (Chap. 1, sec. 1.) But Adam Smith would reply that labour has neither risen nor fallen in value, for it is considered just as irksome as it was before, but that corn has fallen, and other things have risen in value. There cannot be a greater mistake than to suppose that Adam Smith used corn as a measure by which the value of labour itself was to be tested, and he distinctly states that he only used it as a measure of value, because the rates of wages at different times could not be easily ascertained, while the price of corn had been more frequently noticed by historians and other writers. The definition of value as a power of purchasing accords but ill with the idea of a general rise or fall of values, and it is curious to notice the different ways in which different ^niters have encountered this difficulty. De Quincey admits that such a thing may take place, but not seeing what to make of it, thinks it prudent to say no more about it. Senior says that when a general rise or fall is spoken of, some one com- modity must be excluded, with which all the others are compared. When it is said, therefore, that all commodities are of less value now than in the time of Queen Elizabeth, he thinks that this must mean all except the commodity labour, as if this were a thing of the same kind as hats and shoes. ]\Iill, however, says that the idea of a general rise of values is an absurdity, and this is perfectly true in the sense in which he uses it, since it is impossible that everything should purchase more of everything else. But as Adam Smith uses it, a general fall of values, though not very probable, is quite possible, for labour may become more efficient in all trades, and everything may be procured with less toil. Having now, as I hope, sufficiently explained the nature of value, I shall endeavour in the next chapter to explain the causes on which it depends. CHAPTER II.— CAUSE OF VALUE. GENERAL CAUSE OF VALUE — ^MANUFACTURED GOODS — RAW PRODUCE — MARKET VALUE — SUPPLY AND DEMAND, UTILITY, COMPETITION. Value I hare defined to be the esteem in whicli commodities are held, as measured by the quantity of labour which will be given in exchange for them. To explain why a given commodity has a given value is to answer the question ; — Why does its possession enable its owner to com- mand the labour of others for so many days ? — or, which is the same thing, — Why is it necessary for the labourer to spend so many days' wages in order to procure the commodity in question ? Thus value and wages are the same phenomenon seen from two different points of view, and the answer which naturally suggests itself to both questions is — • Because it has required just so many days' labour to produce the commodity. This is, with some necessary qualifications, the explanation which I have to offer. I will assume for the present that all labourers are of equal skill and are all free to change their employment, and that all kinds of labour are equally agreeable, and under these circumstances it is absolutely true that an article, such as a pair of shoes, which it has taken six days to produce, would always exchange for six days' labour. This is a neces- sary deduction from the principle that all men desire to obtain wealth with the least possible labour, for it is evident that a tailor will not give seven days' labour, or the product of seven days' labour, for a pair of shoes which he could make in six days, and it is equally clear that a shoe- maker would not give a pair of shoes to the tailor for working five days, when he could do as much work himself in five days as the tailor could, for this would be working six days to obtain what he could get by five days' labour. As two things which are etpial to the same thing are equal to each other, it follows that two things which are produced with equal quantities of labour will exchange for each other, since each will exchange for the same quantity of labour. Hicardo's theory of value extends no further than this, and merely says that two things which are produced at the same time and place with equal quantities of labour will exchange for each other, and will possess equal power of purchasing other things. He refused to admit that a commodity would always exchange for as much labour as liad been necessary to produce it, and contended that it might and did happen that an article required more labour than formerly to produce, and yet exchanged for the same quantity of it as before. 106 GENERAL jCAUSE OF VALUE. Before examining his argument, it will be necessary to enter more fully into the circumstances which surround, and, in some measure, obscure the working of the abstract law Avhich has been eimnciated above. If a rich man hires a person to pick blackberries for him, the price of the black- berries and the wages of the gatherer are the same thing, and the black- berries are worth exactly as much labour as it takes to collect them. If, however, the consumer buys the blackberries fi'om a tradesman who has previously employed other people to gather them, the price is somewhat more thau what is paid to these labourers. There is of course the labour of the tradesman himself to be remunerated, and he charges more for the blackberries which he does sell, in order to compensate for what he loses by those which he does not sell. Taking both these circumstances into account, we might still say that the value of the whole quantity of black- berries sold is equal to the whole quantity of labour expended in gathering them and in bringing them within the reach of the consumer; but there still remains another element of value to be accounted for. If the tradesman took no part in the actual work of handing the fiiiit across the counter, or even of superintending those 'n'ho performed it, the price of the fruit would still be such as to leave something over after paying the wages of all those who had been employed in gathering or selling them. This surplus would be received by the tradesman in respect of the capital which he had employed in maintaining the various labourers engaged in the work, and would be the reward, not of any labour, but of the abstinence which he had practised in forbearing to consume his capital. If he had chosen to employ his capital in main- taining labourers who produced things for liis o^\^l enjoyment, he would have had his pleasure then, but if he consents to forego it for a time and employ his capital in producing goods for the use of others, he receives as compensation some quantity of commodities every year, the value of which bears some relation to the amount of the capital which he employs. I may assume that this relation is that of one to twenty, or five per cent, per annum, and then a commodity which requires the labour of twenty men for a year to produce vriU. exchange for the labour of twenty-one men. The law, therefore, may be more correctly expressed by saying that the value of a commodity is determined by the amount of labour and abstinence which are required to produce it, but there is still a further qualification wliich needs to be added. Commodities of the same kind are not all produced with the same expenditure of labour, and yet they have the same value. It is a familiar expression that there cannot be two prices in one market, which means that two barrels of flour, for instance, the quality of which is known or beheved to be the same, if exposed side by side in the same GENERAL CAUSE OF VALUE. ' 107 shop, will sell for the same price. This follows inevitably from the principle that every one desires to obtain wealth with the least possible labour, for no one would give a higher price for an article when he could obtain another equally good by paying a lower price, since the larger sum of money must have been obtained with more labour than the smaller sum. As, therefore, different soils in the same country are of different degi'ees of fertility, the corn and other products raised from them are obtained with different amounts of labour, but, as all the products of the same kind possess the same value, it is necessary to decide which of them determines the value of the rest. It might at first be thought that the value Avould be determined by the average, and that if half the wheat in the country were raised in such circumstances that the labour of each man produced twenty hectolitres, and the other half in such circumstances that the labour of each man yielded ten hectolitres, the value of fifteen hectolitres would be equal to a year's labour, but a little consideration will show that this would not be the case. If it were, the labourers who worked on the inferior soils would give a quantity of corn which it had taken them a year-and-a-half to produce in exchange for a year's labour on the part of some one else, and they would manifestly lose by the exchange, since they could, by working for themselves, obtain as much of any other thing in a year as they could in exchange for their corn. The value of wheat, therefore, must be such that ten hectohtres will command a year's labour, and when this is the case no labourer will have anything to gain by changing his trade. If a tailor is dissatisfied ^^ith the quantity of wheat which he receives, he cannot obtain more by turning farmer, for this will only enable him to produce ten hectolitres for himself, which is just what he received before. All the superior soils are already occupied, for otherwise the famiers would not cultivate the inferior ones, and he must therefore content himself with one of these latter. The law, therefore, may be rendered still more correct by saying that the value of a commodity depends on the labour and abstinence which are necessary to produce it in the least favourable circumstances. The amount of abstinence is in proportion to the amount of the capital, which again is in jn-oportion to the amount of labour employed, so that if the amount of labour required to produce a certain commodity be greater at one time or place than at another, the absti- nence is greater also, and the value increases in proportion to the labour employed. If we were considering the case which Bastiat was so fond of quoting, that of Robinson Crusoe, it Avould be a truism to say that the things which he produced were worth as mncli troul)lc as he took to produce them, for this is im})lied in the very fact of their production. The truth which the law expresses is, that all laljourers, in whatever 108 GENERAL CAUSE OF VALUE. trade thej are engaged, obtain commodities with the same amount of labom* as those who actually j^roduce them ; and this, though deducible from the principles of human nature, is by no means self-evident, and has often been explicitly or implicitly denied. In practice it often happens that the price at which a commodity is sold is not sufficient to remimerate all the labour which has been employed in producing it, and on the other hand, it is often more than sufficient to do this ; but neither of these cases can be permanent, and the jDroduction of the article in question will be abandoned in the one case, while in the other its value will be reduced by means of competition. The value which is equivalent to the cost of production (i.e., the labour and abstinence employed), has been termed the "natural" or "normal" value, and the actual market value, if it does not always correspond to the natural value, oscillates within narrow limits above and below it. When we find, as in London at the present time, that 10 granunes of gold will exchange for more than 1000 kilogrammes of coal, we may be sure that it requires a hundred thousand times as much labour to procure a given weight of gold as to procure the same weight of coal. If fi'om any cause it becomes more difficult to produce a particular commodity than it has formerly been, its value must rise so as to be equal to the increased amount of labour employed upon it, unless, indeed, its production be altogether abandoned. It has now become more difficult to procure oysters than it was a few years ago, and their price has risen five or six fold, while wages are but slightly higher than they were before, so that they ^\'ill exchange for more labour. It is well known that the price of cotton rose considerably during the period of the ci^dl war in America, because in no other part of the world could so large a quantity of cotton be raised with so httle labour as in the Southern States of America, which were prevented by the war from pursuing this, their usual occupation. When any improvement is introduced in manufacturing industry which enables the same number of labourers to produce a greater quantity of goods, their price is lowered, while the rate of wages remains the same, or does not fall in proportion, and the goods exchange for less labour. Babbage mentions (in his Economy of Machinery and Manufacture, chap. 17) that the price of a gross of bed screws at Birmingham had been reduced from 22f 50c. in 1818 to 7f. 50c. in 1828, being a reduction in ten years to one third of its former rate, in consequence of various improvements in the method of producing them. Whatever alteration may have taken place in the rate of wages during the same interval, there certainly was not a fall of equal extent. When any district enjoys peculiar facilities for producing a particular article, its value is lower there than in other less-favoured districts. Wine can be produced in GENERAL CAUSE OF VALUE. ^ 109 France with less labour than in England, and it exchanges for less labour there than it does here, and gold exchanges for less labour in Australia, where the mines are exceedingly fertile, than in Germany, where it can only be extracted from the sands of the Rhine with much more labour in proportion to the yield. If a commodity could formerly be produced with the labour of three men for a day, it must have exchanged for three days' labour, but if it now requires the labour of three men for three days, it will exchange for nine days' labour, as will appear when its price is compared with the rate of wages. That the production of a commodity cannot be continued unless its price is sufficient to pay the wages of all the labourers employed, is so obvious that it seems hardly to require proof, and yet Eicardo has denied what is a necessary consequence of its truth, that a commodity must exchange for more labour if it requires more to jiroduce it. He says : — " In the same country double the quantity of labour may be required to produce a given quantity of food and necessaries at one time, that may be necessary at another, and a distant time ; yet the labourer's reward may possibly be very little diminished. If the labourer's wages at the former period were a certain quantity of food and necessaries, he prol)ably could not have subsisted if that quantity had been reduced. Food and necessaries in this case will have risen 100 per cent., if estimated by the quantity of labour necessary to their production, while they vnW scarcely have increased in value, if measured by the quantity of labour for which they vnW exchange. The same remark may be made respecting two or more countries. In America and Poland, on the land last taken into cultivation, a year's labour of any given number of men will produce much more corn than on land similarly circumstanced in England. Now, supposing all other necessaries to be equally cheap in those three countries, would it not be a great mistake to conclude that the quantity of corn awarded to the labourer would in eacli country be in proportion to the facility of production ?" (Chap. 1, sec. 1). If these statements of Ricardo were true they would constitute a serious objection to the theory of value above set forth, but he has not attempted to prove them by evidence of any sort or kind. He says that it may require twice as much labour to produce a given quantity of food at one time as at another, and that yet the labourer Avill receive as much as before for the same quantity of labour. He cannot mean tliat a labourer can earn in six months what it takes him twelve to produce, lur in such a case the labourers, if they consumed all that they earned, would consume more than tliey produced, whicli is manifestly impossible. It appears from this and other pnssngos that the case wliich lie imagined was one in which the whole loss should full on the capitalists, the romunorutiou of abstinence, or the ruto of profit ]10 geneeal cause of value. being diminished, while the remuneraLion of labour should remain the same, and the following illustration probably expresses his meaning. In the first instance, the labour of five men for a year is sufficient to produce 250 hectolitres of wheat, while their Avages are equivalent to 100 'hectolitres, or twenty apiece, and the capitalist receives 150, which is a profit of 150 per cent. In the second, it has become twice as difficult to produce wheat, and the five men produce only 125 hectolitres, but they still receive 100 for their wages, and the rate of profit has fallen to twenty-five per cent. In a later chapter I shall have to examine the arguments which have been adduced to show that the rate of profit varies at different times and places, and will only say here that it has never been proved, and that the case which Eicardo puts appears to me to be wholly imaginary. If, however, it could be proved that such a case had ever occurred, it woidd be necessary still further to qualify the law of value. Capital and labour must then be assumed to be two separate agents working independently of each other, and the value of a commodity may be said to be equal to the labour employed in producing it, the capital being altogether left out of the account. Thus in both the cases just cited 100 hectolitres are produced by the labour of five men, and will accordingly exchange for that amount of labour, but in the first case the capital employed produces 150 hectohtres, and only twenty-five in the second. This mode of speaking may be thought inconvenient, but I only suggest it in order to include cases the possibihty of which I do not admit. When we find that the labour of one man produces more wheat in America than it does in England, we should expect to find that the wages of an American labourer, if all expended upon Avheat, would purchase a larger quantity than the wages of an English labourer ; and this, in spite of Eicardo, we do find. It is well known that money- wages are higher in America than in England, and that the price of wheat is lower in the former country. Mr. Somers mentions in his ''Southern States since the War" (Macmillan, 1871), that the rate of wages paid to common negro labourers in the Southern States is a dollar a day, and on p. 140 he mentions that the ordinaiy price of wheat in Alabama is a dollar a bushel, at which rate a labourer would have to work two and three quarter days in order to procure a hectolitre. In England, the average rate of wages is 2f. 50c. a day, and 20f. the hectolitre is rather below the ordinary price, so that an English labourer is fortunate if he can obtain a hectolitre by eight days' labour. As for Poland, Eicardo has given us no figures to prove either that Avheat is there groTMi with less labour than in England, or that the Polish labourer can obtain less wheat in exchange for his wages, and as I am not in possession of the necessary statistics, I cannot decide the question of majs^ufactured goods. Ill fact, bnt his vague statement is not a sufficient gTound for abandoning a theory which is deduced from the principles of human nature. As vahic is determined by cost of production, so cost of production is measured-by vakie, and ^yhen wo find that the vakie of a certain commodity is greater at one time or place than at another, we may safely infer that its cost of production is greater. The value of manufactured articles depends on the quantity of labour which is required in all the stages of production, in obtaining the raw material, in working it up, and in transporting the finished goods from the place v^'lievQ they are made to the place Avhere they are wanted. This is most clearly shown in the case of goods made to order. When a con- tractor undertakes to supply 10,000 pairs of shoes, the price which he demands is that which he considers will leave him his usual profit after paying for all the labour expended in making the shoes, and, after pur- chasing the leather, the price of which dej^ends in like manner on the amount of labour expended in ch'essing the hides and in tending the animals whose hides arc made use of. If, after the conclusion of a con- tract, anything happens to make more labom' necessary to prepare the leather or to make the shoes, the contractor suffers a logs, and will not undertake a fresh contract on similar terms, but will insist on receiving enough to remunerate his outlay, and thus the value of the shoes is raised to an equahty with the labour expended in jiroducing them. If, on the other hand, any improvement be introduced into a manufactory, which enables more goods to be produced with the same amount of labour, their value will for a time be in excess of their cost of production, but this is only for a time, and is only because the same improvement has not been introduced into all the manufactories of the same class, since value depends on the cost of production in the least favourable circumstances ; and if the one manufactory where the improvement has been introduced is able to supply all the goods which the country requires, or if the im- provement is generally adopted, the value must fall in proportion. When it was found that three bed-screws could be produced at Birmingham with as little labour as one had formerly been, the mamifacturers were compelled to reduce their price ; since, if they had not done so, other persons would have entered into the trade, and would have obtained all the custoin by offering them to the pubHc at a lower price. The point at which the price settles is obviously one-third of its former rate (the value of gold being supposed stationary), because when that point is attained, no one has auything to gain l)y abandoning his trade and engaging i]i the manufacture of screws, while, until it is reached, every person who wants screws has an inducement to do so ; because he can therel)y obtain them with less labour than by working at his own trade and exchanging 112 MANUFACTURED GOODS. his products for them, and equilibrium is attained when the forces acting in all directions are e(|ual. A sudden increase of the demand for any particular kind of manufactured goods has commonly for its first effect an increase of their cost, because it becomes necessary to employ fresh workmen whose labour is less efficient, and to resort to manufactories which are not so well situated, either as regards their capacity for produc- tion, or as regards their means of access to the market which is to be supplied ; but a permanent increase of the demand tends rather to dimin- ish the cost of production, and, consequently, the value. Production on a large scale makes it profitable to introduce expensive machinery, and to carry the division of labour to a much greater extent than could other- wise be done, and both these causes tend to diminish the cost of the articles. In goods in which the cost of obtaining the raw material con- stitutes a very smaU portion of the total cost, manufacturing improve- ments may effect, and are constantly effecting very considerable reductions of value ; and even if the cost of the raw material is at the same time rising, it has no perceptible effect in counteracting the tendency to a fall of value. A piece of iron weighing half a kilogramme, and worth twenty centimes, may be worked up into 50,000 watch springs worth twenty centimes a piece, and it is evident that a rise in the price of iron to ten times its former rate will have no perceptible effect on the price of the springs, but the manufacturer may gain something when the price of iron is low, and lose something when it is high, while always selling the goods at the same price. It may, however, often happen that the in- creased cost of the raw material affects the price of the fmished article without the customers becoming aware of the fact, for the quality of the article may be somewhat altered for the worse, "without the change being detected. Every improvement in manufactures tends to produce other improvements, because every diminution of the cost of an article brings it within the reach of a larger circle of consumers, and thus causes a demand for a still larger quantity, which again renders possible a still further employment of machinery, and a greater division of labour, which still further reduces the cost and brings it within the reach of a larger circle of consumers, and the same cycle is again repeated. The application of steam to the manufacture of cloth has greatly increased the quantity of cloth consumed, and this increase has produced a corre- sponding increase in the number of machines annually produced for the use of the cotton mills, and this has led to numerous improvements in the machines themselves. The great extension of trade which these improve- ments produced rendered it necessary to improve the means of commu- nication, and rendered it profitable to construct and work railways for that purpose ; and these have still further reduced the cost of transport- RAW PRODUCE. 113 ing the material to the factories, and the finished goods to the consumers. As an improvement once introduced is never lost, and as it is almost cer- tain to become the parent of other improvements, there results a con- stant tendency to a fall in the value of manufactured goods as a society advances in wealth and civilisation ; and it may be seen by reference to former periods of our ovra. history, or to less civihsed countries at the present time, that at those times and places much more labour is neces- sary to produce articles which are here regarded as necessaries even by the poorest class, and which are here produced at an insignificant cost, This constitutes the main feature of the economic progress of society, and is the object to which the efforts of the industrial classes are con- stantly directed, and with constant success in spite of all the obstacles wliich the parsimony of nature, or the folly and rapacity of man are for ever interposing in their path. The materials which are employed in manufactures of all sorts are obtained in the first instance from the earth ; sometimes in the form of vegetables produced on the surface, sometimes in that of minerals deposited beneath it. The industries whose object is to obtain one or other kind of product have been called by French Economists " extrac- tive industries," thus including agriculture, mines, and fisheries in one general class wliich has some characters in common, and some which distinguish it fi-om the class of manufacturing industries wliich have just been considered. The important point in wliich they diflPer is that there is a more marked diversity in the productiveness of different mines and different farms in the same district than is found to pre^'ail among manufactories of the same class. Here, therefore, it becomes more necessary to bear in mind that the value of commodities depends on the cost of producing them in the least favourable circumstances. Although most of the coal mines in the same district may be said generally to be equally rich, yet there are always some which are richer than the average, and some which are too poor to make it worth while to work them. If in tliose mines which are just rich enough to remunerate the labour and abstinence expended in working them the average yield of coal is 1,000 kilos a day for each man employed, the value of 1,000 kilos will be equal to a day's labour. If there should be a great diminution in the amsmnption of coal, some of the inferior mines will be abandoned, and the value of coal will fall, because it can be obtained from the superior mines with less labour. If, on the other hand, there should be a great increase in the consumption of coal, it becomes necessary to resort to some inferior mines, which yield perhaps only 500 kilos to a day's labour, and the value of coal is consequently doubled. In the commence- ment of 1872 there was a gi-eat increase in the demand for iron ore, and I 114 KAAV PRODUCE. this induced Englisli merchants to send large orders to Bilbao in Spain, but these orders were much larger than could be properly executed, and it was necessary for the ships to wait much longer than usual before obtaining their cargoes, which increased the expenditure of the merchants and the value of the ore. As the most fertile mines are the first worked, and as the expense of working the same mine increases in proportion as the excavations are sunk deeper into the ground, there is a constant tendency to an increase in the value of minerals, being exactly the reverse of the tendency observed in manufacturing industry. In Australia, immediately after the gold discoveries, it was found that an ordinary digger might expect to obtain 8 grammes of gold by a day's labour, and the value of gold fell to such a point that 8 grammes would exchange for a day's labour, but five years afterwards, the surface diggings having been for the most part exhausted, the average yield of the mines was only 2 grammes for each day's labour, and the value of gold 9 m proportion. But this general tendency to a rise is counter- acted and sometimes overborne by mechanical improvements, which enable the miners to bring the minerals to the surface with much less labour than was formerly necessary, including, of course, the labour of those employed in making the machines and bringing them to the mines. The same eflFect is produced by mechanical or chemical dis- coveries, which facilitate the extraction of certain metals from the ore in which they are found ; and, besides these general causes, thei'e are also occasional discoveries of mines more abundant than any previously worked. It is well known that some very abundant gold mines were discovered in California in 1848, but it is not so well known that some very abundant quicksilver mines were discovered in the same country in 1850, and that this greatly reduced the cost of extracting silver from the ore in the workshops of Mexico. The great fall in the value of silver in the 16th century was o^^ing not only to the discovery of the mines of Potosi and other places, but also to that of a method of employing quick- silver in extracting it ft"om the ore. The rise in the value of minerals, or indeed of any article, is always limited by one circumstance, its utility to the consumers, since no one will give more labour in exchange for any article than he considers will be compensated by the enjoyment which the possession of the article will afford him. If it is so difficult to procure iron or copper that the labour required seems to the people to be too heavy a price to pay for the pleasure of possessing them, they are said to be not worth the trouble of producing, and the mines are not worked at all. If there are two commodities of such a nature that one of them can be substituted for the other, a rise iu the value of one induces many people to abandon its use, RAW PRODUCE. 115 and to use the other for the same purpose. Thus, if coal should experi- ence a great rise of value, its consumption will be greatly diminished, and wood would be used for fiiel, and the effect of this would be to check the rise in the value of coal, since the smaller quantity required might be obtained from the superior mines, and to raise the value of wood, since the gi-eater quantity required could only be obtained by resorting to inferior or more remote forests. Gold and silver stand in this relation to each other, and a fall in the value of one always tends to produce a rise in the value of the other. In some mines, more particularly those of gold and copper, the amount of the product wliich a given amount of labour will yield is extremely uncertain, but this uncertainty is the prevailing characteristic of agri- cultural industry, since the amount of the crop varies Avith the state of the weather, wliich can never be knowii beforehand. It may be thought, therefore, and it has been contended that the law that value depends on cost of production does not apply to the case of agricultural produce. But a Httle consideration will show that farming cannot be permanently cai'ried on miless the value of the produce is sufficient to remunerate all the labour and abstinence which are exerted by farmers. If this were not the case, no one would engage in farming except to produce food for himself, and no one would supply the wants of others unless they gave liim in exchange as much as he could produce for himself if he worked at their trades. If, as a general rule, ten days' labour is required to produce a hectolitre of wheat on the worst land wliich is permanently cultivated, the value of a hectolitre must be generally equal to ten days' labour. The labour, of course, includes that which is ex- pended in making the plouglis and other implements employed, and the abstinence of the farmers must also be remunerated. Most Economists accordingly consider that the value of corn conforms to its average cost of production when a long series of years are taken into account, but they do not think that its actual value depends on the cost of producing it in each particular year. If an unfavourable season makes the crop of one year less by one-sixth than that of the preceding year its value has been knoAni to be doubled, and this is considered a proof that its value is not determined by its cost of production. If it were, they seem to consider that its value would only rise to the extent of one-sLxth, but if this happened it would be very difficult to reconcile it with the theory. It is not the average, but the worst land which determines the cost, and it by no means follows that because the whole area produces one-sixth less than it did before, therefore every farm yields five-sixths of its usual quantity. Suppose the whole crop in the country to be G00,000 hecto- litres of wheat, and that 100,000 of these are grown on land which yields I 2 116 RAW PRODUCE.. one hectolitre to 12 days' labour, and that this land being the worst cultivated, or, as Dr. Chalmers calls it, the " margin of cultivation," the value of a hectolitre is consequently equal to 12 days' labour. If an unfavourable season reduces the crop to 500,000 hectolitres, does it by any means follow that the wheat grown on the worst land vaU be pro- duced at the cost of 14 days' labour to each hectolitre ? It is well kno^Mi that the weather is not the same in all parts of the country, and if the average deficiency is one-sixth it is certain to be much greater in some parts, and probably in some of the worst lands it may amount to one-half. Thus 40,000 hectolitres maybe produced at a cost of 24 days' labour apiece, and the farmers who have produced them are as anxious as any others to obtain full compensation for the labour which they have expended, and they will, if possible, hold back their corn until its value rises to 24 days' labour per hectolitre. The great deficiency which generally prevails may enable them to do this, since wheat is a necessary of life, and people -will give 24 days' labour for a hectoHtre rather than go without it. Mr. Macleod* contends that the value of corn does not depend on the cost of production, because every farmer tries to get as much as he can for it, but this proves nothing, since it only shows that every farmer tries to get as much as will repay him for his outlay ; and, as there cannot be two prices in one market, all farmers obtain as much as will compensate that one of their nmnber who has been least fortunate. Some farmers do not obtain enough to reimburse their expenses, and they consequently fail, but this is because a demand for food can be satisfied without resorting to their lands. Wheat is used for other purposes besides that of making bread, and those who wish to use it in distilling or other ways wall not give so much labour in exchange for it as those who desire to have it in the shape of bread. The value is determined by the cost of producing it on the worst farms, which must be tilled in order to produce the quantity of food which the people are determined to have, and the value each year is the same as it would be if that particular kind of weather prevailed every year. If the harvest has been bad, a small quantity of corn is brought to market, and those farmers who have obtained very small crops are able to obtain a high price, which is sufficient to compensate many of them for all that they have expended in producing it. The greater the scarcity, the greater the chance that every farmer will receive the full remuneration for his outlay, since the demand for food being almost a fixed quantity, the smaller the amount of the crop, the more necessary it becomes to obtain the produce of every farm, and, therefore, to pay the farmer whatever he thinks * Theory and Practice of Banking, p. 105. EAW PRODUCE. 117 sufficient. The opinion commonly prevails among farmers as well as other classes that they benefit by seasons of scarcity, and lose by seasons of plenty, and this opinion has some foundation in ftict, but farmers as well as other people sufier as consumers by the dearness of corn. When corn is dear farmers are more hkely to dispose of their whole stock on advantageous terms, and when it is cheap they are more likely to sell some of it at a loss, for, when the demand for food is satisfied, those who want wheat for other purposes vnU. not give so much labour in exchange for it. When a country has little or no intercourse with other countries, the variations of the seasons may produce variations in the l^rice of corn wliich appear almost incredible to persons living in England at the present day. Thus the price of wheat was nine times as high in England in 1317 as it was in 1321, and it was ten times as high at one period of the year 1289 as at another period of the same year.* In our time a considerable rise of price causes large quantities to be sent here from abroad, and it is not necessary to resort to the least suc- cessful farmers to obtain the quantity which we require, and it is scarcely possible that there should be a bad har\ est in every part of the world at the same time. When, on the other hand, the English harvest is good, com is exported, or less is imported, and the fall of value is in hke mamier checked. I have spoken as if wheat were the sole product, but farmers produce many tilings, and a loss on one may be compensated by a gain on another, and they are satisfied if the value of all that they produce is equal to the whole of the labom' which they have expended upon it. If, however, they find that they lose by one kind of crop, they diminish their production of it and grow more of something else, as is frequently done with wheat and barley, and Mr. Somers mentions that many of the Southern planters are substituting wheat for cotton as their principal crop, because they find the latter to be unprofitable. As an increased quantity of agricultural produce can only be raised at an increased cost, it follows that, as population increases, there is a constant tendency to a rise in the value of all things of this class. In such countries as South America, where there is an abundance of rich pastures, and where the cost of obtaining cattle is httle more than the labour of catching them, their value is extremely small ; but when it becomes necessary to keep them in inferior pastures, to store up food for them in the winter, and to provide shelter for them, the cost of their maintenance, and their value, is much increased. Agricultural improvements are perpetually tending to reduce the cost of production, but the tendency to a rise exists. In the time of Henry * See the Tables in Sir F. M. Etlen's "State of the Poor." 118 RAW PRODUCE. the Eighth, a labourer could obtain three-and-a-half kilos of beef with a day's labour, but he cannot now obtain as much as two kilos in the same time. The gi-eat increase of the population of Victoria consequent on the gold discoYeries raised the value of meat fifty per cent., the price being tripled, while the rate of wages was merely doubled at the close of 1856. During the twenty years, 1852-72, the price of beef in Loudon rose forty-six per cent., and that of mutton forty-eight per cent., as was remarked by the Eegistrar General in liis report for the first quarter of the latter year, but wages did not rise in proportion. Most Economists consider that there is a tendency to a rise in the cost of all agricultural produce, and that the increase of population augments the cost of pro- ducing the staple food of the people. But there is this important difference between the staple article of food and other articles, that while population may increase before the quantity of the latter has been increased, it camiot do so before the quantity of the former has been increased. If three hectolitres of wheat are required for the food of each person, a country which possesses three million hectolitres may support a million inhabitants, and the average cost of each hectolitre may be equal to ten days' labour. If the population could be suddenly increased by one hundred thousand, it would no doubt be necessary to resort to poorer soils, and the value of food would be increased, and this may happen when a district is suddenly invaded by a large army, but in the ordinary course of things population cannot increase until more food has been pro^aded, and it is the increased quantity of food Avhich enables people to maintain a larger number of children. If people could live for a year without food they might wait until the extra quantity had been provided, but if they could live for one year they might live all their lives without it, and an increase of their numbers would not of necessity increase the consumption of food. Many chikken are no doubt brought into the world before the quantity of food has been proportionately increased, but this causes their untimely deaths, and not an increase of the quantity or the cost of food. In almost every country the wages of common labourers are barely sufficient to maintain themselves and their families, and if they bring into the world more claildren than they can properly support, they may indeed desire more food, but their desire mil not cause it to be produced. Their wages being barely sufficient at previous rates, any increase in the cost of food must prevent them fi'om obtaining the necessaiy quantity, and some persons therefore obtain less than IS required to support life. Some, therefore, die of starvation, or of some of the many diseases which want is sure to engender, and the population is prevented fi'om increasing beyond the means of subsistence. It was to prevent the frightful suffering ^vliich these words imply that EAW PRODUCE. 119 Malthiis recommended all persons to exercise "moral resti'aint," i.e., not to bring any childi-en into the world ^^liom tliey Avere not able to main- tain ; and yet, ^Aith singular inconsistency, he liimself argued as if population could increase before the means of subsistence, although the fact that it could not was the sole reason for his recommending the ex- ercise of self restraint in tliis matter. Mr. Rogers * denies that the cost of producing food has any tendency to increase with the growth of society, and maintains that the cost of producing wheat in England is not greater now than it was in the lith century, although the population of the country has increased ten- fold ; and although the total agricultural product has increased seven- fold, and a great deal of land has been taken into cultivation which was formerly thought too poor for that purpose. The tables which he has elsewhere pubhshed,f though extremely copious, do not throw so much light on this question as could be desired, for while they furnish most ample information respecting the prices of wheat and other kinds of grain, they do not give the wages of common labourers with sufficient distinctness. The wages of mowers and threshers are given not by the day, but by the piece, so that they caimot be compared ^nith the rates prevaiHng at the present time. If the thatchers may be considered as corresponding to the common farm labourers, it appears that the wages of this class during the eight years 1307-14, were, on the average, an amount of silver equivalent to 88c. a day, while the average price of wheat during the same period was 8f. 8c. the hectolitre ; so that a hecto- litre would exchange for, and must therefore have been produced by rather more than nine days' labour. The average price of the same quantity of wheat during the nine years 1863-71, was 21f. 80c. ; and the average rate of wages of farm labourers was 2f. 50c., so that the cost of a hectolitre was rather less than nine days' labour. The thatchers' wages can hardly have been less than those of common labourers ; but if they were higher, the comparison would of course be still more favourable to the present time, but, at all events, the cost of producing wheat is not gi'eater now than it was at one period, at least, in the 11th century. The question, however, is not one of statistics, but of theory ; since, if it could be proved that no rise in the cost of producing food had actually taken place, this would only show that the tendency to a rise had been counteracted by agricultural improvements or other causes, and not that no such tendency existed. If, on the other hand, it were shown that at some former period the cost of raising wheat was much less than at present, * See his Manual of Political Economy, " Clarendon Press," 1868. t A History of Agriculture and Prices in England, by James E. Thorold Rogers, M.A., " Clarendon Press," 1866. 120 RAW PRODUCE. this would prove nothing unless it could be also proved that the seasons were not more favourable at that time than at present. The question is whether an increase of population can take place before an increase of food, and this question must surely be answered in the negative by every one who understands by " increase of population " an actual augmenta- tion of the number of the inhabitants of a country, and not a mere increase of births. If the number of births is exactly equal to that of the deaths in each year, there is no increase of population ; and though the people may determine what shall be the number of births which take place in a year, they cannot determine that the population shall increase unless they have previously increased the quantity of food. As a cause must precede its effect, increase of population cannot be the cause of an increase of food, nor of its increased dearness, which is consequent on the resorting to poorer soils in order to raise a larger quantity. If, then, the cost of food has any tendency to increase as society advances, it must be because farmers are prompted by some motive or other to resort to poorer soils, while richer ones are to be had. But such a supposition is contrary to the principle that every one desires to obtam wealth by the least pos- sible labour, and is therefore inadmissible. Poor land is taken into cultivation, not because the population has increased, but because some discovery has been made which renders it possible to obtain as much profit as from the worst previously cultivated, and this discovery enables the quantity of food to be increased, and an increase of population is the effect and not the cause. It appears, then, that while manufactured commodities tend to fall in value as society advances, and raw produce in general tends to rise, the value of the staple food of the people, though it varies from year to year, tends always to remain stationary when the seasons are equally favourable. As the value of a commodity affords a sure index of its cost of production, a good table of statistics would enable us to infer a good deal respecting the economic condition of a country if history had not furnished us vnth any information on the point. The excellent table of mn^ and prices, in Victoria, during the years 1851-56, given by Mr. Ne^oTnarch in an appendix to Tooke's " History of Prices" shows that wages were doubled during that period, and so great a rise in so short a time would tell us that some great dis- covery of gold must have taken place, if we had no historical evidence of the fact. From the same table it appears that the value of ineat rose 50 per cent., and this would show a gi-eat increase of population. Other articles, such as cloth, tobacco, spirits, etc., retain their former jirices, and thus fell to half their former value, and as a simultaneous improve- ment in the production of all of these to the same extent is extremely improbable, we might infer that these were brought from some foreign MARKET VALUE. 121 country where the vaUie of gold had not fallen to an equal extent. Thus the table would inform us that some abundant gold mines had been dis- covered in or near Victoria about the year 1851, that the discovery had attracted a large number of emigrants, and that the people had exported their gold, and imported manufactured articles, all which we know to have actually taken place during that period. As the value of a commodity always in the long run conforms to its cost of production, all attempts of a government to regulate the value or price of any article must be either superfluous or injurious. If the law fixes a price which is equal to the cost of production, it simply does what competition would have done without it, and if the price is less than this, the law will be evaded, or the article will not be produced. A government cannot compel people to exert nine days' labour in producing an article for which they are only to receive eight days' wages, and the consumers wiU find that they must either give nine days' wages or go without the article. "VThen the Parliament of Edward the Second endeavoured to fix the prices of eggs, poultry, and other things, they could, by ordering that those who possessed those articles and refused to sell them at the legal rate should forfeit them to the King, compel some persons to sell them at a loss ; but they could not compel farmers to continue to produce them and bring them to market. The farmers would not do so unless they had good reason to believe that they would get a sufficient price for them, and they would trust to the honour of their customers not to inform against them, while they might perhaps charge a still higher price to compensate the risk of legal punishment. Until recently, an Act of Parliament regulated the fares which might be charged by cabs plying in the streets of London, but it is obvious that no one would have employed his capital in making cabs, and sending them to ply for hire, miless those who made use of them paid enough to compensate him for his outlay, and to give him the ordinary rate of profit ; and if the legal rate was not sufficient to allow this, it must have been made up either by violation of the law, or by supplying inferior cabs and horses, and thus bringing the cost of the article into conformity witli the price. It is well known that both these methods were resorted to, that cabmen constantly received more than their legal fare, and that the horses employed were frequently of the worst description. If the maximum rate of railway fares be fixed too low, the companies must, no doubt, protect themselves ])y reducing their expenditure in some direction or other, and thus diminish the comfort of the travelling public. It has been pointed out above that the cost of jn-oduction will account for many cases of value wliich seem at first sight to require some other explanation, and, when properly uudorstuud, it will explain even such 122 MAEKET VALUE. anomalous cases as those which were observed during the siege of Paris. Butter, which in the first week of the siege was sold at 8f. the kilo, rose in the fifteenth week to more than 80f. for the same quantity,* and this will not seem extraordinary when we remember that the pastm'es which could have been found within the walls must have been far inferior to those commonly used in Normandy and elsewhere, and that the cows must therefore have produced less milk, although they still required as much labom- in tending them. The cost of distriljution was also greater, since the tradesmen had a smaller quantity to sell, while they still had to employ their whole time in their business, and still required the same rate of profit on the money which they employed, though this represented a smaller quantity of butter. As their wages and profit had to be provided by the sale of a smaller quantity, it is obvious that the price of each kilo must have experienced a greater "ise in passing tlu-ough their hands than when they had a larger quantity to dispose of This was called " exorbitant profit," but it was necessary if the tradesmen were to continue to live by their trade, and if they had not been allowed to obtain it, they must, like the poorer classes, have been maintained at the expense of the Government. The rise in the price of eggs from 15c. to 3f. 50c. a-piece may be accounted for in the same way, as the cost of maintainmg poultry must have increased also. There are, however, many cases in which the value of an article does not conform to its cost of production, which only determines what the value shall be when the goods are made to order, or when they are regularly produced during a long period. It has too often happened that an economic law has been proclaimed as a practical truth without proper regard to the qualifying circumstances which obscure and impede its operation, and the law that the value of an article depends on the quantity of labour which is necessary to produce it has been supposed by some sociaHsts to be applicable to all cases of exchange. It appears to them to be a just rule that two articles, each of which requires ten days' labour to produce, should exchange for each other, and they have tried to devise an artificial mechanism by which this result should be always brought about. An attempt of this kind was made many years ago by Robert Owen, who established a sort of market in a building in the New-road, London, to which his followers brought various articles which they bad made, and received in exchange labour-notes, or certificates that the articles in question had, or ought to have, required the labour of so many hours or days to produce. Each of these notes could be exchanged by the holder * See the tables at the end of " Shut up in Paris," by Nathan Sheppard. Bentley, 1871. MARKET VALUE. 123 for any other article ^Yhich had required the same time to produce as that specified in the note, and it was hoped in this way to secure to the labourer a just reward, and to protect him from the suffering produced by the fluctuations of the market. The consequence might have been foreseen — the labourers, instead of pToducing what other people wanted, produced what they liked best — a blacksmith brought a number of screws which nobody wanted, and articles of food and other necessaries were not to be got, and the estabhshment was soon broken up. Labour-notes have, however, been tried again in a settlement founded by one of Owen's followers, at a place to which he has given the singular name of " Modern Times," in Long Island, New York, which was described by Mr. Moncure D. Conway in the second number of the " Fortnightly Eeview," but he does not state to what extent it has been found possible or convenient to employ them. "When a person has produced articles which do not happen to be requu'ed by other people, it is often his interest to part with them at a lower price, and thus induce others to purchase them who would not have done so if their value had been equal to their cost of production, and this fall warns those who arc engaged in the trade to stop or slacken the production of those articles. If the blacksmith to whom I have just referred had found himself obliged to reduce the value of his screws, this would have warned him to bring no more of them, but to bring more of something else, and the market would not have been glutted with them. "When, on the other hand, there is a sudden increase in the demand for a particular article, its value may rise even before its cost of production has actually increased, and this encourages people to produce more of those articles, and to resort to less favourable situations in order to do so. And thus, by the free action of these alternations, producers are warned and encouraged to accommodate their labours to the wants of the consumers. The question now arises, how these changes are to be accounted for, and what is the law to which the actual market value of an article conibrms ? and to this question I am unable to give any answer. About noon on the 25th of April, 18G5, the news of President Lincohi's assassination reached London, and its immediate cQ'ect was a remarkable increase in the sale of the daily newspapers during the course of that afternoon, and many copies were sold for much more than their usual price. While the " Times " is usually sold for 30c., the special edition published on that afternoon was sold, in some cases, for as much as 3f., or ten times its usual price, and I am unable to refer to any law which would explain why that price should have been fixed on more than any other. Its ordinary price is determined by the amount of labour necessaiy to produce it, but we cannot suppose that ten times as much labour was required for printing that particular 124 SUPPLY AND DEMAND. edition, and as I know of no other cause which will account for this or other similar cases, I must leave them unexplained. As, however, other Economists have suggested various modes of explaining them, I must examine their theories, and state the reasons which prevent me from accepting any of them. They may he classified as the theories of supply and demand, of utility, and of competition, which I will now proceed to examine separately. If a tradesman were asked why the price of the "Times " rose in the case just referred to, he would imhiediately reply that it was because the demand was in excess of the supply, or, in other words, the " Times " v.'as not sold at its usual price because the number of persons who desired to purchase it was greater than the number of copies which were offered for sale. This, though it might explain why the price rose, does not tell us why it rose to that particular height, and if the tradesman was asked to explain this, he would reply that it was because when that rate M'as attained the demand and the supply were equal. But when we come to inquire what is meant by saying that the demand and the supply are equal, it appears that, however carefully disguised, the proposition is nothing more than a statement that the buyers and sellers are agreed, a fact which is implied in the statement that a bargain has been concluded. Adam Smith pointed out that demand must mean something more than a mere desire, if it is to exercise any influence on value, since the desire of a beggar to possess a diamond can have no effect on its price, and he therefore proposed to restrict the use of the term "demand " to the effectual demand, i.e., the demand on the part of those who are able to pay the natural price, and he defined the supply as the quantity of goods brought to market. The market value or price was, he thought, determined by the proportion between the effectual demand and the supply, and if the former increased wliile the latter remained stationary, or if the latter fell off while the former remained stationary, the price would rise, and vice-versa. When the supply is diminished, "the market price will rise more or less above the natural price, according as either the greatness of the deficiency, or the wealth and wanton luxuiy of the competitors, happen to animate more or less the eagerness of the com- petition." In the case that I have cited therefore, Adam Smith would say that the price of the "Times " rose because copies of it were scarce, and that the price of it was determined only by the wealth of the purchaser. It will be seen that this is not even an attempt at an explanation, since it merely tells us that the price is such as the purchasers are able and willing to pay if they cannot obtain the article without paying it. The fact that the "Times" was sold at that price implies that the purchasers were able and willing to pay it, and the thing to be explained is, that SUPPLY AND DEMAND. 125 that particular price was fixed on rather than any other, and this Adam Smith does not attempt to explain. A Swiss Economist, the late ]\I. Cherbnhez,* considers that the market price is determined by the pro- portion between the intensity of the demand and the supply, and he would say that the intensity of the demand for the "■ Times " was equal to 3f. for each copy, and that the supply was so small as to raise the demand to that point. Here again we have nothing more than a description of the fact, since to say that a person gave 3f. for a copy of the '• Times," is the same thing as to say that the intensity of his demand for it was such as to induce him to pay that price, and to say that the intensity of the demand was raised to that point by the scarcity of the journal is merely to say that he gave that price because he could not get it for less. We msh to know why a newspaper, which at all other times exchanges for one eighth of a day's labour, exchanged on that particular afternoon for one fourth more than a ■\\-hole day's labour ? and we learn nothing fi'om the information that the purchasers thought it worth so much labom', or that the sellers would not part with it for less, for these are merely re-statements of the fact that the exchange took place on those terms. Mill takes exception to the language of Adam Smith, and contends that there can be no proportion between two things so different in kind as a human desire and a quantity of goods, and defines the demand as the quantity of goods demanded, and the supply as the quantity ofTered for sale. He considers that the market price efiects the equation of the demand and the supply, i.e., that it is the rate at which the quantity demanded is exactly equal to the quantity oflered, and that the price fluctuates until this point is reached. It is against the theory of supply and demand as stated by Mill that Mr. Thornton has directed his attack, and he denies that the market price of an article is always such that the supply and demand are equal. Applying JMill's theory to the case now under discussion, we should be told that if the copies of the " Times " had been sold at If. a-piece, more copies would have been demanded at that price than were to be had, as for instance, 2,000 might have been asked for while only 1,000 had been printed, and that the demand being thus in excess of the supply, the price rose higher. When it rose to 2f., 1,500 copies were demanded, and it was not till it rose to 3f. that the demand fell to 1,000, which, being exactly equal to the supply, the sale took place on those terms. Mr. Thornton's objection is, when ap])licd to this case, tliat we have no evidence that the demand in the last instance is just equal to the sup])]y, and that it may very well be supposed that there were 1,200 people who were willing to give 3f. for the copy, and yet that none of tiiem were * Precis de la Science Economiquo par A. E. Cbcrbuliez, Paris, 18G2. 126 SUPPLY AND DEMAND. willing to give more, in which case the price would rise no higher. In the case which he supposes, in which there are three competitors for the same horse, none of whom will give more than, and all of whom will give a certain sum, as l,000f., for example, the horse will be sold for that price although the demand is three times as great as the supply. On the other hand Mr. Thornton points out that the supply may be often in excess of the demand, as in the case of a shop which is selling off, where the goods are first offered at one price which is found to be too high for the whole quantity to be sold in the required time, and the price is gradually lowered until the whole quantity is disposed of. Yet, in each instance the supply is the whole quantity of goods in the shop, while it is only when the price has fallen to its lowest point that the demand is equal to the supply, and yet some of the goods are sold at the higher prices. It appears then that Mill's theory is not a correct description of the facts, and even if it were, it would only tell us that the price was such as perfectly satisfied both the buyers and the sellers, and that a high price was paid because the buyers could not obtain the article without paying it, and the sellers refused to part with it for less. Cairnes in his latest work has offered a new definition of Supply and Demand, which is free fi'om the objection urged against that which was given by Adam Smith. *' I would define," he says, " the terms as follows :-— Demand, as the desire for commodities or services seeking its end by an offer of general purchasing power ; and Supply, as the desire for general purchasing power, seeking its end by an offer of specific commodities or services." * "When used in this sense, the terms SujDply and Demand are strictly analogous, and we may logically speak of a i^roportion between them, but the new definition does not enable us to explain the market value of a commodity. The price of an article is the proportion between its quantity, and the quantity of money which is given for it ; but we do not explain its price by saying that it is determined by the proportion between the two quantities. Cairnes, indeed, did not consider that his definition would enable us to afford a complete explanation of the pheno- mena of market value. After explaining the causes on which natural value depends, and pointing out that the tendency of the fluctuations of the market is to keep as near as possible to the natural price, he says " The foregoing is the nearest approximation I can make to a statement of the law of market price. I can well believe how utterly unsatisfac- tory it will appear to some Economists, whose views in connection with their science are much more ambitious than my own."f He then pro- ceeds to argue that it matters very little whether a complete theory of * " Some Leading Principles of Political Economy." Book I, Chap. II. Sec. 2. t Book I. Chap. IV. Sec. IV. SUPPLY AiS^D DEMAND. 127 the subject is, or is not discovered, and concludes by saying, " So ftir as tlie doctrine of market price is concerned, it seems to me to suffice for the purposes of Social Philosophy, if we are enabled to set forth in a general way the connections between the fluctuations of the market and the more fundamental conditions on which production and exchange depend. And so much, I venture to think, the theory, as I have stated it, taken in connection with the known facts of particular cases, will sufficiently enable us to perform." Whatever definition therefore maybe given to the words Supply and Demand, the theory amounts to no more than the truism that a coumiodity is sold at the rate which is agreed upon between those who possess, and those who wish to acquire it ; and the theory is of no use in Political Economy which seeks to explain why a particular price is agreed on. But I would not be understood to say that because the phrase is of no use to the economist, it is therefore of no use to the merchant, for the latter desires not to know the reason why the value of a commodity is what it is, but to find some sign wliich vdU tell him when the price of an article will rise or fall, and what it will be. The merchant knows by experience that the price of corn rises after a bad harvest, and he says that it does so because the supply is diminished. The cause, as I have endeavoured to show, is that the corn is raised with more labour, and the diminution of the supply is the sign which indicates to the economist that more labour is required, and to the merchant that its value will rise. The merchant knows that if he gives a much larger order than usual for coals, he will have to pay a higher price ; and he says that it is not because the demand has increased, but it is because more laboiu' is necessary to extract the coals from the mine. He knows that if he tries to sell a large quantity of goods which other people have not ordered, he must submit to a fall of price ; he says that it is because the supply is excessive, and he accordingly reduces the supply by sending less to market, and thus he is warned to adapt his con- duct to the wants of his customers, though an excessive supply means nothing more than a supply which is too large to be disposed of witliout a fall in the price. ]\Ierchants always desire to know the amount of dif- ferent commodities which are held in stock, because the amount of the stock already possessed determines the quantity which must be produced, and this determines the cost of production. Variations in tlie supply are the symptoms, but variations in the amount of labour necessary for pro- duction are the causes, of exchanges of value. When a man of business says that the prices of commodities ought to be regulated l)y Supjily and Demand, it is merely his way of saying that they ought to be settled by the mutual agreement of buyers and sellers, without any interfereuce on the part of Government. 128 UTILITY. A theory has been propounded by Mr. Jevons, and has received the support of several Economists, both in this country and on the continent, the object of which is to explain all variations of value by referring them to variations in the utility of the article. Mr. Jevons argues that as utility is not an intrinsic quality in the articles themselves, but expresses a relation between them and the particular human beings who may at any one time wish to consume them, the same article may and does possess very different degrees of utility according to circumstances ; one of these circumstances being the abundance or scarcity of the article itself. Taking food as an example, he says, " Let us imagine the whole quantity of food which a person consumes, on an average, during 24 hours to be divided into ten equal parts. If his food be reduced by the last part he will suffer but little ; if a second tenth-part be deficient, he will feel the want distinctly ; the subtraction of the third tenth-part will be decidedly injurious ; with every subsequent subtraction of a tenth-part his sufferings will be more and more serious, until at length he will be upon the verge of starvation. Now, if we call each of the tenth-parts an increment, the meaning of these facts is that each increment of food is less necessary, or possesses less utility than the previous ones." * He then proceeds to illustrate his argument by a diagram in which the diminish- ing value of each successive increment is represented by diminishing areas. I have no wish to deny that this is a convenient illustration, or that the symbols of geometry and algebra may in some cases be used with advantage in explaining economic theories, though in my own case, and I suspect in those of the majority of readers, their employment renders it more, and not less difficult to follow the author's reasoning. But I cannot find that tliis theory explains anything which has not been already explained by Ricardo. The mere use of mathematical symbols is not in itself sufficient to introduce certainty or precision into a science. They can only be used with advantage when the scientific laws to which they are to be applied have been already established, and this condition is wanting in the case of market value. Mr. Jevons accepts Ricardo's theory of natural value, so that he introduces nothing new into this part of the subject, but he puts forward his theory as embracing all cases. His theory, as stated by himself, is, that " the ratio of exchange of any two commodities will be inversely as the final degrees of utility of the quantities of commodity available for consumption after the exchange is effected."! This amounts to saying that two commodities exchange for each other in proportion to their utility, but as there is no way of measuring the utihty of commodities except by their purchasing power, * Theory of Political Economy, chap. 3, sec. 4. f Chap. 4, p. 95, UTILITY. 129 the theory does not point ont anythino; npon which their excliange vakie depends, it simply tells us that two things of equal utility will exchange for each other, and the fact that they do so exchange is the sole proof of their possessing equal utility. "The price of mutton," says ]\rr. Jevons, "on an average, exceeds that of beef in the ratio of 1) to 8; we must conclude that people generally esteem nmtton more than beef in this proportion, otherwise they would not buy the dearer meat. It follows that the final degrees of utility of these meats are in this ratio, or that if PX be the degree of utility of mutton, and XY that of beef, we have— PX = ^/g XY." But it may be safely said that no one who eats beef and mutton has ever before observed that the pleasui'es afforded by the two sorts of meat stood in this proportion to each other, and the retail price is generally the same for both. The cause must be the fact that sheep, in proportion to their weight, require more labour to rear them than oxen do, and even if it is true that people prefer mutton to beef, this would have no effect on the proportion between their respective values, unless it induced people to employ more labour in rearing sheep, and it would still be true that value depends on the cost of production. Mr. Jevons gives a similar explanation of the fact that the value of gold is rather more than fifteen times as great as that of silver, because it is fifteen times as useful. But he gives no proof that the utility of gold bears that proportion to the utility of silver except that it exchanges for it at that rate. The proportion in ancient times was 10 to 1, which was altered after the discovery of America to 15 to 1, and can we suppose that the people of Europe in the course of the IGth century discovered some new utility in gold which induced them to prize it more highly ? Even if they had done so, it would have had no effect on the value of gold unless it had induced people to work less abundant gold mines than they would have otherwise done, and Mr. Jevons would still have to admit that the real cause of the change in the proportion between the values of gold and silver was, as has always been maintained, that the cost of producing silver underwent a greater reduction than that of producing gold. He wjiitends that his theory is proved by the very slight effect which the gold discoveries in California and Australia have had upon the gold price of silver, which has not been permanently altered more than two or three per cent., but he takes no account of the causes whicli have been in operation since 1850, which have tended to reduce the cost of producing silver. As I have mentioned above, some abundant quicksilver mines were discovered in CaHfornia in 1850 and 1852, and, as this metal is of great use in extracting silver from the ore, the fall in its value, consequent on the discovery of the mines, tended to reduce the value (•!' niher also. A K 130 UTILITY. correspondent, ^^Titino■ to the "Times," on June 19th, 1K72, under the signature of " F. Gr. S.," mentions on the authority of the manager of a large smelting and refining establishment, that the ores of gold and silver, as well as other metals brought to this country during the previous ten years showed a marked and uniform increase in the amount of their yield over those of the preceding decade. Thus gold and silver have fallen in value because both of them now require less labour to produce, and, as the improvement has not been uniform in both cases, a slight change has taken place in their relation to each other. The fact that both have fallen in value when both require less labour to produce is no proof that their value does not depend on the labour required to produce them. In Japan,* before the Americans obtained leave to trade there, the value of gold stood to that of silver in the proportion of four to one, and what reason can be supposed to have induced the Japanese to form so low an estimate of the utility of gold in comparison with that formed in the rest of the world ? Reference to the cost of production suggests a simple explanation, viz., that in the mines that were worked in Japan it only required four times as much labour to procure a given Aveight of gold as to procure the same Aveight of silver. That the Japanese were not disposed to abandon the use of gold if its value rose higher, is shown by the fact that they continue to use a gold currency, although gold is now sixteen times as valuable as silver. While the old proportion existed, there was a great inducement to American merchants to import silver into Japan, and to export gold from thence ; and they did so to such an extent that the Japanese Government, in order to prevent all the gold coins from being exported, was obliged to call them in, and to issue new ones of the same value, but of one-fourth the size, thus making gold sixteen times as valuable as silver. As far as the precious metals are concerned, Japan now enjoys Free Trade with the rest of the world, and, as the cost of obtaining gold is generally more than fifteen times as great as that of silver, the two metals exchange for each other at or about that rate in Japan as in other countries. It may, perhaps, be objected that I infer the cost of production from the value, when the value is the thing which I have to explain, and that I have no proof that gold required in Japan four times as much labour to produce as silver did, except that it was four times as valuable, but this is only because I consider that the theory has already been established on other evidence. It was knoAvn that gold [could be produced in Victoria in 1851 with less labour than formerly, and the fall in its value took place afterwards, and Avas established by other evidence. * See Seyd's Bullion and Foreign Exchanges, p. 372. COMPETITION. 131 The fact of a favourable harvest is known to all who are interested in the subject before the value of corn falls ; and it is a fact which can be easily ascertained that the same quantity of labour produces more wheat in America than in England ; a fact which rests on the testimony of agriculturists who are capable of judging- the question, and which would be equally true if wheat were never exchanged for other things at all, but was always consumed by those who produced it. Mr. Jevons' theory, on the other hand, seeks to explain the fact of an exchange by something which is inferred from the exchange itself ; and, although he seems to attach more importance to it than to the many valuable suggestions which his work contains, I am compelled to reject it as telling us no more than that people give for conunodities as much as they think they are worth. In his paper on the "Mathematical Theory of Political Economy," read before the Statistical Society of Manchester, November 11th, 1874, Mr. Jevons, after referring to the support which his theory has received from Dutch and other foreign Economists, and answering Cairnes' objections to it, frankly admits that it has not made any material addition to economic science. " I will only further add," he says, " a few words as to the value of the theory itself. It might seem that it leads us to no new conclusions, because we found that the principal inferences from the theory were the laws of Supply and Demand, and the doctrine of the relation of value to cost of prodaction already so well kno\\Tii in Political Economy. But though many facts of economical doctrine, as now ac- cepted, A\ill be confirmed by the theory, other parts Avill probably be shown to be groundless. The results of any such theory must be of a triple character — destructive — conservative— and constructive ; but it is, as yet, too soon to attempt to trace out the actual character and extent of its effects in each direction." I can only say that neither his arguments nor those of M. Walras,* who has independently arrived at a precisely similar theory, are strong enough to lead me to expect that it will throw any material light on tlic extremely complex phenomena of market value. The only theory which now remains to be examined is that which nuiiiitaius that the value of commodities is determined by competition. It is quite true that the price of an article is settled by the competition of buyers and sellers, but competition does not explain what price will be agreed upon, or why any particular price should be chosen. I^Ir. Thornton considers that i)rices are regulated by competition ; that there is no law regulating competition ; and, conscqucuLly, none ♦ Elements D'Econoniic Politifiue Pure, T.iui.saiin'-. 1874. k2 1 82 COMPETITION. reg'ulatiiig price ; and he seems not to consider that competi- tion can afford any explanation of the phenomena. An amnsing WTiter who reviewed Mr. Jevons' work in the Saturday Bevieiv for November 11th, 1871, expressed himself dissatisfied with Mr. Jevons' theory of utility, and suggested that competition furnished the required explanation. He put an imaginary case, in which the British Museum, possessing all the Greek sculptures in the world, and the Louvre, possess- ing all the Roman statues, the two institutions should desire to exchange their sculptures with each other, and declared it would be impossible to decide on what terms the exchange would be effected, if there were no other competitors in the field. But if there were a hundred competitors, I do not see that the difficulty would be at all diminished, and to say that the rate of exchange was determined by competition, would be simply to say that the rate was such as was agreed on, and that the sculptures ex- changed at the rate at which they did exchange. As, therefore, all the theories which I have met with appear to me to be truisms, and, as I am unable to devise one which will satisfactorily account for the phenomena of market value, I am forced to leave them unexplained. I will not presume to say that the exi^lanation y\i\\ never be dis- covered, but I may obseiTC that Political Economy is not the only science in which phenomena can only be predicted within certain limits, and in which a margin has to be left for unknown disturbing causes. In astronomy, the return of the more eccentric comets can only be predicted Avithin a few months, or even years ; and the time of high and low water at different places on the coast does not always agree precisely with the calculations of the Almanack. The value of commodities wliich are pro- duced in order to be exchanged tends to conform to the amount of labour which their production has required ; but when they have been produced, and no others can be made like them, the fluctuations of their value camiot be predicted ; and, though I do not doubt that these pheno- mena, like all others, conform to law, I am not in a position to say what the law is. CHAPTER III.— WAGES. GENERAL CAUSE OF WAGES — OTHER THEORIES CONSIDERED— ADVANTA- GES OF SOME EMPLOYMENTS — SKILL — CERTAINTY OF EMPLOYMENT — WAGES IN DIFFERENT PLACES. The product of industry is divided among tlu'ee classes ; those who possess the laud, those who pro^-ide the capital, and those who perform the labour necessary for production. These are called landlords, capitalists, and labourers ; and the shares Avhich they receive are called rent, profit, and wages, respectively. It may, and often does happen, that the same person performs all these functions, as is the case -with the peasant proprietors in France and other countries, or any two of them may be discharged by the same person, but it will be more convenient to treat the subject as if the landlord, the capitalist, and the labourer were three distinct persons, as is usually the case in England, and the principle may be apphed to other cases by regarding the income of a person who discharges two or three of these functions, as consisting of two or three parts, each of which is the effect of a different cause. In this place it is the labourer's share which is to be considered ; and I have to explain what is the cause on which the rate of wages depends. By the rate of wages is commonly meant the sum of money which is paid to the labourers for a given amount of labour, and it is clear that to ask Avhy a labourer receives a gramme of gold for a day's labour, is the same thing as to ask why a gramme of gold exchanges for a day's labour, and that the question must receive the same answer. As, therefore, I have said in the last chapter that a gramme of gold exchanges for a day's labour wlieu it is produced with a day's labour, so I now say that a labourer earns one gramme in a day when it would take him a day to extract one gramme from a mine ; and the rate of wages depends on the efficiency of labour. The same holds true of all other commodities as well as gold ; and nine days' wages are equivalent to a hectolitre of wheat, because it I'cquires nine days' labour to produce that quantity. Wages, when measured in corn, are higher in America than in England, because corn re(|uirc8 less la])our to produce in the former country. Wages, when measured in coals, are higher at Newcastle than in London, because less labour is required to bring coals to the labourer's dwelling in the former town. The amount of comfort which a laljourer enjoys depends on his power 134 GENERAL CAUSE OF WAGES. of procuring a great nimiber of articles ; and as the cost of different articles varies greatly from place to place, and as what is cheap in one place is dear at another, where something else may be cheap which is dear at the former, it is difficult, if not impossible, to decide in what country wages are high or low, when by wages is meant the labourer's command of commodities in general. It is generally supposed that wages are higher in America than in England ; but persons who haye taken considerable pains to investigate the subject have arrived at the conclusion that an English labourer has about the same power of obtain- ing the articles which he requires as is enjoyed by an American, and that the higher money-wages of the latter are neutralized by higher prices. It has even been contended that wages, as measured by the amount of comfort wliich they aflFord to those who earn them, are about the same in all parts of the world. I do not pretend to decide these questions, because they appear to me to be too vague to admit of a satisfactory answer, for, if a laboiurer in one country can obtain an article which is wholly out of the reach of the labourers in another country, who make great use of another article which is inaccessible to the former, I do not see by what test we can decide which is the best off. The power of the labourer to obtain any commodity depends on the cost of its production, and his general command over commodities is the complex result of the efficiency of his labour in many different employ- ments. Eveiy improvement in production makes some article or other more easy to obtain, and thus tends to raise wages, but some other cause may be operating in an opposite direction with regard to some other article, and we cannot say with certainty that wages are higher now than they were a century ago, unless we know that the labourers can obtain all that they could before, and something else in addition. As there is a constant tendency to improvement in manufactm-es, while there is a con- stant tendency to an increase in the cost of raw produce, wages arc exposed to two opposite influences ; the one tending to raise, and the other to lower them, as society advances. Some writers, as, for instance, Mr. Fronde and Mr. Thornton, have endeavoured to prove that the English labourers were formerly better off than at present, by showing that at certain periods they could obtain more of the necessaries of life than they can now do with the same proportion of their wages ; but this is not sufficient to prove their point. If a labourer is now obliged to spend nine- tenths of his wages on the necessaries of life, of which he could formerly procure the same quantity with one-half of his wages, it does not follow that he is worse off at the present time, for the one-tenth which is still left hun may procure him more luxuries than the half would formerly do. There are many signs which indicate that the condition of the labourers GENERAL CAUSE OF WAGES. 185 has been constantly improving, both in this and otJier conntries, and perhaps the most unmistakable evidence of the fact is furnished by the gradual diminution of the rate of mortality, which is the same thing as an increase of longevity, and shows that the people are exposed to less hardship than formerly. Another proof is the substitution of wheat for rye as the common food of the people, which took place in England in the first half of the last century, and has been effected in a great part of France since the revolution. Wheat has always been dearer than rye, and the change shows that improvements in other branches of industry have enabled labourers to obtain other things with a smaller portion of their wages, and thus to spend a greater portion on food. The use of tobacco, tea, coffee, and other foreign products now so common among the labourers, is another benefit conferred on them by the progi'ess of industrial improvement, of which the extension of trade with foreign countries is a signal example. The introduction of cheap newspapers, which are now within the reach of, and are to some extent used by, the poorest class of labourers, is another consequence, and that a most im- portant one, of manufacturing improvements, for they could never have been produced at so cheap a rate unless the arts of printing and of paper- making had Ijcen invented and brought to a high stage of perfection. Some have doubted whether the progress of industry confers any benefit on the labourers, but as every improvement reduces the cost of manu- facturing some commodity or other, the cost of obtaining such articles must be reduced, and it must become more easy for the labouring classes to obtain them. The labourers' cottages are better built and better furnished than they formerly were, and if meat and dairy produce are dearer than they were, it is clear, at all events, that the labourer gets enough to live on, and, if he gets more comforts in addition, he is better off, even though his expenditure on necessaries is greater in proportion to his income. When I say, therefore, that wages have a tendency to rise as society advances, I mean that the labourers can obtain all the commodities which they could in the earlier stages of society, and many others in addition. Wages, wlien measured in raw produce, depend on the cost of raising it in the worst cii'cumstances. If a farmer, employing instruments which have re(|uired the lul)0ur of tv/o men for a year to produce, and employing directly three men on his farm, produces a crop of 210 hectolitres of wheat on the margin of cultivation, the wages of the five men will be 200 licctolitres, or 40 a-piece, or a sum of money oi' equal value ; his profit being estimated as before at 5 per cent. If their labour becomes more productive so that they pnjdnce 2')2 hectolitres, comi)etition will compel the farmer to reduce the price, and sell the total crop for the same sum 136 GENERAL CAUSE OF WAGES. as before, and as he will pay the labourers the same sum of money as before, their wages vnW have risen if measured in wheat. If, while the labourers produced as much as before, the price of wheat rises by one- fifth, the laljourers wiU demand an equal rise of money-wages, and will compel the farmer to content himself with the ordinary rate of profit. In the one case it is the value of wheat, and in the other, the value of gold which has fallen, and in both the capitalists are compelled to content themselves with the same rate of profit, and the rate of wages, therefore, varies with the efficiency of labour. If all labourers worked on their o^mi accoimt, were all of equal skill, and were aU fi-ee to change their employment, and if all employments were equally agi'eeable, it is obvious that the rate of wages, in whatever article it were measured, would depend on the efficiency of labour in producing the article in question. If it required one day to make a pair of shoes, the tailor, the baker, and all other labourers would earn a pair of shoes by a day's labour at their respective trades, and the same principle will apply to all other articles, aU of which would he earned Avith as much labour as it required to produce them. We know that in point of fact some kinds of labour receive higher wages than others, and the causes of these diflFerences vnW be examined shortly, but the fundamental principle which determines the rate of wages in any employment is the one above stated, and the intervention of money does not put an end to, though it somewhat obscures, its operation. I have already developed this theory of wages in the " Westminster Review " for January, 1872, in an article which was Avritten before I was aware that a precisely similar theoiy had been previously put forward by Mr. Jevons in his " Theory of Political Economy." He has expressed it in the formula that the wages of a working man ultimately coincide A^ith what he produces, the word "ultimately" being inserted in order to show that the theory does not apply to every individual case, and I wish my theory to be taken with the same qualification. Employers may for a time obtain more than the usual rate of profit, but not for a longer time than is necessary to enable fresh competitors to enter the field, and workmen may sometimes be glad to work for much less than the ordinary wages in order to save themselves from starving. High wages are sometimes given in a particular trade which is more than usually active, and this is probably because the men are kept more constantly employed, and therefore do more work in the same time. There are, however, other cases to which a similar explanation cannot be given, and these I must leave unexplained, like the similar cases of market value. The theory not only has the support of the able WTiter just referred to, but it agrees with and explains the opinions constantly expressed by practical OTHER THEOIUKS CuXs?IDEKED. 137 men, both employers and workmen. The former say that they pay for labour as much as it is Avorth, i.e., tliat they reward it in proportion to its efficiency, and that the wages which they pay to each workman are equivalent to the contrilnitiun which he makes to the common product. The latter are fond of saying that they want " a fair day's wages for a fair day's work," i.e., that their wages ought to he equivalent to the portion of the product which owes its existence to their labour, and that the employer should receive only the ordinary rate of profit on his capital ; and if the wages which they receive are less than this, they do their work in a slovenly manner, and, if the employer remonstrates, they reply that they are doing as much work as they are paid for. In both these phrases, therefore, it is implied that the whole product remunerates the labour and abstinence employed, and that the shares of both parties rise and fall with the amount of the product, and hence that wages depend on the efficiency of labour. As Adam Smith regarded value and wages as the same phenomenon, his explanations of them are substantially the same. As he held that in an early stage of society the value of commodities depended on the quantity of labour required to produce them, so he held that before capital had been accunmlated or land appropriated, wages depended on the efficiency of labour. In a more advanced state of society, when the product of industry Avas divided among landlords and capitalists as well as labourers, as the latter no longer o])tained the whole of what they produced, and as he did not know Avhat determined the shares of the other two classes, he considered it impossible to decide what deter- mined the rate of wages, and could suggest nothing except a minimum rate below which it could not fall — that, namely, which was just sufh- cient to provide the labourers with the necessaries of life. It will be observed that I have spoken of the efficiency of labour on the worst farms and in the worst mines as determining the rate of wages Avhen measured in raw produce, and, as these pay no rent, the landlords may be left out of consideration ; and I have also assumed the rate of the capitalist's profit to be stationary, liicardo adopted Adam Smith's sug- gestion at a minimum rate, and, by calling it the natural rate, endea- voured to explain the rate of wages prevailing in any country by saying, that it was such as was necessary to enable the labourers to maintain themselves and their families in that state of comfort which they regard as essential to tlieir happiness, and without which they will not propa- gate their race. Adam Smith seems originally to have meant no more than that labourers cannot live uidess they have enough to live on ; but he subsequently includes amongst necessaries all those articles which in diileront countries are considered as indispensable in order to enable the 138 OTHER THEORIES COXSIDEREO. common labourers to keep up a deceut appearance. With his usual desire to verify his theories by reference to facts, he pointed out that the wages of common labourers were nowhere reduced to the minimum rate, as was proved by the fact that the rate of money- wages often remains the same for years, and even for half a century together ; while the price of food was subject to very great fluctuations. Eicardo, however, con- siders that the rate of Avages must in the long run conform to the cost of food, and that if the price of food rises, the rate of money-wages must rise to such an extent that the labourer can obtain the same quantity of food and other necessaries. If asked why the rate of wages commonly paid in England secures to the labourers a certain quantity of commodities, he would reply that it is because the habits of the people make them determined to obtain that quantity ; and if they cannot obtain it they will not propagate the race. But he gives no proof of the attachment of the people in any country to a particular rate, except that it actually prevails there ; and if we want to know why the ordinary rate is higher at one time than at another, he has to refer to other causes to explain it. He considers that a labourer may obtain more gold, though he produces the same quantity as before, and, as this implies that the capitalist receives less, it will be more convenient to discuss this point in the following chapter, which will be devoted to the subject of profit. The market rate, he thinks, may rise above the natural rate, but, if this happens, an increase of population "nill take place which will reduce the rate again, unless in the meantime the natural rate has risen; or, in other words, unless the people have become attached to a high standard of comfort, and refuse to put up with less. This natural rate appears to me to be too vague an idea to form part of a scientific explanation, for, if wages, after a temporary rise, sink to their former level, we are told that they have returned to their natural rate ; and if the rise is permanent, we are told that the natural rate has risen. What then is the difference between the natural rate and the actual rate, and Avhat more does the theory tells us than that the rate of wages is what it is ? Aii increase of population may lower wages in so far as they are measured in raw produce, but it has the opposite tendency in so far as they are measured in manufactured articles, since it causes them to be produced on a larger scale, which admits of gi-eater division of labour and diminishes the cost of production. It is then by no means clear that an increase of popu- lation will diminish the labourer's comfort, since what he looses in one direction he may gain in another. Ricardo supposes on the other hand, that if the market rate falls below the natural rate, a diminution of the population will raise it again, and the same objection applies to this argument as to the preceding. Ricardo's views are somewhat obscure. OTHER THEORIES CONSIDERED. loD but they have been iiiore clearly expressed and further developed by Mill, who considers that a series of abundant harvests may for a time improve the condition of the labourers by rendering food cheap, but can have no permanent effect unless it continues Iousj: cnout^di to work a chan|uires that some individuals should devote themselves to trade or manufactures for the benefit of the rest, the latter must consent to exchange the products of their industry on such terms that those ^^■ho funiish the capital, or the money with wliich trade and manufactures are carried on, shall obtain the same rate of profit as the farmers. When an article has to pass through several hands in order to undergo several processes of manufacture, the value of the final product nmst be sufficient to compensate the abstinence which has been exerted by all those through whose hands it has passed, so that the cotton-planter, the cotton- spinner, the weaver, and the tradesman, for instance, may each receive fifty francs for every thousand which each has invested in his business. Of course, as a matter-of-fact, all people do not obtain the same rate of profit, nor docs the same person obtain the same profit every year, but these difierences arise ft'om difierences of personal character or local circimistances, but if any one trade is so situated as to hold out an expectation of more than the usual profit to persons of average abihties, this will induce more persons to enter that trade, or those who are ah-eady engaged in it to bring more capital into it ; and this competition will compel the whole body of persons engaged in it to loAver their prices, and by so doing to reduce their profits to the ordinary rate. Even if the competition of the capitalists were not sufficient to do this, there is another force working to the same end. The labourers employed in the trade, seeing that their masters were obtaining higher profits, would require higher wages, and, if these were conceded, the rate of profit would be thereby reduced, while, if they were not, the employers would be obliged either to submit to the loss consequent on a strike, or to reduce their prices. A single railway company may pay 10 per cent, while most others are only paying 5 per cent., but a railway is such an expensive article, and one which requires so long to construct, that a company may obtain 10 per cent for some years before any one thinks it worth while to construct another connecting the same places. The employes of a railway company which is paying unusually high dividends cannot obtain a rise of wages by the threat of a strike, for the other companies cannot afford to give more, and the men must, therefore, content them- selves with the usual wages ; but if they all paid 10 per cent, they would be obliged to reduce their fares, or else so many new railways would be started as materially to interfere with the business of the old companies. Even when a company is so favourably circumstanced as to be able to pay high dividends, aud the Govermnent will not allow a competing railway" to be constructed, the benefit of the high profit is only received M 1G2 EATE OF PROFIT IN DIFFERENT TRADES. by the original shareholders, and the shares rise to a premium, so that those who afterwards invest in them cannot obtain much more than the usual rate of profit. The same thing happens with Joint Stock Banks, such as the London and Westminster Bank, which pay 20 per cent., but which cannot be compelled by competition to reduce their profits by giving more favourable terms to their customers. It is, indeed, open to every one to estab/Iish a new Joint Stock Bank, but, as the chief object of a bank is to provide security for its depos- itors, an old-estal)lished bank has always a great advantage over its younger rivals, and it is difficult for them to draw away custom from it, but its shares rise to a premium. The business of a bank may not always admit of an increase of its capital, for' its profits depend much more on the amount of its deposits than on that of its paid-up capital ; and the former may increase or decrease considerably, while the latter remains stationary. The Bank of England does not pay such large dividends as the London and Westminster Bank, chiefly because the capital of the former (362,500,000f.) is much larger than the business rec|uires, and if one third of this sum were returned to the proprietors the absolute profit might be hardly at all diminished, while the rate of profit "\^'ould of course be increased. When, on the other hand, a com- pany is unfortunate, and its dividends fall below the usual rate, the price of its shares also falls ; and here again there is a tendency to uniformity in the rate of profit on all investments. Not only is it seen that different p)ersons obtain different rates of profit, but it also seems that the rates are permanently diflferont in different trades. Adam Smith, however, has shown that these differences are only apparent, and that the high profits said to be obtained in some trades are in reality no more than the wages of those who work at them. A country grocer, he says, makes a much higher profit than a merchant in a large town ; but, if we deduct from the so-called profit of the former the sum which is due to him as a skilled labourer who is able to keep accounts and who is a competent judge of many diflTerent kinds of goods, we shall find that his profit is not greater than that of the latter. Adam Smith explains in the same way the large returns which a small sum of money will pro- duce when invested in a publichouse, a great deal of it being a compen- sation to the landlord for the disagreeable nature of his business. Senior, too, says, that no class makes a higher profit in the ordinary sense of the word than the apple-women of our streets, who realise 20 per cent, per diem, or about 7,000 per cent, per annum ; but, though this sounds enormous, yet, as their whole stock is hardly worth more than 6f., they do not earn more than If. 20c. a day, which is a very low rate of wages, and their real profit should be considered as amounting practically to RATE OF PllOFIT IX DIFFERENT TRADES. IGo nothing. There is, of course, no tendency towards an eflfacenient of the dift'eronces which exist between different trades in respect to the greater or less comfort enjoyed by those who superintend them, but there is a constant tendency towards the establishment of an uniform rate of profit on the investment of money in whatever mode it is effected. If publichouses, grocers' shops, and all other industrial con- cerns were carried on l)y Joint Stock Companies, it is evident that, as no one would have any inducement to invest in those which paid less than the others, an uniformity of profits would be brought about, either by the abandonment of the less successful undertakings, or by corre- sponding alterations in the prices of the shares. But it may be thought that as trade is at present chiefly carried on by private individuals, the amount of whose profit is scarcely known to themselves, and not at all to their neighbours, there is no reason why a high rate prevailing in any one trade should attract more capital into it. But, although the amount of a tradesman's profit is not knowii to his neighbours, yet, when a par- ticular trade is more than usually profitable to those engaged in it, the fact must be obvious to these at least, and they will do their best to extend their operations, and they will take their relations or their friends into partnership, or some of them will take the opportunity of starting fresh concerns. Some of them borrow from bankers or other money- lenders, and some employ their savings in extending their business, and thus they cause more capital to be employed in maintaining the labourers who are directly engaged in the trade, or those who produce the materials or instraments which are required in it, and in one or other of these ways a larger amount of capital comes to be employed in producing the articles which In-ing in a more than usual profit, and the eagerness of the competing traders to take advantage of the opportunity reduces the rate of profit to its former level, either by compelling them to reduce their prices, or l)y inducing them to produce the articles at a greater cost, though selling them at tlie same price. When a trade is unfortunate, the process is reversed ; those wlio are engaged in it contract their operations — they 1)orrow less from l^ankers — they dismiss their labourers — some of the less successful abandon tlie trade, or they fail, or die, and their place is not occupied by others ; and in one or other of these ways less capital comes to be employed directly or indirectly in producing those articles which are no longer profitable. The length of time which is required for either of these processes is of course a matter of uncer- tainty, but it is evident that a trade which is known to be unprofitable must decline, and that one which is known to be ad\-antageous nmst flourish and extend itself; and if it cannot be said with perl'ect accuracy that at any one moment the rate of profit is actually the same in all M 2 1G4: PERMANENCE OF THE RATE OF PROFIT. trades, it may, at least, be said that the rate is always tending to uni- formity. The high dividends which are sometimes paid by mining com- panies do not in any way militate against the truth of this proposition, for they are quite exceptional, and the disposition of the veins of metal is so irregular, that the success of one mine says nothing for the success of another in the same district, and competition cannot reduce the profits of the most successful. The business of mining, though it affords a prospect of great success, affords also a prospect of disastrous failure ; and, if the losses are set off against the gains, it will probably be found that it is not, on the average, more profitable than other trades, and does not hold out a greater inducement to prudent capitalists to invest in it. As the rate of profit in all other trades is the same as that which prevails in agriculture, it follows that, if the rate is always the same in that employment, it must be permanent in all other trades also, and that, if there is a general rise or fell in the rate, the variation must be manifested in agriculture. The surplus which remains in a farmer's hands after paying his labourers does not, in every case, bear the same proportion to the capital employed, but varies according to the fertility or poverty of the land. As the labourers' wages are determined by the productiveness of labour on the "margin of cultivation," which is, as previously explained, the worst land permanently cultivated, so the farmer's profit is that which is yielded on the same margin of cultiva- tion, and the rate cannot fall below this point as long as equally good land remains for a farmer to take into cultivation. If a considerable extent of land more fertile than the worst previously cultivated should be discovered, much inferior land would be suffered to go out of culti- vation, and the value of corn Avould fall, but the rate of profit Avould not rise, since nothing would have happened to make al)stinence more irksome than before. If, on the other hand, cultivation could not be extended '^nthout resorting to poorer soils it would not be extended at all, and the population of the country would remain stationary. If the labour of the agricultural classes Avere sufiiciently productive to main- tain other classes besides themselves, a capitalist could obtain the same rate of profit by devoting himself to trade or manufactures as by prac- tising agriculture, and he would have no motive to cultivate a barren soil and receive a lower profit, when he could obtain the usual rate by setting up as a builder or a tailor. If the community were wholly agricultural there would, in like manner, be no motive to cultivate land which would not yield the ordinary profit, so that in either case the rate would remain stationary. In this latter case, indeed, if some capital were produced which was not required for the purpose of maintaining the labourers already employed in agriculture, the fact would be .a PERMANEIfCE OF THE RATE OF PROFIT. 165 sufficient cause for the establishment of a manufacture, and tlio com- munity would cease to be purely agricultural. Suppose, for instance, the ordinary rate of wages was 40 hectolitres of wheat per annum for each mau, and the profit of the capitalist amounted to 2 hectolitres for each man employed, and some improvement in agriculture should increase the capital of the country by 4,000 hectolitres, but that the country did not contain any unoccupied land on which the labour of 100 men could produce 4,200 hectolitres. In such a case it would obviously be the interest of the possessors of this capital to employ the people whom it would maintain in producing furniture, or clothing, or some other thing to be exchanged with the farmers for their corn, and if they employed their capital in this way they could exchange their goods, which would be the product of the labour of 100 men, for as much corn as 100 men had produced, and their rate of profit would be the same as that of the farmers. The latter would be obliged to consent to these terms, for if they did not they would have to withdraw a portion of their capital from agriculture, and employ some men in pro- ducing clothing or other articles for their own use, and would thus lose the profit which they formerly received on that portion of their capital, while they would leave some land unoccupied which would be taken by the capitalists who were seeking for an investment, and who would obtain the same rate of profit as the farmers had formerly done. Thus it ^\•ould be the interest of both parties to exchange their goods on such terms tliat both could obtain the same rate of profit. Agricultural profit cannot fall unless recourse is had to poorer land, but such land will never be cultivated, since capitalists can never be willing to submit to a fall of profit ; and the very meaning of the expression that some land is not worth cultivating, is, that it will not yield the ordinary profit to the farmer who should attempt to reclaim it. It appears, then, that the rate of profit is stationary in agriculture, and, consequently, in all other trades ; and that whatever rate be established in an early stage of society, it nuist remain the same throughout its subsequent develop- ment. This theory, however, is in opposition to the unanimous opinion of all other Political Economists, who maintain that there is a constant fall of profit as society advances ; and the reasons which have induced them to adopt this conclusion must now be examined. The principal of these appears to be the ftict that there is a constant tendency to a fall in the rate of interest on loans, which they consider as a sufficient proof that the rate of profit falls likewise, Ijccause they think that no one will pay more for the use of money than he can make by employing it on his own account, and that, therefore, the rate of interest and the rate of profit must be exactly or nearly identical. Bubbage goes so far as to. ICG PERMANENCE OF THE RATE OF PROFIT. ^ say that we can always ascertain the rate of profit in England by refer- ence to the price of Consols ; so that when, for instance, Consols are at par, the rate of profit is 3 per cent,, and when they are at 75, the rate of profit is 4 per cent., &c. That eminent philosopher, the late Mr. Buckle, has assumed, as a matter not admitting of question, that the rate of interest affords a measure of the rate of profit, and that profit was high in India in ancient times because interest ranged from 15 to CO per cent. He says : " Inasmuch as the wealth of a country can only be divided into wages, rent, profit, and interest, and inasmuch as interest is on an average an exact measure of profits, it folIo\^'S that, if among any people rent and interest are both high, wages must be low." * In a note to the words Avhich I have italicised, Buckle admits that the rate of interest is affected by the degree of security which a society enjoys, but he does not seem inclined to attach much importance to this fact. In a country Avhere the creditor has but a small chance of recovering his property, either in consequence of the general dishonesty of the people, or of the insecurity of property produced by a bad or a weak government, he must require a higher rate of interest in order to compensate for the risk which he runs of losing his property altogether; but it does not follow that either money-lenders or other persons obtain larger net profits than they would in a country in which credit was more stable. As society advances, the authority of law is ever becoming stronger, and more efficient protection is afforded to tlie creditor ; and the benefits which honesty confers upon commerce being more and more recognised, people become by degrees more 'willing to lend their money to others, and, as they believe themselves to incur, and actually do incur, less risk of losing it, they are content with a lower rate of interest. In those cases, indeed, in which the borrower has no security to offer, the rates are still, and will always remain, enormous ; and it is said that the impostor who a few years ago laid claim to the Tichborne estate promised to pay interest at the rate of 300 per cent, on the money which he borrowed for the purpose of carrying on the lawsuit, which, of course, could only have been paid if the suit had been decided in his favour. The general security of property tends also to reduce the rate of interest in another and more important way, by giving rise to the institution of banking. While people have but little confidence in one another, no one will deposit his spare cash in the custody of another unless he receives interest for it, but when they have learnt that their cash may be deposited with as much, and even more, security in the hands of a person whose * History of Civilization in England, New Edition : Longmans, 1867. Vol. I., p. 74. PERMAJTEXCE OF THE RATE OF PROFIT, 167 special business it is to take charge of it as in their o^mi liouses, a class of bankers arises to perform this function, and it is found to be most convenient that the same class should undertake, in addition, the business of lending money. As those who deposit their money with a banker do not all require it back again at the same time, he is able to lend a larger or smaller portion of it to others, and, provided that he is always able to meet the demands of his depositors, the latter have no reason to complain, since they do not require him to return the identical coins which they entrusted to him, but only an equivalent sum ; and the profit which he makes by lending it out, enables him, in many instances, to take care of his depositors' money without making any charge for his trouble. Hero an important consequence follows : that while in a primitive society the money-lender carries on his business with his own money, in a more advanced society he lends the money of other people ; and while in the former case he must charge a high rate of interest in order to obtain, not merely the ordinary rate of profit on his own money, but a sufficient compensation for the labour which he or others ha-\'e to undergo, and an indemnity against any risk of loss, in the latter he has a much larger fund out of which to obtain his wages of superintendence and his profit on the smaller sum which really belongs to him. Thus, when a money- lender has only his own money to lend, he cannot be content with 5 per cent, interest, for this would be tantamount to labouring and submitting to risk without compensation ; and, if his stock be small, and the trouble of collecting his debts, or the risk of loss be considerable, interest at the rate of oO or GO per cent, per annum may not leave him a clear profit of more than 5 per cent. As a country grocer makes a greater addition to the cost-price of his goods than a merchant in a large city, because he has a smaller stock by the sale of which he has to procure his o^\^l wages and those of the people whom he employs, so a small money-lender charges a higher rate of interest than a banker wlio has a large amount of money deposited in his keeping. If a money-lender, possessing l()0,OUOf., lends it out at 40 per cent., he will receive 40,000f. a year, but 10,000f may be set aside for occasional losses, and the expenses of carrying on his Ijusiness may well amount to 25,000f , and thus the net profit may be no more than 5,000f., or 5 per cent. A bank, on the other hand, whose paid-up capital amounts to 10,000,000f., may hold deposits to the amount of 40,000,000f., and by lending out the whole at the rate of 5 per cent., may obtain 2,500,000f ; and even if the expenses, including the salaries of the directors, the manager, and all other persons employed, should amount to 2,000,000f., it will still l)e able to i)ay a dividend of 5 per cent. As, therefore, the tendency to a fall in tlie rate of interest may be accounted for without supposing any tendency 168 PERMANENCE OF THE RATE OF PROFIT. towards a fall of profit, it cannot be taken as a sufficient proof of the existence of the latter. Hume, liowever, has collected some evidence which goes directly to show that the rate of profit was higher in ancient Greece than in modern England, which I give in his oami words : — " We read in Ljsias (Orat. 33, Advers. Diagit) of 100 per cent, profit made on a cargo of 2 talents sent to no greater distance than from Athens to the Adriatic; nor is this mentioned as an instance of extraordinary jjrofit. Antidorus says Demosthenes (Contra Apliob., p. 25, ex Edit Aldi) paid 3j talents for a house which he let for a talent a year, and the orator blames his o\Mi tutors for not employing his money to like advantage. My fortune, says he, in eleven years minority ought to have been tripled. The value of 20 of the slaves left by his fether he computes at 40 minae, and the yearly profit of their labour at 12."* But these facts, though they would go far to confirm a theory otherwise established, are hardly sufficient to j^rove that the rate of profit was higher in ancient Greece than it is at the present time. The fact that a trader made a profit of 100 per cent, by sending a cargo of the value of 2 talents from Athens to the Adriatic does not tell us what was the usual net profit received by traders at that time. Short as the voyage may now appear, it may then have been a very expensive one, and there must have been a considerable risk of piracy and shipwreck, and the annual profit of the merchant may have been no more than 5 per cent. Even now, the booksellers of London sometimes sell a book for twice as much as it has cost them, and twenty years ago they usually sold books at a price 33 per cent, higher than that at which they bought them ; and though they now allow a much smaller margin of profit, it by no means follows, and is, indeed, highly improbable, that the general rate of profit in that trade is now lower than formerly. The fact that Demosthenes obtained a rent of one talent a year for a house which had only cost him 3^ talents, is not in itself sufficient to prove a high rate of profit, for it may have been an unusually lucky speculation. Nor can the statement of Demosthenes that his property ought to have been tripled in eleven years claim our implicit confidence, for persons who think that they have a grievance are very apt to put in exorbitant claims, and the owners of some of the whale-ships which were destroyed by Confederate cruisers put in claims for damages in which they reckoned their profit at the almost fabulous rate of 3.50 per cent, per annum. Demosthenes estimated at 12 minas the annual profit which he could derive from the labour of slaves worth 40 minte, and this is equivalent to 30 per cent, but as they * Essay on the Populousness of Ancient Nations. PERMANENCE OF THE RATE OF PROFIT. 169 were employed as sword-cutlers and cabinetmakers, the price of the materials and instruments employed should be also taken into considera- tion, and, if these had been given, the rate of profit would probably appear much lower. But even if these facts were sufficient to prove that the rate of profit Avas higher in ancient India and Greece than in modern England, they Avould not proA'e that in the same country profit is lower at a later, than at an earlier period of its history. Buckle states that the same rates of interest which are mentioned in the Institutes of Menu prevailed in India in 1810, and his object was not to prove that the rate of profit had fallen, but that it had always been high, and though Hume considered that a high rate of profit proved a society to be in its infancy, yet he gives no figures relative to the rate prevailing in G-reece at any period subequent to the age of Demosthenes. Some theories have been propounded to establish the downward tendency of profit, though rather to account for a fact which is taken for granted than to prove by independent reasoning that such a tendency must exist. Adam Smith supposes that the increase of the capital of a country diminishes the rate of profit by increasing the competition of the capitalists with one another, because when profits are unusually high in one trade more capital is attracted to it and they are soon reduced to the ordinary level, he therefore supposes that an increase of capital in all trades must reduce profits in all. But there is here an obvious fallacy, for the fact that capitalists are content with 5 per cent, is sufficient to prevent a higher rate from prevailing in any one trade, but cannot explain its reduction to 4 per cent. There is no apparent reason why the possessors of the additional capital should not be able to obtain as high profits as other capitalists had previously done, and to suppose that they would be content with less than they could get, is to suppose that they would not desire to obtain as much wealth as possible with as httle abstinence as possible. If an article can be profitably produced at the price of of., no one will be able to charge more for it, but competition will not reduce the price below of., and the same rule applies to the rate of profit. No one can obtain more than the usual rate, because there are many others who are content with it, but to say that competition reduces the rate is merely to say that the rate is reduced without explaining the motives which induce the whole body oi' capitalists to submit to the reduction. Ricardo's theory, thougli it is more ingenious, and has been more generally accepted than that of Adaui Smith, is yet open to the same ol)jectioii. His theory of wages as before mentioned, is, tluit they must be sufficient to give the labourer a certain quantity of food and other necessaries, and that if, thereibre, the cost of food increases, wages must also rise. His theory of profit is, that it is, 170 PERMANE^rCE OF THE EATE OF PROFIT. SO to speak, the complement of wages, i.e., that the two together make up the total product of industry, and that as the one rises the other falls. Eeut being for the present left out of account, it is, of course, perfectly true that the A\liole product is divided between the capitalist and the labourer, and that if one of them receives a larger share, the other receives a smaller ; but, though it is perfectly true, it throws no light on the matter. Whether the labourer's share be called wages, as it is by Ricardo, or " cost of labour,'" as it is by Mill, the statement that the share of the capitalist diminishes because the labom'er's share increases, is merely a statement that profit falls because it falls. If the total product be represented by the number 100, then the statement that the cost of labour is equal to 90 is identical with the statement that profit is equal to 10, and can in no way explain the latter fact, any more than the statement that it is three-quarters past two o'clock can explain the fact that it is a quarter to three, or the statement that Paris is to the south of London can explain the fact that London is to the north of Paris. If the cost of labour rises from 90 to 95, profit falls from b to 10, but it would be quite as reasonable to say that the cost of labour had risen because profit had fallen as to make the converse statement, and the statement that the labourer receives a larger share implies that the capitalist receives a smaller one. The unsatisfactory character of Pticardo's theory has already been pointed out by Mr. Jevons in the work before referred to. (Chap. 8, sec. 2). Such, however, being his theory, he sought to establish a fall of profit by showing that food had a tendency to become dearer as society advanced, and that the wages of the labourer increased so as to enable him to procure the same quantity of it, and had this been proved it would undoubtedly have demonstrated that the rate of profit must fall as society advances. Unfortunately, however, these facts, wliich w^ould require very strong evidence to prove them, were, by Ricardo, taken for granted, and we are simply told, as if it were a well known fact, that food tends to become dearer as society advances. It is quite true that if people were to resort to poorer soils than those previously cultivated, although no improvement in agriculture had taken place, the cost of procuring food would, as Ricardo contends, be increased, but he was bound to explain the motive which could induce men to cultivate these poorer soils. He assigns the increase of population as the cause, but such an increase cannot precede, but can only follow, an increase of food. Be the population of the country ^^'hat it may, it must have suflBcient food before the fresh land is taken into cultivation, and if there be an additional supply which is not wanted to support any persons already engaged in agriculture, it may either be used to maintain those who are to reclaim the new land, or to maintain PERMANENCE OF THE RATE OF PROFIT. 171 others in some non-agTicultural employment. But if all the ^Yaste land be inferior to any yet cultivated, it wiil obviously be more desirable to employ this capital in trade or manufiK'tures, and for the labourers to exchange their products or their services for the corn of the farmers. By doing so they can obtain as much corn (say 40 hectohtres of wheat a year) as the farmers produce on the old land, while by cultivating the waste laud they would obtain a smaller quantity (say 36 hectohtres), and as everyone desires to obtain wealth by the least possible labour, the former course would be preferred. In order to explain why the latter course should be adopted, it is necessary to show why people should desire to procure dear food when cheap food can be had, but if we are to suppose that capitalists would consent to give up a portion of their own profits in order that the labourers whom they employ in reclaiming the waste land may receive as much, or nearly as much, corn as those employed on better land, it becomes still more difficult to account for their conduct. The waste land cannot be reclaimed witliout the concurrence of capitalists, and, as they would be able to obtain the same rate of profit as the farmers had previously done if they would employ their capital in some kind of manufacture, to suppose that they would submit to a lower rate is to suppose that they would not desire to obtain Vv'ealth by the least possible sacrifice. Ricardo says that the increase of population would compel them to reclaim the waste land, but this increase cannot take place until after the land has been reclaimed, and, if we are to suppose that Ricardo, and those who follow him, really mean that it must be done in order that an increase of population may take place afterwards, there still remains the difficulty of explaining the motive which can induce the capitalists to take this course. It cannot be a desire to increase their own families, for, by the supposition, they would receive less than if they engaged in manufactures, and it can hardly be supposed that they would submit to a loss in order to enable other people to increase their families. It cannot be that there is no field for the employment of capital in other than agricultural industry, for, as Ricardo hiuiself maintains, there is no limit to the desires of mankind to possess the comforts and luxuries of life. As, therefore, no motive is assigned which coidd induce the whole class of capitalists to Bulmiit to a reduction in the rate of profit, Ricardo's theory, like that of Adam Smith, fails to establish the i'act. Although it is true that as a country advances nmch waste land is reclaimed whicli was formerly thought t(;o poor to cultivate, yet this is owing to the im])rovements which are constantly taking j)lace in agriculture, by which people; are enabled to cultivate it at a smaller expense than would i)reviously have been necessary, and the increase of population is the ellcct, and not the cause. 172 PERMANENCE OF THE RATE OF PROFIT. Cherbuliez, on the other hand, ascribes the fall of profit to the increased productiveness of industry, instead of its diminished produc- tiveness as Ricardo has done. He has explained his theory in the chapter on profit in his work before referred to, and also in the "Journal des Economistes," for July, 1850, in both of which places he has availed himself of the same hypothesis to illustrate his theory. He supposes that there is a small and isolated colony of farmers, who obtain the wood which they require from five capitalists, whom he names B, C, D, F, and G, and that the amounts of capital possessed by each are in the proportion of 10, 20, 30, 40, and 50 respectively, and that the whole is employed in maintaining the labourers who cut down the wood and carry it to the farmers. He supposes that B cannot live unless he receives a profit of 1 on his capital of 10, wliichis equivalent to 10 per cent., and that he is able to obtain it because without the use of his capital the required quantity of wood could not be obtained, and that the others obtained 2, 3, 4, and 5 respectively, so that they receive the same rate of profit as B does. Next, he supposes that D, F, and G adopt some improvement which enables them to reduce the cost of wood, but that neither the capital of B nor that of C is suihciently large to enable these latter to adopt the new method of production. Under these circumstances B and C, of course, abandon the business of wood cutting ; but Cherbuliez contends that D, F, and G will have to submit to a fall of profit, perhaps from 10 to 5 per cent. B and C ^vill lend their cajiital to the other three, and as that of D is now the smallest employed in the business, the rate of profit cannot be less than will enable him to live, but if he receives only 5 per cent, on his capital of 30, he will get 1^, which is more than B had before, while F and G get 2 and 2h on their 40 and 50, and B and C receive interest equal to h and 1 respectively on what they lend to the others, and thus each receives 5 per cent. Thus the discovery of new machines and of better means of enforcing the division of labour tends to bring about a more general accumulation of a large amount of capital in the same hand, and this tends to reduce the rate of profit.* There is, however, the same objection to this theory as to those of Adam Smith and Ricardo, viz. : that it does not tell us why the capitalists should submit to a reduction of their profits. An invention is hit upon which cannot be utilized unless a large mass of capital is held by one individual, and this would explain why a class of large capitaUsts should supplant the small ones, but the same fact would enable them to obtain the same rate of profit as heretofore, since their assistance is necessary to supply the farmers Avith Avood. D, indeed, * See Science Economique, Vol, I, pp. 471-2. PROFIT IX DIFFERENT COUNTRIES. 173 may be supposed capable of living on a profit of 5 per cent., but this is no reason why he should not take 10 if he could get it, and he could do so by simply declining to adopt the new process and continuing to procure wood in the old way. The same motive would equally deter F and CI fi-om adopting the new process, and B and C from abandoning the old one, but, even if D, F, and G- should adopt the new one, this would be no reason for submitting to a lower rate of profit. Cherbuliez contends that they would do so in order to dispose of their increased produce by reducing its price, but if they reduce it in proportion to the reduction in the quantity of labour required to produce it, they will obtain the same profit as before, and to say that they will submit to a reduction of their profits in order that they may sell their wood cheap, is to assume that they -will rather employ their capital in procuring wood than in any other way. Under the circumstances supposed, it would be the interest of the capitalists to produce some other article for which the farmers would give a better price than for wood, or else to become farmers, and supply themselves with the food which they themselves require — a course which would induce the farmers to exchange their corn for wood on such terms that both they and the wood-cutters could obtain the same rate of profit. Cherbuliez's theory, therefore, does not prove a fall of profit, but merely assumes that it does take place, and the real point where explanation is required is passed over in silence. It may be thought, and it has been held, that as society advances people become more willing to submit to low profits, because they are more anxious to save, and feel more security that they will be allowed to enjoy the fruits of their savings ; l)ut though the greater security Avhich a civilized society enjoj's has a greater effect in encouraging people to lend money on interest, it does not follow that those who employ their own money in their own business are content with a lower rate of profit than the people of a barbarous country. A good and stable Government may secure some of its citizens from severe losses to which they might be otherwise exposed, and this prol)ably makes up for any enormous gains to which an insecure state of society may give occasion. The desire of acciunulatiou does not prompt men to accept a suudl gain when a large one is attainable, and I have endeavoured to show that whatever the quantity of food in the country, it can always be employed in maintain- ing labourers -without any diminution of the rate of profit becoming necessary. As different countries are in different stages of civilization, those wlio hold that the rate of i)rofit falls as society advances, naturally hold that different rates ])revail in difierent countries at the present time ; and, as I do not admit. the coiTcctness of the former proposition, I am naturally 174 PEOFIT IX DIFFERENT COUNTRIES. led to doubt the con-ectness of the latter. The question, however, is not like the i^receding, a theoretic one, which can be settled by an appeal to Economic Principles, but is one of fact, which can only be thoroughly settled either by the testimony of the commercial men of all countries, or by a large collection of statistics showing the average dividends paid by Joint Stock Companies in all parts of the world. Not having suffi- cient material of this nature to settle the question, I can only express with diffidence the opinion that the rate of profit is the same in all countries, and endeavour to shovr that there is not sufficient evidence to justify the contrary opinion. As there are many countries whose in- habitants are ever ^^lling to embark their money in foreign investments, there must be a general tendency to uniformity in the rate of profit throughout the world, since money will be sent from a country where the rate is lovv' to one where it is high ; and the foreigners, by selling their goods at a lower price than the natives, will compel them to reduce their prices, and, consequently, their profits. Other Economists, however, while admitting the existence of this tendency, maintain that it is to a great extent neutralized by the various political and social inconveniences attending foreign investments, and that a certain margin may and does exist between the rates prevailing in diflFerent countries, and that compe- tition tends not to obliterate, but to preserve, this difference. The rate, for instance, may be 5 per cent, in one country, and 10 per cent, in another, without competition reducing them to uniformity ; but should the rate in one country show a tendency to fall below 5 per cent., a gi'eat deal of capital will be sent to the other to be invested at 10 per cent., and thus the difference of 5 per cent., which is supposed to compensate the disadvantages of foreign mvestment, will be maintained. To this argument there is, of course, no theoretic objection, and it is quite possible that the power of competition maybe thus limited, but there is one trade in which competition must reduce to the same level the profits of all those Avho engage in it, to whatever country they may belong. This is the business of conveying goods by sea from one country to another, and if the commerce between France and England, for example, be carried on by both French and English merchants, both classes must charge sub- stantially the same rates of freight, and, as their expenses must be the same, they must make the same average net profit. The freight must be the same, for if English shipoT\mers should charge more than the French, the latter alone would be employed in carrying goods from Eng- land to France, or fi.-om France to England, and the expenses must be the same, because if England produces better ships than France, it vrill be called on to supply all that are required, and if the sailors of France are found to be superior to those of England, French sailors alone will be PEOFIT IN DIFFERENT COUNTRIES. 175 employed in English ships, or their VN-ages will be proportionahly raised above those of the English. The rate of profit being the same vrith the shipowners of both countries, it must be the same in all otlier trades, since shipoAmers can obtain neither more nor less than other capitalists ; and the only way in which this tendency to uniformity can be neutra- lized is tln-ough the competition of the foreigner completely driving the natives out of the shipping trade. In a country, if such there be, Avhich lias none of its own citizens engaged in foreign trade, there is perhaps no means of reducing the rate to the same level as in other countries. The chief reason which has induced Economists to believe that different rates of profit prevail in different countries is the fact that the rates of interest ^^ary considerably. Thus, Mr. Fav.'cett, referring to Australia, says, " Wages are far higher there than in England, and profits are also higher. This is abundantly verified by the fiict that the current rate of interest is far in excess of that which prevails in our own country." * The common opinion that the rate of profit is unusually low in Holland, seems, in like manner, to be founded on the fact that the rate of interest in that country is extremely low. I have already endea- voured to show that interest is not a correct measure of profit, and the fact that it is lov/ in Holland may be accounted for by the greater con- fidence whch the Dutch repose in their banking institutions, which renders them more wilUug to trust their money to them, and less liable to be seized v.ith a panic. But this will not explain why the Dutch Govennuent should be able, as it is, to raise a permanent loan, the investors in which receive no more than 2 per cent, on their money, but even this is not sufficient to prove that profit is lower in Holland than in England, where money invested in the Public Funds yields more than 3 per cent. The class of persons who invest in public securities are a difierent class from those who employ their money in business, and tliere may l)c a great difference between the ratios wliich the sums received by the two classes bear to the money invested. It is well-known that the rate at which a Government can borrow money, is largely influ- enced l)y the amount of the loan and the frequency of its appeals to the money market ; and Ricardo, who was himself a Stock Broker, tells us, fchap 21), that l)cfbre the war of American Independence, the English (loA'crmnent borrowed at 3 per cent., but that during the last war with France, it liad to ])ay more than per cent., and that, therefore, tlic rate of interest affords a very unsafe criterion of the rate of profit. If the Dutch Government were now to raise a large loan, say of three milliards, it \\on\i\ proljably liavc to pay more tlian 3 per cent., while, if * Manual of i'olilic;d Ecuuomy, lb(j;5. li. II. Cliap. V. 1'. 18'J. 176 PROFIT IN DIFFERENT COUNTRIES. onr Government were to pay off half of our National Debt, it might reduce the interest on the remainder to 2 per cent. The class of persons who desire to invest in the funds is, in proportion to the sum which the Government is willing to borrow, larger in Holland than in England; and tlie Dutch are therefore obliged to content themselves with a lower rate of interest. Holland is the only country in which it has been generally supposed that the rate of profit is lower than in England ; but it is commonly sup- posed to be higher in the United States, and an examination of the arguments on which this opinion is based will serve to decide the question whether it is higher in any other part of the world than in England. Here again, as in the case of Holland, the rate of interest is taken as the criterion of profit, and because the former ranges from 8 per cent, in New York to 18 per cent, in California, and 30 per cent, in the Southern States, it is assumed that the latter must also be very high. Before discussing the case of America, it will be useful to refer to some phenomena which are exhibited in France, and which may serve to throw some light on the general connection between interest and profit. It is not generally maintained that profit is higher in France than in Eng- land, and a proof that the same rate prevails in both countries is afforded by the fact that, in both of them, land is sold at such a price that the investment yields about 3 per cent, per annum, and as this mode of investment is considered to be the most secure of all, the rate of profit on other and less secure investments must be the same also. Yet, Mr. Newmarch,* who mentions this fact, states also, that while in England the rate of interest on mortgages is not generally more than 4 per cent., the average in France ranges as high as 7 per cent., and in some cases rises to 10, or even 12 per cent. He furnishes us with the explanation of this apparent anomaly, telling us that a great number of these loans are raised by poor men, who are both owners and cultivators of the soil, and fi-equently amount to less than 250f. It is evident that it must be much more expensive to collect the interest on a hundred small debts than on one large one which is equal to the whole of them ; and we need not wonder that the French money-lenders charge a higher rate than is done in England, where mortgages are generally for large amounts. When, moreover, the small amount of each loan is taken into account (one-fourth of the whole territorial debt of France, consisting in 18-41 of advances of not more than l,000f. each), it is easy to see how the French farmers are able to pay interest at a rate which seems so much out of proportion to the j^rofits of their business. Their income * Tooke's History of Prices. Vol. VI., pp. 92, 96. PROFIT IN DIFFERENT COUNTRIES. 177 includes not only the rent of their land, but the profit on their capital, and the wages of their labour ; and the interest which they have to pay bears a very small proportion to their income, while a small sum may be absolutely necessary to enable them to keep their farms in proper culti- vation, and the want of it might expose them to very serious loss. The net profit on their whole capital may be no more than 5 per cent., but a small loan may enable them to utilize a portion of their land and of their spare time, which would not otherwise be profitably employed ; and the whole gain which it would bring them may well amount to 100 per cent, on the loan, from which interest at 10 or 12 per cent, would be a trifling deduction. If we now apply these principles to the case of America, we shall see that the prevalence of a high rate of interest by no means proves a liigh rate of profit. The fact that the rate of discount ranges at from 8 to 10 per cent, in the city of New York, shows rather the unwillmgness of the owners of money to entrust it to the keeping of bankers than the prevalence of an unusually high rate of profit in com- mercial enteiiDrise. I have been informed that traders in New York do not so frequently appeal for assistance to bankers, and that they have not so much confidence in one another as is the case in tliis country; and if this be so, the borrowers being more in want of money are Avilling to give more for it, and the lenders having less confidence that they will be repaid, charge more to compensate for the risk which they incur. IMr. Somers states * that in the Southern States the planters borrow money at rates varying from 15 to 24 per cent, per annum, on the security of their cotton, and this may be thought to indicate a liigh rate of profit ; but his account does not represent them as making large fortunes, but on the contrary, as contriving with great difficulty to keep their heads above water. At the period of the cotton harvest, they have great diffi- culty in obtaining the necessary number of labourers to gather it in, and it is easy to see how a small sum advanced at this period may save them from a serious loss. An advance of 10,000f. may enable a planter to get in a crop which is worth 100,000f ; and if he has to pay as much as 2,-400f for it, he will still be a considerable gainer, though the profit on his whole capital may not amount to more than 5,000f per annum. But even this is putting the case too strongly, for the rate of 24 per cent, per annum is made up by multiplying by twelve the rate of 2 per cent, per mouth, and though Mr. Somers does not mention the fact, it seems pro- bable that the loans are frequently paid back within a few months, so that the loss to the planter in the case supposed al)ovc may be reduced to GOOf, or even 400f In California, too, the rate of 18 per cent, per * Southern States since the War, pp. 45-79. N 178 PROFIT IN DIFFERENT COUNTRIES. annum means IJ per cent, per month, and soon after the gold discove- ries, interest was sometimes calculated by the week ; and in India tlie ryots pay, or used to pay, 3, 4, and 5 per cent, per month. As it must be most convenient to a former to pay off his debts soon after the harvest, there is no reason why it should be more disagreeable to him to pay 5 per cent, on a loan incuiTcd a month before than on one incurred a year before that time, and it is only by a fiction that the one rate is represented as being twelve times as high as the other. If, indeed, the farmer cannot soon repay the loan, he will be sooner ruined in a country where interest is high, and it is said that the ryots who once begin to borrow money wherewith to buy seed, never get out of the hands of the money-lenders until they are completely ruined. In fact, however, the interest which a capitalist has to pay for occasional loans should be con- sidered, not as a measure of his profit, but as a part of Ms expenses ; and, whatever be the rate which he has to pay, it has no effect on the rate of the net profit which remains over after all such losses have been de- ducted. The Federal Government borrows money at about the same rate as the French Government, viz., rather under .5 per cent., and though the English Government can now borrow a small sum at 3, or even 2 J per cent., it had to pay 6 per cent, during the last war with France ; and would probably have to do so again, if obliged to raise a fresh loan equal to that raised by the United States during the Civil War. It may be thought that the rapid increase of capital in the United States betokens a high rate of profit, which enables the people to lay by more than the English can do ; but a little consideration will show that this does not establish the fact. Labour is extremely productive in raising food in that country, but the appetite of the labourers is not thereby increased, and the cheapness of food renders it more easy for labourers and capitalists to save a portion of their earnings. A labourer who in England produces, and therefore earns, the equivalent of 30 hectolitres of wheat in a year, can in America produce 90 in the same time, and can, therefore, either maintain a larger family, or save a greater portion of his earnings ; and the abundance, of unoccupied fertile land enables the people to produce a constantly-increasing quantity of food, which, in its turn, causes a rapid increase of population. As both the number of the labourers and the amount of capital necessary to maintain them, increase rapidly, no further explanation of the great prosperity of the United States is required. It must not be supposed that capitalists derive no lienefit from the fertility of the soil because the rate of profit is not higher than elsewhere, for, as I have said before, the capitalists benefit as consumers, and it is only as such that the labourers benefit by the cheapness of food, and an American capitalist who has saved up the PROFIT IN DIFFERENT COUNTRIES. 17U product of twenty years' labour, eveu if lie caunot obtain more profit upon it tlian is equivalent to one year's labour, can, nevertheless, obtain more of tlie necessaries of life for his annual profit than an Englishman can do who has practised the same amount of abstinence, i.e., has saved up what in England is equivalent to twenty years' wages. For direct evidence on the point, whether profit is really higher in the United States than in England, I have but little to offer, but there is so much English money invested in railway and other companies in the former country, that it would seem that there must be a constant tendency to bring the two to the same level. One proof that this has been already brought about is furnished by the great number of American ships engaged in the carrying trade, in which they have to compete mth the ships of England and other nations, and the merchants engaged in which nnist, therefore, accept the same rate of profit, on pain of losing their business if they attempted to make more than the usual rate. "When De Tocqueville wrote his " Democracy in America," the Americans engrossed most of the carrying trade of the Mediterranean, and, although the supremacy has since passed to the Greeks, and from them to the English, the change can hardly be attributed to the high rate of profit which the Americans require, since the opinion that the rate was high was quite as common when De Tocqueville wrote as at the present time. Mr. Thornton ascribes the success of the Greeks to the system of co-operation which is pursued in their ships ; and their recent decline is the consequence of the obstacles which the Greek Government places in the way of the use of iron for ship-building purposes, from which obstacles English ship-owners arc, of course, free. The Americans do, indeed, complain of the decline of their commerce, and ascribe it to the lower rate of profit with which Englishmen are content ; but as the American Govennneut imposes a heavy tax on the construction and repair of ships in its ports, and even on the first entry of a ship purchased Ijy an American into one of their ports, we need not look liirther for an explanation of the fact that the commerce between England and America is caiTied on chiefly in English vessels. With respect to another lousiness, that of Ijanking, Mr. Newraarch has furnished us with a valuable table showing the actual amount of profit realized during a long series of years l)y the whole of the banks in the United States, and the I'atio which it bore to their paid-up cai)ital.* From this table it appears that the average rate of profit during the twenty-three years, 1834-185G inclusive, Avas 13^ per cent. I am not acquainted with any equally comprehensive taWe of the profits of English Joint Stock Banks, but the * Tooke's Ilistoi-y of Prices, vol. VI., p. 748. n2 180 PROFIT IN DIFFERENT COUNTRIES. following passage ft'om Lombard-streefc, in Avhicli Mr. Bagehot giv.es the result of a comparison of the published returns of 110 English banks for the year 1867, throws some light on the subject : — "The result of these banks, as regards the dividends they pay, is — No. of Companies. Capital. Above 20 per cent Between 15 and 20 per cent. „ 10 and 15 „ „ 5 and 10 „ Under 5 iier cent 15 20 36 36 3 £5,302,767 5,4.39,4.39 14,056,950 14,182,379 1,350,000 110 £40,331,535 " That is to say, above 25 per cent, of the capital employed in these banks pays over 15 per cent., and Q2^ per cent, of the capital pays more than 10 per cent. So striking a result is not to be shown in any other Joint Stock trade." (P. 246). These figures relate only to a single year, but it was not a remarkably favourable one for banking operations, and, if they do not show that the profits of banking are as high in England as in America, they, at least, show that the diflFerence is very slight when compared with the difference between the rates of interest prevailing in the two countries. The experience of India and Australia shows, in hke manner, that high rates of interest do not yield proportionately high dividends to the banks which profit by them. Taking all the evidence into consideration, I am inclined to think that it is not sufficient to prove that different rates of profit prevail in diflFerent countries, since the differences in the rates of interest may be otherwise accounted for, and the competition of different nations in maritime commerce, in railway construction, and in banking, is always tending to produce uniformity in those trades, and, consequently, in all others. In considering the subject of profit, I have hitherto assumed that the labourers are free agents, who mil not work unless the wages which they receive are equivalent to what they can i^roduce, and that the possibility of their demanding higher wages is one of the circumstances which influences a capitahst in restricting himself to the usual rate of profit. There are, however, some cases in which this condition is not fulfilled, and where the labourer is compelled to work against his will, and to content himiself with such remuneration as the capitalist may choose to give him, and it remains to examine whether in such a case higher profits may l^e obtained than under the regime of freedom. The most mOFIT IN DIFFERENT COUNTRIEF;. 181 marked instance of the kind is that in which the hibonrers are slaves, when the quantity of food, l^jc. which they receive is simply such as will enable them to do their work, and has no necessary connection with the amount of goods which they produce. In such a case it might be thought that a capitalist could obtain higher profits for himself by giving his slaves less than fi'ee labourei's would receive, and in some cases this may be so ; but, as a rule, it is found that the labour of the slave is so much less efficient than that of the freeman, that the diminu- tion of the product neutrahses the advantages of the diminution of the expense. There arc several reasons why slave labour should be very inefficient : it is given reluctantly, and therefore requires much super- vision, and, as the slave gains nothing by exhibiting greater skill, it is his interest to conceal any skill he may possess ; and so much trouble is required in teaching him a new process, that the slave-owner finds it most convenient to employ the same men at the same work for the whole of their lives, even in circumstances where the state of the market renders it scarcely profitable. Tobacco, for instance, was gro^\'n in Vir- ginia for a hundi'ed years without intermission, although it often hap- pened that there was no sufficient market for it, and although the constant raising of the same crop destroyed the fertility of the soil. Ic is generally found that when fi'ee and slave labour compete in the same industry, the former has a great advantage, and is able to beat the latter out of the field ; but this is not always the case ; and the circum- stances which enabled slavery to hold its ground tor more than two centuries in the Southern States of the American Union are, in an economic point of view, extremely instructive. The climate and soil of those States are favourable to the cultivation of tobacco, cotton, rice, and the sugar-cane, and, in the case of each of these plants, a large number of men can work together within a small space, and under the eye of a single overseer, which cannot be done in the case of cereals, and thus the expense of superintendence is minimised.* It is only, therefore, where these plants can be groAni that slavery ever throve in the United States ; and even there it would soon have worked itself out by the gradual exhaustion of the soil had there not been such a vast extent of fertile unoccupied land for the planters to resort to when the old land was exhausted. It is well kno^^^l that the desire of the Southern planters to obtain a larger area for the extension of slavery in the "West, was the cause which led to the civil war which resulted in the abolition of slavery. But even if articles could be produced at a cheaper rate by slaves * See Cairnes' Slave Power, 18C3. 182 PROFIT IN DIFFERENT COUNTRIES. th an by free labourers, this would not raise the rate of profit, but would rather lower the price of the goods, since the capitalists would still compete with one another, and would still be obliged to content themselves Anth the same rate as was obtained by those who employed free labourers ; for it is scarcely possible that a society should exist in which there should be no free laboiu-ers, and those who employed slaves could not, on that account, charge higher terms for their sendees. Xow that slavery has almost disappeared from the civilised world, another system is springing up which exhibits some of the same evils, though in a more mitigated form. The planters, who are no longer able to buy and sell slaves, wish, nevertheless, to prevent their labourers from bargaining with them on equal terms and fi'om leaving the service of a master who ill-treats them, and they accordingly enter into a contract with labourers in a distant country to work for a fixed rate of wages for five years, or some other long period. This system has been pm-sued in many isolonies, British and other, but it is in Demerara and Queensland that the abuses connected with it have attracted most attention of late years. In Demerara they are subjected to great hardships, bemg forced to labour for 16 or 20 hours in succession, and find practically no redress from the magistrates, who naturally sympathise with the planters. The question, however, which is to be discussed here, is, whether the system tends to raise the rate of profit? and to this it seems that a negative answer must be given, since, even if the planters could get sugar grown at a smaller expense, their competition would compel them to reduce the price, and to content themselves with the same profit as those who employed free labourers. It is said, accordingly, that the planters of Demerara did not make more than 3 per cent, per annum for three years together. The planters say that they cannot grow sugar because "labour is dear," and that it is essential to the prosperity of the country that " cheap labour " should be imported ; but the fact of which they complain is that sugar cannot be grown in those countries with as little labour as in other parts of the world, or else that the people find it more profitable to produce some other article than sugar. Whichever of these be the case, it is, of course, obvious that sugar should not be grown there, but it is not singular that those who think they can make a fortune by producing it should imagine that their own prosperity is the same thing as the prosperity of the country, and should call on the Government to assist them in obtaining it. Nor is it strange that the Colonial Office should assist the planters in their attempt to make them- selves independent of the labourers of their o\u\ country, and should, at the distance of thousands of miles, support a system which is so injurious to our unfortunate dependencies. What is to be wondered at is that MONOPOLY. 1S3 Economists should recommend the views of the planters as exhibiting a sound appreciation of scientific principles, and should endorse the opinion that low wages are a benefit to a country. Thus the late Mr. Herman jMerivale recommended the importation of coolies into Demerara on this ground, among others, that it would " bring down the enormous rate of wages by fair competition." * He would, no doubt repudiate all intention of saying that a reduction of the comfort of the labouring classes can be a benefit to a country, and yet this is what his words imply, and the disparaging epithet " enormous " is applied to a high rate of wages, while the name of " fair competition " is given to the system by which labourers are practically prevented from choosing their own masters, or the rate of wages for which they -nill work. Unfor- tunately, Ricardo's theory of profit lends itself to the interpretation which is favourable to the views of planters, although he himself would not have jxit such a construction upon it. He repeatedly tells us that profit rises when wages fall, but by wages he means the proportion which the lal)ourer receives of the whole product, and he means nothing more than that profit rises whenever it rises. If the planters could give the labourers a smaller share of the produce they would, of course, keep a larger share for themselves, but a mere reduction of the sum of money paid to each labourer, or even for a given quantity of work, has no effect on the rate of profit, but only on the price. If labourers cannot be induced to work unless bound by long contracts, it is a sure sign that they are not adequately remunerated, and a Government which compels them to adliere to them is sacrificing their happiness for the sake of enabling a few capitalists who wiU not labour for themselves to obtain a fortune by inflicting misery upon others. So long as it is open to everyone to enter any trade which he chooses, the rate of profit in any one trade cannot be permanently higher than it is in others, but when a few individuals, or companies, or a government, enjoy a monopoly of one trade, they may obtain much more than the average profit on the capital invested. After a large sum has been spent in establishing a business, it is frequently found that the receipts increase more rapidly than the expenses, and that, therefore, the net profit would go on continually increasing, if competition, or the fear of competition, did not compel the proprietors to reduce their prices, and so transfer the benefit to the public. It appears from a paper read by Sir James Anderson to the Statistical Society in June, 1872, on " The Statistics of Telegraphy," that if, after the construction of a telcgrapli line, the company continues to charge the same tariff", the numl^er of telegrams * Lectures on Colonisation and Colonies, Now Edition, 1861, p. 318. 184 SOCIALISM. sent will gradually increase, while the expenses will not do so in the same proportion, but that every reduction of the tariff is followed by a diminution of the net profit. This he shows to have been the case wherever it has been tried, whether in England or on the Continent, whether by a government or by a company. If, before the English Government assumed the control of the telegraphs, the companies had enjoyed a monopoly, they might, by maintaining a high tariff, have procured high dividends for themselves, but they were compelled to make several reductions in their tariffs by the fear that, if they did not, new companies would be formed, which would interfere with their business. Their competition, however, did not lead them to reduce their tariff below the point which would yield them a reasonable profit, and their unwillingness to do so was made a matter of complaint, and formed the principle reason which induced the Government to take over the management of the telegraphs. The tariff was immediately reduced, and this measure was vaunted as a great boon to the public, no regard being paid to the fact that an increased charge was imposed on the public in their capacity of tax-payers, in order to compensate the shareholders of the companies, and that the receipts of the telegraph department were but slightly in excess of the working expenses. Those who send telegrams have benefitted by the change, but why they, rather than the tax-payers, should be called the public, is by no means clear. As several reductions had been made in the tariff while the companies retained the business, it is probable that more would have followed if the Government had not interfered, but it is extremely unlikely that the Government will ever consent to a lower rate than the unremunerative one which is at present enforced. A government is even less disposed than a company to make experimental reductions in its tariff, in the hope of obtaining a larger revenue. The reform of Sir Eowland Hill was not introduced without the most vehement opposition on the part of the Post Office, and it would seem that the ordinary rate of letter-postage might now be reduced from 10c. to 5c, ; but the reduction is not made because it would entail an immediate sacrifice of revenue. It is said that the profits of the Post Office are in excess of the ordinary profits of stock, but I cannot tell whether this is the case, as I have never met ^^^th any estimate of the amount of capital invested in it. At all events, the telegraphs are worked at a loss. Before quitting the subject of profit, I will add a few words on a question which has been raised -^-ith regard to it, and which, though it does not come Avithin the province of Political Economy, I am nnwilling to pass over altogether. Many sociahsts hold the opinion that there ought to be no such thing as profit, and that whatever is received by SOCIALISM. 185 capital is, in reality, unjustly taken away from labour. I have endeavoured to show that the reason why capital yields a profit is, that its accumulation increases in productiveness of labour, and, therefore, there must be a profit wherever machinery is employed, and wherever labourers are maintained for any length of time, while engaged in any other work than that of procuring food. This profit need not be appropriated by the persons who provide the capital, but may be distributed among the labourers under the name of wages ; and it is a legitimate subject for discussion, whether it is beneficial to society that those who do not labour should derive any benefit fi"om the labour of others. But whatever solution of the question be preferred, the fact of profit Avill still remain, whether a class of capitalists does or does not exist. It does not belong to Political Economy to defend the existing arrangements of society ; and it is highly undesirable to base any theories respecting the science on their supposed harmony with any notions of social equity. Bastiat considers that the theory that the rate of profit tends to fall as society advances, is the one which is best fitted to show that the interests of capitahsts and labourers are hai'monious, while, if I am right in supposing the rate to be permanent, both classes must be equally benefitted by every improvement in production, and equally injured by whatever impedes it ; but whichever of these theories be the correct one, the question must be decided solely by reasoning ft-om economic principles, and no theory which can receive the sanction of science, can in any way affect the truth of his great principle, that " tons les interets legitimes sont harmoniques." CHAPTER v.— RENT. DEFINITION OF RENT — CAUSE OF RENT — RISE OF RENT WITH THE PROGRESS OF SOCIETY. Besides wages and profit, there yet remains a third division of wealth, to which the name of rent has been given ; and the examination of the laws which govern it will terminate the subject of distribution. After the toil of the labourer and the abstinence of the capitalist have been remunerated, what remains of the product is given over to the landlord or owner of the soil, although he has contril)uted neither labour nor abstinence towards it production, but, as has been said, simply holds out his hand to receive it. This surplus is called rent, but the word has generally a more extended meaning, and commonly includes all payments Avhich are made to the proprietor of a piece of land, or of a house, in return for permission to use them. In reality the rent of a house is, in general, no more than, or is, at least, in great part, the profit on the capital employed in building it, and, as such, it requires no further explanation. Houses cannot be built unless the builders obtain the same rate of profit as other traders, and those who use them must pay as much as will give the builders the necessary sum ; but the ground-rent which the builder has to pay is not to be so explained, since it is often paid for ground on which no capital whatever has been expended, and where, accordingly, there is no abstinence to remunerate. In like manner the rent of a farm often consists in part of the profit on the capital expended by its landlord, or former occupier, in improving it, and if it were only in such cases that rent were paid there would be no occasion to treat of it separately, but it might be dismissed as a form of profit. Rent, in the economic sense of the term, denotes only the surplus value of the product of industry beyond the profit and wages of the producers, and it is in this sense alone that the word will be henceforth used. It matters not whether the same person is o^vner and occupier of a farm, or whether they are two persons, but, in either case, the excess of the yield beyond what is suflBcient to give the ordinary wages of the labour, and the ordinary profit on the capital employed constitutes the rent, and its existence is the phenomenon to be explained. Thus it will have been seen that several of the terms hitherto employed, capital, value, profit, and rent, have all been used in a sense somewhat different to that which is usually assigned to them, and Pohtical Economists have been fi-equently DEFINITION OF RENT. 187 censured for pursuing this practice, wliicli has been described as pedantic, and confusing to the reader. The latter objection is certainly well- founded, and many erroneous theories, and many hostile criticisms, have had no other origin than the misunderstanding of a "writer ^Yllo has used a word in a sense somewhat difterent from that commonly assigned to it. This has particularly been the case with regard to rent, and many of the controversies which are still raging on this subject might he set at rest if the disputants could consent to use the same words in the same sense. Sir H. S. Maine complains* that the minds of Indian officials have been confused by their attempts to reconcile the rent actually paid by the natives of India for the land which they cultivate with the rent Avhich Economists suppose that farmers have to pay. It is nmch to be regretted that any mistakes slioidd have arisen from this source, for the problem before the Economist is very diflFerent from that which the statesmen of India have to solve. The former seeks to discover the reason why a certain portion of the product of agriculture is given to persons who have not laboured to produce it, while the latter have to determine how much it is possible or desirable to nuike the cultivators of India pay towards the expenses of Government. It is necessary that some term should be used to express the thing which Economists are examining, and it would be a great advantage if they could follow the example set by chemists, and invent new names for the elements which their analysis discovers, but as this cannot be done, there is no other alternative except to use the Avord which most nearly corresponds to the idea, and to give due notice that it will be restricted to that sense alone. Dr. "Whewell, in the notice of his friend Jones, prefixed to his edition of the latter's literary remains, remarks that the payment made by the cultivators to the owners of the soil is nowhere the same as the rent in the economic sense of the term, and he asks which of the two is more deserving of attention, the actual rent which is paid in all parts of the world, or the economic rent which is nowhere paid ? The question shows an inability to ai)]>reciate the true object of science, since it is, in effect, to ask whether coni})lcx phenomena ought to be analysed or examined in all their complexity. He might as well have asked which is the most desen-ing of attention, the actual water, which contains numerous impurities, or the chemical water, which consists of oxygen and hydrogen alone. In order to unravel the intricate web which society presents to us, it is necessary to follow up the dilferent threads one by one, and to object to this process on the mere ground that the web is intricate, is the same thing as to object to the solution of a difliculty merely because there is a difficulty. * See the Chapter on Profit and Kent in his " Village Communities." 188 CAUSE OP RENT. • The first attempt to explain the existence of rent was made by Quesney, the founder of the school called "The Economists" in the last century, and his theory was, that agriculture yielded a rent Avhile manufactm-es did not, because, in the former occupation nature co-ope- rated with man, and gave a surplus above the expenses of production. He accordingly maintained that all taxes were really paid out of the surplus product of agriculture, since all that was produced in manufac- turing industry was consumed by the labourers as fast as they produced it ; and he recommended that the whole revenue of the State should be obtained by a tax on the rent of the land, as this would be the most direct way of obtaining a revenue from that which alone is able to furnish it. A little reflection will, however, show^ that this theoiy is unsound, for nature co-operates with man in manufacturing just as she does in agricultural industry, and no rent is paid in many cases in which the assistance of nature is most marked and important. It is owing to natural forces that the combustion of coal is able to work the machines of our factories, and yet the rent which our manufacturers have to pay is in respect of the ground which they occupy, and not of the use Avhich they make of the power of steam ; and they would have to pay as much if they erected dwelling-houses on the site instead of factories. Black- berries are spontaneously produced by nature, and the labour of procur- ing them is nothing more than that of picking them, and yet no rent is paid I'or permission to obtain them. The fish of the sea are produced in the same way Avithout human labour ; and yet no rent is paid for the co-operation of nature in the Avork of providing them for human use. In fact, Quesney 's theory does not explain why the service of nature should need any recompense at all, since, if it enables man to produce things more easily than he could otherwise do, this would explain AA'hy the articles produced should be cheap and Avages high ; but not why a por- tion should be set aside for the benefit of an unproductiA^e class. When a discovery is made AA^hich enables man to call in the aid of new natural forces in a branch of manufactures, the eflPect is to reduce the cost of the articles, but not to raise the rent of the factories ; and Quesney does not explain Avhy a different result should folloAvfrom the assistance of natural forces in agriculture. The true explanation was first given by Dr. Anderson in 1777, but its truth and importance were so Avell demonstrated by Ricardo forty years later, that it has always been knoAvn as Ricardo's theory of rent. According to him, it is not because nature co-operates Avith man, but because she gives him less assistance in some places than in others, that rent is paid for the use of the more favoured localities. In speaking of raw produce, I have pointed out that all is not raised at the same cost. CAUSE OF RENT. 189 but that it is, neyerthcless, all sold at the same price, which must neces- sarily be sufficient to compensate the labour and abstinence exerted in raising the produce in the least favoured locality. But, if the value of the produce be equal to its cost on the worst soils, it must be more than sufficient to repay the cost of raising it on the better soils ; and hence those producers who enjoy possession of the superior lands must receive sometliing more than the same profit and wages as the others obtain. If, for instance, the labour of one man is sufficient to produce 105 hecto- litres of wheat on the margin of cultivation, and the profit on the capital employed is equal to 5 per cent., the value of 100 hectolitres will be equal to one year's labour ; and if on another fiirm the same amount of labour and capital produces 125 hectolitres, the value of these will be equal to the labour of a year and a quarter. It Avill not be merely equal to a year's labour, for there cannot be two prices in one market ; and as it is a matter of indifference to a purchaser how much the article which he buys has cost the seller, he will be quite as willing to give a year's labour for 100 hectohtres gro^ii on good land, as for the same quantity grown on poor land ; and the farmers will accordingly demand the same terms in both cases. Hence there will be a surplus of the value of 20 hectolitres, the disposal of which is to be accounted for. It will not go to increase the wages of the labourer, since, by the supposition, he could not produce more than 100 hectolitres, if he left the farm and commenced farming on his own account, for all the lands on which more could be raised, are ah'cady occupied, and he could only obtain land equal to the worst already cultivated ; for, of course, all the better lands have been selected before the worse were resorted to. It could not go to an increase of profit, for the rate of profit cannot be higher in one trade than it is in others, and if the possession of a ])articular piece of land cnal)les its owner to obtain more than the ordinary rate, he can easily find some capitalist who will consent to take it on condition of paying him whatever is in excess of the usual rate, which, in the present case, is the value of 20 hectolitres, which still leaves him a profit of 5 per cent., and this surplus is the rent of the land. Thus, it will l)e seen that rent siirings naturally from the fact that difi'erent soils arc of difi'erent degrees of fertility, a fact which is too well known to require proof; and even if all soils were equally fertile, their geographical position would still give rise to differences among them which would make the labour employed upon some of them more productive than on others. If there are two farms of equal fertility, the produce of both of which is sent to the same market, one of which is distant only 10 kilometres, and the other 100 kilometres from it, the laljour of conveying the produce will obviously be much less iu the case of the former thuu in that of the latter, and tho 190 CAUSE OP RENT. former will yield a rent equivalent to the advantage derived from its position. It is always observed, accordingly, that rent is higher in the neis-hbourhood of London and Paris than in districts remote from the towns to which their produce is sent, and that the opening of a new rail- way is followed by a rise of the rent of the adjoining lands. It is, indeed, observed also, that wages are liigher in the neighbour- hood of large cities, but this is the consequence of the greater skiU or strength of the labourers ; the former, perhaps, produced by the more frequent intercourse ^nth the active and intelligent inhabitants of the city. It is found that a Dorsetshire labourer caimot do much more than half as much work as a Yorkshireman, and this is because he is badly fed ; and this, hi its tm'u, is the consequence of the low wages which his inefficiency causes him to receive. If manufactures were to arise in Dorsetshire, there would soon take place a rise of wages, which would commence in the towns where more intelligent labourers would be im- ported or produced, and would gradually spread to the rural districts, because the labourers would desire to flock into the to^vns, and the farmers to retain them by giving higher Avages, which would be followed by a corresponding improvement in the efficiency of the rural labourers, through the better diet and clothing which it would enable them to obtain. The neighbourhood of a to\ni would also afford an opportmiity for the occasional employment of the labom-ers, or their children, Avhich would form an addition to their wages ; and the fiicUity which it would afford to the farmers for disposing of their produce would enable them to find more constant employment for their labourers, and, therefore, to give them higher wages. But after the labourers have been remunerated in proportion to their efficiency, there still remains a difference in favour of the most conveniently-situated farms, and this the landlord can appro- priate as rent, since the rate of profit is the same in all parts of the comitry, and the competition of the capitalists will compel them to content themselves Avith the usual rate, and to pay the surplus to the landlord. It will be seen that the theory assumes that there is in every country a certain margin of cultiA'ation, or land Avhich pays no rent, and that there are three distinct classes, the landlords, the capitalists, and the labourers, AA'ho are maintained out of the produce of the soil. The margin of cul- tivation, is of course, determined by the population of the coimtry ; and, if from any cause the margin should rise, i.e., much land already culti- vated, should go out of cultivation, a fall of rent AA'ould l)e the conse- quence. If, for instance, in the case above supposed, a diminution of the population should render it unnecessary to cultiA'ate land yielding less than 115 hectolitres for each man employed, the rent of the superior land yielding 125 hectolitres, would fall from 20 to 10 per annum j and if CAUSE OF RENT. 191 an improvement were suddenly introduced into agriculture l)y which the produce of the inferior land would be so much increased that none would yield less than 115 hectolitres, and that much which had yielded less might be suifered to go out of cultivation, rent would in the same way fall to 10 hectolitres. It was by such reasoning that Ricardo was led to enunciate his celebrated paradox, that the interest of landlords is opposed to agricultural improvements ; and, in the sense in which he understood the terms, the proposition is perfectly true. By a landlord he understood one who lives entirely on the rent of his land, without expending any capital upon it ; and by an agricultural improve- ment, he meant the sudden adoption of some new process which would enable the whole quantity of food required by the whole people to be produced on a smaller quantity of laud than had before been necessary, and he assumed that no increase of population took place. Under these circumstances the interval between the worst land and the best land in cultivation is diminished ; and the rent which corresponds to tliis interval is diminished also, and the landlord is accordingly a loser by the change. The proposition appears paradoxical, because it is obvious that landlords who expend capital in improving their estates, derive a greater revenue from them ; but the increase should be more properly regarded as profit than as rent ; though, if the improvement be a permanent one, the increase is enjoyed by their successors in the same way as if it Avere derived from the natural liroperties of the soil, and is paid because the land is superior to the worst cultivated in the country. The case cannot occur, because agricultural improvements are only introduced by degrees, and are generally followed by an increase of population ; and even where this does not take place, the land which is no longer employed for producing food, is used for some other purpose, and the landlords lose nothing by the change. The general tendency is towards improvement in some places, while the old system is still pursued in others ; so that the landlord derives the benefit in those cases where the improvement is adopted, and the new process enables inferior land to be cultivated and yield food at its former cost, and become the margin of cultivation instead of the old. The question, however, has more than a theoretical interest, for English landlords long upheld the Corn Laws in the belief that their repeal would reduce the cost of corn, cause land to go out of cultivation, and reduce rents. In a few instances this may have happened, but the repeal of those laws did not produce any general fall of rent ; but the large importation of foreign corn which followed, produced an increase of population, and the cost of wheat was not, as a rule, reduced. In those cases in wliich it was not thought i)rofitable to continue to gi-ow 192 CAUSE OF RENT. wheat, the land Avas not snfFered to remain idle, but was used as pasture, and yielded as high a rent as before. As the value of raw produce is determined by the cost of producing it on the margin of cultivation, and as this yields no rent, it follows that rent is not an element in the production of value, but is simply its effect, and that if no payments were made by farmers to landlords, the value of the produce would not be diminished. The same rule which applies to land under tillage, applies also to that which is used for extracting minerals of any kind, and the rent of a mine is the excess of the value of its produce beyond what is necessary to compensate the labour and abstinence exerted in working the worst mine of the kind which is permanently worked. The high rents paid for building-land in the midst of a town are, in the same way, the results of the facilities which the sites afford for carrying on a larger business than can be done in the countiy. The almost fabulous prices paid for land in the city of London, tend to keep down the rate of profit in the city to the same level as in the suburbs, for, if it were not for the rise of rent, the tradesmen of the city would enjoy a great advantage by living in the immediate neighbour- hood of all the houses of business, wharves, banks, etc., to which they have occasion to resort. Their competition, however, makes them content themselves with the usual rate, and pay the difference, in the form of rent, to the owners of the ground on which their warehouses are built, and, even if they are so fortunate as to be themselves the osiers, this would not be considered as securing them higher profits, but rather, as showing that they have invested a larger sum in their business, since they can at any time obtain a large sum by selling the land and merely taking a lease of their houses, but, if they do not do so, they may be supposed to find it more profitable for their business to invest it in the land. The value of land is simply the value of the prospect of receiving rent from it, and the I'cason why it has a value, although no labour has been expended upon it, is simply that some portions of it are more productive than others, and that the better land is worth something in consideration of the labour which it saves to its possessor. Wages and profit are like the primary and secondary strata, which. Geologists tell us, are to be found in all parts of the world, either above or below the surface, while rent is like the tertiary strata, only to be found in a few scattered localities. It has been frequently objected to Eicardo's theory, that the actual payment made by farmers to the owners of the soil is not the same as that which the theory supposes, and much labour has been employed in collecting information from all parts of the world in order to decide what it is that they actually do pay. The landed tenures of different CAUSE OF RENT, 103 conntries present numerous and important differences amongst themselves, but when they are closely examined it will be seen that they do not furnish any grounds for questioning the truth of the theory. In some countries, as in those parts of France and Italy where the " metayer " system is in vogue, the landlord receives not a fixed sum of money, but a certain share of the produce, sometimes one-half, but more generally one-third, and this certainly is not the same as the rack-rent which they would obtain if they offered their farms for competition after the English fashion. In India, again, the ryots pay to the State a fixed proportion of the produce of the land which they cultivate, and no attempt is made to obtain a higher payment by letting the land to those who offer the best terms. In the former of these cases the landlord is required to bear part of the expenses of cultivation, and he is, in fact, a capitalist w^ho requires a profit on the capital which he expends, and the sum which he receives may be no more than the rent, properly so called, and the profit to which he is entitled. If it be less than this, the " ]\Ietayer " (as the tenant is called) receives a portion of the rent, and Eicardo's theory does not pretend to say that the landlord always receives the rack-rent, but only that he can do so if he offers his land for competition to a class of capitalist farmers. In India, the payment which the ryots have to make is a tax determined not l^y competition but by the will of the Government, and it may be paid out of rent, of profit, of wages, or of all three, without affording any proof that the produce of the laud is not divisible into these three categories. In some countries, as in parts of Belgium and Germany, the same person is both owner and cultivator of the ground, and unites the functions of landlord, capitalist, and labourer, and in such a case he has no payment to make for the use of the soil, but as different farms vary in fertility, the peasant who is proprietor of a superior one receives more in return for the same amount of labour and capital expended, and the surplus is the rent which he could obtain if he let his land to another, and the amount of which would determine the price which he would receive if he sold it. A more serious objection is, that there is, in fact, no land which does not yield a rent ; and it is urged in i)roof of this that landlords would not let any land without exacting a rent for it. In fact, however, the good land does not lie in one part of the country and the poor land in another, but they are intermingled, and the same farm contains some of each, while the rent, though nominally charged for every hectare, is, in reality, paid for the good only, a deduction being made in consideration of the bad for wdiich no farmer would consent to pay anything. This fact may partly explain whj large ftirmers are required to pay a smaller lent per hectare than peasants who only occupy three or four hectares, since the latter can more easily select a piece of gi-ound no part of whicli o 194 PAUSE OF REXT. is extremely poor. This, however, is not sufficient to explain the extremely high rent which can be obtained for very small holdings, which can only be accounted for by the wonderful efficiency of the labour expended upon them. The average yield of wheat per hectare amounts in England to 25 hectolitres, and this is a much higher rate than pre- vails in other countries, and 50 hectolitres is considered a large yield for the best land ; but 40 hectolitres have been obtained by a labourer from a piece of ground of the extent of 40 ares, thus being at the rate of 100 hectolitres per hectare. The industry of a man working on his own account is so much superior to that of a hired labourer that the produce is very much increased, and the landlord can obtain a con- siderable share of this increase, because the tenant would rather pay a mnch higher rent than be ejected from his farm and sink into the con- dition of a hired labourer. If hired labourers could be induced to work as steadily and carefully as peasant-proprietors, a great rise of wages would be the result ; but, as this cannot be done, the landlords are able to appropriate much of the benefit, and to reduce the receipts of the peasants to little more than the usual rate of wages and the usual profit. In many cases, where land is too poor to afford a rent, it is cultivated by the owners, who derive from it merely the usual profit, after paying the wages of the people employed ; and thus the objection that there is no land which afibrds no rent, hardly accords with the facts. But even if it were true that there was no land which did not pay rent, there would still remain the fact that all capital employed in agriculture is not equally productive ; and even if a farmer has to pay rent for every hectare which he occupies, some of the capital which he expends in improving his land to the highest pitch brings him in no more than the ordinary profit. To render the theory still more accurate, we must say that rent is paid wherever agricultural capital is employed in any other than the least favourable circumstances, and, with this modification, it holds true in all states of society ; and the farmers who find that some portions of their capital yield more than the ordinary jjrofit, are compelled, under the rule of competition, to give the surplus to the landlords. It is true, that, in America and Australia, the Government obtains a rent, or a price for Avaste land, even when of no better quahty than the worst already cultivated, and this fact is cer- tainly not accoimted for by the theory; but this does not show that the theory is incorrect, but only that there is some other cause in operation besides that of which the theory takes account. One fact cannot con- tradict another fact, and the theory, if it be correctly drawn from facts, cannot be affected by any other facts which may be brought forward. As Cairnes* has well observed : "TVe have here no alternative but to assume * Character and Logical Method of Political Economy, 1657, p. 163 (note). CAUSE OF REXT. 195 the existence of a disturbing canse. In the case before us, e.g., under whatever circumstances rent may be found to exist, this can never shake our faith in the facts that the soil of the country is not all equally fertile, and that the productive capacity of the best soil is limited ; nor weaken our confidence in the conclusions drav^Ti fi'om these facts, that agricultural produce is raised at difterent costs, and that, in the play of human interests, this will lead to the payment of rent to the proprietor of the superior natural agent." In fact, a payment made under these circumstances owes its origin to the will of the Government, and is quite as nuich a tax as an income-tax or a sugar-duty, and it cannot, in an economical point of ^iew, be considered as rent. It is not a surplus beyond the expenses of cultivation, but is a part, and it may be a serious part, of the expenses of reclaiming the land in question, and while rent is not the cause, but the effect, of the value of raw produce, a tax on waste land tends to raise the price of agricultural produce to such a point, that the burden is equally divided between the farmers and all other consumers. When a government professes to charge the same price for all the waste land at its disposal, it cannot, of course, make the bad land equal in value to the good ; but the former remams imsold, and only those lots are taken up which are considered equal to those already occupied. The Govermnent of Queensland offers to immigrants a land-order, entithng its holder to 16 hectares, said to be worth l,000f., but this is simply an imposition on the credulity of the unmigi'ant, and those who receive them find that there are no lands not yet disposed of which are worth l,000f., or, indeed, any other sum, and that the order is simply so much waste paper. What is freely given away cannot be worth much ; and the Queensland Government might just as well offer to the immigrants a present of a thousand fi-ancs worth of air. If a settler has purchased a piece of ground from the Government, which he finds to be not so good as he expected, he sells it at a reduced price to some one else, and thus the poor land soon ceases to afford a rent. The perverse ingenuity of Wakefield was strained to the utmost in devising means to prevent the operation of tliis natural process, but no Government has ever been aljle, or has even persistently tried to repress it, and what is worth nothing soon ceases to have any value. Both in the United States and in British Colonies it is now found to be a wiser plan to give away land to intending settlers. In connncrcial language the name of rent is often applied to the royalty received by a patentee from all those who make use of his invention, as, e.g., that received by Mr. Bessemer, in respect of his invention, was called the Bessemer rent ; but this, too, is not a surplus above the expenses of production, but is a part of them, and the expiration of the time for which the patentee's rights endure, is looked forward to as the date when a reduction of the 100 RISE OF RENT WITH THE PROGRESS OF SOCIETY. price of the patented article will take place. The existence of such a rent is entirely owing to the action of Government, and it only differs from other taxes in being imposed for the benefit of an individual, instead of for that of the State. It is admitted on all hands that a rise of rent accompanies the pro- gress of society in wealth and civilisation, but gi'eat difference of opinion exists as to the cause by which this result is brought about. Ricardo ascribes it to the increase of population, which renders it necessary to resort continually to poorer and poorer soils in order to obtain food, since as rent is the difference between the produce of the superior lands, and that of the margin of cultivation, it is clear that the lower the margin, the greater is the surplus which the better lands afford. If the best land formerly yielded 125 hectolitres to the labour of each man employed, while the Avorst yielded 105, the rent of the best would be equivalent to 20 ; but if it becomes necessary to resort to land which yields only 84, then the best land will give a rent of 41 ; and the former margin will give a rent of 21, and this will be a very great increase of rent. If it were true that the cost of food tends to rise as population increases, Ricardo's explanation would be amply sufficient; but I have already endeavoured to show that an increase of population is the effect, and cannot be the cause, of an increase of food, and that the cost of food tends not to rise, but to remain stationary ; and it is therefore necessary to find some other explanation. It has been frequently objected to Ricardo's theory (as, e.g., by Mr. Rickards in his "Population and Capital,") that, in point of fact, the cost of food does not continually increase, and has not done so in England during the last five centuries. But though this shows the theory to be inadequate, it does not show it to be incor- rect, since Ricardo and his followers admit that the upward tendency may be counteracted by agricultural improvements ; and the fact merely shows that the latter have been sufficient to prevent the cost of food from rising. Mr. Carey, the American Economist, maintains that the cost of agri- cultural, as of all other products, tends to fall as society advances ; and he altogether denies that cultivation commences with the richer, and gradually extends to the poorer, soils. In an able and interesting chapter of his " Principles of Social Science," he shows, by reference to almost every country in the world, that the first settlers have always preferred the less fertile hill-sides, and that it is only after society has made some progress that the more fertile river bottoms are reclaimed. But though the facts are as Mr. Carey states them, they are not sufficient to prove his point, for it by no means follows that because a piece of land yields more for each hectare than another piece of land, it yields more in pro- RISE OF RENT WITH THE PROGRESS OF SOCIETY. I'Jl portion to the labour bestowed upon it. The very reason which he assigns as having induced the settlers to prefer the hill-sides is, that these lands could be more easily drained than the marshy river bottoms ; and the reclamation of the latter is deferred until society has the means of bestowing a great deal of labour upon the task. This is, in etfect, to say that cultivation begins with those soils which yield the most in propor- tion to the labour bestowed on them, and proceeds gTadually to those which yield less ; and this is all that Eicardo contends for. One reason which Mr, Carey gives, is the obvious one that the hill-sides which are easily (h-ained are more healthy than the valleys ; and this, in an eco- nomic point of view, is much the same as saying that they require less expenditure upon them since the mortality among the la])ourers is an important element in the cost of an undertaking. The late professor iXL Bowo , of Heidleberg, after reciting the opposite opinions of Ricardo and of Mr. Carey, respecting the effect of the progress of society on the cost of food, observes,* that neither of them can be accepted as a correct statement of a general law, but that it sometimes happens that the cost of food rises, and sometimes that it falls ; but though there arc ditferent forces tending in opposite directions, it does not follow that there is no general cause in operation, and the object of science is to explain what these tendencies are. Our answer to the question, why rent rises as society advances must be determined by the answer which we give to the question what is the effect of this advance on the cost of food ; and, as I have followed Mr. Rogers in maintaining that the cost of food tends to remain stationary, so I follow him in ascribing the rise of rent to the progress of agricultural improvements. It is not, as Ricardo supposes, because land is cultivated which only yields 84 hectolitres, that the land which yields 105 comes to yield a rent, though it had not previously done so, but an improvement is made which enables 105 to be got fi'om land which would not previously yield more than 84 ; and this, also, enal)les more than 105 to be obtained from tlie old land, and the sur- plus goes as rent to the landlords. Daring the last live centuries numerous improvements of various kinds have taken place in English agriculture, such as the introduction of the rotation of crops in place of the old system of fallows, subsoil drainage, the use of Guano and other manures ; and the effect of all tliese has been an enormous increase in the average yield of arable land. Five centuries ago, the average yield of wheat per hectare was only 7.25 hectolitres, Avhile it is now 25 ; and yet it does not appear that the value of wheat is on tiie average less at the present time than it uas then. Improvements of one sort * Grundsatzc der Volkswirthscliaftslehre, Achte Ausgabe. Leipzig uud Heidel- berg, 18C8. Erste Abtheilung, p. 317. VJS RISE OF RENT WITH THE PROGRESS OF .SOCIETY. or another are constantly taking place, but, as the increase of population keeps pace with the increase of food, a discovery is sure to be followed by the reclamation of land which was formerly thought too poor ; and as the value of food remains stationary, while the cost of producing it is diminished throughout a gi-eat part of the country, a rise of rent is the necessary consequence. This explanation, however, must not be confounded wdth that given by Mr. Carey, who maintains that the rise of rent is entirely due to the expenditure of capital on the part of landlords, and that rent is nothing more than profit on the capital expended upon land by its present or previous o^Tiers. There are many cases, no doubt, where the revenue Avhich a landlord receives fi'om his estate is entirely owing to the expenditure which he or his predecessors have made on its improvement. Cases of this kind may be found where a marsh has been di'ained at a great expense, and where the outlay has been repaid by the increased productiveness of the soil, or where an embankment has been made to protect a district from the encroachments of the sea ; and such cases must be common in Holland ; but if rent could always be traced to such an origin its existence would not require any special explanation. But it is notorious that many landlords are able to raise their rents without expending any capital upon their estates, as is exemplified in the rise of new watering places, such as Eastbourne and Torquay, where the land rises in value before the houses have been built, and as soon as it is thought that the place will prove a popular resort in the summer or the winter season, as the case may be. It is well known that the opening of a new railway is followed by a rise in the rents of the adjoining lands, although the landlords have contributed nothing towards it, and may have even opposed its construction ; but it diminishes the cost of raising the produce, or, at least, of bringing it to market, and this raises the rent by increasing its superiority to the margin of cultivation. Mr. Carey maintains that the price of all the land in a country is not more than equivalent to all the money which has been spent in improving it ; but whether this be so or not, the fact still remains, that rent often rises where no capital has been expended, and this is the fact to be accounted for. This argument of Mr. Carey's has been used by Bastiat to establish the equity of allowing land to become private property, which, according to him, is simply allowing the landlords to enjoy the fiiiits of the labour which they have expended in improving their lauds ; but, as it is a notorious fact that landlords frequently derive an increase of rent fi-om the expenditure of their tenants, or of railway companies to which they have contributed nothing, his argument afiFords but a poor defence for the institution of landed property. As I have observed in treating of profit, it is not the province of Political Economy to defend the arrangements which may be made in RISE OF RENT WITH THE PROGRESS OF SOCIETY. 11)1) different states of society for distributing the produce of the labour of the people, and it is enough for the Economist to show that rent must exist, without discussing the advantages of difterent methods of disposing of it. "Whether land be held from the Government, or owned by the cultivators, or held from private individuals, there must, in all cases, be differences in the productive capacity of different farms, and the excess of the produce of the better ones over that of the worst will constitute rent, and the question whether the existence of this rent is just or unjust has no meaning whatever ; while the question whether it is well for society that there should be a class subsisting entirely on the labour of others, and giving nothing in return, is one for the social philosopher, and not for the Pohtical Economist. The same law which determines the rent of land used for tillage or pasture, determines also the the rent of mines. Mines, like farms, differ in fertihty, and the rent which most of them yields is the measure of their superiority to the worst which is worked, and which is just able to return tlie usual profit and wages to those who work it. As it becomes necessary to proceed to a greater depth below the surface, the cost of working the mine tends to increase, and, as the more fertile ones are worked out, the cost of raising the mineral from the inferior ones tends like^'ise to increase. From both these causes the cost of minerals tends to rise as society advances, and the rent of the superior ones which are not exhausted tends to rise, in consequence of the rise in the value of the mineral. There are, however, many mechanical impro^'ements, and many discoveries of new mines, Avhich are perpetually counteracting this tendency, and, in point of fact, the value of gold, of silver, and of iron, is much less now than it was five centuries ago. These discoveries for a time lower the rent of mines, since they cause some of the inferioi* ones to be abandoned, as, for instance, was the efiect of the Californian gold dis- coveries on the gold mines of Siberia. The Russian Government had imposed a tax on the produce of these mines, which they were well able to afford when they were the most fertile then known, but as soon as the Caliibniian discoveries took place the value of gold fell to such an extent that the Sil)erian mines could no longer afford this tax, and as the Government refiised to remit it, many of them were abandoned, and the production of gold in that region very much diminished. But though the effect of these discoveries is for a time to lower the rent, there are still such gi-eat diversities between the productive powers of diflerent mines, and BO many improvements may be made in some of them which are not applicable to others, tliat it is i)rubaljle that even where the value of the mineral has diminished instead of increashig, there is, nevertheless, a gi-eat increase iu the aggregate rout of all the mines iu the country. CHAPTEE, VI.— RECENT FALL IN THE VALUE OF GOLD. PROOFS OF THE FACT — CAUSE OF THE FALL — ITS CONSEQUENCES. Having now treated of the general principles which regulate the distribution of wealth among the different classes of society, I propose to apply them to the elucidation of a question which has been frequently discussed during the last quarter of a century, the question, namely : What effect have the discoveries of gold in California and Australia had on the value of that metal ? The first thing necessary to a solution of this question is a clear understanding of what is meant by the value of gold, but this, unfortunately, is a preliminary step which most of those writers who have turned their attention to this subject have neglected to take, and the consequence is, that even Avhen writing many years after those discoveries, they have still left it doubtful whether the value of gold has altered or not. Mr. Fawcett* adduces the difference of ophiion prevailing on the subject as a proof that no considerable alteration has taken place, but I venture to think that it is the consequence of the vagueness of the idea commonly attached to the word value, and that until a clear and definite notion has been substituted in its place, the question can never be satisfactorily settled. Those who define the value of gold as its power of purchasing commodities, are obliged, wdien they seek to ascertain the changes which have taken place in its value, to ascertain the prices of all other commodities, or, at least, of a great number of commodities, a process which entails upon them a considerable amount of labour, and e^'en when this has been incurred, the result is far from satisfactory, and is likely to be less so just in proportion as the labour of collection is increased. When Adam Smith traced the changes which had taken place in the value of silver, he compared it Avith one article only, namely, wheat ; and he assumed that the cost of producing wheat was always the same when an average of ten or twenty years was taken as a basis for the calculation. Tooke, however, has now shown that even a period of fifty years is not sufficient to exclude the operation of the natural causes which produce temporary * Manual, 1863, p. 495. PEOOFSJ OF THE FACT. 201 variations in the value of wheat, and that in some cases -where Adam Smith thought that the vahie of silver had risen, it is more hkely that that of wheat had follcn. Though Adam Smith's calculation was thus hable to error, it was still as near an approximation to the truth as he could make with the limited means at his disposal ; and he had in his mind a perfectly definite idea of what he meant by a change in the value of silver. When he said that its value had fallen, he meant that a given weight of it, which would formerly have enabled its possessor to command the labour of an Englishman for a whole day, or would have exchanged for an article wliich required a day's labour to make, would only command two-thirds of a day's labour, or something less than a whole day's, and would only exchange for an article which had required less than a day to make. But the writers who have investigated the effects of the recent gold discoveries, as, for instance, Mr. Newraarch, and Mr. Cliffe Leslie, have endeavoured to ascertain whether a given quantity of gold now exchanges for as much of all other commodities as it formerly did, and to do tin's they have collected tables of the prices of various kinds of corn and other commodities, the effect of Avhich is rather to render it difficult than easy to determine how much the value of gold has altered. The prices of some of these articles show a considerable rise, while others show only a slight rise, A\'hile others are stationary, and some have fallen ; so that it is impossible to say to ^^■hat extent the relation in which gold formerly stood to all of them has undergone an alteration. The prices of corn and other vegetables do indeed exhibit a rise, and if we confine our attention to these we are led to suppose that the purchasing power of gold has diminished, but as the prices of many manufactured articles have remained unaltered, or have even fallen, the purchasing power of gold has not diminished in these cases, and there is no standard by which to determine how much importance is to be attached to each of these classes of commodities. If we find that the prices of all kinds of grain have risen 50 per cent., while those of all kinds of cotton goods have fallen 50 per cent., and if we hence infer that the value of gold has remained stationary, it is an arbitrary arrangement by which the cotton goods arc made e(|uivalent to the grain, and the conclusion would, in fact, close our eyes to the causes wliich arc operating ou the values of those commodities. It may well l)e that the cost of producing corn has remained stationary while that of producing gold has diminished, and that cotton cloth has diminished twice as much as that of gold, but the table will not tell us which of these explanations is the true one. Even if the prices of all the articles mentioned have risen, they are never found to have all risen in the same proj)ortion, and thus the statistics fail to give a precise answer to the question, how much the 202 PROOFS OP THE FACT. value of gold has fallen, and thus fail to perform the very purpose for which statistics are useful and desirable, that of substituting a iDrecise idea for a vague notion. Mr. Newmarch, accordingly, does not venture to tell us how much the value of gold has fallen in England, nor does Mr. Chffe Leslie, in his article on " The Gold Question and the Move- ment of Prices in Germany" (Fortnightly Eeview, November, 1872) tell us how much it has fallen in Germany. It is almost impossible to say whether a person who now receives 2,500f. a year is better or worse off than one who enjoyed an equal income twenty years ago, for while he has now to pay more than formerly for the same quantity of meat or of butter, there are many other things for which he has to pay less, and we have no standard hj which to measure comfort, and even if we were to find an indi%ddual whose income had remained unaltered during the whole period, and were to ask him whether he was better or worse olf, his recollection would be too vague to be relied upon as a test. So long as value is taken to mean the relation in '\\'hich a com- modity stands to all other commodities, the vagueness of this funda- mental notion must infect all the reasonings which are based upon it, and the difficulty of measuring or explaining changes of value must remain insuperable. It is admitted that value depends on cost of production, yet, when the cost of producing an article is known to have varied, doubts are still expressed as to whether its value has altered, merely because the cost of producing other articles has varied also. If it were first ascertained how much the value of gold had altered, the prices of other commodities would show how much their values had altered, but to attempt to ascer- tain each of these quautities from the other is like attempting to discover two unknown quantities from a single equation. I shall not, therefore, inquire whether a given Aveight of gold will now exchange for more of commodities in general, because such a question appears to me to be insoluble ; nor shall I assume that wheat or any other article is always produced at the same cost, because such an assumption is not waiTanted by the facts, and is not required when the means are at hand for obtain- ing a correct measure of value. Value, as has been observed in the first chapter of this book, was understood by Adam Smith to denote the esteem in which a commodity is held, and it is only in this sense that the word is used in the present work. The measure which he suggested for ascertaining the degree of esteem in which diflFerent commodities are held in different times and places, was, the amount of labour which labourers would perform in order to obtain them, and as different kinds of labour are unequally remunerated, it is necessary that some one class of labourers should be taken as the standard, and the one naturally PROOFS OF THE FACT. 208 suggested for tliis purpose is that of couimon unskilled labourers. "When the value of any other article except the precious metals is under dis- cussion, it is necessary first to ascertain the price of the article, and then to compare it Avith the rates of Avages ; but in the case of gold there is only one process to be performed, since wages arc in this country paid in gold (or in silver coin, which is exchangeable for gold at a fixed rate) and a change iu its value, therefore, shows itself at once in the form of a rise of wages. The question, therefore, resolves itself into an inquiry how much the rate of wages paid to unskilled labourers has risen in this country since 1850, but as the rates are not the same in all parts of the country, and as the alterations have not been uniform, it is necessary to collect the rates from different parts, and to compare the averages of the two periods. It was in 1850, that is, after the Californian, and before the Australian discoveries, that Mr. Caird made his tour through England, and this epoch is therefore a most convenient starting point for the com- parison in question. He has only set down the rates of wages in twenty- nine counties, but this is a sufficiently large number to form a basis for a comparison, and as his information was derived from personal inquiry on the spot, and sometimes from actual reference to the farmers' books, and as his sole object was to state the facts exactly as he found them, his statements may be received with implicit confidence. In the following table I give the rates of daily wages in 1850-51, and in 1869-70, the former being taken from his "English Agriculture in 1850-51 " (2nd edition, 1852, p. 512), and the latter from a table contributed by Mr. Edward Stanhope to the "Times" of April 9th, 1872 ; the figures in both cases being reduced from weekly to daily rates, and from shillings and pence to francs and centimes. Mr, Stanhope's table is compiled partly from the report of the Commission on the Employment of Women and Children in Agi'iculture, and partly from Poor Law returns ; and these latter do not include all the unions in a county, so that the average of a part of a county may sometimes be incorrectly taken to represent the whole ; but I trust that this source of error will not materially vitiate the calculation. The arrangement is the same as that of Mr. Caird, except that I have put one figure for Yorkshire, while he has given one for each of the Hidings. I should observe that the table is only intended to show the amount of money received by a hired labourer for a day's work, and tliat a very incorrect notion of a labourer's yearly earnings would bo obtained by simply multiplying the daily rate by the nund)er of days in a your. 204 PROOFS OF THE FACT. Tahle of Agricultural Wages in 1850-51 and 1869-70. JVorthcrn Counties— Cumberland .... Lancashire . . . , Yorkshire Cheshire Derby Nottingham .... Stafford Northumberhmd . Durham Lincoln Soutlbern Counties — Warwick Northampton .... Bucks Oxford 1850-51. 1869-70. f. c. f. c. 2 70 3 45 2 81 3 22 2 60 3 2 50 2 40 2 30 3 12 2 08 3 12 1 97 2 60 2 30 3 45 2 30 3 45 2 08 3 12 1 75 2 40 1 87 2 50 1 75 2 40 1 87 2 50 Southern Countiet Gloucester .... Wilts Devon Norfolk Suffolk Huntingdon . . Cambridge .... Bedford Hertford Essex Berks Surrey Sussex Hants Dorset Average 1850-51. f. c. 1 45 1 50 1 75 1 75 1 45 1 75 2 20 1 87 1 87 1 66 1 65 1 97 2 20 1 87 1 55 1 98 1869-70. f. c. 2 20 2 08 1 75 2 40 2 30 2 20 2 40 2 40 2 30 2 40 2 30 2 80 2 60 2 20 1 87 2 58 Thus the average rise has been 30 per cent., and as a further rise has taken place in several counties since 1870, it may be taken to be equal to one-third, which is the same thing as a fall of one-fourth in the value of gold, since four francs will hardly command more labour than three francs would formerly have done. The people show that tliey esteem gold less than they did, by their refusal to make as great sacrifices as formerly to obtain the same amount of it. The fineness and weight of the coins having been the same at both periods the change is not merely nominal, but is an actual change in the value of every gramme of gold. There is a great diflfereuce among the different counties as regards the extent of the rise, which in Northumberland is as high as 50 per cent., while Devonshire exhibits none at all ; and this difference proceeds from the unequal rate at which the diflFerent counties have advanced in industrial activity. Tlie northern counties still retain their superiority over the southern, which is due to the greater intelligence and activity of the northern labourers, and perhaps, in some degree, to the greater enter- prise of the northern farmers, which leads them to turn their attention to the raising of those products which are the most certain to bring in remunerative prices. But many of the southern counties have made considerable progress as compared with themselves, and, as labour is remunerated according to its efficiency, the unequal rates of progress in PROOFS OF THE FACT. 20o different counties ■uill he sufficient to produce variations in tlie rates of wages, but not to produce a general rise. This could not take place unless the efficiency of English labour had increased more rapidly than that of labour in those countries which supply us with gold, and it can hardly be supposed that England has made more rapid progress in this direction than America and Australia. The differences in the remunera- tion of labourers in different parts of the country are even greater than the table implies, since each figure is the average of a county, and in some parts of Yorkshire the rate is as high as 4f. a day, while in parts of Devonshire it is as low as If. 6Gc. It is worthy of remark, that when Arthur Young made a journey through England ibr nmch the same purpose as that of ]\Ir. Caird, he found that the rates prevailing in the northern counties were much lower than in the southern, ^hile Mr. Caird, eighty years later, found that the case had been reversed. The latter wTiter has given a table illustrating this point, to be found ill his work already referred to. At the time when he made his tour, the country was in a state of transition, following on the repeal of the Corn Laws, and he found that in some districts the rates were lower than they had been the year before, because the farmers had been accustomed to rely chiefly on wheat, and had not yet seen the necessity of turning their attention more to the production of meat, butter, &c., which were then fetching more remunerative prices than grain. The great extension of pasture which has taken place since that time has no doubt done much to remove this cause of low wages, but no tendency is shown to^vards an equalisation of wages throughout the country, which can never be brought about until the labourers in all parts are equally strong, and equally intelligent. Mr. Caird expressly mentions that the poorly-paid and poorly-fed labourers of Wiltshire are much less active and intelligent than those of the north ; and he points out the significant fact that the line dividing the well-paid from the ill-paid districts, is the boundary of the coal measures, which affords a convincing proof of the benefits which manufacturing industry confers not only on those actually engaged in it, but also on the agricultural ])opulation of the labouring districts. Agricultural labourers have here been taken as the standard, because agriculture is less subject to fluctuations than other trades, and therefore a change in the rate of wages is less likely to be produced by a cause peculiar to the trade itself. But such information as I possess goes to show that wages have risen in other trades also, though it is too fragmentary and too uncertain to be relied on as a proof of a general fall in the value of gold. Thus, for instance, a table given by Mr. Bnisscy in his *'AVork and AVages " (2nd ed., ]x 38), shows that the wages of the bricklayers, carpenters, and blacksmiths employed by his latliLr in the 20G PROOFS OF THE PACT. construction of railways, were six per cent, higher in 1869 than in 1849, and though the weekly wages of the navvies were the same in both periods, yet the fact that the price paid for the same amount of earthwork was ten per cent, higher in the latter year, shows that they performed less labour for the same amount of money. Another table given in the same work (p. 157), shows that at the Canada Works, Birkenhead, the rates of wages paid to engineers were not materially higher in 1869 than they had been in 1854 ; but even in the engineering trade there was a reduction of the hours of labour to nine a day, after the great strike at Newcastle in 1871, which is equivalent to a rise of wages. The reason why this particular trade is more slow to feel the effects of a general rise of wages is, no doubt, that which is given by Mr. Brassey, that English manufacturers have, in this branch of industry, to contend against a vigorous competition on the part of their continental rivals, and that, therefore, wages cannot rise in England unless a corresponding rise takes place on the Continent, and more time is required to effect such a general movement. Another table in the same work (p. 198), prepared by Messrs, Lucas Bros., the well-knowm builders of London, shows that, previous to 1853, they paid their masons, carpenters, and bricklayers, 62c. an hour, and subsequently to 1866, 83c. for the same time, while the wages of the labourers rose during the same time from 36c. to 48c., so that, in this case, the rise is the same as in that of the agricultural labourers. A further rise took place in many establishments after the strike in the London building trade in 1872, which year, indeed, was remarkable for the rise of wages which was obtained, by some means or other, by the Avorkmen in every, or almost every, trade. This evidence, then, is sufficient to show that there has been a fall in the value of gold in this country since 1850, and there is not wanting evidence of a similar rise in France and Germany. In France, M. De Lavergne, in 1859, gave the average rate of agricultural wages as If. 50c. a day, while Mr. E. Stanhope, MTiting to the "Times" on April 23, 1872, gives this as the rate of winter wages in 1869-71, and the summer rate as 2f. a day. Mr. Fane,* probably confining his observation to a smaller portion of France than these -^Titers had done, says that the wages of French labourers had risen from If. 87c. a day to 2f. 70c., or 2f. 91c., during the twenty years wliich preceded the time vdien he made his report to Lord Stanley. At Creuzot, as Mr. Brassey informs us (p. 160), the mean rate of wages rose 38 per cent, between 1850 and 1866. Another table which he gives (p. 92), shows that the wages of almost every class of mechanics employed in building ships for * See Brassey's " Work and Wages," p. 168. PROOFS OF THE FACT. 207 the Messageries Imperials, rose considerably between 1859 and 1869. The Beiiiu correspondent of the "Times" mentioned, on April 16, 1872, that a great rise of wages had recently taken place among all classes of labourers in Germany, and in particular among those employed in the building trade of Berlin, whose wages had risen about 50 per cent, since 1864. Mr. CHlFe LesUe gives tables which show a considerable rise iu the price of many articles throughout Germany during the period in question, and, though the method which he has adopted prevents me from receiving his testimony as a proof of a fall in the value of gold, it is satisfoctory to note that he has arrived at this conclusion. He finds, as might be expected, that the rise of prices has not been uniform throughout Germany ; and he has ably generalised the differences which are to be found in this respect. The smallest rise has taken place in those to^vns which are remote from railways, while among those which are pro^■ided viiih. railways, those which are also centres of industrial activity show a greater rise than the rest ; and among these, again, tlie greatest rise is shown in those which are in the western portion of Germany. It is thus shown that the industrial progress of Germany has great influence on the scale of prices in the dillerent parts of the country. Sir. ClifFe Leslie considers that the rise has been greater in Germany than in England, and I may remark, in passing, that the supposition put ibrward by M. Cheval^ier, that the adoption of a silver standard v>'ould save a country fi'om the evils of a change in the value of money, has not been justified by experience, since, in Germany, prior to 1871, silver was the sole standard, and yet the alteration of prices has been as great, or even greater, than in England, where gold is the standard. This I say not as impugning the accuracy of M. Chevaiyer's reasoning, which is con'ect according to his premises, but as showing that the facts have not been as he expected, and that the value of silver has altered nearly as much as that of gold. In the United States a rise of wages has also taken place, and Mr. Wells, in his essay, included among the second series published by the Cobden Club (pp. ^06-7), mentions, that in a maiuifacturing city of the north, the wages of common labourers had risen from 5f. a day in 1860 to 7f. 33c. in 1871, both rates being, of course, given in gold, and not in currency. In Victoria, as appears from Mr. Newmarch's tables, the wages of common labourers and mechanics were twice as high in 1855 as they had been prior to 1851, and tliough there have been many fluctuations since 1855, they have not i'allen to their former level. It appears, then, that altlioiigh the fall in the value of gold has not been universal, it has cxiended to other counlries besides England, and th'at no cx[ilanati(ni will be satisfactory which applies to the circumstances of England alone. 208 CAUSE OF THE FALL. . The popular method of explaiiiino* all changes in the rate of wages is a roference to the demand for, and the supply of, labour. Even Mr. Brassey, who has adduced so much evidence to show that wages depend on the efficiency of labour, accounts for all differences in the rates ]}re- vailing in different countries and periods by saying that the demand for labour is greater or less, as tlie case may be. But this explanation is generally nothing more than a re-statement of the fact, since an in- creased demand for labour means notliing more than that employers are able and billing to pay higher wages, and this is the very fact to be explained. If we ask ^\■hy wages are higher in America than in England, the answer commonly given is, that labour is scarce in the former country, but what this scarcity of labour means is by no means clear. It often happens that English manufacturers are greatly in want of additional hands, and are ready to take on any who present them- selves, but in such cases Avages do not rise to the American rate. On the other hand, it frequently happens that American manufacturers are obliged to reduce the number and the wages of the persons in their employ, but wages do not then fall to the English rate. If, when it is said that the supply of labour is in excess of the demand, it is meant that there are many persons who are unable to obtain employment, then the supply is always in excess, both in England and in New York, as is testified by the large emigration which is constantly taking place from Ensiland to America, and from New York to the Western States of the Union. If by an excessive supply nothing more is meant than that the number of people seeking employment is such that wages are low, this is a mere statement of the fact, and not an explanation. It has often been observed that wao-es are higher in manufacturing than in ao-ricul- tural districts, and this is thought to be explained by saying that manu- factures cause a demand for labour ; but this demand seems to be little more than a generalisation of the amount of wages paid. The judicious -uTiter to whom I have so often referred, Mr. Caird, mentions that the lowest wages which he found in any part of England were paid on a large farm in a southern county, where the farmer commanded all the labour of the parish, and had not men enough to do the work required in summer. In this case the farmer required more labourers than he had, and yet wages were not high, but extremely low. Of course, when there is an artificial interference disturbing the relations between em- ployers and employed, the rate of wages may be reduced when the former are compelled to take on more men than they require ; and this seems to have been the effect of the Poor-Law in some parts of England in which Mr. Caird mentions that the farmers agreed to divide amongst themselves all the unemployed labourers of the parish, with a view of CAUSE OF FALL. 209 reducing the poor rates. In these cases, as the farmers engaged more men tlian they required, they paid lower wages, but it was because the men had httle useful work to do, or, in other words, because tlieir labour was less efficient. Of course, when confining our attention to one trade, we must bear in mind that it is not at all times equally flourishing, and that if those engaged in it determine to continue working at a time when their products are not required by the rest of the community, they must receive less, because the service which they render is less ; and though their labour may be quite as fatiguing, and may yield quite as great a product, it is less efficient as regards the benefit conferred on the rest of the people. Certainly, the table before refen'ed to as given by ]\Ir. Brassey, on page 38 of his " Work and "Wages," shows considerable fluctuations, both in the rate of weekly wages paid to railway labourers and in the price paid for digging a given space, which can only be accounted for by reference to the state of that trade ; and the same remark applies to the Avages of the engineers in the Birkenhead establishment ; but a general rise of wages throughout the country cannot be so explained. A rise of wages has taken place among certain classes of labourers, such as shoemakers and hatters, although there has not been any unusual activity in those trades, and though there has not been any marked improvement in the skill of the worlvinen, as is shown by the fact that the rise was followed by a cor- responding rise in the price of their products. The rise in such instances was claimed by the operatives, not on account of the flourishing state of the particular trade, Imt on account of the rise of wages and prices in other trades. The wages of the miners engaged in raising the precious metals cannot rise unless they actually raise more of the metals to the surface ; and, therefore, if their wages have risen at the same time as those of other classes, a clear proof is aflForded that the rise is due to an increased facility of producing the precious metals. The miners who supply England with gold cany on their operations in America and Australia, and, as a gi'eat fall in the value of gold has taken place in these countries, it is to tlieni that we must look for an explanation of the phenomenon. AVe find accordingly that, as is well-known, discoveries were made about this time in America and Australia which greatly reduced the cost of raising gold. The discovery of the gold mines of California took place in 1848, while those of Australia were discovered in 1851 ; and these mines were found to be much more fertile than any previously known. This is shown l^y the high wages received by the miners, since fertility means yielding a larger return to the same quantity of labour. AVhcn Humljoldt* visited Mexico, he found that the miners engaged in * Essai Politiiiuc sur La Nouvellc Espagno, Paris, 1811, Vol. 111., p. 113. r <: 10 CAUSE OF FALL. the ricli silver mine r)f Yalenc'ana earned five and six francs a day, Avliile in 1859, those engaged in the gold mines of California earned nineteen francs a day ; so that the labonr of the latter was three or four times as productive as that of the former, since the proportion between the values of gold and silver had varied very little during the interval. The discoveries produced a complete commercial revolution in Australia, the history of which has often been told, though the connection of cause and effect has nowhere been so clearly sho'oai as by Mr. Cairnes in an article published in "Eraser's Magazine," in September, 1859.* The circumstances of CaHfornia were similar, but , have not been so fully described, and I shall therefore confine myself for the most park to examining those of Australia. As soon as it became evident that gold could be obtained in abundance by anyone who chose to go and dig for it, everyone who could do so at once hastened to the diggings. All other forms of labour were suspended, shepherds leaving their flocks, and ploughmen leaving their farms, in the hope of obtaining a fortune at this new El Dorado. An old judge who was so infirm as to require to be draAvn al)out in a chair was deserted by all his servants, and Avould have been quite helpless had it not been for the assistance of his own chil- dren. Great fears were entertained that the departure of the labourers would prevent any crop from being sown ; but in a few months many diggers had become convinced that they were not likely to succeed at the diggings, and returned to their former occupations, but not on the same conditions as they had previously been \villing to agree to. Great as was the diversity in the earnings of different individuals, it was found that an ordinary labourer with a pickaxe and a few other tools, could olitain, on the average, seven-and-a-quarter grammes of gold in a day ; and, as this quantity of gold is coined into twenty-five francs, those who engaged in other occupations demanded and obtained twenty-five francs a day, or more or less, according to the more or less attractive character of the occupation as compared with that of mining. This was equivalent to a quadrupling of the rates of wages which had pre- vailed before the discoveries took place ; but as it was only in gold- mining that labour had become more efficient, the employers could not afford to pay these higher wages without a corresponding rise of prices, which accordingly took place. As soon as the enormous prices prevailing in Victoria became known in Europe, a considerable exportation of all kinds of commodities to Victoria was at once set on foot, and, as so fre- quently happens when a new market is open for commercial enterprise, it continued long after the prices of articles of European origin had * Ke-published in his " Essays on Political Economy." CAUSE OF FALL. 211 fallen to a lower point in Victoria than in the countries where they were produced. In 1854, accordingly, the labourers of Victoria enjoyed the advantage of receiving much liigher Avages, and yet being able to buy many of the things which they most wanted for a smaller sum than before; but of course this state of things could not last, and by the end of 1856 the prices of all those articles which could be imported had returned to the point which was sufficient to pay for the cost of carriage, and were, for the most part, much the same as they had been before 1851. In the meantime many of the surface diggings had become exliausted, and it had become necessary to dig deeper below the ground, and the cost of production being thereby increased, the earnings of the miners had diminished. The wages of all other labourers followed suit, and those of the sailors, which had been the most affected by the rise, were also the most affected by the fall. At the height of the gold mania it had, of course, been most difficult to induce anyone to leave a country which held out such a prospect of obtaining a fortune, and the pay of sailors engaged for a voyage to England, which had been one hundred fi'aucs a month, rose at one time to two thousand fi-ancs a month, and then feU to little more than its former rate. Of course, gold mining still held out, as indeed it still does, a chance of obtaining a large sum by a very little labour ; and the amusing author of " Colonial Adventures and Experiences " mentions an instance from liis own experience which may serve to illustrate the uncertainty attending this branch of industry. He had, as he tells us, joined with three other men to work a claim at the Queensland diggings, but had obtained so little in the course of several months that they determined to abandon it, and sold it for a trifle to another man, a sailor. The very next day the sailor turned up a nugget which he sold for 50,000f., and by exhibiting it to the other persons at the diggings he obtained an additional, and by no means despicable, sum of money. The author adds, that a month afterwards he met this very sailor tramping up the country in search of employment, having already gambled away the whole of this large sum. But although such prizes were still to be obtained, it was found that the average earnings of the miners had diminished, and in 1859 they were not more than 12f. 50c. a day. A comparison of the rates prevailing before the discoveries with those of 1850 shows tliat in tliis interval they had douljled. The wages of farm labourers being i)ailly composed of rations are not so easily compared, Ijut as they received in money from llf. 25c. to 15f. a week at the former period, and 31f. 25c. at the latter, it would seem that their wages were about douljled. Tlie wages of mechanics, such as masons and blacksmiths, being nil paid in niuney, exhibit very clearly the proportion in which they had risen, having been, 1' 2 212 CAUSE OF FALL. nt first, from 7f. 50c. to 8f. 750. a day, and having risen too from ir)f. to 17f. 50c. a day. The i^rices of garden and farmyard produce had more than doubled in the same period, so that part of the rise in their case was o^ving to the increased difficulty of production, occasioned no doubt by the great immigration into the country which followed on the discoveries, and which rendered it necessary to resort to less favourable soils than those formerly occupied, in order to supply the wants of the increased population. Subsequently to 1859 the yield of gold from Australia fell oif, but increased again in 1871 and 1872, though it did not return to its former level, and the rates of wages prevaihng in 1870 were lower than those of 1856.. In 1856, married couples employed in agriculture had received from l,875f. to 2,125f. a year, besides rations, but in 1870 they received only from l,250f. to l,625f. a year with rations as before, and the masons' wages had fallen from 1 5f. and 17f. 50c. a day, to 12f. 50c. and 18f. 75c. a day, and the wages of other classes had also fallen. Taking the wages of masons as a standard it would seem that in the period 1851-70 wages had risen 66 per cent., or, in other words, the value of gold had fallen 40 per cent. The table previously given Avith regard to the rise of wages in England showed a rise of 80 per cent., and a further rise of 36 per cent, is therefore required to equalise the effects of the gold discoveries upon the value of gold in Australia and England. Before 1851, money-wages were higher in Australia than in tliis country, and, of course, the discoveries have no tendency to produce an actual equality in the rates prevailing in both countries, but only to raise them to such an extent that the labourers shall be paid in proportion to their efliciency. When the average of England shall have risen from If. 98c. to 3f. 30c. a day, the full efiect of the Australian discoveries so far as England is concerned will have been produced, though of course this result may be afterwards disturbed by any future discoveries in Australia, California, or elsewhere. In California the rates of wages, though Ingher than in Australia, are less than half of what they were in 1853-4 ; those of bricklayers, for instance, having fallen fi"om 52f. to 25f. a day, and those of stonemasons from 52f. to between 22f. 50c. and 25f. a day. As I am not aware what Avas the usual rate of wages in California before the discoveries, which, indeed, were almost contemporaneous with its first settlement, I cannot tell how much they have reduced the cost of obtaining gold in that country, but, at all events, these figures show that the fertility of its mmes has greatly diminished. The cheapening of gold in the countries which produce it has slowly, but surely, affected its value in England and other countries. Its first effect was to cause an increased exportation of manufactured articles from J CAUSE OF FALL. 1>];^ England, and this increased quantity could not be produced except at an increased cost, -which in its turn necessitated a rise of prices. Those manufocturers who were still able to produce their goods at their former cost profited by obtaining the higher prices which their less fortunate competitors were obliged to demand, and their workpeople demanded and obtained a share in the benefits in the form of increased wages. A reaction did indeed take place in consequence of the imprudent and exco^sive exportation to Australia, and the wages of some classes of work- men underwent a temporary reduction. The memorable strike of the cotton-spinners of Preston, in 1853, was directed against a proposed re- duction of wages, and proved unsuccessful, as, indeed, such strikes usually do. Notwithstanding the interruptions which the upward movement of wages has experienced, it has, on the whole, continued, and has spread from the workmen engaged in manufactures to those in the build- ing trade, to railway labourers, and to those employed in agricul- ture. As the people of America and Australia have been able to obtain gold with less labour, they have been willing to part with it in exchange for less labour ; and, accordingly, the money-wages of those engaged in producing articles to be exported to those countries have risen, and the labourers in other trades have obtained a proportionate rise, in order that all kinds of English labour might be remunerated according to its efficiency. A longer time has been required to efiFect a considerable reduction in the value of gold in Europe than was necessary in Aus- tralia, and the reasons why this was so are not far to seek. The quantity of gold which Australia itself required was so small that a few months were sufficient to quadruple the amount previously circulating there, and tlms to increase the quantity of money in proportion to the fall in its value at the diggings. If all the gold required in the world could be produced in a single year, no more than a year would ])e required to reduce its value in all countries in the same proportion as it had been reduced in the mining countries themselves ; but gold is so durable that a very small annual addition is necessary to maintain the existing stock, and the difficulty of producing it is so great that the world could hardly spare a sufficient number of labourers to raise the whole stock in a single year. The total quantity of gold in possession of the people of Europe and America in 1848 has been estinuated as equivalent to fourteen milli- ards, and in order that this sum should be increased in jjroportion to the fall in the value of the metal, an amount etpiivalent to nine milliards or more would )je necessary; wliile the whole sui>ply received from California, Australia, and Russia in the period 1848-50 did not quite amount to half this quantity. All other things remaining the same, a greater quantity of gold coin would be rer|uired in any country in exact ])roportion 214 CAUSE OF FALL. as its value fell, since money is only wanted for the purpose of exchange ; and if a society exerts the same amount of labour, and exchanges all its products as before, their value being the same, a greater quantity of coin is necessary to be exchanged against them when the value of the coin has diminished, and vice versa. Several causes have, however, been in operation which have tended to render necessary a still greater increase in the quantity of gold coin in Europe and America than would have been sufficient to compensate the fall in its value. A great increase of population has taken place, and this in itself renders a greater quantity of coin necessary, since the number of labourers has increased, and, consequently, the total value of the commodities produced. The slight fall which has taken place has been sufficient to cause gold coin, in many cases, to take the place of silver. Thus, for instance, in 1850, as Mr. Caird tells us, a county in which a labourer's wages were as high as 12f. 50c. a week was the exception, while, at the present time, one where this is not the case, has become the exeeption in its turn. This sum is the value of the smallest gold piece which is coined in England, the half-sovereign ; and as the labourers' wages are paid weekly, it is evident that gold coins must often be used where silver alone was formerly required. A substitution of gold for silver, on a much larger scale, was occasioned by the mint regulations of those countries "^^•hich maintained a double standard, i.e., where gold and silver may be used indifferently, at the pleasure of the debtor, to discharge debts of any amount. "Where this system prevails, it is, of course, necessary that the Grovernnient should fix the proportion between the values of gold and silver, and in most countries where this had been done, gold had been underrated, having been generally assumed to be fifteen-and-a-half times as valuable as silver, while the true proportion was more nearly that of fifteen-and-three-quarters to one. The Californian discoveries soon produced a slight change in the proportion previously subsisting between the values of the two metals, and a kilogramme of gold Avas found to be worth no more than fifteen-and-a-quarter kilogrammes of silver. The Dutch Government, fearing that a great depreciation of gold was about to take place, thought to save its subjects from the e-vils consequent on a change in the value of money by expelling gold fi'om its circulation, and enacting that all large debts should be paid in silver; and this step accelerated the depreciation by bringing a large quantity of gold into the market. In France, where the proportion had been fixed at 15i to 1, it became apparent in 1850 that debtors could more easily discharge their debts by purchasing gold, and getting it coined at the mint, than by paying them in silver coin. A kilogramme of silver (900 fine) had been coined into 200 fi-ancs, but would formerly sell for no more than CAUSE OF FALL. 215 197 francs in gold coin, but in 1850 it would sell for 203 francs, altliouo-h ■when coined it would only pay 200 francs, as before. It was, tliereibre, the interest of the buUion leaders to collect silver coins, more especially the new ones, to melt them do^ni, and to sell the ingots at the rate of 203 francs a kilogramme in foreign countries ; and they did tliis to such an extent that silver coin almost disappeared from France. In 1848 that country had possessed two-and-a-half milliards of silver, and only seventy-five millions of gold coin, but in a few years the latter had increased to two milliards, and the former had diminished by an equal, or, at least, a considerable amount. The French (lovernment found it necessary to coin gold pieces of the value of five I'rancs, being smaller than any gold coin which had been previously issued, in order to supply the place of the silver pieces of the same amount, which were, and are, constantly melted down as soon as issued. This large absorption of gold into the French currency has acted, as M. Chevalier expresses it, as a Parachute to retard the fiill in the value of gold, since it has caused a larger quantity to be required than Australia and California could at once supply, and the inferior mines of Hungary, Russia, &c., have determined the value of the metal ; and although some were abandoned, it ^^■as not necessary to cease fr'om working aU those \\hich were less fertile than those newly discovered. Belgium, Switzerland, and Italy, Avere placed in a similar position to that of France, and experienced a similar substitution of gold for silver in their currency, and the Californian discoveries accelerated the same process which had already commenced in the United States. Gold had, in that country, been reckoned as sixteen times as valuable as silver, which was, even then, an exaggerated estimate, and it was gradually taking the place of silver hi the currency; but when its value fell to no more than fifteen- and-a-quarter times that of silver, the disappearance of the silver coin produced so much inconvenience that the Government was obliged to issue small gold pieces of the value of 5f 20c. to take the place of the silver coins of the same amount. In Spain, Eussia, and other countries there was also a considerable substitution of gold for silver coin, and in 1871, Germany, which had so long maintained a silver standard, determined to follow the example of most civilized nations by admitting gold into her circulation on such terms that it would be preferred to silver in all large payments ; and for this purpose it was necessary that gold coin should be struck to the amount of two milliards. On the other hand, other causes have been in operation which have tended to reduce the quantity of gold coin in the world. The action of the Dutch Government has already been referred to, and a similar policy was pursued by the Government of India. In 1841, an order liad been issued 21 n CAU8E OF FALL. enjoining all Indian officials to receive gold coins whenever tendered ; but in 1852 this order was rescinded as far as regarded large payments. It is understood that the Indian Government took this step because gold coins had been offered in rather larger quantities, and fears were enter- tained that the Govermnent ^\'ould be unable to dispose of them again ; but as, in the Indian coinage, gold and silver are valued at the rate of 15 to 1, while in the rest of the world they exchange at the rate of 15j to 1, it is not likely that gold coin would have been to any great extent pre- ferred to silver for the payment of taxes or other obligations. There are, again, many instances in ^\•hich paper has been substituted for gold, and the most notable one of the kind is aflbrded by the introduction of *' greenbacks " into the United States during the civil war; the use of which has continued for many years since the restoration of peace. But although the introduction of a forced paper-currency renders a smaller quantity of coin necessary, it by no means enables the people to dis- pense with coin altogether ; and the official returns of the United States show that the Government has always a large stock of gold in the treasury, and the Customs duties are still required to be paid in gold. In other countries which have no inconvertible notes, there is a tendency to an increased use of bank-notes, cheques, and other substitutes for coin ; but unfortmiately, the meddling propensities of legislators have hitherto greatly impeded the development of this system. In England, for example, the foolish Bank Acts of 1844 and 1845, have prevented an increase in the quantity of bank-notes, except on condition of an increase in the metallic reserves of the banks which issue them ; and there is pro- bably no country in the world in which more bank-notes would not be used if the banks Avere allowed to manage their own business, and to issue as many as their customers required. On the whole, the causes which have tended to increase the consumption of gold have greatly pre- ponderated over those which have tended to diminish it ; and while the total stock of gold in the world was nearly t^nce as great in 1871 as it had been in 1848, its value, as has been seen, had not fallen in England more than 25 per cent. The total stock, as before mentioned, was equi-s'a^.ent to 14 milliards in 1848, and had been increased by 12| milliards by the end of 1871 ; and most of this large addition has been absorbed by the currencies of Continental Europe and by Asia. A nearly equal depreciation of silver has taken place during the same period, and the mere substitution of gold in its place, which has been already referred to, would be enough to cause a fall in its value. The silver market was so abundantly supplied fi-om the currencies of France and other countries, that a smaller quantity would, other things being equal, have been required from Mexico and the other countries which CAUSE OF FALL. 217 produced it. This would cause some of the inferior mines to be aban- doned, and the vahie of silver would consequently fall. In fiict, how- ever, the annual production of silver increased from 200,000,000f. to 300,000,000f. ; and this is explained by the discovery of -abundant quicksilver mines in California, which, by reducing the cost of quick- silver, reduced the expense of extracting silver from the ore, and, consequently, reduced its value also. The large quantities of silver which were expelled ft'om the circulation of Europe were for the most part sent to India and China ; and it has often been made a matter of wonder that they could have been absorbed by those countries, and, from sheer ina- bility to suggest any other explanation, it has been supposed that they have been hoarded. There seems, however, to be little real ground for such a supposition, and I would hazard the conjecture that they have really been used to fill tlie void occasioned by the abandonment of some silver mines in the interior of China. Sir John Davis* mentions that large quantities of silver were formerly brought down to Lintin and exported to India, and that this showed that consideral)Ie sources of supply existed in the Empire. A llussian writer, Otreschkotf, quoted by Mr. Xewmarch, (history of prices, vol. 6, p. 762) estimated in 1856 that the annual production of silver in China was no more thtm 4,500,000f., and describes the Chinese Government as opposing every obstacle to the working of the mines. It would seem that whereas China used formerly to produce enough silver to supply its own wants and those of India, it now imports silver from Europe and America, and that India has to pursue the same course. Perhaps the obstructions of which Otreschkotf speaks would not be so effectual if it were not that China finds it more profitable to import silver from abroad. While the gold mines of Russia were the most productive in the world the Russian G-overnment obtained a revenue from a tax which it imposed upon them, but the competition of California rendered them unaljle to submit to it, and as the Russian Government refused to remit it, many of the mines wei'c abandoned. It is not surprising that a very large quantity of silver should be required to supply the wants of India and China, two countries which are sup- posed to contain half the population of the Globe ; and, in both of which, silver performs most of the functions of money. Mr. Newmarch, in the aljle work which has been just referred to, and from which much of the information made use of in the present chapter is derived, estimates the whole quantity of silver existing in India in the form of coin and plate, as equivalent to ten milliards, and that a hundred million i'rancs' worth are required to replace what is consumed ])y the wear and tear of a single * The Chinese. Loudon : 1811. Vol. IIL, p. 137, 238 ITS CONSEQUENCES. year. If the value of silver has undergone, as there is every reason to suppose that it has done, a slight reduction, a much larger quantity would be required every year in order to increase the amount in proportion to the Ml in its value. What may be the amount existing in China, is of course unkno^vll, but it must be very large ; for, although the Chinese can scarcely be said to possess a coinage of their own, they use silver ingots and Mexican coins, and they make little use of bank-notes, bills, or other modes of substituting paper for coin in carrying on their com- merce, which is certainly considerable. I have already referred to the letter of " F. G. S." in the "Times" of June 19, 1872, stating, that during the past ten years the percentage of metal contained in the various ores of gold, silver, copper, nickel, &c., shows a marked and uniform increase over those brought to the refineries during the previous decade. He does not tell us what is the cause of this difference, the explanation of which is probably to be found in some improvement in the processes of smelting and refining ; but whatever the cause may be, it is one which must tend to lower the value of gold and silver. When the gold discov- eries were first announced, it was supposed by some persons that gold would in time become as cheap as silver, and there is, of course, nothing- impossible in such a consummation ; and if Australia had been excluded from intercourse with the rest of the world, such a state of things might actually have prevailed there, since gold is found there in abundance, while silver is very scarce. It has already been mentioned that in Japan, before the Americans obtained permission to trade there, gold was only worth four times its weight in silver. At present, the tendency seems to be for silver to fall more rapidly than gold. The consequences of a change in the value of the precious metals are so numerous and important that M. Chevalier has devoted a separate treatise* to the examination of them, and yet he does not discuss the whole subject, but confines himself to those effects which are conunon to the whole world, and does not deal with the changes introduced into the commercial relations previously existing between different countries. It sounds paradoxical to inquire whether mankind have benefitted by discoveries which have enabled them to procure these metals with less labour, and yet, as coin is only used as the medium of exchange, for which purpose portability is an advantage, the cheapening of the metal of which coin is made renders it necessary that people should carry a greater weight in order to exchange commodities of the same value. In England, therefore, the cheapening of gold lias been, in some respects, a * De la Baisse probable de I'Or : des ConsSquences Commerciales et Sociales qu'elle i^eut avoir, et des mesures qu'elle provoque. Pai-is ; 1859. ITS CONSEQUENCES. 219 disadvantage, by increasing the labour of transporting it from place to place ; while in those countries where it has taken the place of silver, the people have gained by the substitution of the less bulky metal fur the more bulky one. They have benefitted also by the general adoption of that metal which has long been the sole standard of value in England, which makes it more easy to settle the balance of their payment due to or fi-om England ; and this is a considerable advantage, considering the great extent of English conmierce with those countries. It does not matter so much whether gold or silver be generally used, as that the same metal should be employed in all countries, and the inconvenience be thus avoided which results from the fluctuations in the gold price of silver and the silver price of gold, which render it uncertain how much money a merchant in one country may require to discharge a debt in another. As the advantage of uniformity in this respect has been accompanied by the adoption of the more portable metal, there has been, on the whole, a considerable assistance afforded to commerce. In so far as gold and silver are used in manufactures there has been a gain, since articles made of these metals can be procured with less labour, although it does not follow that they can be obtained for a lower price. As Mr. Cairnes has pointed out in a review * of M. Chevalier's work, a fall in the value of gold would tend to raise the price of a gold snuff-box, for though the price of bullion is unaffected by the change, yet the wages of the v/orkmen employed in making the box are higher, and the price, in so far as it depends on the workmanship, must rise in proportion. The prices, therefore, of articles made of gold and silver, rise in proportion to the amount of labour expended upon them, and their value falls in so far as it depends on that of the raw- material. The most serious effects of the change are those which are implied in a disturbance of all con- tracts extending over a term of years, and expressed in sums of money. Of these the most important are the obligations of a State towards the holders of its funds, and those of landlords towards their mortgagees. In all these cases the creditor loses one-fourth of what he ibrmerly received, and the debtor gains to the same extent. The same sum of money is paid as before, but its value is one-fourth less ; and the ques- tion naturally arises whether the creditor is entitled to any compensation for the loss which he suffers. The obvious answer to this question is, that the creditor can only claim an increase in his dividends when the value of gold falls if he has agreed to submit to a diminution when its value rises, and as this has never been done in the case either of iund- holders or of mortgagees, their claim to compensation in the present * " Edinburgh Eeview," July 18G0, i>. 18. (llc-iuiblislied in liis Essays). 220 ITS CONSEQUENCES. case will not bear examination. They did not ask to receive every year commodities of an equal value, but an equal quantity of gold, and the value of this metal frequently varied before 1850, as it has done since that time. As regards the fund-holders, it may be remarked that the larger portion of the National Debt of England was accumulated during the last war with France, and that during that period the value of gold Wi^s at one time less than it is now, since Arthur Young gave the average rate of agricultural wages in 1810 as 3f. a day, or about one-sixth higher than in 18G9-70. If the change had come sud- denly, and had been completed in a single year, a claim for com- pensation might be reasonably set up, but it has been very gradual, and the fund-holders have had ample time to find other investments for their money ; and the immediate effect of the gold discoveries was to confer a benefit upon them, since the large quantities of gold deposited in the banks lowered the rate of interest, and raised consols to par, a height which had very seldom been attained before. The people, as a whole, have neither gained nor lost, for what the fund-holders have lost the tax-payers have gained, and what the mortgagees have lost the mortgagers have gained ; but a transfer of such a kind, and on so large a scale, implies a great deal of individual suffering. xV large proportion of these securities are held by trustees for the benefit of widows and children, and other persons, who are incapable of working to support themselves, for whom, therefore, there is no relief for what amounts to a reduction in their often scanty incomes. A considerable amount is held for the benefit of charitable institutions, but in their cases a diminution in the value of their endowments is rather a public benefit than otherwise, since it gives the present generation an opportunity of revising the judgments of their ancestors. Ancient endowments are apt to become, after a lapse of time, either injurious, or, at least, useless, but interference with their management is always a matter of difficulty; and a practical diminution of their power of mischief, effected by the operation of natural causes, is a public advantage. In those few cases where a charitable endo^nnent continues to do good service, the people are able to compensate its losses by further donations, which their practically increased incomes enable them to afford. The transfer is made from the non-industrial to the industrial classes of society. The labourers, as a whole, are in the same position as before, although they sufler during the period of transition, which is effected, as M. Chevalier says, not by a continuous flow, but by a succession of jumps. People are so much nnder the dominion of habit that it is always difficult to resolve on a rise of price, and still more so to resolve on a rise of money-wages. When the prices of some articles, and wages in some trades, have risen, ITS CONSEQUENCES. 221 labourers in other trades continue, for some time, to pay higher prices, without asking for an increase in their own wages ; and Avhen they do so at hist, they say that they must ask for more because provisions, etc. are so dear, and this sliows that they must have suffered some sacrifices before resolving to demand a rise. The capitalists, as a body, are unaffected, for the higher wages which they have to pay are compensated by the higher prices of the articles produced ; but in their case also the fluctuations of wages and prices entail considerable losses on individuals, and the strikes to ^vhich the readjustment of the scale of wages has given occasion have inflicted great hardships on large classes of employers in all parts of England. In two of the so-called professions, the medical and the legal, wages are determined, not by competition, but by custom ; and as the scale of fees has not altered, tliere has been a practical loss on the part of physicians and barristers. A physician still receives his old fee of 26f. 25c. for a single visit, and this is now worth one-fourth less than formerly ; Ijut it is by no means certain that the average annual income of this class has not increased in proportion to the fall in the value of money, since physicians, though they cannot diminish the amount of a single fee, yet often decline to receive one, and by accepting one more often than formerly, they have it in their power to increase their total receipts, and they have every motive to do so in the circumstances here under consideration. The barrister's fee, though its minimum amount is the same as the physician's, may be increased to any amount ; and the cheapening of money by raising the incomes of other classes, enables litigants to pay more to barristers, who, in their turn, can easily make their wishes felt by declining to undertake, or by peribrming badly, any business for which they are not ottered suilicient remuneration. The effect of the discoveries has been to diminish the command of the labour of otliers which the possession of a given sum of money secures to its o^\^ler ; but, as the progress of industry has lowered the cost of pro- ducing other articles besides the precious metals, there are many whose l)rices have not risen, and it may be thought that the present inquiry is unprofitable, and that what people really want to know is whether a given sum of money will procure the same, or a smaller amount of com- fort to its possessor. Adam Smith anticipated a similar objection, and I cannot do better than quote the remarks with wliich he concludes his elaljorate review of the changes which had taken place in the value of silver. " The same quantity of silver, it may perhaps be said, will in the present times, even according to the account which has been here given, purchase a smaller quantity of several sorts of provisions tiian it would liavc done during some i)art of the last century ; and to ascertain whether 222 ITS CONSEQUENCES. this change be owing to a rise in the rakie of those goods, or to a fall in the value of silver, is only to establish a vain and useless distinction, which can be of no use or service to the man Avho has only a certain quantity of silver to go to market with, or a certain fixed revenue in money. I certainly do not pretend that the knowledge of this distinc- tion -will enable him to buy cheaper. It may not, however, upon that account be altogether useless." After pointing out the utility of knowing whether the rise of prices is due to a fall in the value of silver, or to an increased difficulty of pro- ducing the articles themselves, he continues : — " It may, too, be of some use to the public in regulating the pecuniary rcAvard of some of its inferior servants. If this rise in the price of some sorts of provisions be owing to a fall in the value of silver, their pecuniary reward, provided it was not too large before, ought certainly to be augmented in propor- tion to the extent of tliis fall. If it is not augmented, their real recom- pense will evidently be so much diminished." (Book I., chap 11.) As the wages of common labourers have risen one- third since 1850, the salaries of all those employed in the public service should be raised in like proportion ; of course, with the reservation inserted by Adam Smith, provided they were not too large before. This ajiplies equally to the humblest and to the most exalted among them ; to the policeman and the letter carrier, to the prime minister and the commander-in-chief. The salaries of all of them are, or ought to be, fixed at such a rate as to compensate the greater or less inconvenience and labour required, as compared with the pay received fi'om private employers. If a fall in the value of money renders the scale no longer appropriate, if the clerks or other public servants receive the same pay, while those in private employ- ment receive increased salaries for doing similar work, an increase in their salaries is required quite as much in the interests of the public as in that of the ofiicials themselves. They have entered the public service because they thought that the pay which was oflTered was as much as they could obtain from private employers, regard being had to the kind of work required, and the advantages attending their position as servants of the state ; and now that the elements of the calculation have altered, they are entitled to ask that it should be made over again without exposing them to the hardship of resigning the posts in which they have spent their lives. If this is not done the public service will be injured, partly by more frequent resignations of such as can obtain employment elsewhere, and the inconvenience wliich such changes inflict on the service, and partly by the indisposition of those who consider themselves aggrieved to do more work than they can possibly help. Even now, it is said that the puisne judgeships are often declined by ITS COXSEQUEXCES. 223 successful barristers on cacconnt of the pay being insufficient, and if this is the case lAith these highly-paid offices, a revision of official salaries must indeed be necessary. A rise in the price of coals, such as that which took place in 1872, and which amounted to 50 per cent., which is consequent on the increased difficulty of raising coal, affiirds no ground for an increase of salaries, because it affects all classes alike, and, if it had been foreseen at the time when the officials entered the service, they could not have provided against it, for they would have suffered quite as much if they had entered the service of private employers. In connection with this subject I may refer to the attempt which has been made by a certain party in the House of Commons to enforce retrenclunent in the national expenditure by restricting it to a fixed sum of money. Honourable as are the motives of those who take this course, they only weaken their cause by adopting it, for it is impos- sible that when the value of money has fallen the same sum can be sufficient to obtain the same quantity of labour. Mr. (now Sir "William) Harcourt, in his speech made in the House of Commons, on February 18, 187o, found fault with the ministry for having allowed the national expenditure in the year 1872 to exceed by 75,000,000f that of 18G(), and in answer to the plea that the prices of many articles required by the Government had risen, he urged that steps ought to have been taken to reduce the expenditure in other directions. An Economist must read with astonishment such a singular argument, for on what rational principle can it be contended that the same sum of money which was sufficient in 18()G must have been sufficient in 1872 ? Not only had population increased in the interval, not only had commerce extended itself in a greater proportion, but the Government had undertaken new duties, and notably had devoted a larger sum to defray the expenses of popular education, and, in addition to all this, a marked fall in the value of gold had taken place in the year 1872. It would be thought strange indeed if anyone were to contend that the people of England ought to be satisfied witli the same quantity of food which they had found sufficient seven years ago, or that a manufacturer who had found it profitable to increase the number of his furnaces should still content himself Avith his former quantity of coal. Yet such a contention woukl not be more surprising than that put forward ))y Sir William Harcourt. The value of money has fallen, and the Government must, therefore, jiay more to those whom it em[)loys, and Sir WiUiam Harcourt replies that in that case it ought to employ fewer men. The vahic of coal, of iron, and of some other articles of which the Clovernnicnt requires a large (]Mantity has increased, and Sir AVilliam Harcourt maintains that tiic Government ought to buy smaller quantities. This course may 224: iTri CO^'SEQUENCES. be suitable to a private indiTidnal, but the GoTerument has to proTide for the defence of the country, and the same number of ships and guns are required whether they be cheap or dear. The increase of which he complained only amounted to 5 per cent., and the increase in the incomes of the people during the same interval was certainly quite equal in extent. They were, therefore, quite as well able to meet the increased burdens as they had been to bear the lighter ones. It is true that Uie increased cost of coals had inflicted considerable suflFering on the middle and lower classes, and this constituted a grave argument for reducing expenditure, but this argument could derive no additional support from the fact that a smaller sum of money had been found sufficient in 18GG than was spent in 1872. The gold discoveries have reduced the value of that metal in those countries where they took place to a greater extent than in the rest of the world. They have, consequently, given rise to some peculiarities in the commercial relations of Australia and Cahfornia with the rest of the world, which have been pointed out and explained by Cairnes in "Eraser's Magazine" of September. 1859, and January, 18G0.* Humboldt contends that the possession of gold or silver mines is not prejudicial to the agriculture of a country, and he points to the fact that land is cultivated in the vicinity of the mines for the sole purpose of supplying food to the miners as establishing his theory. Cairnes, however, who has quoted and commented on this remark of Humboldt's, points out that the possession of mines does induce the people to turn their attention to them rather than to the raising of agricultural produce for exportation. Humboldt himself observed that the people of Mexico exported very little of any other commodity than silver, and he attributed this to a mistaken idea of their true interests prevailing among the people. But it is an error to suppose that a peojile can continue for centuries to export a particular article when they jjroduce another one to export which Avould be more profitable to them, and although Humboldt is right in saying that wealth does not consist of money alone, he is wrong in supposing that the wealth of Mexico is not increased by means of its exportation of silver. The silver itself is not its wealth, but the foreign commodities which are exchanged for it form a great part of the wealth of the Mexican people. Cahfornia and Australia have continued, since the discoveries, to obtain most of their imports in return for gold, and here also the possession of abundant mines has tended to develope mining enterprise at the expense of other branches of industry. Cahfornia, though possessing extensive forests, * Re-published in his Essays. ITS COX.SEgUEXCES. 'J'Jo imports timber from Yancouver's Island ; and Australia, though possess- ing almost unrivalled pastures, imports, or used to import, butter from Ireland. Boots and shoes are exported from England to Australia, although leather can be procured in Australia with less labour, and boots can be manufactured with at least as little labour as in England. Though they could be produced in Australia with less labour, they cannot be sold at so low a price because money-wages are higher, not merely absolutely, but relatively to the efficiency of the labourers, and the people of California and Australia obtain, by importing foreign commodities, an advantage of the same kind as that enjoyed by a landlord who possesses a superior farm, and they, in fact, receive a rent from the rest of the world for the use of their abundant mines. This advantage in their position has given a great stimulus to emigration to those countries, and, consequently, to their industrial progress, which has been remarkably rapid. During the ten years, 1840-49, the total number of emigrants to Australia amounted to 126,937, while in the next decennial period, 1850-59, the number swelled to 498,537, that is to say, very nearly quadrupled. The population of Australia increased from 503,451 in 1850, to 1,105,424 in 1859, that is, more than douljled, while that of Victoria, the principal seat of the discoveries, increased nearly sevenfold during the same period, having risen from 77,345 to 530,202.* The remoteness of Australia had previously proved a great obstacle to its colonisation from Europe, but the attraction of the gold mines ^^•as sufficient to overcome all difficulties, aud the discoveries have powerfully contributed to the extension of civilisation in this new quarter of the globe. The effects of the discoveries in California have been even more beneficial to mankind, since they have prevented the establishment of slavery in the Pacific States of the American Union. The cession of California was extorted from Mexico by the Government of the United States, because the then dominant slavery party desired to extend slavery into that regiou, and wished, and intended, to fuiMu it into a Slave State. The gold discoveries, however, were made almost as soon as the cession had taken efiect, and the news attracted so large a body of miners from the Free States, that the proposal to introduce slavery was rejected by the ]ic()])le. The adnn'ssion of California into the Union as a Free State disturbed the bahmce which had hitherto been even between the Free and Slave States, and by tuniing it in favour of the former, paved tlie \\-.\y inv (hat dissatisfaction on the part of the latter whidi produced tlie civil war, which resulted in tlic al)olitii. 30.1-315. 2i?(; ITS CONSEQUENCES. ifc has received most of the gold exported from them ; and when the importation had produced a rise of wages, and of the prices of many articles, it became profitable to import goods from the Continent, and to export gold in return ; so that England has performed the part of an agent in distributing the new supplies of gold throughout the commercial world. In this way England received during the period 1858-71, 4| milliards, of which it is known that three milliards, and it is supposed that a larger quantity, have been re-exported, partly to the Continent, and partly to India and China. During the same period more than a milliard Avas sent direct from the gold-producing countries to India and China, and the rest of the 7i milliards, which were raised in the whole world during this period, have been absorbed, partly by the Continent, and partly by the gold countries themselves. CHAPTER YIL— TEADES' UXIOXS AXD CO-OPERATION. OBJECTS OF trades' UNIONS — THEIR ORGANISATION — EXTENT OF THEIR POWER — THEIR UTILITY — CO-OPERATION — INDUSTRIAL PARTNERSHIP — GENERAL REFLECTIONS. The rise of wages which has been described in the last chapter has uot taken place without attracting a large share of public attention, and there is one explanation which has been so often, and so ably put forward to account for it, as to require an examination at some length. It has been frequently asserted that the rise in question has been brought about by the action of those combinations among the workmen which are known by the general name of trades' unions, and the discussion of this ques- tion has been in the highest degree advantageous to the progress of Political Economy. Among the works to which this controversy has given birth, two stand pre-eminent, one on either side of the question ; that of Mr. Thornton, " On Labour," in which it is contended that trades' unions can, and do, raise wages, and Mr. Brassey's " Work and Wages," in which it is contended that they cannot, and do not, raise wages to any higher level than free competition would establish. It might be sufficient, as far as concerns the discussion in the last chapter, to point out that the fall in the value of gold was deduced from the rise in the wages of agi-icultural labourers, and that no unions were formed amoug this class until after the latest year to which the figures there given relate. But the question is of such importance, and its solution is so necessary to a right understanding of the laws which govern wages, that it deserves an examination on its own account. A trade union is a society of workmen formed for the object of supporting its members when, from some cause or other, they are out of employment. The rules of different unions differ considerably ; some of them granting an allow- ance to members in case of sickness, some of them sanctioning a payment for the funeral expenses of a memlier or his wife, while others are confined to the supjiort of men on strike. There have always been temporary comljiuations of workmen for the i)urpose of assisting one another daring the continuance of a strike, and such associations were referred to hj Adam Smith, and one is even lueutiitiied as having been formed in the 1 1th century. But it was not till tlie present century that workmen began to feel the necessity (;f Ibrming a permanent orga- Q2J li-IS OBJECTS OF trades' UNION'S. iiisation for conducting tlieir disputes with their employers, and for suc- couring one another in cases of unavoidable distress ; and the ra] id growth of these societies during the present century, has, no donl)t, been brought about by the great extension of our manufactures, and by the great and frequent vicissitudes which this extension has entailed. It so frequently happens that a particular trade is depressed in one to'^Mi while it is flourishing in another, that those who are engaged in the same trade have become sensible of the advantages which they might derive from an organisation which should enable thcni to remove from a place where their labour is not required to one where it is ; and where this cannot be done, should relieve their most pressing wants by a moderate allowance paid out of a fund to which they have themselves contributed when fidly employed. As soon as a society has agreed to give an allowance to its members when out of work, it becomes almost necessary to determine what is the proper rate of wages which its members ought to receive while working at the trade to which they belong ; since, if a man who is out of work is oflerred what is no more than half the usual wages of the trade, it cannot be said that he has a Mr offer of employment ; and he may justly call on the society to give him an allowance just as if no such offer had been made to him. These societies, therefore, generally fix a minimum rate of wages, less than which its members are at liberty to refuse without forfeiting their claim to an allowance from the society. As it frequently happens that the ideas entertained by the leaders of the society as to what is the proper rate of wages do not coincide with those of a particular master on the same subject, a society often finds itself obliged to support some of its members ayIio, though perfectly able to obtain employment if they choose, will not consent to the terms which are offered by a capitalist. • Thus, hj a natural transition, a society which has been formed to obtain objects which meet with universal approval is transformed into one of those which are the subjects of so much obloquy, the feared and hated trades' unions. Such has been the origin of some of the oldest and most successful trades' unions, which still devote the larger part of their fund to the charitable purposes for which they were first instituted, and apply only a small sum to the sup- port of members engaged in strikes. But other unions have had a less peaceful origin, having been the direct results of extensive or unsuccessful strikes. The intense misery which a protracted strike on a jarge scale has so often occasioned to those engaged in it, has had the effect of teaching mechanics ' and others the necessity of forming an extensive organisation so as to provide, not merely against temporary loss of employment in an individual case, but against even so great a calamity as the closing of all the workshops iu a single town, or in half a county; THEIR ORGAXISATIOX. 22!) ami the fuikire of a strike has thus had tlie ciroct of mitio'atinir the snf- fei-iug-s of a succeeding- strike by leading to the formation of hu-ger unions, until some have been formed with branches in all parts of En"-- land, and with some even in foreign countries. Unions which have had such an origin have formed the natural rallying points round which workmen have gathered whenever they have been engaged in a dispute Avith their employers, and have thus been led to take cognisance, not merely of disputes regarding the rate of wages, but also of those which have related to the hours of labour, the mode of performing a particular kind of work, or matters purely local or personal. The antagonism in which they have been placed towards the employers has rendei-ed it necessary for them to exercise more authority over their own members than a mere benefit society has any occasion to do, since their success in a struggle depends upon their power to deprive employers of the means of procur- ing men ; and they, accordingly, enact stringent rules to prevent their own members from working on conditions which they do not approve. As these rules frequently cause individual hardships, the unions have often been regarded as tyrannical societies, whose object is to prevent workmen from making the best bargain -\\'hich they can for themselves ; but this is but a short-sighted view, since they are formed by the work- men themselves to obtain their own advantage, and in this, as in other cases, it is frequently necessary to submit to a little suffering to obtaiu a greater and permanent good. The organisation of trades' unions is extremely simple. The members are required to pay a weekly subscription, which only in a few cases amounts to so much as a franc, and is generally much less. All the officers of the society are elected by universal suffrage of the members, and none of them, except the secretary, receive a sufficient salary to exempt them from the necessity of labouring at their trade. All the members are required to serve in turn upon the comnnttees which manage tlie afl'airs of the society, and while so employed they receive a small compensation for their trouble. In the larger unions, like the amalgamated societies of engineers and carpenters, which have numerous branches, the alfairs of each branch are, for the most part, conducted by the local connnittee ; but a strike cannot be entered on unless leave has l)een obtained from the central committee, wJiich holds its meetings in London, or whatever place may be chosen for tlic head olhce. The secretaries of the diiferent branches are required to make montlily reports to the head office with regard to the state of trade, and of the society in their respective districts ; and llnis the central executive connnittee is furnished witli (Ik; means of taking a genci'al siir\i'y of tin; <;ondition of tlie ti'ade tlirougliout the country. 'J'he central executive 230 EXTENT OF THEIR POWER. has no power to originate a strike at any of the brandies, hut can only sanction, or veto, a proposal on the part of a branch committee to engage in a strike ; and the evidence of the secretaries who were examined before the Trades' Union Commission, shows that such proposals are more often vetoed than sanctioned at head-quarters. The secretary is usually elected for one year, but is re-eligible, and generally re-elected ; and, indeed, considerable hardship would be inflicted upon him if he were not, since it is necessary for him to abandon his trade during his term of office, and this must more or less unfit him for resuming his former occupation when his time has expired. Obviously, too, it is an advantage to the society to retain the services of an experienced man who has sho'mi himself fit for his post. The secretary, however, although he is pretty sure to obtain considerable influence in the society, is always responsible to it, and is constantly exposed to the danger of dismissal if he ceases to conduct himself in a manner apj^roved of by the majority of the members. The weekly subscriptions of the members are sufficient to defray all the ordinary expenses of the society, such as the allowances in case of sickness, the pay of its officers, correspondence, printing, &c. But when a strike on a large scale is undertaken, an additional levy is made upon all the members who are in employment, for the purpose of maintaining those on strike. The allowance which the latter receive seldom amounts to more than a third of what they would earn if they could obtain employment ; so that the assistance of the society can hardly be said to afford any encouragement to idleness, more especially as they forfeit their allowance by refusing to accept employment when the conditions are approved by the committee of the society. In some cases a society grants money in aid of a strike in some other trade than that to which its own members belong, but this is only an exceptional case, when the strike has excited much public attention, and is of such a nature as to enlist the sympathies of the great body of the working classes in its favour. In order properly to discuss the vexed question whether trades' unions are able to raise the rate of wages, it is first necessary to determine what is meant by their ability to raise wages. Unfortunately, some even of the ablest writers who have engaged in this controversy seem to have done so without any clear notion on this subject, and to have thought that the mere fact that wages have risen since trades' unions were first established, is sufficient to prove that the unions have been the cause of the rise. Mr. Harrison, in his article on " The Good and Evil of Trade Unionism,"* enumerates a long list of strikes which have been successful, • K Fortnightly Review," November. 1865, EXTENT OF THEIR POWER. 231 and says, that he leaves it to those Economists wlio first frame theories and then make the facts to fit them, to explain how the facts which he cites are to be reconciled with the theory wliich maintains that combi- nations of workmen have no power to alter the rate of wages. Mr. Thornton in discussing the same question, observes, " A review of the industrial warfare of this country during the last forty or fifty years will show, on the one hand, that when differences between masters and men have led to very severe and protracted struggles, the masters have invariably come off conquerors, yet will show, on the other, that in all the intervals between their victories the masters have been continually giving way. Repeatedly they have been seen successfully maintaining their ground against the most desperate assaults, and then, presently afterwards, tamely retreating without waiting for a renewed attack. Repeatedly they have put themselves to enormous expense in resisting their men's demands, for little other purpose, apparently, than that of having a decent excuse for subsequently admitting them. During nearly half-a-century, all signal triumphs have been on one side, all substantial success on the other. In all the more extensive and prolonged strikes, whose dui'ation proves that though strenuously maintained they were likewise firmly resisted, the men having invariably put forth their utmost strength merely to find that strength miserably inadequate ; invariably, they have met with what a tender-hearted opponent, regarding their proceedings with eyes not the less commiserating because those of an ironmaster, has aptly termed ' the same dismal uniformity, the same miserable monotony of defeat.' . . AVherever the masters have persevered they have reduced their men to submission, but there is no great exaggeration in saying that for every instance of such successful persistence on their part, there have been a hundred in which they have yielded or compromised tlie matter at issue, perhaps after a short fight, but as often as not, merely waiting to be convinced that the men were in earnest about fighting. In all trades under the influence of unionism, Avages, though subject to occasional fluctuation, have, ever since that influence began to make itself felt, been, on the whole, continually rising. In some they are 25 or 30, and in one 50 per cent, higher than they were forty years ago, and in all, the average rate is probal)ly at least 15 per cent, higher than it was then." (On Labour, 2nd Edit., pp. 251-254.) These writers seem to consider that the question is merely whether a rise of wages is sometimes opposed l)y tlie masters, and is conceded iVom a fear on tlieir part tliat the men will refuse to work unless they obtain what they demand. If this were the whole of the question at issue there would be little occasion for controversy, since nothing is more 232 EXTENT OF THEIR rOVrET!. certain than that masters have frequently acceded to the demands of a trade union. But the economic question is not -^'hether unions are in some cases a part of the machinery employed in adjusting the rate of wages, but whether the unions ha'S'e any power to raise wages above the rate at which they would be fixed by the competition of masters and men if there were no coml^ination on the part of the latter. The "post hoc, ergo propter hoc," which these writers put for^vard as a sufficient argu- ment to establish their case, Avill not avail unless it can be shown that no rise has taken place in those trades which are not subject to the influence of nnionism. Kot only do they furnish no evidence to show that there has been no rise in other trades, but it would be difficult to do so, for the table given in the last chapter shows that during the period 1851-70 there was a rise of 30 per cent, in the wages of agricultural labourers, although they had not at that time formed any unions at all. There can be no doubt that wages sometimes rise, and in those trades in which nnions exist a demand for an increase is frequently put forward or sup- ported by the unions, but if there is no greater rise in these trades than in others the mere fact of a rise does not prove that the unions have caused it. The immediate occasion of a rise is a request on the part of the men, and the consent of the employers is necessary to establish it ; but the question is, whether the rate can be settled arbitrarily, or whether both employers and men are obeymg, consciously or unconsciously, an economic law which settles what their rate is to be, and to which both parties must submit. Mr. Thornton, indeed, is prepared to find other explanations given of the rise to ^vhich he refers, but he thinks that they can be easily disposed of by the follo^^ing reply : — " Of course it is open to any one to question whether the enhancement of labour's remuneration Avhich has thus been going on at both ends is due to the influence of trades' nnions, and whether it would not have taken place equally if the price of labour had been left to find its own level without extraneous interference. The questioner here, however, may very properly be left to answer himself, as he may satisfactorily do by proceeding to enquire how often any portion of the enhancement referred to has been volunteered by the masters, and how often it has only yielded to solicitation with force in the background. He v,i\\ find the instances of masters spontaneously raising wages to be about as numerous as those of workmen conscien- tiously beheving themselves to be overpaid, and coming forward to insist that their wages should be reduced." (pp. 257-8.) But this, if it proves anything, proves too much ; for, if the mere fact that a rise of wages is preceded by a demand on the part of the labourers is sufficient to prove that they can raise the rate of wages, the parallel fact that a fall never takes place unless proposed by the EXTENT OF THEIR POWEH. 233 masters must be suflicicnt to prove that tlic latter have the power of reducing wages, and we are thus brought to the singular conclusion that each of the parties to the bargain has the power to determine it in his own favour. Mr. Thornton seems to forget that the cpiestion is, not which of the parties is the first to propose an alteration, but whether a combination on one side is able to clfect an alteration under conditions in which it would not take place if no combination had been made. It is difficult to conceive any stronger argument against ]\Ir. Thornton's contention .than is furnished by his own evidence. He tells ns that whenever a great straggle has taken place between masters and men the former have invariably triumphed, and that, nevertheless, wages have been constantly rising. Surely this affords a convincing proof that the rise is due to some other cause than the action of the men. Whenever they have put forward a demand ^^■hich the employers have seen to be inadmissible they have been unsuccessful, and they have succeeded only in those cases where the employers have considered the claims to be reasonable, and have readily consented to them. Surely, then, the explanation of the rise must be sought in the circumstances which con- vince employers that a rise is required in some cases and not in others. Mr. Harrison and Mr. Thornton have, of course, no difficulty in selecting trades in which unions liaxc been formed and in Avhich wages have risen, and if v,'e confine our observation to these trades a good case seems to be made out ; but it has been reserved for Mr. Brassey to show that the rise has been by no means confined to these trades, and thus to confront the imposing array of facts with another set of facts equally well-established, and tending to an exactly opposite conclusion. The following passage affords some instances of a rise of wages in cases where trades' unions were not in operation : — '' Our operatives have but a faint conception of the rise of v,-ages which has taken place abroad in countries where trades' unions did not exist, and where the im[)rovement in the workman's condition was attributable solely to the increased demand lor labour. From the tables given in the report prepared by Sir. Phipps, on the industrial classes in Wurtemberg, it appears tliat the average increase in the rate of wages in eight branches of manufactures and industry, during the hist thirty yeai-s, auiounted to ])et\veen {',0 and 70 per cent, in tlie building trades the rise of 80 to 00 ])cr cent, is to be explained solely by the unusual activity in the trades. As a general average, 09 per cent, may be taken as tiie increase in the ■ daily wages for the out-door labourers. In their class the increased demand lor labour is peculiarly noticeal)le. In Hungary, ])eforo iHOri, the wages of common labourers were Is. 3d. a day. In Moldavia the same rates of wages were paid on thi; railways, altiiuugh agTicultural 234 EXTENT OF THEIR POWER. labourers were earning only Gid. a day in money, together with an equivalent of Sid. in food. In 1871, in Saxony and Bohemia, in con- sequence of the great and increasing demand for labour, both on the railways and from the general revival of industry after the cessation of hostilities with Prussia, the daily wages of labourers rose to 2s. and 2s. Gd. On the Suczawa line the wages of labourers, at the commence- ment of the Avorks, varied from 45 to GO kreutzers, or 9d. to Is. a day; but, owing to the demand for men on the Moldavian lines, the wages rose within a year to from GO to 80 kreutzers, or Is. to Is. 4d. a day." (Work and Wages, pp. 43-45.) The London building trade has been referred to as one in which Avages have been raised by the action of trades' unions, but it appears from a table given by Mr. Brassey on p. 198 of his Avork, that the rise during the period 1853-69 AA'as no greater in the case of the mechanics who were combined in unions, than in that of the labourers who Avere not, the rise having been, in both cases, equiA'alent to 33 per cent. It was not till 1872 that an union Avas formed among the common labourers engaged in the London building trade. Thus it appears that a considerable rise has taken place in cases where trades' unions have had no influence ; but, as if to make the case still stronger, one trade which possesses a very large and poAverful union exhibits scarcely any rise of Avages daring a period of fifteen years. The Amalgamated Society of Engineers is, in point of numbers, wealth, and organisation, second only to the Amalgamated Society of Miners, and has been described as being so poAverful that employers will never again venture to try its strength. Yet it appears, from a table given by Mr. Brassey (p. 157), that the Avages of the engineers employed at the Canada Works, Bhkenhead, Avere not materially higher in 18G9 than they had been in 1854, when the Avorks were first established, the rise not being so much as 4 per cent. It is true that they had risen to a higher rate in some of the iuterA'ening years, but it is equally true that they had often fallen below the point at which they stood in 1854. The average number of men employed AA'as GOO, which, Mr. Brassey informs us, is *' a sufficient number to afford a fair opportunity of testing the average wages in the mechanical trades throughout the country," and many of them belonged to trades' unions ; and as these bodies were unable to prevent wages fi'om falling on several occasions, it would be unreasonable to give them the credit of a rise whenever one has occurred. Thus it appears that facts, when carefully and impartially collected, by no means establish the alulity of trades' unions to raise Avages above their normal level, and the ground is noAV cleared for the discussion of the theoretic question on economic principles. EXTENT OF TilEIR POWER. 235 It is commonly urged that trades' unions cannot raise wages because these depend on the proportion between the wages-fund of the country and the number of hibourers employed. If by the wages-fund be meant -simply the whole amount of what is distributed in "wages, it is clear that the Avhole body of the working classes cannot receive more unless the fund be increased,, but as the object of those who seek a rise of wages is to increase this fund, the objection has little force, unless it is maintained that the wages-fund is a fixed quantity. This, accordingly, is maintained by those who put forward this argument, for tlicy say that the whole body of capitalists set aside, or destine, a certain proportion of their capital to be employed in maintaining labourers, and that they will neither increase nor diminish this amount in consecpience of any action on the part of those whom they employ. ]\Ir. Longe and ilr. Thornton maintain, in opposition to this theory, that capitalists do not set apart any definite sum of money to be spent in wages rather than on their own personal enjoyment, or on the purchase of machinery or materials. This is perfectly true, but is hardly a sufficient answer to the argument, since their opponents do not maintain that capitalists consciously or arbitrarily devote a certain amount of capital to this purpose, but only that the circumstances of industry are such that this amount must be sc employed if industry is to be profitably carried on. In truth, however, the proposition that the wages-fund is a fixed quantity is one which has never been satisfactorily proved, and which it would l)e diflicult to establish. The quantity of food and clothing existing at any one time in a country is, indeed, limited, and cannot be increased by a combination on the part of the workmen. But there is nothing in the nature of things which compels the possessors of capital {i.e., food and clothing, &c.) to employ always the same quantity of it in maintaining operatives, and prevents them from either increasing or diminishing the ({uantity which they devote to the maintenance of their own iamilies. When an abundant harvest has increased the quantity of food in the country, it must either be eaten or wasted ; but the rich, who have the poMcr of appropriating it, may choose to employ it in supporting a greater number of their own children in idleness, or may choose to maintain additional labourers to minister to their own comfort. The advocates of the potency of trades' unions may, therefore, reasonal)ly contend that these bodies can, by exerting a pressure on capitalists, induce them to increase, not, indeed, the capital of the country, but the i)ortion of it whicli is devoted to the maintemnice of labourers, or, in other words, the wages-fund. Whether this can be done or not will be discussed later on, but at present it is enough to say that the existence of a wages-i'und does not offer an insuperable oljstarlc to its being done. 23 G EXTENT OF THEIR PO'WER. Again, it is said that trades' unions cannot alter the rate of Vwag'cs because this is determined by the demand for, and the supply of, labour. It is, ho'wever, difficult to discover any other meaning in this phrase than that wages are determined by au agreement between employers and employed. Mr. Brassey, for instance, always ascribes a rise of wages to au increased demand for labour, but he frequently assigns the fact of a rise as the sole proof of a change in the relations of supply and demand ; and if this mode of reasoning be admitted to be correct, it is not easy to see how it could be proved that a rise of wages had been brought about by the action of a trade union, since the mere fact of the rise would be urged as a sufficient proof of the increased demand for lal)our, which would be declared to be its cause. It is perfectly clear that wages cannot rise unless employers are so much in v/ant of workmen as to be obliged to give them increased wages rather than dismiss them, and if this necessity is to be called an increased demand for labour, of course wages can never rise unless the demand increases; but this aflPords no proof that a combination on the part of the men may not bring about the increased demand which, in this sense of the words, it is their object to obtain. Sometimes, indeed, Mr. Brassey uses the term " great demand for labour " to signify a state of things in which employers have so many orders on hand that they are glad to engage any man who can handle a tool, and he seems to suppose that it is only in such cases that a rise of money-wages can take place. If this were so, it might afford a proof of the inability of trades' unions to raise wages ; but the general rise which has marked the last quarter of a century has extended to many trades which have exhibited no unusual activity, and it is still open to the unionists to cite these cases as jiroofs of their power. If labour be regarded as a commodity whose price is determined by " the higgling of the market," it is open to the unionists to contend that its price may be artificially raised 1)y withholding part of the supply ; and the unions have the power and the will to do this by restraining their members (and, to some extent, all other persons) from engaging to work unless they receive sufficient wages. This argument has been very forcibly urged by Mr. Thornton, who maintains that whenever commodities are sold without any reserve price being fixed by the sellers, they are likely to fetch less than if one had been fixed, and that labour is commonly offered for sale without reserve because the labourers cannot afford to wait until the market takes a more favour- able turn. They cannot afford to wait unless they have some fund out of which to support themselves until they can obtain their own terms ; and if there are a few individuals Avho have accumulated small sums of money, they cannot (Mr. Thornton contends) obtain what they ask, EXTENT OF THEIR POWEK. '237 because they are so few that craployere can dispense with their services altogether. If Mr. Thornton merely contcndetl tliat u trade union might here and there enable an individual to obtain the current rate of ■wages when, if left to himself, he would not be able to make so good a bargain, there would be nothing to object to in the argument ; but it is going much further to contend that a rise of 30 or 50 per cent, in the wages of a whole trade has been brought about by the efforts of the miions. If a conunodity is habitually sold without reservation of l^rice, it may sometimes be sold very low, but it does not follow that it will always, or, on the average, be sold for less than its cost price ; and it does not follow that because a workman is poorer than his employer, he is more likely to yield in the struggle. As has been urged by Mr. Sterling (in his essay contributed to " Recess Stu- dies,") the motives which influence the two classes arc different in kind, and cannot be properly compared with each other. The poor man has the fear of starvation before his eyes, but the rich man fears the loss of some luxury, or some advantage of social position ; and though the latter may seem to be a more trifling sacrifice, yet the sacrifice of money which the employer is required to make is, relatively to his fortune, much less than it is to the labourer. It has been supposed that the unions limit the nimiber of apprentices whom any master is to be allowed to engage, with a view of diminishing the nmnber of labourers in the trade, and of thus raising the rate of wages. It is, however, more probable that these regulations are made rather with the view of compelliug masters to employ more journeymen and fewer apprentices than with that of limiting the number of labourers in the trade. However this may be, such regulations, if they ever restrict the nmnber of persons in a single trade, may give rise to considerable inconvenience by preventing work from being done, but they cannot raise the rate of wages. In a former chapter I have endeavom'cd to show that Avagcs arc determined neither l^y the extent of the wages-fund, nor by supply and demand, but by the efficiency of labour; and it now remains to examine whether the power of trades' unions to raise wages is consistent with this theory. Instead of reckoning wages in money, I will, for the present, reckon them in the article which the labourei*s produce. Let it 1)C assumed, for instance, that every hundred farm laliouivrs produce 3,780 hectolitres of wheat in a year, and that the rate of profit is o per cent. Under these circumstances each man's wages will l)e 30 hectolitres of wheat per annum, thus leaving 180 for the farmer's profit. In what way can a c(jmbination of labourers raise wages above this point ? Such a combination oljviously does nothing to increase the total product, and there is, therefore, no method I>y which the labourers can obtain more, 238 EXTENT OF TilEIll POWER. except a reduction of the farmer's profit. But what power have they to compel the farmer to submit to this reduction ? They can, indeed, refuse to work for him if he rejects their demands, but he is equally able to refuse them his support unless they accede to his terms. It cannot be contended that he is more in need of them than they are of him, for without him, or rather, without his capital, they could not maintain themselves at all. They might, indeed, provide their omi capital with Avhich to carry on the work, but, if they did so, they would have become capitalists, and would require the same rate of profit as other capitalists had formerly done. If we suppose that there are other trades carried on besides agriculture, a farmer would rather withdraw his capital from agriculture and employ it in some other trade than submit to a redaction of profit, and such a ^nthdrawal would, in time, produce so much distress among agricultural labourers as to compel them to reduce their demands. Mr. Thornton, indeed, contends that if all the labourers of the civilised world were united into one immense international union, they might compel capitalists to submit to a reduction of profit, because there would then be no trade to which a dissatisfied capitalist could transfer his capital. But even in such a state of things capitalists would be no more at the mercy of the labourers than the latter would be at their mercy, for capital would be just as necessary to the support of labourers as it is now, and it could not be accumulated or preserved mdess those who undertook the task received what they considered a suflficient remunera- tion. Elsewhere, Mr. Thornton himself admits that in such a state of things, the capitalists, if their combination was as perfect as that of the labourers, could bring the latter to submission. But a combination is not necessary to prevent people from -carrying on business under conditions which do not satisfy them. The self-interest of each would induce him to stand out against any demand which threatened to trench upon his profit, and the resistance of each would protect the interests of all. The same argument will, of course, apply when wages are measured in any other commodity than wheat ; and the wages of colliers, measured in coal, cannot rise unless some means be discovered of raising a greater quantity of coal with the same quantity of labour. It is the same \nth the wages of gold miners, measured in gold, where the same fact presents itself, that while the product remains the same, the labourers cannot obtain more unless the capitalists receive less, and this the latter vrill not submit to. It may be thought, however, that as all kinds of labour are not remunerated at the same rate, it is possible for a combination of labourers in a single trade to raise wages above the rate at which they should be fixed, if regard were had to the advantages of the particular trade, as EXTENT OF THEIR PuWEll. 239 compared witli other trades. May they not, without doing more work, yet exchange their products on mure favourable terms against the products of other classes of labourers ? To state the matter diiferently, it may be suggested that the money-wages of the mechanics engaged in the building trade, for example, may be raised in consequence of the tlneat of a strike, and that the master builders may secure themselves against loss by a corresponding increase in the prices which they charge to the public. Mr. Thornton contends not only that this can be done, but that it has been done in this very trade, and he devotes a whole chapter (Book III., chap. 4) to an enumeration of all the cases in which it can be done. He discusses the question as if it were one in which none but capitalists Avere concerned, and maintains that the rise in question may be eflFected in those cases where the capitalists enjoy a practical monopoly, and are not compelled to reduce their prices by fear of the competition of other capitalists. He cites the building trade as one which is generally more or less the subject of a local monopoly, since customers who require to have some repairs executed in their houses, have, generally, very little choice as to the builder whom they will employ. He cites, also, the iron trade as one in which English employers have so great an advantage over foreigners that they might raise their prices considerably without any fear of being under-sold by foreign competitors. He cites other examples of the same kind, but these two are sufficient to serve as types ; and contends that in such cases a combination of labourers may effect a rise of wages without trenching upon profit. Certainly, the rise, if eflFected in this manner, would have no effect upon profit, and need not meet with any resistance on the part of the masters. But there is another force which seems to have escaped the notice of Mr. Thornton, which is actively at work to protect the pul)lic against such an imposition. If such a rise were to take place, the labourers in the Ijuilding trade would be receiving higher wages than were sufficient to compensate its disadvantages when compared with other trades ; and this disturbance of the l)alance would attract labourers from other trades, whose competition would enal)le the emi)loycrs to obtain the necessary number of hands at the old rate. In })ractice, a strike never extends to the whole country, and when tlie labourers iii any one town demand more than tlie cmi)loyers can afford to pay, fresh hands are brought in from other parts of the country, and the former rate is maintained. If, indeed, such a strike extended to the whole country, it would Ije difficult for employers to obtain skilled workmen to take the places of tliose who struck ; but, even in such a case, the novices would be taken on to i)erform tlie woi'k which was more urgently required, while other work would be left until the novices had ac(piired 240 EXTENT OF THEIll rOWEK. Bkill, or until the strike was over. Since I\Ir. Thornton wrote, a strike in the London building trade in the summer of 1872, though maintained for many weeks, has ended in ftiihirc ; thus shoAving that this trade forms no exception to the general nilc that lal)Ourcrs who desire to obtain a rise of wages must choose a time when the state of the trade is fayourable to their demands, if they are to meet with success. Although, however, for the reasons just stated, I am unable to admit that trades' unions have any power to raise wages, except at those conjunctures when a rise would take place without their intervention, I see no reason to dispute the correctness of Mr. Fawcett's opinion, that an union may sometimes obtam a rise somewhat earlier than it would otherwise be accorded. Treating the question as an abstract one, I maintain that wages depend on the eflSciency of labour, and that labour cannot become more efficient without wages rising ; but I do not, of course, maintain that there cannot be a delay of a week or a fortnight in the readjustment of tho scale of wages in any trade. When a rise has become necessary, the employers are naturally disposed to postpone it as long as possible, and to appropriate to themselves the high profits derived from a rise of prices, unaccompanied by a rise of wages. Under these circumstances it may sometimes happen that a demand, preferred by an union, may meet with more prompt attention than one coming from an unorganised number of workmen, since the employers may stand more in fear of a strike in the former case than in the latter. Yet I would not attach too much importance even to this slight admission, for it has been forcibly urged by Mr. Sterling, in the essay before referred to, that the uncombined railway navvy knows quite as well -when his seiTices are required, and how" to suit his tone to his circumstances, as the leaders of any trade union. When there are few railways in construction, the na'S'vy is Avilling to accept low wages, and goes about begging for employment ; but when a contractor has many contracts in hand, the navvy changes his tone and refuses to work unless he obtains the high wages which he demands. Mr. Brassey mentions that in 18G6 his father's employes had become quite unmanageable, through the frequency of their demands for higher wages, but that immediately after the failure of Overend, Gurney and Co., they agreed to accept a reduction in their wages. It is gratifying to find that the conclusion thus arrived at, differs little, if at all, from the position maintained by the late Mr. Dunning, the able writer who was put forward by the trade union of which he was a member (London society of bookbinders) to defend the cause of unionism in general. I must endorse i\Iiirs recommendation of his pamphlet, "Trades' Unions and Strikes, their Philosojihy and Litention," to all who desire to know the opinions and feelings of the working classes EXTENT OF THEIR feADOUn. 241 themselves AvitLi reo-ard to this impurtant subject, and to hear both sides of the question before deciding it. The amount of information which it contains is considerable, and the manner in which the argument is stated is certainly calculated to astonish those Avho only know the aro-u- ments of the unionists at second-hand. Mr. Dunning contends that the object of trades' unions is not to raise wages above the normal rate, but to secure to each of their members the normal rate, or, as he calls it, the supply-and-demand price for his labour ; or, in other words, to pro- tect individuals against being unfoirly treated in a bargain, and receiv- ing lower wages than the efficiency of their labour would entitle them to. If, in any case, an union demands a rate which the employers cannot afford to pay to all their workmen, the employers, he says, can protect themselves by employing only the more skilful ones who are able to give a full equivalent for their wages. He docs, indeed, maintain that higher wages are paid in those workshops where many unionists are employed than in those where there are no unionists ; but as he tells us that most of the superior workmen belong to the unions, and that it is only the inferior ones who frequent the shops where lower wages are paid, the supe- riority of the former class is sufficient to account for their receiving higher wages without attributing it to the influence of the unions. But it may be asked how it is that, if trades' unions have no power to raise wages above the rate at which the exigencies of trade would compel the masters to fLx them, there should be such fierce and protracted struggles between the two classes about this Aery subject. On this question Mr. Cunning's pam})hlet throws a somewhat curious light. He tells us that some of the most celebrated strikes, such as that of Preston, in 1853, and that of the London buildere in 1859, were produced not so much by a dispute about the rate of wages, or the hours of labour, as by the haughty behaviour of the masters when the demands of the men were presented to them. In the latter instance the occasion of the strike was the dismissal of the delegates who presented a petition from the workmen asking for a reduc- tion of the hours of labour. ]\Iore recently the strike of the Newcastle engineers in 1871 was occasioned, according to the account of Mr. Burnett, the president of tlie nine hours league, by the angry refusal of the masters to consider the demands of the men, and would have been averted if they had consented to an amicable conference on the subject. Probably the masters would have much to say on their side which would tend to throw the responsibility of the rupture on the shoulders of the men, but if this be so it only strengthens the ease by showing that these disputes arise not from any economic, ncoessity, but IVom Idss of tcinjM'r on one side or the other. It docs not follow that l)ecause there is a certain rate of wages to wiiich \hA\\ parties must agree, it is, therefore, U 242 THEIR UTILITY. at once obvious to both parties ; and as long as the two classes are so entirely distinct as th?y are in a large mannfacturhig city, there must always be a risk of differencos of opinion on these matters leading to a serious quarrel. It may be thought that if trades' unions have no power to raise wages they are therefore useless, but this would be a very illogical m- ference. Because they cannot perform -what some of their admirers have supposed them capable of doing, it does not foHow that they can do nothmg. It has been admitted that they may sometimes obtain a rise somewhat earlier than it would otherwise take place, and this is an advantage to the individuals concerned. They may enable individuals to obtain the current rate of wages who would otherwise be compelled to accept less, and this, again, is a great advantage to the persons con- cerned. But of far greater importance than either of these is the power which they possess to regulate the hours of labour, and the mode in which the work shall be carried on. A great part of the success which Mr. Thornton claims for the unions consists in the general re- duction of the hours of labour, and in the adoption of working rules in accordance with the wishes of the men. I have found it necessary to combat his views respecting the cause of the rise of wages Avhich has recently taken place, but I see no reason for refusing to the unions the credit of having effected these other improvements in the condition of the working classes. Combination is necessary to cflFect a general change in the customs of a trade, and it depends upon the choice of the men themselves to determine how long and in what manner they will labour, though it does not depend on them whether the reward of their labour shall or shall not be proportioned to its efficiency. As long as masters are in the habit of regarding every request from their workmen as " dictation," and are disposed to persecute those individuals who are put forward as the delegates of the men, it Avill Ijc most desirable that there should be some organisation among the latter sufficiently powerful to command the respect of the employers, and to mitigate, if not to avert, the persecution to Avhich the delegates are too often exposed. The gradual amalgamation of smaller into larger unions which is now going on, and is hkely to contimie, produces a beneiicial effect by preventing many ill-advised strikes. The central executive of a national union receives information from all its branches respecting the state of trade in their respective towns, and though this information is not so complete as could be desired, it has proved sufficient to induce the executive to place its veto on many strikes which branch committees have wished to commence under circumstances where the state of trade would not have justified them. But even if there Avere no disputes for the CO-OPERATIOX. 2-43 unions to conduct or to pacify, there would still be work cnoug-h for them to perform in the discharge of their charitable functions. There cannot be a more healthy sign of the progress of the Enghsh people than the determination which is now shown by the poorest class of all, the agricultural labourers, to relieve one another's misfortunes by their own sulxscriptions, without resorting to the voluntary, and much less to the forced contributions of other classes. Various schemes have been put forward at various times for arran"inf disputes between employers and employed, but none of them have achieved as much success as the zeal of their promoters has deserved. Arbitration has been frequently proposed and tried, but it has been difficult to find an arbitrator at once impartial and capable ; and when an award has been made, it has not been easy to induce all the parties concerned to concur in it. The "Conscils des Prudhommcs," in France, give great satisfaction, because they are law courts composed of an equal number of employers and workmen elected by their respective classes ; but when arbitration is resorted to as an occasional expedient, the diffi- culty of finding a competent arbitrator is not easily surmounted. So in international disputes it might be possible to induce nations to submit to the decisions of a permanent and well-organised tribunal ; but when arbitration is tried as an exceptional measure, the arbitrators may prove to be as ignorant and incompetent as those who decided the Alabama controversy, c^ud the a^vard of such a tribunal is rather calculated to deter nations from resorting to this method of arranging their diflferences. The board of conciliation which settles disputes in the hosiery and glove trade of Nottingham has been in operation for many years with great success, for it is a permanent institution to which large numbers have agreed to refer their grievances. But where there is no such recognised body, it is always difficult even to induce both parties to refer the dis- pute to the decision of an outsider, to say nothing of abiding by the decision when made. Another scheme has been proposed ^\•ith a view of preventing disputes by teaching both parties that their interests are in fact hannonious, and under the name of "co-operation " has attracted so much attention that it deserves to be examined in this place. There are two kinds of co-operative stores, both of which are designed to pro- tect customers against adulteration, or other kinds of imposition which may be practiced by private tradesmen, but which employ dillerent means to obtain their end. Those of one class, wliich are most i)atronised by the upper classes, arc provided with the necessary lunds i'or carrying on their business Ijy small subscri[)tions Irom those who are interested in tlie concern ; and the suljscribers are then allowed to purchase ibr ready moucy such articles as the store contains, sometimes at the same price, II 2 244 CO-OPERATIOX. and sometimes at a lower price than is charged by private tradesmen. An arrangement is made with certain tradesmen who, on receiving a small annual payment, agree to sujsply the subscribers with those articles which it is not thought convenient to keep at the store, at a lower price than is charged to other customers, payment being required as before in ready money. As far as regards the articles supplied at the store, of which grocery forms the largest part, this arrangement does in part protect the customers from adulteration. As the capitalists who sell, are the same persons as the customers who buy the goods, no one has any motive to adulterate any article after it has been purchased for the store, since no one can gain anything by it. It cannot, however, protect customers from any adulteration which may be practiced by the whole- sale merchant from ^^■Ilom the goods may be purchased by the agent of the store, who, of course, is as liable to be imposed upon as any retail dealer. As regards the articles supplied by the tradesmen who consent to act as agents for the store, there is no protection to the customers against any of the tricks of trade, and if they are really cheaper it is only because they are sold for ready money. The promoters of these stores have a vague idea of doing away Avith the capitalist's profit, but as the subscribers themselves provide the capital, they have to submit to the same sacrifice as an ordinary tradesman, and obtain their profit in the shape of cheaper goods, and if they gain anything it is because, by requiring ready money payments, they avoid the loss conse- quent on bad debts. Co-operative stores of this class have obviously no bearing on the relations between employers and employed, since the shopmen and others who are employed are paid in the same way as those in private shops. But there is another kind of co-operative store which is more popular among the working classes, and which makes some pre- tension to afford a solution of the social difficulty of the present age ; the reconciliation of the interests of capital and labour. In stores of this class the necessary funds are provided by the customers or others, each of whom is able to take as few or as many shares as he pleases, the amount of each share l^eing fixed at so low a point as to bring it within the reach of every thrifty workman. At stated intervals the accounts are made up, and, if they show a profit, a dividend is declared on the shares, and if there is more than sufficient to pay a dividend of 5 per cent,, the balance, or part of the balance, is returned to the customers in proportion to the amount of their purchases at the store, as evinced by tickets furnished them for the purpose. This latter provision is, of course, a most effectual protection against any adulteration or similar mal-practice on the part of those employed in the store, since any profit made by such means would infallibly revert to the customers from whom it had been CO-OPErxATIOX. 24') extorted. But these stores, though they have done much to protect the working classes against imposition, and to encourage thrift hy compelHng them, as it were, to save money in the very act of spending it, effect nothing towards uniting capitalists and labourers so long as the shopmen and others employed in the store have no interest in the success of the concern, but are engaged, paid, and dismissed in the same way as persons of the same class in private establishments. They are nothing more than joint-stock companies, with rules more favourable to their cus- tomers than those of companies in general, but so long as the capitalists and the labourers are distinct, there is quite as much likelihood of a dispute leading to a strike or a lock-out in a co-operative store as in any other shop. It is true that the employes of a store may, if they choose, buy shares in it, and it is also true that the manager may prefer to employ shareholders if he can obtain them ; and in either of these cases the employes must feel an interest in the success of the concern, and will be likely to avoid carrying any dispute so far as to inflict so great a loss on the company as would be occasioned by a strike. But unless none but shareholders are employed, there is the same antagonism of interests as in other establishments ; and Mr. Harrison goes so far as to maintain* that the workmen employed in a co-operative store are not merely treated no better, but are actually treated worse, than those em- ployed by private capitalists. If the workmen are admitted to a share in the profits, they will take as much interest in the success of the con- cern as the shareholders themselves, and will, doubtless, work more diligently and faithfully ; but this plan is very seldom adopted. Even if it were more generally followed, it would still be necessary to come to some agreement as to the rate of wages, and the proportion of the earn- ings which should be set aside for the shareholders' profit. There might still be disputes on this subject, but such an arrangement would probably impress on both parties the conviction that their interests were harmonious and not opposed, and would restrain them from resorting to extreme measures. As long as co-operation is confined to the business of distribution, it can only afford a partial guarantee against adulteration, &c., which may be practised by those who supply articles to the stores, and it has, therefore, been determined to extend the system to the business of production. Several cotton mills, as well as other manufactories, have been estaljlished on princi[)le8 similar to those adopted by the co-operative stores of the second class just described; and these furnish chtth and other products to the stores and other customers. In these cases, as in * Article f>ii Induritrial Co-operation. " Fditniglitly Ivuvicw," Jan. 1, 18CG. 246 CO-OPERATIOX. the stores, ready-money payments are, as far as possible, enforced ; and in these, too, the co-operation very seldom extends to the workmen employed, who have no interest in the success of the concern unless they happen to be shareholders. Some of these societies have been very successful, and their success has encouraged imitation in other branches of industry, in which even agriculture is now included. But there have, of course, been many iailures, and they have generally Ijeen less successful in the south than in the north of England, and less successful on the Continent than in England. Two attempts have been made in London to cany on the business of a tailor on these principles, but both have failed ; and in one case (perhaps in both) the reason of the failure was the incompetence of the manager, who was unable to supply the wants of the customers in as satisfactory a manner as they were accustomed to in other shops. It is, indeed, generally found that co-operative stores are not so successful in selling articles of dress as in selling grocery and other things, and this seems to indicate that the managers of these establishments do not pay so much attention to the "wishes of their customers as to satisfy them in a matter in which their tastes, as well as their comfort, are concerned. Even where the manager's salary is made partly dependant on the profits of the business, he has not the same interest in its success as a capitalist whose whole fortune is embarked in it ; and though he will try to secure a profit, he will be likely to be less careful about petty savings and other matters of detail, which are, however, of great importance where there is a keen competition from outside to contend against. It is sometimes urged that, if the government of a co-operative society is in the hands of a number of working men, they will be un^nlling to pay a high salary to the manager, because this would conflict with their notions of equality ; and if this were so, it would, of course, be a fatal obstacle to any considerable success in the co-operative movement. But if any such feehng really exists among the working classes such as the objection implies, it is pretty sure to disappear before the teaching of experience, which will soon convince them that the services of an efficient manager are indispensable, and cannot be obtained unless they are highly remunerated. Wlien De Tocqueville enumerated all the causes which were tending to produce equality among all classes in America and elsewhere, he was reluctantly forced to confess that there was one cause which tended in the opposite direction, viz. : the growth of manufacturing industry on a large scale. Large factories are requisite for the successful adoption of mechanical improvements, and the necessity of entrusting the management to a single mind tended, in De Tocqueville's opinion, to INDUSTRIAL PARTNERSHIP. 247 estal)]isli and perpetuate that subordination of the many to the few whicli, in all other circumstances, is giving way before the advance of knowledge and of civilization. Co-operation aflords a means of reconciling industrial progress with liberty and equality. The direction of a factory may still be confided to a single manager, but he may be elected and removable by the workmen whom he directs, or by a committee elected by them. If they are wise enough to al)stain from unnecessary interference, the manager may have quite sufficient power to carry on the business properly, while the knowledge that he is responsible will prevent him fi-om adopting that haughty tone which masters too often adopt towards those v,hom they employ. At present, however, there seems to be no chance that co-operation will ever become the rule in manufacturing or other industry ; and the unwillmgness to give credit shows that the promoters of these societies do not think theniselves equal to a fair contest with private enterprise. Mv. Harrison considers it an objection to co-operation that there is no means of deciding what is the right proportion in Avhich the earnings should be divided between the shareholders and the workmen ; but this is a merely theoretic objection, and can be easily got over in practice. If the worlanen receive the same rate of wages as in private establishments, it matters little whether five, ten, or any other number, per cent, be reserved to the shareholders, or how the surplus then remaining is divided between the shareholders and the workmen. Provided that both classes are benefitted by the success of the concern, the arrangements ^^-hich may be made for this object are only matters of detail ; and the right course to pursue is that which proves successful. Many strikes in various trades in England, France, and Germany, have been followed by the establishment of co-operative societies, by means of which the workmen hope to free themselves from the tyranny to which they consider that they have been exposed. It is well that such attempts should be made, but unless great care is taken in framing the rules of the society, the same antagonism of interest will re-appear, and will lead to a conflict between the shareholders and the workmen. Another system has now been introduced which combines in an admira- ble manner the advantages of co-operation and of individual enterprise, to which the name of industrial partnership has been given. Under this system one or two persons provide the greater part of the capital, and have the entire management of the business; l)ut i]\v. workmen are allowed to take shares in the concern, and receive a share in tlie profits even when they do not choose to become shareholders. Tin's system has been inaugurated by J^Iessrs. IJriggs, the owners of tiie Whitwood aA- liery, near Normanton, in Yorkshire ; and if their success may be taken 248 IXDUSTRIAL PARTNERSHIP. as an earnest of what it is likely to produce, its general extension will prove an inestimable benefit to all classes, both of producers and of consumers. Previously to 18G5, Messrs. Briggs had carried on their business on the same principles as are generally adopted by private firms, and they had been subjected to considerable loss and annoyance by frequent disputes with their workmen ; but in that year they deter- mined to see whether this state of things could not be put an end to by taking their workmen into partnership. They accordingly trans- formed their business into a limited liability company, themselves taking two-thirds of the shares, and offered the remaining third to their emijloyes, and to the general public. Only a small proportion of the shares so offered have been taken by their employes, but jMessrs. Briggs inserted a proviso, that whenever the profits in any one year should exceed ten per cent., the surplus should be divided between the share- holders and their employes, the former, of course, receiving in proportion to their shares ; and the latter, in proportion to the wages which they may have earned during the year. The effect of this change in their arrangements has been almost magical, for it has not only put an end to strikes among the workmen, but has induced them to become as careful as they had formerly been negligent in performing their work ; has pro- duced a marked improvement in the material and moral condition of themselves and their families, and has yielded a profit three or four times as high as that which Messrs. Briggs had obtained for some years previ- ously to 18G5. It deserves to be mentioned that the scheme was sug- gested to Messrs. Briggs by Mr. Fawcett's article on " Strikes, their Tendencies and Remedy," in the "Westminster Review," for July, 1860. Another firm, Messrs. W. H. Smith, and Son, the well-known news- agents, have applied the same principle to that portion of their business which consists in supplying newspapers at railway stations. Each clerk receives a regular salary, and, in addition, a per centage on the profits of the particular stall of which he has the management ; and this arrange- ment is found to work extremely well, as it stimulates the clerks to an activity which is equally beneficial to themselves, their employers, and the public. These two firms are, however, the only ones which Mr. Thornton, (from whose ^^•ork " On Labour," nnich of the information made use of in the present chapter is derived), can point to as practising a genuine co-operation with the labourers in their employ, since they alone allow them to share in the profits without m'oviding part of the capital. There are many instances in which the business of a j^rivate firm has been converted into a joint-stock company, and in some of these, as in that of Messrs. Crossley, carpet manufacturers, of Halifax, the employes have been expressly invited to take shares ; but in these GENERAL REFLECTIONS. 2-40 cases they only obtain profit as shareliolders, and not as labourers. There are, however, some occupations, both in this and in other countries, in which it is the rule, and not the exception, that the capitalists and the workmen should divide the proceeds among them according to certain fixed rules; and in these cases the wages of the latter are made to depend wholly on results. ]\Iariue fishery is one of these occupations, the rule on some parts of our coast being that the owner of the net should receive four shares of the fish caught, the owner of the boat one share, and each fisherman one also. In other parts of the coast the rules of division are difterent, but the same yirinciple prevails, as it does in the whale fisheries of the Arctic Seas. In the tin mines of Cornwall, a system is in operation by which the miners form themselves into an association, and contract with the owner of the mine to work a portion of it in consideration of receiving a certain share of the proceeds. This system is found to \vork very well, and completely obviates the strikes which are so common in the coal and iron districts. Wherever industrial partnership has been tried it has generally proved successful ; but it is feared by some that its general extension nuiy be ibund to be a matter of difficulty. It frequently happens that a capitalist carries on his business for a whole year at a loss, and in such a case, as there would be no profit to divide amongst the workmen, they might begin to doubt whether their increased industry had produced any result ; and if on this account they were to relax their efforts during the next year, this would probably end as the former one had done, without yielding any sur- plus to be divided amongst them. This objection, however, is not a very formidable one, since the majority of enterprises nmst yield the average rate of profit, and the hope of shariug in the surplus will stinmlate the workmen to that increased industry whicli, in the majority of instances, will produce its own reward. The three systems whicli have been described in this chapter, unionism, co-operation, aud industrial partnership, are all calculated to iuiprove the condition of the working classes ; the first afibrding them relief in times of distress, and the two latter affording an addition to their wages. It is significant that the development of all three has been impeded by legal obstacles, both in this country and on the Continent. Trades' unions were altogether prohibited in this country down to 182(1, as they still are in Austria and otlier countries. After their existence had been tolerated in England, they were, and, to some extent, still arc, exposed to a sort of outlawry, by the refusal of the couiis of law to enforce the claims of a trades' union against any of its nieiul)ers who ]nay have embezzled a jiorLion of its funds. The original ground of this refusal was the monstrous principle that a man cannot steal the property 250 GENEBAL EEFLECTIONS. of any society of which he is a member, since he is part-owner of the l^roperty, and cannot steal what is his own. When the injustice of tiie principle became apparent, parliament, instead of sweeping it away, merely ordained that benefit societies, if registered as such, and if there was nothing in their rules tending te "restraint of trade," should be exempted ft-om its operation. It was then decided that support given to a strike was in restraint of trade, and that trades' unions were entitled to no protection. Then the laAv was again tinkered, and they were promised protection if they would register themselves in a certain way, as if they were to regard it as a favour that they should receive the same protection as all other citizens in the use of their property. Even now the Amalgamated .Society of Engineers is not registered, and is not entitled to legal protection. The establishment of co-operative societies in this country was long impeded by the law, which prevented them from purchasing as much land as was necessary for the buildings in which their business could be carried on. Yriieu M. Leclaire, the house- painter, of Paris, proposed to give some of his workmen a share in the profits of his business, he desired to assemble them together in order to explain his scheme to them, but the laws of France did not allow him to do this without obtaining leave fi'om the Govcrimient, and his application for an official authorisation was refused. In England, the introduction of such a system of industrial partnership as that pursued by Messrs. Briggs, was long impeded by the law which prevented anyone from sharing in the profits of a business without becoming responsible for its losses, whereby the workmen were exposed to a risk which it might have been dangerous for them to run. The law has now been altered, and the gTOund has now been cleared for all those Avho desire to try the system. Whatever may be the destiny which is in store for these three systems, their success or failure will in no way afiect the correctness of the principles which have been laid down as regulating wages and profit. Unionism, whatever may be its future de^s'elopment, can never lower profit or raise wages. Co-operation and industrial partnership tend to raise wages, but only by stimulating the industry of the workmen, whose wages rise because their labour is more efficient. BOOK III.— EXCHAXGE. CHAPTER I.— SIDNEY. THE USE OF EXCHAXGE — MEDIUM OF EXCHAXGE — STANDARD OF VALUE — COIX — STATE COINAGE — THE BRITISH MINT. Production can hardly be carried on witli nuicli profit to the members of a society nnless they exchange their products witli one another. The habit of exchanging is one of those which distinguish man from the inferior animals. Tliere are some kinds of animals, such as the ants and the bees, which live in common, and in which different functions are performed by different members of a group, but man alone exhibits an organisation in which different individuals devote their labour to the task of supplying the wants of others, in the full reliance that their own wants will be supplied by the labour of others. There are many small societies, Buch as monasteries and communistic establishments, the members of which strive to dispense with exchange, and to apply the labour of all to producing a common stock out of which the wants of all maybe relieved. But these societies have seldom, if ever, been able entirely to dispense with the assistance of other persons not belonging to their bodies, and in order to obtain this assistance, they have been obliged to give something in exchange for it. If every person were to attempt to su})])ly his own wants they would not be so well supplied as if each had a business of his own and devoted his whole energies to learning that business thoroughly. " Jack of all trades, and master of none " is a proverb which expresses one of the disadvantages to which a society is exposed where such a system is carried on, since if every man is his own farmer, his own baker, his own tailor, &c., it is impossible that he should acquire a thorough mastery of any one trade, and all the advantages of the division of labour would be lost. As regards agriculture, a still more serious disadvantage would be experienced, fur if each district were entirely dependent on its own produce for fodd, ;i bad harvest in any one district would be inevitably followed by n famine which it would be imj)ossible to relieve from the [)lenty of other districts. 8uch is the melancholy coiiditi'm of (lie greater part of India where 252 THE USE OF EXCHANGE. the produce of the more favoured districts cannot be brought into those which are stricken with famine, or, at least, not in sufficient quantities to reheve it, because the country is not provided with roads, and the want of roads is the consequence of the small extent of internal commerce. The only way in which a country which has no external trade can save itself from periodical famines is the accumulation of the sui'[3lus of abun- dant years in large granaries, to be made use of in years of scarcity. This course is said to have been adopted by the Incas of Peru, but it would seem that the stocks preserved in their public granaries were not very abundant, since they were soon exhausted by a few hundred Spaniards, who, however, are said to have been extremely wasteful. As the Incas took the management of this matter into their own hands, taking from their subjects whatever was in excess of their wants, and giving to them whatever was necessary for their support, there was no system of free exchange, but the people of one district were sometimes fed with the corn produced by those of another, and these in turn were often clothed with the wool produced by the people of other districts, so that they Indirectly exchange their products with one anothor. In Africa, at the present day, foreign trade is, in some sort, a monopoly of the Govern- ment. An European traveller who visits Uganda or any other portion of equatorial Africa receives, on arrival, a present from the king, and is expected to give another present in return, and the king is certain to express his dissatisfaction if he receives what he considers to be of less value than what he has given to the traveller. The king provides all that the traveller requires during his stay, but does not permit him to trade with the people, and if Europeans desire to carry on commerce with these regions, they must do so by exchanging presents with the local kings. Such a practice as this may have been the origin of exchange, but in any country where it has once become customary it must have had the effect of restricting different individuals to different occupations, for people must soon have discovered that they could obtain more comfort by devoting their whole time to producing those articles which they were best able to make, and presenting them to others, who would give them other articles of which they were in need. It is not necessary for an exchange to be profitable that one of the parties should excel in one kind of industry, and the other in some other kind, but a man who excels another in skill in both branches may yet find it to his advantage to devote himself to one kind, and to exchange some of his products with a less skilful labourer who devotes himself to the other business. At first sight this sounds paradoxical, but a little consideration will show that it is quite possible, and there is good reason to believe that such a state of things is actually realised in practice, both as regards THE USE OF EXCHANGE. 253 different individuals in the Scame country and different nations. If Jones can make in three days a coat which Brown wduld require six days to make, and can also make in two days a hat whicli Bro\\-n could only produce -with the labour of two-days-and-a-halt; lie ^vould he both a better tailor and a better hatter than Brown, and yet it would be advan- tageous to both that Jones should become a tailor, and Brown become a hatter, and that they slioidd mutually supply each other's wants. By the labour of three days Jones could produce a coat which he could give to Brown in exchange for two hats, to produce which for himself would require the labour of four days, and would thus save one day's labour. Brown also would gain by the transaction, for the hats ^vhich he pro- duced with the labour of five days Avould cnal)lc him to procure a coat which he could not have produced for himself in less than six days, and he, too, would spare himself the labour of a day. The exchange is profitable because Jones, though he has an absolute superiority in both cases, has not in both the same relative superiority over Brown, and it is better for him to devote himself to that occupation in which his superiority is relatively greatest. As a tailor, his skill has been supposed to be twice as great as that of Brown, while, as a hatter, he only excels him in the proportion of five to four; but if Jones were twice as good a hatter, as well as being t^vice as good a tailor, he could gain nothing by an exchange. If Brown required four days to make a hat, he would not give more than a hat and a half for a coat which he might make in six days, and Jones, by agreeing to such a bargain, would obtain by the labour of three days nothing more than the hat and a half, which he could have made for himself in the same time if he had not been engaged in making a coat for Brown. It is quite possible that the intelligent artisans of the towns might, if they devoted themselves to agriculture, make better Itirmers than the rural labourers, but even if this were so, the a1)ove example shows that it may still be better for them to devote them- selves to the mechanical arts, in which they have an unquestionable superiority. Ricardo has demonstrated that a trade between two countries might be profitable under such circumstances ; but I believe that Cairnes has been the first to point out an instance in which such a trade is actually carried on, viz., between Euroj)e and Australia. Australia, as he tells us, imports, or used to import, boots and shoes from England, butter from Ireland, and timber from the north of Europe, although all these articles could Ite ]troduccd in Austr;ili;i wilh less lalxjur than is employed in ])i-oduciugt]K;ni in P]urope, to say nothing of conveying them to Australia. The extensive ])astnres of Australia enable leather and butter to be produced with very little lal)our, and the difliiculty of making boots cannot be greater than in England, while the 254 MEDIUM OF EXCHANGE. natural forests of the country afford quite as great facilities for procur- ing timber as do those of Sweden or Norway. But, although Australia has a superiority over Europe in these respects, it has a still greater advantage in the production of gold, and its inhabitants find it cheaper to devote most of their energies to extracting gold, and to exchange it for the articles which they need, and which can be produced in other countries where gold can hardly be found at all. People frequently speak of a self-supporting country as if it must be in a peculiarly happy condition, but it is pretty certain that such a country is really wasting its energies in producing articles which it might import from abroad Avith greater advantage to itself; for even if it were so favourably cir- cumstanced as to be better fitted than any other part of the world for the production of all the articles v\'hich its inhabitants required, it is scarcely possible that it should possess the same relative superiority to every other country in every branch of industry. England now imports milHons of eggs from France, but this does not prove that the French can produce eggs with less labour than the English ; for it may be more convenient for the English to devote themselves to raising coal and iron fi'om their mines, and, with the aid of these minerals, to manufacture cloth and other articles to be exported to France. The system of exchange enables food to be brought to the mining districts in sufficient quantities to maintain a large population who are engaged in mining and in manu- factures, and thus secures not only to England, but to the whole world the advantages of the abundant supply of cheap fuel which the districts possess. Exchange in its simplest form is know'n by the name of barter, and consists of the direct exchange betAveen two individuals of the articles which each possesses, and the other requires. On the west coast of Africa trade is still carried on in this manner ; the European trader who desires to obtain palm-oil, or any other commodity, being obliged to provide himself with beads, or cloth, or some other article which the natives with AA'hom he deals require for then- omti use. AYhere trade is carried on in this way it is obvious that commodities will in the long run be exchanged for one another in proportion to the labour expended in j)roducing them, since no one will give an article Avhich has cost him six days' labour in exchange for anothei' AA'hich he could make in five days, which would be equivalent to performing a day's labour without an object, and it is unnecessary to repeat here what has been said in treating of the subject of value, to explain which a system of exchange was assumed to exist. When a system of barter has been long in vogue, and people have become accustomed to rely on the labour of others for the satisfaction of their own Avants, everybody finds it convenient to keep by him a MEDIUM OF EXCHANGE. 255 stock of some article Avbich is in general request ; so that wlicnevcr he requires anytliiug for himself lie may always have something to give in exchange for it. In those parts of Africa which were visited by Captain Speke, cloth is a commodity which answers to this description, and tliat traveller was obliged to take v.ith him as many bales of cloth as he thought would suffice to provide fer all his wants during his journey. His stock, however, ran out before his journey's end, and he found it necessary to send to Zanzibar for a fresh supply ; and tlu-oughout his journey he had to employ a large number of porters to carry the l^ales from place to place. The fi-equent desertions of his porters, and the difficulty of replacing those who ran away, constituted the chief annoyance and trouble to which he was exjwscd. Had he been provided with a sufficient stock of some commodity which was as much in request as cloth, and, at the same time, much less bulky and heavy in proportion to its value, he might have been able to undertake his journey with a veiy few porters, or with no porters at all, and tlnis to accomplish it with much less trouble and expense. In the IMalay Archipelago Sir. Wallace found that small knives were convenient articles to have at hand Avheneveii he required to buy fish or other food for his dinner ; and in other parts of the world various articles are used for the purpose of a general medium of exchange. One of the qualities which a commodity should possess in order to render it a good medium of exchange is obviously that of portability, which is, perhaps, the most important of all, and in this cloth is utterly deficient, as it is very cheap in proportion to its weight. Another requisite is that it should be easily divisible into larger or smaller quantities, so as to suit the varying wants of those who desire to obtain other commodities of more or less value ; and, in this respect, live animals, which appear to have been used for this purpose at or before the time when the Iliad was composed, arc extremely deficient, since one part of an aiiimal cannot be parted \vitli without its being killed. The metals possess divisibility in an eminent degree, and two of them, gold and silver, combine with this advantage that of possessing gi'eat value in proportion to their weight and bulk. The substance, whatever it may be, which is generally used in any country as a inedium of exchange, is said to be the money of tliat country. It is necessary that money slionld consist of some material wliicli will lose little or nothing by keeping or Ijy use, and iu this respect gold is eminently fitted for the purpose, as it does not combine with the oxygen of the atmosphere, and therefore does not coiTode by exposure ; and it is so duraljle that it has been estinnited to lose no more than one four- Innidredtli part of its Aveight J^y the friction to which it is exposed by pjissing from hand to hand lor a whole year. Copper is found convenient 25C STANDARD OF VALUE. in poor couutries, and is nsed to some extent in richer ones, bnt its value is so much less than that of silver in proportion to its weight, that it is seldora used for any large purchases in a country which is acquainted with the use of silver. Iron, Avhich was used in ancient Sparta, is so inconvenient for carrying on any trade on a large scale that its employment in that city has been ascribed to the policy of a legislator distinctly intending to prevent the Spartans fi'om becoming a commercial nation. It is more probable that iron was used merely because it was found convenient in a country which possessed very little trade, and it was certainly abandoned in favour of gold and silver as the prosperity of Sparta increased. A similar substitution of the more costly for the cheaper metals has taken place, and is now taking place in other countries as their wealth and commerce have increased. Copper was originally the sole money of ancient Eome, and the same word " res " continued to denote both money and copper, long after gold and silver had, to a great extent, supplanted it ; but in modern Italy gold is principally used in large transactions, at least, in all cases where it is not replaced by l)ank-notes, which are, or profess to be, exchangeal^le for gold. In England, though copper money dates only from the reigii of Elizabeth, silver was coined by the Government for many centuries before gold, which latter was first coined, and that only to a limited extent, in the reign of Henry the Third. We have now, for nearly two centuries, used gold as the principle medium of exchange, and silver has been confined to small transactions. A similar change has taken place thi'oughout the Continent of Europe. In Asia, on the other hand, at least in that large portion of it which is comprised in India and China, silver still constitutes the principal medium of exchange ; and as its value is there five or six times greater than in England, it is more convenient for the payment of wages and for effecting daily purchases of the necessaries of life than gold would be, though it is certainly inconvenient when large sums have to be sent from one part of the country to another, as must often be done by the Indian Government, and by private individuals. Money, besides seiwing as a medium of exchange, performs another important function by serving as a standard of value. Not only does it enable a man to obtain whatever commodities he requires at whatever time he requires them, but it furnishes a ready means of calcidating how much of any other commodity he will be able to obtain in exchange for those which he happens to possess. If a man possesses a hectolitre of wheat, he may know for how many sheep or for what fraction of a coav it will exchange, but it is impossible for him to remember the quantities of all commodities for which it will respectively exchange. In order that STAIsDAllD OF VALUE. 257 he may be able to tell at any moment how much of any other commo- dity he can obtain in exchange for his ^vhcat, he needs a common standard with which to compare the valnes of the two conunodities. The value of an article depends, as I have already endeavoured to explain, on the amount of labour required to produce it ; and though the farmer may know how much labour has been expended in raising his wheat, he cannot know how much has been required for the production of all other articles. The use of money enables him to compare the values of his own commodities with the value of money, and record the result of the comparison by naming the quantity of money for which he is willing to exchange a certain quantity of his produce, which quantity of money is called the price of his commodities. As he uses money for the payment of the labourers whom he employs, he knows how much money he has spent in raising his crops ; and by fixing a price, he is able to distribute the cost over the whole of the produce. As all other producers fix a price for their commodities, the farmer has merely to compare his prices with theirs in order to see how much of any other commodity he can afford to buy ; and it is no longer necessary to consider how much labour a particular article has required for its production, or how much labour it would enable its possessor to command. It is enough for a person to sell an article (as giving an article in exchange for money is termed), for more money than he gave for it, and he need not calculate whether the money which he paid was of more value at the time or place where he paid it than the quantity which he received is at the time and place where he receives it, since he has certainly got more than he had ; and, at the same time and place a larger quantity of money will always be Avorth more than a smaller quantity. As Adam Smith expresses it, if an English merchant buys an article at Canton for an omice of silver which he can sell in London for two ounces of silver, it does not matter to him that one ounce has as great a value at Canton JUS two ounces have in London ; because two ounces in London arc of twice the value of one ounce, and this is what he wants. AVhen it has Ijecome customary for all commodities to be bought and sold for money, a class of men spring up who make it their business to buy commodities which they do not themselves require, and to sell them to other persons who do require them, and to make a living out of the diflerence between the buying and selling prices, which they fix at such a point as will enable them to detain the average rate of profit on the capital which they employ, and suflicient wages for their own labour ; and to this class the title of tradesmen in its widest sense belongs. At first sight, it seems that tradesmen perform no useful function which could not l)e better done by the producers and consumers themselves, and it was the opinion B 258 STANDAED OF VALUE. of Aristotle that they were of no use, and ought to be discouraged, if not absohitely suppressed, in a well-governed State. In our own day, we frequently meet with the remark, that the tendency of the age is to bring consumers into direct contact with producers, and there certainly are a few facts which lend encouragement to this opinion. Many persons who are dissatisfied with the milk supplied to them by a milkman, find that they can do better by buying it direct from a farmer, and arrange- ments have been made by which a Manchester manufacturer can buy cotton direct fi'om a planter in Carolina or Tennessee. But in spite of such isolated instances, I see little reason to anticipate that the class of trades- men will ever disappear, since they discharge the necessary function of keeping a supply of articles on hand to meet the wants Avhich are ever occurring unexpectedly, and which, therefore, cannot be provided for by the consumers. So great is the variety of the articles which an individ- ual requires in an advanced state of society, that no one can possibly live within easy reach of all the producers who supply them ; and though he can enter into an engagement with a farmer at a remote distance to supply the food which he requires in quantities which vary little from week to week, he \vill find it very inconvenient, if there were no place near at hand where he could obtain an article which he wanted on a sudden emergency. A Londoner may buy his poultry direct from a farmer in Norfolk, but he would be badly ofi", indeed, if he were accus- tomed to order his tea direct from China, and if his stock were to fail just after the departure of the mail-steamer. As an additional class of labourers is interposed between producers and consumers, the value, and, consequently, the price of each article is greater than it would otherwise be ; but the greater cost is compensated by the greater convenience, and the distributors perform a function which is quite as useful and necessary as production itself. The wants of a large body of consumers cannot be supplied without the production of a great quantity, and its subsequent distribution ; and, if consumers purchase direct from the producers, the work of distribution is not left undone, but is performed by the pro- ducers themselves, or by persons employed by them. The farmer who sends his milk to the private houses of the inhabitants of a neighbouring town has to employ people to carry the cans just as a milkman has to do, and if his business increases, he finds it difficult to give that super- vision which this part of it requires without in some degree neglecting the rest. It then becomes profitable for a person to devote himself exclusively to the business of distributing the milk, and the advantages which accrue from the division of labour in production are obtained from the separation between production and distribution, the advantages being comprised in the fact that both kinds of work are better done. STANDARD OF VALUE. 259 If all bargains were concluded for ready money, and no engagement extended beyond a day, the money of the country would, by the mere fact of its being a medium of exchange, be proved to be fit for a standard of value. At the same time and place the prices of all commodities are in proportion to then- value, and, consequently, a comparison of the prices is all that is required to determine how much of one commodity will exchange for a given quantity of another, and the money which is paid is of equal value with the article which is paid for. But when an article is bought on credit, i.e., when he who obtains it gives nothing in exchange except a promise to give something else at a future time, it is important that this something should be of such a nature that its value will not alter before the bargain is concluded by its payment. If this something be money, as is almost always the case, it is desirable that the money should be incapable of changing in value ; but, unfortu- nately, there is no conmiodity known to us which possesses this character, and mankind have been forced to content themselves with such as most nearly approach this perfection, while, at the same time, possessing the qualities which are requisite for a medium of exchange. All commodities are liable to fluctuations in their cost of production, and agricultural produce is especially so because of the great vicissitudes in the seasons, which frequently cause the value to double in a single year. If a man had received a quantity of cloth, and engaged to give for it a hectohtre of wheat twelve months afterwards, a bad harvest in the following year might double the value of wheat, and compel him to give what was really worth twice as much labour as the cloth which he had received. On the other hand, a favourable harvest might cause the margin of cultivation to fall so much that the portion of the crop which determined the value of the whole should be raised -with only half as much labour as an equal quantity at the time when the bargain was concluded, and, in this case, if it were carried out to the letter, he who received the wheat will only receive one half of what he calculated on. Gold and silver are not so liable to sudden changes of value as agricultural pro- duce, because there is always an immense stock of these metals in existence, and a long time is therefore necessary to effect a change in the value of the whole amount. Their durability is the principal reason why there is always a large stock of them in the possession of mankind, for as a gold coin is estimated to lose only one four-hundredth part by friction in a year, it is only necessary that one four-lumdredtli part of the whole stock should be raised in a single year. To raise so large a quantity as one-half, or even one-quarter of the Avhole stock in a single year would require so great a disturljinice of industrial arrangements, and would require so many men to (^uit their old em[)k)ynients, that it cannot ■s -J 260 STANDARD OF VALUE. be attempted, and yet tliis would be necessary to effect a sudden change in its value. Most manufactured commodities are so constantly liable to be clieapeued by improvements, reducing the labour necessary to produce them, that they could hardly ever be used as a standard of value for any length of time. Labour, which, as Adam Smith has shown, is the best standard of value, cannot be used as a medium of exchange, because it would not be convenient for a person who had parted with a concrete article of great value to receive in exchange a promise of a great quantity of labom" wliich would require a long time or a great number of labourers to perform. He wants the means of procuring the labour of others, but he does not want to have a number of labourers whom he must employ at a particular time, or in a particular way. It is quite possible, where a contract extends over a long period, to use labour as the standard of value, while still requiring that it should be fulfilled in money. A definite sum of money may be fixed on to be paid at the conclusion of the bargain, but a condition may be inserted that this sum shall be increased or diminished in the same ratio as the money- wages of common labourers shall have risen or fallen in the meantime. Thus it might be enacted that every one who holds a thousand francs in the national funds shall receive thirty francs interest for the fu'st year ; and that in the second year the Government shall be bound to ascertain whether the money-wages of some particular class or classes of labourers have risen or fallen since the loan was contracted, and that if it be found that wages have risen ten per cent., the fund- holder shall receive thirty-three francs, and so on, in proportion, and that the calculation shall be repeated every year. I am not aware that such a plan has ever been adopted by a Government with regard to its funded debts ; but it is not unusual to insert in commercial contracts a clause providing that the contractor shall receive a higher price for his coals or other goods than that originally agreed on, if he should find it necessary to raise the wages of the workmen whom he employs. The fall which has recently taken place in the value of gold may render it worth while for statesmen to consider whether some such plan should be introduced for regulating the dividends on the National Debt, and the salaries of the public servants, so as to bring them into conformity witli the ever-changing circumstances of the times. The colleges of Oxford and Cambridge have, for three centuries, been accustomed to use wheat as a standard of value, by requiring that one-third of their resen'e rents should be a sum of money which should vary according to the market price of Avheat on the days on which the rents become due. The practice has been cliiefly useful by leading to the preseiTation of records of the price of wheat, which have been found serviceable by Economists COIN. 2G1 and statisticians, bnt it has not been of so much importance to the colleges as has often been supposed, and it has done little, if anything, to protect them from loss occasioned bj the depreciation of money. The system pursued by the colleges in leasing out their lands was that of exacting a large fine on the commencement of a lease, and a small reserve rent during its continuance. This reserve rent was, of course, much smaller than the rent which might have been obtained if the land had been let in the ordinary way for as high an annual payment as a respectable tenant could be induced to give ; and it was only one-third of this sum Avhich was regulated by the price of wheat. As the colleges always retained the power of terminating the leases, they could always raise the fines to such an amount as, when added to the rents, would afford as large a total as private landlords would receive for similar land ; and they could never have been in any danger of materially losing by the depreciation of the precious metals. The system is, I believe, gradually dying out, but private landlords have, in many parts of the country, arranged with their tenants that the money-rent of corn lands shall vary in proportion to the price of corn. But, whatever arrangements may be made ^vith regard to leases, or other contracts, extending over a term of years, all bargains, which are to be concluded in a few weeks or months, will always be expressed in money ; and the values of gold and silver are sufliciently stable to serve as a good standard in all such cases, and as they are also good mediums of exchange they are doubly fitted for employment m all bargains, and are preferred in almost every country in the world. It having been once decided that one or several metals shall be used as money, it is necessary that there should be pieces of different weights and sizes, to be used according as the things to be bought or sold are of greater or smaller value. In ancient times copper and sih'er were com- monly melted into ingots or bars, which w^ere always weighed before they were handed over by the purchaser to the seller of a commodity. The " hbripens " or person whose business it was to weigh the bars of copper in a pair of scales, was an indispensable witness to a Roman testament, and the name was still retained in legal plu'aseology, long after the practice of weighing had become obsolete. Many of the names which are still used to designate sums of money, such as "pound," "livrc," &c., originally meant a definite weight of silver, or some other metal ; and were, no doubt, in use at a time when bars were connnonly used. In China, at the present day, ingots of silver are largely used by the natives ; and even in Europe, gold bars frequently sei"ve as a means of remittance from one country to another. But, as commerce increases, people find it convenient to have small pieces of metal which they can 262 COIN. use for small transactions, and which do not require the trouble of weigh- ing ; and as these are exposed to much friction in passing from hand to hand, it is desirable that they should be of such a shape as will expose them to as little friction as possible. This shape, as Say has observed, is that of a sphere, but this would be inconvenient, as the globes would be liable to roll away when placed on a table, or elsewhere, and could not be heaped up in any great quantity. It has been found, or, at least, con- sidered by most nations, that the best shape is that of a very low cylinder ; although, in Japan, a more oblong shape has been adopted. These pieces, whatever their shape, have some image or words stamped upon them denoting their weight, and to such stamped pieces the appel- lation of coins is applied. At first, gold coins were made of pure gold, or of gold as nearly pure as could be obtained ; and such was the case with the bezants issued, as their name implies, by the Byzantine Emperors, and such is still the case with the " tomans " of modern Persia. Pure gold is, however, so soft, that coins made of it are liable to be bent in use ; and to prevent the inconvenience thereby occasioned, it has long been customary in Europe and America to alloy it with a certain pro- portion of copper, usually one-tenth of the whole weight of the coin ; but in the English coinage, only one-twelfth. Silver also is alloyed with copper, sometimes to the extent of one-tenth ; but in the English coin- age, to the extent of three-fortieths only. When alloying has been brought into use, the stamp on the coin serves to denote the fineness, as well as the Aveight of the metal, and thus performs a much more im- portant service. It would be troublesome to weigh every coin, but every intelligent person is capable of using a pair of scales, and every house is pro"\dded with such an instrument. But in order to ascertain the fineness of gold or silver, it is necessary to perform a somewhat costly operation, "which is called assaying, and for which some skill and great nicety are required. A very large quantity of alloy must be mixed with the pure metal in order to make such a difference in its colour as shall be percep- tible to an unpractised eye, while a very small difference in the amount of the aUoy would inflict a serious loss on those who should accept an inferior coin in place of one composed of purer metal. The stamp on the coin is thus intended as a guarantee to all who may receive it that it is really made of a certain definite quantity of one of the precious metals and a definite quantity of alloy ; and thus to avoid all disputes respecting its weight or fineness. Thus a france is a piece of silver 835 fine (i.e., the pure silver in which is to the whole weight as 835 is to 1,000), which ■weighs 5 grammes ; the gold twenty-franc piece is a piece of gold 900 fine, and weighing 6.451 grammes ; and every coin in the world has its own definite weight and fineness, by whatever names these may be STATE-COIXAGE. 263 described by different nations, and by whatever name it may be called. There is nothing new in the statement that the stamp on the coin merely designates the quantity and quality of the metal of which it is composed, for it is stated by Aiistotle, and the fact must always have been familiar to those who were entrusted with the task of coining money. It is only necessary to insist on it here, as many persons still have a vague idea that the Government interferes with Free Trade by fixing the price of gold, i.e., by announcing the amount of coin which the Mint will give in exchange for a certain Aveight of bullion. They ask, AVhy the Govern- ment should fix the price of gold when it leaves the prices of bread and of all other articles to vary according to the conditions of the market ? The answer is a simple one, viz., that to fix the price of gold is merely to state the weight and fineness of the coins which receive a particular denomination ; while to fix the price of bread is to fix the ratio in which bread shall exchange for gold, and is often tantamount to compelling the producer to part with his produce for less than it is worth. ^Yhen the French Government announces that the Mint will give 3,100f. for a kilo- gramme of gold 900 fine, it merely announces that 155 twenty-fi-anc pieces weigh a kilogramme, and are all made of gold 900 fine. When it announces that a small sum will be deducted from the amoimt given out by the Mint, it merely announces that it will charge something for the labour which it performs in coining the metal. In like manner, the price which the British Mint fixes for all the gold bullion brought to it is merely a declaration that it will return an equal weight of pure gold to that which it receives, and will make a present of the requisite alloy to the person who brings the gold. The price of an article measured in itself is little more than a change of names, and it might be said that the Government fixes the price of flour because it fixes the weight of flour which is to be used in making the loaves of bread which arc called by particular names. To what extent, and under what circumstances, the market price of bullion may vary from the Mint price, will be considered more at length in the next chapter. It is necessary that some person or persons should undertake the ]}usiness of manufacturing coins, and it is necessary that the public should have reason tg trust in the capacity and, what is more, the honesty of those who undertake it. In every country where coins are used, the business is carried on by persons more or less subject to the control of the Government ; and such has l)een the case from the most ancient times of which we have any record down to the present day. It has, therefore, been long regarded as one of the highest attributes of sovereignty to have the power of issuing coins. " Lord of the coin, and of the cA'cniiig prayer," is the formula by which every Mahomcdau 264 STATE-COINAGE. sovereign expresses his independence, while he acknowledges his nominal subjection to another ruler by assigning to him that honourable title. " Petty treason " was the name given by English law to the heinous offence of counterfeiting the king's money. It requires a considerable mental effort even to conceive it possible for private enterprise to supply a people with money, but a thinker who shrinks from no consequences to which his principles lead, Mr. Herbert Spencer, has ably maintained * that it is not only possible, but extremely desirable, for this to be done. He contends that a private manufacturer would carry on the business at a smaller cost, and the public would thus be spared part of the expense which they must now bear in order to maintain the coinage. He contends that it is a violation of the rights of individuals for the Government to dictate to them what they shall receive in payment of their debts, or in what manner they shall pay them. On this point, however, it must be borne in mind that, in order that the State may properly enforce the fulfilment of contracts (a duty which Mr. Spencer fully recognises as incumbent upon it), it must define the meaning of the coins in wliich most contracts are expressed. So far as this goes, the State must exercise as much control as will enable it to ascertain that the coins are what they profess to be ; but it by no means follows that it must perform the work of coining by its own agents. Whoever carries on the business is exposed to the temptation of issuing coins which are of less than the proper fineness, and the servants of the Govenmient are no more incapable of sinning than other men. Governments have usually undertaken the task because they have been supposed to be incorruptible, but they have debased the coinage too frequently for such a notion to be any longer entertained. If the work were performed by private firms we should have quite as much security as at present that it would be properly done. As Mr. Spencer says : — " Competing firms would assay each other's issues whenever there appeared the least reason to think them below the estabhshed standard ; and should their suspicions prove correct, would quickly find some mode of diffusing the information. Probably a single case of exposure, and the consequent ruin, would ever after prevent attempts to circulate coins of inferior fineness." (p. 401, first edit.) The ojily security which we in England at present possess in this respect is derived from the ancient ceremony called the Trial of the Pyx, which, since the passing of the Coinage Act in 1870, has been held once a year, and at which specimens of every kind of coin issued by the Mint during the last twelve months, are weighed and assayed by a jury of goldsmiths ; that is, of persons * Social Statics, chap. xxix. STATE-COIXAGE. 265 quite independent of the Mint authorities. An unfavourable verdict would be followed by the imposition of a heavy fine on the Master of the Mint ; and no such verdict is mentioned in the records of the exchequer which embrace the last two hundred and fifty years. If coins were issued by private firms, the largest quantities would, as at present, be demanded by bankers, and these could easily require the coiners to submit to some test similar to that to which the mint authorities are now subjected. There is, however, one advantage which may be, though it is not always, obtained from entrusting the business of coining to the Government, which will probably be thought to outweigh all the disadvantages of the system. The Government may take upon itself all the loss which is occasioned by the wear and tear of the coin, and may thus spread over the whole community a loss which is inevitable, and for which no individual can be considered as more re- sponsible than any other. If a private firm certifies that a particular gold coin weighs four or eight grammes, it may justly be compelled to receive it in payment of any debt to the extent of four or eight grammes of gold ; but it cannot be reasonably expected to receive it at its nominal rate when it has lost fifty milligrammes by constant friction, and, in fact, no longer weighs the certified weight. Still less can a private firm be expected to issue new coins in exchange for any equal number of worn ones which may be jDresented by the holders. But a Government can undertake this task, for it can always obtain the necessary funds from the taxes, and the English Government docs undertake it as far as the silver coins are concerned. If this is not done, the coins commonly pass as if they were of full weight even when they are considerably worn ; but every now and then some bank or Government office weighs the coins, and refuses to accept the light ones except at a rate reduced in proportion to the deficiency. Thus it often happens that the last holder has to bear the w^hole loss caused by the friction to which he has contributed but an infinitesimal part ; and this seems so unjust that people generally desire to throw it on the Government by requiring it to receive all coins by tale, and to give new ones in exchange for worn ones whenever presented for that purpose. This course was recom- mended, on the score of justice, by Say, but he does not seem to have been aware of the common objection that it would encourage the "sweating" of the coin, i.e., the reduction of their weight for fraudulent jmrposes, which is even now practised to some extent, and which, if it became common, would throw a very serious burden on the Govern- ment. There was a controversy on this subject in the columns of the "Times" in the year 1871, when tlie probability of sweating was, of course, made the principal objection to the proposal that the Govern- 2GQ STATE-CONTROL. ment should accept old and new coins at the same rate. A correspondent writing to that paper on October 25, who signed himself " A Banker," stated that this objection was of no great force, because a practised eye could readily distinguish between coins Avhich had been sweated and those which had been fairly worn. Although the ^vi'iter was anonymous, and though his statement was disputed by Mr. Seyd, I can hardly suppose that it would have been so confidently made if it had not been supported by good evidence ; and if it is correct, there can be but little objection to the proposed change beyond that of expense. Of course, the Mint, or the Bank of England, or whoever may be entrusted with the business of withdra^^•ing old coins fi'om circulation, can command the services of persons who are acquainted "nith the secret Avhich will enable them to reject the sweated coins ; and this will be sufficient to prevent sweating from being practised on a large scale. Against its being done on a small scale the public will, at least, enjoy as much protection as at present. At present the loss consequent on the wear or the gold coins is principally borne by country bankers, who naturally complain of the burden, although, as they find it profitable to carry on banking notwithstanduig, it does not seem that they have very much to complain of. The weight of a sovereign when issued fi-om tlie Mint is 7.988 grammes, and it is allowed by law to circulate until it has lost 51 milligrammes, after which every person to whom one is tendered is ordered to cut it so as to prevent it from circulating any longer. No penalty is, however, provided against those who do not comply with the law, and it is seldom enforced except by bankers and Government offices. Even the Bank of England, which is more strict than other banks in enforcing it, does not think it worth while to weigh sovereigns when presented in ones or twos, but only when brought in large numbers. Country bankers find that it is most convenient both to themselves and to their customers to receive without weighing all the sovereigns which are paid into them ; and they pay out the light ones again, and feel no inconvenience as long as their transactions are confined to their own districts. But when, in order to settle their accounts with the London bankers, they find it necessary to remit sovereigns to Loudon, the coins are only received according to their weight ; and the loss falls, of course, on the country bankers if *&^'ls any deficiency. A sovereign which weighs less than 7.937 grammes is not legal tender, but is regarded as a mere piece of bullion ; and a person who presents one which weighs, e.g., 7.925 grammes, loses the whole difference between its weight and that of a full sovereign of 7.988 grammes, although no objection can be made to receiving one weighing 7.937 grammes. It is, therefore, the interest of country bankers to pick out the heaviest sovereigns for remittance to THE BRITISH MINT. 267 London, and to keep the light ones in the conntry. Mr. Jevons, in a paper on " The Condition of the Metallic Currency of the United Kingdom ^vith Reference to the Question of International Coinage," read before the Statistical Society in November, 1868, mentioned that during the year ending on the 30th September previous, one large bank had lost 150,000f. by receiving light gold coins, in spite of the care which may be presumed to have been taken to cull out the hea\7- ones. The statistics which he furnishes show that the deterioration of the coin is very great in the agricultural districts. Unless the Government undertakes to manufacture coins there seems no reason why it should give new in exchauge for worn ones ; but if it does undertake the one, there are certainly reasons of pubHc convenience why it should undertake the other. When the German Government, at the close of 1871, announced its intention of introducmg a new gold coinage, it announced that it would bear the expense of the wear and tear of the coins, and whatever reasons are sufficient to recommend this course in Germany are equally applicable to other countries. Mr, Spencer, in the chapter already referred to, mentions that certain facts, which he was not at liberty to publish, had been communicated to liim which afforded convincing proof that coining could be carried on more economically by a private firm than by the State. The public have now an opportunity of judging for themselves "as to the capacity of the British Government to carry on the business, for Mr. AnscU's work* on the Mint affords as full iiilbrmation as could be desired respecting every detail of the operations of the Mint, and its frequent references to the management of the private Mint of Messrs. Heaton & Son, of Birmingham, enable the reader to compare a public and private establish- ment, the result of the comparison being decidedly unfavourable to the former. Mr. Ansell was formerly employed in the ]\Iint, but the Mint authorities thought proper to dismiss him some years ago, and it would be, of course, unfair to condemn them solely on the testimony of a man who has been irritated by the loss of his place. But the generally unfavourable judgment of Mr. Ansell is supported by the more impartial testimony of Mr. Scyd, who has devoted one chapter of his work already mentioned to a " Criticism on the British Mint." Since his work was published, Mr. Seyd has, indeed, expressed in the " Times " his opinion that a great improvement has taken place in the management of that institution, but the fact remains that it was very defective in 1868. That the defects are owing to the monopoly whicli, as a State institution, it enjoys, may be inferred from Mr. Seyd's criticism on the Paris Aliut, * "The Royal Mint," by G. F. Ansell. Effingham Wilson, 1870. 2C)8 THE BRITISH MINT. which is nearly as unfaTOurable as that on the Mint of London. It may, moreover, be presumed that it is owing to the Mint authorities them- selves that they have not been heard in their own defence. On May 5th, 187], Lord Kinnaird moved in the House of Lords for a Committee to enquire into the past and present management of the Mint, and prefaced his motion with a long speech, showing a minute acquaintance with the technicalities of the question, and calling attention to several faults, or what he deemed such, in its management. But his motion was opposed by the Government, and meeting with no support from the opposition was negatived without a division. Applying the principle of "Cui bono ?" we may presume that the resistance to the motion was prompted by the officials of the Mint, and they have no one but themselves to blame if judgment is given against them by default. Lord Kinnaird has, I believe, made other attempts to obtain an enquiry, but all of them have met with the same fate, it may be presumed from the same cause. The objections which have been raised to the present management of the Mint may be classified under three heads : that the building is incon- venient, that the machinery is not of the best kind, and that great waste takes place in its operations. As to the first of these objections, it is admitted on all hands to be well-founded, and a Bill was actually brought into Parliament by Mr. Lowe, in 1872, to authorise the sale of the present building and the erection of a new one better adapted to the work to be carried on. The Bill, however, was rejected by the House of Commons, apparently on the score of expense, although the evidence taken before the Select Committee showed that a sufficient sum could be raised by the sale of tlie old site to purchase a new one and erect and furnish a new building. It is not, therefore, owing to the Mint officials that the present inconvenient building on Tower Hill is retained, but it is owing to the Government, though to another branch of it. As to the machinery, it is sufficient to mention here that both the wi'iters to whom I have referred recommend that a lever-press should be substituted for the screw-press which is now used for stamping the coins. This im- provement may, for aught I know, .have been already eflFected, but it had not when I visited the Mint in November, 1871, more than three years after the publication of Mr. Seyd's work. As to the third head, there is one practice referred to by Mr. Ansell which strikes the unlearned reader as so wasteful that I cannot avoid mentioning it. An ingenious automatic balance is in use which rejects both the coins which are too heavy and those ^vhich are too light, and distributes them into separate compartments, and all which are thus rejected are melted down again. With the light ones this is unavoidable, but Mr. Ansell, when he was in the Mint, saw the means of avoiding it in the case of the heavy ones. He had the "blanks " THE BRITISH MINT. 269 weighed before being stamped, and then had the edges of the heavy ones filed down to reduce them to the proper weight. By this means an economy was effected equivalent to the diff"erence between the little labour required for filing, and the great labour required for repeating every process, from the melting to the stamping of the coins. Yet the old plan has again been adopted of Aveighing the coins instead of the " blanks," and as the edges of the coins cannot be filed without spoiling their appearance, the waste of labour is again submitted to. This was the- case at the period of my visit to the Mint, but I am not aware whether it is still the case, or whether the officials have any reason to urge in defence of it. Xeither can I venture to pronounce a decided opinion on this or any of the matters, many of them personal, to which Mr. Ansell refers, but will content myselfwith observing that the general effect of the perusal of his work is to leave on the unprofessional reader the impression that the Mint is not so well managed as a private one would be. The Lords of the Treasury have more than once called the attention of the Master of the Mint to the unsatisfactory state of its management, and have threatened to adopt the system of private con- tracts, unless some thorough reform could be introduced. Previously to the year 1851, the work of coining was intrusted to a semi-independent corporation called " The Moneyers of the Mint," who worked in the government building, but contracted to do their work for a stipulated price. The suppression of this ancient body does not seem to have been attended -^ith advantage, and, on the whole, I incline to the opinion that it would be better to entrust the business of coiuing to a private con- tractor, or to two or more contractors. There is too little work to be done to admit of many competitors in the trade ; but if part were entrusted to Messrs. Heaton and Son, and part to a London firm, there would be enough competition to insure the adoption of the latest im- provements, both in the machinery and in the processes employed. Already, it has been found necessary to call in the assistance of Messrs. Heaton and Son to produce a great number of silver and copper coins, or rather " blanks," for the actual stamping is always done at Tower Hill. The Bank of England is the principal chaiuiel by which coins are issued to the public ; and, if the directors were free to obtain them wher- ever they chose, they would of course require the manufacturers to submit to the trial of the Pyx, or some equally satisfactory test. CHAPTER II.— VALUE OF MONEY. QUANTITY OF MONEY — AMOUNT OF BUSINESS DONE — EFFICIENCY OF CIECULATION — PROPORTION OF COIN TO PAPER — SLOWNESS OF A CHANGE OF VALUE — PRICE OF BULLION — ACCESSIBILITY OF THE MINT — SEIGNIORAGE — PROHIBITION OF MELTING — PAYMENT BY TALE — INCONVERTIBLE NOTES. The value of gold, as of aU other commodities, depends on the quantity of labour required to produce it ; and the quantity which a people pos- sesses is determined, as is that of all other commodities, by their power of producing it for themselves or of giving other things in exchange for it. A certain quantity is required in order to carry on the exchanges effected by the people, and a class arises which makes it its special busi- ness to supply this want. There can never be any reason to fear that a people which has anything to give in exchange for it can be permanently in want of gold, any more than that it can be in want of cloth, of wood, or any other commodity ; for the private interests of those persons who, whether natives, or foreigners, are in possession of gold mines, and of the means of working them, will induce them to bring their gold to market and exchange it for the products of those who want it ; and the gold miners themselves must feel the want of food, clothing, and other things which gold itself cannot furnish them. Nothing can be more foolish than for a government to endeavour (for it cannot do more than endea- vour) to prevent the export of gold from a country, or to encourage its importation. Such attempts have been made in order to increase the wealth of the country ; but, even if they were successful, they could in no way increase wealth, for no want would be satisfied which was not satisfied already ; and as the quantity of labour exerted by the people would remain the same, the value of its total produce would remain the same also ; and, if more money were used to exchange it, it would be evident that money itself had fallen in value. Locke attempted to estimate the quantity of money which a people requires, and took as one of the elements of his calculation the rate of wages, contending that there ought to be ouough money at any one time to pay one ^\'eek's wages to aU the labourers in the country. Suppose that this sum were 100,000,000f., but that the Government could compel people to use 200,000,000 i., .the consequence would simply be that money would be AilOUXT OF BUSINESS DONE. 271 reduced to half its Talue. This is exemplified when a Govermuent issues notes wliich profess to represent sums of money, but which camiot be exchanged for coin at the pleasure of the holders, and compels its sub- jects to receive them in payment of all debts. So long as the Govern- ment confines its issues to the amount of the coin which was formerly used by the people, no change takes place in the rate of wages, or in the prices of commodities ; but when it attempts to force a larger quantity of notes into circulation, the notes become depreciated in proportion to the excess ; and wages, and prices, if estimated in paper are proportionally raised. Such is the case with the " gi-eenbacks," or treasury-notes issued by the Government of the United States, which are now depreci- ated to the extent of about 10 per cent., and which, when issued in larger quantities during the civil war were not worth more than half of the quantity of coin which they professed to reijresent. Similar notes were issued by the Government of the Confederate States, during the same war, with such reckless profusion that they fell to one-hundredth part of the value of the same nominal sum in gold. Such facts have often been noticed, both in our o^\•n day and in former times, and have been held to establish the theory that the value of money varies inversely as its quantity. Properly understood, the theory is perfectly accurate, as is also the converse proposition that the quantity of money varies inversely as its value ; but, as has so often happened with the generalisations of Political Economy, the theory has often been applied to actual facts without regard to the necessary qualifications, other things being equal. If two persons have to exchange the product of a day's labour and to use money in the transaction, it is clear that if two grammes of the metal employed are worth a day's labour, twice as much metal will be used as if one gramme were worth a day's labour. Two grammes will be required Ijccause they are worth the article, and two grammes will be worth the article l:)ecause they are worth the same quantity of labour. But when from an individual case we proceed to generalise respecting the requirements of a populous country we must bear in mind that there are many circum- stances wliich may affect the result, although by no means inconsistent with the theory. These circumstances are, mainly, tliree : the amount of business done, the efficiency of circulation, and the proportion wliich Ijank notes and other forms of paper credit bear to the quantity of coin in the country. I proceed to examine these in detail. If the same people have a greater quantity of business to transact at one time than at another, they will require a greater (piantity of money for the purpose, even if its value remains constant. This is so obvious that it would seem hardly necessary to insist on it here, and yet it has been repeatedly ignored by wi'iters on the currency. The returns 272 EFFICIENCY OF CIRCULATION. published by the Bank of England show that the amount of its notes which are in circulation is constantly varying, and is generally larger in those months in which the dividends on the public funds are paid than in other parts of the year, and these augmentations have been gravely spoken of as producing a fall in the value, not only of Bank of England notes, but of those of other banks, and of coin. The fact is, as is well kno\vn to all persons who are engaged in business, that much more busmess is done at these periods than in the intervening months. Not only are the dividends paid on the public funds, but railway and other companies pay the dividends on their shares and debentures ; foreign Governments pay the interest due to English holders of foreign stocks; a large number of commercial bills fall due, and the richer classes choose the same time to pay their tradesmen's quarterly bills. To effect all these payments a larger quantity of money is required, and the mere fact that it is used in one month rather than another has, and can have, no effect on its value. The returns of the Scotch and Irish banks show similar fluctuations in the amount of their issues, and these occur in the same order year after year, and correspond with the knoA^m fluctua- tions in the trade of the country, the amount rising at those times when more produce is sent to market, and falling when the contrary is the case. In aU such cases the increase in the quantity of money is the consequence of the increase in the value of the commodities exchanged, and affords no proof that the value of money has fallen. Even where there is the same amount of business to transact, a change may take place in the habits of the people which may enable them to perform it with a smaller quantity of money. The circulation may be rendered more efiicient, or, in other words, a coin may change hands more frequently while performing the same amount of busuiess. As the function of coin is to circulate from hand to hand, it docs its work better in proportion to the frequency vnth which it changes hands ; and, other things being equal, any change which should have the effect of increasing the eflBiciency of its circulation would be an improvement. Locke, as before observed, argued that there ought to be sufHcient coin in the country to pay one week's wages to all the labourers. This is, of course, assuming that wages are paid weekly, in which case, as he justly observes, the coins must be either in the hands of the labourers them- selves or of their employers. If all the labourers receive their wages in coin on the same day of the week, the payment cannot be effected with less than the whole amount of their wages. During the remainder of the week the coins are gradually passing from the hands of the labourers to those of the tradesmen with whom they deal, and from the tradesmen back to the employers; and if every labourer spent the whole of his PROPORTION OF COIN TO PAPER. 273 wages ill the week, the coins might suffice for the double puqwse of paviug and of spending their wages. Bat if it became customary to pay wages daily, one-sixth of the quantity of coin might suffice for the work. The rate of wages lieing the same as the coin received ou Monday might find its way back to the employers in time to pay the wages on Tuesday, and thus the efficiency of the circulation would be increased. I do not say that such a change is desirable, for there are other circumstances to be taken into consideration, as, e.rj., the greater quantity of labour which would be necessary to effect such frequent payments, but merely give it as an example of the way in Avhich an economy of coin may be effected. In collieries and other mines it is a common practice to pay wages once a fortnight, and even as seldom as once a month ; and the system has been objected to on the ground that it compels the workmen to resort to the use of credit, while it is defended by the employers on the ground that, as the men always get drank on pay day, the fewer there are of such days the better. If, however, the attention which has been directed to the evils of the system should produce its abolition, some, though perhaps a slight, economy, will be effected in the use of coin. The most important change in the habits of a people which can effect a change in the quantity of coin used, Avheii coin itself has not altered in value, is an extension or diminution of the use of paper currency in its various forms. In every civilized country a large portion of business is transacted by means of bank notes, cheques, bills, and other pieces of paper, which merely represent a certain quantity of coin. If a people, which has been accustomed to effect all payments by means of coin, should suddenly introduce a quantity of notes of an amount equivalent to the whole of the coin previously in use, they can dispense with coin for all payments amongst themselves, although some may be required to pay deljts to foreigners, and they can thus save nearly the whole of the coin which they formerly required. Such a change cannot be suddenly effected, except by the command of a Government which compels all its subjects to receive its o\ni notes, or those of some favoured bank in all business transactions ; and a Government is then said to establish a forced currency. But such a change may be gradually brought about by the increase of banking without any interference of the Government ; and Scotland affords an instance of a country in which all payments are effected in bank notes, except those which are of a smaller amount than 2 Of. ; and the only reason why they are not used for smaller payments is, that thai amount has been fixed liy law as the smallest for which a note can lie issued. In England no notes may be issued lor smaller sums tiian Vl'o'i., and this is also considered as the smallest sum for which cheques should be frequently drawn ; but as there is no legal limit in 274: PROPORTION OF COIN TO PAPER. their case, smaller cheques are occasionally used. As the stamp tax is the same on all cheques, whatever their amount, the law virtually discourages small cheques, although it does not absolutely forbid them, A great extension has been given of late years to the use of cheques in this country, but since the passing of the Bank Act in 1844 there has been no increase in the quantity of bank notes which has not been accompanied by an equal increase in the reserve of coin held by the banks which issue them. Although, therefore, there has been an actual increase in the amount of notes in circulation, there has not arisen from this cause any change in the proportion of coin to paper. On the other hand, other causes have been at Avork which have tended to increase the use of coin. One of these has been the growth of co- operative societies, which almost always require ready-money payment, and therefore require that large quantities of coin should be used, while if similar articles are purchased at ordinary shops, and paid for at the end of the quarter or the year, the payments are more usually effected by means of notes and cheques. Thus, while I have said that the frequent payment of wages diminishes the quantity of coin required in a country, I contend that the frequent payment of tradesmen by their customers increases the use of coin. This may seem inconsistent, but it must be remembered that I have assumed that quarterly, or annual, bills would be large enough to require notes or cheques to be used in paying them, while I have assumed that a week's wages are too small a sum to be paid otherwise than in coin. If a colher's wages are as high as 12 of. a month, less coin would be required to pay his wages montlily than fortnightly, because, in the former case, bank notes could be used, and in the latter they could not. A system has been in use for centuries of paying the labourers engaged in mines not in coin, but in goods, or in tickets, which can only be exchanged for goods or money at certain shops. Many Acts of Parliament have been passed at different periods, from the reign of Edward the Fourth down to that of Queen Victoria for the purpose of suppressing this, which is knoAra as the " truck " system, as it is considered to be very injurious to the labourers themselves. It is obvious that if a labourer is obliged to deal with a particular shop for all that he requires, he is in a great measure at the mercy of the shopman ; and there is abundant evidence to show that the labourers who are in this position are abominably cheated, both as regards the quality and the quantity of the goods which they purchase. To save them from such an imposition is, no doubt, highly desirable, but even if the Mines Regulation Act of 1872 should have the effect, which no previous Act of the same kind has yet had, of abolishing the " track " system in all its forms, it may be doubted whether the labom-ers who now suffer from SL0WXES3 OF A CHA^'GE OF VALUE. 275 it will be materially benefitted. The plan at present pursued by eniployei's who keep up a form of truck is to advance to the labourers a portion of their wages before pay-day, and to advance it in the form of tickets, which can only be exchanged for goods at a store which is kept by the employer, or by his agent. "When pay-day arrives, the man receives his wages in coin ; but as he receives them he is obliged to redeem the tickets which he has formerly received ; so that he may, in fact, carry away a very small portion of his wages, or, indeed, none at all. Thus, the cause which compels the men to submit to the system is their want of a sufficient stock of money to enable them to obtain what they want during the three, four, or five weeks which may elapse before pay-day arrives. Even if truck be abohshed, yet, if pay-day comes no oftener, there will still be many men who will be forced to obtain credit from the local shops ; and when they are once in debt they will be virtually obliged to deal at the same shop, and will be as much exposed to imposition as at present. AVhat, however, concerns us here is, to observe that the " truck " system has already been discontinued in many places, and that its discontinuance, though on the wdiole beneficial, tends to the employment of a larger quantity of coin. The several causes above enumerated have been tending in opposite directions to increase and diminish the quantity of coin in use in this country. On the whole, the preponderance has probably been in favour of an increase in the quantity of coin, consequent on the gi-eat increase of business v.'hich has taken place during the last quarter of a centuiy. But even if these causes had not been in operation, or had operated in opposite directions, and had neutralised one another, there Avould still have been an increase, because the A'alue of the precious metals has fallen since 18.50. I have endeavoured to show that there has been a rise of about one-third in the average rate of wages, and this must have pro- duced a proportional increase in the prices of the commodities bought and sold in the country, and this, in turn, an increase of the nominal amount of money used to pay for them. Indeed, unless some means are devised of substituting credit for coin, or of increasing the efficiency of the circulation of coin, the prices of all commodities cannot rise unless the quantity of coin be increased. If higher prices cannot be paid except in coin, and if there is no more coin to pay them with, it is evident that higher prices cannot Ijc maintained. Hence the slowness of the fall in the value of the precious metals which is now taking place. ]\Ir. Jevons, in the paper before referred to, estimates the t(jtal (pKUitity of gold, silver, and coi)[)er coin in the United Kingdom as rather uiuler two and a half milliards of francs, and if wages should rise to the extent of another third, as I have given my reasons for anticipating, a further sum T •> 'J7i'> PRICE OF BULLION. of eight hundred millions will be required for our currency. This sum is less than that which we import on an average every year, and if we did not export it again, one year would be sufficient to efiect a proportionate change in the value of money. But Ave cannot retain what we receive, because as soon as a slight rise of prices is perceived in England it immediately becomes profitable to import commodities from foreign countries, and to export gold and silver to pay for them, so that England is, in foot, obliged to act as a feeder for the rest of the world. A few months sufficed to effect a four-fold rise of wages and prices in Australia and California, because those countries only contained a few thousand inhabitants, and the limited quantity of coin which their trade required could very soon be produced. Those who were actually engaged in gold mining could at once obtain higher money-wages in proportion to the quantity of gold which they produced, and other classes could soon obtain a proportionate rise by engaging in mining themselves, or by demanding a rise if they remained at their former occupations. But although the gold discoveries did produce a considerable emigration from Europe to the gold countries, they did not, and could not, produce such an extensive exodus of labourers as to bring wages to the same level at both extremi- ties of the world. In spite of all that has been said and written about the superior position which a working man can obtain by emigTation, tlie fact remains that a man is, of all commodities, the most difficult to move, and the number of emigrants still bears but a small proportion to the population of the countries which they leave. The whole quantity of gold produced in the world during the period 1848-71 v.as twelve and a half milliards, while the whole stock previously in existence has l)een estimated at fourteen milliards, so that it has been nearly doubled during that period. This shows, either that the aljsorption has been much more than in proportion to the change in its value, or that the estimate of the previously existing stock was too low. But the change, however slow, is still continuing, and will not cease until the value of gold and silver shall have fallen in proportion to the diminution in their course of iwoduction. Hitherto I have spoken of the changes in the value of money which are co-incident with similar changes in the value of bullion, having their origin in the difficulty of producing the metals themselves. I have now to speak of those slighter variations which may affect the value of money without affecting that of bullion, or may affect that of bullion but not that of money. The proportion which the values of coin and bullion bear to each other is shown by the i^ricc of bullion, and if this price varies, it shows either that the value of coin has altered while that of bullion has remained constant, or that that of bullion Las altered while ACCESSIBILITY OF THE MINT. 577 that of coin has remamecl constant, or that both have altered in difll'vent proportions. That the price of silver measured in gold, or the price of gold measured in silver, should vary fi-om time to time can excite no surprise, for the cost of producing each of these metals is liable to "S'ary, and there is no reason why the variations should take place in both cases to the same extent, or even in the same direction. But the case ■which I am here considering is that of a metal whose price is measured in cuius made of the same metal, and in such a case it is clear that both the coin and the bullion must be equally affected by all changes in the cost of production. As was before observed, a coin is a piece of metal which has a stamp impressed on it to denote its weight and fineness, and the statement that a kilogramme of gold is worth o,100f, is but one way of saying that 3,100f. weigh a kilogramme. There could, in fact, be no fluctuations in the price of bullion if there were no obstacles to prevent bullion from being instantaneously converted into coin whenever this was desired, or to prevent coin from being as speedily converted into ingots. If the holder of a kilogramme of gold 900 fine could at any moment take it to the Mint, and at once receive 3,100f. in exchange for it, no one would sell a kilogramme of gold for any smaller sum of money. If, on the other hand, the gold coins which represent the sum of 3,100f. weighed exactly a kilogramme, and were all 900 fine, no one would give that sum for any smaller weight of bar gold of equal fineness than a kilogramme when he could obtain that weight by simply melting do\Mi the coins. In practice, however, this perfect equality is very rarely realised ; and I have now to give in detail the various circum- stances which prevent, or may prevent, its attainment. Even when the Government undertakes to coin bullion for its subjects free of charge, it can hardly avoid interposing some delay between the receipt of the bullion and the issue of the coins to the person who has brought it. The English Government promises to give gold coin to every one who Ijrings bullion to the Mint, and to make no charge for its trouble ; or, in other words, to return the same weight in gold coin which it has received in bullion, but, in practice, gold is scarcely ever sent to the Mint except by the Bank of England ; and the holders of bullion are content to take it to the Bank, and to receive immediate payment of a somewhat smaller sum in bank notes than they might oljtain in coin I'rom the Mhit. Colonel Tomlin is, I believe, the only private individ- ual who has sent gold to be coined at the Mint for many years i)ast ; and he did so, not as a matter of business, but in order to estaljlish a jn-in- (•i[)le. The Mint rc'{uires twenty days for the jjrocess of coining, and those who take Inillion there must submit to this delay before they receive their money ; and this is equivalent to a loss of the interest 278 ACCESSIBILITY OF THE MINT. which thej might ohtain if their property were not locked up during that time ; and this furnishes an inducement to tlie bullion-dealers to repair to the Bank of England, Avhcre they can obtain prompt paym.ent, rather than to the Mint. Mr. Seyd, in a pamphlet* publislied in 18G8, has called attention to various other circumstances which deter the bullion- dealers from sending gold to the Mint, such as the inconvenient situation of the building, which is at some distance from the business quarter of the city, and the regulations as to the weighing of the ingots, their size and shape, and other matters which need not be specified here. The result of the Avhole is, that gold is always sent to the Bank of England, which institution has been, since the passing of the Bank Act in 1844, obliged to buy bullion from all who choose to bring it at the rate of £3 17s. 9d. per ounce troy, British standard, or 917 fine. The Bank sends the bullion which it buys to the Mint, and receives coin at the rate of £3 17s. lO^d. per oz., or, in other words, receives an equal weight in coin to what it has sent in bullion, so that the Mint, which is a State institution, performs its labour gratis, Vi'hile the Bank, which is a private company, makes a profit on the transaction. Reduced to French weights and French money, the Mint price of gold is 3,100f. per kilogramme, 900 fine, and the Bank price 3,095f., or a few centimes less. As coin is more convenient than bullion for the purpose of paying debts, the holders of bullion are generally willing to sell it to the bank at the above-men- tioned rate, although they then receive a smaller weight of gold in exchange for a larger one ; but it sometimes happens that large quantities of bullion are required for foreign remittance, and at such times the price of bullion rises above the rate fixed by tlie Bank, and varies be- tween that rate and that of 3,100f. a kilogramme. Beyond this latter point it cannot rise, because any one who holds 3,100f. in coin can obtain a bar of gold weighing a kilogramme by simply melting them down; but between these two points slight fluctuations may and do occur. It is hardly necessary to say that at such periods little or no gold is taken to the bank, which never alters its terms. One of the inconveniences mentioned by Mr. Seyd as atteudant on the Mint, is its situation at a distance from the business quarter of the city, and he suggests that another building should be established in a more suitable locality. But the inconvenience here referred to is as nothing when compared with that to which the people of Australia were exposed when gold was first discovered there. As it was not pre- viously kno^ni that gold could be found there iu large quantities, no Mint had been established there, and the nuggets could not be converted * Question of Seigniorage, &c. Effingham Wilson, ACCESSIBILITY OF THE MINT. 279 into coin nntil they had been sent to the other end of the Avorkl, Australia being; a dependency of Great Britain. Several months were required for the transmission of the bullion and the specie, and during this interval Australia presented the curious anomaly that, while gold was plentiful, gold coin was scarce. Gold had fallen in value, but the gold coins were wanting which could pay the higher prices; and to remedy the inconvenience thus occasioned, the newly-constituted Par- liament of South Australia passed an Act authorising the banks to issue notes in exchange for the deposit of bullion. These notes were, of course, expressed in coin, but might be redeemed in bullion ; and such was the scarcity of coin, that persons who brought an ounce of bullion to a bank were wiUing to accept in exchange notes to so small an amount as £3, or even less. So remarkable a discrepancy between the prices paid for gold in Australia and England (where it was then, as now, £3 17s. 9d. per oz.), could not fail to attract public attention, and it was regarded by some mercantile men as showing that the gold discoveries were making gold cheap, in the sense of reducing the price of bullion. The discoveries did make gold cheap, for they caused it to lose much of its power of commanding labour, but it was merely an accident that they had the eflFect of lowering its price. The cheapness or dearness of gold in no way affects its price when measured in itself, any more than the cheapness or dearness of wheat affects the quantity of flour to be used in making a quartern loaf. The fall in the market price of gold bullion was merely the result of a temporary difficulty in getting gold coined, and the phenomenon ceased as soon as its cause was removed by the transmission of a large quantity of coin from Eng- land to Australia. Mr. Newmarch, in a pamphlet which he published in 1853, after mentioning the prices of gold bullion in Australia, and the rates charged for conveying it to England, observed : — " Taking into account the cost of insurance, freight, commission, and charges, it is very douljtful whether, to yield a profit, gold bullion can be consigned from Australia to London at a higher buying price than 67s. to G8s. per oz. Tiie last advices give the price as 77s., but that cannot last."* If Mr. Newmarch meant to say that gold would not be exported from Australia to England unless its price was as low as the rate which he assigns, he was mistaken, for the exportation has continued ever since, although the price of bullion has long been the same in Australia as in England. It has continued because Australia required English com- modities, and liad nothing else than gold to exchange for them on such l)rofitable terms, because the prices of commodities were lower in Eng- * New Supplies of Gold, p. 66. 280 SEIGNIORAGE. land than those which must have been charged for sunilar commodities if produced in Australia. The bullion-dealers were obliged to send gold to England in order to discharge their liabiUties in this country, and whatever the freight and insurance might have been, it would still have been necessary for them to send it. So far is it from being true that 77s. an oz. was too high a price to last, that a much higher price has been constantly paid for many years. It is possible, however, that Mr. NeA\Tnarch merely meant that a margin of 10s. an oz. must be left between the prices of bullion in Australia and England in order to render it profitable for English speculators to buy bullion in Australia and send out coin in exchange, and with such a proposition I have no wish to quarrel. Mints have now been established at Sidney and Mel- bourne, and are sufficiently accessible to the gold miners of New South Wales and Victoria to prevent any wide deviation from the Mhit price from occurring; but Mr. Kennedy mentions in his "Four Years in Queensland," that in 186G, when gold was first discovered in that colony, it was sold at the diggings for as low a price as £3 8s. the oz. This would show that the Mint of Sidney was then as inaccessible to Queensland as liondon formerly Avas to New South AVales, nnless, in- deed, the gold was of very inferior quality ; and Mr. Kennedy does not specify the fineness. It must al^^■ays be borne in mind that, ■\\-hen the Mint price of gold is spoken of, gold of a certain fineness is always referred to ; and when Mr. TroUope, in his account of " Australia and New Zealand," speaks of the price as varying between £3 15s. and £4 2s. an oz., he obviously refers to gold of different qualities, as the latter price could only be paid for gold much finer than the British standard. As before observed, an ounce of standard gold is coined into no more than £3 17s. lOhd., and a holder of £4 2s. in coin could obtain much more than an ounce of bullion by melting do-«ii the coins. The Mint may be ready to coin all the bullion which is brought to it and yet, those Avho bring bullion may not receive back as much as they have brought, but something may be deducted for the benefit of the Government. To this deduction the name of "seigniorage" is commonly applied. Strictly speaking, perhaps, this name should only be applied to a tax levied by the Government on the bullion over and above the expense of coining, and the name of " Brassage," or " Mintage," should be given to the charge which is merely equivalent to the expense of coining ; but it is more common to comprise under the same name all deductions made by the Government, whatever be their reason. In England, the Government charges nothing for coining gold, but in France a charge is made of Gf 70c. for every kilogramme (900 fine) so that those who bring bullion receive only 3,09 3f. 30c. per kilo. This SEIGNIORAGE. 281 is the actual price -which the GoTernment pays to tlie Directors of the Mint for coiuing, so tliat the French Government does not make any profit by the transaction. The Bank of France, though not legally compelled to do so, buys bulUon from the public at the same rate as that paid by the ]\Iint, and we may say that the price of bullion in France is 3,093f. 30c. the kilo. Thus here again there is a diti'ereuce between the values of the same quantity of gold when in the shape of coin and in the shape of bars, because coin is more convenient than ingots to all those who have payments to make, and as more labour has been expended on the coins, their value is proportionally greater than that of the ingots. The discussions which have recently taken place concerning the proposal to levy a seigniorage on the gold coin of this country have disclosed the fact that many persons are unable to understand that its imposition would have the effect of increasing the value of the coin. Although all Econo- mists who have treated of the question, from Adam Smith to Mill, have maintained that it would have this effect, yet many persons imagine that the value of a coin depends solely on the weight and fineness of the metal which it contains. Even Mr. Bonamy Price (in an article in Eraser's Magazine, in November, 1871) speaks contemptuously of ]\Ir. Lowe becoming the mouthpiece of certain people who suppose that the law can give the value of twenty shillings to that which does not possess twenty shillings' worth of xalne. The proposal which gave rise to the discus- sion was one emanating from the French Government, that the English sovereign should be assimilated to the twenty-five-franc piece, which the French Government proposed to issue. The weight of the present sovereign is 7.988 grammes, and as one-twelfth part consists of alloy, the quantity of fine gold is 7.323 grammes. The proposed new coin would weigh 8.064 grammes, but as one-tenth would consist of alloy, the fine gold will be only 7.258 grammes, so that the reduction would be, as nearly as possible, 1 per cent. If no other change were effected, the value of the coin would, of course, be reduced to the extent of 1 per cent., and the inconvenience which would l)e caused by a corresponding altera- tion in all existing contracts would, no doubt, be considerable. But it was suggested that the difficulty might be got over by imposing a seigniorage of 1 i)er cent., so that the value of the sovereign might be as much raised by the seigniorage as it was reduced by the diminution of the gold it contained, and thus remain the same as before. The conunon objection is that this cannot be done, because the *' intrinsic value " of the coin would Ijc reduced, and that foreigners would not receive it ibr more than its "intriiinic viilue," This plirase is a misleading one, as it implies that the value of gold is something inherent in it, like tiie yellow 2f^2 SEIGXIOIIAGE. colour, or the metallic lustre, instead of being the consequence of the amount of labour expended in procuring it. If it be once recognised that value depends on labour, we see that a coin has had more labour expended upon it than an ingot, and that it will consequently exchange for more labour. This applies only to the case where a governmeut charges a " brassage " and no more ; but if a government undertakes to coin gratis, and instantaneously, the value of the coin would not be greater than an equal weight of ingots. In this respect there is no diScrencc between gold and other commodities, for if the Government undertook to issue boots gratuitously to all persons who brought the necessary quantity of leather, there would be no difiTereucc between the value of a pair of boots and that of an equal weight of leather. If, on the other hand, the government were to levy a seigniorage which exceeded the cost of coining, the value of coin v.'ould exceed that of bullion to the same extent, because no one would be able to obtain coin without paying the seigniorage. Though the actual labour expended on the coin would not be sufficient to produce so great an increase in its value, yet the difficulty of procuring coin would be sufficient for the purpose, since a person v>-lio required 99 sovereigns could only obtain them at the Mint, and could only procure them there by giving bullion enough to make 100 sovereigns. As coin would be for most purposes more useful than bullion, it would be worth while for people to give a larger v>'eiglit of bullion for a smaller weight of coin ; and the market price of bullion vrould generally conform to the I\Iint price, since no one would give more than 99 sovereigns for a weight of bullion less than that for which he could procure 99 sovereigns at the ]\Iint, miless, indeed, he were extremely desirous to obtain bullion for exportation abroad. In such a case the price of bullion might rise to any point not exceeding that which would iuducc people to melt do^ii the coin. It will be seen that this argument assumes that people are obliged either to go to the IMint in order to get their bullion coined, or else to do without coin altogether ; and the case Avould be materially altered if private persons were to undertake to coin bullion and not to charge more than their actual expenses. Of course, if the English Government were to levy a seigniorage it would still prohibit private coining as it does at present ; but it is possible to impose so high a seigniorage as to induce pri^■ate individuals to break the law, and where this is done, the value of the coin cannot be maintained at the rate which the Government dictates. A very high seigniurage, varying from 10 to 16 per cent., is charged on the silver coin, but there is no temptation to private individuals to issue silver coins, because these are not legal tender to a larger amount than 50f., and it would be difficult to dispose of so large ■ SEIGNIORAGE. 283 a quantity as must be made in order to yield sucli a profit as would compensate the risk incurred by yiolating the law. It would probably be found impossible to levy so high a seigniorage as 10 per cent, on the gold coin, which are legal tender to any amount, but it does not seem likely that a gain of less than 1 per cent. Mould induce peoi»le to break the law on a large scale. I say less than 1 per cent, because they would have to bear the expense of coining, which may be reckoned as one-fifth per cent. Mr. Seyd docs, indeed, maintain* that 1 per cent, is high enough to induce private individuals to break the law, but few of those who have considered the subject will be inclined to agree with him. Perhaps the best answer to Mr. Seyd is afforded by the fact that a seigniorage of 1 per cent, is charged in Australia, as is mentioned by Mr. Hendriks in his evidence before the International Coinage Coin- mission (vol. II., pp. 30G-S07) without giving rise to private coining. In order to restrict the fluctuations of the jirice of bullion within as narrow limits as possible, it has been proposed that the Mint or the Bank of England should be required by law to give bullion in exchange for coin at the same rate as the Mint gives coin for bullion. Thus, if the proposal vrcre adopted, the Mint would give £3 17s. lO^d. for an oz. of gold, and will also give an oz. of bullion for £3 17s. lO^d. The coins would contain 1 per cent, less gold than at present, but the holder could always obtain an oz. of gold by going to the Mint, as he can now do by melting dov.-n the coins, and there would, therefore, be the strongest inducement to abstain from melting them. Perhaps the most convenient plan would be to enact that the Bank of England should sell bullion at £3 17s. lOid. the oz. and buy it at £3 17s. 9d. the oz., in which case the limits of variation would be the same as at present. The latter task is already imposed on the Bank, and the former is voluntarily undertaken by it. It might, of course, occasionally happen that the Bank would be unable to produce the required amount of bullion, and the price (expressed in notes) might then rise higher than £3 17s. lOid. the oz. ; but such a case would be only exceptional. Adam Smith, and many other authorities, both speculative and practical, ha^■e, from time to time, urged on the English Government the necessity of imposing a seigniorage on the gold coin as a thing desirable in itself, without reference to the advantages to be derived from the assimilation of the English coinage to that of France and other countries. The objections to such a change seem to result from little more than the prejudice which always opposes a dei)arturc from an established system. Lord Liverpool, in his exhaustive work on the coinage, puljlishcd seventy * Qu' stion of Seigiiionigfi, p. 31. 284 SEIGNIORAGE. years ago, whicli laid down the principles which have been acted on by the Governmeut since 181G, observes: — "I incline to think that the charge of fabrication shonld not be taken from those coins, which are the principal measure of property and instrument of commerce ; and still loss any profit derived from seigniorage payable to the Sovereign. Becanse this princijial measnrc of property would not, in such case, be perfect. Because the merchants of foreign nations, who have any commercial intercourse with this country, estimate the value of our coins only according to the intrinsic value of the metal that is in them ; so that the British merchant would, in such case, be forced to pay in his exchanges a compensation for any defect which might be in these coins ; and he must necessarily either raise the price of all merchandise and manufacture sold to foreign nations in proportion, or submit to this loss. Because no such charge of fabrication has been taken at the British Mint for nearly a century and a half past ; and, if it were now to be taken, the weight of the new gold coins must be diminished to pay for the fabrication. And, lastly, because these new gold coins would either difier in weight from those now in currency, or, to prevent this evil, the whole of our present gold coins must be taken out of circula- tion, brought to the Mint, and be re-coined." (Treatise on the Coins of the Realm ; in a Letter to the King, 1805, pp. 154-5). None of these objections are of any real moment. The first, viz., that the standard of value would not be perfect, is simply unmeaning. The new coins would serve the same purpose as the old ones, that of supplying a definite mean- ing to contracts expressed in money, and they would afford quite as good a measure of value as the old ones. This objection is repeated by the International Coinage Commissioners on page 13 of their report, where they say, " If the value of the new coin containing 112 grains of fine gold is to be maintained as equal to that of the existing sovereign containing 113 grains by the power which the holder of it is to have of demanding from the Mint or the Bank of England in exchange for it 113 grains of fine gold in bar, it is obvious that the new coin becomes only a token coin, the value of which is maintained by its convertibility. It ceases, however, to retain its quality of beiug the standard of value ; and, in fact, 113 grains of fine gold in bar are substituted for a coin containhig that quantity of fine gold as the standard pound and measure of value in this country." In the only sense in which a coin can be said to be a standard of value, the new coin would be quite as much a standard of value as the old one, for in it would be measured the prices of all commo- dities, and people would thus be enabled to compare their values. What the commissioners mean by saying that it would become a token coin is by no means clear, but the convertibility is merely a means of keeping SEIGNIORAGE, 285 dowii the price of bullion, while the value of gold is quite as much exposed to fluctuations under either system. A l)ar of gold would not become a measure of value to any greater extent than at jiresent, for the values of commodities would not be measured in it, but in coin. Lord Liverpool's second objection, that a disturbance w^ould be intro- duced into our foreign trade, is of equally little force. It is quite true that foreigners estimate our coins according to their weight and fineness, without regard to the amount of the seigniorage which we impose, l)ut the very object of a seigniorage is to prevent coin from being exported to countries where it does not circulate. An English merchant, who has to pay debts abroad, commonly sends ingots for the purpose ; and the imposition of a seigniorage will induce him to buy bullion rather than melt the coin, as is now commonly done. It will neither be neces- sary for him to raise his prices, nor to submit to a loss, for the value of the coin will be the same as at present (the -s'alue of gold being supposed constant) ; and the only effect of the change will be that he will buy bullion for exportation instead of melting coin. There is another advantage attending the present proposal which, of course. Lord Liverpool could not have anticipated, that the sovereign would be made exactly equal to twenty-five francs, and would, therefore, circulate in France, Belgium, Switzerland, and Italy, so that the coins would be exported, but not for the purpose of being melted down at foreign Mints. His third dejection, that no seigniorage has been charged since the reign of Charles the Second, is one which applies equally to the imposition of a similar charge on the silver coin, which was, however, recommended by Lord Liverpool himself, and subsequently adopted with gTeat advantage. Because a bad system has been long pursued it by no means follows that a good one should not be introduced. The quantity of gold in the coin must be reduced, but this is an advantage and not tlie reverse. His last objection, that a complete re-coinage would lie necessary, may be best answered by a reference to ^\v. Jevons' paper already referred to, where it is shown that so large a part of the gold coin is already reduced by wear below the legal weight, tliat a re-coinage is highly desirable, if not aljsolutely necessary, and that the proposed change affords a most favourable opportunity for such an operation. According to Mr. .Jevons' calculations, 70 per cent, of the sovereigns in circulation are too heavy to pass as twenty-five-franc pieces, iiiul wdiild have to be melted down ; but the gold which the Govermnent would ol)tain from them would l)e sufficient to defray all the expenses of issuing new coins in their room, and to leave a profit of more than .''),(lOO,()OOf. "^I'lie principal advantage to be derived from a seigniorage is the saving of a cousideruble amount of labour which is now employed in coining 28G PROHIBITION OF MELTING. sovereigns which pass ahnos': immediately to the melting-pot. Gold- smiths find it more convenient to dra'.v a cheque on their bankers and require it to be paid in gold coin than to go to the bullion market and buy bullion, because this saves them the trouble of assaying and of bargain- ing for what they want. They then melt down the coins to be made up into plate, and when other people want coins, Iresli ones are issued. The same process is repeated on a much larger scale where remittances are made to foreign countries, since the coins being of no more value than an equal weight of bullion, nothing is lost by melting them down, and, as they do not circulate to any great extent aljroad, they are either melted and re-coined at foreign Mints, or made into bars before they leave this country. That a very slight seigniorage would be sufficient to prevent such'a practice is shown by the experience of the United States, where it amounts to no more than one-half per cent., and where, as Mr. Seyd observes, "bars are consequently too cheap as compared to coin, and being thus subject to exportation before the exchange arrives at the cash-point, they are ^found absent when that point is really reached, and bankers are obliged to send coin. This accounts for the occasional large arrivals of American coin, in spite of the seemingly protective charge of one-half per cent." (Question on Seigniorage, p. 35.) It will be observed that a seigniorage does not altogether prevent the exportation of coin, but I believe that American eagles when brought to this country are not melted, but retained hj the Bank of England, or other banks, and subsequently returned to the United States. The imposition of a seigniorage Avould not only save the tax- payers of England from the burden which they now bear of making millions of coins which are immediately melted down, but would intro- duce greater regularity into the operations of the Mint, and thus benefit all those who are employed in that establishment. The Mint would then be simply required to furnish gold coin in sufficient quantities to replace the annual loss by wear and tear, by ship^n-ecks and other causes, which is a tolerably constant quantity. At present, whenever the foreign exchanges are in favour of this country, immense quantities of gold are sent to the Mint, which has been required to issue in a single year as much as one-fifth of the whole stock in the country, though the annual wear and tear is said to be no more than one four-hundredth part of the whole. It is to be hoped that the English Government will soon adopt the simple remedy which has been so often suggested. Another circumstance, which barely deserves to be mentioned as capable of giving rise to a difference between the value of a metal in bars and in coin, is the legal prohibition of the melting or exportation of the coin. If the Government allows bullion to be exported, but does not PAYMENT BY TALE. 287 allow coin to be either exported or melted down, a case might arise in which a possessor of coin who desired to make a remittance to a foreign country would rather give coin for a smaller weight of bullion than incur the risk of punishment by melting down the coins. If so, the price of bullion would rise above the Mint price to such an C!itent as would compensate the risk ; and a kilogramme of gold might, fur instance, be sold for 3,130 francs. But the melting of coin is so easy an operation, and can be performed with so little risk of detection, and it is so absolutely impossible to discover the source from which a given ingot has been derived, that it can hardly l)e admitted that any such rise of the price of bullion can actually take place ; and I am not aware that such a case has ever been observed. The capacity of the metals for speedy convei*sion into different shapes is one which is highly conducive to their utility as a medium of exchange ; but it is also a great obstacle to the Government in its attempts to preserve the coin, and in its more legitimate attempts to prevent the stealing of plate. In Spain even the penalty of death was found insufficient to prevent the exportation of gold to other countries where it was wanted. The severe penalties which were inflicted by the Star Chamber were equally insufficient to prevent exportation fi'om England. The Russian law prohibiting the export of silver has not prevented the substitution of gold for silver in the currency of that country. In order that the holder of coins may be able to obtain by melting them the same quantity of bullion as was given for them at the Mint, it is necessary that they should be of full weight ; and if they have been worn by friction, or reduced by clipping, a larger quantity of them will be required to purchase bullion. It generally happens that coins are below the full weight, and if they are received by tale, the nominal price of bullion may rise somewhat above the Sliut pi-ice without render- ing it profitable to melt the coin. If they have generally lost one- hundredth part of their Aveight, the price of gold might rise to 3,1 Slf. the kilogramme, but no higher. No such rise is now observed in England, because all large purchases of bullion arc made either with cheques or bank notes, both of which can be exchanged at the pleasure of the holder for gold coin of full weight; and il" it does happen that worn coins are used, they are weighed and counted, not according to their actual number, Ixit according to the number of perfect coins the weight of which is equal to theirs. In France, where coins are received by tale, a slight rise of the price of bullion above the i\Iint price has sometimes been noticed where the coins have been nnicli worn. Bnt the most striking instance of the kind was afforded by the price of silver bullion iu England during the reign of AVilliani the Third, wiien the 288 PAYMENT BY TALE. ounce of silver which was then coined into 5s. 2d. was sold in the niarke!: for Gs. 5d., or for nearly a quarter more than the Mint price. iSo remarkable a phenomenon could not fail to arouse public attention, and the philosopher, John Locke, contributed three able pamphlets to the controversy to which it gave rise. He demonstrated that the cause was and could be nothing else than the extremely degraded condition of the silver coin, in whicli, and not in gold, all large payments were then made. He very truly observed that a person who had as much silver coin as weighed an ounce and a quarter would not pay them away for an ounce of bullion, when much more than an ounce could l)e obtained by melting them do^ni. Melting was then prohibited by law (as con- tinued to be the case until 1819), and Locke conceded that this might possibly raise the price of bullion to 5s. 3d. per oz., though he did not consider even that to be probable ; but he thought it ridiculous to sup- pose that a profit of 25 per cent, would not induce peoj)le to break the laAV. Locke's arguments were opposed l)y an official in the service of the Treasury of the name of Lowndes, ^vho, in a report which he made to the Lords of the Treasury in 1695, proposed that the quantity of silver in the coin should be reduced so as to bring the Mint price up to an equality A\'ith the market price, which he thought Avould induce people to bring silver to the Mint, and prevent them from melting the coin. Had LoAMides proposed that a seigniorage should be charged on the silver coin, and their weight proportionately reduced, the suggestion might have been of some service^ but he did not do so, but merely pro- posed that an ounce should be coined into 75 pence instead of 02, and the whole returned to the importer of the bullion, as was then the prac- tice. As Locke Avas only arguing to shoAV that such a mere change in the denomination of the coin could have no effect in inducing people to send bullion to the Mint, or preventing them from exporting bullion, he often states his case in a Avay Avhich, though perfectly correct Avheu properly understood, is calculated to giA'e rise to a false impression in the minds of those Avho take it Avithout the necessary qualifications. He repeatedly states that " it is certain that one ounce of sih'er is alAA-ays of equal value to another ounce of silver." (" Considerations of the LoAvering of Interest and Raising the Value of Money." Works in 10 A'ols., 1812, vol. Y., p. 50, and passim.) He admitted that the value of the coin might be raised by a seigniorage, and that a very con- siderable seigniorage might be levied on the smaller coins if they Avere not made legal tender for large amounts ; and he merely contended that, other things being equal, the value of a coin AA'as in proportion to its Aveight. The silver coins which were then in circulation had lost much of their Aveight, partly by AA'ear, and partly by the fraudulent practice of PAYMENT BY TALE. 289 clipping. Having been struck by hand, they were often so chmisily execated that a piece could be cut off without being missed. In the reign of Charles the Second, the method which is still in use of giving a milled edge to the coin was adopted, and clipping could not be practised on the new coins without detection ; but, nuibrtnnately, the old hammered coins were still left in circulation, and the clipping contmued until the coins had been reduced, on the average, to little more than half their weight. The law did, indeed, prohibit the use of clipped coins, but it allowed those which had been fairly worn to pass as if they were of full weight ; and the difficulty of distinguishing between the two classes was such as to introduce a confusion into all bargains, which at length became intolerable, and was finally terminated by the calling in of all the light pieces, and a complete re-coiuage, which was carried out under the direc- tions of Newton, then Master of the Mint. Although Locke explained that the rise in the price of bullion was owing to the degradation of the coin, he did not explain how it was that the rise was not in proportion to the degradation. From the experiments recorded l^y Lowndes, it appears that the coins had, on the average, lost nearly half their weight ; and yet the highest price of bullion which is recorded by either Locke or LoTMides ■was 6s. 5d. per oz., or not quite one-fourth above the jMint price. It is possible that the coins which were used in the bullion market may have been heavier and better than the average of those which were received at the Exchequer, and Avhich furnished the basis of the experiments above referred to ; but the discrepancy may be accounted for without resorting to such an hypothesis. It is known that it was a common practice to make new coins of the pieces of silver which had been clipped off the lawful ones, and that these forged coins circulated along ^nth the rest. If this had not been done, the mere deterioration of the coins need not have produced a fall in their value, for the smaller coins would have had to perform as much business as an equal number of perfect ones ; and, as the value of money varies inversely with its quantity, the value of coined silver would have risen as its quantity diminished, and the same nominal amount of business would have been transacted with the same nominal amount of coin. But private coining prevented this, for the number of coins was artificially increased, and the amount ot business remaining the same, the value of the coin was diminished in proportion to the increase in their nnml)er. As the numljcr was not nearly doubled, the price of Ijullion was not doubled eitlier. I have assumed that the amount of business remained the same, but it is probable that it was diminished ; for the confusion which Macaulay has so gTaphically described prevented many bargains from being concluded, and so diminished the quantity of coin required. U 290 IXCONVERTIBLE NOTES. The above cases are all iii which a difference can exist between the value of a metal in coin and the value of the same metal in bars. If it is difficult for the holders of bullion to get it coined, the value of coin rises in excess of that of bulHon in proportion to the difficulty, and if it is dangerous to melt coin its value may faU below that of bullion m proportion to the risk. Where coins are received by tale, the price of bullion may rise ; but this is only a nominal rise, and it cannot be higher than is sufficient to give rise to melting. These conditions being understood, it may be safely said that the price of bullion is fixed by the very nature of the commodity, and merely represents the labour of coining, not the caprice of the GoveiTiment. There is only one other case to be considered in which the market price of bullion may rise above the Mmt price, and this again is a merely nominal rise, and does not show that the value of the metal in one shape is different from the value of the same metal in another shape. The case is that in which notes are issued which are not exchangeable for coin at the pleasure of the holder ; and where this is done, as the notes can neither be melted nor exchanged for coin, there is no limit to the price A^diich may be paid for bulHon when payment is made in notes. When a Government fixes the quantity of gold which a bank shall give in exchange for its own notes, it is not fixing the price of a commodity, but insisting that its subjects shall pay their debts. CHAPTER III. SINGLE AND DOUBLE STANDARD OF VALUE. GOLD STAXDARD — SILVER STANDARD — DOUBLE STANDARD — SUBSIDIARY COINS. Although gold and silver are used as money in all civilized countries, they are not received in all of them on the same terms. In some, as in England, aU large payments are required by law to be made in gold, and in such countries gold is said to be the standard of value. In others, as in India, all large payments are required to be made in silver, and here silver is said to be the standard. In others, as in France, all payments may be made either in gold or in silver, at the option of the debtors, and such countries arc said to have a double standard. The controversy is stiU open respecting the merits of these different systems, and the question is one of so much practical importance, as well as speculative interest, as to deserve to be examined in a separate chapter. To begin with the system pursued in this country, the most obvious advantage of a gold standard is, that the labour of transporting the coin from place to place is thereby minimised. Gold, in proportion to its weight, is more than fifteen times as valuable as silver, and the labour of transporting an equal value of the more precious metal is proportionally less. Although the introduction of banking enables many debts to be discharged by means of bank notes and cheques, it by no means renders the transport of bulhon altogether unnecessary, and even in countries where banking has been carried to its highest perfection, it is a matter of some importauce to reduce as much as possible the labour of transporting coin and bullion. Sir Charles Napier once mentioned in an Indian report that twenty thousand men were constantly employed in transporting chests of silver from one part of India to another. Had India possessed a gold standard, two thousand men might have sufficed for the work, and eighteen thousand have been set free to engage in agriculture, manufac- tures, or some other useful employment. There is a well-known story which ascribes the death of the painter Correggio to the fatigue brought on by his carrying home the money which he had received for one of his pictures, the whole of which had been paid in copper. The reasons which nuike silver preferable to copper apply, though not to the same extent, to gold U2 292 GOLD STANDARD. when compared with silver. The superiority of gold is equally apparent in all cases where the coins have to be counted, as much time and labour are saved by employing the more precious metal. A portion of the indemnity which was paid by France to Gennany after the war of 1870-71 was paid in the German silver coins which had been disbursed by the German soldiers in the course of the campaign, and it was this portion the receiving of which inflicted the greatest amount of trouble on the German officials, for the amount was considerable, and the coins of the same denomination differed so much in weight and fineness that it was necessai-y to count the whole quantity. Where the payment was effected in French gold coins, the simple process of weighing was suffi- cient, because all were of the same fineness, and were only received according to their weight ; but even if it had been necessary to count them, it could have been done with one fifteenth of the labour required for a similar operation with the German coins. Of course the most desirable quality for a standard of value is that its oahi value should be invariable, but neither gold nor silver, nor any other commodity possesses this character, and to seek for such a substance is to seek for what can never be found. But if one of these two metals is less exposed than the other to fluc- tuations in its value, this would constitute one reason for preferring the less variable one as a standard of value. CherbuHez* has called attention to a circumstance which tends to make gold less liable than silver to these fluctuations, viz. : — that gold is generally found pure, and, therefore, only liable to be cheapened by mechanical improvements, while silver requires to be extracted from the ore by chemical processes, and its cost is, therefore, liable to be reduced by the cheapening of the substances used for this purpose, and by the discovery of new processes, as well as by those mechanical improvements Avhicli diminish the difficulty of extracting both gold and silver from the mines. The cheapening of silver, after the discovery of America, was due not so much to the fertility of the mines of Potosi as to the discovery of a new method of employing quicksilver in the reduction of silver ores. The discovery of abundant quicksilver mines in California caused a fall in the value of silver contemporaneously with that which was established in the case of gold by the discovery of fertile gold mines in the same country. Cherbuliez's observation teaches us that, as a general rule, gold is less variable than silver ; but at any given period the value of silver may be exposed to less fluctuations than that of gold, and gold certainly fell more than silver after the Californian and Australian discoveries. Cherbuliez himself considered that, having regard to this fact, those * Precis de la Science Econoinique, II. 3, IV., vol. I., pp. 246-7. GOLD STANDARD. ' 203 Goyerumeuts which had ah-eady established a silver standard would act wisely in retaining it for the present.* It should, however, be observed that the best way to retard the fall of the value of gold is to find a new use for it, so that the less fertile mines may be worked in order to produce a larger quantity ; and there is no way in which this can be done so eflectually as by substituting gold for silver in the currency of a country which has previously had a silver standard. It has been maintained that the "s-alue of silver is more stable than that of gold, because silver is more largely used for other purposes than coin, and there is, consequently, a larger stock of silver in existence, and a longer time is required to effect a change in its value. It is not easy, however, to see the force of this argument, for, Avhatever the stock of silver may be, the annual production must be sufficient to replace the annual wear and tear, and any new discoveries which should have the effect of increasing the aimual yield would have the same effect on its value as a proportionate increase in the case of gold would produce on the value of the latter metal. If silver be more durable than gold the amnial production would be less in proportion to the total stock, and a longer time would be required to produce a fall in its value, but the mere fact that the total quantity is larger than that of gold can have no effect of the kind. There is another respect, and by no means an unimportant one, in which gold is superior to silver for the purpose of ser\iug as coin, viz. : — that it is less liable to be imitated by the forgers of base money. Silver coins, when much worn, differ so Httle from similar pieces of lead, that it is very difficult for any but a practised eye to detect the base coins wliich are passed off" as silver, to the great annoyance and inconvenience of honest people. It seems to be much more difficult to eifect a good imitation of a gold coin, for those who are imposed on in this way think it worth while to write to the newspapers and mention the occurrence. This is probably due to the peculiar colour of gold which distinguishes it fi'om other metals and metallic compounds ; or it may be that the de\ace on the gold coin is not so frequently obliterated as in the case of the silver coin, and that thus an additional o])stacle is placed in the path of tlie false coiner. As the inducement to such malpractices is much stronger in the case of gold, we may feel sure that the ingenious and persevering class who devote to urime the talents which, if better directed, would prove so beneficial to society, would have discovered some means of imitating gold coins if it were i)racticable. Their failure has not been for lack of eff'orts, f(jrbase coins are sometimes found in circulation, but these are generally composed of gold with more * See part II., :\ II., vol. II.. pp. l.'.n-fi. 294 SILVER STANDARD. than the legal amount of alloy, and the loss thus occasioned to those who are imposed on is slight in comparison with that A\-hich is caused by the substitution of lead for silver. The practice of sweating, which Avas referred to in a former chapter, is believed to be occasionally resorted to for dishonest purposes, but it is not pursued to such an extent as to cause any palpable inconvenience to the general public. In the United States a practice is in vogue of sawing out the interior of a thick gold coin, preserving the two outer faces intact, and inserting a piece of platinum in the place of the gold extracted, and then finishing up the edge with a gold rim, closely soldered. This is so skilfully done that it is very difficult to detect any alteration in the appearance, the size, or the weight of the coins. The director of the United States Mint, in his report for the year ending June 30, 18G7, suggests that, as the fraud is rendered possible by the thickness of the coins, the largest of them all, the double-eagle (which is equal in value to one hundred francs), should be altogether abandoned, and that the eagles and half-eagles should be made thinner, or, at least, be somewhat concaved, so as to be thinner in the middle ; and if the suggestions are adopted, the fraudulent practice may be put an end to. This is a matter which only concerns the United States, as they are the only country where such large coins are sent into circulation, but if the EngUsh Government should ever resolve that the double sovereigns and five-pound-pieces, which at present are only knoAvn to collectors, should be sent into circulation, precautions must be taken to prevent similar frauds. Thus, in every respect, gold is superior to silver as a standard of value. It is more portable, it is more stable in value, and it is more difficult to counterfeit. These advantages are only now beginning to be appreciated. England has had a gold standard since 1816, and her example was followed by Brazil in 1849, by Portugal in 1855, by ChUi in 1860, and by Germany in 1871, on the occasion of the introduction of an uniform coinage for the whole of the newly constituted Empire. Its universal adoption was recommended at the monetary conference which was held at Paris in 1867, and was attended by delegates from nearly all civilized countries. Although the resolutions of the conference had no binding force on the Goverimients there represented, the expression of opinion on this point was so strong that it may be hoped that it will, in time, produce some practical eflFect. The recapitulation of the advantages which gold possesses for the pur- poses of a standai'd of value has been by implication a condemnation of silver. It is less portable, it is more likely to fall in value, and it is more easily counterfeited. In spite of these disadvantages it is still retained as the standard in many countries ; and, in fact, throughout a very considerable portion of the world, if we merely consider the extent SILVER STANDARD. 295 of those conntnes of which India is one and China is another. Where it is still retained, it is either from the force of habit and the difficulty of effecting a change, or else from a behef that, since the Califoruian and Australian discoveries, silver is less likely to fall in value tlian gold. In a country like India, where the value of silver is so great that half-a- franc a day is considered good wages, and where the Government fmds it worth while to collect income-tax from incomes of two hundred and fifty francs a year, the inconvenience of silver coin is not so much felt in retail transactions as it would be in England, where silver is five times cheaper. This, however, is no reason why gold should not be used in all cases where it is necessary to transport large quantities of specie from place to place, as is often done by the Indian Government. In Germany, while the silver standard was maintained, the inconvenience to the general public was minimised by the use of bank notes, but the fact remained that it was frequently necessary for bankers to transmit specie to one another ; and whenever this was done silver was more inconve- nient than gold. If one country retains a silver standard, an induce- ment is held out to neighbouring countries to do the same, for the price of silver measm-ed in silver fluctuates much less than its price when measured in gold ; and if two countries have the same standard there is much less fluctuation in the rate of exchange between them, which is an advantage to all the merchants engaged in the foreign trade and, con- sequently, to all their customers. While Germany maintained a silver standard, the Governments of Denmark, Sweden, and Holland said that they could not abandon it ; and as soon as Germany adopted a gold standard they began to take measures preparatory to following her example. It was natural to suppose when the Califoruian discoveries were first announced that gold would be much more depreciated than silver ; and it is not surprising that the Dutch Government substituted silver for gold as the standard, in order to spare its subjects the incon- venience which any great and sudden change in the value of money must occasion. But, in fact, the value of silver fell nearly as much as that of gold, as is shown by the very slight alteration which has taken place in the gold price of silver, which has not exceeded the three per cent. The action of the Dutch Government had the effect of somewhat accelerating the depreciation of gold by throwing 300,000,000f upon the market, but in those countries wliich maintained a double standard so large a sub- stitution of gold for silver took place that the foil was materially retarded, wiiile at the same time silver was depreciated, aiiARD. 299 that silver coins were urgently required, and would have been forth- coming if the Mint regulations had been favourable to their production. Although it was not profitable to bring silver to the Mint, it was profitable to pay debts in the worn silver coins which were then so abundant. As was mentioned in the last chapter, all silver coins which had been fairly worn and had not been evidently clipped were received by the Government and by private individuals at their full nominal rate, and [although gold was over- valued when compared with silver fi-esh from the Mint, it was under-valued in comparison with the deter- iorated silver coins. Indeed, wherever the douljle standard is in force, the under-valued metal makes its appearance only in the shape of old coins, which become more and more worn as years pass by, without any addition being made to the previous stock. Macaulay, who has given a full account of this subject in his history, has quoted some lines from the " Frogs of Aristophanes " (718-31), ridiculing the Athenians for preferring bad coins to good ones, and worthless politicians to able statesmen. It is probable that in the time of Aristophanes the double standard was maintained at Athens, with its inevitable effect of preventing the supply of new coins of one or other metal. Macaulay considered the fact to be easily explained by remarking (vol. iv., p. 621), that men would not give six shillings to pay a debt which they could discharge with five, and that the good coins would naturally be exported, and the bad kept at home. This is so far true that the newer coins are always selected for melting when merchants require bullion for foreign remittance ; and our gold currency suffers from this practice at the present day, but certainly not to such an extent as to give rise to general complaints on the part of the public, or to suggest a joke to a comic "writer. Lowndes proposed that the weight of the silver coins should be reduced so that an ounce should be coined into 75 pence instead of G2, as was then the practice ; and had his suggestion been adopted, it would, no doubt, have had the effect which he desired of bringing silver to the Mint. But he himself did not understand the reasons which would have made his plan successful, as may be judged from the fact that he proposed that the Government should compel publicans to bring their silver tankards to be melted at the Mint. A reduction of the weight of the silver coins, while the gold coins were left unaltered, would have been a raising of the proportion which silver bore to gold, and as it would have been a rise of nearly 25 per cent., silver would assuredly have been over-valued, and would have rapidly expelled gold iroiu the circulation. But Lowndes did not even allude to this as an argument in favour of his plan, and he merely jiroposed the rate of 75 pence to the ounce because that was nearly the price at which an ounce of silver wi\8 300 DOUBLE STANDARD. purchased in exchange for deteriorated silver coins. Locke devoted his argument to demonstrating that a reduction in the weight of the coins would be followed bj a corresponding reduction in their value ; and this is perfectly true, but as the new coins would have been worth, at least, as much as the old ^-orn ones, it does not appear that the peoj^le would have suffered the inconvenience of a change in the value of money. "When the Government at length determined to carry out a thorough reform of the coinage, it agreed to receive all the old pieces at their fidl rate, and to give new ones in exchange, and this process was carried out at an enormous expense. "What the expense was is not accurately known, but it can hardly have been less than 100,000,000f., a large sum even in our own time, and, in comparison with the wealth of the country at that time, certainly prodigious. As all the hammered pieces were called in and melted do^ra, and new ones, with raised edges, were issued in their stead, the practice of clipping was for ever put an end to ; and no such confusion as then existed has ever been again experienced. The difficulty of counterfeiting was also very much increased by the superior execution of the new coins, and thus the people were rescued from both the evils fi-om which they had formerly suffered so much. In carrying out the re-coinage the Government, of course, had to buy large quantities of silver to make up for the deficiency of the light coins, but when the work was completed, and the task of replenishing the circulation was again left to the discretion of private individuals, it was found that no silver was brought to the Mint. It may be as well to mention here that, as a general rule, the Government is merely passive as regards the supply of coin, and that the IMiut simply stamps all the bullion which private individuals choose to bring to it. This is still the case as regards the gold coin of this country, but a somewhat different course is pursued ■nith regard to the silver and copper coin. AVhen people found that it was cheaper to buy gold bulhon, and take it to the Mint, than to send silver thither, they, of course, took nothing but gold ; and during the reign of Queen Anne, the immense quantity of silver coin which had been struck during the re-coinage of 1695-9 gradually disappeared. Another change was subsequently made in the proportion between gold and silver, the value of the guinea being somewhat reduced in accordance with the recommendation of Newton ; but the change was not sufficient, and gold still maintained possession of the field. From that time down to the end of the century, the people suffered great inconvenience from the difficulty of getting small change, because silver was hardly ever issued from the Mint. During the long period which elapsed between the accession of George the Third and the final abolition of the double standard in 1816, there was only one year, 1787, in which any considerable quantity of DOUBLE STANDARD. 301 silver was coined. In 1763, 2,000 shillings were struck for distribution among the crowd on the occasion of the Earl of Northumberland's entry into office as Lord Lieutenant of Irehuid, but no one brouglit silver to the Mint as a matter of business. In 18 IG the coinage was estabUshed on its present footing by the Act 56, George the Third, cap. GS, which enacted that silver should no longer be legal tender for any larger sum than two pounds sterling, and that all larger debts must be discharged in gold, unless the creditor were willing to accept silver. It also enacted that the pound of silver should be coined into GG shillings, instead of G2, as had been the practice ever since the reign of Charles the Second, and by so doing it lowered the proportion of gold to silver to 14i to 1. But for the provision that silver should only be legal tender for a limited amoimt, this enactment would have had the effect of driving the gold coin from the circulation, as silver is considerably over-valued. As an additional security, the Government does not issue silver coin to all who choose to bring silver bulhon to the Mint, but issues them whenever required by the Bank of England, on which occasions the Mint buys whatever quantity is necessary for the purpose. The Government is not more arbitrary in the supply of silver coin than in that of gold, for the Bank of England is guided in its demands by the demands made upon it by other banks, and these, in their turn, only obey the wishes of their customers. Thus the general public determines the quantity of coin which shall be issued, but the Government is not so purely passive in the case of silver as in that of gold. A review of the whole period shows that it is impossible for a suffi- cient supply of both gold and silver coins to be kept up where the double standard is maintained. When gold was undervalued, as in the reign of James the First, it disappeared from the circulation, and the people had to content themselves with the heavier metal. When gold was over- valued, as it continued to be during the whole of the last century, no silver was coined, and those who lived at that time, as ior instance, Lord Liverpool, complained bitterly of the difficulty of obtaining small change. Yet Lord Liverpool, though he has himself given an account of the whole period from which much of what precedes has been derived, had so slight a grasp of the principles which he himself enunciated, tliat he supposed that in his own time people preferred gold merely because it was lighter, and so more convenient ior large payments. He says, " In very rich countries, and esi)cciully in those where great and extensive com- merce is carried on, gold is the most proper metal of which this i)rin- cipal measure of property and this instrument of commerce sliould be made ; in such countries gold will in practice become the principal mea- sure of property and the instrument of commerce, uith the general 302 EOUBLE STANDARD. consent of the people, not only without the support of law, but in spite of almost any law that may be enacted to the contrary;" (p. 146). This is so far from being true that there is nothing which is more easy for a goverimient to do than to exclude gold from an extensive circulation. If the English Government wish to do so, all that would be necessary would be to enact that silver should be legal tender to any amount, and the gold coin would soon disappear. Prior to 1871, Germany had no difficulty in maintaining a silver standard by simply enacting that silver alone should be legal tender for large amounts. Even Adam Smith observes, " In reality, during the continuance of any one regulated pro- portion between the respective values of the different metals in coin, the value of the most precious metal regulates the value of the whole coin."* It is now generally admitted that Adam Smith was mistaken in suppos- ing that gold was preferred in his time because it was the more precious metal, and the real reason was that gold was over-valued. Indeed, all Economists, even those who, like M. Wolowski, are in favour of main- taining a double standard, are now agreed that it is impossible to keep both metals in circulation together, and that the over-valued one will always be preferred. The experience of France is to the same effect as that of England. Previously to 1 785, the louis d'or was rated by the French Mint at 24 livi'es, while the bullion which it contained was worth in the market 25 li\T.'es, 10 sols. ; and, as it therefore answered nobody's purpose to pay in gold, the gold coin almost disappeared, although gold was, of course, the more precious metal. In 1803 (7 Germmal year 11); the French Goveriunent ordered that a kilogramme of gold should be coined into 3,100f., and a kilogramme of silver into 200f., thus fixing the proportion at 15 J to 1. At that time, and for fifty years afterwards, gold was worth more than fifteen and a half times as much as silver, the propor- tion being generally about 15| to 1. Silver was thus over- valued, and was accordingly preferred to such an extent that gold very seldom made its appearance in large payments. But the effect of the gold discoveries in California and Australia was to reduce the value of gold more than that of silver, and the proportion fell to 15| to 1. As soon as this was observed, which was in 1849, the buUion dealers commenced sending gold to the Mint, and buying up and melting down the silver coin, to be exported in the form of ingots to India and China. The price of silver expressed in gold com being 203f. a kilogramme, while the same weight of silver converted into coin would only serve to pay a debt of 200f., there w^as every inducement to continue the substitution of gold for silver until * Book I. Chap. V. M'Culloch's Edition, 1863, p. 18. DOUBLE STANDARD. 303 the -whole currency of France had been completely transformed. In 1857 the French Government seriously thought, and actnally took steps towards legally prosecuting some of the principal bullion dealers of Paris, who made no secret of the fact that they were busily engaged in melting down the silver coin, but on maturer reflection they abandoned so ridiculous a method of counteracting the'inducements which the law held out to the practice. M. Chevalier's able work on the probable fall in the value of gold appeared at this time, and its object was to induce the Government to lower the nominal value of the gold coin to such an extent as would bring the proportion between gold and silver to the same rate as that prevaihng in the market, and thus to take away the inducement to melt down the silver coin. He proposed this not so much as a matter of convenience as one of public faith, maintaining that the real object of the law of 7 germinal year 11 was to maintain silver as the standard, and to fix the proportion so that gold would not be used to any great extent. If the debtors who had contracted to pay in silver were allowed to pay m gold merely because gold had become cheaper, it is clear, as M. ChevaHer contends, that a loss would be inflicted on the creditors, and this must have happened in France after 1849 ; although, as the change in the proportion was very slight, it must have caused a very trifling addition to the loss which all creditors sufiered fi*om the depreciation of gold and silver. Other authorities, as M. Wolowski, deny that the object of the law has been correctly stated by M. Chevalier, and maintain that it was intended to establish a double standard. The controversy is like those ■\^■hich we have seen regarding the spirit and the letter of an Act of Parliament on such occasions as the appointment of Sir Robert Collier to a seat on the Judicial Committee of the Privy Council, and Mr. Gladstone's retention of his seat in the House of Commons after he had accepted the office of Chancellor of the Exchequer without having resigned the Lordship of the Treasury. The law says that any Frenchman may pay a debt of 3,100f. by giving either one kilogramme of gold or loi kilogrammes of silver coin. But M. ChevaUer quotes a remark made by M. Gaudin, the then Minister of Finance, to the effect that whoever has a debt of 200f. owing to him shall always receive a kilogramme of silver, neither more nor less. If this was really what he meant he ought to have made the law more exphcit on the point, but no English judge would interpret a law according to the speeches of the ministers who proposed the bill. If we consider the question upon wider than technical grounds it seems a strange contention that the creditors of 1853 were defrauded because a minister who had proposed a law fifty years before had said that he in- tended that they should be paid in silver. Every creditor must have 30tt DOUBLE STANDARD. been more or less clearly cognisant of the law which authorised debtors to pay either in gold or silver, but only those creditors who had some taste for historical studies were likely to have heard of M. Gaudiii's obser- vations. The French Government disregarded M. Chevalier's protest and allowed the substitution of gold for silver to take its course. In justice to M. Chevalier it should be remembered that throughout his work he assumed that the value of gold would be reduced by one-half while that of silver would remain unaltered, and if the facts had been hi accordance with this hypothesis there would have been a very strong case in /avour of his proposal. The French people derive a certain advantage from the use of gold, and this counterbalances the slight loss which some creditors must certainly have sustained. For some years after the Californian discoveries the French Mint was so overwhelmed with work in coining gold that it was found necessaiy to pass a law releasing it from the necessity of coining more than a million francs a day, and even at this rate the importers of buUion were some- times kept waiting for two or three months before they received their coin in exchange. As gold became plentiful silver became scarce, and the difficulty of obtaining small change caused so much inconvenience that the Government at length, in 18G7, followed the example of England, by reducing the fineness of the smaller silver coins to such an extent that, as far as they were concerned, silver was over-valued, and there was, therefore, no advantage to be gaiued by melting them. The same inconvenience ha-ving been felt in Belgium, Switzerland, and Italy, the same remedy was applied in those countries as in France. These four countries agreed in 1865 to a monetary convention, by which the coins of each were allowed to cii'culale in aU the other three, and one of the articles stipulated that all the silver coins of less value than five francs should be made of silver 835 fine instead of 900 fine as had formerly been the rule, while their weight remained unaltered. As the weight and fineness of the gold coins remained the same, this was equivalent to fixing the proportion between gold and silver at about 14 J to 1, and it was at the same time agreed that these coins should only be legal tender up to the amount of fifty francs, being the same limit as that which is adopted in England. A limit was also assigned to the quantity of these coins which each government might coin, the quantity being in proporton to the population of the respective countries. These measures have been eflFectual in maintaining an adequate supply of small change, but as the five-franc piece is still of its old weight and fineness, and is still legal tender to any amount, the French are still exposed to a substitution of silver for gold whenever the price of the former falls below 200f. the kilogramme. Such was the case in 1867, and a large DOUBLE STANDARD. 305 quantity of silver was sent to the Mint, and in 1873 tlic price of silver fell so much in consequence of its expulsion irom the coinage of Germany, that all the countries included in the monetary convention experienced a considerable increase in the coinage of silver, and their governments held a conference, at which it was agreed to limit the coinage of five-ft-ance pieces to a small amount during 187-i. Already in 1870 the French Government had appointed a commission to consider whether it would be desirable to abandon the double standard, and to adopt gold as the sole standard of ^alue, and seventeen out of twenty- three commissioners gave their opinions in favour of this course. The majority included M. Chevalier,* who has now thought it wise to accept accomplished facts, and favours a gold standard as the best basis for an assimilation of the coinages of all countries. The report of the commission did not appear till 1872, its publication having been delayed by the war, which broke out almost as soon as the commissioners had concluded their labours. The French Govermnent has not yet acted on their suggestions, but there is every reason to expect that it will do so, and that the double standard will be abandoned, not only in France, but in all the countries which were parties to the convention of 1865. A review of the experience of France shows that the double standard inflicts considerable inconvenience where the proportion between gold and silver is fixed so near to the average market rate as to favour each metal alternately. In the first place, creditors are constantly exposed to a sHght loss by the option -wiiich debtors enjoy of paying in whichever metal happens to be the cheapest. This objection, however, is not so important as that which is grounded on the great amount of unnecessary labour which is imposed upon the Mint. In whatever way the expenses of coming are provided for, the fact remains that the labour of many men is employed in producing coins which are to be melted down before they have done as much work as coins ought to do ; and so much labour is thereby withdrawn from more useful occupations. But for the double standard the silver coins which were in use before 1850 Avould have seiTcd the people until 1860 with very slight animal additions, and all the labour of coining two milliards of gold would have been saved. Even admitting that this was a labour France must have undertaken at some time or other, there still remains the waste of labour which occurs when- ever silver five-franc pieces are coined to take the place of gold. The change which has been made in the smaller silver coins show s that the Government finds it im])OKsible to maintain the double standard in its integrity, and it will be strange indeed if France can permanently repose * See Euquclo aur In Qu<;slion Muuutidiv. riiiis,_ 1872. Yv\ II., p. 395. X 306 DOUBLE STAXDAED, at such a halting place. The experience of the United States has been in all respects analogous to that of France. A law passed in 1792, soon after the formation of the union, fixed the proportion of gold to silver at 15 to 1 ; and, as tliis was below the market rate, it was too favourable to silver, which alone Mas coined in any large quantities, as long as the law continued in force. In 1834, however, the quantity of gold in the eagle was so much reduced that the proportion was altered to 16 to 1, and the efiect of the change was a gradual substitution of gold for silver, as the rate prevailing in the market was about 15| to 1. The dollar had been formerly worth about 4s. 6d. sterling, and after the reduction Avas worth about 4s. l|d. ; and it is a curious instance of the tenacity of old habits that though the change was made in 1834 it was not till the commencement of 1874 that the Committee of the London Stock Ex- change ceased to reckon the dollars as worth 4s. 6d. in quotations of United States securities. The Californiau discoveries had such an effect in accelerating the disappearance of the silver coin that the Government was obliged in 1853 to reduce the weight of the silver coins of smaller denominations than one dollar, making the proportion in their case 14| to 1, and to limit the amount for which they should be legal tender. The silver dollar continued until 1873 to be legal tender to any amount, but as the i)roportion in the coinage was 16 to 1, while in the market it has been generally below loh to 1, very few silver dollars have been coined since 1853. In 1873, the remarkable fall in the price of silver raises the proportion to a trifle above 16 to 1, and the United States Government seriously entertained the idea of returning to specie pay- ments on a silver basis, but the price rose again before it carried out its intention. Both in France and the United States the effect of the Cali- fornian discoveries was to induce the Government to issue small gold coins of the same denomination as the largest silver coins already in use, the five-franc piece in the one case and the dollar in the other, the two coins being of the same fineness, and very nearly of the same weight. In both countries it has been found impossible to maintain the double standard in its integrity, and the present state of things must be regarded as merely provisional. The United States having adopted a higher pro- portion than France has done have suffered less inconvenience from the fluctuations of the market. M. Wolowski, the most eminent defender of the double standard, bases his argimient on the very fact which is generally regarded as affording the strongest reasons for rejecting it. In his evidence* before the Monetary Commission in 1870, he objects to the use of the phrase * See the Enquete, &c., vol, I., p. 451, et seq. DOUBLE STANDARD. 807 "double staudarrl," on the ground tliat only one metal can be tlie standard at any one time, and maintains tliat France has had a gold and a silver standard alternately. This alternation he considers as extremely useful in that it conduces to stabihty in the value of money. If the value of gold rises silver is used in its stead, and if silver rises gold is used, and thus a rise in the value of the one is, to some extent, counter- balanced by an increased use of the other. If all the money in the world were made of one metal alone, there would, M.' AVolowski considers, be more danger of a rapid change in its value than there is at present, now that the effect of the cheapened production of gold is counteracted by an increased use of it for purposes to which silver ^^•as formerly applied. It must be admitted that it is highly desirable to maintain the value of money at the same level, and that the substitution of -one metal for the other has often mitigated the effects of an improvement in production. But even if a gold standard were universally adopted throughout the world silver coins would still be used for small payments; and a rise in the value of gold would still be followed by an increased use of silver coin, and vice versa. If, for instance, the average of the weekly wages of the agricultural labourers of this country should again fall below 12f. 50c., silver coins would again be generally used for paying their wages, instead of gold coins, as at present. It is, moreover, probable that a rise in the value of gold would have some eifcct in promoting an increased use of silver plate and silver watches by those Avho Avould formerly have had such articles made of gold. As regards the present time more particularly it must be borne in mind that it is gold which is now exposed to a certain and considerable depreciation, and that this will certainly be retarded by whatever steps are taken to obtain an increased employment for it. On these grounds, therefore, I am inclined not to attach so much weight to M. Wolowski's argument as he does himself. There is, however, nothing in his opinions which is inconsistent with the principles of P(jlitical Economy, and the task of the Economist is simply to point out what arc the effects which follow from any given system, while it is for the politician to strike the balance between the advantages and disadvantages of different systems. But Mr. Seyd, the principal, if not the only Avriter who in tliis country advocates the introduction of the double standard, does so on grounds Avhich could not be maintained by any one well acquainted witli the principles of Political Economy. lie is a baidccr who is thoroughly familiar with all the facts relating to tlie in'oductiun and distribution of the precious metals, and his work on " ]3ullion and Foreign Exchanges " is a valualjlc niim; nf inCorinaU'nu in all those who wish to study the details of the suljject. But with tlie exception of a single work of M. x2 308 DOUBLE STANDARD. Chevalier's, he does not appear to have studied the writings of any Political Economist, and the natural consequence has been that in the chapter ■which he has devoted to a defence of the double standard (part III., chap. IV.), he has fallen into some strange errors. He tells us that if silver is partially demonetised, i.e., is no longer used as coin, except for the purpose of small change, a great stock of silver will be thrown on the market, which could not be absorbed without submitting to a great reduction in its price. If the price falls very considerably, it will, he tells us, be impossiljle to maintain the English silver coin in circulation. He says : — " Let us suppose silver to go down in price some 30 or 50 per cent., what would be the inevitable effect of this fall upon the silver coinage still remaining in circulation ? The actual price at which the Euglish silver coinage is issued is G6d. per oz. standard ; in other countries it is issued at GO|d. to 61d. per oz., the present market price being 61 Ad. But let the price of the metal, regulated simply by the laws of supply and demand, fall some 30 or 50 per cent., say to 43d. or 3 Id. per oz., Avill any one pretend to maintain that the law of legal tender will be sufficiently powerful to keep up the nominal value of the silver coinage ? The people may consent to take a farthing bronze piece for a penny, but they certainly vnW never agree to take eightpence or sixpence for a full shilling." (p. GOO.) But he^ gives us no reason why the nominal value of the coin should not remain constant while the price of bullion is falling. Even so great a difference as fifty per cent, between the value of silver coin and an equal weight of bullion is not "without a precedent. The peoj^le of China were long acccustomed to use dollars of a particular pattern, called the Carolus dollar, which were coined by the Spanish Government in Mexico, but A\hich were no longer issued after Mexico achieved its independence. As time went on, the Carolus dollars became scarcer and scarcer, but the Chinese felt more confidence in the purity of the metal of which they were made than in that of the newer dollars which were coined in j\Iexico or elsewhere ; and, though these coins were of nearly the same weight and fineness as a five-franc piece, they would at one time exchange for seven-aud-a-lialf francs in other coins. If it be true that people would not take sixpence or eightpence for a shilling, it is not from any unmllingness on the part of the public, but merely fi'om the inducement which a very high seigniorage would hold out to private coiners. The law which limits the use of silver coin to payments not exceeding fifty francs renders it very difficult for private coiners to dispose of so large a quantity as they must make in order to compensate the risk incurred by breaking the law ; but if it be true that a profit of 50 per cent, on each coin would be sufficient to render private coining profitable, a simple remedy can be at once DOUBLE STAXDARP. • 800 applied. It is only necessary for the Government to reduce cither the weight or the fineness of the coins (\A'hichever may be found most con- venient), to such an extent as to alibrd no higher profit then 10 per cent, to private coiners, and their operations Anil at once be put an end to. Mr. Seyd contends that the disuse of silver will be a diminution of the wealth of the world. After estimating the quantity of silver coin which will be thrown out of circulation at twelve milliards, and the total amount of gold and silver at thirty or thirty-one milliards, he proceeds : "We are justified, then, in assuming that the solid circulating medium now existing in the world would suffer a somewhat sudden reduction of some thirty-eight-and-a-half per cent., for which we could not possibly expect to find an immediate compensation in the increased supply of gold money, or in a considerable rise in the value of gold. Will anyone pretend to deny but that the withdrawal of so large a portion of the world's solid circulating medium must seriously injure the best and truest interests of trade and commerce, and disastrously affect the social welfare of man- kind?" (p. G12). It may be doubted whether anyone except Mr. Seyd himself will noAv contend that the interests of society can be affected except for good by the substitution of gold for silver. It is a mere sub- stitution, for, although Mr. Seyd says that we cannot possibly receive compensation from an increased supply of gold money, it is scarcely possible for the silver to disappear until the new gold coins are ready to take its place. Whenever a government makes such a change it always allows sufficient time for the Mint to manufacture the new coins before it declares that the old ones shall no longer be legal tender ; and, even if this precaution were not adopted, the creditors would be willing to accept silver, if silver were to be had in abundance, and if gold did not exist in sufficient quantities. Mr. Seyd tells us that whatever differences may exist among Political Economists, they are all agreed that the recent gold discoveries have given a great impulse to industry and commerce ; and he further gives us his own opinion that an increase of the currency of a country, even in the Ibrm of inconvertible notes, affords a stimulus to trade. "The example," he says, "of the United States, with their greenback currency, is conclusive on this point," (p. 013); and, on the next page he observes : " The converse surely must hold equally good, tlierefore, viz., that the destruction of a considerable i)ortion of the existing circulating medium, the annihilation of part of the world's capital, cannot but prove injurious to the best and truest interests of mankind ; and we are clearly justified in maintaining that the advocates of tlie single gold standard, I>y the pntjccktl uiiivei-sal ] ruliibitions of l)ayments in silver, except to an iiisigniHcaut amouiil, would strike a most serious blow against the advance of civilization and the lilcssings 310 DOUBLE STANDARD. of social progress." Thus he tells ns that the expulsion of silver from the currency of the world ^^'ould be an injury to trade, while he tells us that the gold discoveries have given an impulse to trade ; and yet the new gold has been chiefly employed in filling the place of the silver expelled from countries where the double standard is in force. He tells ns that the issue of greenbacks has given an impulse to the trade of the United States, and yet the greenbacks have been solely employed to take the place of gold and silver coin. Thus his views are inconsistent with one another, besides being opposed to those of all Economists who have written since the time of Adam Smith. As the value of money varies inversely as its quantity, an increase of the quantity does not increase the wealth of a country, but merely causes more money to be used in performing the same amount of business. The gold discoveries have, indeed, imparted a certain direction to the commerce of the world, for they have given rise to an extensive trade between Australia and Cali- fornia on the one part, and the rest of the world on the other. But this has been a mere change in the direction of the current and not an addi- tion to the wealth of the world. The substitution of gold for silver would require a considerable exchange between the gold-producing coun- tries and those where silver coin is abundant ; but a mere increase of trade is not a benefit in itself unless it brings increased satisfaction to human wants. If the standard of value were changed in every country every three years there would be a more frequent exchange of gold for silver between different countries than there is at present, but this increase of trade would be simply an increase of trouble, and not an advantage. It has not been the increase of the "greenback" cur- rency which has stimulated the trade of the United States, for whatever may have been the increase in the nominal amount of the business tran- sactions of that country, the incfease, so far as it is due to the use of " greenbacks " is merely nominal, and the depreciation of the currency has not raised the value of commodities. Whatever benefits the people have derived fi-om the use of "greenbacks" are owing to the conveni- ence which so light and portable a species of money affords as compared with gold, and to the saving of labour which is effected by the compara- tive disuse of so expensive a commodity as gold. j\Ir. Seyd speaks as if the silver wliich is expelled from the currency is to be lost to mankind ; but it is easy to foresee that any great fall in the value of silver would be followed by a great increase in its use for domestic utensils and other purposes. If silver were to lose nineteen-twentieths of its value, even the worst-paid labourers would probably use silver spoons and forks, and other articles made of silver would come into general use. The holders of silver would rather sell it for one-twentieth of its cost price than SUBSIDIARY COINS. 811 throw it into the sea ; and whatever was the extent of the depreciation, it -would prove a benefit to the great mass of the community. Putting an extreme case, the utmost effect of the depreciation could only be to put a temporary stop to the working of silver mines, and it could never bo found impossible to find some use or other for the existing stock. There is yet another argument put forward by Mr. Seyd which seems the most extraordinary which occurs in his chapter on this subject. It is that the prohibition of the use of silver for large payments is a violation of the principles of Free Trade. He says : " It is clear to us that the advocates and supporters of the single gold standard offend against the laws of Boimd reasoning when, having taken their stand professedly upon the broadest basis of the principles of Free trade, they, at the end of their case, suddenly turn round deliberately to demand the adoption of a most illiberal and prohibitory law to put do^\^^ the use of silver in future as a standard of value ! "We cannot help looking upon such a proposition as one of the most flagrant and mischievous violations of the very prin- ciples upon which, up to that point, all their arguments in support of the single gold standard proposed by them have been based." (pp. 642-3). I have seen in a comic journal a speech put into the mouth of a spend- thrift complaining that Free Trade could not be said to prevail so long as trade was shackled with the onerous and absurd condition that debtors should be compelled to pay their tradesmen's bills. "What was there said as a joke differs very little fi'om what Mr. Seyd puts forward in sober earnest. Of all the senses in which the hackneyed plu-ase " Free Trade," has been used, the strangest is that of freedom to the debtor to choose whether or not he will pay his creditor what is of equal value to that which he owes. The establishment of a gold standard does not prevent creditors from accepting silver in any quantities which they choose ; but merely decides that payment shall be made in gold when no stipulation has been made to the contrary. It is necessary for the Government to announce publicly what is the form in which it will accept payment of taxes, and it is convenient, if not absolutely necessary, to lay down some rule for the guidance of the tribunals which may have to settle cases of unfulfilled contracts, and to make gold coin legal tender is merely to define the meaning of the sums of money in Avhich contracts are genci-ally expressed. To demonetise silver is not to interfere with the right of individuals to exchange commodities in what- ever way is mutually convenient to them, but is simply to prevent indi- viduals from forcing others to accejit what they do not want and have not promised to receive. It is to make an arrangemeuL fur (he general convenience of society, and not to interfere with the libniy of indi- viduals. 312 SUBSIDIARY COINS. Where silver is the standard of vakie it is possible for the people to use it for all payments, however large or however small ; but where a gold standard is in force it would be extremely inconvenient if the people were left Avithout coins made of some cheaper material to be used in small payments. Even where silver is the standard it is usual to issue copper coins for very small payments. In order that these coins may not be melted down, as so constantly happens wherever the double standard is in force, it is necessary for the Government to over- value the metal of which they are made in comparison with that which is the standard of value. Thus, in the English coinage, silver is reckoned as standing to gold in the proportion of 14i to 1, wliile the proportion in the market is much higher. To express the same thing in other words, an ounce of silver is coined into 5s. Gd,, while it can be purchased in the bullion market for 5s. or less. Thus a considerable seigniorage is extracted from the silver com, a seigniorage which is constantly varying in amount, being sometimes as low as G per cent, and sometimes higher than IG per cent. It is not a fixed proportion, as is the case mth the seigniorage on gold coin ^vhich is charged in France, for the English Mint buys silver hi the market whenever the price is low, or whenever it is thought convenient to do so, Avhile the number of coins wdiich are to be made out of each ounce is fixed by law. As the coins which w'eigh an ounce are capable of discharging a debt of 5s. Gd., while an ingot formed by melting them w^ould only sell for 5s. or thereabouts, a loss would be incurred by melting them, and consequently it is never done. The copper, or rather bronze coins are rated very much in excess of their value as lumps of metal, the quantity of copper of which a penny is made not being worth much more than a farthing until it has been coined. This would hold out a very strong inducement to private coining were it not that these bronze coins are only legal tender to the amount of twelve pence, and it is therefore practically impossible to dispose of any large quantity. Unfortunately, this difficulty imposes serious inconvenience on some people who have no wish to break the law, but the nature of whose business causes them to receive large quantities of bronze coins. The keepers of public-houses naturally receive a large quantity of these coins from the poorer classes of their customers, and the accumulation in their tills is so great that their landlords have, at least in London, consented to receive large sums in bronze in payment of the rents of the houses. The owners of the houses are generally the brewers whose beer is sold in them, and some brewers have publicly stated that they have lost very large sums by receiving at par large quantities of these coins which they are subsequently unable to dispose of. To melt them down SUBSIDIARY COINS. 313 would entail a loss of 75 per cent., and the law of legal tender renders it, if possible, to dispose of them in any other way. The remedy which is required seems to be not so much an alteration of the law as of the practice of the Mint. It would be unwise to compel the l\Iint to receive bronze coins in any quantities at par, for this would give rise to private coining on a large scale, and would entail a ruinous expense on the Government. But though the law cannot Avell be altered, a practice might be introduced at the Mint of applying to the principal breweries for bronze coins whenever they were asked for by the public instead of at once issuing new ones as is now done. Thus the old stock would be properly utilised instead of new ones being issued in one part of London while heaps of old ones are lying unused in another. The same incon- venience has been sometimes experienced with regard to the silver coin. At periods when there is great activity in the manufacturing districts the public call for large quantities of silver coin, and the scarcity of it is sometimes so great that manufacturers are willing to pay their bankers a jDremium to obtain it. When a period of stagnation returns and there are no longer such large amounts" of wages to be paid, the silver coins accumulate in the vaults of the Bank of England, and on some occasions, as in 1831 and 1836, the directors have been obliged to melt down large quantities and sell them as bullion, thus inflicting a considerable loss on that establishment. By a clause in the Bank Act of 1844 the Bank of England is allowed to keep a quarter of its reserve in silver, and I presume that since the passing of that Act the directors have not foiuid it necessary to resort to so expensive an expedient. The reserve whicli that Act compels the Bank to retain has scarcely ever been less than 150,000,000f., and is generally about 250,000,000f, and the accumulation of silver coin has probably never amounted to one-fourth of the smaller of these sums, and, at all events, I am not aware that it has ever been found necessary to melt down silver coin since 1844. M. Wolowski * adduces the fact that this clause was inserted in the Bank Act as a proof that the working of the English system of a siugle gold standard is not altogether satisfactory, and supports his opinion by reference to that of Sir Robert Peel, who proposed tlie clause in question on tliis very ground, that it would mitigate the inconvenience of a single standard. It must be admitted that there is an inconvenience, and as the remedy which has been applied inflicts another inconvenience on the Bank of England by enforcing the maintenance of a larger reserve than is really necessary, it cannot be regarded as quite satisfactory. But tlic inconvenience which is thus occasioned is slight in comi)arison with that * Enquete, etc., vol. I., p. 477. 314 SUBSIDIARY COINS. to which those nations are exposed who maintain a double standard, as they are always suffering from a scarcity of one or other metal. We in England do occasionally feel a scarcity of silver coin, but this is only because the Mint is not large enough to supply a sudden and large demand. The difficulty is purely mechanical, and could be got over by enlarging the Mint, or by calling in the assistance of private Mints in times of pressure, and is not caused by the melting of the coin, as is so often the case in other countries, but simply by a change in the wants of the community. CHAPTER IV.— CREDIT. USE OF CREDIT — BILLS OF EXCHANGE — BANK NOTES — CHEQUES — CLEARING-HOUSE — CHEQUE BANKS. Although the use of money is extremely advantageous, and even necessary to every society in which trade has advanced beyond its rudest stage, it is not altogether unaccompanied by a disadvantage which it is desirable as far as possible to minimise. Inconvenient as it is to con- duct all trade by means of barter, the system possesses at least this advantage, that the whole labour of the producers is devoted to the pro- duction of articles which are required for their own sakes ; while in a country where money is used, some portion of the labour of the people must be employed in producing the money itself, and in transporting it from place to place. If, therefore, a method can be devised by which the people, without returning to barter, can efiTect their exchanges A^ith a smaller quantity of money, a great benefit will be confen-ed on the whole people. The quantity of gold, silver, and copper coins in this country is supposed to be equivalent to about two milliards and a half, and this sum represents the labour of three million men for a whole year. If a method could be devised for dispensing altogether with this vast sum of money without using any substitute for it, the advantage would be gained of applying the whole quantity of gold, silver, and copper to various domestic uses, and the people would thus obtain the benefits of the labour of three million men, while so much labour as is employed in producing articles to be exchanged for the gold and silver used to replenish the currency could be devoted to some other purpose. Credit affords the means of approximating, though not of attaining, to this ideal perfection. If a person who wishes to obtain an article gives no money, but a promise to give money at a future time, tlic use of coin is dispensed with, at least so far as that particular transaction is concerned ; and though it is true that the promise nuist be redeemed at a future time, it does not follow that coin will even then be required. Before the time has amved for its fulfilment, the original seller may purchase something from the original buyer, ami if the two articles are of the same value, and the t\\'0 i)r(jmises are fullilled at the same time, one may be set off against the other, and no transfer of coin Jiccd take place. Trade, thus conducted, is ))artcr relieved from the dillicuHy that 81 G USE OF CREDIT. the wants of buyers and sellers are not felt at the same time. The articles produced by diffbrent persons are exchanged for one another, but by means of credit the operation of exchanging is spread over a considerable time, to the mutual convenience of both parties. The simplest form in which credit of this kind is given is that of book-credit, i.e., where the seller of an article merely makes an entry in his books to the effect that the purchaser owes him a certain sum for the goods supplied. "Where two tradesmen supply each other with goods, and are alternately in each other's debt, no transfer of coin need take place until they have made up their books at the end of the month, the quarter, or the year ; and even then the sum required is not the total amount of the transactions, but the difference, if any, between the debts respectively owing by each of the two parties to the other. A large number of transactions between dealers are settled in this manner, and a still larger number are settled by the same process in a somewhat more complicated form. Instead of two parties setting oS their respective debts against each other, they settle them by transferring debts due from third parties ; and a class of men soon arises Avho make it their business to effect these settlements. The use of credit not only enables a people to dispense with coin, but also renders it more easy to transfer capital from the hands of possessors who do not know how to employ it, to the hands of those who have the necessary skill and enterprise to employ it with advantage, but do not possess a sufficient quantity. "Without credit it would be more difficult for the capital to come into the possession of those who are able to make the best use of it, and a country where the transfer can be easily effected possesses a certain advantage over others in the competition of industrial life. In England this is easily effected through the medium of bankers. Those who have capital which they are unable to employ, sell it, and deposit the money in a bank, and the bank, in turn, lends money to manufacturers or others, which enables them to procure capital to be employed in producing articles which are required by the public. Mr. Bagehot has given us an illustration of the advantage which England derives from the greater development of its system of credit in competition with other countries which are less advanced in this respect, in a passage which deserves to be quoted at length : — " In a new trade, English capital is instantly at the disposal of persons capable of understanding the new opportunities, and of making good use of them. In countries where there is little money to lend, and where that little is lent tardily and reluctantly, enterprising traders are long kept back because they cannot at once borrow the capital, without Avhicli skill and knowledge are useless. All sudden trades come to England, and, in so doing, often disappoint both rational probability and USE OF CREDIT. ol7 the predictions of philosophers. The Suez Canal is a curious case of this. All predicted that the Canal would undo what the discovery of the passage to India round the Cape effected. Before that all Oriental trade went to ports in the south of Europe, and was thence difiiised through Europe. That London and Liverpool should be centres of East Indian commerce is a geographical anomaly, which the Suez Canal, it was said, would rectify. ' The Greeks,' said M. de Tocqueville, ' the Styi'ians, the Italians, the Dalmatians, and the Sicilians, are the people who will use the Canal, if any use it.' But, on the contrary, the main use of the Canal has been by the English. None of the nations named by TocqueviUe had the capital, or a tithe of it, ready to build the large screw-steamers which alone can use the Canal profitably." * I would not ascribe too much to the influence of credit in this case, for the possession of abundant coal and iron mines gives England a great advantage over Southern Europe in the manufacture and equipment of screw-steamers ; and, as regards the Greeks, the interference of their Government greatly impedes the construction of iron ships. I merely cite it as an instance of the way in which a speedy transfer of capital from hand to hand may give one nation a good start in the race of industry. The use of credit is beneficial by affording an encouragement to honesty and punctuality in matters of business, and thus often assisting a man of good character, but of comparatively small means, to obtain the wealth which he has shown himself capable of employing to the advantage of the community. There is a general belief that men are respected in the City in proportion to their wealth, but all who are engaged in money-lending know that this belief is erroneous, and that a man of good character can obtain a loan on better terms than a much wealthier man who is addicted to questionable practices in his business. In Scotland it is a common practice for a bank to giA^e credit to respectable people for a small sum ^A'hich will enable them to set up in Imsiness ; and many a frugal and honest person has thus received a start in life which has led to the acquisition of a considerable fortune. In England such a practice has not been reduced to a system, but Sir Arthur Helps mentions in his life of the late Mr. Brassey that that eminent contractor was enabled, by tlie kind assistance of a bank, to obtain the capital wliicli was needed to undertake his first contract, so that it was owing to credit that he was started in his remarkable career. Whenever public attention is arrested l)y some scandalous abuse of credit, observations arc made implying that credit itself is at I'ault, and that il * Loiif^jard-street : A Description of the Money Market. l'>y Waiter JSageliut. Loudon, 1873. p. 1-1. 318 USE OF CREDIT. would be better if no business were done except for ready money. The person who has been victimised often gets httle sympathy, but is thought a fool for his credulity, and it is represented as the part of a wise man to place confidence in no one. Yet, if there be anything at which the reformers of humanity should aim, they should surely strive to raise the moral standard of the race to such a point that everyone could safely trust, not merely his relations or intimate friends, but every stranger, with the whole of his fortune, if occasion required it ; and as such a feeling of confidence can only be. generated by constant practice, we ought to regard the development of credit as a beneficial influence in the improvement of mankind. All who are engaged in money-lending, whether bankers, bill-brokers, or others, are obliged, for their own safety, to watch as carefully as possible the conduct of those to whom they lend, and the supervision thus exercised must tend to promote honourable conduct among men of business, every one of whom knows that he may at any time be obliged to borrow, and that any misconduct on his part will be sure to bring its appropriate punishment when the day of need arrives. Mr. Gilbart, in his " Practical Treatise on Banking," ascribes a beneficial influence to the establishment of a bank in a country town, on account of the supervision which its manager exercises over the conduct of the local tradesmen, and the same influence must be felt in other places. It must not be supposed that credit adds anything to the wealth of the country, for it merely affords the means of transferring wealth from hand to hand. It is sometimes said that credit is capital, but such a notion is quite inconsistent with the definition of capital which has been adopted in the present work. Capital, as the term is here used, consists of the food and clothing which labourers require while they are labouring, and it is clear that no pieces of paper or entries in books can fulfil the function of maintaining labourers. All that credit does is to enable those who know how to, make a good use of capital to obtain possession of it for so long a time as will enable them to produce some articles by the sale of which they can obtain enough money to discharge their obligations. It would not be sufficient for persons to lend money to Railway Companies unless the country contains sufficient capital to support the labourers required to construct the railways, and a country which imports food receives assistance from foreign coimtries although nothing may be actually lent by foreigners to its inhabitants. As on the one hand the advantages of credit ought not to be over-estimated, so, on the other hand, its disadvantages should not be too highly coloured. When a commercial crisis takes i^lace people are apt to ascribe it tp the use of credit, but, in reahty, the disaster is generally the effect of natural USE OF CREDIT, 319 causes, and would take place if credit were iinkno\Mi. Credit, in fact, rather mitigates than aggravates the calamity, and though it takes the form of a general inability to fulfil pecuniary engagements, this is merely the form, and the distress which constitutes the calamity would be quite as great if there were no debts to discharge. The most general cause of a commercial crisis is a bad harvest, which, by raising the price of corn, compels many people to reduce their expenditure on other articles, and thus disappoints the expectations of producers and distributors engaged in various branches of industry, and renders them unable to meet their engagements. I may quote another passage fi-om the instructive and entertaining work which I have just referred to. " All the industries, A, B, C, D, up to Z, are somewhat affected by an augmentation in the price of corn, and the most affected are the large ones, which produce tlie objects in ordinary times most consumed by the working classes. The clothing trades feel the difference at once, and in this country the liquor trade (a great source of English revenue) feels it almost equally soon, especially when for two or three years harvests have been bad and corn has long been dear, every industry has been impoverished, and almost every one, by becoming poorer, makes every other poorer too." (Lombard-street, pp. 127-8.) The disturbances would be quite as gi'cat as at present, even if no business was transacted except for ready money. Under any system, producers and dealers would accumulate stocks of commodities in order to supply the wants of the public, and a bad harvest would have the effect of diminishing the sales of clothing, liquor, and other articles which the holders had counted on being able to dispose of. Xot being able to find such a ready sale for their goods, they Mould make smaller profits, and would be forced to dismiss many of the persons who were in their employ, and these again, being thrown out of work, would be less able to purchase goods from otlier pro- ducers, and the distress would thus be propagated through the whole community. The distress is caused not by men trusting one another, but by less wealth being produced, and its becoming necessary for many people to cease fi'om working in the mode to which they arc ac- customed. A co-operative store where no credit is given is not secure against such reverses of fortune, for its usual customers may suddenly find themselves unable to make their usual purchases, and the managers of the store may find themselves unable to pay the wages of the shopmen and clerks employed. A few years ago, Sir James ]\Iartiu, the prime minister of New South Wales, was defeated in the Legislative Assembly, and thereupon dissolved that body so suddenly that it had not time to vote the sui)plies. For a month or so the civil servants were unable to obtain their usual salaries, and the consequence was, that the 320 USE OF CREDIT. co-operative store which they had established on the principle of giving no credit was almost deprived of custom, and must have been closed if assistance had not been obtained from a bank. Thus a society which set its face against credit was itself obliged to resort to credit in an extra- ordinary emergency, and yet its customers belonged to the class whose incomes are beyond all others the most certain to be punctually received. As in this case of a particular society, so in that of traders in general, a resort to credit is the best and almost the only means of tiding over a temporary difiiculty. As manufacturers make a much larger quantity of goods than they could purchase with their own money, because they reckon on being able to dispose of them again, any sudden turn in the market may leave them with a large stock in hand which they do not themselves require, and which they cannot dispose of. An advance of money will enable them to keep their factories at least partially employed until a favourable opportunity for disposing of their stock arrives ; and, if they are unable to ol)tain a loan, they may be obliged to sell their goods at greatly reduced prices, and altogether close their factories. Not only would their own loss be greater, but the suft'ering would be propagated among all those who are in any way directly or indirectly dependent upon them, and though it is true that their liabilities would not have been so great if they had not accumulated stock in anticipation of a demand for it, we must remember that it is to the advantage of consumers that a large stock should he always ready to meet any sudden demand. If a country is able by means of credit to obtain a large quantity of food from abroad, the evils of a bad harvest can be very greatly mitigated, and if the loan is repaid by means of the subsequent production of other articles which foreigners require, the relief is obtained without inflicting any injury upon foreigners. A country which has not the means of borrowing in a time of difficulty is exposed to all the evils of a famine whenever its own harvest is deficient ; and even though credit is neither given nor taken, universal distress will be found to pre- vail. A common feature in a commercial crisis is the inability of railway companies to meet their engagements ; but it is not because people give credit to railway companies that a stagnation of railway enterprise takes place, but because there is not sufficient capital in the country to complete all the schemes of railway promoters ; or else because some of them are badly planned, and would have proved unpro- fitable if carried out by men who embarked in them no one's money except their own. Where credit is used to bring capital into the hands of those who will squander it in useless luxury, or in enterprises which, though intended to be useful to society, are so ill-conceived or ill-exe- cuted as to prove altogether useless, there is, of course, uo benefit, but BILLS OF EXCHANGE. 321 only an injury done to society. Credit in itself can neither add to nor diminish the wealth of a community, and is only so far beneficial as it enables the capital which the community possesses to be more eflectiyely employed. Having thus taken a general view of the advantages and disadvantages of credit as a system, I pass on to an examination of some of the particular forms which it assumes. Next to book-credit, the simplest form which credit assmnes is that of a bill of exchange. In every trade there is a custom of giving credit for a certain time after the goods are delivered, it may be for one month, more usually for three months; and in some cases, where the traders reside at great distances from each other, for as much as two years. "When a manufacturer has supplied goods to a wholesale dealer, he writes an order on the latter, telling him to pay the price to a third party as soon as the customary period for giving credit (in commercial language the "prompt") has expired. This order is called a bill of exchange, and is said to be " drawn " by the creditor and " accepted " by the debtor, i.e., signed by him as an acknowledgement of the debt, and a promise to pay it on the specified day. Bills of exchange are mainly useful in two ways. First, they are used to save the trouble and expense of remitting specie to distant places. If the tradesmen of Manchester have bought goods fi'om London, and the manufacturers of Manchester have sold goods in London, bills of exchange afford the means of dis- pensing mth the double transmission of specie to discharge both sets of obligations. The manufacturers draw bills on their London corre- spondents, i.e., order them to pay the money which is owing for the goods, not to the manufacturers themselves, but to the London trades- men who have sold goods in Manchester, and sell these bills to the Manchester tradesmen, who remit them to their London correspondents. Thus, supposing the debts due in London to be equal in amount to those due in Manchester, e.g., a million francs in each place, no specie need be transmitted in either direction. One million francs is paid in Man- chester from the tradesmen to the manufacturers, and another million is paid in London by one set of dealers to another set. Of course, in practice, the amounts due in different places are seldom exactly equal, and it is frequently necessary to transmit specie ; but this is only done in order to discharge the balance which remains after a much larger amount has been settled without any coin being used. Bills of exchange arc said to have been first used by the Lombard merchants of the middle ages, who resorted to them in order to save themselves the trouble and expense of transmitting specie from place to place, and the expedient is so simple, and so convenient, that it would seem as if it were certain to be em- ployed in every country where commerce has grown to large proportions. Y 322 BILLS OF EXCHANGE. Commerce between foreign countries is transacted almost entirely by means of bills ; but it must not be supposed that there is any likeli- hood that bills will be able to supersede coin altogether, either in foreign or in internal commerce. Do what we will, there will always be some difference between the debts due to, and those due from, the traders of a particular place at any particular time, and coin or bullion must be transmitted to secure the punctual payment of bills. Secondly, the practice of drawing bills enables a trader to obtain payment for his goods before the " prompt " has expired. The drawer of a bill usually sends it to his banker, who undertakes to present it when due ; and as the ac- ceptor usually makes it payable at his bankers', the great mass of bills are usually in the hands of bankers from the time when they are di'awn to the time when they are paid. Bankers thus become tolerably familiar with the signatures of various firms besides their ovni customers, and also with the general amount of the bills which they accept, and with their character as men of wealth and of business habits ; and as bankers are always ready to give one another information as to the respectability of their customers, they are able to form a pretty correct judgment as to the probability of a bill being paid when it becomes due. A practice therefore springs up by which a trader who wishes to get his money before the "prompt" has expired sells the bill which he has drawn to his banker, the latter, of course, receiving the money when the bill is paid. The banker, in consideration of his having to wait for some time for his money, does not give his customer the whole amount of the bill, but deducts a small portion for liis own benefit, which is called the discount, and purchasing a bill in this way is called discounting it. The discount is in proportion to the amount of the bill and to the time which it has to run, or, in other words, which must elapse before it is paid, and is said to be so much per cent, per annum. Thus, supposing the rate to be 4 per cent, per annum, and a banker agrees to discount a bill for 10,000f. which has three months to run, he will only give his customer 9,900f., and will take lOOf., or 1 per cent, for a quarter of a year, for his own profit. Not only is the rate or discount different for different persons, according to their reputation for respectability and wealth, but the rate of discount which is charged to first-class houses,' whose failure is scarcely regarded as possible, is perpetually varying, and has often been changed ten times in a single year. The causes of these changes will be discussed in a future chapter, but it is sufficient to say here, that the rate rises when bankers are besieged with numerous applications from boiTowers, and falls when they have large sums in their possession which they are anxious to lend. It having been found that bills are a convenient means of raising money, a practice has arisen BILLS OF EXCHANGE. 82 n of drawing- bills simply for the purpose of gettinp; them discounted, i.e., of borrowing money upon them. An English bill bears on it the words "value received," which denote that it is drawn on account of a debt due for the value of goods received by the acceptor from the drawer,- and the law now requires that these words shall appear on every bill, in default of which its payment cannot be legally enforced. When, there- fore, persons who are not engaged in business draw and accept bills, they are obliged to insert these words, even though nothing of any value has, in fact, been received, and it is perhaps for this reason that bills of this class are called "fictitious bills." Were it not for these words, there is no more reason Avhy one of these bills should be called ficticious than an ordinary one arising out of a commercial transaction. A person who is in need of money gets a friend to " accept " a bill for him, i.e., to promise to pay a specified sum on a specified day, the understanding being that before the day arrives the drawer, who is the person who Irishes to borrow, m\l provide the money with which the acceptor is to pay the bill. The bill having been duly di-awn and accepted is taken to a money-lender and discounted, and provided that it is paid when due no harm is done to anybody, but, on the contrary, two or three persons have been benefitted by the transaction. Bills of this class are indeed less likely to be paid, and are discounted at a higher rate than commercial bills by a class of money-lenders inferior in standing to the bankers and bill-brokers who perform the same office for merchants and manufacturers, and there is certainly some reason for the distrust with which they are regarded. But the same disparaging epithet is applied to bills of a different order dra^\n or accepted by bankers for the purpose of borrowing and lending money, and whenever it is known or suspected that large quantities of such bills are in circulation, the most melancholy vaticinations may be heard as to the disastrt)us results which the issue of so much fictitious paper will produce. During the earlier part of the year 1873 it became known that American bankers were borrowing large sums, to the amount, it was said, of 200,000,000f. li'om London, by means of bills sent thither to be discounted, and the " Times " at once predicted that the issue of so much fictitious paper must be followed sooner or later by a general Ijreak-up of credit. It is perfectly true that a commercial crisis did occur in the United States in September of the same year, but it would not be easy to establish any connexion between the two circumstances. It is not the form in which credit is given, but tliu extent to which it is given to persons who are unable to meet tlieir engagements, which causes tlie general collapse which is called a commercial crisis. So long as the American banks were al)le to })ay tlieir del)ts, it did not malfcr whether V L' 324 BANK NOTES. the bills which they drew on London represented debts owing to them from London bankers or were merely drawn as a means of borrowing money. The banks which discounted them were interested in knowing whether the names which they bore were a suflicient guarantee for their punctual payment, but beyond this there was no reason why they should concern themselves about the origin of the bills. As the extent of a man's business imposes a limit to the amount of bills which he can draw agauist sales of commodities, he cannot incur such heavy liabilities by means of such bills as he can by those which are drami for the sole purpose of borro^nng money, and this furnishes a slight reason for making a distinction between the two classes of bills. But, in truth, a money-lender can derive very little assistance from a knowledge of the fact that certain bills represent an actual sale of goods, and he must be largely, if not entirely, guided by his knowledge of the characters of the parties concerned if he would form a correct judgment on the commercial value of the bills. So much experience, and such constant vigilance, are required for success in the business of bill-discounting, that, in a large city like London, it is carried on by a special class of bill-brokers, who act as intermediaries between the bankers A^"ho lend them money and the merchants whose bills they discount. The London bankers do, indeed, discount bills, but, as a rule, they do so only for their customers, i.e., for persons who keep accounts Anth them, and may be said to lend money to the bankers in their turn by keeping an unemployed balance with them. The amount of bills in circulation in England is enormous, and is constantly increasing. In 1856 it was estimated by Mr. Ne^NTnarch at about five milliards, but it was estimated by Mr. Palgrave in 1873 at nearly nine milliards, i.e., bills to that amount are held at one time by persons who have discounted them. As the great majority of them are exchanged against one another, a very small quantity of coin is required to effect these vast transactions. Bills of exchange are chiefly used by traders, and can do but little to supersede coin in payments made by persons belonging to the profes- sional or the labouring classes ; but bank notes, to which I now proceed, may be used by all classes of society, and go as far as any pieces of paper can to do away with coin altogether. A bank note is a promise given by a banker to pay a certain sum on demand, i.e., whenever it is brought to him for the purpose by any one who happens to have posses- sion of it. As long as the reputation of a banker is such that a large number of people are fully convinced that he can and will pay his notes whenever presented, there is little need to put his capacity to the test by actually presenting them, and a note may be passed from hand to hand for months, or years, and may perform a hundred payments before BAXK XOTEt>. 325 it is returned to the banker who orighially issued it. If notes are issued for very small amounts they may supersede cuiu altogether, as far as internal trade is concerned ; but this rarely, if ever, happens, unless the government compels all its subjects to receive them as a full discharge of all debts. Scotland affords the best example of a country in which bank notes which are not legal tender, but obtain a circulation simply from the confidence which the public entertain in the solvency of the banks which issue them, have obtained such general favour as to have nearly superseded gold coin. Sovereigns are seldom seen in Scotland, imless brought by travellers from England, and Mr. Baxter once men- tioned in the House of Commons, that when he offered one as a gra- tuity to a Scotchman, the man regarded it suspiciously, and asked if he could not give him a one-pound note. This is the smallest amount for which notes may be issued in Scotland, and if the law allowed smaller ones to be issued, the disuse of coin would no doubt be more complete. Sir A. Helps, in his life of Brassey, mentions an instance of the advantages derived fi'om the introduction of bank notes. One of the numerous contracts Avhich Brassey undertook was for the construction of a railway in the north of Spain, and his agent found that it was a costly and dangerous job to convey the large sum of money required for the pay of the labourers to the secluded mountain district in which they worked. Xot only was the chest a heavy load to draw, but it offered a great temptation to any adventurous band of highwaymen who might wish to overpower the escort. After a time, the agent commenced paying the labourers in the notes of a local bank, and though they could not at first understand the transaction, they soon found that it was quite as convenient to them as to their employer. When the notes were first offered them in place of the gold coins which they had been used to receive, they took up the silver and remarked that it was not the whole amount to which they were entitled. When they were told that by taking the notes to the bank they could obtain the gold which was their due, they took them reluctantly, and at once rushed with them to the bank ; but finding that they were always cashed when presented, they soon got accustomed to them, and kept them till the next market day or other time when they wished to spend their wages. Thus the construction of the railway was the occasion of gaining a circu- lation for bank notes in that part of the country. The convenience of small notes is keenly appreciated in Scotland and Ireland, where a dealer has frequently to send a commercial traveller into rural districts to make a great number of small purchases from a num])er of petty farmers, and where it is consequently of some importance that tlie traveller should Iw encumbered with as light a load as o2G BANK IfOTES. possible. Whenever it has been proposed to abolish these small notes by Act of Parliament, the Scotch and Irish have met the project with so much opposition that it has never yet been carried out. In England, during the first quarter of the present century, small notes were allowed to be issued, and they quite superseded gold in ordinary transactions, but during the last fifty years no notes have been permitted of a lower denomination than 125f., which is too high a figure to admit of the disuse of gold in retail transactions. The reason Avhich prompted Parliament to prohibit the issue of smaller notes was the fear that such notes would get into the possession of poor people, who would be more likely than the rich to be seized with a panic and to produce a general bankruptcy by running to present notes for payment. Had the issue been allowed, it can hardly be doubted that the people of England would have become as much accustomed to them as the Scotch, and would have been no more disposed than the Scotch to inflict a loss on themselves by a senseless run for gold. When the public have become accustomed to the use of bank notes a material addition is made to the banker's power of lending, as he can feel sure that all his notes ^yi[l not be retm-ned at once, and can lend not only all his own money but also as much more as the circulation of his notes amounts to. When asked for a loan, he can give the borrower some of his o^nl notes, and he need only keep as much coin in his coffers as is required to cash the notes which may happen to be presented for payment. In common language it is said that the power of issuing notes makes an addition to the banker's capital, and enables him to give so much the more encouragement to trade and manufactures. In reality, no addition is made to the capital of the country, but the disuse of gold enables the people to apply to other purposes the capital Avhich would other\\-ise be used in producing gold, or in producing other articles to be exchanged for gold, and the same amount of capital is made to produce more commodities which the people require. Thus some impetus is given to trade and manufactures, and a still greater assistance is afforded to the establishment of a sound system of banking. Some of the oldest banks in the world, as those of Amsterdam and Hamburgh, were estabhshed for the sole purpose of giving notes for coin and coin for notes, and were supposed to keep in their coffers an amount of coin exactly equal in value to the notes which were in circulation. The small States of Holland and Hamburgh experienced much inconvenience from the quantity of worn coins from various countries which circulated in them, and these banks were founded to enable merchants to obtain good coins whenever they required them. A merchant could deposit any quantity of good silver coin in the bank, and the bank would give him an equal amount of its notes, which BANK NOTES. ^27 were always accepted within the hmits of the city as equivalent to coin, and which could always be exchanged for coin when the holder required specie for exportation. By this plan the people were saved the trouble of transporting specie from one part of the city to another, but so long as the specie in the vaults of the bank was],fully equal to the notes in circulation there was no economy of coin, and the people had to bear the expense of replenishing the large store of silver as required from time to time. Great importance was attached to the preservation in the vaults of the Bank of Amsterdam of the whole of the specie entrusted to it, and those who had the management of it were sworn to keep it intact. To quote Adam Smith's words, ''The bank is under the direction of the four reigning burgomasters, who are changed every year. Each new set of Burgomasters visits the treasure, compares it with the books, receives it upon oath, and delivers it over with the same awful solemnity to the set which succeeds ; and in that sober and religious country oaths are not yet disregarded." But M'Culloch's note on this very passage shows that even in Holland an oath was a very poor security for faithful administration, and the directors of the bank had secretly lent a portion of its specie to the Dutch East India Company, and to other bodies, though the fact did not transpire until the French invasion in 1795. Whenever the directors of a bank are free to conduct its business according to their oum judgment, they must see that it is quite unneces- sary to keep in their coffers an amount of specie equal to their notes, as it can only be on a very extraordinary emergency that the whole of their notes will be presented for payment. By keeping a smaller reserve they not only increase their ov^ii power of lending, but confer a benefit on the community by setting free a quantity of bullion for exportation, or for use in manufactures. Dming the last thirty years the English Govern- ment has allowed no increase in the amount of bank notes, unless accompanied by an exactly equal increase in the metallic reserve of the banks which issue them, and thus the people are deprived of one o the principal advantages which result from the use of notes. There remains, however, the convenience of having an extremely portable medium of exchange, and some protection against theft, for as every note has a number of its own, it is more easy to trace one which has been stolen than a particular coin. As notes can always be exchanged for coin at the banks which issue them, they must retain the same value as the coin which they represent, and the amount of notes in circulation depends on the amount of the payments which the people have to make, and in which paper is more convenient than coin. The amount, therefore, of notes in circulation always increases at those periods of the year when most business is done, tuid diminishes when business is slack. The 328 CHEQUES. bankers cannot keep in circulation a larger amount of notes than the public require, for anyone who has a note which he does not want will either take it to the bank to be cashed, or will pay it away to some one else who will do so, and the circulation will thus be reduced to its proper level. As soon as the notes of any one bank get into the possession of another bank they are presented for payment, perhaps the next day, or at most after an interval of three days ; and a bank which did not keep a sufficient reserve to meet such calls would soon be obliged to stop payment. Thus the power of issuing notes does not give any encouragement to the reckless lending of money to those unable to repay the loans, but merely enables a banker to provide a convenient kind of money for those who trust in his solvency. So great is the convenience of a system of bank note issue, that it has now been established in every civilized country, and is found to exist even in the interior of China, where it cannot have been suggested by European mfluence. Its general extension through- out the world has been, in a great measure, the result of English enterprise, and there is hardly a considerable city in Europe or America which does not possess one or more banks directed, or at least founded, by Englishmen. Bank notes, even when their issue is not regulated by the State, can never wholly supersede coin, for the simple reason that when notes are presented the bank cannot pay them in its own notes, and it cannot often happen that the notes which it has to pay are precisely equal to the notes of other banks which it holds. Banks will not consent to a delay in the payment of the notes which they present, and coin is the only means of ultimately satisfying a debt. Even the Scotch banks had to keep a reserve of coin to meet such calls before the Act of 1815 compelled them to keep in then' vaults an amount of gold exactly equal to the increase of their circulation beyond the amoimt at which it stood in 1844. There is another kind of paper-currency wliich seems destined to attain larger proportions than either bank notes or bills of exchange, wliich consists of orders upon bankers to pay specified sums on demand, which are commonly known by the name of cheques. Though used in other countries, it is only in England that they are so popular as to bid fair to become the principal means of settling pecuniary liabilities, and, as compared with bank notes, they are modern even in England. In the seventeenth century, when a banker agreed to make a loan he did so by advancing some of his ovm notes, but at the present time he usually gives the borrower a credit in his books, and allows him to draw cheques to the amount, and undertakes to pay such cheques whenever presented either in notes or in coin, as the bearer may prefer. Among the richer classes it is now au almost universal practice to deposit money with a CHEQUES. 329 banker, chiefly for the purpose of di-awing it out from time to time by means of cheques. It is natural that the use of bank notes should precede that of cheques in the history of bankino;, for a person ^vho accepts a note runs but a small risk by trusting to the banker's solvency as compared -^-ith what he incurs by entrusting his own money to the banker's custody. A note generally represents but a small sum, while a person who keeps an account at a bank is expected to keep a large unemployed balance in the banker's hands. It costs less trouble to accept a note, or to pay it away again, than it does to pay in or withdraw deposits from a bank, especially if the bank be at some distance from the depositor's residence. A person who accepts a note runs somewhat less risk of being defrauded than one who accepts a cheque, for a note is a promise which the banker is obliged to keep, while a cheque is an order which the banker may not in all cases be obliged to obey. A banker is, indeed, obliged to pay the cheques drawn on him by his depositors, or customers as they are commonly called, but only when the cheque does not exceed the balance which is standing to the drawer's credit in his books, and the receiver of a cheque has no means of knowing what is the amount of the drawer's balance. Not only may a cheque be refi;sed payment, or, as it is termed, dishonoured, because the drawer has overdrawn his account, but it is much easier to forge a cheque than a note. Most bankers issue printed forms of cheques to their customers, which are to have the amount filled in at the customer's pleasure, and be signed ])y him. If any of these forms come into the possession of a swindler, nothing is easier than for him to fill in any amount which he chooses, and sign it with his own, or with a fictitious name ; and if any person is unwary enough to cash it for him, the fi'aud cannot Ije discovered until the cheque is presented at the bank. If a swindler has had a genuine cheque in his possession it is more easy for him to forge printed forms for cheques on the same banker than it would be to forge bank notes, which arc carefully manufactured in such a way as to give the greatest possible trouble to imitators. For these reasons cheques are less willingly received from strangers than notes, and circulate for a much shorter time before being presented for payment. A bank note has been known to circulate for a hundred years before returning to the Ixudv which issued it, and it is quite a common thing for notes to circulate for months or years ; but cheques are usually presented within two days of the time wlieu they are dra\\'n. Hence, of course, a very much larger amount of cheques is required to transact a given amount of business than is the case with bank liotes ; but, in spite of this disadvantage, cheques possess certain advantages which make them, in many cases, preferable to notes. In 330 " CHEQUES. tills country the extensive employment of cheques has, no doubt, been very much promoted by the action of the Government, which has done its best to discourage the issue of notes, and which subjects bills to a heavier taxation than cheques. The celebrated Act of 1844 prohibited the establishment of any new banks of issue, and limited the issues of all existing banks in England and Wales, except the Bank of England, to the amount which they used to issue just before the passing of the Act. The Bank of England was not confined to any absolute amount, but was only allowed to issue notes to the amount of 350,000,000f. (since increased to 375,000,000f.), in excess of the bullion or specie in its vaults. It was further enacted, that if two issuing banks should decide to amalgamate their business, they could only do so by forfeiting the circulation of one of the two, and that if any country bank should commence transacting business in London it should lose the right of issuing notes. This latter penalty has been actually incurred by the National and Provincial Bank, and the circulation of the country banks was thereby diminished by 10,000,000f. During the thirty years which have elapsed since the Act was passed many private banks have failed ; and though the diminution of the country notes has been more than compensated by an increase in the circulation of the Bank of England, yet the total increase has been very small. In 1845 two Acts were passed restricting the issue of notes in Scotland and Ireland. As in England, the establishment of any new issuing bank was forbidden ; but the existing banks were allowed to increase their issues on condition of retaining in their coffers an amount of gold exactly equal to the excess beyond the average issue of 1844. In spite of this condition, which must diminish the profit derived from their issue, the circulation of the Scotch and Irish banks has considerably increased since the passing of the Acts. The diflTerence between the results of similar legislation in the diiferent parts of the United Kingdom is probably owing to the fact that much smaller notes are allowed to be issued m Scotland and Ire- land, as such notes are not so much exposed to the competition of cheques. Notes are always issued for round sums, while cheques are commonly dra'wn for the exact amount of the payment which the drawer wishes to make ; and, as the adding-up of a great number of small odd sums entails considerable trouble, there is a tacit understanding between bankers and their customers that cheques are not to be habitually draTVTi for smaller sums than 125f. As was mentioned before, the fact that the tax is the same on all cheques, whatever their amount, affords an additional discouragement to the use of small cheques ; and though bank notes are subject to a tax it is paid by the banker, and not, as in the case of cheques, by the customer, and does not, therefore, discourage CLEARING HOUSE. o31 the use of notes by the public. Bankers not only take care of the money which their customers deposit with them, but may be said in many cases to collect their income for them, by receiving in their names dividends on the public funds, railway debentures, railway shares, foreign stocks, and numerous other pubhc and private stocks, from which so large a proportion of the incomes of the richer classes is derived. Hence the practice of keeping an account with a banker is almost necessary to a rich man who has a great deal of money invested in different ways and does not wish to take the trouble of goiug in person to receive his dividends as they become due. To receive a great number of dividends for a great number of customers involves very little trouble to a banker in comparison with what must be undergone by the customers themselves if each of them acted singly. Although the use of cheques tends greatly to economise both coin and notes, there is but little reason to expect that they will entirely supersede either the one or the other, for when a cheque is uresented for payment it must be paid cither in coin or in notes, and a considerable number are presented every day by, or on behalf of, those who draw them, and who wish to provide themselves Avith notes or coin to be used ui small payments. By cashing cheques, banks still perform, to some extent, the function for which those of Amsterdam and Hamburgh ^-ere originahy instituted, that of providing good coin for the use of the public. When an employer requires a quantity of coin to pay the wages of his workmen he sends a cheque to his banker, and asks to have it cashed in such coins as he needs, and bankers are obhged to keep a store of coin to meet such calls ; and if their stock falls low they must replenish it by obtaining fresh coins from the Mint. Persons who from the nature of their business receive large sums in coin, transmit them to their bankers, and if the latter find among them a number of worn pieces, they either melt them, or, in the case of silver, send them to the Mint to be exchanged for new ones. The silver which is collected after a charity sermon is sent to a bank, to be soon drawn out in smaU sums, and again returued, so that the currency of the country is constantly passing through the hands of bankers. Bankers have resorted to various expedients for reducing as far as possible the amount of notes and coin which they must keep in reserve to meet the calls made on them 1)y one another. The system adopted in London is that of settling their liabilities by cheques on the Bank of Enghmd. There is an establishment in the city called the Clearing House, to which all the lianks send every day all the checpies, bills, and other orders on other bankers whicli liave cuiue into their possession, and, as far as possible, these engagements are set off against each other. The 332 CHEQUE BANKS. balances which remain outstanding after all has been done by mutual exchange to settle the accounts are liquidated by cheques on the Bank of England, with which every bank finds it necessary to keep an account. The system of clearing, even if it could be applied to all cheques, would not do away with notes or coin, for it would still be necessary for banks to use one or other to keep up their balances at the Bank of England, on which they draw their clearing-cheques. This system is rendered pos- sible in England by the exceptional position of the Bank of England, which enjoys an unquestioned pre-eminence over all other banks, but a diflFerent one has to be employed in Scotland and Ireland, where no bank enjoys a similar pre-eminence. In Edinburgh and Dublin, meetings are held twice a week at which a mutual exchange of notes, cheques, &c., takes place among the different banks, and the outstanding balances are settled by the transfer of exchequer bills. Here again, though the system is extremely convenient, it does not tend towards the total disuse of coin, for the banks must sometimes find it necessary to buy exchequer bills from one another, and must pay for them either in gold or in Bank of England notes, which can only be obtained by means of gold. A new system has been recently introduced for the purpose of giving a great extension to the use of cheques by freeing them from some of the disadvantages which have hitherto impeded their more extensive employ- ment. In 1873, a bank was established in London called the Cheque Bank, the object of which is to encourage the use of small cheques. In order to do this the more effectually, a new method has been devised by its i5]'omoters to prevent the possibility of over-drawing. Its cheques, unlike those of other banks, bear on their face a printed announcement that they cannot be filled up for more than a specified sum, and care is taken that a customer shall only be supplied with such a number of cheques that the total amount which he can draw out by means of them shall not exceed what he has deposited in the bank. Thus, if a customer deposits 500f., he may obtain a cheque-book containing ten cheques, each of which has an announcement printed on it to the efiect that it cannot be filled up for more than 50f. ; but can, of course, be filled up for any smaller sum. The security which is thus afibrded against over-drawing acts as a considerable inducement to receive these cheques from strangers, and several railway companies have announced that they will accept them in payment of the fares. In order to compensate for the greater trouble entailed by the payment of a large nmnber of small cheques, this bank makes a charge for the cheque-books which it supplies to its customers in addition to the payment for the stamps on the cheques themselves, which are always paid for by the customers of this and other banks. If this stamp-tax should ever be repealed, it is difficult to fore- CHEQUE BANKS. 883 see the extent to whicli these cheques ^^•onld be employed ; but under our present system they can hardly be much used, except in cases in Av]iich post-office orders would otherwise be used. Their cost is less than that of post-office orders, and they can be better protected from being stolen while passing- through the post ; and, when once the public has become accustomed to them, will require less trouble to cash them. They are " crossed," i.e., marked so as to indicate that they can only be paid tlu'ough a banker, which renders it somewhat more difficult for a thief to dispose of one than of a post-office order, which can always be cashed by any one possessed of information usually contained in the letter from which the order has been stolen. As any banker will cash them, it is not necessary for the receiver to go to the post-office to receive his money ; but he can pay it away to any tradesman. The cost of the system is less than that of the money-order system, because the cheques are only pay- able in London, while the post-office undertakes to cash orders in any part of the country, and must transmit specie for the purpose. The question Avhether the bank will succeed is one on which it is the less becoming in me to speak as I am pecuniarily interested in the result ; but if the anticipations of its promoters are ever realised, it will have effi^ctcd a considerable economy in the use of coin. CHAPTER v.— VALUE OF A PAPER-CUERENCY. EFFECTS OF CREDIT ON PRICES — INCONVERTIBLE TREASURY NOTES — INCONVERTIBLE BANK NOTES — CONVERTIBLE BANK NOTES. The proposition that the vahie of money varies inversely as its quantity is only true within certain limits, and much confusion has been introduced into Political Economy by writers who have endeavoured to account for all changes of prices by variations in the amount of the currency of the particular country, without paying sufiicient attention either to -the circumstances which would have caused prices to vary if the amount of the currency had remained the same, or to those which would have produced an alteration in the amount of the currency if prices had remained stationary. If all sales were effected for ready money, and if nothing but coin were used, there could hardly be a simultaneous rise in the prices of all commodities without an increase in the quantity of money. If larger sums are to be used, there must either be more coin or the same coins must pass more frequently from hand to hand, or in other words, there must be a greater efficiency of circulation. If the prices of all commodities rise simultaneously, it must either be because labour has become less efficient in all branches of industry, or because it has become more efficient in producing the substance of which coin is made. The price of a coimnodity depends on the quantity of labour employed in producing it, and on the rate at which that labom* is remunerated, and if the price rises, it must either be because more labour has beeen expended, or because the labourers have received higher wages. It is extremely unlikely that labour should become less efficient in all directions at the same time, so that an universal rise of prices is almost certain to be due to a fall in the value of money ; and we might safely infer that something had happened to render money cheaper, even if we had no direct evidence to show that money-wages had risen. But when the rise of price is confined to a few commodities, it is extremely unsafe to infer that the value of money has fallen -without any direct testimony to the fact that money-wages have risen, and it is equally unsafe to assume that the value of money has fallen merely because its quantity has increased, without reference to the question whether a greater number of labourers have been employed, or a -greater number of commercial transactions effected. In a country where credit is EFFECTS OF CREDIT ON PRICES. 885 commonly given, there might for a time be a general, and even an universal, rise of prices, without any actual increase in the quantity of metallic money, and without any fall in its value. Purchases may be made on credit at prices which are continually rising, and as no coin will be required until the expiration of the term for which credit is given, the quotations of the market may continue to show an upward movement for some months, without the actual quantity of coin in the country being increased. Even when the time of settlement has arrived it may possibly be effected without more coin if the rise has been common to several commodities, and if means are devised for settling the account by transferring the large debts due for one commodity to those who have already contracted large debts for another commodity. Bills of exchange furnish a convenient means for such a settlement. The merchants who have sold cotton at a high price, draw bills for the amount at two or three months' date, and purchase tea, paying for it by accepting bills which 'nail fall due at the same time ; and when the time arrives the two sets of bills may be exchanged for one another, and the debts cancelled with but a small transfer of coin, or without any coin at all. At a time when speculation is rife, the prices of many commodities rise at the same time, and a greater amount of bills are drawn to pay for them. If the bills which fall due at the same time are not equal, but require a larger quantity of bank notes to settle the balance, a larger quantity of notes wiU be issued, or more coin will be -sntlidrawn from the banks for the purpose. Prices rise in what is called a speculative period, because speculators buy up a larger quantity of certain commodities than is usually supplied to that particular market, and thus render it necessary for fresh stocks to be brought from a greater distance than usual, or to be produced in less favourable circumstances, and to be brought to market at a greater cost. In conunon parlance, prices are said to rise because the demand is in excess of the supply, but I have endeavoured to show that this explanation only touches the surftice, and that the real cause of the rise is the increased cost of producing the last quantity which must be brought to market in order to satisfy the requircuieuts of the purchasers. It matters not whether the purchasers actually give ready money for the goods, or merely promise to pay for them, so long as the sellers are convinced that the promises will be kept, for the price depends on the cost of production ; and the producers will continue to produce as long as they arc satisfied that they will be al^lc to sell at a profit. AVe thus arrive at the conclusion which was slowly elaljorated Ijy Tooke — after a long and careful examination of the fluctuations of prices in the English market during more than half a century—" Tliat the prices of commodities do 336 EFFECTS OF CREDIT ON PEICES. not depend upon the quantity of money indicated by the amount of bank notes, nor upon the amount of the whole of the circulating medium ; but that, on the contrary, the amount of the circulating medium is the con- sequence of prices." * This conclusion appeared the height of absurdity to Colonel Torreus, who was undoul)tedly an able and well-informed writer, but who displayed his ability rather in ingenious attempts to make facts conform to a pre-conceived theory, than in framing theories in con- formity with facts. In a pamphlet published in the same year as that of Tooke he cites the above passage, and then observes — " The logical accu- racy of this couclusion may be tested by affirming the analogous proposi- tion, that the prices of commodities in Europe, after the discovery of the mines of South America, did not depend upon the quantity of money indicated by the amount of coin, nor by the amount of the whole of the supply of gold and silver ; but that, on the contrary, the mines of South America, and the increased amount of gold and silver obtainable there- from, were the consequence of the subsequent rise of prices." | Thus Colonel Torrens maintains that the rise of prices which followed the discovery of America was produced by the great increase in the quantity of gold and silver, and that, in the same way, a rise of prices in a country where bank notes are used must be caused by an increase in the amount of the notes in circulation, or of the coin, or of both. • Even the first of these propositions is by no means so certain that it can be taken without qualifications as a basis for a theory, and if the first were true, the second would not be a necessary inference fi'om it. The reason why the value of gold and silver fell after the discovery of the American mines was that those metals could be obtained fi-om the new mines in greater quantities 171 xoroportion to the labotir emjjloyed than had been the case in the mines which had been previously worked. The same quantity of labour produced a greater quantity of silver, and the result was that the same quantity of labour would exchange for a greater quantity of silver. In order that the miners might not be better remunerated than other labourers in proportion to the disagreeableness of their labour, the money-wages of other labourers were raised in the same proportion as those of the miners, and as this rise of wages was not necessarily accompanied by increased efficiency on the part of the labourers, it was necessary for them to raise the prices of the articles which they produced, and it was thus that the rise became general. As it gradually came into operation the quantity of coin was gradually * Inquiry into the Currency Principle, 1844, pp. 123-4, conclusion 12. f Inquiry into the Practical Working of the Proposed Arrangements for the Renewal of the Charter of the Bank of England, &c. By R. Torrens (Second Edition) 1844, p. 44. EFFECTS OF CREDIT OX TRICES. 337 increased, and the increase of the coin was rather the effect than the cause of the rise of prices. It is true that at a time when so httle recourse was had to iDaper-currencj no great rise of prices could have taken place until the quantity of coin in circulation was increased, and the actual rise was slow because many years were required to produce the necessary quantity. But the mere increase of the quantity of the precious metals, unaccompanied by any diminution in the labour required to pro- cure them, wquld not have led to any fall in their value. If many new mines had been discovered, but none of them had been more fertile than the poorest which was previously worked, there might have been a large increase in the quantity of bullion and coin, but there would have been no fall in their value. If it had been thought worth while to work these mines, it would only have been because the consumption of gold and silver for purposes of ornament was increasing, or because an increasing population, or an abandonment of barter rendered a greater quantity of coin necessary. There is no reason why the consumption of gold and silver should not increase from one or other of these causes while their value remains stationary, and it would be extremely unsafe to infer a depreciation from an increase of quantity. Colonel Torrens charges Tooke ^ith inconsistency in explaining the fall of price in the case of other articles by attributing it to an increased supply, and yet maintain- ing that an increase in the supply of money does not produce a fall in its value ; but, in truth, money does not in this respect differ from other commodities. Tooke never contended that the price or the value of wheat was continually diminishing because a constantly increasing popu- lation renders it necessary for a larger quantity to be brought to market every year, nor would any one maintain that the price of coal falls when- ever a larger quantity is extracted from the mines in the course of a year. But even admitting that the value of the precious metals fell after the discovery of America, because their quantity was increased, it would not follow that the same efFect would be produced by an increased issue of bank notes. It is so important that the distinction between the two cases should be thoroughly understood that I propose to devote the pre- sent chapter to explaining as clearly as I can, what are the circumstances in which they differ, and what are the oversights which have led Colonel Torrens and other writers to what I regard as erroneous conclusions. The most important difference between gold and bank notes as regards their effect upon prices is, that the former can be forced into circulation at the pleasure of the holders while the latter cannot be forced into cir- culation at the pleasure of the issuers. When a fortunate digger dis- covers a new deposit of gold, he can at once obtain commodities in exchange for it, because traders in almost every part of the world have z 3:-)8 INCONVERTIBLE TREASURY NOTEB. agreed to part with the whole, or any portion of their stock whenever gold is offered them in what they consider sufficient quantities. The first finder is able to obtain gold with less labour than other people, and yet to buy goods at the same prices as other people, and is therefore more highly remunerated. As the discovery becomes more generaUy kno\vn, other labourers are induced to try their fortune in the same field; and if many succeed in obtaining more gold by digging than they formerly earned in other employments, there is an obpous induce- ment to the local tradesmen to raise the prices of their goods. The diggers on their part are not unwilling to give the gold which has cost them less labour in return for smaller quantities of goods than formerly, for while they spend more with one liand, they earn more with the other. As the discovery of a new mine does not increase the efficiency of labour in producing food, clothing, or other commodities, a general rise of prices is necessary in order that all articles may exchange for one another in i^roportion to their cost of production. The quantity of gold is increased, because it is the interest of every digger to raise as much as he can, and to spend it before prices have risen, and the quantity of coin is increased because j^rices rise. In order that the same eflFects may be produced by an increase of paper as by a discovery of gold, the issuers should have the same power of forcing their paper into circulation as the discoverer has of doing with his gold. The only case where such a power is enjoyed by the issuer, is where the issuer is a government which compels its subjects to receive Treasury notes which it Anil not cash, although they are nominally promises to pay coin, and in such a case, the same results follow from a large issue, as from a discovery of gold. When a government is engaged in a costly war, or from other causes thinks it necessary to spend more than it receives, an obvious expedient for relieving its financial embarrassments is to pay for the articles « hich it purchases by giving promises to pay at a future time, and if when the time arrives it is still unprovided with the means of payment, it can diminish the loss which the contractors would otherwise suffer by enacting that the records of its promises shall be accepted in all transactions between debtor and creditor as equivalent to the sums which they repre- sent. Thus the contractors or civil servants who first receive treasury notes (as such promises are called) are able to pay tliem away to their creditors in discharge of debts previously incurred, and for a time no one suffers any inconvenience. If the government consents to receive its notes in payment of taxes, and the revenue proves sufficient to deft-ay the expenses of government without re-issuing the notes thus received, they may be destroyed, and the debt thus cleared off. If the INCOXVERTIBLE TREASURY NOTES. ^30 notes are ve-issued and yet the total amount is less than that of the coin previonslj in use, the only eflFect will be that the notes will be used as a partial substitute for coin, and will be received at their full or nearly their full nominal value. As the notes cannot be sent abroad, or used for any other purpose than that of paying debts within the country, while coin can be either used to pay debts abroad or melted down and made into some useful article, there is an obvious inducement to use notes in all internal transactions, and to let coin disappear wholly or partially from circulation. A note-holder may be one who has been compelled to receive notes in payment of some debt for which he expected to recei"\-e gold, and there is no way in which he can utilise them except by passing them off on somebody else, who, in his turn, is obliged to dispose of them in the same way, and thus the notes are maintained in circulation. When a government has once begun to issue inconvertible treasury notes (i.e., notes which cannot be converted into coin at the pleasure of the holder) it seldom stops until the amount of its paper far exceeds that of the coin which was previously in circulation, but as the notes are still legal tender (i.e., a legal means of discharging all debts) they still remain in circulation, though their amount is far iu excess of what the people require. But a greater quantity of money cannot be used to do the same work unless its value is reduced, and as soon as the notes have been issued in excess, the value of each becomes so much reduced that tlie whole are worth no more than the quantity of coin which they displaced. Were it not for this depreciation, a government might continue to manufacture money almost mthout expense, and yet obtain as much in exchange for it as those who had raised gold from the mines by the expenditure of much labour. The position of such a government resembles that of a man who has discovered an immense heap of gold. As long as he is content to take from it but a small quantity he may obtain goods at their former prices, while obtaining gold with less labour ; but if he orders a vast quantity of goods in order to make use of the whole of his treasure, he will be forced to pay a higher price for them and will compel other purchasers to do the same. As long as anyone can obtain coin for notes by presenting tliem to the issuer, the notes must be worth as much as the coiu, but when this is no longer the case, and notes arc issued in excess, a discrepancy silities of the writer who stepped forward to vindicate the truth.' " The eulogium contained iu the first of these remarks is well merited, but I should rather apply to this pamphlet the praise which Macaulay gives to Boyle's answer to Bentley, that it is the best book ever written on the wrong side of a question. The history of physical science furnishes more than one instance in which a great man, who was a master of tlie art of arguing, lias obtained an apparent victory over an opponent whose powers of exposition were inferior, but who has since been Ibund to have had some truth at least on his side. Bosanquet was not able to state his views clearly enougli to defend them against tlie attacks of so perfect a master of fence as Ricardo, who, on his part, was always ready to seize on every opportunity ibr making a dexterous thrust. Bosan(piet, for instance, said that bank notes were only issued in (he i|iiantitic8 required to supply the wants of commerce, and Ricardu at once fastened on the exiu'cssion as ])eing too vague, and said that no ([uantity could be too great for sucli a i)urpose, and that if the value of money fell to one- tenth of what it had been, commerce W(->uld at once require ten times as 352 INCONVERTIBLE BANK NOTES. large a quantity. All this is true enough, but it is really beside the question, "which is, whether a large issue of notes can depreciate money, not whether the depreciation of money can cause a large issue of notes. Bosanquet contended that the Directors of the Bank did not increase the circulation at their o^ai pleasure, because it depended on the depositors how many notes should be issued, and how long they should remain in circulation, and Ricardo did not give any satisfactory answer to this argument. It might be thought that when the Bank was relicTed from the obligation of cashing its notes on demand, the Directors would have become less cautious in giving credit, but this cannot have been the case, for, as Ricardo himself mentions, the amount of the annual dividend and the price of Bank Stock doubled during the period of the restriction. Soon after the appearance of Ricardo's pamphlet the House of Com- mons appointed a Committee (which has since become so celebrated as " The Bullion Committee ") to investigate the causes of the high price of bulhon, and their report agreed in the main with the views of Ricardo. Like him, they ascribed the high price to an over-issue of bank notes, and, like him, they recommended a return to specie pay- ments. Lord King gave a practical turn to the controversy by sending a circular to his tenants, informing them that he Vi'ould not receive Bank of England notes in payment of their rents except at a discount, and requiring them either to pay in gold, or, if they paid in paper, to bring as much as would purchase the amount of gold which was due. He was a Political Economist who shared tke views of Ricardo on this subject, and his object in taking this step was to bring public opinion to bear on the Directors of the Bank, and thus compel them to restrict their issues. It thus became necessary for Parliament to decide whether any action should be taken in the matter ; and, in spite of the report of the Bullion Committee, an Act was passed depriving landlords of the power of distraining on tenants who offered j3ayment in notes, and the resumption of specie payments was not ordered till 1819. Bank notes ■ were not actually made legal tender till 1832, and though landlords were not allowed to distrain, they, like all other creditors, were able to sue at common law for payment in gold during the continuance of the restriction. The interference of Parliament, of course, settled the pecuniary question between Lord King and his tenants, but the econ- omic question could not be disposed of in such a summary way ; and though the law was obeyed, the House of Commons has incurred no small amount of ridicule for its conduct on this occasion. The House agreed to a string of resolutions moved by Vansitart, the ClianceUor of the Exchequer ; one of which, the third, affirmed that Bank of England notes were equivalent, in public estimation, to the gold which they CONVEETIBJ.i: D.LN'K XOTES. 3b'6 represented. This resolution has become one of the stock examples of the folly of legislative bodies. The late Sir John Bowriug stated, as instances of the ignorance of English politicians at the beginning of this century, that a Minister informed Parliament that Demerara \vas an island, and that Parliament itself declared that a pound-note and a shilhng were worth a guinea, which sold for twenty-eight shillings in the market ; as if the economic ignorance exhibited in the latter case were fully equal to the geograpliical ignorance displayed in the former. It would seem, however, that though the language of the resolution was unfortunate, those who voted for it intended it to represent a correct opinion. They meant to affirm that notes were received in all ordinary transactions at the same rate at which gold woiild have been taken if tendered, and that nothing was said of any reduction in consideration of payment in gold. In the United States, at the present time, com- modities have two prices, according as they are paid for in gold or paper, but this was not then the case in England. Prices were fixed in accordance with the value of the articles as compared with gold, but bank notes were received in payment without any discount, whether the premium on gold was high or low. The premium made its appearance in subsequent years, but it was not a constant phenomenon, but only appeared when gold was required for exportation. "Whatever difference of opinion there may be respecting the liability of inconvertible notes to become depreciated, it seems strange that any- one should suppose that notes can become so when people have both the power and the will to obtain gold in exchange Ibr them by simply taking them to the bank which has issued them. I say, the power and the, will for a law is not enough to secure convertibility, if the habits of the people are opposed to it. Strange as it may sound to an Euglishmau, public opinion in the United States is said to condenni as "sharp practice," the presentation of a note which professes to be payable on de- mand, and the exaction of the fulfilment of the promise. Bank notes thus become practically to some extent inconvertible, and are sometimes depreciated to the extent of 3 or -i per cent., as they are less useful than gold. But where, as in England, ])ank notes are constantly presented for payment to the banks which issue them, there cannot be any dilfer- ence between the nominal and the actual value of notes as long as the bank remains solvent. It is probable that tliis would never have been disputed if there had not been a controversy re.-;[)ccting the deitrecia- tion of notes at a time when they were inconvertible, but the contro- versy has survived tlie circumstances which gave it birlh. The cause which Bosanquet i)leaded was taken up and more ably handled by Tooke, whose voluminous "History of Prices" is an exhaustive refuta- A A oo-i: COIfVEETIBLE BA2sK NOTES. tiou of the fallacies and misstatements put forward by various "writers, who ascribed almost every rise of prices to the capricious manao-ement of the Bauk of England. Colonel Torrens came forward to defend the accuracy of Ricardo's opinions against the assaults of Tooke, and though in the meantime the Bank had resumed specie payments, he neverthe- less maintained that it could and did depreciate its notes by over-issue. He could not, indeed, maintain that any note-holder "\^■ould buy gold at a premium when he could obtain it at par by simply presenting the note at the bank, but he maintained that the presentation itself was a proof of depreciation. As Ricardo had contended that gold could not be exported unless it was depreciated, so Torrens contended that a note could not be presented for payment unless its possessor found that it was less useful to him than gold, and Torrens considered that this was the same as depreciation. lu fact, however, notes are frequently pre- sented, not because the holders have any fear that they will not be received at par, but simply because they desire to get change for making small payments, and the presentation of a note no more proves that it is depreciated than the sendhig of gold to the Bank of England in exchange for notes proves that gold is depreciated. Perhaps Tooke's language on this subject was somewliat faulty, for he maintained that bank notes could never be issued in excess, because, Avhenever any one had any notes A^-hich he did not require, he would take them to the bank and the superfluity would be at once removed. Torrens replied that this amounted to contending that the existence of the effect proved the non- existence of the cause, and he admitted that convertible notes could not ])C permanently depreciated, but contended that there might be a tem- porary depreciation. It is singular that he should have contended with so much earnestness for such a paltry victory, for if Ave admit his argu- ment to be correct, it amounts to nothing more than saying that a bank note may be received by a person Avho does not wish to keep it, and that it is depreciated during the half-hour Avhich elapses while the holder is walking to the bank and getting it cashed. His argument Avith regard to the exportation of bullion is much the same as Eicardo's, although he had had the advantage of studying the facts which had been collected by Tooke to shoAV that an export was frequently brought about by circumstances uncoimected with the state of the currency. The most common cause of an export of bullion is a bad harvest, Avhich pro- duces a sudden demand for foreign corn AA'ithout producing a foreign demand for the commodities of the corn-importing country. This is Avell knoAMi to all persons engaged in business, and Avas stated by Thornton and Bosanquet in Eicardo's time, as it AA-as afterwards by Tooke. Eicardo's reply has been already noticed, but that of Colonel CONVERTIBLE lUXK NOTES. 355 Torrens is somewhat different, and is an endeavour to save the theory while admitting- a fact which is in direct opposition to it. He says : " When from a deficient harvest, the proportion between the (luantity of commodities and tlie amount of circulating medium becomes less in any particular country than in other countries, the currency of that country, although not increased in actual amount, is rendered relatively redund- ant. And should the currency consist of convertible paper, the issue of such paper upon whatever securities, or however urgently demanded, would be an excessive issue, leading sooner or later to inevitable contraction, more abrupt and calamitous the longer it should be delayed." * Thus, Avliile admitting that the export of bullion is caused by a bad harvest, he nevertheless ascribes it to a redundant currency, and says that this very redundancy is caused by the bad harvest. This may save the theory, but only by depriving it of all value, for if the currency is said to be redundant merely because the prices of one or two articles have risen, it may be called redundant at any time when it suits the purpose of the writer, and no light is really thro^^'n on the causes of the export of bullion. The real question is Avhether an increase of bank notes pro- duces the same eflFect as the discovery of a fertile mine upon the foreign trade of a country, and this question cannot be solved by merely calling the currency redundant whenever bullion is exported. That bankers have no power to determine the amount of their circulation is a fact which is patent to all who have attentively observed the mode of their operations. Every one who lias ever presented a cheque to a bank knows that he has been at once asked " How will you have it ? " and according to the nature of his reply has received notes, or gold, or both. This is the only way in which notes can come into circulation ; and thus, unless the law interferes, the amount of the issues is entirely determined by the customers or those to whom they give their cheques. As, moreover, persons who do not require the notes which they receive send them back to the l)ank, either directly or through the medium of other banks, it is the public uhich determines the length of time for which the notes are to remain in circulation. But, say Ricardo and Torrens, if banks have no power of forcing notes into circulation, how did bank notes ever come into use at all ? If the circulation was already sufficient before banks were established, how were bank notes able to su])plant coin except by depreciating it and expelling it IVom (he country? The difiiculty is only apparent, for though it is true that banks could not, in the first instance, ol)t;uii a ••iimhif i.m \\>v (iicir notes * Principles and Practical Operation of Sir Robert Puerb I'-lll of I84i, &c. London, 1818, p. 7G, 356 COA'VERTIBLt BANK KOTE.S. Avitliout ofleriug them to their customers, yet it is the customers who determine the amount which they will take. Persons who would other- wise have asked for coin ask for notes instead, and the coin is gradually paid back into the banks, while the notes take its place in the circula- tion. Bankers, finding that coin is not asked for so much as formerly, are not obliged to keep such large reserves, and as it is ahnost always necessary to send bulhon to some foreign country or other, the surplus gradually disappears. Ricardo and Torrens would, no doubt, say that in such a case gold is redundant, and, in a certain sense, it is, but it does not follow that any rise of prices, or any fall in the value of gold takes place. At all events, an export of bullion under such circumstances is not a thing to be deplored, but is a benefit to the country. It may be as well briefly to recapitulate the principles Avhich it is the object of the present chapter to establish. Convertibility affords the only infallible means of securing that the value of a paper currency shall always be equal to that of the gold which it represents. When inconvertible paper is issued to defi'ay the expenses of a Government there is no limit to the possible extent of its depreciation, because the Government may force unlimited quantities into circulation. Such a Government is in a position similar to that of the discoverer of a mine, and it is not without reason that the French apply the name of ** papier-monnaie " to inconvertible paper. When the notes of a bank are made inconvertible, but the bank is allowed to continue its business just as before in all other respects, there may be some depreciation, but it is neither so great nor so permanent as in the case of Treasury notes. When bank notes are practically convertible they can never be depre- ciated. Bank notes, whether convertible or not, provided only that they are issued by the banks according to the requirements of their customers, can never produce a general rise of prices, but the amount of the circulation depends upon the general range of prices and the amount of business done. CHAPTER YI.— RESTRICTIONS ON BANKING. FREE TRADE IN BANKING — PRIVILEGED BANKS — JOINT STOCK BANKS — ISSUE OF NOTES — BANK OF ENGLAND — COLTsTRY BANKS — SCOTLAND AND IRELAND. The business of money-lending has for ages been viewed with disfavour, and it is not difficult to understand why there should always exist a prejudice against men who seem to earn a living by taking advantage of the necessities of other people. In some countries the lending of money at interest, or, as it is called, usury, has been totally prohibited ; while in others it has only been allowed to be practised by persons standing in the position of social outcasts. As civilization advances, the prohibition of usury is found to be so inconvenient that legislators content themselves with regulating a trade which they cannot suppress ; and allow interest to be charged, provided that it does not exceed a certain maximum. Although the Usury Laws have now been repealed in England, France, and other European countries, the notion still seems to prevail that money-lending is a business which, more than others, requires to be watched over and regulated by the State. Even those who are most anxious to secure to other traders the most complete liberty to manage their business in whatever manner may seem best to them, are not inclined to admit that the same arguments are equally applicable to the case of bankers as to those of corn dealers or sugar refiners. Cobden, who devoted some of the best years of his hfe to an agitation in favour of Free Trade in corn, was one of the supporters of the Bank Act of 1844, which imposed the most stringent and unheard of restrictions on trade in money. It is remarkable that the American protectionist, ^Ir. Carey, is in favour of allowing bankers to manage their business in their o^^'n way, without interference from the Government. It would appear, therefore, that neither of these eminent men has been led to his conclusions by political considerations as to the value of liberty in the abstract, Ijut that each was guided by his opinions as to the teaching of Economic Science. It is, therefore, of some importance to consider what light can ])e thrown on the political question l)y reference to economic principles ; and this is the object of the present chapter. .;V.s an instance of the views commonly held respecting tlie propriety of granting to bankers the same liberty which all other subjects consider 858 FEEE TRADE IN BANKING. themselves entitled to enjoy in the manao-ement of their own affairs, I may cite a passage from the well-known work of Tooke, who was one of the most strenuous advocates of the repeal of the Corn Laws, ^^■ith whose mischievous ellx^cts he, as a corn dealer, was practically and most disagreeably acquainted. He says : — " I agree with a writer in one of the American papers, who observes that Free Trade in Banking is synonymous with Free Trade in Smndling. They (Claims for Freedom of Banking) do not rest in any manner on ground analogous to the claims of freedom of competition in production. The claims for such freedom of competition are on the part of the public, and are alone of paramount consideration. But the issue of paper substitutes for coin is no branch of productive industry. It is a matter for regulation by the State with a view to general convenience, and comes within the province of police." (History of Prices, vol. 3, chap. 4, sec. 3, page 20G.) That a ^\Titer who is so honourably distingaished by moderation and fairness, should endorse so strong an expression as "Free Trade in Swindling " as an epithet to denote a system of which he did not approve, affords a remarkable instance of the extent to which the judgment of the calmest enquirers may be perverted by their feehngs. Tooke might have remembered that in most instances in which the State has stepped in to regulate a trade, it has done so on the ground that such a course was necessary for the prevention of fraud, and yet no one llo^v contends that the public interest would he better served if the trade guilds were re-invested with their ancient powers. Those who advocate Free Trade in Banking do so on the ground that such a system is the best for the public interest, and not merely because they consider that bankers have a right to do as they please in their own business. It is true that banking is no branch of productive industry, but this is equally true of corn dealing, ^\hich is simply a distribution of corn already produced, and Tooke gives no reason why an argument which is applicable to productive should not equally apply to other kinds of industry. Englishmen have now been convinced that the supply of corn can be best maintained by allowing corn dealers to buy such quantities as they require at whatever time they choose, from any producer, whether native or foreign. Why then should we suppose that the supply of paper substitutes for coin would not be best maintained by allowing bankers and their customers to bring them into circulation in whatever quantities, and at whatever times, they find to be mutually convenient. It is no answer to say that it is a mere matter of police, for this is begging the very question in dispute, and not telling us why it is a fit subject for State control. Tooke goes on to expatiate on the inconvenience of a circulation consisting of very small notes, and asks why, if nothing FREE TRADE IN BAXKIXG. 359 except the discretion of the banks is to determine the minininni amount of a note, thej should not issue " shin-plaisters," as the Americans call notes of very small amounts. He might as ^Yell have asked why a law- should not be passed to regulate a minimum (juantity of wheat or of flour, which should be sold at one time, and the answer to either question would be equally simple. Either the small note is convenient or it is not. If it is, a positive injury would be done by preventing its circula- tion, and, if it is not, the public would not ask for it, or accept it when offered, any more than they would purchase wheat in quantities too small to be convenient. It is but just to Tooke to bear in mind that the above passage was published in 1840, before he had become fully convinced of the merely passive character of banks in regard to the extent of their issues, and that he strenuously oj^posed the act of 18-44, which was based on the contrary assumption. Cherbuliez* considers that competition will not suffice to protect the public in this as in other trades, because the public have not sufficient knowledge to discriminate between safe and unsafe banks. But if this argument proves anything, it proves too much, for if the ignorance of the public is a sufficient reason for legislative interference in its behalf, such interference would be quite as much called for in other trades, and most of all in those which supply the necessaries of life. The public cannot tell what frauds may be practised by dealers, who must necessarily be more intimately acquainted with their o^\^l business than the public can possibly be, and who must always have some power of using their superior knowledge for dishonest purposes. The public cannot tell for certain which are the banks that are about to fail, but they can tell which are those which have stood the test of successive commercial crises, and they have some means of knowing which are those that are managed by persons of upright character. If the government steps in to prescribe regulations which are to prevent banks from ftiiling, the effect will be that many people will regard the banks as safe because these regulations are complied with, instead of exercising their own judgment and discrimin- ation. As ]\Ir. Spencer somewhere says, to pro\'ide means for avertiug the consequences of folly is to people the world with fools. Thus even if the State by laying down regulations for the guidance of bankers could prevent the public from suffering any considerable pecuniary loss through the failure of banks, it might still be regarded as a questionable benefit, for it would 1)e purchased at the expense of the intellectual energies of the people, whicli would suffer in its capacity for self-control to the same extent as it was subjected to the control of the State. But what reason * Vol. II, Chap, iv, sec. iii, \k 170. 360 FREE TRADE IN BANKING. is there to suppose that the government can obtain the desired end ? A long succession of commmercial crises, in one of which as many as seventy banks were swept away, might have been sufficient to teach Enghshraen at least that State-controlled banking cannot afford infallible security. It may be safely granted that competition does not attain perfection in this any more than in other departments of industry, but this alone is not, as Cherbuliez seems to suppose, sufficient reason for abandoning it, for we must first have some reason for believing that State regulation will serve us better ; and no satisfactory reason, or at least none which is satisfactory to my mind, has yet been produced. It seems to me that Mr. Spencer, who has discussed this question with his usual vigour in his Essay on " State Tampering with Money and Banks," and more briefly in his "Social Statics," has completely proved his point, that the interference of the State in this matter is as needless, and as mischievous, as in the case of trade, or of religion. Why, he perti- nently asks, should it be supposed that ])ankers are more desirous than other classes to ruin themselves ? Bankers fail because they give credit to persons who are unable to repay what they have borrowed, and what more eflFectual means can be devised for rendering them cautious in this respect than is already provided by the knowledge that bankruptcy is the certain consequence of any grievous error. All dealers are obliged to exercise caution in giving credit, but to the banker it is more especially necessary, for giving credit is the very essence of his business, and it is therefore to be presumed that he will be fitted for the discharge of his difficult duty if anyone can be. In like manner those who entrust their money to the keeping of bankers are obliged to exercise caution and discrimination in selecting the firms or companies with which they will deal, and they have the strongest motive of self-interest to take all possible pains to arrive at a right conclusion. If either the banker or his customers are reckless, their failure will serve as a warning to others, and wiU at least prevent them from incurring further liabilities, and so put an end to the mischief which they are doing. Every commercial crisis weeds out a number of banks which have been imprudently managed, and their disappearance brings more custom to the better-managed ones which have survived the trial ; so that there is a process of natural selection constantly going on, preserving the strong, and destroying the weak, and continually adapting banking institutions to the wants of the society in which they exist. All that a government can reasonably expect to do for its subjects is to prevent the continuance of unsafe banks, and this object is already attained by the natural opera- tions of commerce without the intervention of the state. No government can prevent its subjects from incurring debts which PRIVILEGED BANKS. 361 they are unable to pay, and without doing this the solvency of bankers cannot be secured. Nor is this a matter in which it is the unquestion- able duty of the government to attempt something, even if it cannot attain complete success. It is, indeed, bound to see that such of its subjects as are able to do so pay their debts ; but it docs not follow that it ought to prescribe rules which it thinks calculated to prevent its sub- jects from incurring debts. Even if its interference were in some degree successful, we might still grudge the time and labour expended on it by the legislature amd executive which might have been more profitably devoted to improvements in the administration of justice. But, in truth, experience abundantly proves that its interference is never successful, but that, on the other hand, it produces inconveniences which were not contemplated when it was first resolved on. There are three courses which have been commonly adopted by governments in dealing with this subject. Sometimes they have con- ferred special privileges upon one or a few banks, sometimes they have prohibited the establishment of banks whose constitution did not conform to a certain type, sometimes they have restricted the issue of notes. All these methods are united and blended in practice, for it is the privilege of issuing notes which is most commonly confined to a favoured bank, and the State does not usually interfere with the management of non- issuing banks. But as each of these methods might be defeuded on different grounds, they may with advantage be considered separately. It is a common practice for a government to confer valuable privi- leges on the bank with which it deposits its own money, in return for which the bank lends a large sum at low interest at the time of its for- mation, and is expected to be ready to assist the government in time of need. In France, for example, the " Bank of France " is the only insti- tution which is allowed to issue notes, and the same monopoly is eujoyed by the " Bank of Austria " in its owu country. The Bank of p]ngland has never enjoyed such a complete monopoly ; but it is the only English bank which has l)een allowed to increase its circulation since 1HI4. By establishing such banks it may Ijc supposed that governments seek to I)rovide their subjects with i)laces wlierc they may sal'ely deposit their money, and if these banks were sufficient to sujiply the wants of their respective countries, this object might be attained, for they are generally managed with great prudence and success, and it is very seldom tliat one of them fails. Unfortunately, they can Inu'dly suilice lor all the peoj»lo who would be willing to deposit money with them, and whatever bcntifit they may confer on the ca[)ital, and on a few large towns, they still leave the inhabitants of the country towns exposed to the danger of loss from confiding their money to less trustworthy hands. The Bank of England 362 PRIVILEGED BANKS. has only eleven branches, and though the Bank of France has sixty, even this does not come vip to the number of one for each Department, which the French Government at one time ordered it to establish, but was obliged to refrain from compelling it to do. The absence of branches of the privdeged banks does not prevent peoj)le fi'om borrowing in the country towns, for they find plenty of bankers \vho, though not able to issue notes, are still able to lend and borrow money ; and the people are still exposed to all the losses which imprudent banking entails. Even in the large towns where the privileged banks carry on business, they are not able to obtain complete possession of the field. Their privileges enable them to oljtaiu great success, but this very success, by rendering them old and wealthy, renders them indisposed to enter upon any new- fashioned coarse, so that they often let slip opportunities of extending their business, which are eagerly seized on by younger and less wealthy rivals. While, therefore, these privileges do not secure the public from pecuniary loss through the failure of banks, they give rise to a new danger, by entrusting the destinies of a whole country to the discretion of a very few men. Daring a commercial crisis, the banks of issue are best able to supply the increased loans which the public always require ; for at such times there is a scarcity of specie, and these banks alone have the power of creating money in the shape of notes. If, as in England and Austria, there is only one bank which can increase its circulation at such times, the most important interests of the commercial community are confided to the discretion of the directors of a single institution, and the danger of a serious mistake must be much greater than it would be if the collective Avisdom of a dozen banks were brought to bear on the best mode of meeting the difficulty. Whenever a crisis occurs the directors of the bank are abused for not doing enough to relieve the pressure to which the community is exposed, and although the complaints of deljtors must be regarded with some suspicion, proofs are not wanting that they are not without foundation. The Bank of England has refused, in the midst of a crisis, to advance money on the security of railway debentures, although these are con- sidered to be such safe investments that trustees are allowed by law to purchase them. The Directors of the Bank are well aware that these debentures are safe, for, as Mr. Thomson Haukey mentions in his work on banking, they have invested a part of the proprietors' capital in this manner. But they have a rule not to advance money on such securities, and they adhere to it. In like manner the Bank of Austria, during the crisis of 1873, declined to lend money on the deposit of certain stocks on which it had not been accustomed to lend; although, as regards many of these, the Directors were well aware that they aflForded ample PKIVILEGED BAXKS. 363 security. It is still more sino-ular that they even refused to lend notes on the deposit of gold bullion, by which they would not have been exposed to any risk whatever. One of the statutes of the bau-k required that if a person wished to borrow on the deposit of bullion he must bring at least eighty per cent, of it in silver, and only twenty per cent, in gold. This statute had been framed at a time when silver was the standard of value, but it was still adhered to in 1873, long after gold had usurped the chief place in the circulation. I do not say that mistakes would not be made if all banks were left to do as they liked, but if such were committed the Government would at least be m no way responsible, which cannot be said under the present state of things. In the examples just given it does not appear that either bank gained any advantage by refusing to act in the manner required, and it is evident that those who were refused assistance must have suffered serious loss. In the discussions which have taken place on this subject it is fre- quently asserted tliat England is the peculiar country of commercial crises, and it is then sought to explain how these visitations might be averted by a reform in our currency laws. In i'act, however, we have no such unenviable distinction, and the notion has, probably, no other foundation than our comparative indifference to w^hat happens in other countries. No reason can be given for assigning the name of crisis to the state of things which prevailed in London in 1866, and refusing it in the cases of Vienna in May, 1873, or of New York, in September of the latter year. In the United States, although banking is not free, the privilege of issuing is not so unequally shared as in England, and it is necessary for the leading banks to concert a common plan of defence when a panic has become general. This plan is usually what amounts to a virtual suspension of payments, as they refuse to cash any large cheque unless presented by another banker ; so that what is taken from one bank must be paid into another, and the cash reserve of the whole body remains undiminished. Perhaps the law courts, if they were appealed to, might comi)el every bank which adopted this course to stop payment altogether, but nobody would gain anything by calling in the aid of the law to take such extreme measures. Such a course is the only one which the banks can take to save themselves and their customers ; and its beneficial effects are soon seen in the cessation of the i)anic and the maintenance of many banks whicli would certainly have failed if exposed to a run. It is not, however, the monetary i)anic which constitutes the chief evil of a crisis, nor does the cessation of the panic put an end to the distress which the crisis has caused. The evil shows itself in the ibrm of a scarcity of money, and a failure of credit, but the real evil is the scarcity of the connuodities which 36-i PRIVILEGED BANKS. money is required to purchase, and the faihire to produce the commodities for which credit is given. The most common cause of a crisis is the faihire of the harvest, which renders it necessary to export large quantities of specie to pay for food, which exportation causes a great diminution in the cash reserves of the banks, and compels them, in self-defence, to endeavom- to diminish their advances. They naturally decline to lend, at such times, to persons of whose solvency they have least confidence, and hence many traders who have been for some time struggling on with the aid of borrowed money, are obliged all at once to suspend payment. Their creditors desire to obtain fresh advances to replace the money which they have lost by the failure, and as the demand for loans is thus increased, failure follows failure among traders and bankers until they culminate in the stoppage of some large house which has been hitherto regarded as of unquestionable soundness. Such w'ere the houses of Overend and Gurney, whose failure was the occasion of the English crisis of 1806, and Jay, Cooke, & Co., whose failure brought on the American crisis of September, 1873. In neither of these cases was the monetary panic of any long duration, and, indeed, in the former case it lasted no more than two days ; but in both there was a consequent stagnation of trade, w^hich continued for many months. It is not so much the failures in the City as the closing of manufactories, the dismissal of labourers, and the retrenchment of expenditure by all classes which constitutes the disaster w^hich is deplored whenever a commercial crisis is spoken of. A bad harvest raises the price of food, and compels people to spend less upon other things, and the inevitable consequence is that many persons who have been accustomed to produce certain kinds of articles are thrown out of employment. The labour of a large section of the community, the agricultural class, is less productive than before, and as less is produced there is less to exchange, and the whole community feels the loss. Monetary legislation cannot enable people to consume what has not been produced, nor can it enable human labour to become equally productive in all seasons. It is not, therefore, with a view of preventing commercial crises that I advocate the removal of all legal privileges at present enjoyed by various banks, but merely in order that the people may have the full benefit of whatever can be done by human eflPorts to mitigate these dreadful calamities. It is not because a system in which there are many competing banks would be absolutely safe, but because it would be safer than one in which everything depends upon one bank that I advocate its adoption. Mr. Bagehot, while admitting that such a system would be better than that which we now maintain, does not venture to propose it, because he considers that the habits and prejudices which the old system has engendered are now too PHIVILEUED BANK.-5. 865 strong to be got rid of, and that he must be content to reform instead of abolishing. Such diffidence may be cautious in a practical banker who wislies to see his proposals carried into effect at once, but as I am here discussing a scientific question I see no reason why I should not openly contend that it would be better to establish freedom of banking, and should not expect that time, which has removed so many economic prejudices, will remove these also. The experience of Scotland and Ireland shows that a country suffers no loss from the want of a bank endowed with extraordinary privileges. It may, indeed, b3 remarked, that whatever disadvantages those coun- tries have suffered through the absorption of their legislatures in the Imperial Parliment, they have at least gained something by the enjoy- ment of comparative freedom in banking matters. Each of them formerly possessed a baidi which enjoyed a monopoly of issuing notes in the metropolis, and in each case the privilege which had been granted for a term of years was allowed to expire on the first opportunity after the passing of the Act of Union. The transference of the capital to London seems to have rendered it more difficult for the authorities of the privi- leged banks to persuade the ministers and parliament that the interests of a small corporation were identical with those of the people. In both countries the indifference of parliament lasted long enough to allow several issumg banks to spring up, and to familiarise the people with their notes to such an extent that these have almost superseded coin. This universal confidence is not misplaced, for bank failures are rare, and certainly do not cause more suffering than those which take place in England, in spite of all the care which the government takes to ])revent them. The object of English legislation has been to limit the number of issuers, but this object has been much better attained in Scotland and Ireland by the simple action of competition, which swept away numerous small banks, and practically confined the business of issuing notes to a few large ones long before the Acts of 1845 prohibited the establishment of any new ones. There is no reason why the government should not entrust its money to the keeping of a bank and make certain conditions to ensure that the latter shall be able to fulfil its engagements. The practice of the United States Government for more than thirty years has been to keep its own cash in the Treasury, and not to employ a Ijank at all. The effects of this policy arc that a much larger reserve of gold has to be maintained to meet the expenses of the government than would be necessary if it were kept by a bank which could lend out with one hand what it received with the other; and that tlie government is con- stantly exposed to the suspicion of making an improper use of its oppor- tunities of speculating in the money market, liy empluying a bank, a 366 JOINT-STOCK BANKS. government avoids both these disadvantages, and also confers some benefit upon those persons to whom it has to pay money, as payments are hkely to be more punctually and conveniently made by a bank than by a State department ; but all these advantages may be quite as well obtained without conferring any privileges on an institution which already receives a substantial benefit by acquiring so valuable a customer as the government is pretty sure to be. Mill did not go beyond the truth when he said that for a long time the English Government made safe banking a punishable offence. In order to protect the Bank of Eugland from unpleasant competition, it was enacted that no bank which had more than six partners should be allowed to carry on business in England. The business of banking- was thus confined to the Bank of England and a host of private firms ; and the repeated failures of the latter were adduced as reasons for further legislation. Such is the manner in which legislatures always proceed, first providing some expedient for curing an evil, and, when they find that their remedy produces no effect, trying a new one, without suspecting that it is their own interference which is likely to aggi'avate the evil. In Scotland and Ireland, Avhere joint-stock banks have long- been permitted to be established, they have almost entirely engrossed the business, and during the last fifty years when they have been allowed to exist in England, they have been in like manner swallowing up, or otherwise putting an end to, private banks, and giving promise of eventually monopolising the trade. In 183J: they were first allowed to be established in London, and the foundation of the London and Westminster Bank in that year marks the commencement of a competition Avhich has proved extremely formidable to the private banks, and is not to be despised by the Bank of England itself. In both these quarters, accordingly, the intruder was viewed with no friendly eye, and the steps which were taken to thwart its growth were characterised l)y equal meanness. The private bankers refused to admit joint-stock banks to the Clearing House, and persisted in doing so until ISoi, thus causing considerable inconvenience to their rivals without any advantage to themselves. On the other hand, the Bank of England refused to open a drawing account with the London and Westminster Bank until 1842. The effect of both these courses was the same, viz. : to compel the new bank to keep a larger reserve ; but in spite of this persecution the new bank grew and flourished, and is now one of the wealthiest in London. Its history has been related with a pardonable pride by its first manager, Mr. Gilbart, in his " Practical Treatise on Banking." Other joint-stock banks have been successively established, and their published balance- sheets show that their business is constantly increasing. That of the JOIXT-STOCK BANKS. 367 private banks, ou the other hand, is behevecl to be stationary, if not actually diminishing, and no new one has been established for many years. The reason why the jomt stock principle has proved so successful in this instance is obviously that it affords a better guarantee to the public than a few individuals can possibly do. Wherever joint-stock companies are formed they can easily command a larger capital than private firms ; but this docs not, in all trades, give them a decided advantage. In railways the advantage is so great that it scarcely ever happens that one is owned by a single individual, and, although it is not so overwlielming in the case of banking and insurance, it is still veiy great. In both these trades the public have to entrust their money to othei"s in the hope of receiving it back at a future time, and it is, therefore, essential that they should have good grounds for this confidence. A large company secures this, partly by raising a large sum to begin with, and partly by including a large number of shareholders, who may be called on to contribute further sums if the company should suspend payment. The collective wealth of the shareholders is likely to be gTcater than that of the partners in any private firm, and even if (as imder the present system of limited liability) they are only bound to contribute a definite sum, this amount is always large, and is always known to the pubhc, who have thus a tolerable guarantee that they will obtain payment of their debts. It is accordingly in both these trades that the competition of joint-stock companies has been most successful in driving out private firms, although many of the latter are still able to hold their ground. How great is the security which they afford to the pubhc may be judged from the fact that during a hundred and fifty years no depositor has ever lost anything by the failure of a Scotch joint- stock bank. The shareholders have had to bear considerable losses, and no doubt many of them have been ruined, Init the main object of the institutions, viz. : to provide safe places in which to deposit money, has been completely attained. ^Ir. Bagehot considers that joint-stock banks have a gi-eat advantage in their constitution, which provides that the more responsible work shall Ijc done by a pernuuient official, tlie manager, who receives a higli salary, and is merely supervised by the directors, who have a less intimate knowledge of the business. Tliis may l)e so ; but there is no reason why private firms should not secure equally competent managers of the same class, if the ])iibb'c \\ould i)Iace equal confidence in them. He says that no cnie but a xvvy rich man can start a bank, and that no very rich one will start one ; but thdiigh this may be true enough, it only half accounts for the gradual decHnc uf private ones, and the real cause must be, as I have said, that large conq)auies can oiler a better guarantee to the public. As, therefore, 368 ' JOINT-STOCK BANKS. this is the safest method of banking, and as it was formerly prohibited, there is no exaggeration in the statement that safe banking was formerly a pnnishable oflFence. The impediments which have been put in the way of joint-stock banking have had other inconveniences besides that of forcing the people to confide their money to untrustworthy hands. They have com- pelled many persons to do Avithout banking altogether, as we may see by comparing the proportion of banks to the population in the three kingdoms. In England there is one banking office for every lo,000 of the population, while in Scotland there is one for every 4,000, or about three times as many in proportion. It is true that in Ireland the pro- portion is slightly smaller than in England, but even this must be considered as relatively larger when we take into account the much poorer and more backward condition of Ireland. By thus starving as it were the monied classes of England, the Government has compelled them to make a much larger use of coin, and to undergo more inconvenience on all those numerous occasions when cash is required. The joint-stock banks have introduced into London the practice of allowing interest on small deposits, and have thus conferred a great benefit upon many persons who had saved money which they could not invest. By pre- venting the establishment of these companies the government inflicted an injury upon these prudent persons which it has but tardily and imperfectly repaired by the establislunent of the post office savings banks. In Scotland the system of joint-stock banking gi'ew up gradually, while in England it started into life on the repeal of the prohibitory laws. "When they were first introduced into this part of the island there was, of course, a great difficulty in obtaining a sufficient number of capable managers, the business being a new one, while Scotland could not furnish as many as were required. The failure of some of the first which were established was due to this difficulty, and, as usually happens, though this was owing to the interference of the government it was made use of as a gi'ound for advocating further interference. Though the London business of the Bank of England has not suffered any diminution since it was exposed to the competition of other companies, its countiy branches have found more difficulty in holding their gromid, and three of them have been actually closed. These were situated at Exeter, Gloucester, and Norwich, and their abandonment indicates that the Bank of England is not able to modify its procedure so as to meet the requirements of an agTicultural centre, although this has been easily accomplished by other joint-stock banks. The gradual reduction in the number of private banks has not been entirely owing to their failure, but some have been wound up on the death of a partner, JOI^-T-.STOCK CAXK,«. - SfiO while others have been amalgamated witli other 'private bank?, and others have been converted into branches of joint-stock banks. How great has been the reduction from all these causes combined may be judged fi-om t^vo facts. In 1844 there were 204 private banks wliich issued notes, while 30 years later there were only 120. In 1810 there were 40 private banks admitted to the London Clearing House, while GO years later there were only 11. Of course there have been many failures of joint-stock banks, and when these have occurred they have produced distress as much exceeding that caused by the failure of a private firm as the wealth of a company exceeds that of a firm. "We cannot yet expect, and perhaps can never expect, that the management of all banks ^nll become so good that failures will never occur, but if such a consummation is ever attained it will, be by means of companies, and not by private firms. If bankers had never issued notes it is possible that they would have been allowed to carry on their business in peace without interference from the State ; but the issuing of paper money seems to be an usur- pation of the prerogative of the Sovereign, and thus to call for some control on his part. The reason why the Government usually monopolises the coining of metallic money is, that such a course is thought to be the best for protecting its subjects against fraud. If no individuals had ever issued coin intentionally made of less than their alleged fineness, there would have been no occasion for the Government to meddle in the matter, and even after such frauds had been practised the Goveniment might have limited itself to punishing forgers when detected. It has, how- ever, been generally thought most convenient for the Government to issue corns of which it guarantees the weight and fineness ; and as the practice is tolerably convenient, and is ft'ee from the abuses by which it was formerly disgraced, it has met with general approval. But, as so frequently happens, the slightest transgression on the part of the State beyond the limits prescribed to its action by the duty of protecting person and property is made a pretext for further transgressions, and because Government controls the issue of coin, people argue that it ought to control the issue of notes. Some go so fiir as to recommend that the State alone should issue notes, and that all private issues should be prohilnted by law. Others consider that private issues should be allowed, but only on condition that securities for the full amount should he deposited with a State department, and such a system has been, to some extent, adopted in the United States. Tlic argument that because notes are called money thereiure the State ought to regu- late their issue, hardlv admits of serious discussion. In both cases the n \i 870 ISSUE OF NOTES. State is equally bound to protect its sul)jects aq,'ainst fraud, and to punish the forgers whether of coin or of notes ; hut the argument assumes, first, that the monopoly of coining is the best means of pre- venting fraud, and, secondly, that if this were so a similar course would also be the best in regard to notes. Neither of these assumptions can be justified ; and even if, by certain regulations, a Government could secure that all notes should be cashed when presented, it would not thereby secure its subjects from losing their money, but merely from losing it in a particular manner. We might as well try to stop the Ganges by closing up one of its mouths as to save people from pecuniary loss by preventing them from using one kind of paper-currency. The State might, indeed, totally suppress the issue of notes, but this would not prevent its subjects from losing money through the failure of banks, nor will it compel them to forego the use of paper in large payments. Many persons, however, and even some Economists, seem to consider that the loss occasioned by the dishonouring of a note is more serious than one of equal amount occasioned in any other Avay. The reasons for this opinion are difficult to conjecture. Whether a note or a cheque is dishonoured, the holder is disappointed in finding that what he had regarded as money turns out to be worthless, and, if the amount is the same, the annoyance is equal in both cases. Those who deposit money in a bank, experience the same shock and the same loss when it stops payment as those who accept its notes, and it is difficult to see in what respect the position of one class of creditors is worse than that of the other. It is, indeed, said that people can choose whether they will or ViiW not deposit money in a bank, and whether they will accept cheques, but that they have practically no choice about receiving notes. There is some truth in this statement ; but the reason why notes command such general confidence that they can hardly be refused in payment is, that they are found to be practically as good as coin, and it is rather unreasonable to make their very safety a ground for interfering in order to see that they shall be safe. This argument is especially made use of in the case of small notes Avliich circulate chiefly amongst the poor, who are supposed more than other classes to need the protection of the Government. In England these notes have been long prohibited, and other countries which possess them now seem inclined to follow the example. The Italian Government, which sees no great evil in the depreciation of its own paper to the extent of 15 per cent., is so much alarmed l)y the prospect of the possible loss Avhich its subjects may suffer from accepting private bank notes of less than a franc in value, that it is taking steps to prevent such from being issued in future. The German Government is, in like manner, endeavouring to fix the same ISSUE OF NOTES. ^71 uiiiiimum as has been adopted in England, although its subjects have long been accustomed to use notes in most of the cases in which coin or cheques would be used in England. Yet whatever advantao-e can be obtained from the suppression of small notes could just as well, though perhaps more tardily, be obtained by leaving things to take their o^mi course. If they are inconvenient the pubhc will not ask for them, and they will cease to be issued ; while, if they are unsafe, the banks which issue them will cease to exist. By prohibiting or limiting the issue of notes, the State in some measure contributes to render banks unsafe, for the power of issue enables a bank to carry on its business in a more economical manner, and the mere fact that its notes are \^idely knomi in some measure preserves it from a run. In fact, the tendency of all legislation on the subject of notes is to sacrifice the interests of the depositors to those of the note-holders, and there are some people to whom such a course appears justifiable. Banks, it is said, are impru- dently managed ; therefore, when one fails, its notes should be paid in full before the claims of its depositors are dealt with. It would not be more arbitrary to say that because banks are imprudently managed, therefore the depositors should be paid in full before the claims of the note-holders are dealt with. Both classes are creditors whom the bank is bound to satisfy, and who are equally victimised by its failure. That the note-holder should receive more sympathy than the depositor is perhaps merely owing to the fact that notes are of older date than banking accoimts, and have borne the name of money before cheques began to be used. "Wliethcr as regards the rich or the poor, no substantial case has ever been made out for protecting them fi-om the consequences which must inevitably follow from entrusting money to insolvent ^oersons. Let the State do what it will, it cannot prevent its subjects from incurring debts, nor one bankruptcy from bringing others in its train, and the consequent privations will be quite as painful, whatever be the form in which the debts were expressed. It has often been supposed that the indiscriminate issue of notes would produce other inconveniences than such as are implied in the failure of banks. It has been thought, for instance, that an excessive issue causes a general rise of prices, which, in its turn, produces a large exportation of specie, and brings on a commercial crisis. This theory has, however, been sufficiently discussed in the last chapter, and it is unnecessary to repeat what was there said on the subject. It has been thought that the power of issue renders bankers more likely to give credit to undescr\nng persons. But as notes are payaljlc on demand, a banker is not f|uite so prone to incur a risk by lending them as by lend- ing his name on a l)ill for which payment cannot Ijc demanded for three B B i? 872 THE BANK OF ENGLAND. months or more. Before the bill becomes due he may expect to pro-s-ide himself Avith cash to meet it, but the notes may, for aught he knows, be presented the next day. Cheques, like notes, are payable on demand, and the proliibition of notes does not prevent bankers from giving credit to unworthy persons, nor prevent these from obtaining the goods which they want ■\^'ith as much ease as if coin had been lent to them. Of all the modes in which bankers contri^'c to ruin themselves, issuing notes is the least likely to succeed, and is the one which has been most jealously watched over by the State. Several Acts have, fi'om time to time, been passed to regulate the issue of notes in the different parts of the United Kingdom, and the most celebrated of these, and that which, as far as England is concerned, still regulates our monetary system, is the Bank Act which was passed at the instance of Sir Eobert Peel in 1844-. When it was first proposed, the most extravagant expectations were entertained respecting the good results which it would produce, and whatever may ha^s'e been the opinion of its more clear-headed advocates it must have derived no slight support fi'om the belief that it would save the country fi-om the recurrence of commercial crises. "We, who li-s'c Avhen time has been allowed to test the Avorking of the Act, and w'lio have witnessed three commercial crises since it was passed, cannot ascribe any such salutary eflFect to it ; and its defenders must now content themselves with more modest claims. As, moreover, on each of these three occasions the Act has been virtually suspended, if not actually violated, its more uncompro- mising opponents naturally maintain that it is the cause of crises instead of being a remedy, or even a palhative, for them. The controversy has been long and fierce, naturally obtaining a greater share of public atten- tion at the time of a crisis, and sinking into comparati^'e neglect when the public no longer realise the intense suffering which such a calamity entails ; but the opponents ot the Act, although they have often raised their voices in Parliament, have never been strong enough to obtain its repeal or material alteration. Of late years the rooms of the Statistical Society have been the principal arena in which the conflict has been carried on, and the Journal teems with papers in which the question is discussed from every point of view. In 1871, we find a vigorous attack on the Act in a paper by Mr. Patterson, which is followed, in 1872, by a defence of the Act by Mr. Hammond Chubb, and some suggestions for its improvement by Mr. Seyd ; while, in 1873, there is an elaborate and impartial review of the whole subject by Mr. Palgrave. All these gentlemen have, I believe, some practical acquaintance with the subject of which they treat, and, as each of them regards it from a different standpomt, a comparison of the instances in "s^'hich they agree and in THE BA^■K OF EXGLAXi). 37o which they differ cannot fail to Ijg instructive. The Act may be divided into two portions; that which relates to the Bank of Enyhuul, and that which relates to the conntry lianks ; and it is to the former that I shall for the jiresent confine my attention. Althongh I have already mentioned it several times, I mnst here repeat that the Act limits the amonnt of notes which the Ba]ik may issne in excess of the amount of coin or bul- lion in its coffers to 350,000,000f. There is no absolute limit to the amount of notes which the Bank may issue, but a shifting limit is fixed by the amount of gold and silver of which the Bank is at any moment pos- sessed. As a general rule, the actual amount of notes in circulation is very considerably below the maximum limit prescribed by law, and it is only at the height of a crisis that the limit is attained, or very nearly approached. On such occasions the near approximation to the full amount is not so much owing to the increase of the notes in circulation as the diminu- tion of the atock of gold, great part of which is withdrawn from the Bank by depositors for foreign exportation or other purposes. To ensure the due performance of the law by the Directors of the Bank, they are required to keep separate accounts for the issue-department and the banking- department, and to publish every week the amount of notes issued, and of bullion and securities held in each department. The returns of the issue-department are nuide up by adding to the actual stock of bullion the total amount which may be issued against securities (which has now been increased from 350,000,000f. to 375,000,000f) and setting down the total as the amount of notes issued. This amount, however, is not the same as that of the notes in the hands of tlic public, and the difference between the two appears in the accounts of the banking-department as the notes v,hich it liolds in reserve. The banking-department holds some coin in reserve, but if it desires to replenish its stock from the larger resources of the issue-department it can only do so by diminishing to the same extent its reserve of notes. It is obliged, as it a\ ere, to present notes to the issue-department and get them cashed, and, by so doing, diminishes the balance standing to its credit ; just as one of tlie customers of the bank would do by casliing a cheque. One of the oljjects which the supporters of the Act sought to obtain was that of compelling the Bank to reduce the amount of notes in circulation in exactly tlie same proportion as its stock of gold was at any time diminished. This oljject lias not l)een ol^tained, for the returns of tlie Bank show that the amount of notes in rirciilution frc([uently increases at the same time that coin is witlidrawn. This was j)ointed ont soon after the Act was passed, and it is curious to see ho^v Colonel Torrens strove to conceal its failure in this respect. In his defence of tlie Act he boldly maintains that the circulation has always risen and lallcn o74 THE BANK OF EXOLAXD. simultaneously with the gold, and refers to the returns of the issue- department as establishing this proposition. Of course, what are spoken of in the return as notes issued rise and fall with the amount of gold, for their amount is made up by adding a fixed sum to the amount of the gold. But these are not notes actually issued, but those which may possibly be issued, and they cannot be considered in circulation for they do not circulate, but remain in the Bank. "When Colonel Torrens recommended that the amount of the circulation should be made to depend on the amount of gold, he meant, of course, the real circulation in the hands of the public, for which alone the Bank needs to provide the means of payment, but such Avas his unwiUingness to own himself in the wrong that he would rather save his theory by a quibble than acknowledge that the facts were opposed to it. The Act, to some extent, divides the Bank into two separate institutions, and Torrens availed himself of this fact gravely to maintain that, as the banking-department was separate fi'om the issue-department, the notes which it held were quite as much part of the circulation as the reserve of any London bank. It is natural that the circulation should increase at the same time that the reserve of coin is diminished, for both eflfects arc due to the same cause, viz., the need Avhicli the public have of more money mth which to make payments at certain seasons of the year v.hen notes arc required for the larger payments, and coin for the smaller ones. The ground which is now generally taken by the defenders of the Act is, that it secures the convertibility of the notes of the Bank of England. Mr. Hammond Clmbb, for instance, says : — " If it be conceded that it has secured the convertibility of bank notes, and I think it may be shown that it has done no more, even if it has done so much, then it has been successful. If it be insisted that in effecting this, evils have been brought about, these evils must not be attributed to the operation of the Act, but must be regarded as the accompaniments of the use of convertible bank notes with a regulated issue. And if these evils are held to be intolerable, there is notlhng to be done but to revert to the use of notes vrhich may or may not be convertible, and be issued in regard to supposed local requirements, and not with reference to international dealings. * * * Amidst all the depreciation which showed itself on every side and in e\ery shape, Avheu the only result that could happen did come about, the bank note maintained its promise to the letter." * The latter of these passages refers to the crisis of 18GG, and implies that, because the convertibility of the note was even then maintained, this advantage was secured by the operation of the Act. It * Journal oi" tlie Statistical Society, vol. 35, pp. 173-182. THE BANK OF ENGLAND. 375 is quite true tliat the notes have been convertible ever since the Act was passed, but it is e(iually true that the earth has continued to rotate on its axis ever since that event ; and it might, with equal show of reason, be maintained that the continual recurrence of day and night was owing to the wisdom of Sir Robert Peel. Ever since the Act of 1810, which ordered the resumption of specie payments, came into operation, the promise which every note bears on its face has been literally fulfilled. During the period of 20 years which preceded the passing of that measure the promise was frequently broken, but only because the law required that it should not be kept. Thus the Act of 1819 marks the division between the periods of convertibility and inconvertibility, while that of 1844 is simply an undistinguished year in a long period of conver- tibility. We arc not, therefore, obhged to suppose that the Act of 1844 has been the cause of convertibility, or that wc must choose between incon- vertibility and the evils Avhich may be found to be inseparable from the maintenance of the Act. "We have only to return to the state of things which existed between 1819 and 1844, and we should be free from both of them. It is frequently said that the Act of 1844 is complementary to that of 1819, for, while the earlier Act ordained that the Bank should cash its notes when presented, the later one took steps to provide that a sufficient reseiTe should be kept for this purpose. It is, however, on this point that the essence of the controversy turns ; the earlier Act contented itself with requiring the Bank to keep its engagements, and left the directors to use their discretion in providing for so necessary an object as the maintenance of a reserve. The later one curtailed their discretion, and, to some extent, dictated the amount of the reserve which they should keep, and the purpose to which they should ap{)ly it. As usually happens when a legislative remedy is proposed I'or any social disease, its advocates declare, and often believe, that their opponents are indilferent to the cure of the evil because they oppose the adoption of the particular remedy. In this case the supporters of the Act seem often to suppose that all who are opposed to it are also opposed to converti- bility, although, in fact, this is only true of a small, and by no means influential, section of them. It is true that tlie Act does compel the Bank to keej) u liirger reserve than it would otherwise du, and so far increases the chance which every note-holder has of getting his notes cashed ; but, in order to obtain tin's object, a course is adopted which increases the danger of the bank stopping payment. In all commercial crises a remarkai)lc feature has been the extreme anxiety uf bankers and merchants to obtain an increased (|uantity of liank of England notes, although the reserve of gold is known tu he at its lowest, and the chance of the notes being cashed migiit seem to be extremely small. In 1825, 87G THE BANK OF ENGLAND. for instance, the reserve was almost exliansted, and yet the cry on all sides was f(.»r more notes, which were accordingly issued by the Bank in the most liberal manner, both as regards their amount, and the rules respecting the securities against which they were granted. It was on this occasion that Huskisson made the memorable remark that " We were within twenty-four hours of Barter," implying that, as the country had been drained of gold and the Bank was within au ace of stopping payment, there would soon be neither coin nor notes to perform the functions of a medium of exchange. In 1839, again, the reserve was reduced to a very low figure Avithout impairing the confidence of the public in the solidity of the institution. On this occasion the Bank righted itself by borrowing a large amount of gold fi'om some Paris bankers ; a proceeding which has often been regarded as a national humiliation by writers whose patriotism is more sensitive than any which I can lay claim to ; and it Vvas partly in order to save the country from a similar disgrace that the Act of 1844 was passed. It certainly has had the effect of maintaining a large stock of gold in the Bank, but only under conditions which have rendered it practically useless. In former crises the whole stock was nearly exhausted, but since 1844 the withdrawal has only continued until the stock of the banking department was exhausted. At such times the crisis has reached its height, for the whole reserve of tlie banking-department being exhausted, the Bank would 1)C unable to meet its engagements towards its depositors if they should rc({uire to withdraw any large amount of their deposits. AYere it not for the Act, the Bank might use the gold which is in tlie issue- department, but this cannot be allowed to depart except in exchange for notes ; and at such times there is always a demand for an increased quantity of notes, partly from bankers who desire to strengthen their reserves as a precaution against a run, and partly from other persons who are afraid that bills and cheques will be refused amid the general distrust which prevails, and who Vtish to provide themselves witli paper which no one will liesitate to receive. Were it not for the Act, the Bank might issue any quantity of notes, but it cannot do so unless the stock of gold is increased ; while at such times there is usually a drain of gold for exportation, and the same reason which makes people keep a larger stock of notes induces them to keep coin also. If it had been known that the Act would be strictly enforced, it is higlily probal)le that the Bank would have been compelled to stop payment in 1847, 1857, and 18GG, and if this had happened the note-holders would have found themselves in quite as awkward a predicament as the depositors. As on none of these occasions was there u sufiicient stuck of gold to cash all the notes, it would have been TilE BASK OF EXGLAXU. " 377 impossible to satisfy the claims of all the holders, aud it may be doubted whether they would have been allowed precedence over the depositors. The Act says that gold may not be withdrawn except in exchange for notes, but it does not contemplate the case of the Bank suspending payment, aud does not provide (as is often erroneously supposed) that the Government shall redeem any portion of the notes, or that its assets shall be dealt with in any other way than is usual with companies which have failed. To prevent such a catastrophe the ministry of the day have always interfered by writing a letter to the Directors of the Bank, recommending them to be liberal in their discounts, and pledging themselves to do their utmost to procure from Parliament an Act of Indemnity in case such a course should lead to the increase of the circu- lation beyond the legal limit. The publication of these letters has always produced a good effect in calming people's minds, and a mere knowledge that more notes were forthcoming if required has been sufficient to reduce the immediate demand for them. It vras only in 1857 that the Act was actually violated, but in 18G0 it M'as only saved by the Bank of England taking the unusual course of requesting other banks to send back all its notes which they could possibly spare. A similar system prevails in Austria, where the privileged bank is only allowed to issue notes to the extent of 500,000,000f. in excess of the bullion in its vaults, and during the crisis of 1873 the Austrian Govern- ment suspended the operation of this law. During the American crisis of the same year the Executive took a similar course by allowing the infraction of the law which requires the banks to keep a reserve equal to one-fourth of their liabilities. In all these countries, therefore, it is found by experience that a rigid rule as to the amount of reserve cannot be enforced, but must be relaxed at the very time Avhen its operation is most sensibly felt. Xor is this strange, for the very object of a reserve is to be used on extraordinary emergencies, and if it cannot be used at such times it might as well not exist. Here may be seen the edect of State interference : if banks were allowed to manage their own affairs they might keep too small a reserve, and they nu'glit be guided by foolish rules in issuing their notes, but they would never lock up their own rcseiwe in such a way as to be inaccessible to tliemselves when it was wanted. Tlie rule wliicli iK.tw guides the issues of the Bank of England was adopted by the Directors of their own acronl l)eforC the Act was passed, l)ut if it had not received the force of law tliey woulil uvwv h;i\e adhered to it at the time of a crisis. The rei)eated iuterlurence of the (Joverument, and the certainty that similar steps will again be taken if required, have done nuich to mitigate the effects of the Act; but the regulation of such a matter cannot be so safely intrusted to statesmen us 378 THE BANK OF ExXGLANl). to bankers, and it cannot be rationally contended that an Act which is virtually suspended at the only time when it produces any important effect can confer a great benefit on the community. Some persons are so much impressed with the evil consequences which would result from the dishonouring of bank notes, that they find fault with the Act for not going far enough, and propose that the note circu- lation should not be allowed to exceed the amount of bullion held in reserve ; Mr. Seyd does not go so far as this, but in the paper already referred to, proposes to prohibit what he calls the " Fiduciary Issues," i.e., the notes issued against securities, except Avhen the rate of discount is high: the only apparent reason which he puts forward is, that such a course would furnish an infallible security to the holders ; but as the confidence of the public in the notes is already perfect, it does not appear that anything would be gained by the change. This confidence was quite as great before the passing of the Act as it has been since, and the law which in 1833 made the notes legal tender, merely gave legal sanc- tion to what had long been the nniversal practice. Many will remember the pride with which Burke in his "Reflections on the French Revolu- tion," contrasts the general acceptance of the Bank of England note with the depreciation of the assignats, and says of the former that it is all-powerful on 'Change, because it is powerless in Westminster Hall. If Mr. Seyd's proposal Avere adopted, it would be necessary for the Bank to increase its reserve, for it would still require as much as at present to meet demands on the banking-department, and this addition would represent a large expenditure of English labour in procuring the gold, which would only be compensated by an imaginary increase in what is already complete, viz., our confidence in the solvency of the Bank. Mr. Seyd himself tells us that, " The great position of the Bank, its high credit, its large deposits without interest, and its general influence and monetary power, are due simply to its enormous capital and rest, and to the prudent and superior management of the institution under all cir- cumstances." * The popular belief that the Bank cannot fail is not ill- founded, although the reason given for it, that the Government is bound to pay its debts, is founded on a mistaken one. Its capital of 3G0,000,000f., which is four times as large as that of the Bank of France, and far exceeds that of any other bank in the world, and its " Rests," (or undi- vided profits), which have for years been maintained at 75,000,000f. constitute an enormous fund which the most reckless directors would require a long period to squander, while the high position of the Bank has always enabled it to procure the services of the ablest and most * Journal of Statistical Society, vol. 35, p. 504. THE BANK OF EN'GLAND. o7'J honourable men Avhom the City of Loudon can produce. The function of issuing notes against bullion is one which might be quite as Avell per- formed by a government department, as, indeed, others have proposed that it should be, and it constitutes (or, until recently constituted) the sole business of the Bank of Hamburgh. But the experience of Hamburgh in 1857 shews that such a system affords no guarantee against specula- tion or commercial crises, as, under Mr. Seyd's system, the amount of the fiduciary issues would be allowed to increase as the rate of discount rose, it might be possible to weather a commercial crisis without suspending the law ; but this is the only advantage which would be gained, and although his scale has been framed after a very careful study of the last accounts of the Bank, it would be dangerous to fetter the discretion of the directors by holding them do^^'n to rules which may not be found suitable to the vicissitudes of the future. Among the more extreme opponents of the Act, who go so far as to maintain that it is the cause of commercial crises, is Mr. Patterson, who says, " England is the peculiar seat of monetary crises, just as Egypt is of the plague, and India of the cholera. These monetary plagues arc the bane and opprobrium of our country. Our monetary system, I venture to say, is a disgrace to oui- civilization, and I hope the day is not far distant when our trading and manufacturing classes, nay, our whole community, will be relieved from the terrible periodical convulsions which owe their peculiar severity to the defects of a l)aukiug system wliich, in this latter half of the nineteenth century, is still based upon the vicious and antiquated principles of monopoly and restriction."* But it has been already pointed out that commercial crises are not peculiar to England, and have recently occurred in Austria and the United States, though it must be admitted that the laws of those coun- tries are similar to those of England in regard to the issue of notes. But on wider grounds it may Ije safely maintained that crises are not the result of monetary legislation, but of impediments to production. It is not the want of money, l)nt of commodities which inflicts so nmch suffering on our trading and nuuuifacturing classes ; and the freest issue of notes could not save them from the sufferings consequent on an Irish Famine, or a Continental War. No system of banking can ensure the prudent management of all houses^of business, and the failure of such a house as Overend and Gurney must, whenever it occurs, bring many others in its train. As tliere arc several banks wliich liave contri\ed to hold their ground for nearly two centuries, it cannot be nuiintaincd that our monetary legislation creates any obstacles which may not be over- ■'" Journal of Statistical hJociuly, vol. 3i, y. 3oi.'. 380 THE BANK OF ENGLAND. come by skill and i^rndeiice. Mr. Bonamy Price seems inclined to go to the other extreme, and while justly maintaining that crises are not produced by the Bank Act, he seems to me to go too far in contending that the amount of gold held in reserve by the Bank of England neither has, nor ought to have, any influence on the money market. The former of these propositions he supports by reference to the Bank returns, which show that there is no invariable connection betvreen the amount of the reserve and the rate of discount. The latter he bases on his general argument that what is really lent and borrowed is not money, but commodities ; and he regards as a popular delusion the belief that the facility of obtain- ing loans depends on the bulk of a heap of metal in Threadneedle-street. It is perfectly true that the directors, when they fix the " rate of discount, have to take other things into consideration besides the amount of their reserve ; and that a table which merely gave the amount of reserve, and the rate of discount which prevailed at the same time throughout a series of years, would disclose no apparent connection between them. But it does not follow that the reserve is not one of the elements to be taken into consideration, and it is certain that its amount is always extremely small at the time of a crisis ; and it can scarcely be maintained that the Directors can grant enormous loans without considering what means they have of meeting their own eno-ao'ements. That the diminution of the reserve excites unnecessary alarm may be admitted, although Mr. Price seems to have exaggerated the extent to Avhich this actually happens. In two letters which he addressed to the "Times" in November,. 1873, he described the City as having gone mad in consequence of a diminution in the reserve, and instanced the high rate of discount and increased demand for accommodation which then prevailed as proofs of the existence of a panic in the City. But Mr. Crump, who is doubtless better acquaiuted with the actual facts of the case, and who has examined these letters at some length,* assures us that the panic was, on tliis occasion, confined to a few merchants of inferior standing, in whose case it could not be deemed unreasonable, as they were sorely in need of advances. But Avhen a veritable crisis occurs, the power of the Bank to relieve it is, for a time at least, curtailed by the restriction which prevents it from issuing more notes. That a large amount of gold should be locked up at such a time is an evil of less moment, for if it were not for the Act there would probably be hardly any left, but to prevent the Bank from issuing notes to all such as are willing to accept them, is to impose a hardship * Theory of Stock Exchange Speculation. By Arthur Crump. Longman, 1874. Chap. 15, COUXTRY BANKS. 881 on the banking and commercial commnnity whkh is not compensated by an advantage to any other chiss. In discussions on this subject a good deal is said about the function of banks, one party contending that their function is to make advances, Avhilc another party maintains that it consists in taking care of what is entrusted to them by depositors. It is, however, unnecessary to enter into this question here, for it is certain that banks do in fact make advances, and therefore the commercial community may reasonably expect them to continue to do so. If it were proposed that the Bank of England should be compelled to make advances at the time of a crisis, there would be some reason in the plea that the Bank exists for the benefit of its proprietors and depositors, and not for that of intending borrowers ; but the opponents of the Act merely ask that the Bank should be allowed to conduct its business in whatever way is most convenient to itself. To make large advances during a crisis is a policy which is quite as profitable to the Bank as it is beneficial to the borrowers, and it may be doubted whether a refusal to do so would not compel the Bank itself to suspend payment. Such a refusal would greatly augment the number of failures, and, as several banks would probaljly fail, it is quite possible that, as Mr. Bagehot suggests, the Clearing House system Avould be given up, and the banks would then A\ithdraw their balances from the Bank of England ; and so large a withdrawal would be more than the latter could bear, and would compel it to suspend payment. A free issue of notes enables the Bank to make advances almost unlimited in amount ; and though the interference of the Government has always come in time to save the Bank, there must always be many firms \\ho suffer much from the delay of even a few days on the part of the Government in resolving on so important a step. In countries where little is known about the monetaiy system of England, the suspension of the Bank Act is regarded as being identical with the suspension of cash payments, which it in fact prevents ; and the alarm thus occasioned must have some effect in inducing foreigners to withdraw dejjosits from England just at the time when every inducement ought to be held out to retain them, L'nreasonable as the mistake is, it yet illustrates the evil consequences Avhich result from passing a law which is only harmless so long as it is in operation, and must be suspended whenever it begins to act. It is remarkable that the opponents and supporters of the Act, though they agree in nothing else, agree in condemning tlie provisions which relate to country banks. These latter are not allowed like the Bank of England to increase their issues if they will consent to increase their reserve in proportion, nor are they requii-ed to keep any i-eserve at all; but they are simply forbidden to issue a single note in excess of tlic r>82 COUNTRY BANKS. amount which they used to do shortly before the passing of the Act. The authors of the measure no doubt expected that it would gradually lead to the extinction of the country issues, as no new bank of issue Avas permitted to be established ; but although a great reduction has since taken place, it has by no means realised their expectation, and the Act itself has been the means of securing a longer lease of life to the smaller and weaker of the country banks. It provides that, if two issuing banks are amalgamated, the joint-bank may only maintain a circulation equal to those of the two when separate, on condition that the number of partners is not more than six after the amalgamation. Thus this provision, while it permits the amalgamation of small private banks, prevents large joint- stock banks from uniting with one another or fi'om absorbing private banks. As the establislunent of joint-stock banks was prohibited prior to 1826, the business of banking in England was shared among a large number of private banks, and the Act of 18-44 came before the joint- stock banks had had sufficient time to absorb them, while it furnished an additional obstacle to amalgamation ; the privilege of issuing notes, even to a small amount, being too valuable to be lightly parted with. We find, accordingly, that as compared Avith Scotland and Ireland, Avhei'e joint-stock banks have long been tolerated, the number of issuers is truly enormous, being (in 1872) one hundred and seventy-seven as against eleven in Scotland and six in Ireland. This multiplicity of issuers has always been justly regarded as the great defect of the English system, as there is a greater risk of failure with many poor banks than Avith a feAV rich ones ; but the authors of the Act of 1844 felt themselves oblisred to respect vested interests, and therefore allowed all those who had already obtained a cu'culation for their notes to keep AA'hat they had fairly earned. But although we may understand why this course Avas adopted, and though it could not have been avoided without a large expenditure by way of compensation, there is no valid reason why any distinction should be made between banks founded before and after a particular year, or Avliy the amount of notes which sufficed for 1844 should be made to suffice for all succeeding years. Xo provision is contained in the Act to protect either the note-holders or the other creditors of country banks, but it simply provides that the amount lost through the dishonouring of notes shall not be greater than it would have been in case the bank Avhich issued them had failed in 1 844, They may Avaste their oAvn and their depositors' money in any Avay they please, but they may not earn the profit Avhich might be fairly derived from the public confidence reposed i'.i them Avhen it is shown in a disposition to accept an increased number of their notes. The restrictions imposed on joint-stock banks haA'e been even more galling than those to which the private ones are subjected, but COUNTRY BAXKe^. 383 they contrive, nevertheless, not merely to hold their own gronnJ, but greatly to extend their operations: one of them, the National and Provincial, has forfeited its right of issue by establishing an office in London, while the Scotch and Irish banks have been allowed to do business in London ■without incurring a similar penalty. AVhile its ojjerations were confined to the country its circulation amounted to about 10,000,0001'., and I have been assured by one of the Directors that the loss which it sufiered was as great as would have been caused by the withdrawal of deposits to the amount of 25,000,000f. While it was allowed the right of issue a considerable part of its reserve could safely consist of its own notes, which cost nothing until they were issued, but now Bank of England notes must be retained and, of course, paid for. Country bankers complain that the licence duty on branch offices is at present so high as to act as a great impediment to the establishment of new branches. All bankers are required to pay for stamps on the notes and bills A\hich they issue, and by way of composition i'or the increased circulation which every branch is supposed to obtain they are required to pay 750f. a year for every branch office. Small as this amount appears, it is said to be more than sufficient to swallow up the profits of many branches which might otherwise be established in small towns. As, however, the tax is imposed for the sake of the revenue derivable from it, the discussion of its merits belongs rather to the subject of taxation than to that of free banking. It is sufficient to observe that the safest system of banking is that of a few banks with many branches, and that if a sufficient revenue can be obtained ])y less objectionable means it would be well to abolish or reduce a tax which at present defeats its own end by preventing the use of the thing on which it is imposed. Country bankers have been so long accustomed to submit to State reguktions that they almost seem to have lost the wn'sh for independ- ence, and to regard some kind of regulation as inevitable. On June 15th, 1874, some of them presented a memorial to the Chancellor of the Exchequer, in which they prayed for the removal of a grievance ; but this Avas only an invasion of their field by tiie Scotch banks, which are allowed to issue notes in England, and one of which has establislied a In-anch in Cumberland, while more tlian one have done so in Londou. The Scotch banks being allowed, like the Bank of l']ngland, to issue as many notes as they please, on condition of proportionally increasing their reserves of gold, are able to avnil (licmselves (n (lie lull (irHic powers allowed them of issuing notes unsecured l)y gold. 'Vlw I'lnghsh banks, on the other liand, not 1)eiiig allowed to exceed a certain limit, are obliged, ill order to keep on I he safe side, to keej) nuich bcluw it, and are practically restricted to threc-fourLlLS of their authorised issues. 884 COUNTRY BANKS. The deputation simply asked that the Scotch hanks, if allowed to issue notes in England, should be subjected to the same conditions as their English competitors, and the memorial concluded with the words — " Your meniorialists, therefore, respectfully pray that this important subject may have your early attention, and that you and the other members of the Government may, by immediate legislation, uphold in thorough integrity the spirit of the Bank Act of 1844." Thus they speak of the Act as if it were something which it concerned them to uiDhold, not as a burden imposed upon them without any regard to their interests or wishes. Mr. Dun, the manager of Pars Banking Company, who was one of the deputation, published his views on the subject in the form of a letter to the Chancellor of the Exchequer, and if sound sense and moderation can procure a respectful hearing for his arguments they are certainly entitled to it. The gist of his recommendations is contained in the following passage : — " In order to put the English banks completely on a par with the Scotch, as they now stand, it would be necessary to give to all of them the power of issue. This, however, Avould be out of the question. There are in Eugland too many small banks, both private and joint-stock, to warrant such a course. The three essential qualifications of a note-circulation are, security, convertibihty, and acceptibility. Keeping these three qualifications in view, what I venture to suggest is, that every joint- stock bank in England, having a paid-up capital of not less than (say) £200,000, should receive the power to issue notes to an amount not exceeding (say) one-half of its paid-up capital against the deposit -snth the State of English Government Securities for an equivalent amount, with a margin of (say) 20 per cent, to cover possible depreciation, on condition of always holding coin or Bank of England notes to the amount of (say) one-third or one-half of its notes in the hands of the public, and under the obligation of always paying its notes in legal tender on demand." * Thus he takes for granted, just as statesmen do, that because multiplicity of issuers is inconvenient therefore it ought to be prohibited, and does not see that competition is suflficient to correct whatever inconvenience or risk the system may involve. If it be admitted that some regulation is necessary, his scheme desei-ves con- sideration, and is well calculated to secure the proposed end, viz., security for the payment of notes. Somewhat similar rules are actually enforced in Sweden, of whose banking system an interesting account is furnished by Mr. Palgrave in the paper above referred to, and they have been found to work well, if we may judge fi'om the fact that none * English Bankers' Grievance, p. 16. By John Dun. Effingham Wilson, 1874. SCOTLAXU AXD IRELAND. 385 of the banks subject to them have yet failed, although the system has been iu force for about forty years. But whatever merits these or other systems may possess, the general principle remains that the State cannot give increased security to note-holders Avithout proportionately injuring depositors, and that natural selection will establish safe banking by rooting out all the institutions which are badly managed. The success of the Bank of England in monopolising the note-issue of the metro- polis affords an instance of the effects which free competition has power to produce. Although joint-stock banks have never been allowed to issue notes in Loudon, the private ones used formerly to do so, but the public showed such a preference for those of the Bank of England that the private bankers ceased to issue them long before they were actually forbidden to do so by the Act of 1844. The London public are now so thoroughly accustomed to the notes of one bank that it would be difficult for any of the large joint-stock banks to obtain a circulation for their notes, which certainly could not be rendered more safe than those now in use. This, however, is no reason why they should not be allowed to make the attempt, and there is no more pernicious assump- tion than that because people have contrived to do without a thing they should therefore be prevented from using it. The temerity of legis- lators is nowhere more conspicuous than in their acting as they so often do, on the principle that whatever is suited to one generation must do equally well for all succeeding ones. It is to be hoped that the same spirit which has dictated the throwing open of the East Indian trade to all British subjects, and of the Corn Trade to all foreigners, will finally induce the English Government to throw open the business of note- issuing to all who may wish to engage in it. Let all impediments to amalgamation and to increased issues be done away with, and time will be sufficient to transform our multitude of banks into a few large ones ■with innumerable branches. The issues of the Scotch and Irish Banks are now subject to regulations imposed by two Acts passed in 1845, the aim of which was much the same as that of the English Act of the preceding year, but which dilfered from it in many important respects. Banking luiving been allowed to develope itself more freely in those countries, the people have become more thoroughly accustomed to it, and the commercial classes have rallied round the banks whenever they luu'c been assailed, and have extorted more favourable terms for them. Although the same principle was introduced into these Acts that the issues of notes not backed by gold should never increase beyond what it had been in 1814, the details were BO arranged as to be much more favourable to the Banks than those of the English Act. In the latter the period for which the average c c 386 SCOTLAND AND IRELAA'D. circulation is calculated is the short one of twelve weeks, and any bank which allows its circulation in any period of twelve successive weeks to exceed its authorised limit is subjected to a fine. In Scotland and Ireland the average is struck over a whole year, so that the banks are able to obtain the full benefit of the expansions to which the currency is liable at certain seasons of the year. As, moreover, they are allowed on increasing their reserve, to make an equal increase in their issues, they are never obliged, as English banks have sometimes been, to ask neighbouring banks to allow them to pay off any of their notes which the latter may have in hand. Although it might seem that by requiring them to lock up an equal amount of gold the Government prevents them from profiting by an increase in their issues, this is not the fact, as the notes act as an advertisement of the bank wliich issues them, and the power of increase enables the banks to supply the wants of an advancing country without compelling the people to resort to the use of gold coin. As the circulation of notes, both in Scotland and Ireland, attains its maxununi about November, it is ah\'ays necessary to remit a large amount of gold from London to fill up the reserves of the banks at that time of the year ; and this withdrawal has a perceptible effect on the London money market, and is one reason why the rate of discount is usually highest, and crises usually occur, in the last quarter of the year. This inconvenience is not counterbalanced by any benefit to the holders of Scotch and Irish notes, for the gold is in no way hypothecated for their payment, and when a bank fails the note-holders are not entitled to any precedence over other creditors. As two issuing banks are allowed to amalgamate without forfeiting any portion of their issues, a great obstacle to amalgamation is removed, and partly from this cause, and partly from failures, the number of issuing banks in S'cotland has been diminished from 24 to 11 since the Act was passed. There are none which do not issue notes, and these 11 had, in 1872, 801 branches. The experience of Ireland has been somewhat different, for the six banks which were in existence in 1845 still continue, but have not a monopoly of banking as they have of issue, there being six others which do not issue notes. Although the banking systems of Scotland and Ireland are comparatively good, and although a new bank of issue, even if it were permitted, would find great difficulty in obtaining a circulation for its notes, I see no reason why the same liberty should not be allowed to bankers as to other classes in these countries. If no one availed himself of the permission to issue notes, no harm would be done, which is more than can be safely asserted of the present system of prohil^ition. CHAPTER YIL— FOREIGN TRADE. DOMESTIC JCsD FOREIGN TRADE — EXPORTS AXD IMPORTS — FOREIGN EXCHANGES — INTERNATIONAL VALUES — FOREIGN COMPETITION — ADVANTAGE OF FOREIGN TRADE. The subject of foreign trade is one' which has received a considerable share of attention from Economists, but is, nevertheless, one respecting Avhich some pernicious errors are still prevalent. Although the general motives which prompt the inhabitants of difterent countries to exchange their products with one another are the same as those which induce fellow-citizens to do so, jet there is a difference between the two cases which renders it con^-euient to treat them separately. Within the limits of a small country, capital ' and labour arc so readily transferred from place to place, that each branch of industry is confined to the district where it can be carried on with the most advantage, and the difierent districts supply their wants by exchanging what they can best produce for themselves with what can be produced elsewhere with less labour. But it has been observed (book 3, chap. 1), that these are not the only condi- tions under which trade can be carried on, and it may be profital)ly maintained where one party is superior to the other in his capacity for producing the articles which he buys, as well as those which he sells. The mere knowledge that coal can be procured with less labour in England than in France would not be sufficient to induce the French colliers to emigrate en masse, although a similar ground would be sufficient to make English miners move from Staffordshire to Durham. Capitalists, too, although frequently willing to embark in foreign undertakings, have to take into consideration other things besides the amount of profit •which they will be able to obtain. This difficulty of transferring labour to the field where it can l)e most advantageously employed, is a new con- dition which makes an important diilerence between foreign and domestic trade, and hence a special theory is required to explain the fornicr. Com- merce is often earned on between two countries, one of which is better adapted than tlic other for producing both the articles which it exports, and those which it imports. If it possessed an equal advantage in both respects, it' could gain nothing by importing one of the two articles, but if, while possessing a superiority in both cases, it has a greater advantage in one than iu the other, it will gain something by couliuing itself to the CC 2 388 DOMESTIC AND FOKEIGN TRADE. ■\vovk wliioli it can do best, just as individuals of superior ability find it best to devote themselves to the business in which their ability can be turned to the best account. An American Economist, Mr. Bowen, informs us that Barbadoes is better fitted than New York for the pro- duction of breadstnflFs, as w^ell as for that of sugar and spices, and that, nevertheless, Barbadoes imports the former from New York, and pays for them by exporting the latter. The mere circumstance that both of these kinds of commodities can be raised Avitli less labonr in Barbadoes, does not induce the people of New York to emigrate to that island, though if it were a fertile district in the State of New York, population would be attracted to it at the expense of other parts of the State. By confining themselves to that branch of industry in which they possess the most decided pre-eminence, the inhabitants of Barbadoes are enabled to procure breadstufi's with less labour than if they produced them at home, while they are able to supply sugar to the people of New York at a less cost than the latter would have to submit to if they raised it for themselves. That foreign trade might be carried on under such conditions was first distinctly shown by Ricardo ; and Cairn^who has devoted several chapters of his " Leading Principles of Political Economy " to this subject, is of opinion that no inconsiderable portion of the commerce of the world is carried on under these conditions. While internal trade enables each class of the community to satisfy its own wants while devoting itself to the best mode of labour which the circum- stances of the country admit of, external commerce enables people to obtain a moderate satisfaction for their wants without submitting to the inconvenience of expatriating themselves in order to repair to the place where their labour will be most productive. Of course, all such words as "external," " foreign," and " international," fail to express accurately the distinction which is important in an Economic point of view. The thing to be expressed is, that every industrial community is circum- ' scribed within more or less elastic limits, outside which men do not so easily pass in search of profit as they do between places within them ; and these limits may be imjDOsed by political or religious divisions, or they may be the result of distance merely. England and Australia form part of one State, the citizens of which are equally entitled to their political rights in whichever part they may settle ; but although large numbers of Englishmen have settled in Australia, and large amounts of Australian property is owned by Englishmen, the great distance which separates the two countries acts as an effectual bar to so large an emi- gration as Avould bring wages to the same level in both of them ; and Australia still exports gold, and imports other things which could be made by the Australians themselves with less labour than is bestowed on EXPORTS AND IMPORTS. o80 them in the exporting countries. Althouo-h the territory of the Russian Empire has a continuous land connection, it is probable that its farthest extremities are but little aliected by what takes place at St, Petersburgh, and that the trade between the capital and the provinces is carried on in much the same way as between two independent coimtries. But, as a rule, the limits between the internal trade of a country and that which it carries on with other communities whose industrial systems are inde- pendent, are marked with sufficient acciu-acy by the Custom House barriers, and the name of foreign trade may be without any great impro- priety applied to that of which the particulars are given in the statistical returns published by the Government. It is immaterial whether some of the countries with which it trades are colonies which have not yet renounced their allegiance to the mother country. The exportation of commodities from one country to another is determined by the prices Avhich they bear in the respective countries. If the diflFereuce is sufficient to cover the cost of carriage it will be the interest of merchants to buy the article where it is cheap, and to sell it where it is dear. It does not matter whether the article is of greater value in the exporting than in the importing coimtry, provided that its price is lower, for the difference of price is all that is needed to secure a profit to the merchant. The quantity of tea which is worth a day's labour in China may be worth only half a day's labour in England, but as the value of silver is also greater in China, the English can afford to send out silver which it has cost them little labour to procure, and can obtain tea which it would be impossible to produce for themselves. Where trade is free, the prices of commodities which will bear transportation cannot long continue to differ by more than the cost of conveying them from the one country to the other ; but their values may differ as much in different countries as the degrees of efficiency to which the labourers in each respectively have attained. A foreign merchant need only order a quantity of commodities in a country where they are cheap, transmit the necessary sum in the money of the country, and convey them to his own, and an effect will at once be produced on the price in one of the two countries if the difference between them is such as to leave him a large profit on the transaction. A number of merchants will seize the opportunity of enriching themselves thus afforded them ; and when a large quantity has been imported, one of two things must happen. Either the iiome producers, finding that they receive fewer orders, will be ol^liged to reduce their prices, or cease producing ; or the foreign producers, finding themselves required to furnisli larger quantities, will raise their prices. Whether the foreigner.-; monopolise the field, or a compromise be effected by settling the price at some point intermediate 890 EXPORTS AND IMPORTS. between the two at which it formerly ranged, the same result is attained. The price is lower in the exporting than in the importing country, and competition will prevent the difference from materially exceeding the cost of carriage. The smaller the cost of carriage the more nearly will the prices of a commodity approximate to uniformity in every part of the world, and perfection is most nearly attained in the case of the precious metals ; the price of silver, measured in gold, being, as nearly as possible, the same in England, Russia, and Japan. Although the power of transmitting gold and silver from country to country is a necessary condition of the establishment of equilibrum betvreen the prices of the same commodity in different places, the exercise of this power is, as far as possible, avoided, and merchants use every eflFort to make the exports of each country pay for its imports without the use of bullion. If the foreign trade of each country consisted entirely of exchanging its pro- ducts for those of other countries, the total of its exports would be exactly equal in price to the total of its imports ; and, if it were occa- sionally necessary to remit bullion from one side, an equal amount would be subsequently returned ; supposing, that is, that neither country pro- duces the precious metals. We thus arrive at the principle enunciated by Ricardo, that the trade between two countries is practically one of barter, and that if they do not themselves produce gold, they exchanga the same amounts on the same terms as they would do if they made no use of gold. It is, indeed, self-evident, that a country which does not possess mines from which gold can be procured, cannot permanently export it ; and this consideration might suffice to shovr that, in the long run, foreign trade comes to the same thing as barter, Xor is it diflficult to see how trade adapts itself to this condition, although every individual transaction is an independent one, and is based on the comjDarative prices of the particular commodity. Where the amounts which each country has to pay to the other are equal, the payments are effected by means of bills of exchange ; and when they are unequal, it is only the balance which need be transmitted in gold. Such a transmission, by diminishing the quantity of money in the country, tends to reduce the general level of prices, since the value of the whole quantity of money in a country is equal to that of the commodities for which it is exchanged. Among the articles Avhich thus fall in price there are sure to be some which are fitted for exportation, and a fall in price renders it more profitable to export them than it had formerly been. On the other hand, the influx of gold causes a general rise of prices in the other country, and thus encourages importation, so that from both sides a pressure is exerted in the same direction, causing nn exportation of commodities and a re-importation of gold until the EXPORTS AND DirORTS. 301 balance is restored. It is not often that a general fall of prices manifests itself, and, indeed, it only happens at the time of a commercial crisis ; bnt it is quite sufficient that the prices of a few should tall in order to produce the required effect. These may be articles which have been reduced in price through some improvement in the method of produc- tion, or they may be selling below their natural price in consequence of their ha-^ing been produced in quantities too large for the home market to absorb in a short time. If the fall of price should attract public attention, it would, no doubt, be ascribed in each instance to the cir- cumstances of the particular trade ; but although such an explanation would be substantially correct, it is not inconsistent with the theory that the exportation of gold must bring about such a fall of prices as ■will increase the exportation of commodities. The mere fact that an iuiprovement has taken place in production, though it is sufficient to induce foreigners to buy a larger quantity of the article, does not enable them to expend a larger sum of money upon it unless they are also provided with the means of paying for it. The fact that more money has been spent on foreign commodities compels retrenchment in other directions, and thus brings about that indisposition to purchase certain kinds of native produce which the persons engaged in each particular trade would think sufficiently accounted for by saying that trade ^vas slack, or that the articles were not in demand. It is, however, through the prices of interest-bearing securities that the effects of the trans- mission of gold are most easily seen and felt. When gold is withdrawn ft-om a country, its loss is chiefly felt by bankers and others who make it their business to lend money. Its loss exposes them to the danger of being unable to produce the sums which they have bound themselves to pay on demand, and they endeavour to protect themselves by offering every inducement to people to deposit money with them, and by discou- raging borrowers from applying for fresh loans. In order to do this, they raise the rate of interest, both on what they borrow and on what they lend; and by the former course, they hold out an inducement to foreigners to send gold into the country, or to let it remain if they already possess some there. By raising the rate of discount (or the rate at which bankers lend), they produce some effect on the prices of securi- ties, as there are always many persons who have been enabled to borrow money by pledging securities; and, if tlie rate of interest on the loan rises higher than that which the securities bring in, it soon becomes necessary to sell the security and extingiiisli the del)t. Others again desire, for a similar reason, to part with scciu-ities in order to obtain higher interest by lending out the money which they can obtain by selling them. There are others who lia\(' pirchased stocks with bor- 392 a:XPORTS AND IMPORTS. rowed money, and whom a rise in the rate of interest prevents from con- tiunino- their operations, and who are forced to sell out at any price. Bankers themselves always hold large amounts of good securities for the express purpose of selling them whencA'er they require a supply of ready money, and such is always the case when large amounts of gold are with- drawn for exportation. AU these causes combine to bring an unusual quantity of securities into the market for sale, and the natural conse- quence is, a fall in their price. If the security is a good one, purchasers can generally be found, but if people are induced to buy in amounts, and at a time which are not such as they ■v^■ould themselves have chosen, they must indemnify themselves by receiviug higher interest, which is effected by lowering the price of the security in question. At the present time all the principal stock exchanges of the world are connected with one another by telegraph, and any considerable ftiU in the price of a well- known stock is sure to be followed by large orders from foreign pur- chasers. There is less risk involved in the purchase of a stock tlian in that of a commodity whose price has fallen, for the money invested in the former does not lie idle, but brings in interest until the opportunity of selling arrives, while a commodity brings in nothing until it is sold, and the probable variations of its price are more difficult to foresee than those of a stock. Hence it is usually by the transfer of securities that the drain of gold from one country to another is checked, and as those wliich are sold in times of difficulty are subsequently bought back at higher prices, the surplus gold soon finds its way back to the countries from which it came. For simplicity's sake, it has been assumed that each country only trades with one other country, but the essence of the argu- ment is unaffected by its extension to ifiany countries all trading with one another. A country which has no gold mines cannot permanently export more gold than it imports, but England may continue to export more gold to France than she imports from France, because she imports gold fi'om Australia without exporting any in return. England, in short, may act, and does act, as an agent for diffusing gold throughout the world. When a commercial treaty was arranged between England and France at the same time as the Treaty of Utrecht, it was rejected by Parliament on the ground that it was too favourable to France and that England lost by the French trade, which caused it to export a large amount of silver every year. If the fact M^ere so it cannot have involved any loss of silver to England, which simply acted as the channel through which silver was brought from India to France. If the trade between the two countries had been entirely stopped, England would not have retained any more silver, and France would have received no less, but would simply have procured it direct from India, or through some other EXPORTS AXD IMPORTS, 398 channel than England. Taking into acconnt the \vhole of the trade carried on between one country and the rest of the world, we see that it is essentially one of barter, and that no stream of gold can permanently flow out of a country where a source is not furnished by natural mines. "Where a country does possess mines capable of supplying more than the quantity of gold required for its o^^^l coin and plate, it is naturally led to produce gold for exportation to other countries less favourably circum- stanced. Australia and California raise gold for exportation, just as China raises tea, and England manufoctures cloth for the foreign market. Comparative j-irices serve as the index in this as in other cases to deter- mine when and where it is profitable to export gold. As gold can be raised in Australia ^Yith less labour than in England or Germany, wages measured in gold are higher in the former country, and, consequently, higher prices are paid for all those goods which require the same amount of labour for their production in Australia as in Europe. It thus becomes profitable for Australia to import goods irom England, Germany, &c., and in order to pay for them it is necessary to export gold. It is not necessary for Australia to export commodities in order to bring back the gold, for her mines afford her ample means of replenishing her stock of coin, and it rarely, if ever, happens that Australian gold is returned to the country whence it came. The same cause produces a tolerably con- stant flow of gold from the United States to England, but in this case the cuiTent is sometimes turned in tlie opposite direction. This, however, only occurs in exceptional cases, when a large quantity of gold is suddenly required in Xew York, and the current does not probaljly continue to flow back up to the source of the stream in Caliibrnia. The greater distance of Australia of course renders it more diflicult for England to supply any temporary deficiency in Sydney or Melbourne than in New York. The flow of gold from the countries where it is produced to the rest of the world is constantly tending to raise prices throughout the world, and those who have studied the subject have satisfied themselves that the prices of the princij)al articles of commerce have materially risen since the Californian discoveries. Althougli lal)()ur is more efiicient in California and Australia than in ]']urope, tlie superiority does not seem adequate to explain the whole of the great dificrence between the rates of wages prevaihng in those divisions of the world, and tlie former countries are still enjoying the advantage of possessing abundant mines which have not yet jn'oduced their full eilect ui)on the value of gold throughout the world. When this has been done as great a rise of wages will have taken place in Europe as luis occurred in Australia since 1851, and the possession of abundant nn'nes will not confer any extraordinary advantage on Australia, though it may still constitute an 394 EXPORTS AND i:\ErORTS. important feature in her industrial system. As it is not necessary that I the imports and exports of gold should exactly balance each other between two particular countries, so it is not necessary that the amounts of commodities should be equal, for one country may make up the balance by means of its trade with a third country. There are several instances of what has been called a triangular commerce, in which one country pays for what it imports from a second by exporting goods to a third which exports other goods to the second. One of these is afforded ■by the trade between England, the United States, and China. The people of the United States consume large quantities of tea, which they import from China, but they do not pay for it by exporting their own products to China; they find it to be most convenient to all parties concerned to export their corn and cotton to England, while England, in its turn, exports to China enough of cloth and other articles to pay for its own imports and for those of the United States into the bargain. The transaction is easily effected thi-ough the medium of bills of exchange. Those Americans who export produce to England draw bills on London for the amount, and these bills are sold to the Chinese merchants who have imported goods from England. The English exporters, on the other hand, draw bills on China, which are bought by the Americans, and through the medium of bill-brokers one set of bills is made to purchase another set, and the transmission of bullion is, as far as possible, avoided. Germany, England, and India, form another trio of a similar kind ; the exports of Germany to India not being sufficient to pay for its imports, and the balance being made up by exports to England. It is still less necessary that the exports and imports of a particular port should balance each other. It may be worth while to mention this, because Mr. Somers, in his entertaining work, " The Southern States since the War," seems to suppose that unless this happens there must be some artificial influence to prevent it. A great portion of his work is occupied with complaints of the pernicious effects of the protective tariff maintained in tlie United States, and his praiseworthy zeal in this direction has sometimes led him to ascribe to the tariff effects for which it cannot fairly be held responsible. He was struck, when at New Orleans, by the fact that nearly all the vessels that entered the port came in ballast, the exceptions being chiefly vessels bringing iron from Cardiff. He ascribes this to the tariff, which he supposes prevents the people from importing foreign goods in exchange for their cotton and sugar ; but a little consideration is enough to convince us that the facts do not v,arrant such an inference. Granting that the people of tlie Southern States exported nothing for which tliey were not to receive an equivalent, it does not follow that this equivalent must be brought to EXPORTS AND IMrORTS. 395 them tlirongli tho port of New Orleans. They might receive their money's worth in the sliape of clothes and fmniitnre irom the mannfoc- turers of the north, while the north would receive its payment in the shape of goods imported from Europe, and paid for by southern exports. It is true that the tarifi" encourages northern at the expense of Euro- pean manufactures, but even without any artificial stimulus, there would still be a considerable inducement to buy native rather than foreign goods, and save the cost of carriage. Even if the Southerners did receive all their payment in the shape of goods imported through New Orleans, there might still be a preponderance of ships arriving in ballast, for the value of commodities is not in proportion to their bulk, and two fi-eights of equal value do not ahvays require the same number of ships to carry them. Had ilr. Somers extended his observation to Cardill", he would have found that it presented a similar spectacle of numerous vessels arriving in ballast, the exceptions being chiefly those bringing iron-ore from Bilbao, and this might suffice to convince him that an artificial interference is not necessary to account for an excess of exports over imports in a particular port. At the time when Mr. Somers visited the United States, the total imports into the country largely exceeded the exports, and this state of things had continued for some years before, and lasted for two years after his visit. If the Southern States imported less, and the Northern States more than they exported, the diflfcrence cannot be attributed to the tariff, for the same duties are le^aed at New York as at New Orleans. To what cause it ought to be attributed, is a question which cannot be answered without knowing something more of the financial position of the country than can be learnt from its revenue and curreacy laws. There are several transactions between diflPerent countries besides those of simple exchange, to effect which it is necessary to transmit money, or money's worth, from one side to the other. Owners of estates in one country may reside in another, and require to have their rents trans- mitted to them. If the country \vhich has to make the payment possesses mines of gold or silver, the necessary sum may be sent in one of these metals ; but if there are no mines, other kinds of produce must be sent, and, at all events, the exports of the country must (if not coun- terbalanced by some similar payment from elsewhere) exceed its imports, since they must be sufficient to pay for the latter, and for the rents into the bargain. Complaints have often been made of the burden imposed upon Irelaud by the necessity of exporting its produce to pay the rents of absentee landlords, but whatever may be the evils of absenteeism, the mere loss of commodities which this exportation occasions is no greater than must be endured if the landlords staid at home. Wherever they 39C EXPORTS AND IMPORTS. lived, they would require servants to wait on them, and tradesmen to provide them with luxuries ; and, in any case, the burden of supporting those who minister to their wants would fall on the Irish tenants. If the landlords lived in Ireland, their attendants would do so too, and the population would be somewhat increased ; but, as their consumption would be the same, the produce of Irish farms would be quite as much lost to the producers as if it were exported. At the present day very large sums are always due from one country to another in respect of dividends on shares in various undertakings owned by persons residing in other countries than those where the business is carried on. This is particularly the case between colonies and their mother country; a colony holds out a more tempting field for commercial enterprise than a foreign country can generally do. The similarity of the language, of the laws, &c., renders it more easy for investors to understand the position of a company ^vhicll is to carry on business in a colony subject to the Govern- ment of the investors' country than that of a foreign company, which is always regarded with suspicion when its shares are offered for subscrip- tion out of its own country. When colonists have made a fortune, they are fond of returning to the mother country, whose superior wealth and civilisation usually render it a more pleasant residence for a wealthy person than a young colony can be, and they require to have transmitted to them the dividends upon such of their colonial investments as they think it worth while to retain. These dividends must be remitted in the produce of the country which has to pay them, whether this consists of the precious metals or of other commodities. In the first instance, when the loans are raised, a large exportation takes place in one direction, and when the whole has been subscribed, the stream begins to flow back, partly on account of the payment of dividends, and partly through the re-purchase of the stocks on the part of the country which first contracted the loan. The United States, at the time above referred to, were in the first stage of such an operation. As has been fully explained by Mr. D, A. Wells, in his able reports to the United States Treasury, the country continued to borrow large sums year after year from Europe, partly by means of loans to the Federal Government during the war, and more recently by loans to the various States of the Union, and to rail- ^vay and other companies. Such was the extent of these loans, that the country Avas enabled to import more than it exported to the average amount of a milliard of francs for years together. Many of the loans were raised for the })urpose of constructing railways, and the proceeds of the subscriptions were doubtless often laid out in the purchase of rails in England, which, of course, appeared among the imports of the United S;:ate:. Such a process, though it may continue for several years, cannot EXPORTS AXD IMPORTS. 397 go on indefinitely, for, as was pointed out by Mill, a country which borrows an equal sum every year, will in time have to pay more on account of interest than it receives on account of principal, and a reaction will ha naturally produced. If the average rate of interest on the loans be 6 per cent,, and the same amount be borrowed every year, the amount due for interest will, at the end of seventeen years, exceed the annual loan, and the excess will be constantly increasing year after year. This consummation can only be averted by continually increasing the amount of the annual borrowing, but a nation which engages in such a course is liable to encounter a rude check when anything occurs to shake its credit abroad. Such a check has already been given to American bor- rowing by the crises of 1873, and the returns of the year ending June 30, 1874:, shew that the exports exceeded the imports, so that the reac- tion has akeady set in. The numerous instances of defalcation and repudiation which have disgraced so many companies and States in the American Union have not been suflficient to shake the faith of European investors in the general soundness of American securities ; but industry was so much disorganised by the crises, that the country for some time afterwards afibrded but a poor field for financial enterprise. Every civilized country has to remit and receive sums of more or less magni- tude, on account of the expenditure of such rich citizens as travel abroad, or of foreign travellers who visit it. "Where the travellers who leave the country are both numerous and wealthy, and the country does not offer sufficient attraction to induce an equal number of foreigners to \isit it, there must be an excess of exports in order to provide for the expenditure of the travellers abroad. Such is the case with Russia, whose wealthy nobles are fond of residing abroad, and who draw such large sums from home to meet their expenditure as constitute an nn- portaut item in Eussian trade. They pay for what they consume by drawing cheques or bills on Eussian banks, and the possession of these orders enables foreigners to obtain Eussian produce. England, in like manner, has to remit the produce of her manufactories in order to pay for the expenditure of English travellers in every part of the world. They get Avhat they want by paying in coin or in notes, but the transaction does not end here,- for the English notes are sent to England, and enable foreigners to purchase Englisli produce, which is then exported, A country like Switzerland, which is visited every season by a crowd of tourists from every part of the world, is able to import foreign commodi- ties without exporting anything in return. Instead of the Swiss sending their produce abroad, foreigners come to consume it in Switzerland itself, the only difference Ijcing that the cost of carriage is reduced to one-half of what it would otherwise be. 398 EXPORTS AND IMPOETS. England affords an example of a country which is reaping the fruit of large investments in foreign countries, and which is able to import more on account of dividends than it exports on account of principal. By merely continuing to lend equal, or nearly equal amounts every year, a country, at length, arrives at a period when the dividends on the old loans overbalance the principal of the new loans, and this point once reached, the excess of the return over the outlay is pretty sure to con- tinue increasing. The returns of English imports and exports for the twelve years, 1860-71, reduced to milliards of francs, are given in the following table :— Years. Imports. Expcfrts. : Years. Imports. Exports. 1860 0.2 4.1 1866 7.3 5.9 1861 5.-t 4.0 1867 6.8 5.6 1862 5.6 4.1 1868 7.3 5.7 1863 6.2 4.9 1869 7.3 0.9 1864 6.8 5..3 1870 7.5 6.1 1865 6.7 5.4 1871 8.2 7.0 Thus it will be seen that in every year included in the series, the imports exceeded the exports by more than a milhard. If the whole of the imports must be paid for by exports it would have been necessary to export gold and silver eveiy year to the extent of more than a milliard, and as our gold and silver currency does not much exceed two and a half milliards, two years would have been sufficient to drain the country of its coin. Yet the returns of the bulUon trade during the same period show in every year a preponderance of imports o^'er exj^orts. This excess of imports is easily accounted for on the supposition that the debts o^ing by foreigners in England are much larger than those owing by Englishmen abroad, but the statistics are not in themselves sufficient to decide whether it is due to loans subscribed abroad for the benefit of England, or to dividends due to Englishmen for loans made to foreigners. When Mr. Gregg complained of the loss England suffered through her large investments in foreign stocks and shares, Mr. Grant Duff replied that it was counterbalanced by the investments of foreigners in English stocks. No doubt there is a large amount of Consols and other English securities constantly held by foreigners, as is shewn by the amount of personalty sworn to in the Court of Probate, which is disposed of under foreign Wills ; but Mr. Grant Duff hazards a bold statement when he supposes that this amount is equal to that of foreign securities held in England. If any large amount of a stock is held in a foreign country, it is sure to be quoted on the Boui-se ; and our own official list furnishes ample evidence of the multifarious foreign investments which are patron- EXPORTS AND IMPOKTS. 399 ised by English capitalists, but Mr. Grant Duff is probably not prepared to maintain that the shares of English companies are as frequently quoted on foreign Bourses as those of foreign companies on the London Stock Exchange. When a foreign Government or company raises a loan, London is commonly one of the places at which tenders are received, and though there is nothing to prevent foreigners from sending orders and subscriptions to London, it would not be singled out for the purpose unless it had been found Lhat a great part of the subscriptions came from England. In the case of the United States, the excess of imports has been accounted for by a continued supply of fresh loans, but in that case it is notorious that American railways have been built at English expense, and that enormous amounts of railway mortgage bonds arc held in Eng- land and Germany. In the case of England, we do not see either the Government or private companies offering loans for subscription in foreign markets, but we do see English subscriptions im-ited for loans to every civilized government, and we see companies formed in Eng- land for supplying other countries with banks, railways, gas, water, and, indeed, almost e'\-erythiug which they can l)e supposed to require. "We see wealthy colonists retaining their estates while residing in Eng- land, and we see advertisements in English papers offering foreign estates for sale, as if foreigners expected that English purchasers ^\■ould keep up the price by their competition. Under these circumstances, we may be justified in concluding that more property is held by Englishmen abroad than by foreigners in England, and in thus accounting for the excess of English imports. The natural effect of this excess is, that more bills are drawn by foreigners on England than by Englishmen on foreign countries, a fact which has been noticed by Mr. Palgrave in his paper referred to in the last chapter. The trade between Australia and England illustrates the position of a tributary country wdiich has to export more than it imports, in order to pay the rents and dividends due to persons residing in another country. The following table shows the imports into the United Kingdom from Australia, and the exports to the same quarter during the five years 18GS-72, expressed in millions of francs : — Years. Imports. Exports. 18G8 ilo .325 18G9 500 350 1870 500 250 1871 525 275 1872 625 .375 Among the imports are included the gold and silver, wliich idways amounted to somewhat over lo(>,0U0,000f., and was thus always absorbed 400 FOEEIGX EXCHANGES, in paying the excess over and above the exports, Mr. Cork, who has discussed the subject in a paper on "Tlie Statistics of Australasian Banking," considers that a sum fully equal to this excess is annually due to proprietors residing in England. He estimates that 75,000,000f. are due to absentee landlords, and 100,000,000f. to persons who have invested in Government loans and in companies of various kinds.* It may be expected that, as time goes on, the balance will be redressed, as may be done in various ways. The landlords may come to reside on their estates, or may sell them to others who will do so. The Govern- ments of the colonies may gradually redeem their loans, and the colonists may buy up the shares of the successful companies ; and though, while the process is going on, the balance will be turned against Australia even more than it is at present, the ultimate effect will be to produce equilibrium. The payment of the war indemnity by France to Germany illustrated the eflFects of an artificial importation. So large a sum as five milliards was not, and could not be imported into Germany in the shape of gold, but Germany was enabled to ol)tain without cost a large stock of gold for its new coinage, and the sudden addition to the purchasing power of the people produced a marked rise in the prices of many commodities, which encouraged importation from France and elsewhere. The rise of j^rices did not neutralise the advan- tages of the indemnity, but enabled the Germans to obtain the advantage which consisted in obtaining an increased quantity of com- modities. The illustrations which have now been given are sufficient to show that we cannot accept without qualification the statement that the exports of a country pay for its imports, and that the correct account is that they discharge all its liabilities, whether these are created by exchange transactions or by other causes. Although the merchants engaged in foreign trade make every effort to escape the necessity of transmitting the precious metals in order to pay for the commodities which they import, it is quite impossible for them to avoid it altogether ; and there is no time at which some ships are not engaged in transporting gold and silver from one country to another. This is, of course, necessary between the countries which possess mines and those Avhich do not, but, apart from this, it is constantly necessary to transmit specie or bullion, in order to adjust the balance of transactions between countries, none of which possess mines of their own. Every transaction in commerce is an independent one, and there is no reason why the purchase of French goods by an Englishman should be immediately counterbalanced by an equivalent purchase of English goods by a Frenchman, When this is not the case, * Journal of the Statistical Society, 1874, i>, 69. FOREIGN EXCHAXGES. 401 the debt iiicniTed tliroiigh the importation of the French goods, must be liquidated by sending gold to France, and, in the language of commerce, the exchange is said to be against, or unfavourable to, England. These expressions come down from the time when it was generally believed that the object of commerce was to bring gold and silver into a country, and that a country lost by a trade which compelled it to export these metals. Although this notion is now almost extinct, the phi'ases to which it gave rise have been too much hallowed by time, and are too convenient to be abandoned ; and, in fact, an unfavourable state of the exchange is prejudicial to the numerous class who are engaged in lending and borro\nng money, and is usually one of the causes which bring on a commercial crisis. "When the l^alance of payments is turned against a particular country, the fact soon makes itself known by a rise in the price of foreign bills. If the exports of a country are just sufficient to meet all its liabilities, those who have to make payments abroad can best do so by purchasing the bills drawn against these exports and sending them abroad, while the foreigners who have payments to make in the country buy up the bills drawn upon it, and the two sets of bills balance each other. When the amount of foreign bills offered for sale is just equal to the amount required by those who have to make payments abroad, the bills will be sold at par, i.e., a bill for a thousand francs will fetch a thousand francs, or very nearly that sum. But if the amount requu'ed is larger than that of the bills offered, the wants of all the intending purchasers cannot be satisfied without the transmission of gold or silver, as the case may be. They may, and probably will, be able to purchase the fuU amount of bills which they require, but some of these will be created for the purpose by dealers who make it their business to sell bills on their foreign corres- pondents, and to send over bulhon to enable their correspondents to meet the bills when they become due. In order that it may be worth the dealer's while to create such bills, he must derive sufficient profit from the transaction to cover the expenses of the conveyance of the bullion of the insurance against such possible loss, and to leave him something over for the use of his money in this particular business. To obtain this he must sell his bills for something more than their nominal amount, e.g., may charge a thousand and five francs for the bill for one thousand francs. The other holders of biUs, of course, wish to sell their wares at the highest price, and therefore demand the same as the dealers who have actually incuiTcd the expense of transmitting bullion, although in their case no such outlay is necessary. It then becomes known that bills on a particular country are selling at a premium, and those wlio study the cost of the exchanges, can tell, from the amount of 1) i) 402 FOEEIGN EXCHANGES. the premium, Avliether it is profitable to export bullion, and if they find that it is, some of them will do so in order to be able to draw bills against it, and sell them at a profit. The principal cause of the constant fluctuations in the rates of exchange between different countries is the cost of transmitting bullion, but there are various other circumstances to be taken into account by those who wish to understand every variation as a matter of theoretic or practical interest. A very clear account of the general principles involved has been given in a work on " Foreign Exchanges," published in 18G2, by Mr. Goschen, who has since become so well-known as a statesman. An elaborate account of the technical details of the system has been given by Mr. Seyd in his " BulUon and Foreign Exchanges," which contains all the information which can be imparted by one Avho is famihar with its practical working. These two works combined will enable any reader to understand as much of the sub- ject as is needed for the comprehension of the general principles involved. The motive which prompts men's actions here, as in other departments of industry, is the desire to obtain wealth with the smallest possible labour. The object of those who buy and sell bills is to avoid when possible the expense of transmitting bullion, and where this cannot be done, to reduce to a minimum the expenses which must be incurred before the gold taken fi'om one country can be used to discharge debts in another. Where a great distance separates two countries, the length of time which must elapse between the drawing and the payment of a bill becomes an important item to be taken into account in fixing its price. An order to pay one thousand francs six months hence will not exchange for a thousand francs in ready money, but for as much less as corresponds to the interest which the purchaser might obtain if he employed his money for six months in some other way. The amount of this difference, or discount, varies, of course, with the rate of interest prevailing at the time and place where the bill is purchased, and attains its maximum at the time of a commercial crisis. During the American crisis of 1873, bills on London were sold at as low a rate as 5 per cent, discount, although at other times the rate seldom reaches a higher figure than 1 per cent., and this was not on account of any increase in the difficulty of transporting gold across the Atlantic, but because every one who was in possession of ready money wished either to keep it himself or to lend it out at the high rates of interest then prevaihng. Except at such times the variations in the rates of exchange are confined within very narrow limits, but the rate of interest must always be taken into account unless the countries are very near together, and the bills are drawn for very short periods. Leaving the rate of interest out of the account, we see that the discount cannot long exceed what corresponds to the cost of FOREIGN EXCHAXGES. 403 conveyiiig- the precious metals from one coimtry to the other. If the expense of freight and insurance be one-half per cent., no one who has a bill for 1,000 francs will take less for it than 995 francs, for it would be cheaper for him to get liis bill paid in gold and bring it to his own country. On the other hand, no one would give more than 1,005 francs for it, because it Avould be cheaper for him to send gold over to the place where he wishes to make a payment. Between these two points any rate may be fixed by mutual competition, and as long as it keeps within these limits no gold will be sent either way. The subject is somewhat complicated by the fact that difierent nations use coins of different weights and sizes, and do not accept foreign coins in payment of debts, or, at least, not so readily as their own coin. If a banker has to transmit money from Australia to England, he can do so in the coin of his own country, because this circulates in both countries alike ; but if he has to send it from England to France, Enghsh coins will not be found so suitable for the purpose, for they are not legal tender in France, and are not of such sizes as to correspond easily with any given amount expressed in French coin. The amount of gold contamed in a sovereign is equal to that in 25 francs 22 centimes, which is an inconvenient proportion to calculate, and the sovereigns which are spent in France by English traveUers are usually received as equivalent to no more than 25 francs. When a large remittance is to be made, this shght diflFerence is worth taking into account, and the rate of exchange between England and France very seldom falls so low as 25 francs to the sovereign. As the expense of conveyance is about one-half per cent, it should never fall below 25f. lOc, or rise above 25f. 34c., and in fact gold is sent when the rate falls to 25f. 13c. It is usually sent in the form of gold bars, which are either taken to the Paris Mint to be coined, or are deposi- ted in the Bank of France as a security for advances, or are sold to the Bank at the same price as that which the Mint would give for them. The Paris Mint charges a seigniorage of Cf. 70c. per kilogTamme, and the Bank of France, of course, makes an equal charge. As a kilogramme is coined into 3,100f. this deduction is equal to a charge of about one- fifth per cent., which is lost by the person who sends ingots to pay a debt in Paris. This loss is "to some extent counterbalanced by the greater convenience of ingots, w^hich take up less room, and can be packed with less trouble than coin. For many years the Bank of England has been accustomed to buy French coin as well as that of two or three other foreign countries, and to sell it again to persons who desire to make payments abroad, and tlius the inconvenience occasioned by the dillerencc of coinage has been, as far as possible, minimised ; but as the Bank must make a profit by the transaction, the price at which it buys the coin is D d2 404 FOREIGN EXCHANGES, rather less than what would correspond to their weight in English coin, and some loss is occasioned to the importer. As the imports of one country from another may be paid for by exports to a third, so an un- favourable exchange between England and France may be corrected by calling in the aid of the bills passing between these two countries and Holland. There are dealers who make it their business to study the rates of exchange prevaihng between foreign countries, as Avell as those between their own and foreign countries. If they find that they can effect payment in France more cheaply by buying a Dutch bill on France than by remitting gold from England to France, they will proceed to buy such bills, which will have the effect of increasing the price of bills on Holland, and lowering that of bills on France, and thus restoring equilibrium. As each country has a coinage of its o\mi, it is a matter of some difficulty to ascertain this point, but the calculations are not too complicated to be performed by experts, and the ease ■with which it can be done is a measure of their powers of making a fortune. Where two countries have not only a different system of coinage but a different standard of value, the limits of variation are very much extended, for they must include not only the cost of conveying gold or silver but the fluctuations in the proportion between the values of these two metals. A few years ago the proportion was 15 j to 1, but the demonitisation of silver by the German Government raised it to about 16 to 1, and the effects of the change were at once seen in the lower prices which were paid in London for the Mexican dollar and Indian rupee. As an unfavourable balance of trade tends to correct itself by giving rise to an exportation of commodities and an importation of bullion, so an unfavourable state of the exchanges is gradually corrected by the operation of the same cause. Merchants are guided in their dealings by a comparison of the prices ruling in the home and foreign markets, and have to consider whether the difference is great enough to cover aU the expenses which must be incurred when goods are sent fi-om one country to another. The price at which an exporter can sell the bills which he draws on his foreign correspondent is one of the items which he must take into account in calculating the profit to be derived from the transaction. If the exchange is at 25f. 10c. to the pound, he can seU his bills on more favourable terms than if he can only get £1 for every 25f. 30c., and this difference, slight as it is, may make all the difference between making a profit and incurring a loss. Hence, when the exchange falls, it becomes worth while for English merchants to export goods to France, Avhich they could not do at other times, and to draw bills on their correspondents for the amount. These bills being sold in England, supply the wants of those who have imported goods IXTERXATIOXAL VALUES. 405 from France, and thus the excess of importation naturally brings about a counterbalancing increase of exportation. Mill has devoted an essay to the discussion of the question what determines the values of the commodities which are the subjects of foreign trade. Articles produced in the same country exchange for one another in proportion to their cost, i.e., the labour and abstinence under- gone in producing them; but this rule does not apply to articles produced in different countries. As labour and capital do not move so readily from one country to another as from one part of the same country to another, competition has not the same power of bringing wages to the same level ; and though it can effect a tolerable equalisation of prices, yet, as different rates of wages prevail in different countries, the same price represents different costs of production. The principle, how- ever, which governs" the case, is the same as that which applies to the products of different classes of labourers within the same country. An article which a farm labourer has produced in a day does not exchange for one which a watchmaker has spent an equal time in producing, because the latter is a more skilful operative, and the remuneration of labour depends upon its efficiency as well as on its irksomeness. In the same way, a country in which labour is highly efficient is able to procure commodities from other countries Avhose labour is less efficient on more favourable terms than the producing countries themselves. The rate of wages paid to farm labourers in the United States is about twice as high as that which rules in England, but, unless the cost of carriage rises as high as 100 per cent., English commodities are sold in the United States for less than double the j^rices wliich they fetch at home. Using the term " value " in the sense given to it in Book II, Chap. I, the value of English commodities is, in many cases, lower in the United States than it is in England ; and the explanation is, that labour is more efficient in the United States. To the question what determines the value of a foreign commodity, it may be answered that it depends on three things : its cost of production, the difference between the efficiency of labour in the two countries, and the cost of carriage. If the last could be left out of the account, the value of English com- modities in the United States would be just half what it is in England; or, in other words, the value of each would be aljout equivalent to half as many days' labour as had been needed to produce it. Such is the explanationf urnished by the theory of value and wages set forth in the Second Book, and seems to be all that is required to render the general prin- ciple intelligiljle. Mill used " value " in the sense of ratio of exchange, and the problem which he set liimself tu solve was, accordingly, AVhat is the ratio in which commodities would exchange when they are produced in one 406 INTERNATIOXAL VALUES. conutiy and consumed in another ? Seeing that cost of production was not sufficient to account for the rates which might be established, he sought for a fuller explanation in the principles of demand and supply. He framed imaginary cases, and followed them out through considerable ramilications, and his explanation has been praised by Cherbuliez and Cairnes as an important addition to the science. But, with all respect for his memory and for the eminent men who have endorsed his theory, I must submit that he has not really explained the subject, but has merely re-stated the problem in a different way. In Book III., Chapter xviii. of his well-known work, he has gone over the ground very carefully, and has illustrated his arguments at great length; but, after all, he sums up by telling us, " The law which we have now illustrated may be appropriately named the Equation of International Demand. It may be concisely stated as follows : the produce of a country exchanges for the produce of other countries at such values as are required, in order that the whole of her exports may exactly pay for the whole of her imports." (Sec. 4.) But in the case which MiU was considering, it was assumed that the two countries concerned had no transactions with one another except those of simple exchange, and as in such a case the exports and imports must be equal, the law which he enunciated amounts to the statement that the ratio of exchange is such that the exports pay for the imports. But the fact that the exports jDay for the imports implies that the two exchange for one another, and to say that the ratio is that in which the two exchange, is to say that the ratio. determines itself. If, instead of consid- ering the trade between two countries, avc were considering an exchange between two individuals, and wished to know why ten grammes of gold would exchange for a pair of boots, it would not help as much to tell us that this ratio was established because it was just sufficient to equalise the monies spent and the goods purchased. The fact that the goods were bought, implies that the money given on one side was equal in value to the boots given on the other ; but, in order to explain why ten grammes rather than nine or eleven grammes were given, we must refer to something else than the facts implied in the bargain itself. It is not because the o-oiier of the gold is determined to get rid of ten grammes, that he offers them in exchange for the boots, nor does the cvvTier of the boots give them for ten grammes of gold, because that is the whole supply which is offered him. Ricardo's theory of value refers us to the cause which compels each of the parties concerned to agree to the bargain, and this cause is the amount of labour and abstinence which has been undergone in order to produce the two commodities which exchange for each other in proportion to their cost of production. "What- ever ratio of exchange has been estabhshed by competition, it is obvious IXTERXATIOXAL VALUES, -407 that the two things exchange for one another ; but this docs not explain why a particular ratio should happen to prevail. Mill himself seems to have felt that his explanation was unsatisfactory, for, further on in the same chapter (Sec. 6), he observes, " That this, however, does not furnish the complete law of the phenomenon, appears from the following consideration : that several different rates of international value may all equally fulfil the conditions of this law." He then proceeds to examine still further the diflFerent circumstances which may cause one country to consume more or less of the productions of another country, but as his argument still proceeds on the assumption that the matter can be ex- plained by confining the attention to the exchange without reference to the cost of production, it still remains open to the ol)jection that it does not point out any circumstance a laiowlcdge of which would enable us to predict the ratio of exchange. By reference to the cost of production in one country, and to the comparative efficiency of labour in the other, the value of any foreign commodity can be explained, and if these parti- culars are known in the case of two commodities, a comparison of them will explain the ratio in which the two will exchange for each other. Mill wished to arrive at this result by enumerating all the conditions which would lead to an increase or diminution of demand on the part of one country for the productions of another ; but these circumstances, though they may influence the total amount of a nation's trade, can only affect values by operating on the cost of production. Whatever may be the extent of the demand, whether domestic or foreign, the value of a commodity will not permanently rise unless its cost of production, or of conveyance, be increased; and a reference to such an increase in its cost, constitutes an explanation of the rise of value. Caimes, who has devoted a chapter to this subject, has accepted Mill's theory with some modifications rendered necessary by the difference between his and Mill's views respecting demand and cost. The word " demand " signifies with Mill, the quantity demanded ; w^hile with Cairnes it signifies quantity of commodities offered in exchange for the one required ; so that, in his sense of the word, the two commodities which are exchanged in every bargain constitute a demand for each other. When discussing the subject of value in an early portion of his book, he refers all cases which cannot be explained by cost of i)roduction to the action of reciprocal demand (p. 99). When discussing the subject of international values, he again refers to this principle for an explana- tion. He says, " Where the monopoly is at once strict and reciprocal, a case not frequent in international trade, but which sometimes does occur, as in the traffic which takes place between the tropical and the frozen zones, in the exchange, suppose, of spices for ice. In this case the 1U8 INTERNATIONAL VALUES. influence of reciprocal demand on value is unqualified and absolute, since, under such circumstances, there is nothing but the desires on each side, supported by such means as are available to give them effect, to deter- mine the bargain." (Part III., chap, iii., sec. 3). But in Cairnes' language, reciprocal demand means the commodities offered on each side ; so that, in his example, the spices constitute the demand on the part of the tropical, and the ice the demand of the fi-ozen zone. When, therefore, we ask -what determines the proportion in Avhich spices and ice exchange for each other, we learn that it is the desire on the part of the consumers which induces them to give a certain quantity of their omi products in order to procure its satisfaction. There is nothing, he tells us, but the desires and the means of giving them effect to determine the bargain ; but the question is, What determines the means of giving effect to the desires, and what enables the desires to be satisfied at a particular cost ? In every bargain there is a desire to be satisfied and a sacrifice to be incun'ed, but Political Economy is not content with the explanation that the bargain is settled by the play of these two factors. In the case of ancient works of art wliich cannot be produced when required, no law can be laid do\Mi to determine their value ; and a similar admission ought to be made in all cases where nothing further can be offered as an explanation than reciprocal demand. In the case assumed by Cairnes, the value of ice in the frozen zone depends on the cost of conveying it from the sea or river where it is found to the house where it is wanted, and its value is increased by the cost of conveying it to the tropical zone. But when it has been brought there its value may not be so great when compared with the labour of the tropics as with that of the frozen district from which it came. The rate of money-wages may be twice as high in the importing as in the exporting country, and thus the price may be remunerative, although its value at the tropics may be no gi'eater than that of the spices which have required half as much labour to produce them. This difference in the rate of wages would be owing to a corresponding difference in the efficiency of labour in the two regions, and thus the value of ice in the importing country would be determined by two factors : its cost of pro- duction, and the comparative efficiency of labour in the two countries. •The proportion in which spices and ice would exchange for each other would be determined by a comparison of these factors in l)otli cases. Here, then, is the difference between the explanation of value in the case of foreign imports given above, and that furnished by Cairnes. The one explains the value of foreign commodities by the same principles as those which govern the cases of articles exchanged in the country where they are produced ; while that given by Cairnes refers it to a different FOEEIGN COMPETITION. 409 principle, and virtually leaves it unexplained. I have thought it neces- sary to discuss the theories put forward by Mill and Cairnes on this subject, because their works deservedly stand high in public estimation ; and it is of some importance that even an occasional error committed by them should be at once corrected. It will not, I trust, be thought that I have any wish to deny the ability and clearness with which they have illustrated many of the most intricate problems presented by foreign trade. "Where commodities of the same kind can be produced in several countries, competition will effect an equalisation of prices in the same market, and each country will be called on to produce a larger or smaller quantity, according to its uatm-al capacity for production and its vicinity to the place of consumption. The tendency of Free Trade is to confine each country to the production of those articles for which its soil and climate arc best fitted, and to establish a division of labour among different countries similar to that prevailing among different districts of the same country. There is, however, but little probability that such specialisation can ever reach perfection, for whatever improvements may be effected in the means of transport, the item of distance will always be an important one in the account, and those countries which are nearest to the market will always be able to continue production, although in other respects they may not be so favourably situated as others at a greater distance. Distance acts as an impediment to trade in other ways besides merely increasing the cost of carriage, for it increases the difficulty on the part of the producers in understanding the wants of the consumers, and it, to some extent, lessens the confidence which the dealers can repose in one another. Even where one country has a decided advantage over the rest of the world, it does not follow that it would retain its position if it were to attempt to produce enough to supply the whole world. England has a great advantage in the production of coal ; but if England were to endeavour to supply the whole world with coal, it ^^'ould have to raise a very much larger quantity than at present, and this would necessitate the opening out of new shafts and the deepening of old ones, whereby the cost of obtaining the mineral would be so nuich increased that it would be cheaper for foreigners to produce it for themselves than to import it fi'om England. Coal is a bulky article, and the cost of transport is very great where large quantities are concerned. At present, indeed, English coal is exported to every foreign port, but this is only possible under certain peculiar conditions of trade. Newcastle coal, being of a remarkably fine quality, is required for English steamers, even tliough the cost is extremely high, and part of the export is thus accounted fur. The rest 410 FOEEIGN COMPETITION. is chiefly sent to ports from which goods have to be brought to England, without any equal bulk being sent from England in return. The ships employed having to make one voyage without a cargo, their owners are obliged to load them with something as ballast, and coal beiug excellently adapted for this purpose, it is worth while to seud it to any port where it can be sold for something more than its cost price. The cost of its carriage is rarely paid by the freight received for the return voyage ; and, as an instance of the peculiar character of this trade, it may be mentioned, that the charge for conveying coal to Peru is no greater than for conveying it to Spain. This subject has been fully treated of by Mr. Jevons, in his valuable work on " The Coal Question," where his object is to show that England cannot import coal to supply the wants occasioned by the gradual exhaustion of her coal-fields, and it, of course, serves equally to show that England cannot supply the whole world with coal. The principle which apphes to coal applies equally to all products of the extractive industries, and, though it does not to the same extent apply to manufactures, still there are limits to the extension which these can receive within the limits of a single country. A country which possesses an inherent capacity for engaging in a particular kind of manufacture will be encouraged to devote itself to this employment by receiving foreign orders backed by foreign goods sent in exchange, and, if necessary, will receive corn from abroad to enable its artisans to subsist without producing their own food. Such, in fact, is the position which England now occupies, as she receives food fi-om almost every agricultural country, and pays for it with the products of her manuflic- tories. But although foreign countries derive a great advantage from thus making England their workshop, the benefits of the system are not so great that England can monopolise the whole of the manufac- turing business of the world. To do this, her people would need to be crowded into towns to a much greater extent than at present, while foreign countries would be almost entirely confined to agriculture, and such a state of things would lead to social and political evils which would far outweigh its commercial advantages. The dread of foreign competition, which is perpetually finding expression in the letters and speeches of commercial men, seems to be based on little more than the fact that foreign commodities are imported, but they would perhaps be puzzled to explain how foreign trade could go on if such importation did not take place. There is nothing chimerical in the belief that a country may suffer material injury from foreign competition, and Ireland affords an instance where this has actually occurred. In the "Fragments on Ireland," which form a most interesting ■ part of Cairnes' " Political Essays," it has been very ably shown that the great FOREIGN COMPETITIOX. 411 Increase of the population of Ireland during the latter part of the last, and the earlier part of the present, century, was owing to the corn laws, which gave the Irish farmers so great an advantage in the English market; and that the great depopulation which we have witnessed in the last thirty years was occasioned by the adoption of Free Trade, and not, as is gCDerally supposed, by the potato blight. But, to judge from the complaints of manufacturers, they would seem to suppose that every mstance in which a commodity is imported which might have been produced at home shows that England's powers of production are declining, and that foreigners are supplanting Englishmen in their own market. If those who speak and va'ite thus would consider the nature of trade, they would see that the instances to which they point show, in reality, that England is still capable of producing enough for her own wants as well as supplying those of foreigners. If commodities are imported, they must either be paid for or obtained without payment. In the former case, English commodities must be exported to pay for them, and thus the very fact of the importation furnishes a proof of the activity of English production. In the latter case, the commodities are sent in order to discharge debts due in England, and thus afford a proof of the wealth of the country which has made judicious investments abroad ; and it is difficult to see how the fact that other countries are tributary to it can be made to prove that its wealth is declining. There is much to be done by English merchants and manufacturers who wish their country to succeed in the race of competition, and the most important matter to which they can devote their energies is, the main- tenance of strict integrity in their dealings with foreigners. It is a melan- choly fact, that the seat of various branches of manuiacture has been repeatedly changed, less on account of any natural disadvantage in the place itself, than on account of the dishonesty of the persons engaged in it. Tlic Irish flax trade and the woollen manufactures of the Eastern Counties have suffered severely from the dishonesty formerly practised in them ; and there are instances at the present time in which countries are threatened with the loss of extensive trades from ecpuilly disgraceful causes. It has been repeatedly made a matter of complaint that the cotton goods sent from Manchester to China are for dishonest purposes loaded with so much sizing as to be subject to mildew when they have reached China, and the practice has now become so general that Chinese merchants are unwilling to aoccpt p]iigli.sh goods of this class. A similar complaint has been made in England and in Russia of the adulteration of Chinese tea ; and the great extension of tea-planting in India is owing to the belief, whether well orill-gruuuded, tiiat the Indian planters have not yet learnt to follow the example of their Chinese rivals. If those 412 ADVANTAGE OF FOREIGN TRADE. who complained of foreign competition will set themselves to reform evils like these, they may secure a great extension for the trade of their own and of foreign countries ; but it is of little use for them to complain of importation as a proof of the decline of native industry. That foreign trade is advantageous has long been recognised, but very different reasons have been given at different times to prove it, and different measures have been proposed for determining the exact amount of benefit which it confers; at first, it was generally held that the benefit consisted in the amount of the precious metals which it brought into a particular country, and, according to this theory, a trade which caused a country to export these metals inflicted an actual loss upon it. That this theory was erroneous a very little consideration will now enable anyone to perceive, for it is evident that these metals, though they are useful, are not the only objects which men desire ; and that a trade which brings men hardware, or wines, or cloth, satisfies their wants and is useful to them, just as much as one which supplies their needs for gold and silver ; as, according to this theory, wherever two countries exchange gold for other commodities, the one must lose what the other gains. It would have been difficult for those who held it to explain how such a trade could be carried on, as the people of one must be supposed to be continually blind to their own interests. The trade of the East India Company was actually assailed as prejudicial to 'England because it carried silver out of the kingdom, and the defenders of the Company could make no better defence than that the goods which they brought from India were subsequently exported to other countries and sold for silver, so that the exportation of silver was the means of bringing about a large importation. In this theory the satisfaction of human wants goes for nothing, and the question is regarded solely from the dealer's point of view. The object of tradesmen is to sell their goods, and hence it was supposed that the object of a country was to sell its produce for gold and silver. Adam Smith, although he exposed the fallacy of supposing that these metals were the sole objects of trade, was yet so far uuder the influence of the theory that he regarded the subject fi'om the dealer's point of view. Thus, when speaking of foreign trade, he says : " It carries out that surplus part of the produce of their land and labour for which there is no demand among them, and brings back in return for it something else for which there is a demand. It gives a value to their superfluities by exchanging them for something else which may satisfy a part of their wants, and increases their employments."* He thus considers that its advantage consists in providing a market for * Book IV, chap. 1, p. 195, M'Cullock's Edition, 1863. AB VANTAGE OF FOREIGN TRADE. 418 the exports of a country. There are cases in which such a position is not altogether untenable, and these are chiefly Avhere the exports consist of agricultural produce. As the amount of these articles which may be produced in any one year depends on other causes besides the will of the producers, it often happens that more is produced than the inhabitants of the country are willing, or even able, to consume; and in such cases it is an advantage to be able to dispose of the surplus abroad. In his entertaining work on Australia, Mr. Trollope tells us that, in consequence of the protective tariff adopted by Victoria, it often happens that an abundance of fruit is left to rot in Tasmania, which, if trade were free, would be converted into jam to supply the Victoria market. Yet, even in this case, the advantage to be gained by Tasmania would consist in what she was able to import from Victoria, and, if her supei-fluities were sent to Victoria without producing any return, she would be no better off than if it were wasted on the spot. No doubt the expression, furnisli- ing a market, implies that something is obtained in exchange for what is sent to market, but the term superfluity implies that commodities are produced, not for the purpose of being sold, but unintentionally, and that some use has to be found for them afterwards. Even with agricultural produce this is only partially true, and when a trade has once been established between an agricultural and a manufacturing country, corn and cotton are as regularly grown in the former to supply the wants of its foreign customers, as cloth and steel are manufactured in the latter for a similar purpose. It is not because they have more cotton than they know what to do with that the people of Carolina and Georgia export it to England, but because they find that by doing so they can obtain various comforts and luxuries at less cost than if they produced them for themselves. In the case of manufactures, it is obvious that nothing is produced except with deliberate intention, and that it can only be an exceptional instance where a glut is relieved by foreign purchases. Englishmen engage in manufacturing goods for all countries because, by doing so, they can procure food and other things on more favourable terms than by producing them at home ; and though to the manufacturer it seems that the advantage of English commerce consists in enabling him to sell his wares al)road, the advantage to the English people consists in the commodities which are sent to pay for their exports. If trade were stopped between England and foreign countries, there would be a great change in the direction given to her industry, but her capitalists would still be aljle to find a market for their products, and there would be no greater superfluity than at present. If her capital was as large as before, it would give emi)loyment to the same numl)er of labourers, who would all ])c engaged in supplying the wants of native 414 ADVANTAGE OF FOREIGN TEADE. consumers, and those who had formerly produced goods for exportation would have to produce such as had formerly been imported. Things would not be the same as before, for production would be carried on in some cases with greater, and in others with less, difficulty ; but, as far as regards the facility of disposing of what had been produced, there would be no alteration. The habit of looking at the question from the dealer's point of view has led, in our own time, to a curious inversion of the ancient belief. According to the latter it was liest for a country that its exports should exceed its imports, because this was expected to lead to an influx of the precious metals ; but of late years some writers have espoused the theory that the excess of imports over exports represents the gains made by those engaged in foreign trade. Even Mr. Eogers says : " The profit of foreign trade consists in the difierence between the price at which the goods are bought and carried, and the price at which they are sold. A rough index of its amount is to be found in the difference between the money-value of the exports and imports of a country. The aggregate value of the latter is greatly in excess of that of the former. Thus, for example, in 1863-4-5, the imports of the United Kingdom were represented by the figures 249, 275, and 271 ; the exports by 197, 213, and 219. At first sight it would seem the people of this country bought more than they sold by 52, G2, and 52 daring these three years. In fact, the exports paying for the imports, they bought the greater sum by the less ; the diflFerence, some deductions being made, being the profit on the foreign trade."* It will be seen that this argument assmnes that all imports have to be paid for by exports, and, if this assumption be correct, the difference between the totals can only be set down to cost of carriage and profits made by the merchants. But what ground is there ibr this assumption ? The period referred to is part of that which I have previously cited, as exemplifying the position of a country which receives tribute from other countries on account of rents and dividends due to its citizens ; and though, of course, the statistics will lend themselves to either interpretation, it would be rash to assume that nothing is imported which is not paid for by exports. It is well known that large amounts both of landed property and of stocks and shares are held by Englishmen in foreign countries, and it is, to say the least, not prudent that an equal amount is held by foreigners in England. Mr. Rogers, perhaps, intends to allow for this circumstance when he adds the qualifying words of "some deductions," but this is hardly allowing sufficient importance to it. Commercial statistics furnish many instances * Manual of Political Economy, 2nd Edition, page 247, ADVANTAGE OF FOREIGN TRADE. 415 iu which a country exports much more than it imports, and it would be absurd to infer that the diflereuce constituted the loss incurred through foreign trade. Such an inference would not, indeed, follow from Mr. Rogers' reasoning, for the fact that foreigners had gained would not prove that natives had lost, but it might be plausibly urged that if the greater amount were only sufficient to pay lor the less, the difference must have been lost by the merchants engaged in the trade. While it is obvious that commodities which are exported must be sold at a higher price than in the country from which they came, it would be rash to assume that this difference is in all cases sufficient to account for the excess of imports ; and it is always desirable to seek for some other explanation, which the mere statistics will not afford. M. de Lavergne when estimating the cost which the possession of Algeria entails upon France, seeks for information in a comparison of the exports and imports exchanged between the' two countries, and finding that France exports 150,000,000f. more than she imports from Algeria, concludes that this represents the expenditure incurred by the French Government iu maintaining its civil and miUtary establishment in the colony. The inference is a legitimate one ; but if it were assumed that the exports merely paid for the imports, we should have to suppose that theAlgeriau merchants made a profit of 300 per cent., since, by exporting goods to the value of 50,000,000f., they Avere able to import goods to the value of 200,000,000f. In what, then, does the advantage of foreign trade consist ? The answer to this question is not far to seek. As the object of industry is to obtain wealth by the least possible labour, every system is advantageous to industry which promotes economy of labour. Foreign trade is beneficial to a country in so far, and so far only, as it enables the inhabitants to obtain what they require with less labour than they could otherwise do. It accomplishes this end in several ways. There are some commodities which can only be produced under certain conditions of soil and climate, and foreign trade enables them to be consumed in regions where they could not be produced. We have no means of measuring the advantage wliich is thereby conferred upon mankind. The trade which enables Englishmen to obtain cotton-cloth, confers on them a benefit which is none the less certain because we cannot measure the extent of it. If this trade did not exist, the people would be obliged to wear clotlies made from flax, wool, or some other material, and it would be difficult to calculate how much more labour would then be recjuired, and impossible to tell how much the comf:D THE SOVEREIGN. 433 which coutaiu as much gold as it does. Thus, both the old and the new sovereign are equal to 2 of., but the latter is in more perfect harmony with the French coinage ; and if this view be correct, there is, of com-se, no occasion for compensation. Unfortunately, however, it appears from Mr. Seyd's " Question of Seigniorage "' that this state of things no longer prevails, and that the French INIint has for many yeai's past returned coin for bullion after a very short delay, so that nothing like one per cent, can be allowed for loss of interest. While the substitution of gold for silver was m progress, the Mint was heavily taxed, for the Avhole coinage required to be renewed ; but now that the substitution has been completed, there is no extraordinary press of work at the Mint, and though the decree of 1850 is still in force, its provisions do not oppose any impediment to the public. We are thus constrained to admit that the old sovereign is equal to 25f. 22c., while the new one would only be equal to 25f. ; but even this does not establish the conclusion that the two are unequal, for there is still another alternative, that the value of the franc yviU be raised when the new system comes into operation. If the English Government imposes a seigniorage it vaU. be almost necessary for the French Government to impose one of equal amount if the coins of both countries are to circu- late together. Otherwise, the Miut which makes the lowest charge will be required to do all the work, and the English seigniorage would become inoperative from the want of bullion on which to levy it. The matter would, no doubt, be arranged by treaty if at any future time England should consent to join the Monetary Union. If England charged a seigniorage, and France did not, the gold coins would still be of equal value in Ijoth countries, for a seigniorage docs not raise the value of a com Avhcn compared Avith other coins in circulation at the same place, but only affects the price of bulhon in the country where it is imposed. If France, as might be expected, should impose a seigniorage equal to the English rate, the value of the franc -nould be as much raised as the weight of the sovereign was diminished, and 2i3f. being worth as much as 25f. 22c. were worth before, would be equal to the sovereign whose value had remained unaltered. It will be seen that though on this plan no readjustment of bargains would be necessary in England, yet, as the value of the franc would be increased, strict equity would require that French debtors should be compensated for the increased burden which would be laid upon them. The conclusion is inevitable, for it would be utterly inconsistent to make the imposition of a seigniorage a ground for rejecting the claims of English creditors, and not to admit it as a ground for compensating French debtors. The question is one which interests Freuclmien rather than Englishmen; but, although in strict equity F F ■iol OTHER SCHEMES. the claim is irresistible, we may see reasons why it is not likely to assume so much prominence as the similar claim which has been dis- cussed in England. In the fii'st place, the French people have already been forced to submit to a delay in coining, which has, as had been said, practically amounted to a seigniorage as high as the one proposed, and, at the time when this was the cavse, no compensation was given to debtors. In the second place, there will be no actual alteration in the French coin ; and, as the law entitles the creditor to a certain quantity of gold, and does not provide that no change shall be made in the rules of the Mint, the letter of the bond will be adhered to if he still receives the same quantity of coin. However this point may be settled, it is evident that if the sovereign be unequal to the 25f. piece, the one cannot be substituted for the other without loss or trouble being imposed upon somebody; and it is to be hoped that somebody will consent to bear it for the sake of the general advantage to be derived from the change. A generation which has undergone a fall of 25 per cent, in the value of gold without any general revision of contracts, might consent to submit to an alteration of one percent, in the value of the coin. As the labours of the Paris Conference have resulted in the elaboration of a scheme Avhich, if adopted, would harmonise the existing cm-rencies of nearly the Avhole world, it is hardly desirable for the advocates of uniformity to set to work to invent a new system which is to take the place of all those which are now in use. M. Chevalier has proposed that the unit should be a coin containing ten grammes of pure gold, which he favours merely on account of its fitting in Avith the metric system. On a former occasion he objected to the abandonment of silver as a standard of value, because the silver franc consisted of exactly ih grammes of pure silver, while the gold ft'anc does not contain such an easily-remembered amount. Dr. Farr proposes to take as the unit a coin Aveighing 8 grammes, and consisting of gold 900 fine. It is to be regretted that the 25f. piece would not exactly correspond to this description, as one hundred and twenty-four of them Avould Aveigh a kilogramme — not one hundred and twenty-five, as Avould be the case with the coins proposed by Dr. Farr. A A'cry slight alteration Avould be required to bring the pieces to this exact Aveight ; but as the kilogramme Avould then be coined into 3,125 francs instead of 3,100 francs, the Avhole question of compensation Avould be reopened. Either of these schemes Avould deserve consideration if all nations Avere prepared to enter on a ncAV course, but the difficulty of inducing them to make even a slight change is so great that little can be gained by preparing a scheme for a complete revolution. The advantages of a decimal coinage have often been dwelt on, and some schemes have been proposed for introducing it OTHER SCHEMES. 435 into England -without doing more violence than necessary to the existing system. That which has obtained most favour is lalo^Yn as the pomid and mil scheme, by which it was proposed to divide the pound into 1,000 mils instead of 960 farthings, but to make no alteration in the value of the shilling or of any larger coin. This scheme would have had the disadvantage of disturbing the numerous small bargains con- cluded among the poorer classes, who would gain very little l)y the new arrangement. INFr. !MusgTavc, the Governor of South Australia, suggests* tliat a half-sovereign should be called a pound, and accounts should be kept in these and in shillings. All that would be necessary to bring old accounts into the new system would be to divide by two. Another scheme has been proposed which Avould leave the penny unaltered and raise the pound so as to be equal to 250 pence, or 1,000 farthings. This scheme, while it would not inflict much inconvenience on the poorer classes, and would in many respects be convenient to the whole community, would yet cause a great deal of trouble in recalculating all considerable payments, while it would not quite bring the sovereign into harmony with the American half-eagle, which would closely resemble it. It may be said generally of all these schemes, that, whatever their individual merits may be, none of them can compare with that proposed at the Paris Conference in any of the requisites for a gTcat monetary reform. =" studies ou Political Ecouumj', 1875, p. i2. i-"F2 CHAPTER IX.— RATE OF INTEREST. PROHIBITION OF USURY — INTEREST ON STOCKS — RATE OF DISCOUNT — STOCK EXCHANGE SPECULATION — FOREIGN INVESTMENTS. In every country there has probably been a time when the lending of money at interest has been discouraged, either by law or by opinion. It is well kno^Mi how the Jewish law prohibited the Jews from taking usury except from foreigners, who were not considered to be entitled to the same consideration as fellow-citizens. It is curious that when the Jews were scattered throughout Christendom they should have been enabled to carry on this very business by this exception in regard to foreigners, while the Christian Governments allowed them a virtual monopoly. It was sinful according to the opinions prevalent in the middle ages for a Christian to lend money on usury, and Christians were there- fore forbidden to do so ; but as the Jews Avere already damned on account of their creed, it was not thought Avorth Avhile to prevent them from committing one sin more, and they were accordingly alloAved to engage in the business. The monopoly Avhicli they thus enjoyed must no doubt haA'C greatly contributed to secure them AYcalth and influence. Aristotle,* as is AA'cU known, considered that usury ought to be altogether pro- hibited as a dishonourable practice, and one which was altogether against nature. He considered it legitimate for traders to make a profit by supplying commodities to consumers, but he thought that merely lending money Avas not mcreasing the stock of commodities, but Avas making a profit at the expense of other people. He doubtless would not have objected to a person receiving money for the hire of a house, and yet the gain which is thus made is obtained at the expense of the hirer quite as much as the interest on a loan at the expense of the borrower. When a man borroAVS money, he generally spends it on commodities, and, by means of these, obtains a profit Avhich enables him to pay the inte- rest ; and it can make no difference whether the purchase is effected by the lender or the borrower. In either case, AA'hat the borrower Avauts is the commodity, and he accepts money as the most convenient means of procuring what he requires. If he spends it in the purchase of a house, he will be able to let the house for an annual rent ; and if he were not required to pay interest he would make a considerable profit, and aa'ouM yet be able at any time to obtain by selling the house a sum sufficient to * Politics, Book I., chap, 10 (Congreve's Edition). PROHIBITION OF USURY. 437 repay the loan. The lender, on the other hand, having parted witli his money, would be deprived of a similar opportunity of making a profit ; so that lending without interest would be in eiieet giving away something in addition to the amount of the loan. Money does not breed money, but it is not therefore unnatural to make money bring in money, for it enables its possessor to buy plants or animals which will breed according to their kind, and the profit which may be thus secured being obtained at the lender's expense, there is no reason why the bor- rower should not compensate him for the sacrifice undergone. The pre- judice which has always existed against money-lending is mainly duo to the fact that those who engage in it seem to make a living by taking advantage of other people's necessities ; and, as far as concerns the lowest class of these dealers, the opinion is probably well-founded. The money- lenders who send circulars to young ofiicei*s and undergraduates, oflFer- ing to lend money on pereoual security, cannot be actuated by a mere desire to obtain a living by supplying the wants of other people. It is clear from the way in which these offers are worded that they desire to tempt imprudent young men into extravagance in order that they themselves may obtain a profit by ruining their unfortunate customers, or by working on the feelings of parents or others who are interested in them. It is not, however, because they lend money, but because they try to tempt others to run into debt that they are justly regarded as a disreputable class of men. The same stigma, in fact, attaches to another class of men who tempt people to extravagance by supplying them with commodities on credit. The tallymen who induce the ^\ives of miners to buy dresses and other articles on credit, promising that they will never importune for payment, and who then transfer the debt to a third party who sues for the money, are justly regarded as a public nuisance, who ought to be as far as possible discouraged by law. But the mere lending of money, or of money's worth to be repaid with an addition, does not in itself constitute an injury to anyone, but confers a benefit on both parties concerned. The debtor has to pay more than he receives, but the loan either enables him to secure a profit, or saves him from incurring a loss. In most cases where high interest is paid, the loan is required to avoid the necessity of selling commodities, and everyone knows how enormous is the loss consequent on a forced sale. When the goods of a bankrupt are sold by auction, it is thought a gi-eat piece of luck if they realise three-quarters of the usual price. By borrowing money for three months, a tradesman may avoid the necessity of such a sale, and even if he has to pay interest at the rate of 40 per cent. ])CY annum, lie will only lose 10 per cent, instead of 25 per cent. "While, therefore, such an arrangement is profitable to the bon-ower, it is advantageous 438 PROHIBITION OF USURY. to the lender, and need not bring in any extraordinary profit to those Avho carry on tlie business. The profit on a single transaction appears large, but there is a considerable risk in a busi- ness where unusually high rates are charged ; and, in fact, the rates are made high in order that repayments by solvent debtors may com^Densate the losses sustained in cases where the debtors are insolvent or dishonest. The legal prohibition of usury tends rather to aggi-avate the hardships of the debtors, for it introduces further risk against which the lender must guard himself, viz., the loss inflicted by the legal penalty if the transaction is detected. They can only protect them- selves by charging a higher rate ; so that in this, as in so many other instances, the interference of the Government only injures those whom it is intended to relieve. A loan is a transaction which it is so easy to keep secret that it is practically impossible for a law against usury to be en- forced; and, indeed, it frequently happens that the very government which forbids usury is obliged to borrow money at high rates from the very men whose business it seeks to annihilate. The facility of evasion applies equally to aU laws for regulating the rate of interest, which, so far as they have any effect at all, defeat their own end. [Money-lending must be carried on, and must, therefore, bring a profit to those engaged in it, and competition will insure that the rates charged A\all not be higher than is required to bring profits in the trade to the same level as in other trades, regard being had to its peculiar disadvantages. The law cannot enable the average borrower to obtain money on terms which are not profitable to the lenders, and on terms which are profitable he will always be able to borrow without the assistance of the law. If the legal rate be fixed above that which is usually charged, the law may remain harmless so long as it is inoperative ; but whenever it becomes necessary to exceed the legal maximum, the debtors must suffer an additional loss in order to compensate the risk incurred by breaking the law. The distress occasioned by the commercial crisis of 1825 was, as Tooke tells us, much aggravated by the usury laws. At that time it was illegal to lend money at a higher rate than 5 per cent., and although it v/as commonly lent at higher rates, respectable establishments like the Bank of England did not venture to break the law. At the time of the crisis it was impossible for these banks to lend at 5 per cent, in sufiicient quantities to supply the wants of borrowers, though they might have been able to do so at 7 or 8 per cent., and they were therefore obliged to refuse many applica- tions. Those who were thus refused were not thereby enabled to obtain money on favourable terms, but were obliged to borrow at 30 or even 40 per cent, from a less scrupulous class of money-lenders, and, in the last resort, to sell their wares at a much greater sacrifice. A great alteration PEOHIBITIOX 01" USURY. 4:^0 Avas made in these laws in 1830, when commercial bills were exempted fi-oni their operation, and a fnrther change was made in 18r)4, when mortgages were similarly exempted. This amonnted to their virtnal repeal, thongh there is still a class of cases in which the law endeavours to protect debtors against the consequences of their poverty. It still forbids pawnbrokers to charge more than 5 per cent, interest on their advances, and this last relict of the usury laws has met with the approval of ^Ir. Rogers, who speaks of it as follows : — " The law controls certain trades, regulating, for example, the hours during which public-houses may be opened ; detennining the rates of interest which pawnbrokers may exact on pledges ; fixing the maximum fiire which public con- veyances can charge for the services which tliey render. In these and many other cases Avhich might be cited, the Government is rightly occupied in protecting the weak against the strong ; in preventing the liolder of a supply, the demand for which is nrgent and temporary, fi-om taking advantage of the position which he occupies." (Manual, p. 235.) Yet the same reasons which have been urged to show that the rate of interest on ordinary loans cannot be regulated by the State for the benefit of debtors, are equally applicable to the case of pa"mibrokers. They, like other lenders, must charge such a rate as will bring them in an adequate profit, and their competition will, as in other trades, fix the rate at such a point as to bring in ordinary profit. If 5 per cent, were too low for this purpose, pawnbroking would not be carried on ; and, in point of fact, means are devised for evading the provisions of the law, strict as they appear. One obvious method would be for the pawnbrokers to advance a smaller sum than the goods are worth, and to take the chance of their not being redeemed ; and, to prevent this, the law requires that the goods, if not redeemed within 12 months, shall be sold by auction, and that the excess of the price which they fetch over the amount of the loan shall be restored to the person who pledged them. In fact, however, these persons very seldom exercise this right, and pawnbrokers, no doubt, make a considerable profit in this way beyond what the law intended that they should. They also make something by charging for the ticket which they give whenever an article is pledged, and by requiring the customer to take a number of tickets when several articles are pledged at the same time, although one would be sufficient. Other laws might be devised to prevent these evasions, l)ut a law is of little use when those for whom it is intended have not the means or the inclination to put it in force ; and even if a law could be framed which it would be impossible to evade, it could only secure to necessitous persons the choice between pledging their goods on such terms as would make pawnbroking profitable, or going without accommodation of tliis 440 PROHIBITION OF USURY. kind. In this latter alternative, those who would otherwise have pledged their goods would be forced to sell them, and, in so doing, would suffer a much heavier loss than they would have done if allowed to pledge them on such terms as could be obtained. The French Government does, indeed, meet the difficulty by establishing a pawnshop at its own expense ; and, of course, a government institution can be carried on at a loss, and can confer some benefit on necessitous persons by giving them more favourable terms than they could otherwise obtain. But as the loss incurred through such an establishment must be made up out of the public taxes, the burden is only shifted, and the pressure of heavier taxation tends to produce poverty to the same extent as relief is afforded by the pawnshop. Bentham's " Defence of Usury " contains a most forcible, and, at the same time, entertaining exposition of the causes which render all attempts to regulate the rate of interest either mischievous or nugatory. He points out that where loans are recognised by men of business, they can obtain what they vrant at a heavy sacrifice without violating the law, by the simple process of selling securities at a low price on condition of receiving ready money. It is customary Avhen stocks are sold to charge a higher price if payment is not to be made until the end of a fortnight or a month, and the difference between the credit jirice and that paid for immediate delivery varies with the rate of interest prevailing at the time. A holder of stock may sell it for ready money, and agree to pay back an equal amount a month aftervrards at an increase of one per cent., in which case the loss incurred is as great as by borrowing at the rate of 12 per cent, per annum. Yet here the law can hardly interfere to dictate the prices at which particular stocks shall be sold for immediate delivery or at the end of the month. The commercial crisis of 1825 afforded an example of this mode of evading the law, for the divergence between the two prices of consols was remarkably great. Adam Smith thought that a legal maximum was not altogether undesirable, and that if it were not placed too low, it would affect no one except profligates and projectors, and that, by discouraging these classes, it would prove to some extent beneficial, Bentham replied that as to projectors it would be most dangerous for the State to impose any artificial impediment to their success, because every new invention must be brought in by a projector, and if no new inventions could be carried into practice, society would stagnate. He admitted that it must always be a hazardous undertaking to lend money to a projector, ])ut he pointed out that though this was a sufficient reason why cautious people should not lend to projectors at the usual rate, it was no reason why those who chose to run the risk should not be alloAved to do so, or v^'hy projectors should be INTEREST ON STOCKS. 4^1 forced to pay more than sufficient to compensate tlie extra risk. He urged that society had ah'oady received an immense benefit from projectore, and that there was every reason to expect that the projectors of the future would not prove inferior, but would far surpass the projec- tors of the past. In our own time we have heard much of the evils consequent on the rapid extension of limited liability companies, but whatever ground there may be for these complaints, no one would wish to be without the railways, steamers, and telegraphs, which we owe to projectors ; and all will admit that Bentham's expectations have been fully realised. As for profligates, Beutham urged that regulating the rate of interest would not prevent them from borrowing money as long as they had any security to offer, and that if they had no security they would not be able to borrow it in any case. If they could not borrow they could obtain money by selling whatever property they possessed, and the sacrifice which they would thus incur ^vould be quite as great as if they had to pay interest on a loan. Even if they could not obtain money, they could, at least, obtain on credit the goods which they required, and, by paying much more than the ordinary price, would lose as much as if they had borrowed money in order to buy them. At the present time, the law courts endeavour to protect this class of persons by refusing to enforce the payment of what is considered excessive interest. No penalty is, however, imposed on the- money-lender, and this interference is confined to cases where the youth and inexperience of the borrower are considered to place him at an unfair disadvantage in his dealings with the money-lender. Even in such cases, where the intention of the law is commendable, it can, after all, do very little. It can refuse to enforce any bargain, whether it be a loan at high interest, or the sale of goods at extravagant prices; but though it can relieve individual debtors, its interference introduces an additional risk into the business, and the whole body of spendthrifts must suffer in order that a few of their number may obtain relief by appealing to the law. In fact, the ca.ses where such an appeal is made, afibrd abundant proof of the enormous rates which ai'c charged to debtors of this class, GO per cent, being no uncommon figure ; and the law is powerless to prevcut the ruin of those who can consent to borrow on such terms. When a government is not content to confine its interference to such cases, but endeavours to prescribe the rate which shall be charged to ordinary debtors, its impotence becomes still more apparent ; and modern Turkey affords an example of a government which stultifies itself by fixing a maximum which it habitually exceeds when borrowing money to support its own extravagance. When borrowers and lenders are left to arrange freely the rate of 4-i2 INTEREST ON STOCKS. interest at which the loan is to be negotiated, the only risk to be taken into account is that which is involved either in the business in which the borrower is engaged, or in his personal character. The element of risk can hardly be said to be completely eliminated even from the best securities, although this is almost attained in the case of the funded debts of the most wealthy and scrupulous governments. The difference between interest and profit is, that the former is a more or less definite per centage which one person or set of persons has agreed to pay to another, while the latter is an uncertain quantity which varies accord- ing to the success with which capital is employed in a particular business. Where the business is a small one, and is superintended by the capitalist who furnishes the means for carrying it on, it is not easy to determine how much of the total gains ought to be set down as profit on capital, and how much as wages of superintendence. But the development of joint-stock companies in our own time furnishes a ready means of distinguishing between these two elements, for the managers of companies receive regular salaries like the clerks and artisans who are employed, and the owners of the concern form a distinct class who receive the profits for no other reason than that they have provided the capital with which it is carried on. As it is the practice of companies to raise considerable sums by borrowing from the public by way of debentures, mortgages, and preference shares, their accounts furnish examples both of interest and of profit. The dividends on the ordinary shares constitute profit, which varies according to the ability and success with which the particular company is managed ; and the average rate of these dividends may be taken as a fair index of the rate of profit derived from private undertakings of a similar class. The dividends of the debentures and preference shares are interest on loans raised by the companies, and the rate paid by the ^vealthiest and most res])ectable companies may bo taken to represent the highest that can be obtained by cautious investors who 'wish to derive an income from their money without breaking into the principal, and without incurring any trouble. It is clear that there must be some connection l)etween the rate of profit and the rate of interest, for interest is profit minus risk ; but there are several circumstances which render it unsafe to assume that the differ- ence between the two rates must always l^e the same. Although the same persons fi'equently invest part of their money in shares, and part in debentures or other loans, the advantages of these two modes of invest- ment are viewed in a different light by different classes of investors, and there is a large class, that of trustees, who are almost debarred fi-om purchasing sliares in which any risk is involved. If the Government be firmly established, and, at the same time, known to be honest, it can INTEREST ON STOCKS. 443 generally borrow'money on more favourable terms than private companies, for these latter are always exposed to the chance of loss through some imexpected turn of trade, while a government, though equally exposed to such losses, can always resort to an increase of taxation to supply the deficiency. As a rule, of course, trustees are allowed, and often requii'ed, to invest in stocks the interest on which is paid or guaranteed by the government, and in a country where very large sums ai'e at all times held in trust, there is always a large fund ready to be invested in a government loan. As a rule, the public debt of a coimtry goes on increasing as its wealth and population increase, but the national debt of England is actually smaller now than it was 50 years ago ; and the United States and a few other countries have reduced their debts during the last ten years. If Englisli trustees were still bound by the restriction formerly imposed upon them, which practically prevented them from investing in anything except the publicf unds, the price of these would probably be ten or twelve per cent, higher than it is now, for the sum to be invested has been constantly increasing, while the nominal amount of the national debt has Ijcen decreasing. If the larger sum must be spent in purchasing the smaller, it can only be effected by increasing the nominal price of the stock. In 1851, consols rose to par, and they would probably have remained at, or risen above, that point if the law on the subject of trustees had not been altered as was done in 1855. Trustees are not actually forbidden by law to invest in any stock which they may think proper, but before 1855 it was provided that if they invested in any other stock than the public funds, and the price should happen to fall after the investment had been made, the person for whose benefit the trust existed might require the trustee to replace the sum originally invested. Thus, a trustee who made such an investment ran the risk of being called on to make up out of his own pocket for any accidental fall in the price, while in the case of a rise he would obtain no benefit, but Avould 1)0 obliged to keep the stock in trust as before. This practically compelled trustees to confine themselves to the public funds, unless in excuptioual cases, but in 1855 a considerable extension was granted to their discretion. They were then allowed to invest in railway debentures, mortgages, the stock of the Bank of England, and of the Bank of Ireland, and in any stock the interest on whirh was paid or guaranteed by the Government of any colony or dei)endency of Great Britain ; and ])y a more recent Act the stock raised by the ]\Ietropolitan Board of AVorks has been added to the list. This measure not only opened a much wider field for the investment of trust-money at tlie time when it was passed, but has furnished the means of increasing the l)urcha8al)le fund simultaneously with the increase of the trust-fund 444 INTEREST ON STOCKS. itself. The national debt is steadily decreasing, bnt many of the dependencies of Great Britain liavc increased their debts, and the continual extension of railways brings along with it a proportionate increase in the amount of railway debentures. The greater latitude which is thus afforded to the discretion of trustees has had its effect in diminishing their eagerness to buy consols, the price of which has seldom exceeded 95 since the Act was passed. Even at this price they yield little more than 85 per cent., and the fact that the British Government has been able to borrow 20 milliards at so low a rate is justly regarded as a striking proof of its high character and the general confidence in its stability. If it were to folloAv the example of other governments, and largely increase its debt, it would not be able to borrow at so low a rate ; and, in fact, during the war with France, it Avas sometimes obliged to pay per cent,, although it had previously been able to borrow at little more than 3 per cent, in time of peace. The rates at •which different governments are able to borrow money differ considerably from various causes. The late Mr. Dudley Baxter, who has taken some pains to investigate this subject, has given, in a paper in the journal of the Statistical Society for 1874, a table showing the different rates prevailing at the time, from which the following is extracted (the total amount of each debt being omitted). High Interest. 6i and 7 per cent. States- {."e'^^ent. Portugal G-7 Japan 6'8 HiTngary 7"0 Austria 7*5 Columbia 7"'i Koumania 7"8 8 to 10 per cent. States — Uruguay 8*0 Italy 8-2 Cuba 8*2 Egypt 9*0 Peru 9'7 Ecuador 10-0 Turkey 10-7 Excessive Inteeest. Guatemala I4"5 Bolivia 15-0 Spain 16"5 Mexico 17"5 Costa Eica 220 Paraguay 25'0 Venezuela 2o'0 San Domingo — Greece 33'0 Honduras 66-0 Low Intp:rest. Interest 3 per cent. States— per cent United Kinsdom ... 3i Denmark ... 3i 4 per cent. States — Holland ... 4-0 Belaium ... 4-0 German States ... 4-0 India 4'2 Canada ... 4-6 Australasia ... 4-6 Sweden ... 4-9 Modeeate Ikteeest. 5 to 6^ per cent. States- Morocco 5 United States 5"l Brazil , 5"1 Russia 53 France 53 Natal, Cape of Good Hope, Ceylon, and Mauritius... 5*7 Chili 6-7 Argentine Republic 6"3 INTEREST ON STOCKS. 445 It is obTJous that tlie enormous rates set dovm in the last division of the table cannot be long maintained, and, in fact, they all occur in the cases of defaulting goTernments ; and the figures represent not the actual rate of interest paid, but the small value which the investing public attach to the promise of the government that it will pay what it has midertaken to do. The figm-es in all cases represent, not the nominal rate of interest on the principal of the stock, but the actual yield wliich an investor can obtain by purchasing the stock if the interest is duly paid. The divisions of the table are, of course, more or less arbitrary, and the slight rise or fall in the price of a stock would cause the government which issued it to be shifted from the region of moderate to that of low interest, or vice versa. Within a year after the paper was printed, the French 5 per cents, had risen above par, and this would be a sufficient reason for placing France among the countries Avhcre interest is low, although nothing had occurred in the interval to increase the confidence of investors, either in the stability or in the honesty of the French Government. It is, indeed, a most remarkable sign of the times, that' although no country is more subject to revolutions than France, none of its many changes of government has been followed by any viola- tion of public faith ; but every party which has succeeded to power has scrupulously fulfilled the engagements of its predecessors. There have been gi-eat fluctuations in the prices of the French funds, and there have been times when the French Government has had to pay dear for a loan, but this has not being owing to any Avant of confidence, either on the part of Frenchmen or of foreigners, in its ability and determination to meet its engagements, but rather to the particular circumstances which made it difficult to lend the required sum at the time when it was wanted. During the war with Germany, it brought out a G per cent. loan at the price of 80 per cent., or, in other words, undertook to pay 7^ per cent, on what it borroAved ; but the stock Avhicli Avas thus created rose to par soon after the termination of the war, and Avould doubtless haA'c fetched a considerable premium had not the holders been exposed to the chance of being paid off at par. At the time Avhen this loan Avas brought out. Frenchmen Avould have been as A\illing as ever to assist tlieir Government, but the Avar brought so uluch distress upon them, that all of them Avho had any money were anxious rather to keep it by them in the shape of coin or notes than to invest it in even a good stock. Foreign capitalists, though they could hardly have doubted that the French Goveriunent Avould fulfil its engagements, Avere indisposed to invest largely in a stock which might be further reduced in price by future issues, and they accordingly required high interest to compensate tliom for the iucouvcuience and risk to which they submitted. A few 44:0 INTEREST ON STOCKS. years before Uic "war, the French 3 per cents, stood at 73, while during its continuance they fell to 00 ; and, according to Babbage, this would show that the rate of profit liad risen i'rom 4 to G per cent, in the interval. This, however, would Ijc a very unsafe conclusion, for it can hardly be supposed that French capitalists could have made higher profits during a war which almost put a stop to business. The investing public were certainly able to obtain better terms for fresh investments, but this does not show that persons who were engaged in business were able to obtain a higher profit by raising their prices or by other means. The United States afford another instance of a Government which has been obliged to pay dear for the loan raised in time of war, but has been able to reduce the rate of interest after the return of peace. During the war, the Federal Government brought out a 6 per cent, loan at 70, or, in other words, had to pay 8^ per cent. ; liut it has since been able to borrow at 5 per cent. Here, again, the high rate paid during the war was not so much owing to any want of confidence in the stability of the Government, for no one supposed that the Northern States, even if unsuccessful, would be unable to maintain their own independence, or would be forced to repudiate their debt, as was afterwards the case with the Southern States. The high rate was simply the consequence of the large draft which was suddenly made on the resources of the trustees and other persons who favour this class of investments. In order to take up the large amounts which were offered for subscription, it was necessary either to withdraw money fi-om other investments, or to make fresh accumulations ; and, in either case, time was required for the process, and those who came forward to save the Government from the necessity of waiting required compensation for their own trouble and expense. This they obtained, partly by means of the^ high interest which they received, and partly liy being enabled to sell at a higher price after the Government had ceased to raise fresh loans. It is so well kno^^■n to all persons engaged in financial business that time is required for the public to "absorb " a loan, that a fall in the price of Government stocks can be predicted whenever a large loan is offered for subscription. "We cannot, therefore, take the price of the public funds at any particular time as indicating the rate of profit, though it does show the rate of interest which the investing public can obtain. The Government can raise or lower the price of its stocks by reducing or increasing their amount, but it Avould be strange indeed if incun-ing increased expenditure and heavier taxation would raise the rate of profit. Portugal appears in the table as a State which borrows at the rate of G.7 per cent. ; but if the table had been framed in 1870, the figure would have been 9 per cent. This fall is not u^^ng to any fall in the rate of profit, but to an improve- INTEREST OX STOCKS. . 447 meut ill the management of Portuguese finance. The payment of tlie interest on tlie debt was at one time somewhat irreguhn-, and the reform of tliis abuse was naturally followed by a rise in the price of Portuguese stock. Mr. Baxter has noticed a somewhat curious fact concerniuii- the degrees of credit enjoyed l)y different States, which is, that the countries of high interest lie Avithin the same geographical area, Southern Europe and Central America ; while the countries of moderate interest are fouud, for the most part, either to the north or south of this zone. He does not proclaim this as a rule without an exception, for the dependencies of Great Britain, wherever situated, partake to some extent in the high credit of the mother country ; but it is certainly remarkable that Por- tugal is the only State in Southern Europe which does not seek in some way or other to defraud its creditors, and almost all Spanish- American Republics pursue a similar coui'se. The heat of the climate is generally considered to foster indolence, and may be the remote cause of the apathy which the inhabitants of these countries display when required to make sacrifices, in order to fulfil their eugagements. The United States and Australia are countries in which the rate of profit is usually sujiposed to be high ; yet, according to the table, they are able to borrow at a lower rate than France, which is not generally thought to be remarkable for high profits. It might be thought that the rate of interest on Govern- ment stocks is more hable to be affected by foreign purchases than the rate of profit, and, to some extent, this is probably the case ; and some countries might be compelled to pay higher interest if all their creditors were natives. But, in fact, the stocks of Victoria have sometimes stood at a hidier figure on the Colonial Stock Exchange than in Loudon ; and thoucrh this miu'ht not have been the case if the whole loan had been subscribed in Victoria, it yet shows that the colonists are content to receive a lower rate of interest than is rcpiircd to satisfy Euglish investors. There are many circumstances besides the rate of interest which influence the price of a Government stock. Ju the case of the British lunds, the dividends could not till recently be received without the stockholder either submitting to the trouble of going in person to the place where the dividends arc paid, or the expense of a power of attorney to enable some one else to receive them. Of late years, many foreign governments have adopted the practice of issuing bonds with coupons attached, and undertaking to i)ay the interest to anyone who presents the coupons at the ai)i)ointed time and place. Each of these modes has it advantages and disadvantages. The English practice renders it more troublesome to obtain the dividends and to transfer the stock, for the same formalities have to be gone through in a case of a transfer as iu that of receiving dividends. The foreign practice greatly 448 INTEREST OK STOCKS. facilitates both these operations, for all that is necessary is to hand over the bond or the coupon to some one else ; but this very facility increases the chance of the interest being received by those who are not entitled to it, and the formalities required in England are a valuable safeguard to the holders. It is usual for bondholders to intrust their bonds to their bankers, who undertake to present the coupons as they become due, and cases have occurred, though they are happily rare, in which bankers in embarrassed circum- stances have abused the confidence reposed in them, and have made away with bonds thus entrusted to them. This could not be done in the case of the British funds, and the foreign practice also exposes the bond- holders to a loss when the bonds are accidentally mislaid. A holder of British funds has his name inscribed in the book of the debt, and his title cannot be disputed; but as'foreign governments only undertake to pay the bearer of a particular piece of paper, they refuse to pay when the paper is not forthcoming. These governments frequently undertake to pay off a loan by instalments, and, in order to secure impartial treatment for all their creditors, an annual selection is made, by lot, of the bonds which are to be paid off. The bonds are all numbered, and the numbers which happen to be dra^^•n are advertised, but it sometimes happens that a bondholder is not aware that his bond has been drawn, and he continues to present the coupons as before. When the fact is discovered, the Grovernment pays it off, but deducts the amount of interest which has been paid in error ; and though there is much to be said in defence of this practice, it is at least illiberal, and is inconvenient to the bondholder. Although such cases may be very rare, the possibility of their occurrence is enough to deter cautious people fi'oni investing in these bonds so readily as they would do in stocks, in connection with which no such losses can occur. The possibility of the loan being paid off at par is a contingency which must always be kept in view by investors, and the apprehension of such an e^'ent tends to keep the price of the stocks which bear high interest lower in proportion than other stocks, Avhich are similar in every otlier respect, but bear lower interest. Thus, for instance, when the French 5 per cent, rentes Avere at par, the 3 per cents, were at 63 or 64, although 60 would have been the propor- tionate price, the security being identical. The 3 per cents., though they brought in lower interest on the money invested, yet offered a better chance of making a profit by subsequently selling out, for there was a possibility of gaining 36 fi-ancs on every 64 francs invested, while any considerable rise in the price of the 5 per cents, might induce the French Government to propose to lower the interest, and thus compel the holders either to submit to a loss or to find a new investment. The INTEP.EST ON STOCKS. 449 times at which dividends are paid have some slight influence on the price of stocks. As a rule, these are paid half-jearlj, but the French Government prefers to pay every quarter, and, in many respects, this is a more convenient practice. The price naturally rises as the time for the payment of a dividend approaches ; and this goes far to explain the diflFerence which may be noticed between the prices of stocks issued by the same Government, and bearing' the same interest, such as consols and reducc^I o per cents. It, however, frequently happens that the latter of these stocks is cheaper than the former, even when it will produce a dividend within a shorter tune ; and this apparent anomaly is said to be due to the fact that the amount of the whole stock is smaller, which renders it somewhat less certain that a purchaser will be at once forthcoming when a holder wishes to sell. If, leaving these details, we cnqnire what is the cause of the rate of interest, it will appear that it is a remuneration for abstinence. Money is not capital, but a possessor of money can obtain capital, and employ it in productions, and can thereby obtain a larger income than by unassisted labour. If he consents to forego this advantage, and lend his money to a government, he requires some compensation for the possible gain which he has sacrificed. It need not be so much as he would have made for himself, for it will be obtained without trouble, and, in the case of a scrupulous government, without risk. In the case of trustees, it is possible that their funds would be entrusted to the Government even if no interest were paid upon them, for they would be relieved from the risk of losing what had been entrusted to them. Bankers and other persons are obliged to keep large sums in the Bank of England without interest, aud a stable government might, to some extent, make itself the custodian of the money of its subjects without giving them any other advantage than security. But when a large loan is required, an appeal must be made to persons who would be able to obtain a profit by employing their money otherwise, and to do this successfully some interest must be offered them. What the rate will be depends upon the amount which the govenmient desires to borrow, and on the resources of the people. The fundholders are maintained at the expense of the producing classes of tlie coumumity, and as the burden to which these can submit is limited, a government cannot increase its debt beyond certain limits without failing to pay the interest. "When it has once begun to fail in this respect its difficulties increti^e, its creditors will only lend at higher interest, fresh loans are raised to pay the interest, and the debt increases uulil the Governiiieiit is driven at last to tacit or open repudiation. Where a government keeps clear of such folly, the rate at which it can borrow varies inversely as the amount of its debt, and it is possible that G G 4r)0 INTEREST ON PTOOKS. a statistician might be able to specify the amount which each particular country could borrow at 3 per cent. There must always be some unwillingness to entrust money to the keeping of a foreign government, but it is to be hoped that as the intercourse of nations becomes more friendly, and the conduct of governments more upright, the legal and other barriers to investment in foreign stocks will be, to some extent, broken down, and that a table compiled a century hence on the model of Mr, Baxter's would exhibit a much more uniform charactei'. The interest paid on railway debentures might with more propriety than that on Government stocks be taken to indicate the rate of profit. Railway companies would not be able to borrow money Avithout paying interest, as the Government might do, and as they are trading concerns they must retain fi'om their own profits sufficient to enable them to pay the interest on their debentures, and cannot obtain this by a compulsory levy on the taxpayers. Yet even here there is room for variation in the rate of interest, while the rate of profit is the same. American railway companies are obhged to pay 7 per cent, on their mortgage bonds, while the rate paid on the debentures of English companies is about 4^^ per cent. But the dividends on the ordinary shares of American and English railways do not exhibit so great an inequality, for, while in the former case the average is 5 per cent., it is 4 per cent, in the latter. This would seem to show that the rate of profit is little, if at all higher in the United States than in England, but that the credit of railway companies does not stand so high in the former country. Although most of the American railways fulfilled their engagements there have been some scandalous failures, and as it is difficult for the outside public to tell which will be the next defaulter, they slu-ink fi'om investing in such securities without the compensation of high interest. The profits of the railway must be sufficient to meet the interest on the mortgages, but it does not follow that the profits are equal to 7 per cent, on the capital invested in it, for the amount of the mortgage may be much less than that of the share-caj)ital which is pledged for its payment. There are, indeed, many American railways which pay much more than 7 per cent., but there are also many aaIiosb whole earnings are swallowed up in paying the interest on mortgages, and the average rate is not much higher than that which English investors can usually obtain. The vast extent of thinly-peopled territory which the United States still possess affords a favourable field for speculating in railways, which, according to the accounts of their projectors, are to open up new and fertile districts, but which, being constructed before there is sufficient traffic for them, frequently end in a more complete collapse than the most unfortunate English lines. When a railway company has proved successful, and has RATK OF i)i>. r.Of! ^vlnch tliey onolit to perform. That this assumption is erroneous will appear from a consideration of the fact that what maintains labourers is not the work in which they are actually engaged, but the capital which has been previously accumuhited. Human beings have numerous wants to satisfy, and if they are proTided with capital to maintain themselves wliile working at other occupations than that of raising food, their own wants will soon teach them the direction which their industry should take. Instruction from the Government is not required in order to point out objects which they ought to desire, for their own tastes and feelings will point out quite as many, and, indeed, far more than they can pro- duce. As a protective duty or a bounty does not add anything to the capital of a country, it can only cause it to be transferred from one employment to another ; but this transfer must be from an employment which satisfies some existing want to one which does not, and, conse- qnently, simply injures consumers 'without conferring any benefit on producers as a body. Another mode of directing industry into a particular channel which has been adopted by many governments, though not entirely for industrial purposes, consists in placing restrictions on foreign shipping admitted to its ports. The most celebrated of the Acts which have from time to time been passed in England in reference to this subject is one which was passed in Cromwell's time, and known as the Navigation Act. Its principal object was to prevent the Dutch fi'om importing into England the produce of any other country than Holland itself, but it was not so much designed to procure a profitable trade for the English as to relieve the country from the danger to which it would be exposed in case of war if it were not provided with a large number of ships and seamen. Adam Smith himself has praised it as a wise measure, because well cal- culated to secure the independence of the country. In a passage which has been frequently quoted, he points out that the law was a great im- pediment to foreign trade, that it compelled the English to buy dear and sell cheap, and in many cases prevented them from buying at all ; but he i)raises it because it dealt a blow at the naval power of Holland, and concludes by saying, " As defence, however, is of much more importance tliau -opulence, the Act of Navigation is perhaps the wisest of all the commercial regulations of England." (Book iv., chap. ]]). M'Culloch, in an able note appended to his edition of the " Wealth of Nations," has carefully examined the facts and arguments which have induced Smith and others to believe that the Navigation Laws had succeeded in obtaining the object wliidi they were designed to promote, and has shown that there is scarcely any evidence to support the belief The great victories of Blake over the Dutch were obtained ])efore the Act was passed, while rt04 NAVIGATION LAWF^. the most disastroiis nayal war in which England was ever engaged was with the Dutch, and occurred in the reign of Charles II. after the pass- ing of the Act, This latter war was, indeed, in great measure the consequence of the irritation felt by the Dutch at the adoption by the English Government of a policy so hostile to their interests. But as time goes on, and the memory of remote events becomes more and more indistinct, the wars between England and Holland are classed together as if quarrels were frequent, and it is forgotten that they would have been much rarer if a more liberal policy had been pursued in commercial matters. It is well known that the naval power of Holland continued to be formidable long after Cromwell's time, and its subsequent decline is due rather to the greater progress made by other States than to an absolute diminution in its own strength. Nor does it appear that the Navigation Act made any considerable addition to the inercantile marine of England, for, though it secured to English shipowners a monopoly of a great part of the commerce between England and other countries, it could not secure to them a monopoly of the trade between foreign countries themselves. It deprived the Dutch of a part of the carrying trade, but caused a diversion of English shipping from its accustomed channels, and wdiat was gained in one direction was lost in another. As the industry of a country is limited by its capital, an artificial extension of one trade must be followed by a contraction in some other, and in this case it is easy to see how the result w'as brought about. English ships were required to do the work A\'hich had been formerly done by Dutch ships, and the consequence was that many Avere Avithdrawn from the Baltic trade, of which the English had formerly enjoyed a large share. The freights charged by Dutch ships AA'ere loAA'cr than the English rates or the Act Avould never have been passed, and the difference was probably increased by the operation of the Act, one clause of which required that three-fourths of the crew should be Englishmen. This acted as a discouragement to foreigners, AA'ho might otherAvise have employed English ships, but Avere compelled to use those of Holland or some other nation. The great diminution in the naval poAver of Holland which has taken place since CromAA'ell's time has destroyed the force of the political arguments which induced English statesmen to pass the Navigation Laws, and even those Avho consider that they Avere useful at the time Avhen they were passed have ceased to regard them as any longer necessary. They were substantially repealed soon after the Corn Laws, to which they were, in principle, so nearly allied ; and their repeal has not been folloAved by any diminution of English shipping. That the mere throwing open of the trade is not necessarily folloAA-ed by the intrusion of foreigners is shoAA'n by the small effect produced by the PROTECTIOX TX A:N[ET^TCA. AO-') opening" of the coasting trade, whicli in most countries is reserved to natives, but whicli in England was thrown open to foreigners in 185i. Although very little advantage has been taken of this measure by foreign shipowners, the knowledge tliat foreign competition was possible must have acted beneficially on natives engaged in the trade by com- pelling them to reduce their frciglits and to avail themselves of new inventions. The chief evil of a protective system lies in the encouragement which it gives to the natural indolence of all men, whether farmers, manufacturers, or shipowners, by limiting the field of the competition to v.-hich they are exposed. When the Commercial Treaty between England and France came into operation, it did so much to bring the manufacturers of both countries into Competition tliat it Avas impossible for any to maintain their ground unless they vN'ere prepared to do their utmost to bring their works to perfection. i\I. Chevalier remarked that the treaty sounded like au alarm bell in the ears of French manufacturers, and that they at once set to work to introduce machinery of the most improved type and every new process which promised to facilitate production. We can. hardly need a better proof of the backward condition of French manufactures before that time, or of the enervating effects of Protection. Similar effects must be produced in the shii^ping trade wherever it is protected by Navigation Laws, and wherever one trade is protected, similar protection is sure to be demanded, and obtained, for others. Whatever diminishes imports diminishes exports also, and retards the growth of those branches of industry which might contribute to supplying the foreign market. By circuitous channels, the effects of Navigation Laws may be diffused over several trades, and, among them, the ship-building trade itself ; and whatever hinders sliip- Ijuilding does far more to injure the commerce of a nation tlian can Ijc done by Navigation Laws to promote it. In those countries wlicre a duty is levied on English iron for the purpose of protecting the native iron trade, a gTcat obstacle is put in the way of building ships, in which iron is fast becoming the principal material ; and tlie natural advantages which England enjoys in this respect are enhanced by the -N'ery measures which are directed against English trade. By removing all restrictions on the intercourse of its subjects with foreign countries, the English Government has done all that it can do to encourage shipping by enabling an extensive commerce to grow up wliieli requires an immense mercantile marine to carry it on. Althougli the system of Protection lias now been coin])lctely abandoned in England, there is a large community in wJiich the Engli.sh language is spoken and English books arc universally read which has nevertheless been so little affected by the progress of English thouglit, that Protection, 500 PROTECTION IN AMERICA. far from having been al)audoncd there, is still dominant, and has of late years materially gained in strength and popularity. The community is one which might have been expected to look with peculiar favour on the doctrine of Free Trade, for its citizens pride themselves on the amount of individual liberty which they enjoy, and on their independence of the rule of any class. But all these influences united have not proved suffi- cient to induce the people of the United States to adopt the policy which has been so strongly recommended by Political Economists, both in England and on the Continent, and a school of writers has sprung up in America to defend the maintenance of the Protective system. The unanimous opinion of English Economists, though it has not been able to affect the policy of the United States Grovernment, has not been altogether without effect, for American writers rather strive to prove that theirs is an exceptional case than boldly to maintain, like the writers who preceded Adam Smith, that Protection is essentially beneficial to industry. They tell us that England has been brought by the nursing of Protection to such a pitch of industrial perfection that it is now able to defy the competition of the whole world, but that the United States, being less advanced industrially, cannot afford to dispense with the support which that system affords. In Adam Smith's time, foreigners were apt to attribute the commercial greatness of England to the -wisdom of the protective system which was there in force, and the belief may have had some foundation, though not such as would afford much encouragement to those who held it. Adam Smith considered that the protective system pursued in England was better than those of foreign countries, but it was only better because it was less protective. Observers who looked only at a few facts saw that England had a protective system and an extensive commerce, and they at once concluded that the two things stood to each other in the relation of cause and eflfect. In the same way many writers now adduce the great extension of English com- merce which has taken place since the adoption of the policy of Free Trade as a conclusive proof of the truth of the economic doctrines on which that policy was based. In both cases the reasoning is equally unsound. Political Economy does not teach that a country cannot attain to commercial greatness while subject to a protective system, nor does it teach that a great extension of commerce will follow the abandon- ment of such a system. Statistics may prove that a country possesses an extensive commerce, or that it has greatly increased its commerce ; but by themselves they are quite inadequate to prove or disprove any assertions which may be made regarding the effects of a particular policy. In order to show that Protection promotes commerce, it is not enough to show that the t^^•o things flourish together, but some proof must be PROTECTION IN AMERICA. 507 addnced tliat the one has a tendency to promote tlic other. The Pro- tectionists have indeed attempted to do this, bnt they liave only shown that Protection cansed a certain trade to be carried on in a locah'ty where it Avonld not otller^Yise exist, and they liave never shown that it wonld make any addition to the capital or the total industry of a country, much less of the world. Adam Smith and others have shown how it injures industry by causing production -to be carried on under less fovonrable conditions, and, consequently, at a greater cost ; and their argument would be equally convincing even if statistics did not show a great increase of commerce where their advice had been followed. The charge of insidious selfishness which is brought against England on account of its luning got all the good it could out of Protection, and then called on other countries to abandon what was no longer neces- sary to itself, l)ut was useful to them, is one of the most ridiculous which was ever brought against any nation. The only reason why Pro- tection has been abandoned by Knglish statesmen, is, that they have been convinced that it is essentially useless and injurious ; and when they call on other countries to follow their example, they do so because they are convinced that its maintenance is equally injuri- ous to other countries. Foreign Protectionists attribute to ]i]nglish- men a desire to monopolise all the trade of the world, not seeing that there must be two parties to every trade, and that every extension of the commerce of England must be accompanied by an increase of that of the countries which trade with it. When President Grant, in a Message to Congress, recommended the annexation of San Domingo, he dilated on its capacity for producing many articles which are imported into the United States from foreign countries, and urged that if his advice were followed, importation would cease. Yet, in the same Message, he dilated on the advantage which the United States would derive from the exportation of their produce, and seemed to suppose that the process would continue even though importation were annihilated. How he supposed that foreigners were to ]:iay for American cxi)ort, if they were not allowed to export anything in return he did not exiilain, but he probably wished them to do so by remitting the precious metals. If this were to ])e done, the exports of the United States \vould soon be reduced to a very low figiu-e by the inability of the rest of the world to furnish them with a large and constant supply of gold and silver. Among the American writers who defend Protection none are better known than ]\Ir. H. C. Carey, whose " Principles oi" Social Science," published in IBoG, contains an elaborate defence of the system in all its ramifications. The work being somewhat pi-olix, an aljridgment TiOS PROTECTION IN AIMERICA. lias been prepared * for the convenience of the American public, from ^vhich the following observations are extracted : — ".A country embraces all the varieties of soil and climate requisite for a very varied agri- culture, from the barley of the North to the sugar of the South ; and yet its inhabitants are compelled to go abroad for various articles, paying many times the origiual cost, and losing annually more than Avould, if properly apphed, suffice for naturalising them at home. . . . Iron ore and fuel abound, but there being no furnaces both remain useless, and the farmer can scarcely obtain a plough. Wool abounds, but as there is no woollen mill, the farmer's daughter is idle while he himself cannot obtain a coat In this state of things, society says to the formers and labourers that the establishment of mills and furnaces would double the value of both land and labour, and that to enable them to combine their efforts for the erection of such establishments it will require of the foreign producers of cloth and iron a certain portion of the value of all they may import — applying the proceeds to the making of new and better roads, or to paying the expenses of govern- ment ; thus improving the modes of communication among themselves while relieving them at once and for ever fi'om the oppressive tax of transportation to the distant market." (Chaptor xliv., sec. 2, pp. 509-510). Thus, Mr. Carey considers it a greater hardship for consumers to ha-s'e to pay for the transportation of the goods from a great distance than to pay an equal amount for similar goods produced within the limits of the political community to which they belong. What differ- ence it can make to them whether the high price which they have to pay is owing to the high cost of production or to that of transportation, he does not explain, and Avould probably find it difficult to do so. If for transportation we substitute production, the argument would be equally cogent. Mr. Carey might say that though ploughs and coats could be produced at home with less labour than would be required to ])ring them from abroad, it would be better for society to step in to compel the native producers to contribute something towards reducing the cost of sea transport, and thus at the same time reduce the expense of travelling and relieve the consumers at once and for ever from the oppressive tax of production. Human labour, as has been well explained by Mill, consists of nothing else than moving things from place to place, and, wherever production is carried on, transportation is carried on also. If an American farmer buys iron raised from a mine in his own State, what he pays for is the labour of transporting the ore from the bottom * By Kate McKean. Philadelphia, 1872. PEOTECTIOX IN AMERICA. 509 of the mine to the surface, and theuce to the furuace, and of trans- porting the iron to the different workshops where it is made up into the shape in which he requires it, and, lastly, of conveying the finished article to his own house. The most complete Protection cannot, any more than the most absolute Free Trade, emancipate human beings from the necessity to which they are subjected by the laws of matter and force; and, so long as iudustry continues, consumers will have to submit to the oppressive tax of transportation. So far as this tax can be lightened, it is done by Free Trade, ^vhiGh enables goods to be brought to their destination with the least possible expenditure of labour, ^h: Carey looks only at the distance, and thinks that there must be more labour of transportation the farther the goods are brought. This is clearly an error where land and -water carriage are compared, and even where the actual journey which is made by the goods in tht'ir finished state is longer, the labour of transporting the different elements to the place where they are combined is often greater, and the total labour of transportation is greater also. A protective duty would not be imposed unless foreign producers were able to undersell the natives, and the fact that they are able to do this shows that the con- sumer are able to obtain what they want by a smaller expenditure of money and of labour. The alternative is not between production and transportation, but between a smaller quantity of one kind of transportation and a larger quantity of another kind. Another assump- tion made in the above passage is, that labourers would not find employment unless guarded by Protection ; but the very fact that a protective duty is proposed shows that foreign goods are imported, and, if imported, they must be paid for by corresponding exports. Tlie farmer's daughter, we are told, is idle, but her chances of obtaining employment will not be increased by the imposition of a protective duty. If the duty succeeds in excluding foreign goods, foreign purchases will also cease, and those who have hitherto laboured to produce goods for ex[)ortation will compete for employment in the production of the articles which were ibrmerly imported. If the farmer's daughter was not able to get employment while the old state of things continued, she would be no better able to do so under the new, for her competitors will be as numerous as before, though the kind of work will be different. AVe are told that the farmer can hardly procure himself a coat, but he will I)e no better able to do so after the change than before. If he could not formerly import a coat, or the cloth of which a coat might be made, a protective duty will not cause him to buy it in a new quarter, but it will reduce his power of pui'chasing coats, or, indeed, any other articles. By the supposition it will force him to pay dearer for home-made articles 510 PROTECTION IN AMERICA. thau he had formerly done for foreign ones ; and whatever makes him pay dearer for a given quantity of commodities, must, pro tanto, diminisli his purchasing power. Bat the most curious oversight which is exhibited in this passage consists in the assumption that a protective duty can, at the same time, fulfil its purpose and yet bring in a revenue. Foreign producers, we are told, are compelled to contribute a portion of the price of their goods, which is applied to the construction of roads, or to the maintenance of the Government ; and thus taxation is lessened, while native industry is encouraged, the iron mines are worked, the wool is manufactured, etc. But it is obvious that unless protective duty is high enough to exclude foreign products it cannot secure a monopoly of the market to native producers, nor afford any additional inducement to open up native mines or establish native factories. If, on the other hand, the duty is sufficient for the purpose, it cannot yield a revenue, for the goods on which it is imposed will not be brought within reach of the Custom Houses. In the former case the duty ceases to be protec- tive, and, indeed, belongs to that class of taxes which are viewed with favour by many writers who are strong advocates of Free Trade. The tea duty, which has long been levied in England, is a tax on a foreign product which l^rings in a considerable revenue, but it is not protective, for, whether it existed or not, English farmers would not strive to compete with those of Asia in tea growing. In the latter case, when a duty is really protective, its defects cannot be palliated by pointing to a relief which it furnishes to the taxpayers. It is, indeed, possible for a duty to be so adjusted that it merely diminishes, instead of preventing, the importation of foreign commodities ; but when this is the case, it fails in its object just to the extent to which the articles are imported, and, instead of being entitled to praise, both as a fiscal and as a protective expedient, it is a compromise which is equally objectionable to both parties. Mr. Carey frequently complains that Free Trade impoverishes the United States by encouraging the export of corn, Avliich is, in effect, the gTadual removal of the soil itself. There is a certain foundation for this objection, for, as the removal of each crop is the removal of so much of the soil as has already been absorbed into the substance of vegetables, the process, if continually repeated, must completely impoverish the soil. That continued exportation of produce does produce this effect has been shown on a lamentably largQ scale in the Southern States of the Union during the maintenance of slavery, and other countries have exhibited a similar spectacle, though not on so large a scale. South Australia is one instance, and the county of Durham, at the time of Mr. Caird's visit, was another, and in both cases the effect is clearly shown by a diminution in the average yield. But, as Mill has clearly shown. PEOTECTION IN AMERICA. 511 there is no connection between Free Trade and such a wasteful system of tillage. All that is necessary is, that the farmers should import manure to replace those elements of the soil which have been removed in the shape of corn, and Free Trade, far from preventing them from doing so, places every facility in their way. On the other hand, Protection does not prevent farmers, if so inclined, from thus impoverish- ing their lands ; and the county of Durham was so impoverished during the period of Protection. As ]\Iill points out, the argument, if it were good against Free Trade with foreign countries, would be equally good against Free Trade within the limits of the same country, especially in one so extensive as the United States. The corn which is brought from the Western States to the great cities on the Atlantic Coast is not brought back in the form of manure any more than that which is exported to England or France, and if Custom House barriers are necessary in the one case, they are equally necessary in the other. It has been shown by experiment, as, indeed, it might be proved a priori, that when a proper (quantity of manure is supplied, the same kind of crop may be raised year after year from the same soil without undergoing any diminution in its quantity ; and this being so, the question becomes a purely agricultural one which cannot be affected by the discussions of Economists. If the price at which American corn is sold is not sufficient to enable the farmers to supply themselves with manure, they have the remedy in their own hands, for they can raise tlie price nntil it is higli enough for the purpose. If they are not sagacious enough to do so, then it can matter little to what market they send their grain, for whether it be American or foreign, near or remote, the soil will be equally impoverished, and they will have no one but themselves to blame. The farmers of Durham have already found that the consumption of the United Kingdom was large enough to impoverish their farms when they would not consent to take the trouble to renovate the soih Mr. Carey considers Protection to be necessary for securing the sta- bility of the banking system of the United States. According to him, the monetary crises whicli have from time to time occurred in that country have been due to the scarcity of gold, and tliis in its turn has been caused by the absence of a fiscal system which would cause gold to be constantly imported in large quantities. To secure a regular influx of gold and silver was the object of all systems of Protection adopted in mediaeval Europe, because in those times tlie l)clicf was general that wealth consisted in these metals alone. Such was the anxiety of the p]nglish Government to secure tin's ol)ject, that at one time it appointed agents to see that in every Ijargain which an English merchant concluded abroad he exchanged English goods for foreign gold or silver. The 512 PKOTECTION m AMERICA. Government allowed foreigners to import their goods into England, but took great pains to prevent them from carrying away any but the smallest portion of the precious metals which they received in exchange. I\[r. Carey does not suppose tliat Avealth consists entirely of these metals, but he fears that a country may not be able to obtain a sufficient quantity unless the Government makes special provision for the purpose, and he seems to have as much confidence in the power of the Government to obtain this object as was shovai by media3val statesmen. That it is necessary for a country which uses gold for its currency to keep up its stock is obvious enough, but Mr. Carey does not tell us why the assist- ance of the Government is necessary to enable the people to obtain v^'hat they require. England possesses no gold mines worth mentioning, and has, for the last quarter of a century, pursued a policy of Free Trade, and yet it has received a large portion of what has been produced in Cahfornia, and nearly the whole of wliat has been raised in Australia, and no Englishman who has anything to give in exchange has any difficulty in procuring gold coin. There have been occasions when English banks have been denuded of their stock of gold ; but even at these times the scarcity lias only been felt by the Hmited class of merchants who happen to require large quantities, and the general public have had no difficulty in obtaining as many coins as they desired. Mr. Carey contends that Protection secures to a country a constant and sufficient supply of gold, and so saves it from monetary crises. Speaking of the United States, he says, " Protection ceased hi 1818, bequeathing to Free Trade a commerce that gave an excess import of specie, a people among vrhom there existed great prosperity, a large public revenue, and a rapidly diminishing public debt." "Free Trade ceased in 182i, bequeathing to Protection a commerce that gave an excess export of specie, an impoverished people, a dechning public revenue, and an increasing public debt." (Chap. xxix. sec. 8, p. 348). And he continues to enumerate several changes, all of Avhich told to the disadvantage of Free Trade. I do not know what are the particular changes in the tariff which Mr. Carey describes as tran- sitions from Protection to Free Trade, or vice versa; but since the commencement of the civil war, the United States have adopted a tariff which is as protective as he could desire, and yet it has not saved them from the scarcity of gold which characterised the crisis of 1873, as it has characterised all commercial crises in America, England, and elsewhere. A fiscal system based on the principles of Protection may seriously obstruct the importation of foreign commodities, but cannot prevent fluctuations in the amount of exports and imports, and it is the fluctuations which drain a country of its gold. Ho^vever frequently a tariff may be modified, PROTECTION IN AMERICA. 613 it must be considered as permaueut ^yhell compared with the fluctuatious of commerce, and a permanent rule cannot prevent consumers from sometimes requiring an unusual quantity of a pai-ticular article, "When this happens, it must frequently be foimd that the country has no other commodities except gold wliich foreigners will consent to accept in pay- . ment for what is imported, and no tariflf can prevent gold fi'om being exported in such a case. Several crises occurred in England under the regime of Protection, and the most noted of these, that of 1825, was marked by quite as great a diminution in the reserve of gold held by the Bank of England as has ever occurred since. So far as Protection has anything to do with commercial crises, it rather tends to multiply and aggravate them, for by obstructing the trade of a country with foreign countries it impedes the gi'owth of those business relations which would teach foreigners to accept native produce rather than gold on such occa- sions. The discovery of gold in California ought to have relieved the United States from all danger of crises if these could be prevented by regular importation of gold, for the produce of that region is far in excess of what is needed to keep in repair the currency of the United States. But the high prices which the discovery has produced have encouraged importation from abroad, and the vicissitudes of commerce have pro- duced a temporary dearth of gold on several occasions since that event, as they had done before. Another American writer, Mr. H. Carey Baird, contends that American producers are entitled to protection because they have to submit to heavy taxation while foreigners are able to introduce similar goods without paying the same taxes, which he seems to regard as the same thing as being untaxed. He commences a pamphlet * by asking " What is British Free Trade ? It is that extraordinary governmental policy which would grant privileges to foreigners which it withholds from its own people ! It is that system of legislation which would permit those foreigners to send the goods, wares, and merchandise, the products of their labour, into your country untaxed, without contributing toward the support of your city, town, county, state, or National Government ; while you pay for those purposes taxes upon real estate, sales, incomes, manufactures, corporations, transportation, furniture, watches, light, heat, books, newspapers, bonds, mortgage deeds, notes, checks, food, spirits, ale, medicine, law, &c., &c. ; in a word, upon all you eat, drink, wear, are obliged or desire in any manner or form to use, have, or enjoy, excepting only the air you breathe. Can such a system bo based upon any principle of right or justice, or can it be expedient in any country * " The Rights Of Amcricau Producers aud the Wrongs of British Free Trade KcTeuuo Heforin." Philadelphia, 1870. L L 514 PROTECTION IN AMERICA. or among any people?" There would be nothing to object to in this argument if Mr. Baird simply contended that when a duty was imposed on an article produced in the United States a corresponding duty should be levied on it when imported from abroad. American producers haye fr'equently suffered from the neglect of their Grovernment to take such a' measure, which is equally required by justice and expediency, but it is evident that Mr. Baird's argument is not confined to such cases. He argues that because American producers are heavily taxed, they should have a monoply of the market as against foreigners who do not con- tribute to American taxation, but he does not show any connection between the two things. The reason why foreigners do not contribute to American taxation is, that they derive no benefit from the main- tenance of the American Government, and Mr. Baird gives us no reason for calling on them to contribute towards it. The fact that the Americans are able to buy foreign products at a cheaper rate than those produced at home does not show that they are less able to bear the burden of taxation, but, on the contrary, everything which diminishes their ex- penditure in one direction makes' them better able to afford it Avhen it takes the form of paying taxes. If American consumers were debarred from the purchase of foreign goods, the burdens imposed on -Ame- rican producers would not be thereby rendered less onerous. They would not be required to produce more, but would simply have to supply the home market instead of producing goods for exportation. The amount of taxation would be just as great for the expenses incident to the maintenance of the military and civil services, and the payment of the interest of the public debt would be the same whatever system of raising the revenue were adopted, but if a protective system were established the people would to some extent be impoverished. Whatever excludes cheap goods on account of their cheapness must compel con- sumers to accept less in exchange for a given quantity of labour, and must, pro tanto, diminish the surplus which they can place at the disposal of the Government after their most pressing wants have been supplied. Mr. Baird discusses the merits of a tariff proposed by the partisans of Free Trade, the principle of which is, that duties shall with few exceptions be levied solely on articles which cannot be produced in the United States, and he makes the following observations : — " Now, the duties here contemplated being generally, and with but few exceptions, levied upon products which Ave do not produce and must have, we ourselves must of necessity pay them, there being substantially no American competitors to keep down or regulate prices, or to oblige the foreign producers themselves to pay the duties in order to compete with such American competitors. These duties, then, become an absolute and PROTECTION IX AilElilCA. 515 positive tax upon Americans from which there is no escape except by their ceasing to consume the products. Again, the general reform principle, as here developed, being to le^-y no duty upon any product the like of which is produced in this country, a few heavily-excised articles almost alone excepted, foreigners are to be allowed free and untaxed access to our markets here to compete with American producers, the mere fact of any article being largely produced in this country being the title by which, by the code of the " reformer," the foreigner obtains the right to send such articles into this country untaxed. As all of the people of this country must ultimately live oflF, or from, the product of American production, so must all taxes, national, state, and local, ultimately fall upon American producers, and upon them alone, unless ^xe can make foreigners who seek our markets, and enjoy the advantages and profits thereof, pay a portion of these taxes, precisely the thing which these British Free Trade revenue-reformers intend shall not be done." Thus, what he complains of is a system l)y ^^■hich Americans would be made to pay for the Protection which theu' government affords to them, and to them alone, and would ha^-e to pay neither more nor less than is abso- lutely necessary. It is difficult to see wherein he supposes the griev- ance to consist. Americans alone have to pay for what they alone use, and he fails to point out any sort of reason why anyone else should be made to pay for it. He argues that, because the whole of the commodi- ties which are consmned by the American Government must be either produced in America or paid for by American produce, therefore the whole bm-den of taxation falls on American producers, but this does not necessarily follow. All that part of American taxation wliich falls upon unproductive consumers is levied without imposing any heavier burden on producers than they would have to bear if such taxation was aban- doned. He regards it as a hardship that heavily-taxed American producers should have to face a competition of untaxed foreigners, but he seems to forget that foreign producers have their taxes to pay, though the American Government derives no benefit ft'om them, and he quite omits to show that such taxation prevents Americans from selling their produce at as cheap a rate as foreigners. He regards it as singular that the Free Traders should make the fact that an article can be pro- duced at home a reason for admitting it from abroad untaxed, but he quite forgets that the exception of "a few heavily-excised articles " cuts away the ground from under his argument. The Free Traders do not object on principle to the taxation of articles which can be produced at home. They simply consider that the revenue can be more conveniently raised when duties are levied on a very few articles, some of which can be, while others cannot be, produced at home. In the interest L L 2 516 PROTECTION IN AMERICA. of producers themselves Free Traders desire to restrict within the nar- rowest limits the iuterference with production which a system of excise necessarily brings with it. In the interest of consumers they object to the imposition of any duty which raises the cost of an article without benefiting the revenue. The object of the revenue reformers is to devise a scheme for providing for the expenses of government which shall press most equitably on all those who benefit by its maintenance. It would be just as reasonable for Mr. Baird to complain that American producers have to bear the expense of feeding and clothing themselves as to complain that foreigners are not compelled to provide them with a government. In another pamphlet, Mr. Baird publishes part of a con'espondence between himself and Mr. Perry, Professor of Political Economy at the Yale College, who, it appears, had endeavoured to convince him of the folly of Protection, and to whom he makes the following characteristic reply : — "'They ' " (the Protectionists) you go on to say, "'ignore the fact that all trade is voluntary exchange of services between two parties who know better than anyone else can tell them what their interests are, and that such trade ceases of necessity the moment it becomes unprofitable.' " " Granted, for the sake of the argument. May not the same be said of the vohuitary exchange of services between tw^o highwaymen, the one who holds your horse, and the other who puts his revolver to your head and demands your money or your hfe ? Do not these highwaymen ' know better than anyone else can tell them what their interests are ?' Is this exchange of services to be aUoAved to go on until it ceases because the entire community having been either robbed or frightened from the road * it becomes unprofitable.' " * The case which Mr. Baird puts is in no way parahel to that which it concerns him to discuss. In tlife case of the highwaymen there is no occasion for anyone to interfere in the interest of the highwaymen themselves. The reason why society interferes in the matter, is, that it wishes to protect those whose liberty the highwaymen wish to infringe. It interferes, not to curtail liberty, but to preserve it. In the case of a protective duty, society interferes not to preserve the liberty of any individual, but to prevent individuals from procui'ing what will satisfy their own wants without injuring other individuals. Mr. Baird, indeed, seems to consider that American producers are injured whenever an American buys foreign goods instead of those produced by his own countrymen ; but this assumes that the producers have a right to choose what they will produce, and to compel their countrymen to buy from them whether they like it or not. This "Two Letters to Arthur Latham Perry," Philadelphia, 1871, p. 6. PROTECTION IN AMERICA. 517 is to assume that a certain class of men are entitled to dictate to the rest as to the manner in which they shall deal with their own property and supply their own wants ; an assumption of the same kind as that which is made by highwaymen, and against which society in their case protests BO strongly. The conduct of society where Mr. Baird's scheme is carried out is so far from resembling its conduct Avhen dealing with highwaymen, that it might be much more fairly compared to the conduct of the high- waymen themselves, since in both cases there is the same interference ■with persons who have done no wrong, and in both cases it is undertaken for the benefit of a class which is very small in comparison with the number's of those who are injured. Another argument which is put forward by American Protectionists is, that wages being higher in the United States it is impossible for the producers of that country to compete against the pauper-labour of Europe, This argument proceeds on the assumption which is so fre- quently made by commercial men, and sometimes even by Political Economists, that the amount of money spent in wages indicates the cost of production. If this were so, the cost of production would certainly be high in the United States, for money-wages are about twice as high there as they are in Europe ; but the theory of wages, which has been explained in a previous chapter, is directly opposed to such an assump- tion. As Adam Smith said long ago, the cost of an article to a person who wants it is the trouble and difficulty of procuring it, whence it follows that the greater the quantity of a commodity which can be attained by a given quantity of labour, the smaller must be the cost of producing it. The fact that wages measured in gold are higher in the United States than in Europe proves that the cost of producing gold is low, for otherwise a smaller quantity of labour would not be rewarded with a larger quantity of gold. When Americans say that the high cost of labour prevents them from competing with their European rivals, they forget that wages are just as high in gold-mining as in other branches of industry, and that they are able to produce gold for exporta- tion. So it is with agriculture where wages are high, and yet an immense quantity of produce is annually exported. If the wages of American farm-laljourers were as high as at present, but their labour was not more efficient than that of their European rivals, it would no doubt be impossible for American farmers to stand against the disadvantage of the greater cost of carriage which must be submitted to before their produce can be brought to an European market. But the very fact that such an exportation does take place shows that they can compete with what they are pleased to call the pauper-labour of Europe and that there must be something wrong in this theory. That the theory is not 518 PROTECTION IN AMERICA, altogether devoid of foundation must in fairness be admitted, and is brought home to many American manufacturers V)y their daily experi- ence. Each of them finds that, though his machinery is as good, and his workmen as skilful as those employed in Em'opean factories, he cannot afford to sell his products at so low a price as his rivals, and, having exhausted all other means of accounting for his failure, he finds a suffi- cient explanation in the enormous difference between the rates of wages paid in his own and his rivals' establishments. But though this explana- tion is correct as far as it goes, it is not sufficient to support the theory which American Protectionists build upon it, for there are many trades, of which gold-mining and agricnlture have already been cited as examples, in which American producers can, and do, compete successfully with Europeans. What, then, is the meaning of this theory of the inability of Americans to do so ? The answer is furnished by Mr. Cairnes, who observes, "What it means, and what it only can mean, is, that they are unable to do so consistently with obtaining that rate of remuneration on their industry ^^hicli is current in the United States. If only American labourers and capitalists would be content with the wages and profits current in Great Britain, there is nothing that I knoAV of to prevent them from holding their own in any markets to A\hich ]\Ianchester and Sheffield send their wares. And this brings us to the heart of the question. Over a large portion of the great field of industry, the people of the United States enjoy, as compared with those of Europe, advantages of a very exceptional kind ; over the rest, the advantage is less decided, or they stand on a par with Europeans, or possibly they are, in some instances, at a disadvantage.* " While the Americans confine themselves to those branches of industry in which they have a decided advantage over Europeans they are able to produce on a large scale, both for themselves and for foreigners. What they complain of is their inabihty to compete successfully in those branches in which they are at a disadvantage, or, at least, have a less decided advantage. They do not complain that they are unable to obtain any commodities which they require, for the demand for Protec- tion implies that foreigners are ready to supply their wants. Their complaint is that they are not able to obtain high remuneration when they mU. not consent to produce those articles which natives and foreigners are most willing to purchase. Similar complaints are heard in other countries in which money-wages are much lower than in the United States. Eussian and Austrian producers dread nothing so much as English competition, although they have to pay their workmen much " Leading Principles, &c.," p. 464. PROTECTIOX IX AMERICA. 519 less than their English competitors. It is not the high rates of wages which prevent Americans ft-om competing with Europeans, but their refusal to select the trades in which the high wages can be successfully earned. As Mr. Cairnes says, in continuation of the passage already quoted, " The people of the Union decline to confine themselves within these liberal bounds. They would cover the . whole domain of indus- trial activity, and think it hard that they should not reap the same rich harvest from every part of the field. They must descend into the arena with Shefiield and ilanchester, and yet secure the rewards of Chicago and St. Louis. They must employ European conditions of production and obtain American results. What ' is this but to quarrel with the laws of nature." That they cannot under these circumstances compete with advantage is clear enough, but Protection would not enable them to do so. The laws of nature cannot be repealed by the fiscal regulations of any government, and if the situation of the United States is unfavom-able to the growth of a particular industry, the exclu- sion of foreign products will not make it thrive. A protective tariff may uideed compel the Americans to produce for themselves the articles which they would otherwise have imported from abroad, and the producers will, in such a case, receive the same rates of profit and money- wages as the rest of their countrymen. But the advantage will be merely nominal, for, in the first place, American producers would have earned quite as high a nominal remuneration if they had produced goods for exportation ; and, in the second place, although money-wages will be the same, real wages would have fallen. The fact that foreign commodities were im])orted shows that they were sold at a cheaper rate than those produced in the country ; and if a monopoly of the market is granted to the home producers, the consumers would have to pay dearer for what they purchase, and a given quantity of labour will be rewarded with a smaller amount of comfort than it would otherwise have been. I use the word monopoly in spite of the objection made by Mr. Baird, who, in a letter to ^Ir. Perry, says, " I am tempted to remark upon a passage in yours of the 10th ult., where you ask, 'AVhy then should exchanges be prohibited professedly in the interests of taxpayers, but really in the interests of monopolists'. This cry of 'monopoly,' is, as I am well aware, a most important part of the stock-in-trade of the so-called ' Free Traders,' but is there, however, anything but an attempted deception in it. Suppose any article, iron for instance, be prohibited, not merely pro- tected, to whom does it grant any monopoly ? Is it not simply to each and every one of the 40,000,000 of inhabitants of the country who has the desire, the brains, and the capital to engage in its manufacture ? Do you call this ' monopoly ? ' If you do, you must rely upon and consult 520 UNITED STATES TARIFF some dictionary which I have never seen, and I should Hke to know the name of the author." (p. 11). Perhaps, in strictest accuracy, tlie word monopoly signifies a privilege of selling enjoyed by one person alone to the exclusion of all those who can be restrained by the authority of the granter of the privilege. But the word has long been used in cases where the privilege is shared among a large number, and where very little difficulty is experienced in obtaining a share in its advantages. The Bank of England is said to enjoy a monopoly of note-issue in London, although its proprietors are numbered by thousands, and anyone who has money to invest can become a proprietor if he wishes to do so. The East India Company was in hke manner said to enjoy a monopoly of the trade between England and the East Indies, although its proprietors were very numerous, and it was easy to obtain admission into their body. "What is essential to the argument is, that the monopoly, whether enjoyed by one person or many, should have the effect of restricting production to those localities where it can only be carried on at a greater cost than would other^nse be necessary, and the privilege enjoyed by American producers is of this character. It is for their benefit that foreign goods are excluded, and American consumers have to pay dearer for what has been produced with more labour. The monopolies which were formerly granted to single individuals were open to objection on the same ground, but they prevented consumers from obtaining what they wanted on the cheapest terms ; and as the same principle is involved in both cases, and the same word has been commonly applied to both, I see no reason for abandoning it. That the protective tariff enforced in the United States has had tha effect of diminishing real wages has been shown by Mr. D. A. Wells, an American gentleman who is well known, both in England and in his own country, by his writings on this subject. By a careful comparison of the rates of wages and the prices of the principal articles w^hich enter into the consumption of the labouring classes, he has arrived at the conclu- sion that the rise which has taken place since the time when the Morrill tariff was adopted has been much less in the case of wages than in that of prices. Wages have risen considerably, even when measured in gold, the rise being, as he tells us, 50 per cent, in the case of unskilled labour, and 60 per cent in that of mechanical labour during the period 1860-8. But the rise of prices during the same period averaged 78 per cent., so that the labourers suffered a real loss of about 20 per cent, in their wages. This result cannot be explained by anything except the tariff, for the effects of the paper currency have been eliminated by confining the comparison to cases in which all amounts are reckoned in gold, and taxation, which is the only other circumstance which might be adduced UNITED STATES TARIFF. 521 to account for the fact, has been shown hy j\[r. Wells to be quite inade- quate. It does not appear that the Congress Avhicli adopted tlie tariff were chiefly actuated by a desire to protect native industry, but they were in such haste to create fresh taxes for meeting the expenses of a civil war that they did not stop to consider whether those that were proposed would or would not be protective in their operation. The manufacturers and other traders concerned were adi'oit enough to seize the opportunity of getting taxes imposed which seemed to favour their particular interests, and to make a profit out of the embarrassment of their country. In the able essay which Mr. Wells contributed to the series published by the Cobdeu Club in 1871-2, Congress is described as proceeding on no other principle than that pursued by the Irishman at the fair, " Wherever you see a head, hit it." Wherever they saw any sign of wealth they proceeded to tax it, and the reckless haste with which they acted often led them to impose such high duties on native products as encouraged importation until corresponding import duties were imposed. One case is mentioned in which a tax was laid on copper, from which the Government derived less than it lost by having to pay an increased price for its own copper. In other cases, duties were imposed on spirits, and an exemption was granted to those which had been made before the Act was passed. The very men who had sug- gested the tax had taken care to manufacture large quantities beforehand, and wei'e able, while escaping from payment of the tax, to sell their stocks at the high prices which were paid for similar liquor on which it had been paid. In other cases, spirits on which the excise duty had been paid were entered in the Custom Houses as intended for exportation, whereupon the manufacturers were entitled to a drawback, or, in other words, a return of the money which had been paid. The object of this iirovisiou was to j^revent the duty from putting a stop to the export of American spirits, and a similar policy is usually adopted where excise duties are imposed. In some cases, however, the system led to the perpetration of scandalous frauds. By the connivance of the officials concerned, the owners were enabled to withdraw their casks of spirits from the warehouses and to substitute others containing little more than water ; and when it had been reported that these casks had arrived at a foreign port, the owners received the drawback and were released from further liability. That these and similar abuses should have been sul)mittcd to during the war was no more than might have been expected, but that a tariff in which nearly every article is taxed should have been maintained during so many years of peace, is a fact which can only be accounted for by the confi- dence of a majority of the people iii the truth of the doctrines taught by 522 UNITED STATES TARIFF. Mr. Carey and others. In England, every effort has been made to repeal Customs duties, and the articles Avhich are subject to them may almost be counted on the fingers. In the United States, a duty of 35 per cent. ad valorem was, as a rule, imposed on every article imported from abroad, and the inconvenience resulting ft-om such an arbitrary rule must have been considerable. The unforeseen effects which may follow from this mode of proceeding are curiously illustrated by an anecdote told by Herr Julius Faucher in an essay included in the same series as that of Mr. Wells just referred to, A tariff had been adopted, which, after specifying duties on various articles imported into Prussia, imposed an uniform duty of half a thaler per hundi'edweight on all articles not previously named, and this continued in operation for many years with- out attracting much attention. Herr Faucher, however, tells us that, "One fine morning in 1864, the Prussian Minister of Commerce, Count Itzenplitz, who still occupies that place, took the House of Deputies of the Prussian Landtag by surj^rise, by soliciting their assent to an isolated measure of tariff reform, certainly never heard of before. He did not attempt to justify it at all, for in this case there was, as the reader soon will see, not the slightest necessity for it. He begged, namely, to be authorised by the House to propose to the ZoUverein Conference that henceforward sea-water might be imported duty-free across the land frontier. The members did not know whether they could trust their ears. Here and there they got up from their seats, leaning forward and crying, " What ? Say it again!" "Not understood," and the like. Where- upon the Minister related that it had become necessary in the previous year to stop by order in council — the sanction of the Landtag being reserved — the general import duty of half a thaler on the hundred- weight upon sea-water imported by rail across the land frontier at Wittenberge from Hamburg, and at Emmerich from Rotterdam, for the oyster-shops of Berlin and Cologne, and for other uses. " The communication was received with roars of laughter, in which our jolly Minister of Commerce joined heartily." (p. 276). Herr Faucher, who was himself one of the deputies present on the occasion, took advantage of the incident to obtain the repeal of the Avhole clause. If the American tariff has not led to any such ridiculous consequences, it has at least produced equal inconvenience. For the benefit of the manufacturers, high duties have been imposed on foreign manufactured articles, and the producers of raw material have at once asked for similar protection for their industry. When this has been granted, the manu- facturers have lost through the dearness of their material as much as they have gained by the exclusion of foreign competition; and Mr. Wells contends that the system can only be called protective on the EXCEPTIONAL CASES. 523 principle of " lucns a noii lucendo." A heavy duty was imposed on English steel fur tlie benefit of American iron-masters, but those who were engaged in manufacturing goods from steel complained that the duty was a great impediment to their business. It was difficult, if not impossible, to produce steel in the United States equal in quality to that made in England, and the American manufacturers who produced for expor- tation were often required to use English steel. But they were thus obliged either to pay the high duty or else to lose the contract ; thus affording an example of one of the many ways in which restrictions on imports bring about a diminution of exports. There is thus a constant struggle going on in the United States between the different classes of producers, each of whom desires protection for himself, and, at the same time, freedom fi'om the restrictions which are imposed upon him for the benefit of others. A French ^mter of some ingenuity, ]\I. Alby,* con- tends that where all interests are equally protected no one has any right to complain, and that injustice is only perpetrated where a few classes are protected at the expense of the rest. According to him, it is unjust that millions should be compelled to pay dear for iron in order that a few thousand iron-workers may be benefited, but the injustice becomes less and less as the number of protected trades is increased, and falls to zero when all are protected. In the case of the United States, it is obviously impossible to apply M. Alby's imaginary system, for the farmers of Illinois and the gold miners of CaHfornia can derive no benefit from protective duties on foreign corn or gold. These classes feel the full weight of the tariff which raises the price of nearly everything which they buy, while they cannot console themselves with the reflection that it secures them a better market for their produce than they would otherwise enjoy. But even if it were possible that every class of xVmerican producers could receive a compensation such as is suggested by M. Alby, it would not follow that no one would have a grievance to complain of. According to the theory, every trade would be protected, which is the same thing as saying that every article would be produced in the country at a greater cost than would have been necessary if it had been imported; from which it follows that every consumer would be forced to submit to a greater sacrifice in order to obtain what he wanted* Every one would be in the same predicament, and could hardly complain that others had not acted towards him in the same spirit as he had acted towards them ; but, nevertheless, every one would be worse off, and the system would be foolish, if not immoral. Now that the system of Free Trade has been adopted to the fullest * Revue de» Deux Mondes, October 15, 18G9. 524 EXCEPTIONAL CASES. extent by one important commercial conntry, and efforts have been made to secure its adoption in many others, the advocates of Protection are obhged to abate something of their pretensions, and to content themselves with recommending, as a temporary expedient, what they formerly demanded as essential to industrial prosperity. Many of them now tell us, that though there are countries which can afford to do without Protection, there are others which require to be nursed and sheltered for a time until they are able to hold their own against foreign competition. Mr. Carey and other writers, both in the United States and in the British colonies, who adopt this line of argument, derive some support from the well-known passage in Mill's " Pohtical Economy." "The only case in which, on mere principles of Political Economy, protecting duties can be defensible, is when they are imposed temporarily (especially in a young and rising nation), in hopes of naturahsing a foreign industry, in itself perfectly suitable to the circumstances of the country. The superiority of one country over another in a branch of production often arises only fi-om having begun it sooner. There may be no inherent advantage on one part, or disadvantage on the other, but only a present superiority of acquired skill and experience. A country which has this skill and experience yet to acquire, may, in other respects, be better adapted to the production than those which were earlier in the field ; and, besides, it is a just remark of Mr. Rae, that nothing has a greater tendency to promote improvements in any branch of production than its trial under a new set of conditions. But it cannot be expected that individuals should, at their own risk, or, rather, to their certain loss, introduce a new manufacture and bear the burden of carrying it on until the producers have been educated up to the level of those with whom the processes are traditional. A protecting duty continued for a reasonable time will sometimes be the least inconvenient mode in which the nation can tax itself for the support of such an experiment. But the protection should be confined to cases in which there is good ground of assurance that the industry which it fosters will, after a time, be able to dispense with it ; nor should the domestic producers ever be aUowed to expect that it will be continued to them beyond the time necessary for a fair trial of what they are capable of accomplishing."* That this passage should have become popular among Protectionists of the United States and of the British Colonies, is natural enough, for, as Mr. Rogers says, " The circumstances in which they are situated exactly square with the hypothesis of Mr. Mill. The countries are young and rising, industrious, as yet nascent, are thoroughly suited to the natural capacity * Book v., chap, x,, sec. 1, vol. 2., pp. 537-8, 6th Edition. EXCEPTIOXAL CASES. . 525 of the region and of the people, the latter being of the same stock Tvith the mother country whose manufactures they prohibit or discourage. There is no reason, apparently, except that of priority in the market, why the industry of the old country should not be transplanted to the new. Hence, I repeat, Mr. MilUs concession is perpetually quoted, and is perpetually mischievous."* "What advantage is to be gained by the naturahsatiou of a new industry in such circumstances is not very clear, for if it Avas one which could hold its own, no protection would be needed ; and if it could not, it does not appear what compensation the country would receive for the sacrifice submitted to. The history of industry is full of instances in which individuals have tried, in spite of heavy losses, to naturalise a new industry in their country ; and, indeed, this kind of enterprise rather needs checking than encouraging. Of course, if it is assmned that the gains will exceed the losses, the experi- ment is justified on economic grounds, for, by the hypothesis, it promotes the increase of wealth ; but the real question is whether there is any chance that such an experiment will succeed. It is not necessary that native pro- ducers should be able to equal their foreign rivals in order that they may introduce a new industry, for they may be able to produce a small quantity at a cheaper rate, although they cannot undertake to supply all that is required. To quote again from Mr. Rogers : — " Every country enjoys a natural protection to its manufactures. When the article is cheap and bulky, the cost of carriage is equivalent to a prohibitive duty ; when it is cheap and hght, the same element of cost, amounting to a considerable per ceutage, is a protective impost. In the great majority of cases this charge and similar incidents attached to a foreign commerce, are abund- antly sufficient to give a legitimate stimulus to home production." (p. 234:). This natural protection aflbrds to producers an opportunity for producing on a small scale to supply their immediate neighbourhood, and if the new conditions lead to any improvement, they can afterwards extend their operations. In such a case as the iron-trade of the United States it is evident that the more fertile mines can be profitably worked in spite of English competition, and a duty which prevents or obstructs the importation of English iron does not naturalise a new industry, but simply gives an unnatural extension to one which would exist without it. Thus it certainly compels American consumers to pay dearer for their iron, while even if American producers were able to maintain their ground after the repeal of the tax, proof would still be wanting that the inconvenience sufTered during its continuance was outweighed by the advantage of producing at home what might be imported from abroad. ♦ lilanual, Chap, xvii,, p. 234. 2nd Edition. 526 EXCEPTIONAL CASEB. But what constitutes the strongest objection to Mill's argument is the impossibility of finding any authority competent to decide which indus- tries ought to be naturalised, and how long a period of Protection ought to be granted to them. Mr. Eogers asks "Again, who shall decide whether a particular industry should be developed in a country by pro- tective regulations ? AVho shall determine the period at -which the protection shall cease ? Is it not manifest that the selection of favoured industries (of course, I except those which may be conceived as abso- lutely necessary to the well-being of the country) and the prolongation of the term of protection will be a matter of perpetual intrigue, will be a powerful means for demoralising the administrative or legislative body which makes or extends these concessions ? " (p. 235). Private individuals often make egregious mistakes in the selection of a branch of industry Avhich they attempt to naturalise in a new locality. Is it to be supposed that governments will possess greater powers of discrimination? Individuals have the strongest motive of self-interest to induce them to obtain all the data on which to found a right conclusion, but it can matter very little to legislators whether their experiments succeed or not. When we remember how numerous are the instances in which laws passed to regulate industry have produced evil effects never dreamt of by their promoters, it seems the height of temerity to entrust legislators with the jDower of deciding a question which presents so much difficulty and is at the same time of so much importance as the propriety of introducing a new trade into a country. In Australia, many efforts have been made to produce wine from native grapes, but these have not met with much success if we may trust Mr. TroUope, when he tells us that he seldom found Australian Avine that was worth drinking. If foreign wines were excluded in order that the native wine-gTowers might have time to establish their trade, what compensation could be obtained by those who were forced to drink bad wine during the process ? How could the Australian legislators decide how much time should be allowed ? If they were content to take the advice of the wine-growers, a very long period A^'ould be assigned, and if they did not do this, who would be benefited ? Mr. Trollope tells us that the protective tariff of Victoria excludes tlie strawberries of Tasmania, and that pumpkin-jam flavoured with strawberries is sold in Victoria as strawberry-jam. Can this be considered as one of the improvements in manufacture which result from its trial under new conditions, and if not, how much time ought to be allowed for some improvement to be discovered ? So far is it from being true that a temporary protection stimulates producers to effect improvements, that, on the contrary, there is plenty of evidence to show that its >-9 ' ronaiaH com roiiBiaJT ooMi ' Liiiiui ^ 527 maiutenance encourages the natural unwillingness of all men, whether manufacturers or not, to make a change in their habits. A curious anecdote is related by ]\Ir. Wells which illustrates the enervat- ing effect of Protection on American manufacturers : — "' Tn the summer of 1867, while studying the industries of Europe, the Com- missioner visited a factorj^, the products of which had for many years found an extensive market in the United States. The product being staple, and the industry one that was exceedingly desirable should be extended in the United States, the Commissioner studied the process of manufacture with great care, from the selection of the raw material to the packing of the finished product, the rates of Avages, the intelligence of the operatives, and the hours of labour. When his investigation was completed, the Commissioner said to the foreign manufacturer, a man Avhose name is a household word in his own country for integTity and philanthropy, ' The duty on the import of these articles into the United States is respectively 3.3 per cent, and 30 per cent., ad valorem, and 20 cents, per pound ; if you have given me your prices, products of machinery, and cost of labour correctly, I do not well see how you could export your fabrics to the United States, even if there was sub- stantially no duty, as the advantage of raw material is mainly upon our side.' ' I am sometimes at a loss myself to account for the course of trade,' was the reply ; ' but perhaps it will help you to a conclu- sion if I tell you that some time ago, findjng ourselves pressed with German competition, we threw out our old machinery and replaced it with a new and improved pattern, and the machinery by us rejected was sold to go to the United States.' To complete the story it is only necessary for the Commissioner to add that the owners of this second-hand machinery have, since its importation, demanded and received an increased protection on its products."* There can hardly be a more striking example of the effects of Protection, and if the duties here referred to had been nominally imposed for a limited time, the mannfac-^ turers could always have indulged the hope that they would l)e renewed. Whether the renewal was granted or not they would still think that they could safely put off the troublesome business of improving their machinery until they knew for certain that they would have to face foreign competition. If a government wishes to see a new industry naturalised in its territory, it can promote this object by removing all obstructions to domestic industry or ibreigu trade, but if it endeavours to go further and to compel its subjects to produce at liome Avhat they could import irom abroad, it enters on a course which is almost certain * Report, 18C8, p. 74, quoted in Cairnes' " Leading Principlet>," pp. 485-486. 528 FOREIGN COMPETITION. to do more harm than good. Consumers certaiuly suffer during the process, and even if the new industry is able to stand alone after the pro- tection has been withdrawn, it must always remain a moot point whether home production possesses any intrinsic advantages over importation. The cry for Protection, which was once so loud and frequent, is now seldom heard in England, but manufacturers still regard the entry of foreign goods as in some way signifying that English industry is declining, and that foreigners are able to beat them in their own market. A few instances are cited as if they were the precursors of a great revolution which is to deprive England not merely of its leading position with regard to other countries, but of the skill and enterprise which do so much to promote the comfort of its inhabitants. Theories are not wanting to account for the alleged decline of the national vigour, which at one time is ascribed to the refusal of the labourers to content themselves with reasonable wages, and, at another time, to the want of education which renders them inferior to the labourers of the Continent. The first of these theories affords to the enemies of trades' unions an opportunity for charging their leaders with ignorance and foUy which are ruining the very classes for whose benefit unions exist. One writer, who has proved himself to be a true friend to the unions, has been so much impressed "with the force of these arguments, that he thinks it his duty to warn thoir leaders against pursuing a policy which would lead to such results. He advises .them to abstain from demanding a rise of wages in those cases where the concession, if granted, would place Eng- lish producers at a disadvantage as compared with their foreign rivals, because this would be followed by the loss of the trade, and the defeat of the very pm-pose for which the demand was made. He then says, " There is some reason to apprehend that the limits within which unionist exac- tions ought in prudence to be restrained have akeady been in some cases overstepped. The importation into Hull of doors and window-frames from Stockholm ; the order from Russia for 40,000 tons of iron obtained in 1866 by a Belgian firm in opposition to English competition ; the contract with the Dutch Government for rails ^vrested in the same year by a Liege house from Enghsh iron-masters ; the fact of Belgian rails having been laid down on the East Gloucestershire railway, and of there being French locomotives running on the Great Eastern line — these, after every abatement of their significance that can be suggested, are still ugly symptoms which our unionist workers in wood and iron cannot wisely disregard. I have seen it somewhere stated (by Messrs. Creed and Williams, if I recollect rightly) that the order for 40,000 tons of iron alluded to above, involved wages to the amount of £150,000.* If * Thornton oii Labour, Second Edition, p. 293-4. Note. (C^}^\^Ci:y^ Cntv/c^^^:/ UMI T E P tJTA^EO TAIIIPF. / 529 Mr. Thornton, ^^•hose words are here quoted, were merely contending that trades' unions should not authorise a strike where it would have the effect of preventing the employers from obtaining a lucrative contract there would be notliing to object to in his argument, but it will be observed that nothing is said of any connection between the pai'ticular instances recorded and strikes in those particular trades. He argues that because certain goods are imported which one might naturally expect to see produced in England, therefore the operation of trades' unions has been misdirected, and has inflicted an injury both on the capitalist and on the working classes themselves. This conclusion, however, is not justified by the premises. The fact that Hull imports doors and -svindow-frames from Stockholm does not show that the labourers of Hull are not able to earn as much wages as when they did their carpentering for themselves. It simply shows that their industry has taken a new direction, and that, instead of making their own doors and window-frames, they make other things to be exported to Sweden in exchange for these articles. Sweden is better fitted than England for the production of timber, and it would seem to be a more natural state of things that timber should be manufactured in the country where it is grown than that it should be transported across the sea before it is worked up. That trade should have taken such a turn is a fact which may be accounted for -oathout assuming any diminution in the capacity of the artisans of Hull for doing their work or regulating the scale of their wages. A similar migration of industiy has been observed in the ship-buildmg trade. When ships could be built of Avood they could be built in the Thames as well as anywhere else, but now that they are chiefly built of iron it is found cheaper to construct them in the neighbourhood of the mines from Avhich iron is procured ; and the Clyde having an advantage in this respect, is preferred to the Thames. The consequent decline of shipbuilding in London has been ascribed to the existence of trades' unions among the operativcB engaged, but those who reason thus, forget that unions exist on the Clyde quite as much as on the Thames. To proceed to another instance cited by Mr. Thornton, that of the rails supplied by a Belgian firm to the East Gloucestershire Railway. Here, again, the very fact of the importation indicates that there must have been a corresponding expor- tation, and tliat some other branch of industry must have been well employed. But ^[r. Brassey supplies us with facts which entirely take away the importance of the incident, even as illustrating the position of the iron trade. In his chapter oC tlie " Comparisun ol" Progress of Nations " he says : — " It was also said that Belgian rails were being largely imported into England, and it is true that sume fioo tons JI M 530 for the East Grloucestcrshire Railway were supplied by a Belgian firm in 18G5. The price of these rails was £6 10s. per ton, or thereabouts, delivered at Gloucester. But a solitary instance like this proves nothing as to the general comparative prices of English and Belgian rails. It was because our iron-masters were more fully employed than the iron-masters in Belgium, and because the prices of rails had, in consequence, fallen more rapidly in Belgium than in England, that the order in question was executed abroad. Since the year 1865, rails have been made in England at a cheaper rate than that paid for the Belgian rails supplied to the East Gloucestershire Eailway,"* Thus it happens, curiously enough, that the very instance which is quoted to show the decline of the English iron trade testifies to its prosperity, and the order was given to a Belgian house because the English manufacturers were fully employed. ]\Ir. Brassey, in the same chapter, throws some additional light on another of the cases cited by Mr. Thornton. He says, "Serious alarm was felt when, in 1865, fifteen engines were ordered for the Great Eastern Railway from M.M. Schneider. These mis- givings would probably have been allayed had it been generally kno^vn that at the same time when the fifteen engines were ordered from Creuzot, forty other engines were ordered from English firms, and that when M.M. Schneider were subsequently asked to undertake the con- struction of twenty-five more engines at the price they had agreed to accept for the fifteen engines originally ordered, the offer was declined." (p. 183.) Here, again, the incident loses its significance when we see that a larger numljer of engines were ordered from English firms, and, in fact, proves little more than that MM. Schneider made one of those bad bargains to which foreigners occasionally commit themselves in their eagerness to compete with Engiish manufacturers. That engine-building is carried on more largely on the Continent than it used to be, is a fact which need not inspire any alarm in the breasts of English manufiicturers. As railways were invented in England, Englishmen were the first to learn how to make the engines and other articles required for their working, and it is equally natural that as railways are extended on the Continent, foreigners should become equally expert in the arts which minister to them. " Surely," says Mr. Brassey, " it would have been unreasonable to assume that we were to remain for ever monopolists of a trade in which the foreigner only required additional experience in order to enable him to compete with our countrymen." (p. 193.) The other instances cited by Mr. Thornton are not suflicient to establish any general decline in English industry, but merely show that in * Vv'ork aud Wages. Fifth Tliousaud, p. 188. Ui f ll ' llD aTAlLS T.UtJ^ ' iJ ' .! 531 particular iustances a foreign firm has been able to procure a lucrative contract in spite of English competition. Such instances must occur wherever several nations are engaged in the same trade ; and that the English do not always succumb is shown by the intense di'ead of their competition which foreigners exhibit. In the chapter akeady quoted, Mr. Brassey furnishes abundant evidence that where fair competition is allowed, English manufacturers obtain the lion's share of the contracts both in engine-building and ship-building, and that in many cases they are only prevented from obtaining more by the protective duties which arc imposed for the beuefifc of their foreign rivals. Mr. Thornton, in another essay,* has treated the same subject in a different manner. He considers that experience has shown that the industrial greatness of England is on the decline, and he attributes it to the want of technical education. If he does not go so far as to say that the Government ought to establish technical schools in order that English manufacturers may be enabled to hold thek ground against their foreign rivals, he at least speaks vdth. evident approval of the Governments of "Wurtemberg and other German States which have pursued such a policy. Other writers and speakers besides Mr. Thornton who have advocated the establishment of technical schools have recom- mended that they should be supported out of national or local taxes, and have referred to the danger of foreign competition as furnishing a ground for prompt action. It is here that their arguments show a kinship to those of the Protectionists, for in both cases the contention is that the bulk of the community should be taxed in order that a par- ticular class of producers may be enabled to find a market for their goods. Yet, if there is any ground for believing that technical education is a great advantage to artisans, the proper persons to bear the expense of it are the manufacturers who would benefit by it. Whatever may be said as to the inability of the artisans themselves to pay for it, there can be no doubt that the manufacturers are rich enough to do so if they wished. The evidence on which Mr. Thornton relies to estab- lish the industrial decline of England is chiefly derived from the results of the International Exhibitions of London and Paris. The fii-st of these, that of London in 1851, afforded, he tells us, proofs of the immense superiority of England over her foreign rivals; but in 1857 and 1862 her superiority was less decided, and in 1867 it had given place to an inferiority. The cause of this change in the relative position of England and the Continental nations is to be found, he-tells us, in the serious efforts which the latter had made to devolope their resources to ♦ Tochnical Educatiou hi Eiiglainl, Coruhill Magazine, September, 1871. 532 v:. -MaiTSD/OTATEa -y >ie^^^^ ^^-trmJiUhH^yi. the utmost. Seeing that they could not hope to rival England in the possession of mineral wealth, they determined to do their best to improve the skill of their artisans, and with this view they estahhshed the technical schools to which the success which they have obtained is ascribed. What that success has been, Mr. Thornton tells us in the follow- ing words: — "Turning to recent parhamentary papers on the subject, we shall find Leeds grieving over the loss of a shawl-trade filched from her by foreigners ; Dewsbury lamenting that in the lighter and more fancy woollens Yorkshire is being superseded by the Continent ; Hawick complaining that Xerviers, by producing a superior article at the same price, has usurped a larger portion of the Scottish woollen-trade ; Bir- mingham handing in a long list of wares, which used to be specialities of hers, and which are now partially or wholly displaced in common markets by corresponding articles from France, Prussia and the United States ; Nottingham confessing that she is obliged to send large quanti- ties of hosiery abroad to get it properly dyed ; Macclesfield and Coventry owning that it is no longer French, but also Swiss, silks and ribbons they have to fear. Worst item of all in this sadly significant catalogue, Belgiiun boasting that, in the fifteen years ending with 1867, the increase in her export of cotton goods was almost exactly twice that of England, or as 292 to 148 per cent." (p. 329). Thus Mr. Thornton accumulates a number of instances in which English manufacturers have been, or have thought themselves, surpassed by foreigners, and thinks that he may generalise the result by saying that England is everywhere, or generally, beaten. He does not stop to consider whether the trade of England is on the increase, but having satisfied himself that foreigners are surijassing us, he infers that our trade must be declining. He expressly says : " In England, national wealth is little else than another name for commercial prosperity, one indispensable element of which is efiiciency of labour, which again has now become a relative term, applicable or not, according as the industrial sections of a population excel or fall short of those of other countries in mental culture." (p. 330). But there cannot be a greater fallacy than is implied in the belief that a nation cannot increase in wealth unless it is superior to other countries. How, indeed, could the trade of the superior countries increase if there were no cor- responding increase in the trade of the inferior countries "\^•ith which it deals ? As well might it be argued that unskilled labourers could not carry on any trade because they cannot rival the skill of superior artizans. Mr. Brassey commences the chapter already quoted by appeal- ing to a much better criterion to ascertain whether England is,'orisnot, making progress. He points out that each census shows a material increase m the population, and that the statistics of exports and imports TOHTED otate;t tari^ . 533 show au enormous increase during the last twenty years. He refei"S to the great development of the trade between Europe and the East, and points out that nearly the whole of the increase has been obtained by England. The increase of population affords indisputable evidence of the increase in tlie resources of the country, and it is difficult to see how France, whose population is diminishing, is to encroach to any serious extent on the domain of English commerce. That English manufac- turers ought to make every eflfort to withstand the foreign competition to which they are exposed, is a proposition which no one will dispute, but it may be doubted whether teclniical education will afford any material assistance. In Denmark, where technical schools have been opened, the results are far from satisfactory. The mere fact that young men are kept in a school ^vhere they can always apply to a teacher to help them over any difficulty prevents them from learning to find out things for themselves, a lesson which is more important to success in life than any which can be learnt at school. ]\Ir. Thornton says himself that there is no school like the workshop, where both the teacher and the pupil have the strongest interest in doing their work well. That some deeper acquaintance with mechanical, chemical, and other scientific principles would be beneficial to artisans a sa matter of culture there is no need to dispute, but those who advocate such an improvement in their education will not materially strengthen their case by appealing to its industrial advantages. BOOK IV.— TAXATION. CHAPTER I.— GOVERNMENT. FUNCTIONS OF GOVEENMENT — EDUCATION — CHARITY — CONVEYANCE OF LETTERS — TELEGRAPHS — RAILWAYS — NECESSITY OF TAXATION. When Adam Smith devoted his fourth book to the examination of certain systems of Pohtical Economy he attached to the words a very diflPerent meaning to that which they now bear. In the introduction to that book he expressly states that the objects of Pohtical Economy are : " First, to provide a plentiful revenue or subsistence for the people, or more properly to enable them to provide such a revenue or subsistence for themselves ; and, secondly, to supply the State or Commonwealth with a revenue sufiicient for the public services. It proposes to enrich both the people and the sovereign." He did not consider that the " Wealth of Nations " was a treatise on Political Economy, though he thought it necessary to devote a part of the work to the subject. To him and his contemporaries the Avords suggested ideas which accorded much better with their etymology, and were used to denote the art of managing a government with the same care and success with which a prudent man manages his household. But since his time the meaning of the words has materially altered, and most of those who now write books on Political Economy embrace the whole field which was covered by Adam Smith. A recent Swiss writer, M. Walras,* finds fault with Adam Smith's definition, and expresses surprise at its being deferred until the commencement of the fourth book. The definition is, as he says, inadequate to express the science which explains the laws governing the production, distribution, and exchange of wealth ; but as Adam Smith did not attempt to do this, there is no reason to be surprised at his not having succeeded. The field of inquiry which was opened up by Adam Smith has been found to be productive of much knowledge which is useful to statesmen, but even if there were no statesmen to instruct, ihere would still be sufficient reason for studying Political Economy, as * Elements D'Economie Politique Pure Lausanne, 1874, chap. 1. FUNCTIONS OF GOVERNMENT. 585 tliose words are nov; understood. ]M. "Walras and many other Economists have taken great pains to show that the object of their studies is not the art of governing well or prudently, but the science which explains the conduct of men engaged in the pursuit of wealth. ]\Ir. Hearn has been bold enough to eschew the phrase altogether, and to give the title of Plutology to his treatise on the science. But the result of his experi- ment has not been such as to encourage imitation, the strangeness of the title having prevented many who might otherwise have consulted the book from guessing the nature of its contents. I have, therefore, thought it most convenient to retain a phrase which is hallowed by long usage, although it certainly gives rise to some misunderstanding. All the propositions which have been proved by Economists to hold good in respect of the causes which determine the rate of wages, the rate of profit, and the gi'owth of rent, would be equally true if it were not customary for governments to raise any revenue whatever ; but as the manner in which the revenue is raised may have a considerable effect on the production and distribution of wealth. Political Economists fi'om Adam Smith downwards have always thought it necessary to devote some attention to the subject of taxation. Political Economy cannot indeed give a complete answer to the question whether a given tax ought or ought not to be imposed, for there are many other things besides Economic arguments to be taken into consideration before a particular tax can be approved or condemned. In order, however, that statesmen may form a proper judgment on the question, they should have the means of estimating the Economic effects of diflerent modes of taxation, and a study of this science will help them in doing this. They will still have to consider in each case whether the object which the tax is imposed to obtain is worth the sacrifice which it entails, and it is for them, not for Economists, to say whether the merits of a particular tax outweigh defects. The only taxes which Political Economy can be said absolutely to condemn are those which are purely protective, but it condemns them on the ground on which every statesman ought to reject them, viz. : that they do not yield any revenue at all, and therefore do not obtain the object for which they are ostensibly imposed. It shows that they do not obtain the object of increasing the production of wealth, and this being the only other purpose for which they are maintained, they are ipso facto condemned when it is shown that they are not capable of fulfilling their professed purpose. But with regard to all taxes which do yield a revenue, the business of the Economist is only to point out what will be the effects of levying them in a particular way, upon what classes they will fall, and. what are tlio advantages and disadvantages of different systems of taxations, wln'ie it 536 FUNCTIONS or government. is for statesmen to compare these, and to choose the system which is on the whole l)est for the country which tliey ha^-e to govern. The suhject can hardly be discussed without considering what are the functions Avhich a government ought to perform, and this is a question on which the greatest diversity of opinion prevails, and is likely to prevail for a very long period. Disputes about the superiority of particular forms of government have but little interest for the Economist, as the progress of wealth is not aflfected by the substitution of democratic for despotic, or despotic for democratic, forms of government. It has, indeed, been supposed that if the people have the control of the govern- ment in their own hands they will prevent it from imposing heavy taxes, and from incurring expenditure beyond the resources of the country, but experience has shown that republican governments are not less prone to extravagance than monarchical ones. In the whole of South America there is but one monarchy, and this enjoys better credit than any of the numerous republics in the same Continent. In Europe, on the other hand, there is but one State which has permanently adopted a republican form of government, and this is the only State which has no National Debt. Whatever be the form of government, its financial policy is determined by the character of the people, and if they would rather have many public offices and heavy taxes than light taxes and few salaries, their wishes are sure to be indulged Avhether the offices are created by a royal decree or by the vote of a popular assembly. What- ever be the form of government, a nation is equally disgraced by open or tacit repudiation, and no government would resort to such a practice unless supported by the approval of its subjects. Whatever difference of opinion may exist respecting the functions which a government ought to perform, there is one as to which there is no dispute. It is universally agreed that it ought to protect its subjects from violence, whether on the part of their fellow citizens or of foreigners, and that, wherever the institution of private property exists, every subject ought to receive protection for his property as well as for his person. Whether or not it ought to undertake any other function, it may, at all events, be considered as a joint-stock protection company which undertakes to afford protec- tion to all who choose to employ it ; and taxation may be regarded as the means of obtaining payment from its customers. There is, however, an important difference between a government and an ordinary trading- company, in that it does not allow its customers very much choice as to whether they will deal with it or not. Great as are the advantages of division of labour, they are not obtained without a corresponding loss. When a small number of men undertake to perform a function for the rest of the community, they learn to do it better than could be done if FUXCTIOXS OF GOYEEXJIEXT. 537 every one acted for himself, but as the great majority cease to perform it, they soon lose the power of doing so, and if any circumstance paralyses the action of the particular class Avhich has undertaken to do it, the people are "worse oft" than if no such separation of employments had ever taken place. In the case of a government, the injury thus occasioned is conspicuous. A few thousand soldiers and policemen are able to protect millions of unarmed citizens, but there still remains the query, quis citstodiet custodies, and the very fact that the majority have entrusted the government with the task of protecting them renders them unable to protect themselves against the government. As the individuals who carry on the government are little, if at all, better on the average than those whom they govern, the same motives which would induce men to oppress one another in a state of anarchy induce government officials to oppress those whom it is their duty to protect. The establishment of a government does not alter the character of a people, and the character being the same, there must be the same amount of oppression though in a different form. It does not follow that nothing is gained by the substitution of one kind of oppression for another, for the oppression which comes from the government differs from that of private individuals in this respect, that it is more regular, and can be more easily foreseen and provided against. The establishment of a government does not diminish the total amount of suffering, but it distributes the suffering over a larger surface, where it is less keenly felt. Taxation is the method by which the losses caused by the misconduct of the few are distributed over the whole body of the people instead of being borne entirely by those who have been victimised. However bad a system of taxation may be, men will rather submit to a regular tax whose amount they know beforehand than to an uncertain exaction dependent on the caprice of a powerful robber. In Sicily, at the present time, it is a common practice for people to pay a stipulated sum to a brigand-chief for a safe conduct which will secure tliem from molestation by brigands, and it is possible that some governments may owe their origin to nothing more honourable than successful brigandage. When the question is discussed what benefits a government confers upon its sul)jccts, we ought to know what amount of property would be taken from them if they were in a state of anarchy, and compare this with the actual amount which is taken from them by the government. It is, of course, impossible to do this accurately, but it is well known that the number of crimes increases when a govcrument is paralysed by a revolution or a civil war, and that the return of a stal)le govcrument is always welcomed as a bcuefit to industry. As it is universally admitted that governments ought to afford protection to the jicrsons and property of their subjects, 538 FUXCTIONS OF GOVERKMENT. it only remains to be considered whether it ought to undertake any- other offices. Looking at the question as an economic one, it is evident that there is a great advantage in confining every company to a single function, and that as a government is a protection company there is a p-ima facie case against its undertaking any other office than that of a protector. Every additional office which it assumes must, pro tanto, diminish its power of effectually performing what it has already under- taken. If a railway company were to undertake the business of banking and insurance, it could not be expected either to manage the railway as well as it had done before or to be able to compete in its new enterprises with companies specially formed to carry on banking and insurance. Whatever be the form of government, the con- trol of the central authority must become weaker in proportion to the increase in the number of functions which it performs, and as the control becomes -weaker so must each function be performed in a more negligent manner. Xor is this the only objection to the policy of entrusting a government with functions which can be performed by private associations. It is almost proverbial that govern- ment business is worse done, and done at a greater cost, than private business ; and it is easy to discover a reason why this should be bo. Whenever the consumers of a particular article are fi'ee to procure it wherever they find it best and cheapest, there is a constant struggle among producers to obtain custom by supplying the public on better terms than their rivals ; and those who succeed best in doing this are enabled to continue in business while those who are less active, or less disposed to adopt improvements, are deprived of support and at last obliged to cease producing altogther. Private competition cannot attain perfection, for human nature is not perfect ; but, however slow the process may be, those individuals who do the work best must succeed, and those who cannot satisfy their customers must at length cease work- ing altogether. When a business is carried on by a government, this wholesome check on negligence is altogether removed. A government can compel its subjects to deal with it by leaving them no other alternative than to buy from it or to go without the article which they want ; and though it is true that the actions of a Government are ultimately con- trolled by its subjects, the pressure v.hich they can exert is very shght in comparison with that to which private traders are continually exposed. When the business of carrying goods from jjlace to place is left open to private competition, several houses at once enter into it, and those who wish to employ them have the certainty that the rates which will be charged can never be much above the lowest which -\nll suffice to yield the usual rate of profit to the capitalists engaged. But when, as FUNCTIONS OF GOVERNMENT. 539 is the case in most countries, the business of carrying letters is monopo- hsed by the government, those who Avish to send letters have in most cases no alternative except paying the g^",vernment price or submitting to the much greater inconvenience of not sending their letters at all. If complaints are made that the rate of postage is too high, the govern- ment officials are always ready with the ans^ver that the state of the revenue does not admit of a reduction, and it is very difficult to induce them to make the experiment of reducing the rate for a time in order to see whether the increase of business would not be great enough to compensate for the loss. Private companies have very little difficulty in altering their rates for the conveyance of persons or telegrams and in returning to the old rates if the change is not found to answer, but government officials dread nothing so much as a serious alteration in their rules. The fact that there is no one in a government office to whom the success of the business is of so much consequence as that of a private company is to its directors and shareholders, renders it necessary to adopt numerous and complicated rules to insure that all who are employed do their duty ; and, however well these rules may be devised, they must impose some inconvenience on the customers, while they can never secure the same efficiency as is found in a well-managed company. One of the numerous disadvantages which is inseparable from undertakings carried on by government is the great temptation which is always held out to the abuse of patronage. The word nepotism has come into existence in order to express the system of appointing the relatives of the sovereign or of high officials to all places which are worth having without regard to their fitness to perform the duties. Private firms are no doubt exposed to the same danger, but they are better able to protect themselves against it. However partial a father may be, he has better means of knowing his son's character tli;ni a minister has of knowing that of his friend's sons or nephews, and he has at the same time the strongest motive to rel'rain from admitting his son into his own business unless satisfied of his competence to carry it on with prudence and success. In spite of all these advantages, jn-ivate traders do make serious mistakes, but the consequences are not si)read over the whole trade of the country, but arc confined to the extinction of those houses which have been badly managed. Jn a government office, the effect is permanent, for it very rarely happens that jobbery is carried to such a scandalous extent as to lead to the suppression oi" the office, and the public are continually made to bear the consequences of ineffi- cient management. The system of open competition, which has of late years been introduced in this and other countries has, no doubt, done much to prevent favouritism in the case of first appointments, but no 540 FUNCTIONS OF GOVERNMENT. system of examination can be deyised^vhich will select candidates so well as is done by private individuals vliere their own business is concerned, and the most important thing 't-o be done is not to select the best candi- dates in the first instance, but to secure that they shall do their work thoroughly when appointed. It is next to impossible -to devise rules with regard to promotion which shall neither, on the one hand, leave any room for favouritism, nor, on the other, unduly fetter the discretion of the head of the office, and encourage mediocrity at the expense of ability. Rules for securing diligence are of little use unless it is somebody's interest to enforce them, and this is a point in Avhich a government office must always be inferior to a private concern. The complaints which are made Avhen a government office fails to do its work serve rather to irritate the officials than to produce any useful reform. Finding that these complaints are often ill founded, and that even when well founded they are often exaggerated, officials naturally come to regard complainants as a nuisance, and are generally able to concoct some elaborate excuse for doing nothing. It is quite true that a similar unwillingness to adopt new suggestions is exhibited by the officials of private companies and by many private traders, but, as has been said before, the ordeal of bankruptcy is always in store for those who are the least inclined to improve. A government office may be worked for years at a loss, as is actually the case with the post-office in the United States, and is, or was, the case with the money-order depart- ment of our own post-office. Even when a government has been so hopelessly extravagant that it is obliged to confess its inability to pay its debts, the catastrophe does not lead, as in the case of a private company, to its being wound-up and prevented from incurring further debts, l3ut, liaving made its confession, it continues its business as usual, while its creditors have only to submit to their losses. Thus, the most efficient of all checks is removed, and, as a necessary consequence, govern- ment officials are noted for their unwillingness to adopt improvements, for their slowness, and their indifference to the amount of trouble which they give to those who have recourse to them. It is very seldom that, when fair competition is allowed, a government office can compete with a private company, and the struggle generally ends in the forcible establishment of a monopoly. It is said that though as a general rule a government ought not to carry on any branch of trade or industry, there are certain depart- ments in which it may do so with advantage, and others in Avhich it is bound to interfere. In spite of all that has been written by Wilhelm Humboldt in Germany, by De Tocqueville in France, and by Mr. Spencer in England, in favour of restricting the action of EDUCATION. 541 gOTernmeut to the single task of aifovdiug protection, there still remains a strong party who nrge with great vehemence that the sphere of government action, far from being too extended at present, ought to be very much enlarged. Stated generally, the argument of this party is, that if it is the duty of an individual to do a certain thing it must also be the duty of other individuals to com})el him to do it. It is the duty of every parent to educate his children, and it is therefore contended that it is the duty of parents collectively to see that all children receive a good education. Similarly, it is the duty of a rich man to relieve the sufferings of the poor, and it is therefore contended that it is the duty of the whole people to compel all who can afford it to contribute to the relief of the poor. This argument, however, if it is sound, leads to consequences which are, perhaps, hardly realised by those who openly or tacitly use it. If it be true that those who consider a certain system of edueation to be good are bound to force those who think differently to adopt it, there is no reason Avhy children alone should be kept under control in this respect. If the majority may decide on compelling every child to learn reading and writing, they may, Avith equal justice, compel adults to learn foreign languages, physical science, or whatever else they may consider it desi- rable to know. The cause of education suffers in proportion to the extent to which the interference of the government is carried. If Bchools are supported by the government, they are more or less relieved from the check on negligence and incompetence which is imposed on private schools by the necessity of keeping up the number of the pupils. If the government prescribes the subjects which are to be taught, there is a constant danger that the curriculum will be confined to those studies which have been long in vogue, to the exclusion of new ones which changing circumstances render necessary. When a government has decided to give assistance to schools, it can hardly be restrained from inspecting them in order to see that their management is satisfactory. The opening which is thus afforded for centralisation is sure to be enlarged till it reaches its climax in the state of things described in the old story of the French Minister of Public Insti-uction who said that he was able to name the very lesson Avhich a million boys were learning at the time when he was speaking. If the system of education were already perfect, there would be no harm in imposing it on all children, but as this is very far from Ijeing the case, it is necessary that experi- ments should be made in order to improve it, and this cannot be properly done unless those who inti-oduce an iimo\aLion are allowed to comjiete fairly with those who adhere to the established routine. Whether the government prohibits the est;iljlishnient of private schools, or grants 542 EDUCATION. money to assist those which are managed or supervised by its own offi- cers, it gives an advantage to certain teachers ^vhich is not enjoyed by others, and, unless its decisions are regarded as infalhble, it follows that encouragement must be sometimes given to bad schools, while good ones are discouraged. Whenever this happens, an injury is inflicted, and not only on aU the teachers who are deprived of pupils, but on all the parents and children who might have benefited by the establishment of good schools, and a heavy responsibility rests on those who maintain a system which is liable to gross abuse. When a public and private school enter into competition, the former is generally able to offer instruction at a cheaper rate, because the taxpayers can be compelled to make up any deficiency which may be caused by its want of popularity. An inducement is thus held out to parents to select the cheapest, rather than the best school for their children, and, in so far as it is due to the action of the government, the system undoes, by injuring the parent, what it does by improving the children. The argument most commonly adduced in favour of State interference with education is, that parents who are not themselves educated cannot tell the value of education, and that unless some outside authority interferes, the children will never rise into a better position than their parents. But the assumption contained in this argument is one which is plainly opposed to facts, for if it were impossible that uneducated parents should educate their cliildren, education could never have become so generally diffused as it is now in civilized countries. There was a time when it was considered that reading and writing were not necessary parts of the education of an English gentleman, but no member of this class would now think of allowing his cliikben to grow up without tliese accomplishments, although the government has never thought it necessary to interfere in the matter. What the richer classes have done for themselves the poorer classes would do if time enough were aUowed for the process. It is said that this cannot be expected because it has not yet come to pass, but this merely shows that the labouring classes do not yet feel the necessity of obtaining such an education for their children. They are, at least, quite as likely to be right as the members of other classes who wish to legislate for them, as they have both better means of comparing the condition of educated and uneducated children, and they have the motive of parental affection impelling them to make the best decision in their power. It seems to be taken for granted in these discussions that what children learn they will remember, and that, if once taught to read, they will make as much use of their knowledge as the higher classes do. Yet experience is continually proving that a very short time after leaving school is enough to allow children to forget what they have learnt, and EDUCATION. 543 that readiug and writing form no exceptions to the general law, that a man loses in time the power of doing what he has ceased to practice. Even if this were not so, and if every labonrer remembered throngh life what he had learnt at school, there would still remain the qnestion whether what he had learnt was of more importance than what had been sacrificed in order to learn it. Something mnst be sacrificed for the time and money which are spent in securing school education which would have been spent in some other way if the schools did not exist, and childi-en are continually learning something, Avhether they are in school or not, while the money, if expended on the physical comfort of the children, would confer on them a benefit of another kind. In German schools, for instance, the desks are frequently so badly arranged that the childrens' eyes are injured in the very act of learning their lessons, and yet the statistics of school attendance are triumphantly quoted as showing the benefit conferred on the people by the government which is dciiriv- ing them of the most valuable means of acquiring knowledge, good sight. A curious commentary on the system of entrusting the education of the poor to the State is furnished by the experience of ]\Iiss Rye, who is so well known for her attempt to improve the condition of pauper children. This lady has, during the last few years, had several hundred children under her care, and she tells us that the result of her experience is, that the children who have been found utterly neglected in the streets arc more docile, more affectionate, and in every way morally superior to those who have been brought up in workhouses, who only excel in the mere knowledge of reading and writing. In England, those who advocate compnlsory education generally seek to impose it on the poor, while they consider that the rich may be trusted to send their children to school of their own accord ; but on the Continent, where com})ulsion has been longer and more generally tried, it is equally a[)plied to rich and poor. This is logical enough, but when a government presumes to interfere in such a matter it is doing what cannot possibly be productive of much good, and must, in individual cases, inflict great hardship. When government officials have to decide on the fitness of teachers they must adopt some simple test, such as having received an University degree, or passed some examimition, and however carefully these tests may have been devised, they cannot fail to exclude many persons who are quite fit for the posts which they wish to occupy. It does not follow that a person who has a thorough knowledge of a subject is therefore able to teach it, nor, on the other hand, that one who knows very little may not have the character and manners which are sufficient to counter- balance this defect, and may not make the best teacher. No doubt a bad teacher may get employed in a private school, but \vhen a govern- 544 EDUCATIOK". ment meddles in the matter it is apt to enforce a rigid rule withou regard to consequences, and the mistakes which it commits are more dangerous in proportion to the extent of its power. When we are told how many schools have been opened and how many scholars have been forced to attend, we ought to be told, also, how many schools have been closed and how many scholars prevented from attending in consequence of the inability of an experienced teacher to pass an examination prescribed by officials who know little or nothing of the wants of the localities to which their rule is apphed. Wherever the State interferes with education, it is always confronted by what is commonly knoN^Ti as "the religious difficulty." Many persons who are practically engaged in teaching tell us that this is merely "a platform difficulty," and that it is easy enough to educate children together though their parents belong to different sects. But the question is not whether parents can be induced to send their children to a school in which doctrines of which they do not approve are taught, but whether a system can be devised which will not give an advantage to one sect and place others at a corresponding dis- advantage. Wherever a State church exists, the dominant sect is sure to obtain some advantage from the mode in which the system of State education is administered ; and, unless the country is in that extremely rare situation in which there is no dissent, the privileges Avhich are accorded to one sect are felt as a grievance by others, and the govern- ment becomes more or less unpopular from the impossibility of pleasing everybody. We know how recently our own Universities have been so far reformed that a considerable share of their endowments may be competed for by persons who do not belong to the Established Church ; and, even now, a considerable number of fellowships, and, what is of more importance, headships are reserved for clergymen. France boasts that she has attained religious toleration, yet Auguste Comte was deprived of a place in a government school for jrablishiug his great work on " Posi- tive Philosophy." He was engaged in teaching the innocent subject of mathematics, and it was never even pretended that he was an incom- petent teacher or that he made use of his position to instil his doctrines into the minds of his pupils. Yet, because his work was opposed to the prejudices of a numerous sect, this remarkable philosopher, the greatest whom France has produced during the present century, was deprived of the means of earning his bread, and was reduced to a dependence on the charity of friends and admirers. The more recent case of M. Eenan, though there was perhaps more excuse for interference, as the complaint was directed against the lectures which he actually delivered fi'om his professorial chair, yet serves to illustrate the injustice which the system of State Education necessarily involves. The minister who removed EDUC'ATIOX. 545 M. Keuau was no bigot, for he ofl'ered the displaced professor another official aitpoiiituieut, aud nominated a Jew to succeed him ; but the fact remains that this eminent scholar Avas deprived of his professorship because his public teaching was in opposition to that of a body with which the French Government wished to remain on good terms. If there were several universities in France, all independent of the State, each of them might afford instances of intolerance, but the injustice would be less glaring if every important sect, school, and party were able to establish its own university, where those who sympathise with its objects could be sure of finding a refuge. It is, perhaps, impossible for a government to keep altogether clear of education, for it has long been a common practice for people to leave property for the purpose of encouraging education, and the State, as the guardian of property, is obliged cither to take care that these endoAvments are properly applied, or to take the extreme course of suppressing them altogether. Indirectly, too, the state may exert some influence on the ])rogress of education by the methods which it may adopt in order to secure the efficiency of its own servants. It is absolutely necessary that many employes of the Government should be able to read and Avrite, and by simply making it kuoAMi that no candidates for official situations will be accepted unless they possess this elementary knoAAledge, a government may do much to encourage the practice of teaching reading and writing to children. It is said .that a recruit who can read and Avrite can learn his drill in half the time which an illiterate recruit requires, and in a country where military service is compulsory an inducement is held out to all who wish to shorten their time of service to prepare themselves by literaiy culture. In countries where military service is almost universal as well as compulsory, the government is not exceeding its functions when it provides that all, or nearly all, its male subjects shall learn to read and Avrite, for nearly all of them are its servants, and it has the same right as any other employer to require that those whom it employs shall in some way or other make themselves fit to do their work. But when it attempts to pass beyond these limits, and to dictate the kind of education which shall be given to children who are not likely to enter into its service, it encumbers itself with a duty which it cannot adequately discharge without at the same time failing in respect of its other and more important duties. Every new office wliich is established increases the difficulty ol" ett'ectively controlling the action of the government, and every new oljject of expenditure makes it necessary to resort to some new tax, which, however well selected, must interfere with N N 546 CHARITY. the iuclnstry of the uatiou. By attempting to direct the education of the people, the govemnient docs not, as seems to be often assumed, make a clear addition to their Avell being, but simply diverts into one channel the energy of resources which would otherwise have been turned into another. The standard of education cannot be raised above the tastes of the people by the action of government, for the officials A^•ho direct education are themselves inhabitants of the country, and dravr their ideas from their fellow-citizens who surround them. If it were possible to elevate the standard in this way, the attempt would be useless for want of the indispensable condition — the desire of the people to learn. By turning its energy in this direction, the govern- ment, while it impairs its own efficiency in other respects, at the same time impairs the capacity of the people to make use of the boon Avhich it bestows upou them. In countries where the greatest stress is laid on the duty of educating the people at the expense of the State, the greatest obstructions are placed in the way of the circidation of newspapers. Yet, for the gi-eat majority of an educated people, newspapers afford the chief and almost the only means of making use of their power of reading. It is of more importance that a considerable number of people should read cheap and good newspapers than that a much larger number should be able to read them but have none Avorth reading. The inter- ference of a government Avith newspapers may take one of two forms — it may either impose a tax on them for the sake of procuring a revenue, or it may place restrictions on the expressions of political opinions in their columns. The former of these modes is more likely to be resorted to in proportion as the expenditure of the government increases, and if a system of State education is established, it thus has a direct tendency to stop np one avenue of knoAvledge Avhile it is opening another. The connection between State education and restrictions on liberty of discussion is, of course, more remote and by no means necessary, but to Avhatever extent men resign the control of their oavu affairs into the hands of their government they become less capable of thinking and acting for themselves and of resisting the commands of the government, AAdiich becomes proportionally more disposed to be overbearing and tyrannical. Another function which most governments have, to some extent, undertaken, and which it is commonly held that they are bound to undertake, is that of relieving poverty. Because it is admitted that charity is a duty, it is contended that the poor have a right to relief, and that therefore the State is bound to provide it for them. It is forgotten that charity ceases as soon as it is made compulsory, and that every system of affording relief must tend, more or less, to produce poverty I CHARITY. 547 by eucouraging the belief that the effects of improTidence will always be mitigated by assistance from the provident and indnstrious. This objection applies, no donbt, to private as well as to pnblic charity, bnt the resources of the former are limited by the benevolence of individuals, while the latter can do more harm because it has a larger fund at its disposal. A comparison has often been drawn between the improvidence of the Enghsh and the thrift of the Scotch people, and one cause of the difference may be found in the fact that in England the poor can always count on obtaining relief from the parish rates, while in Scotland tliey can rarely do so. The demoralising effect of the English system has often been noticed, and its abolition often demanded. Bishop Burnet, early in the last century, pointed to Scotland as an instance of a country much poorer than England which yet contrived to dispense with a poor law ; and, although there can be no doubt that there is much distress in Scotland, it has yet to be sho^ni that there is more than is undergone by the inmates of our workhouses. The difficulty which is in the way of the abandonment of our present system, is, that those who sympathise with suffering cannot endure the thought that a person who is destitute should have no place to turn to where he can be certain of finding help ; and if a poor law really supplied this want, and ■u'ere the only means of supplying it, it would be impossible to overcome this difiiculty. But, in point of fact, the poor law does not prevent occasional deaths from starvation ; and the very people ^\'ho are most deserving of assistance are those who choose rather to starve than apply to the workhouse. The fact that the workhouse is supported by compulsory charity is enough to make it, in too many cases, all that a charity ought not to be. Whatever is given is grudged, and the neglect and discomfort are such that the condition of the inmates is often worse than it would be if they depended on the kindness of their friends. It is impossible that State charity in a country where much poverty prevails should be as liberal as private charity, for the taxpayers are ever on tlic look-out against any excess ; but it is equally impossible that any charity should be long carried on without in some measure producing the very evil which it is intended to cure. Oar present system of poor-law administration is an attempt to reconcile two conflicting theories represented by in-door and out-door relief respectively. The former is, that the State ought only to provide for the destitute ; and, consistently with this view, in-door relief is refused in all cases where the applicant has any property left. An evil insepara- able from such a system is, that it reduces the poor to absolute destitution, and renders it extremely difficult for a person who has once been received into a workhouse to become independent again. In order to mitigate the hardships of this system, oiit-dour relief is given to those who are N N 2 r>-Lb CHABITY. able to earn something but not enough to support themselves ; but this practice, though it is more palatable to the recipients, aud, in many cases, less burdensome to the ratepayers, is, in the long run, more pro- ductive of pauperism. At the time when Malthus wrote, it -was a common i^ractice for out-door relief to be given to married labourers whose wages were supposed to be insufficient, and for the allowance to he increased after the birth of each child. Malthus pointed out how much this practice tended to paui^erise the labourers by encouraging them to marry and bring up families which they had no means of main- taining ; and he constantly advocated the gradual restriction and final abolition of the poor law. Although his efforts have not been fully successful they have not been without eflfect, and the poor law of 1834 was passed with a view of restricting out-door relief within the narro^^'est possible limits. Unfortunately, the hostility which the innovation pro- voked, though it has never become strong enough to cause the law to be repealed, has been sufficient to prevent it from being thoroughly put in practice, and out-door relief is still given on a large scale. It is obvious that the practice acts as a discouragement to thrift, for in deciding on ajDplications for outdoor relief, the guardians can hardly help rejecting those of persons whose houses do not show signs of poverty. Thus, the labourers who have laid by money and have struggled hard to keep up a decent appearance, find, when they are in temporary want, that they can get no help from the parish without first parting mth all their property, and then entering the workliouse. Those, on the other hand, who hare made no provision for the future, can obtain assistance without leaving their homes, and it is not to be supposed that such a system can be long practised without influencing the conduct of the labouring classes. It has been recently proposed by Mr. Bartley, that, instead of thus making improvidence a condition of relief, the poor-law. authorities should make providence a test by refusing out-door relief to all who cannot show that they have laid by something for the future, and in giving to those who have in proportion to their savings. But if this plan were followed, there would still remain the objection that the poor would be discouraged fi-om saving beyond a certain amount, and would have an inducement to conceal what they had saved if it wo aid appear too much to make them eligible for parish relief. In some form or other the difficulty is always encountered that parish relief cannot be given without checking the disposition of relations or friends to afford assistance. If out-door relief is given, it is not regarded as being equally disgraceful Avith in-door relief; and those who would rather provide for their relative themselves than send him to the workhouse, will withhold assistance if COXVEYAXCE OF LETTERS* 549 they think that an allowance will be given. In the case of children, on the other hand, their relatives seem to regard the parish school as a fit place of residence for them, and will not come forward unless they hear that the guardians propose to board-out a child in a private family. It cannot be doubted that, if the government made no provision for the poor, they would receive much more assistance from their relatives and friends. Private charity is, no doubt, open to the same objection, and those who have the management of hospitals find it difficult to prevent their abuse when relief is given to out-patients ; but as the resources of private charity are much smaller than those of a goverimient, it has less power of doing mischief, and its abuses are more easily rectified. The case against government interference in this matter may be summarised in the statement that it tends to encourage the pauperism which it is intended to remove, that it discourages private charity by making people believe that ample provision has already been made for the poor, and that it cripples the energy of the government by encumbering it with a new task in addition to that ^vhich it is always bound to perform. Another function which many governments undertake to perform, though it never has been contended that it is their duty to do so, is that of conveying letters. The first establishment of regular posts was brought about by the necessity which the rulers of an extensive territory experienced of having some means of transmitting their orders to all parts of their dominions. In order that the work of a government may be carried on efficiently, the central authority most have some means of communicating with its subordinates ; and a government does not depart from its duty when it establishes regular communication for its own purposes, nor even when it diminishes the cost of transport by allowing such of its subjects as choose to })ay for it to make use of it for their own convenience. But when it has once been found that by allowing its subjects to make use of the public conveyances a revenue may be obtained which will exceed the cost of transport, a temptation which few govern- ments have been able to resist is held out to establish a monopoly in favour of the State. A monopoly having once been established, people become accustomed to having their letters conveyed by the govermneut, and come in time to l)elieve that this is the best and only convenient way of carrying on the business, until it recpiires some mental effort even to imagine that letters might, like other things, be conveyed hy [irivate individuals or associations quite as well as by government ollicials. As a sample of tlie manner in whicli it is commonly taken lor gi'anted that governments ought to undertake to convey letters for (liiii- subjects^, T may cite the following remarks of the late^lr. ^IcCulldch : — " The con- vf'varK'f of letters l)y post is one of the few industrial undertakings whicli 550 CONVEYANCE OF LETTERS. are better mauagecl by goyernment than by individuals. It is necessary to the satisfactory working of tlie loost-ofSce that it should be conducted -with the greatest regularity and precision, and that all the departments should be made subservient to each other, and conducted on the same plan. It is plain that such results could not be obtained in any extensive comitry otherwise than by the agency of government, and the interference of the latter is also required to make arrangements for the safe and speedy conveyance of letters to and tln-ough foreign countries."* Such are the arguments which he considered sufficient to justify the present system, but there is not one of them which does not assume the ^'ery question in dispute. It is necessary, he says, that the operations of the post-office should be reg-ular, and that all its departments should be con- ducted on the same plan ; but, even admitting this, it only follows that a single organisation would be able to do the work better than a number of competitors — not that the G-overnment ought to step in and prevent competition on the plea that if tried it w^ould not succeed. If the business of conveying letters Avere thrown open to public competition, it does not follow that many would engage in it. Perhaps one large company would be able to satisfy the public better than many small ones, and the natural efPect of competition would then be that one would be left in complete, or nearly complete, possession of the field. If it did the work best, it would not need a monopoly in order to secure a profit, while the possibility of competition would act as a valuable security to the public. If the action of the leading company were defective in any respect or in any part of the country, rival companies might be estab- hshed to supply the defects, and the mere knowledge that competition was possible would compel the managers of the company to consider the interests of the public as well as those of the shareholders. That private companies and individuals are capable of undertaking this business is shown by the success which they have attained in the analo- gous businesses of conveying parcels and telegrams. It must be remembered, moreover, that much of the work AA'hich is supposed to be done by the post-office is really done by railway companies contracting "ft-ith the office for a certain price, and they would be quite as willing to do the same work on the same terms for a company. Why the inter- ference of the Government should be necessary to secure the safe and speedy transmission of letters abroad McGulloch does not explain. It post-offices in all countries were managed by private companies, there would be no more difficulty in arranging terms for the transmission of letters from one country to another than there is in the case of * Taxation and the Funding System, 3rd edition. Part II., chap, vii., p. 319, CONVEY ANCF, OF LETTERS, 551 ordinary merchandise. Eren if other countries entrusted the business to their goYernments Avhile it was performed in Enghmd by a private company, it would still be easy for the latter to enter into conventions which would answer the purpose of postal treaties. Foreign goYcrn- ments and their subjects would be quite as anxious to recciYC English letters as Englishmen to receive letters from abroad, and, this being so, there could be no difficulty in framing an agreement satisfactory to all parties. Before the English Government bought up the telegraph companies, the latter had no difficulty in making arrangements for the transmission of telegrams to all parts of the world. It is, indeed, more likely that commercial companies in different countries should be able to work in harmony than that a number of independent governments should be brought to a general agreement. It is not necessary to go further than McCulloch's own account of the post-office, contained in the very chapter of which the above quoted passage is the commencement, to learn how very little ground there is for the belief that the business could not be managed by private enter- prise. Thus, he tells us, that — " In 1 784, it was usnal for the diligences between London and Bath to accomplish the journey in seventeen hours, while the post took forty hours ; and on other roads the comparative rate of travelhng of the post and stage coaches was in aljoat the same proportion. This difference in point of despatch made a very great number of letters be sent by other conveyances than the mail : the lavN- to the contrary being easily evaded by giving them the form of small parcels." (p. o22.) Thus, the very writer who tells us that the interference of the government is necessary to secure speed, safety, and regularity in the despatch of letters, confesses that at no very remote period private enterprise was able to outstrip the government in these respects, although weighted witli the heavy disadvantages of legal penalties and prohibitions. It will be said, of course, that tin's is an antiquated example, that the defect has now been remedied, that no system can be perfect, &c. ; but the point which deserves attention is that the defects in the official system were corrected by private enter- prise, and the burden of proof rests on those who contend that private enterprise would not liave sufficed to do the whole work if it had been left untrammelled. In order to select examples of gross abuses, it is ncces.sary to go back to those whicli liave 1)cen corrected, for these alone will bo generally acknowledged as such, wliile if any fault is found with the present management of a system, the matter is sure (n be one on wliich conflicting opinions are held, and the objection is regarded as of little vahie. To say that a system is good because no defect can bi^ ]iointcd out Avhich all arc agreed to consider such, is to use the same kind 552 CONVEYANCE OF LETTERS. of fiillacions argument as is so commonly emiiloyed by those ^^'llo talk against Home Eule. The Irish, it is said, have no grievance to com- plain of, and if one is pointed out wliich has been already redressed, it is said that Home Eule is unnecessary, while if one is mentioned from which they still suffer they are told that it is not a grievance at all, and the fact that they consider it one is sufficient reason for denying them the power to govern themselves. For twenty years befere the intro- duction of the uniform system suggested by Sir Rowland Hill, the net revenue of the post-office remained, according to McCulloch, practically stationary, and there can be little doubt that a large number of letters were sent by private conveyances. Had there been no monopoly in favour of the government it would have been both easy and profitable for private adventurers to offer their services to the public at a lower rate, and to compel the government to reduce its terms. The introduc- tion of the penny post is supposed to atone for all the faults which the office may have committed, and to be an unparalleled benefit to the country. But it should be remembered that this important measure, though it produced a great increase in the number of letters posted, was followed by a falling off in the net revenue of the post-office. The deficiency had to be made up in some Avay, and recourse was had to an income-tax which is now resented as a grievous burden by the very classes who benefited most by the reduction of postage. Had the post- office been managed by a private company, a higher rate would have lieen resorted to when it was found that the adoption of a low one reduced the dividend, and the public would at most have had to pay for wliat they got at its true value instead of being exposed to the annoyance which is almost inseparable from the income-tax. The choice was not between retaining the old rates and adopting the present one, for there were a hundred ways in which the old system might have been improved without any sacrifice of revenue ; but although the interests of the public are often sacrificed to the supposed necessity of securing a large revenue from the post-office, there was not so much care taken at this important juncture to protect the revenue as would have been taken by a company to secure a high dividend. How much the public suffer from being compelled to resort to a govermnent department instead of to private capitalists is evinced by the state of the law with regard to the loss of articles in the course of trans- mission from place to place. When an individual or a company undertakes to carry goods, he or it is bound to carry them safely, and to make good any loss which may occur through the carelessness or dis- honesty of those to whose custody they are consigned. But when letters are committed to the post-office, nobody is responsible for their COX^'EY.VXCE OF LETTERS. nfiS non-deliverj, unless, indeed the actual thief can bo detected. It is frequently said that the profits of the post-office are large in proportion to the capital invested in it, and that several independent companies would not make so much out of the business ; but if this be true, it should be remembered that the post-office is exempt from the serious responsibility of being obhged to pay for its own failures. In order, as it were, to make a pretence of insuring safety, the regulations of the post-office require that letters containing money or valuable articles should be registered ; but regisfi-ation, instead of being a benefit, is simply a burden to the public. Though a fee is charged for registration, the post-office is not thereby bound to replace the contents of the letter if lost, and the system rather increases the risk by making it known to the post-office officials that the contents of the letter are worth takino-. It has been abundantly proved that a registered letter may be opened and robbed of its contents and yet closed up again in such a way as to avoid detection. "While the law has often been strained in order to inflict heavy penalties on private firms and companies engaged in the business of transporting goods, this gross defect in the law relating to the post-office has been allowed to remain for ^ two centuries unremedied, and it is thought of more importance to increase the revenue by sheltering a department from the consequences of incompetence than to improve it by making it responsible. There is another business with which the post-office in some countries concerns itself, though it has nothing akin to the conveyance of letters, that, namely, of receiving money from individuals and undertaking to pay it back again at another time or place. By engaging in this busi- ness, it, to some extent, does the work of bankers, and credit is oi'ten taken for the benefit which it thus confers on the public. But before the government can be praised for what it thus does for' its subjects, it is but fair to ask whether it interferes in any other way to prevent jirivate bankers from doing the work. By the establishment of post- office savings banks, a place is provided for depositing small savings with greater security than private banks can afi'ord ; but these, if relieved from various restrictions to which they are now subject, would be entitled to, and would enjoy, more confidence than at present ; and the government which promotes security with one hand is diminishing it with the other. Complaints have frequently been made that a license duty is charged on the establishment of branch banks in such a manner as greatly to impede their multiplication, and to whatever extent this is the case, the peoiile are deprived of the means of depositing their savings in a place of security. The restrictions which have l)eeu placed on the issue of notes and tlio amalgamation of banks, and which have been considered in a fornici- 554 CONVEYANCE OF LETTERS. chapter, tend in lilce manner to prevent the growth of banking", and to prevent private enterprise from doing what the government now nnder- takes to do. As regards the transmission of money from place to place, the interference of the government is more decidedly injnrions. In order that hankers may undertake this business they ought to ha allowed to establish branch offices Avherever they please, whereas the present license duty greatly hinders them from doing so, while it brings in no corresponding advantage to the revenue. That private enterprise is capable of discharging this function is shown by the fact that it is discharged by the banks in Sweden, and by the success which has attended the operations of the cheque bank. This latter institution, though the extent of its business has not been sufficient to enable it to pay a dividend, has yet succeeded in supplying the public with the means of transmitting money at a cheaper rate than the post-office, and the diflFerencc would be very much greater if it were not that stamps were required on cheques. While the money-order system, though worked on a vast scale, shows generally a loss, a moderate extension of the opera- tions of the cheque bank would yield a profit to the shareholders, and at the same time furnish a revenue to the government by means of stamps. There is, therefore, very little reason for the government to take credit to itself for discharging the functions of a banker, when it is at the same time preventing private ndividuals from doing the work much more efficiently. The English Government has so long enjoyed a monopoly of the conveyance of letters, and has, on the whole, worked it in so satisfactory a manner, that it may naturally be thought that the best maxim to be applied to the case is qidda non movere. Even Mr. Spen^i^who has Sfyeni given in his " Social Statics " an able summary of the reasons which should prevent governinent from interfering in this matter, considers that its intervention is less objectionable in this department than in those of religion or education, as it does not necessarily lead to a curtailment of individual liberty or to the imposition of a tax for other purposes than that of protection. In a later work, he says — " I am not about to call in question the general satisfactoriness of our postal arrangements, nor shall I contend that this branch of state-organisation, now well- established, could be replaced with advantage. Probably the type of our social structure has become in this respect so far fixed that a radical change would be injurious." * There are, hov>-ever, other coun- tries where the post-office is not so well managed, and where the public might gain much more by having the business thrown open to general * Essays, Scientific, Political; and Hpeculative, Vol. III., p. 169. TELEGRAniS. 55u competition. In the United States, for instance, the privilege of frank- ing is so grossly abnsed as to produce an annual deficit in the post-office budget, and it is certain that this practice would be at once put an end to if a company were allowed to take over the business. All that is needed, in order to prevent the inconvenience which might result from a sudden change of i^lace, is to declare the business open to general competition, and to leave the public to see whether the government or private individuals can do the work cheaper and better. If the govern- ment were still able to maintain its ground, there would then be no other objection to its continuing to discharge the function than that it must to some extent impair its power of protecting its subjects by undertaking an additional task. Early in 1870, the English Government followed the example which had been set by many Continental States, and undertook to convey telegrams for its subjects. This proceeding affords a good example of the way in which one encroachment leads to another. Thus the government • has gone beyond its functions in order to convey letters, and we are now asked what reason there can possibly be why it should convey letters which does not equally apply to the case of telegrams. The minister who first proposed the scheme said that he would not ask for a monopoly, in order that the department might be stimulated to adopt new improve- ments ; but when the scheme was finally adopted by the legislature, a monopoly Avas granted, and has been ever since maintained. It is unfor- tunate that in a case of this kind there is no class whose interests are bound up with the maintenance of fi'ee competition, and who might be trusted to make every effort in their OAvn defence. The only class which was directly interested in the question consisted of the shareholders aud officials of the telegraph companies, and the liberal compensation which was RAvarded to them was quite enough t(j prevent them from opposhig the change. The compensation was indeed too liberal, aud while, on the one hand, several of those who are connected with submarine telegra]>h companies are endeavouring to get the government to buy their cables at an equally extravagant rate, the goverimient, on the other, has been prevented Irom realising so large a profit as was anticipated. The telegraph-office has, like the post-office, been managed well enough to give general satisfaction, as might have been expected in so business-like a country as this, where the people had already had experience of pri- vate competition, and could easily resort to it again if the govermneut failed to do its work. But the expectations which were formed respecting the benefits to be derived from the change have not lieen realised. Under tlie present, as under the ibriner system, it olten liai)i)ens thata telegram an'ivcs later than a letter sent off" at the same time. Under the present, 556 TELEGRAPHS. as under the former system, the authorities fi'eqneiitly decline to estabhsh offices in country districts where tliere is not business enough to make them pay. Though the receipts exceed the working expenses, the excess is not enough to make up for the interest on the money borrowed in order to purchase the wires, and instead of the change affording a relief to the taxpayers, they must be paying a constantly increasing amount in order that those who use the telegraph may pay less. Under the old system, though the average charge was higher than at present, it was lower in the case of telegrams sent from one part of a large city to another ; and here again there has merely been a shifting of the burden from one class to another. That the management is not so economical as formerly may be inferred fi'om the fact that the working expenses Avhich under the companies amounted to GO per cent, of the receipts, have risen under the government to 78, 78f, 8H and 9H per cent. It is true that the average charge having been reduced to little more than half of what it was, the cost of each telegram may in reality be about the same as before, but one argument which was used in favour of the change was that unity of management v^'ould secure a reduction of expenditure. That those who use telegrams have benefited by the reduction of the charge cannot be doubted, but it is not equally clear that they would not have derived as great, or greater, advantage from the old system if it had been allowed to continue. Competition had often forced the companies to reduce their rates, and if the process had been allowed to continue they would probably by this time have reduced their rate to its present amount, and there would always have been a chance of their reduc- ing it still lower. When tlie government took over the telegraphs, a hope was held out that the rate would after a time l:)e lowered, but such an improvement seems to be still as far ofl" as ever. Meanwhile, there is the fact that the rate has been raised for messages between different parts of the same toAvn, a step which it is not likely that the companies would ever have resolved upon. IVIuch is said about the advantage conferred upon trade by the reduction in the rate, but as the government has had to bear the expense of estabUshing a new system, traders are obliged to submit to taxes w^hich take from them in one way what they have gained in another. Although there is no important difference in principle between the case of the submarine telegraph lines and those which are confined to these islands, the former are, for the present, left in private hands, and it is to be hoped will long be so. The chief difference between the tA\-o cases is, that while the former can only supply the wants of a limited class, the latter may obtain custom from the general public if the rates are only made low enough. Experience hns shown in the ca^^e of botli letters and telegrams that a reduction of TELEGEAPlIt^. 007 the charge on those exchanged between foreign countries has no ix-reep- tible effect in increasing their number, Avhile within tliL' limits of the siune country a reduction is sure to attract a new chiss of customers. The submarine telegraphs are chiefly used for conveying political news for the information of goYcrnments and newspapers, and commercial news for the benefit of merchants, and in both cases those who send the telegrams feel them to be of sufficient importance to justify almost any expense. A reduction of the rate benefits them by reducing their expenditure, but does not make them send more messages than they would otherwise do, but it is different in the case of inland telegrams. It is well known that as soon as the transfer of the telegraphs to the gorernment had been completed, there Avas an enormous increase in the business, so great, indeed, as to overtax the energies of the department, and to produce complaints of delays and mistakes with which the newspapers were filled for some weeks. Cases are continually occurring in which persons who do not often make use of the telegraph wish to send a message of no great consequence in itself but which must be sent quickly if it is to be of any use, and it is in such cases that a low rate makes its superiority felt ; and these chance customers being an extremely numerous body, it is no Avonder that the new system has become extremely popular. Formerly, the receipt of a telegram in a private house was always the occasion of some alarm, but the Ioav rate which has now been in force for some years has familiarised the public Avith telegrams, and their arrival attracts little more notice than that of a letter, A case has been knoAvn in Avhicli a lady telegraphed to her maid to send her a copy of the " Times " Avhich she had left behind on leaving home, thus paying for the telegram four times as much as a fresh copy of the newspaper would have cost. No such extension of the business could be hoped for if the charge for foreign telegrams were reduced, and the government could not hope to obtain any great popularity by taking oA'cr the submarine cables and establishing a low scale of charges. Those Avho advocate such a step have therefore nothing to urge except the benefits Avhich it Avould confer upon trade, and these arc of a very questionable character. It may be doubted Avhether the number of mes- sages Avould be very much increased if the charge were reduced to a hall', or even a third, of its present rate. A high tariff holds out a great encouragement to the practice of packing telegrams (i.e., using such a cyi^her that many messages may be sent in one), but it does not prevent merchants from sending as many as their business requires. 11' they ai'c enabled by the establishment of a low tariff to reduce their exj)cnditnre in tins direction, the public Avill probably not receive, and would certain- ly not notice, any benefit from it, as it would only affect a small portion 558 RAILWAYS. of the exiDenditnre which each braiicli of foroigu trade renders necessary on the part of those who carry it on. That the shareholders in the telegraph companies should be anxious to transfer their property to the government is not to be wondered at. Not only have they the prece- dent of the transfer of the inland telegraphs to make them hope that they wdll receive for their property much more than it is worth, but they would be freed from what is certainly a most harrassing situation. Com]3etition, though extremely useful to the customers, is necessarily harrassing to the producers Avho are engaged in it, and it is easy to understand the jealousy with which an old-established telegraph com- pany regards every rival. The first company which succeeded in laying a cable across the Atlantic only did so after several failures, and it is no doubt hard for those whose energy and perseverance at length In'ought the work to completion that they should be exposed to the rivalry of fresh adventurers who have profited by their experience and wish to share the reward without bearing the burden and heat of the day. It is tantalising, no doubt, to find that as soon as one rival has been quieted by amalgamation, a new one starts up, and the cycle of ruinous competi- tion, compromise, and amalgamation has to be run over again. But though these are hardships, they are not greater than must be submitted to in every other branch of trade, and as no one is obliged to embark in this particular business, no one has much right to complain if he does not gain as much as he expected from it. It is often said that there is no real competition because rival companies charge the same rates ; but, as a matter of fact, there has licen a great reduction of charges since the" first cable was laid, and all that can be expected from competition is that it should cause the charge to the customers to be reduced as low as is consistent wdth the profits of the producers. If the government were to purchase the cables, it might in the first instance make a great reduction in the charge, but the public would have no security that another reduc- tion w^ould be made at any future time. The government would l)e as anxious to secure a large revenue as a company would be to pay a large dividend, and it Avould be sheltered by a monopoly from the necessity of altering its rates in order to ensure custom as well as of adopting im- provements in the system of working. In the same w^ay as it is contended that because the government conveys the letters it ought to convey telegrams, so it is argued that it ought to convey merchandise and persons fi'om place to place, and as railways now afibrd the principal means of conveyance, the government is recommended to undertake their management. It cannot be con- tended that in this country private enterprise is incapable of constructing and working railways, for they have been in private hands from the KAILWAYS. 559 first, but wc are asked to believe that tlie State could manage tliem better. Although it is generally found that when a goTcrnraent competes Avith private traders it is beaten in the race, it is still maintained that railways -would be, and are, better managed by governments than by private companies ; and all the shortcoming-s of the latter are adduced as if they were enough to prove that the proposed ne^' system would be better than the old. Although it is proposed to give a monopoly to the government, the advocates of this course think that they cannot say anything more damaging to the present system than to call it a monopoly. They tell us that there is no real competition between railway companies, because, in point of fact, wherever two lines connect the same towns, the scales of fares are sure to be equal. This naturally happens, but it does not follow that there is no competition, as the companies still compete in the speed and number of then- trains, and the fact that there are two lines prevents cither from arbitrarily raising its fares. The essence of competition is that the price of the product or seiTice should be kept down to tlie lowest figure which is consistent with the profit of the capitalist, and there is competition where all the rivals charge the same price just as much as where their prices are difl'erent. The cost of production is more liable to variations than the cost of conveyance, and, as a matter of convenience, it is better for a railway company to keep up the same scale of fares for a considerable time, even though it may cause a loss ; but, nevertheless, the public derives some benefit from the actual and possible competition of different companies. When one company has shown itself able to pay a high di^'idend for several years, its success tempts enterprising persons to start a rival line ; and though, as in the case of the telegraphs, the rivalry may end in amalgamation, there is always a chance of fresh rivals coming forward. Indirectly there may 1 'C competition between different railways which do not connect the same places, as, for instance, between those which start in different directions from London. A traveller who wishes to go to the north cannot avail liimself of the southern lines, but persons whose business compels them to live near London must take into account the scale of railway fares in choosing their place of residence ; and the competition of the companies for this suljurl)an traffic must establish some sort of equality between their fares. To say that railways are a monopoly is hardly more true than to say that farming or cotton manufiicture is a monopoly, for in both cases the business is confined to those who choose to engage in It, and in both ca.ses those already engaged can obtain a certain advantage Ijefore fresh rivals have time to enter the field. If the Government were to undertake the management of the railways it would establish a real monopoly, and those who advocate such a course do not explain how it 50U KAILWAYS. Avould be Letter for the public tlian the so-called monopoly which now exists. We are, indeed, told that the Government, being under the control of the people, would be obliged to consult the people's conyenience, but the experience of the post-office does not show that government officials are less disposed than private companies to charge high rates, or to make vexatious rules. The authority of parliament has sometimes proved sufficient to prevent obnoxious innovations from being persisted in, and even to force the adoption of a new system on reluctant officials, but the greater the revenue derived from the railways, the more un^^■illing the ministry will be to risk any part of it in novel experiments ; and it is by no means an easy matter for parliament to carry through a change in spite of the opposition of the officials concerned. The more functions the administration is burdened with, the more difficult it becomes for parliament to exercise an effective control, and the greater is the danger that the more important ones will be sacrificed to the less important. As in the case of the telegraphs, an argument on which great stress is laid by those who advocate the p)urchase of the railways by the State, is, that unity of management would greatly reduce the cost of working. Mr. Lea, Avho brought the subject before the House of Commons on J\[ay 20th, 1873, referred to the railway clearing-house, where he had been informed more than a thousand clerks Avere employed, chiefly in calculat- ing what payments were due from different companies to each other. If all the railways belonged to the State, it is obvious that no labour of this kind would be any longer necessary, and the clerks might be employed iu some more useful manner. ]\Iucli ^^■astc is now incurred in cases where carriages belonging to one company have been allowed to run over the lines of another, but are not allowed to be used by the latter, but must be returned empty. All this would cease whenever a single jn-o- prietor came into possession of all the lines, and there would doubtless be a large saving under the head of law expenses which now represents the cost of quarrels between different companies. On the other hand, it must be remembered that these advantages ^^•ould follow from amal- gamation, whether carried out by the government or by private agreement ; and that amalgamation has already made great progress, and is likely to make much more. Many of the large lines now repre- sent the union of more than thirty small ones, and the process has been going on continually in spite of the efforts of the legislature to prevent it. Although there are many objections to this practice, and though the legislature was fully justified in trying to prevent it, it possesses so many advantages, both for railway officials and for the public, that means are sure to be found for continuing it. Only a few years ago a scheme was proposed for amalgamating the southern lines, and if it had been RAILWAYS. .■■)(]1 sanctioned by Parliament, the precedent would have been followed in other cases, and so near an approach would have been made to unity of management that there would hare been small reasoii to recommend State purchase in order to obtain it completely. Too much stress, how- ever, should not be laid on unity of management, for centralisation has its defects as well as its advantages, and the present system intrusts the management of the railways to a number of persons who have a strong interest in doing their work well, while the proposed change would hand it over to a body of officials who would have a vast system to control, and would have no strong motive to do their best. Although all would be under one management, yet, as the managers would not have the same interest in securing economy, there would be as much waste from carelessness as there now is from misdirected zeal. The cost of management of the telegraphs is actually greater now that they are in the hands of a public office than it \\'as when they were owned by several companies.* In all discussions of this subject, great stress is laid on the frequency of railway accidents and the difficulty experienced by the Board of Trade in enforcing the adoption of proper precautious. Mr. R. B. IMartin, for instance, who advocates the purchase of the railways by the State,f cites several passages from the reports made to the Board after various accidents, in which, of course, each particular accident is ascribed to some neglect on the part of the company, and he seems to suppose that these are enough to show that some more efficient control is required. But, without impugning the ability of the officials who make these reports, it may still be doubted whether their evidence is sufficient to establish a general charge of care- lessness against railway officials. "When one of them is sent down to report on the cause of a particular accident it is his duty to give his opinion, and lie may be quite correct in assigning a particular cause for it. But in matters of this sort there is room for differences of opinion among persons equally competent to judge, and railway officials cannot be blamed for acting on the advice of their own engineers, though it may be contrary to that of those who are consulted by the Board of Trade. The opinions of the latter caiTy more weight with the public, perhaps because they are only made known after an accident when it is certain that some mistake has been made, and railway directors say that they find it useless to make any reply to official censures. But it ^vould be unreasonable to suppose that great care is not taken, because each accident shows that somebody has not done his duty. Whatever system * See Mr. Jevons' Article on Post Office Telegraph, " Fortnightly Review," DeceniV;f,T, 1875. f Journal of Statistical Society, 1873. 00 562 RAILWAYS. were adopted.it 'A' onld still have to be worked by human beings, and nothing can be more unreasonable than to suppose that because one system has foiled through human fallibility, another system v.'ould be certain to succeed. Unpunctuality is commonly denounced as the most prolific cause of accidents, and it is urged that severe penalties on the former would afford the best means of preventing the latter. It is quite right that railway companies should be made responsible for any loss ^^diich passengers incur through unpunctuality, for they have con- tracted to convey people to a given place at a given time, and the State should enforce the fulfilment of this as of other contracts. If it were made a simple and easy matter to sue companies for compensation for any loss occasioned by unpunctuality the practice Avould no doubt be checked and the convenience of the public greatly promoted. But if severe penalties Avere imposed, the public would probably find that they lost more than they gained by greater punctuality, for the consequence would be that the companies would be obliged to allow the maximum instead of the average time for the journey, and the great advantage of speed would be sacrificed for the sake of regularity, which, after all, could not always be secured. The slower trains of Continental railways do not always keep their times as it is often erroneously supposed that they do, and it is remarkable that those who advocate State control for the sake of safety do not enter into a comparison between the private railways of England and the State railways of Germany. Experience does not teach us that the control which the government exercises over the navy is enough to prevent loss of life. The loss of the "Captain "in 1870, the most serious disaster which has befallen the English navy for several years, was directly brought about by that very deference to public opinion which is spoken of as such a great advantage in the management of government business. The ship v^'as built on what tm-ned out to be an unsound plan, in spite of the opposition of the oflScial whose business it was to decide on the merits of different systems of construction, and in order to satisfy outside critics. The indifference of railway companies to new inventions and hostile cri- ticisms is often made a subject for jests and complaints, but it is better than the weakness which adopts unsafe plans merely in order to quiet troublesome complaints. If the English Govei-nment were to undertake the management of the railways, it ^vould most probably claim the same irresponsibility which has hitherto been conceded in the case -of the post- office and the telegraphs ; and there would then be even less inducement than at present to railway oifieials to do their v/ork punctually and well. Under the present system, a railway accident affects the dividend of a particular company, but it does no harm to the country at large ; but if RAIL-\VAYS. 563 all the railways belonged to the State, the revenue would be aifected by every serious accident, and the government would be sure to come in for some shai'e of unpopularity. Already there is mischief enough due to a necessity of maintaining public dockyards for the use of the navy. At the last two general elections the dockyard towns returned members ojjposed to the government of the day, and throughout the country successive miuistries have been denounced and have certainly lost votes on account of simply performing their duty in reducing the cost of the dockyards. With so large a system as that of the railways of the United Kingdom difficulties and disputes are sure to arise, and when- ever the ministry decide against the wishes of a small section they are sure to lose more by offending an interested minority than they gain by attending to the welfare of au indifferent majority. Mr. Lea thinks this a matter of no importance, and that the government is better able to deal with questions of work and wages than the companies. When treating of this subject in his speech in the House of Commons, he says : — " Then my honourable friend, the member for Rochester, referred to the dilSculties of controlling the operatives, and talked of gigantic unions and strikes. I say we have as much, and more, fear of that at the present time. And who is there so proper to deal with that as the government, who M'ould be compelled to see that justice was done to the employes as well as the public, and who would have the power of control- ling such organisation as might exist. But what are the facts of the case ? We have had strikes amongst engine-drivers and porters, but when have we ever had a strike amongst dockyard men or any other govern- ment servants?"* If we have not yet heard of a strike amongst dock labourers, v,-e have had one among telegraph clerks, and another among the ifctropolitan Police. The latter was called a mutiny, and punished as such ; but a mere change of name cannot alter the fact, nor prove that the government can manage its dealings with its employes better than a private company can. We have had something like a strike among post-office sorters, and the greater the number of functions which the government undertakes, the greater is the risk of incurring odium through acts which would pass unnoticed if done by private individuals. The whole community is injured when a ministry whose general policy satisfies the country is forced to resign by a clamour raised against acts for which the ministers are nominally responsible but of which they can know but little and cannot avoid sanctioning without a gross breach of duty. If every railway accident is to be made au e.Kcuse for attacking the ministry iu the same way as a naval disaster now * " Purchado of the Uaihruys by tho Stftte," p. 25. 002 564 KAILWAYR. is, it is plain that mncli of the time, both of the ministers and of Parlia- ment, will be wasted in futile discussions, to the exclusion of really important matters concerning the defence of the country, and the admin- istration of justice. The question assumes a different aspect in different countries, and there may be special reasons why the government of one country should undertake the management of railways which do not apply to others. The policy of the Indian Government in guaranteeing a certain profit to railway companies is defended on the ground of military necessity ; and, if it be true that the construction of a system of railways makes it easier to suppress an insurrection, it can hardly be said that the Government is exceeding its functions in adopting this policy. But it may 1)e doubted ■\A'hether Indian railways afford much assistance to trade, and, as they are, with two or three exceptions, a source of expense to the Government, traders and the community at large must lose as much by paying higher taxes as they gain by cheap transport. In Australia, where it is a com- mon practice for the State to construct and manage railways, the peo^Dle are made the victims of an amount of jobbery which, if not greater than what prevails in England, is more injurious to the whole community. xnce of the way in which public money proposal was made for a railway in the Southern province, three hundred miles long, but the Northern members of Parliament refused to support it unless their province re- ceived a railway also. When they were told that the population of their province was only one-tenth of that of the Southern, they still insisted that they ought to have a railway of proportionate length, and a line was accordingly built, thirty miles long. It is practically useless, for the merchandise ^^■hich might supply it has to be brought from a great distance by horses or bullocks, and it is not worth while to transfer it to the railway when the journey is nearly done. Mr. Trollope visited it, and on asking whether it paid its expenses, was told that it did not even pay for the grease used on the carriage-wheels. There are many branch lines in England the working expenses of which exceed the receipts, but these are generally constructed at the expense of individuals who live in the neighbourhood and gain in convenience what they lose in money, and, at all events, whoever loses has entered into the risk of his own accord. One consequence which would follow from the absorp- tion of the railways by the State, should such a course ever be resolved on in this country, may be thought worth pointing out. It would be necessary to compensate all the holders of shares and debentures, and the simplest way of doing so would be to create a large amount of con- sols or some similar stock. The present value of the railways is computed j^ — — — — ^ ^ Mr. Trollope has gi>:pn us an, instan( is squandered m ^'rwTi""''''^iC A NECESSITY OF TAXATION. 565 at fifteen milliards, and as the interest on this enormous sum would have to be paid by the Bank of England instead of by private and joint-stock banks as is now done, the latter would be at once deprived of a great part of their business. The private banks, which even at present are losing ground, would probably suffer so much from the change that many of them would be wouud-up or amalgamated, and a further stimulus would be given to the movement which is now bringing banking into the hands of joint-stock companies. The object of the preceding remarks has been to show cause why the government should not undertake certain functions which have often been assigned to it. It must not be thought, however, that because State interference in these matters is injurious it is therefore possible to dispense with government altogether. On the contrary, the more the action of government is restricted to the single task of protecting its subjects, the more benefit will they derive fi'om it and the more thoroughly will its Avork be doue. In order that every subject may reaUy obtain protection from the government, it is necessary that the latter should either have the power of obtaining labour gratis, or should be furnished with the means of hiring as many servants as it requires. Both these courses are adopted by different governments, but the latter is resorted to more and more frequently as civilization advances. In one respect, indeed, modern nations are now returning to the ancient practice, and instead of hiring volunteers to perform military service, are now compelling all able-bodied citizens to undergo a militaiy training and to serve in the field when required. In England, where this innovation has not yet been adopted, it naturally meets with little favour, and is denounced as a great interference with liberty. But whatever objection may be justly made to the practice of universal conscription, it cannot be maintained that a government which enforces it is exceeding its proper functions. In order that a government may protect its citizens it must be able to protect itself, and it may fairly call upon them to make whatever sacrifices are necessary to defend it against attack whether from within or from without. As far as liberty is concerned, it is just as much inlringed by taxing a subject in order to pay for the support of a standing army as it is by exacting military service I'rom him. In both cases the government may reasonably say to the citizen Avho would refuse the demand, that if he will not protect the State, the State will not protect him, and they offer him the choice between submission and outlawry. Recent experience has shown that a State which has adopted universal conscri[)tiun is more than a match for any State of equal size which has not adopted it, and, this being bo, it is almost inevitable that when one country has set the example all its neighbours 5t!t> NECESSITY OF TAXATION. should follow it. At all events, whatever may be thought of the question as one of expediency there is nothing unjust or tyrannical in taking such a course. In countries where military service is optional, there are many duties which citizens are required to perform Avithout receiving any payment, such as serving on juries and acting as magistrates, and English law even requires all citizens to aid the police in seizing offenders on penalty of being themselves imprisoned if they refuse to do so. But although many services may thus be rendered, as it were, in kind, it is impossible that all the work of the government should be done by unpaid officials. The duties of many offices are such that those who hold them nmst give up their whole time to their performance and cannot labour to support themselves ; and it is therefore necessary that the rest of the community should support them. Soldiers who are to serve in a short campaign may be compelled to do so at their own expense, but when conscripts are kept in barracks for three years the State must make itself answerable for the expense of feeding and clothing them. It would be difficult, if not impossible, to provide military stores and other articles required by the government by simply ordering the manufacturers to make as much as was wanted and to supply it without charge. To exact such large quantities fi'om a particular class merely because it happened to possess the necessary skill for producing the articles in question, would be to impose a very heavy and unfair burden, and if such a policy were persisted in it would defeat its own end hj ruining the manufacturers who were the victims of it. As, therefore, it is necessary that the government should, in some way or other, be provided Avith a revenue, it remains to be considered what are the most convenient methods of providing it. This question depends in some measure on the functions which a government is expected to perform. When it undertakes to convey letters for its subjects it can make them pay for the service by simply fixing a charge for conveyance and refusing to take letters which are not paid for. When it undertakes to provide its subjects with education it can pay itself by compelling all parents who make use of its schools to pay such fees as will reimburse the expenditure incurred in constructing and maintaining them. In such cases there is no need of a theory of taxation, for the consumers are simply left to provide as they can the means of paying for a particular service. It has been suggested, and Adam Smith has countenanced the suggestion, that the cost of administering justice might be provided for in the same way by charging fees to the suitors. It is perfectly true, as Adam Smith says, that the fees of the judges and other officials of the law courts, form but a small part of the expenses of a law- suit, and that the much greater part which is absorbed by legal NECESSITY OF TAXATIOX. 567 advisers and advocates is usually borne by the suitors themselves. But there is a great diflFereuce between the position of those who apply to a court for justice and those ^vho ^vish to consume a com- modity, or to obtain any ordinary service. As a rule, it is right that those who require to obtain either the one or tlie other should pay for it, as they are the persons benefited by it ; but a person who applies for redress to a law-court is not the one who derives most benefit from the protection of the government but the one who has been least protected, since he has suflFered an injury from which the government was bound to defend him. To make those who have been injured bear the expense of redressing their own Avrongs is to aggra^-ate instead of relieving their distress, and to throw the burden upon those who are least able to bear it. It is much as if an insurance company should refuse to replace a house that has been burnt down uidcss the insurer will pay them over again for doing what they have bound them- selves to perform. It is singular that sixty years after Bentham's vigorous protest against law taxes, the practice should still be retained of compelling litigants to pay" fees on applying to our law courts for redress of grievances. It may be thought that as the defeated party is ordered to pay the costs, the party who is in tbc right suffers no loss ; but, in fact, there are many cases in vrhich the loser is unable to pay and the winner is held responsible, while there are many which are com- promised and each side has to pay its own costs, and there must be many more in Avhich persons are deterred from going on with a suit by the amount of the preliminary expenses which must be undergone before the case is decided. Instead of throwing on the suitors the whole expense of maintaining the law courts the government ought to relieve them fi-om the very heavy burden to which they are now subjected by being made to pay the fees of their solicitors and counsel. The govern- ment cannot be said to protect its subjects when it only affords redress to those who are able and willing, after having suffered an injury, to incur a heavy expense for the sake of redressing it. In some cases, indeed, as in those of murder, theft, and a lew other offences which are regarded as more particularly dangerous to society, the govermnent does undertake to pay the expenses of the prosecuti(Mi ; but, even here, the scale of payment is often too low to secure that the work should be efficiently done, and in tlmsc mimerous and expensive cases which occupy most of the time of the superior courts the suitors have to bear the whole of the expense. Tlif question is not free from difficulty, for if the government has to pay it will naturally fix a moderate scale of payment, while the suitors, if C(Uiducting their own case, can obtain the ablest couuBC by offering high iees, and many would prol^ably prefer to ruu 508 NECESSITY 0¥ TAXATION. such a risk for the hope of winning the case. But whatever practical difficulties there may be in the way, some means ought to he found of overcoming them and of rendering legal protection something more than the mere name which it must be when it is denied to all except those who are rich enough to disregard exj^ense. In the case of protec- tion by force of arms against foreign aggression it would be impossible for the government to charge for the service whenever and in proportion as it is furnished to its subjects, for, in order that such protection may be of any use, an army must be maintained in time of peace, and when Avar comes the inhabitants of the invaded districts are quite unable to bear the expense of protecting themselves, and it must be borne by the rest of the country. A revenue, therefore, must be provided in some way, and the position of a government is so different from that of private individuals that it must resort to peculiar methods in order to obtain it. A private trader has only to fix a certain charge for the service which he renders to his customers, and can leave them to provide the money as best they can. A charitable society can leave its sul)- scribers to decide how much they will give and the time and manner of giving it. But neither of these courses is open to a government, which must support itself at all hazards, and can neither allow its sub- jects to dispense with its services when they please, nor place itself in the precarious condition of all bodies which depend on voluntary bene^'o- lence. In the heat of a civil war, very large contributions have often been made by partisans of their own free will ; but, even in such cases, private generosity has always proved unequal to the burden of supporting the war, and the party which depends upon it is sure to yield to that which can rely on methodical taxation, xis it is necessary to resort to taxation of some kind, the question of the best method or methods of doing so is of great importance, and will be considered in the two following chapters. CHAP. II.— DIRECT TAXATION. PRINCIPLES OF TAXATION — LEGACY DUTIES — INCO:\rE TAX — TAXES OX HOUSES — TAXES ON LUXURIES — LICENSE DUTIES — TAXES ON COMMERCIAL TEANSACTIONS. The object to be kept in view in all systems of taxation is that of taking nothing from the taxpayers beyond vdiat is absolutely necessary to support the government, and avoiding all interference Avith the industry of the country and with the Avays in which people would spend their money if they were untaxed. An ideal tax would produce no more inconvenience to those who had to pay it than a payment of equal amount for any service which they wished to obtain. It is scarcely possible that any tax should attain this perfection, nuich less that a large revenue should be derived from a number of taxes all perfect in this respect, and all that can be hoped for, is, that the least objectionable taxes should be retained, and that the whole system of taxation should be so planned as not to inflict any heavy burden on the people without absolute necessity. But, in order to attain even this, it is well to bear in mind the characteristics of a perfect tax, in order that any tax which is established or proposed may be tried by certain fixed canons, and its merits or defects at once perceived. Adam Smith has laid down four fundamental maxims respecting taxation which are admirably fitted to serve for a test of this kind. First, a tax should press upon every citizen in proportion to his ability to pay. Second, there should be no uncertainty as to the amount which each person nuiy be called on to contribute. Third, it should be levied at the time, and in the manner most convenient to the contributors ; and, lastly, it should take as little as possible out of the pockets of the people beyond what it brings into the Treasury. Even the first of these rules is very difficult, or I'ather impossible, to apply, and it is not easy to give any completely satisfactory explanation of its meaning. In what sense is it true that two persons who have e(iual incomes ai'e ('([ually able to bear taxes ? And, if a. dis- tinction is to be nuide between life annuities and incomes derived IVo)n land or investments, how is the value of each class of incomes to be calculated ? AVhat, again, is to be done in oixler to establish an equality between large and small incomes in the matter of taxation ? It is oi'ten contended that a labourer who pays a tax of 10 per cent, on his wages makes u greater sacrifice than a millionaire who jiays an v(\\\:\\ pi-oiiortioii 570 PRINCIPLES OF TAXATIUX. of liis income, and if this be admitted, -what steps can be taken to remedy the inequahty ? Bentham's suggestion that the State should fix a certain sum as being necessary to support life, and should merely tax the excess of a person's income beyond this amount is a good one, and has been very properly acted on in the assessment of our present income-tax, but it is notliing more than a rough guess, and our application of it deala with only one tax, while those who are relieved by it are required to pay taxes on some of the principal articles of their consumption. But, however difiicult it may be to establish perfect equahty, it is necessary to keep the object steadily in view, and to levy taxes on such a principle that the wealthy shall pay more than those of moderate means; and these, again, more than the poor. To say that it is unequal, is not in itself enough to condemn any tax, provided that those who are favoured in its imposition are compelled in their turn to contribute to some other tax which presses more lightly on those who are heavily burdened by the first. The duties now charged on tea and tobacco press more hardly on the labouring classes than on the rich, but these in their turn are subjected to an income-tax and other imposts from which the labouring classes are exempted ; and none of these taxes can be condemned as unfair unless it can be shown that the whole burden of taxation presses more heavily upon one class than upon another. Some persons are of opinion that the poor should be altogether exempted from taxation, while others maintain that the rich ought to be made to contribute in a higher and higher proportion as their wealth increases. As, however, the poor are certainly benefited by the protection which the government affords them, there is no more reason why they should be excused from paying for it than for the articles which they consume. In that imaginary state of things in which the labourers earn no more tlian is absolutely necessary to support them, it would, of course, be impossible to tax them, because whatever was taken from them would be replaced at the expense of other classes who would really pay the tax ; but even in such a case, taxing the labourers would simply be futile, not oppressive, or unjust. The proposal of a graduated tax to increase in proportion to a person's wealth indicates a desire to use government as a machinery for redressing the inequalities of wealth, and cannot be countenanced by anyone who regards a government as an association for protecting its members in the enjoyment of as much liberty as can be granted to each without interfering with that of the rest. The second of Adam Smith's maxims is one which is so uniformly acted on in this country that its expediency hardly needs to be pointed out. But in other ages, and other countries, it has been so shamefully neglected that the taxpayers have suffered more fi'om the arbitrary manner in which the taxes were levied PRINCIPLES OF TAXATION. 571 than they would have clone if t^Yice as niueli had Ix'cu taken from them on a more regular system. This was particularly the case in France before the revolution, and is still the case in Oriental countries. The occasion of the insurrection in Herzegovina in 1875 was the oppression exercised by those who had farmed the tithes of certain districts, and who strove to extort from the peasantry more than the latter had been led to suppose that they would have to pay. And even in British India it is found that the imposition of an income-tax leads to much capricious tyranny on the part of the subordinate officials who are employed to assess it. The third rule is one which should always be kept in view in regulating the times at which particular taxes shall be paid. Those which are to be paid by farmers or lando^^lers should be levied at the same time as rents are usually paid, and an income-tax on possessors of stocks or shares should he levied at the time when the dividends are paid. It is one of the chief merits of customs duties that the consumers upon whom the tax ultimately falls pay it by instal- ments at the time when they purchase the articles, so that they hardly know that they are paying it at all. Tlie fourth rule is apt to be violated whenever the system of farming taxes is put into operation, for the care- lessness with which government business is too often managed prevents the contracts from being properly revised, and the people are compelled to go on paying constantly increasing taxes while the revenue received by the government remains the same as before. At the Accession of Henry IV. of France, the net revenue received by the government was not so much as one-sixth of the taxes paid by the people. Almost the only instance in which a tax is farmed in this country is that of the turupike- rates, but it does not appear that any hardship is inflicted on those wlio use the highways, as sufficient care is exercised in making and renewing the farming contracts. Taxes are commonly divided into two classes, according as they are imposed directly on the persons whom the government intei\ds shall pay it or on persons 'who are expected to be able to throw the burden on to the shoulders of others. To the former class the name of "direct," and to the latter that of "indirect" is generally given. Mr. Lowe, on one occasion, spoke in the House of Commons of a third class, which he called neutral, but he probably referred to the charges made by tlie post- office, and the rent of the Crown lands, which cannot be considered as taxes at all. The former are a payment for work done, and the latter are the result of a competition among tenants for the privilege of nsing superior land, and both would have to be i)aid if tlie government did not exist. Each class lias its peculiar merits and defects, and naturally each has its partisans and opponents, but there are probably no governments 572 LEGACY DUTIES. which have fully committed themselves to the adoption of one system aiid total exclusion of the other. Direct taxation is recommended on the gronnd that the contributors are made to feel how much they are paying ; and therefore induced to keep a vigilant control over the conduct of their government and prevent it from incurring useless expenditure. In- direct taxation, on the other hand, is recommended on exactly the oppo- site ground, that it enables the government to procure a sufficient revenue without obtruding on the people the fact that they are taxed in order to provide it. In a country where a large part of the public expenditure consists of the interest of the national debt, there might be some reason to fear that if the whole revenue were raised by direct taxa- tion the people would refuse to submit to the burden and would prefer to face the disgrace of repudiation. Indirect taxes are certainly more popular, and statesmen who see the necessity of certain expenditure are naturally inclined to propose a scheme of taxation which will be cheer- fully submitted to. The chief objection, however, to indirect taxes is, that it is more difficult to calculate their effects, and that they are more apt to interfere with the natural course of industry and trade. The general and special objections of this kind will be more fully considered in the next chapter, Avhile the present will be devoted to the examina- tion of particular classes of direct taxes. When it is desired to tax individuals in proportion to their wealth, the attempt may be made by an assessment on their incomes, or by one on the principal of the property fr'om which their incomes are derived. A convenient mode of effecting the latter is to tax property whenever it passes from the dead to the living. In almost aU cases where the property is at all considerable some intervention of authority is needed to secure that it should be handed over to those who are by law entitled to receive it, and the government can easily take this opportunity of ascertaining its amount and deducting a certain portion from it. In most cases, the time when a person succeeds to property is the most convenient time at which he can pay taxes ; and, provided these are not excessive, taxes of this sort are paid with less hardship and complaint than any other of whose payment the contributor is fully conscious. In spite, however, of the obvious advantages which distinguish these taxes, an objection has been made to them, which, as it is founded on eco- nomic reasoning and supported l)y the authority of Ricardo, requires to be noticed. " It should be the policy of governments," he says, "never to levy such taxes as will inevitably fall on capital, since, by so doing, they impair the funds for the maintenance of labour, and thereby dimin- ish the future production of the country. In England this policy has been neglected in taxing the probates of mils in the legacy duty, and in LEGACY DUTIES. 578 aJl taxes affecting the transference of property ft-ora tlie dead to the living-. If a legacy of £1,000 be snhject to a tax of £100, the legatee considers his legacy as only £900, and feels no particular motive to save the £100 duty from his expenditure, and thus the capital of the country is diminished ; but if he had really received £1,000 and had been re- quired to pay £100 as a tax on income, on wine, on horses, or on ser- vants, he would probably have diminished, or rather not increased, his expenditm-e by that sum, and the capital of the country would have been unimpaired." (chap, viii.) It is, no doubt, important that taxation should not be levied in such a way as to diminish the capital of the country and to dry up the sources ft'om which future taxation must be supplied, but it is easy to see, and Ricardo saw plainly enough, that the result depends much more on the amount of taxation than on the parti- cular manner in which it is levied. An income-tax may, as he says, be so heavy that those who have to pay it will rather deduct something from their principal than forego some part of their usual expenditure, and a tax on the value of property may be so light that its owners can afford to pay it out of income. There are many considerations which indicate that a reasonable legacy-tax can have no such effect as Ricardo ascribes to it. In the first place, in those numerous cases where property passes to children who have been living with their parents, they have been practically enjoying the use of it althongh they were not the legal owners ; and if the tax really took away any considerable part of the property they would have every inducement to make up for it by greater economy. In the second place, the capital of a country depends very little for its maintenance on the efforts of persons who are content to live up to their income without trying to increase it by fresh savings. Those who really increase the wealth of a country are the industrious persons who live within their incomes, and make steady, continuous efforts to increase them by Avell-directed labour. A. legacy tax in no way discourages them from doing so, but in so far as it has any effect upon them it urges them to greater efforts. Probate and legacy duties have continued to be charged ever since the time when Kieardo wrote, but no one will say that the English people have con- tracted thriftless habits, or that the wealth of the country lias not largely increased. If, instead of fixing our attention on money, we turn td the land where the food of the people is actually produced, \vc sec at once how little reason there is to fear that its production will be seriously checked l)y such taxes. The mere fact that these ha\c to be jiaid whenever a farmer dies, caiuiot make farmers, as a class, iiKliUcnjut to the advantages of rendering their lands as productive as possible, of doing their best to obtain access to good markets, or of laying by a suDlcient 574 LEGACY DUTIES. provision for their ftimilies. So long as they do these things they will increase the capacity of the conntry to maintain labourers, and these, in turn, will find productive occupations for themselves, and the wealth of the country will be increased. It is only when a tax of this kind is arbitrary and excessive, when, as in some Mahometan countries, the sovereign confiscates the whole property of deceased ofiicials, that it can be expected to have much effect in discouraging thrift. If those w'ho accumulate riches know that their families will, after their death, have no share in what they leave behind, they are obviously tempted either to spend as much as possible during their lives, or to store their wealth in some such form as gold or jevrels in order to elude the rapacity of the government. Industrious people may be driven to leave the country where such a system prevails, and fly to one where taxes are levied on a more rational system. Thus, legacy duties may have the effect of diminishing the capital of a country, but it is only when levied in an arbitrary manner ; and any tax so levied would have the same effect. Although these taxes are unexceptionable in principle, the mode in which they are now levied in this country is open to various objections. They ought to be imposed in proportion to the value of the estates subject to them, and to be collected in such a way as to be as little as possible inconvenient to those who have to pay them, but they do not comply with either of these conditions. They consist of three classes, probate, succession, and legacy duties, none of which are altogether free from objections on the score of inequality. The probate duty, which is charo-ed on estates before the executors or administrators are allowed to take possession of the property, is not fairly imposed in proportion to the estates subject to it. Surprise has often been expressed at the fact that a higher duty is charged on the property of an intestate than on that of a person who has left a will. It is suggested that if the law^ is to favour one class at the expense of the other, it ought to prefer those who have been content to let their property be divided as the law directs to those who have thought it necessary to devise a scheme of their own. But in defence of the distinction it is pointed out that the property of an. intestate is divided among relatives, and, in most cases, among near relatives, while there is always a chance that a will may contain legacies to distant relatives or strangers in blood. The rates of duty charged on legacies vary with the degree of relationship, ranging from nil in tlie case of husbands and wives up to 10 per cent, in the case of strangers, and as there is always a probability that the government will receive more in this way where the deceased has left a Avill, there is some reason for charging a higher probate duty in cases of intestacy. This is, however, but a clumsy way of adjusting the burden, and a more LEOACT DUTIES. 57 'OiO simple one ought to be adopted. A more serious fault is the inequality with which the tax presses on lurgo. and small estates. An estate of the value of 25,000 francs pays a duty of 750 francs, and an estate of 250,000 francs ought therefore to pay 7,500 francs, but, in lact, only pays 5,000 francs, while an estate of 25,000,000 francs pays only 375,000 irancs instead of 750,000 francs as it ought to do. Thus the moderate fortune pa^-s only two-thirds, and the vast fortune pays only one-half of what would be charged if a just proportion were observed. A wealthy man is obviously quite able to make as great a sacrifice in proportion to his wealth as one of moderate means, and the injustice which is committed by relieving him from the necessity of doing so is not remedied in any other way, for there is no tax which presses with peculiar force on the owners of large personal estates. The distinction between the rates charged on legacies, according as the property is real or personal, affords another instance of an inequality established for the benefit of the classes whose influence is paramount iu the legislature. Xominally, the rates are the same in both cases, but there is this important difference, that, Avhereas in the case of person:il property they are charged on its full value, they are, in the case of laud, charged only on its value calculated on the assumption that the person who succeeds to it is only a life-tenant. Where this assumption is in accordance ^vith the facts, the practice is reasonable, though even in such cases the property y\i\l generally descend to the life-tenant's children, and he is not iu the position of au annuitant ; but when the successor is a tenant in fee-simple, who can dispose of the estate in any way he pleases, there is no reason why he should be treated with more ffivour than a man who has an equal fortune invested in the funds or other stocks. Those who succeed to landed estates are allowed a longer time for papng the duty than is the case with those who inherit funded property ; and there is some reason for this, as it is notorious that rents are less regularly paid than dividends, and it is but fair that landlords should have time enough allowed them to provide the means of paying the tax. There is, no doubt, a stronger feeling against selling a portion of a landed estate than exists in the case of such uninteresting property as the public funds ; and there is something to be said against imposing a tax wdiich would make it necessary for landlords to diminish their estates immediately on succeeding to them. But the resource of bor- rov.ing is always open to those who are called on to pay a large sum, but do not wish to sell any part of their estates, and there is no reason why the possessors of landed property should be subjected to a lower tax unless it can be shown that land is subject to heavier burdens of some other kind. 57r) LEGACY DUTIES. The differences in the rate of duty according to the degree of relation- ship are not altogether free from objection. That husbands and wives should pay no duty is reasonable enough, for they are always regarded by the law as one person, and the transfer is not an increase of the wealth of the survivor, and, in the case of widows, is generally accompa- nied by a pecuniary loss. That children should pay the lowest rate is also reasonable, but there is no apparent necessity for making any fur- ther distinction between near and distant relatives, or between these and strangers. In most cases, a person is equally ^^'ell able to pay a legacy- duty whether he succeeds to a brother, a cousin, or a stranger in blood ; yet the rates in these cases range from 3 to lO per cent. While the lowest of these is so low as needlessly to forfeit a considerable amount of revenue, the highest is so heavy as to be regarded as a real burden, and it might be an improvement if an uniform rate of five per cent, were charged on all property which did not pass in a direct line. Care must always be taken in fixing these rates to avoid making them so high as to encourage the practice of transferring inter vivos, which already prevails to some extent. But when kept within reasonable hmits these duties are among the least objectionable of all taxes. The mode of their collection is not, however, as convenient as could be desired. The probate duty is required to be paid before the executor can obtain possession of the property, and, in many cases, the executor cannot advance the money until he has obtained possession. The difficulty is got over by the intervention of solicitors, who undertake to furnish the money and get the will proved ; but Avhen this is done it is necessary to pay interest on the money thus advanced, and various fees to the solicitors, and thus the expense is increased to much more than the actual amount received by the government. The probate duty is always charged in round sums, only roughly proportioned to the amount of the property, and there is little difficulty in calculating how much ought to be paid, but the legacy duties are calculated in exact proportion to the legacies, and a great deal of troublesome calculation has to be gone through. It might be naturally expected that Avhen the value of the estate has been assessed for the probate duty the legacy duties would be based on the same valuation ; but as the two are paid at different times, it frequently happens that the value of the estate has altered in the interval, and, at all events, the property has to be revalued, which is generally a trouble- some process. If any mistake is made, it is differently regarded, according as it is in favour of, or against, the government. If the executor has paid too much, he must claim a return of the excess within six months, and will receive it without interest ; but if he has paid too little, he may be called on to make up the difference after any lapse of time. INCOME-TAX. r)77 and will have to pay interest on it. It is niueli to be desired that some- thing shonld be done to lessen the trouble and annoyance to which execntors are exposed, and thus to diminish the unpopularity of taxes which, if properly levied, are almost the best that can be devised. Another mode of taxation which would be admirable, if it c\)uld be properly carried out, is to tax people in proportion to their incomes. The income which a person enjoys afibrds a tolerable index of his power of bearing taxation, and if there were no practical difficulties in the way, an income-tax would be about the best resource on which a government could rely. But, unfortunately, the value of an income varies consi- derably according to the source fi'om which it is derived, and a tax which shonld treat all incomes alike would not impose equal burdens on all contributors. Adam Smith's first rule is, that all citizens should contri- bute iu proportion to their respective abilities, and a person who is dependent for his maintenance on a salary or professional fees is not so well able to pay taxes as a possessor of an equal income derived fi'om funded property. The important difference between them is, that the former is obliged to save iu order to provide for his family after his death, while the latter, knowing that his family will possess as large a fund as himself, is able to live fully np to his income. It is said that, on the average, professional men lay by one-third of their income ; and if this be so, a tax which treats all incomes alike imposes on the professional classes a burden heavier by one-half than that to vrhich other classes are subjected. If an attempt were made to remedy this inequality by charg- ing a lower rate on professional incomes, so many questions of degree would arise that it would be found impossible to arrive at any satisfactory settlement. A person ■'.vlio is in receipt of a salary from the government is obhged to save for the benefit of his family, but his income is not so precarious as that of a barrister or a physician, and he has a pension to look forward to when he becomes incapable of working. It would not be fair to treat both these classes ahke, and yet if any difference were made between them it would be a difficult matter to assess them fairly. A simple expedient, which has been adopted for relieving the pressure on the possessors of life-incomes, is to exempt from taxation the amount which is actually paid in j)remiunis on life insurance policies, and as far as this goes it does remedy the iuequalities of the tax. But, unfortunately, this aftbrds no relief to those who save, but invest their savings in other ways than insuring their lives, and there is no reason why the govennnent should show any pec'.liar favour to tho^^e who choose this particular mode of pro-yiding for their families. A more serious objection than that of the difficulty of assessing the tax fairly on nil incomes which mi-c known is the difficulty P 1* 578 INCOME-TAX. of finding out what is the real amount of a tax-payer's income. If everyone conld be trusted to say what was the amount of his income, and how much he saved every year, there could be no difficulty in assessing the tax, but this is precisely what the average taxpayer cannot be trusted to do. The tax consequently falls with peculiar hardness on those whose incomes are derived fi-om such sources that it is difficult for them to conceal the amount, while those who have the means of conceal- ment are able to evade their share of the burden. This is particularly the case with those who are included in the much talked of Schedule D — that is to say, the commercial and manufacturing classes — and the amount of evasion which is practised by them constitutes the strongest argument for repealing the tax. It would not be sufficient to exempt all the incomes included in that schedule, for this would make the tax unequal in the extreme, and several more exemptions might fairly be claimed if this were granted. The fundholders are mulcted of a small per centage of their dividends in order that they may pay their share of this tax, but it would be a breach of public faith if this Avere done at the same time that the rich tradesmen and manufacturers of the country were exempted. Government officials in the same way may be fairly called on to contribute out of their salaries to a general tax, but not to one from which a large class is exempted. If these in their turn were exempted, there would remain no one to pay the tax except those whose incomes were derived from land, from investments in other than public fimds, and from unofficial salaries ; and the two latter of these classes are certainly no better able to pay than those who would under such a system be exempted. The proposal which still finds a few advo- cates to impose all taxation on realised property is one which is so scan- dalously unfair that no nation could ever be induced to submit to it. It would be, in effect, to exempt all those who were engaged in making fortunes, and to derive the whole revenue from those who were living on what had been saved by themselves or others. It would be to exempt those who had the best means of compensating by increased efforts the loss which the government inflicted on them, and to exact a heavy con- tribution from those who were, for the most part, unable to ^vork for themselves, and would have no means of meeting the tax except l)y increased economy. Even as it is, the mode in which the income-tax is collected inflicts much inconvenience on the holders of incomes derived fi'om stocks and shares. Those whose incomes are below a certain amount are exempted from the tax, but it is found to be practically convenient for the government to collect it in one sum from the company or bank which pays the dividends, and to leave those who claim exemp- tion to apply for the return of their money. Although there is no great IXCOME-TAX. 579 difficulty in obtainino- such a repayment, it is not o-ranted witliout some trouble and delay, which are, in many cases, enough to prevent any apphcation from being made, and many persons who arc entitled to this relief are not aware of the fact, or do not know how it is to be obtained. In all cases where the tax has to be deducted fi-oni dividends, much additional trouble is given to the clerks who have to calculate their amount, and the expenditure of labour which is thus caused must bo regarded as an addition to the burden which the tax involves. It is not, however, from stock and shareholders that the loudest complaints against the tax proceed, but from the professional and trading classes. As it is not easy for the collectors to tell what is the exact amount of a merchant's income, they must either allow him to fix it for himself or must make some rough guess of their own. The former method at once opens the door for evasion, and is very objectionable, as it places a man's interest in direct conflict with his duty, and, Avhere it is extensively practised, must have a demoralising eflFect on the classes concerned. In India it is found to be impossible to trust the natives to assess their incomes for themselves, and even the higher standard of morality which prevails in England is not enough to secure the Government from being defrauded by under-statemeut of incomes. Cases have occurred in which trades- men who have estimated their profits at a certain rate when filling up an income-tax paper, have fixed them at twice as high a rate when claiming compensation for their loss of business through the execution of repairs in the streets in which their shops were situated. It is of no use to say that such instances merely show the low standard of morality which prevails among the people, and that higher penalties ought to be imposed on all who make fraudulent returns. The government is bound to avoid, as far as possible, doing anything to injure the morals of its subjects, and it is unreasonable to hold out a strong temptation to commit an offence and at the same time to punish severely all who yield to the temptation. If the collectors are allowed to guess at the amount of a merchant's income they are certain to make some mistakes, and ii" the tax is, notwithstanding, levied according to their assessment, an injustice is committed in a peculiarly irritating manner. Under our present system an appeal is allowed against the assessment of the collector, but it is a troul)lesome business to appeal, and the officials who have to judge the case are more inclined to decide in favour of the collector than of the taxpayer. It is not surprising that those who have to submit to the questioning and other annoyance ^\•hich such a system involves should be strongly opposed to the maintenance of tho tax, nor that it should 1)0 highly iiupo])ul;ir in a country where to I)rand a proceeding as " inquisitorial " is almost enough to condenui it. It pp2 580 INCOME-TAX. might have been thought that the great reduction which has been made in the amount of the tax would have mitigated the hostility which it has excited ; but, although it docs not now amount to much more than 1 per cent., it still gives rise to as much agitation as \vhen it was much higher. This may be because its opponents have been encouraged, by its gradual reduction, to hope for success in their attempt to obtain its abolition, or more probably because those who are most annoyed by it become more unwilling to submit to it in proportion ag the benefit which the go"\ern- ment derives from it becomes more paltry. Although the change of ministry which took place at the beginning of 1874 was followed by a change of financial policy and a disappointment of the hopes which had been entertained of an immediate repeal of the income-tax, there is e^'ery reason to believe that it will not be found possible to retain much longer a tax Avluch, after it has been tried for thirty years, is still as unpopular as ever. As all incomes are either derived from rent, profit, or wages, or from taxes paid by those whose incomes are derived from one of these sources, a perfectly fair income-tax would press upon all three of these categories. It is generally held in England that wages ought to be exempt, the chief reason being that the expense and difficulty of collecting the tax from labourers would be too great to admit of its being done with profit. A similar tax is, however, imposed in Germany, and the difficulty of collec- tion is much diminished by the simj^le plan of demanding a smaller sum from those who will pay the whole in one instalment at the beginning of the year than from those who pay it by several instalments. There are some who contend that it is useless to tax wages, because "whatever is taken from them must be made up by the capitalists upon whom the tax is said really to fall ; but this argument is entirely based on the groundless assumption that the labourers earn nothing but the bare necessaries of life. The fact that duties on tea and tobacco have been frequently raised and lowered without any corresponding change in the current rate of wages is enough to prove that the labourers are able to retrench in their expenditure when a heavier burden is imposed on them, and, in fact, a very large portion of the revenue of this and other countries is furnished by the labouring classes. As the labourers in general cannot shift the burden fi'om themselves to the capitalists, so the capitalists, as a body, cannot shift it from themselves to their customers. When a tax is imposed on a particular article, the tradesmen who deal in it can and do raise the price and make the public bear the cost of the tax ; but even in such a case they have to pay tlieir share of it when- ever they themselves consume the article in which they deal. They are able to raise the price, because, if they did not, they M'ould be submitting IXCOilE-TAX, . 581 to a lower rate of profit than prevailed iu otlier trades, and the public are obliged to pay tlic higher price on pain of seeing the trade altogether abandoned as nuprofitable. But a tax which falls on all traders alike, and on them in common with other classes, cannot be shifted on to the shoulders of others, for no one is able to escape it by changing his trade. In whatever way a man invests his money he is still liable to be mulcted of a. portion in order to pay the tax, and as those who retain the old prices will be no worse off than if they transferred then capital to other trades, or retired from business altogether, it will be their interest to go on as before, and their competition will effectually prevent others from raising their prices. In so far as an income-tax falls on landlords, it is a Imrden which they cannot shift on to the shoulders of others. The rent of land is the surplus which remains after profit and wages have been provided for ; and as it is not like the two latter, a reward for any sacrifice, it may be diminished without any discouragement being given to production. If the State were to take the v^-hole rent of the country, it x^'ould not be laying a heavy burden on one class, but appropriating for the benefit of the whole community an indispensable article which properly belongs to the community though it has been suffered to become the property of a few individuals. It would, of course, be an act of injustice for the government of any country in Avhich land has become private property to take possession of it without compensation to the o^Tiers, but if due provision were made for all vested interests, such a course would be unob- jectionable as a matter of morality, and, in some circumstances, profitable as a matter of policy. The State would then have the full benefit of every rise in the value of land which might take place in particular districts in consequence of the increase of population or of impro\"cd means of communication, while the tenants who had to pay the increased rents would be no worse off than they would be if they held from private landlords. The labour of the community is the source from which every increase in the rent of land is derived, and if the government apjn-o- liriated the fruits of every increase and applied it for the benefit of the people, they would receive back in one form what, under a system of competition they are compelled to pay in another. Tlic difliculty of carrying out such a system lies in the incompetence of governments either to manage land judiciously or to apply what it receives for the benefit of its subjects and of them alone. It has often been obscr\ed that the management of Crown lands is so bad that what ought to be valualjle estates become a source of loss to the nation, and, uidess the principles of constitutional governments are very firmly established, it is dangerous to intrust the executive authority with a source of revenue 582 . IXCOME-TAX. which is independent of the goodwill of the taxpayers. Some ingenious speculator has ascribed the English rebellion of 1G42 to the depreciation of the precious metals which followed on the discovery of America. The argument is that the depreciation lowered the value of the hereditary revenues of the Crown and made it necessary for the Stuarts to apply to Parliament for fresh taxes, and that these applications produced the rebellion. Far-fetched as such a theory is, it can hardly be doubted that the authority of Charles I. would have been retained much longer if he had been able to support the expenses of his government out of the rents of tlie Crown lands. The Crown tenants would never have thought of refusing to pay their rents when every one who did so must have been ejected from his holding ; and if possessed of an ample revenue, Charles would have been able to defy the authority of Parliament for more than two campaigns. Unfortunately for him, and for- tunately for his subjects, his predecessors had given away so much of the Crown lands that he had not enough left to bear the expenses of a civil Avar. It is remarkable that a similar state of things is now exhibited in one of the youngest of English colonies, that of Victoria. In the course of 1875, a proposition Avas made in the Legislative Assem- bly of Victoria to prohibit any future alienation of public lands, and those who advocated it relied on the authority of Mill and other English economists ; but the minister was able to obtain its rejection by simply pointing out that if the sales AA'ere stopped the deficiency of revenue must be made up by the imposition of a tax. Thus, in Victoria, as in England, the policy is pursued of killing the goose which lays the golden eggs ; and rather than submit to taxes for themselves, the people reject a course Avhicli Avould enable their posterity to secure the benefits of an established government almost free fi'om the corresponding disadvantage of taxation. The diflficulties in the way of such a step as the apjoropria- tion of all land by the government are trifling in Victoria in comparison AA'ith Avhat they are in England. The Avaste land of Victoria, Avhich is still held by the government, is of large extent, and might be retained without interfering Avith any vested interest ; and it is certain that much of it Avill at some future time yield a rent Avhich the government can thus appropriate without spending anything in compensation. But in England the extent of waste land is so small in proportion to Avhat is already cultivated or utilised in some other way, and there is so httle of it which could be made to yield a rent, that no material relief to the revenue would be afforded by a measure Avhich Avas confined to the lauds not already taken into cultivation. It is not, howcA'er, necessary that the line should be drawn at this point, for the requirements of justice would be satisfied if all existing landlords received the full value of their IXCOME-TAX. 583 estates at the time when the change was introduced. It is only necessary that they should be offered the option of selhng their estates to the government or continuing to receive their former rents, while any further increase was transferred to the government in order to prevent any just complaints. There might be some difficulty in fixing a per- manent rent without at the same time discouraging landlords from ap- plying capital to the improvement of the estates which were left them, but, after all, the problems to be solved would be no harder than those which are settled by hundreds of stewards and land-agents every year. What the State is entitled to appropriate is what ilill has called the "unearned increment" or increase in the rent of land arising independ- ently of any exertion or outlay on the landlords' part, and there can be no gTeat difficulty in settling its amount, at least accurately enough for practical purposes. It is objected to this proposal that landlords who have been judicious enough to buy an estate which has afterwards risen in value are as much entitled to enjoy the fruits of their sagacity as those who have made equally judicious investments in stocks or shares, and that there is no more reason for the State to appropriate the " un- earned increment " in the one case than in the other ; but thie objection admits of being answered in several ways. In the first place, any proper scheme of compensation Avould include due allowance for the value of the prospect of an increase in the rental of a particular estate ; and land- lords who were disappointed of a larger rental would enjoy the advantage of receiving a larger capital sum if they could point out a reasonable probability of an increase in the value of their estates. If no individual suffered a loss, as Avould be the case if the scheme Avere properly carried out, the whole class of landowners could not be injured. In the second place, no one really supposes that when any public advantage can be derived from the compulsory purchase of particular stocks or shares such a proceeding is indefensible because the holders are thus disap- pointed of their expected profit. When the telegraph con)panies were bought up by the govermnent no one suggested that the shareholders were unjustly treated because they were deprived ol' the cliance of earning larger dividends, but the value of their chance was calculated and paid for accordingly. Shareholders, indeed, generally regard com])ulsory purchase as meaning the purcliase of their property at more than its value, and are rather prone to agitate foi-, than against, such a measure. In the third ])laec, there is an essential difference between land and other things which become the subjects of private property, which justi- fies a different mode of proceeding in regard to it. The economic reason for respecting private property is that it encourages the production of wealth ; but this docs not apply to land, which is not the product of Ij i)6i TAXES o:S HOUSES. human labour. Land is at the same time h'mited in quantity and essential to the maintenance of life, and it is therefore impossible to admit the theory that one or a few individuals can ever have a right to monopolise it and prevent the rest of mankind from making use of it. Self-preservation is the first. law of nature, and all men have an equal right to maintain themselves by appropriating the fraits of the earth when these are produced without the expenditure of human labour. If it be once admitted that individuals may acquire and transfer to others a right to the exclusive use of a particular portion of the earth,' there is nothing to prevent one or a small number of individuals from acquiring possession of the whole, and if they are regarded as possessing the same rights over their landed property as over articles which they have made Avith their own labour, it follows that they have a right to keep the earth for tlieir own exclusive enjoyment and to debar the rest of mankind from mg,king any use of it. As this cannot be admitted, it follows tha mankind, as a whole, have a right which they can at any time assert to hold the earth in common, and to ignore any claims of individuals to monopolise particular portions of it. When the inhabitants of a parti- cular country decide that all the land which it contains shall be held for their common benefit they are simply carrying out a logical principle with as much consistency as circumstances will admit. In point of fact, the right of the community to take land from individuals when it is wanted for public purposes is everywhere recognised and enforced ; and a conspicuous instance is afforded by the compulsory powers of purchase vrhich have been granted to railway companies. In such a case, the State and the community are practically identical, and the appropriation of all the land by the government may be regarded as the successful assertion of a natural right. "Whatever difficulties there may be iu carrying out such a system it is much to be desired that they should be " resolutely gTappled with, for success in the undertaking would be equivalent to the raising of a large revenue without any real burden on those vrho ha\-e to furnish it. Where it is fouud impossible or incom'enient to raise a revenue by direct assessment on the real or supposed amount of the kiq-jhyo^ pro- perty, the principal resource left is to tax them according to their expenditure. In many respects the amount of a person's expenditure affords a better guage of his capacity to bear taxes than the amount of his property. By taxing expenditure the difficulty of deciding how much ought to be allowed for savings is avoided, and when the subjects for taxation are judiciously selected there is less room for evasion. One of the best subjects which can be chosen for the purpose is a house, which cannot be concealed, which very few persons can possibly dispense vrith, TAXES U^' llOUSEt^. 585 and of whicli it is tolerably easy to estimate the value. The main object to be kept in view in fixing taxes of this kind is to choose such as will not defeat their own end by inducing the taxpayers to give up using the taxed article, and this is a danger which is less likely to prove serious in the case of houses than in that of any other article which could be selected. A house-tax might, indeed, induce some people to live in inferior houses in order to pay a lower tax, but the revenue could not be seriously diminished in this way, for if the practice became general, all that would be necessary would be to raise the rate charged on inferior houses. A house contributes so much to a person's comfort, and is so commonly taken as a test of his position in society, that the last thing which any one would do who could avoid it would be to move from a good house to a worse one. Houses are so commonly sold and let, that it is very easy for oflficials possessed of local knowledge to make a fair assessment of their value, and there is no occasion for holding out any temptation to the owners by requiring them to set their own value on their property. A house-tax should be regarded as a tax on expenditure, and, therefore, varying in proportion to the amount which the owner can afford to spend on his personal enjoyment. Thus, on the one hand, a merchant who is required by the nature of his business to use a largo building for storing goods or other purposes, should not be required to pay in proportion to the letting value of his office, but only in proportion to the value of his private house, by which his means of enjoyment can be really tested. House taxes being chiefly levied in England for local purposes, the inhabitants of each district are apt to think themselves aggrieved if any buildings are allowed to stand in it without contributing to the tax. If the buildings ^Yere not there, they say the ground might, or would, be covered ^vitll houses which would l)e liable to the tax, and they think this a sufficient reason for taxing all the buildings which belong to the central government, to companies, corporations, charitable, or other societies. As far as regards the rates for lighting and repaii'ing the streets the argument is reasonable enough, for those who use the buildings must use the streets which lead to them, and would have to provide the means of lighting and repairing the streets il" it were not done for them by the local authorities. But to proceed iVoni (his to argue that these buildings ought to be subjected to the poor rate is to lose sight of the original object of the tax, and to reason as if ta.xes were to be paid, not by human beings, but by inanimate objects. A house- tax is levied for the supjwrt of the poor because it affords a convenient means of raising the required sum, and its object is not that every piece of ground should contribute in proportion to its extent, but that every citizen should contribute in proportion to his wealth. If every dwelling- 586 TAXES ox LUXURIES. house is taxed, everyone will have to pay in i)roportion to his abihty, while if every bnildiiig is taxed, many persons will have to pay twice o^er. The fact that the tax is local makes it an apparent grievance for the inhabitants of a district to have to pay increased rates when private houses are bought by ijublic bodies, but unless the districts are very small the hardship thus arising will be quite inappreciable, and the substitution of public for private buildings tends, as far as it goes, to diminish the number of houses which will furnish paupers. It is pre- posterous that a building like St. Thomas's Hospital should be taxed for the poor-rate merely because private houses would be taxed if they stood on the same site. The charitable people who subscribe to the hospital are thus forced to contribute towards a burden which the Government had decided the people of Lambeth should bear ; and by restricting the means and consequent usefulness of the hospital, more injury is done to the poor than can possibly be repaired by a redistribution of the poor- rate. On the other hand, Avhen the mansion of a wealthy proprietor is valued for the purpose of taxation, it should not be, as is now the practice, assessed at a Ioav rate on the ground that considering how much it costs to keep it in repair it could not be let for any high rent. The letting value of a house affords a fair basis for taxation when the occupier pays a rent for it, but when the occupier is also the owner this is not necessarily the case. The large houses of great landed proprietors are universally regarded as a proof of great wealth, and should be treated as such in settling a scale of taxation. In their cases an estimate ought to be formed of the amount of money that has been expended in building the house, and the annual yield of this sum, calculated according to the price of the funds or of land, would form a fair basis for taxation. A revaluation, might, of course, be made from time to time, and due allowance made for any depreciation occasioned by want of repairs. A house-tax is a tax on wealth, tested by means of expenditure, and those Avho show by the outward appearance of their houses that they possess great wealth may be fairly called on to l)car a large share of the public burdens. There is no suggestion more popular Avith those Avho have not reflected much on the principles of taxation than that the revenue should be raised by taxing luxuries. Such a suggestion seems to couple the advantages of deriving a revenue fi'om those Avho are best able to afford it, and of properly discouraging that mode of expenditure, which, because it is called luxurious, is supposed to be condemned as pernicious. In fact, however, these two reasons for taxing luxuries contradict each other, and no tax can combine both advantages. In order that the rich may be compelled to furnisli a revenue to the government, they must be TAXES OX LUXURIES. 587 subjected to taxes which they camiot evade, and most of what are called luxuries are things which those who use tliem can attbvd to do without, and would do without rather than pay a henxj tax for their use. One of the most remarkable instances in which the imposition of a tax on an article of luxury has been followed by the disuse of the article is afforded by the imposition of a tax on hair-powder in 1707. Before that time, it was the common practice for the men-servants in all great houses to powder their haii", but as soon as the tax Avas imposed, although it was by no means a heavy one, the practice was almost discontinued, and powdered hair continues to be the exception, and not the rule. In this case the revenue received hardly any benefit, while nothing was done to discourage luxury. Those who had indulged in this particular luxury were iuduced to abandon it, but as they were not compelled to hand over to the government what they had formerly spent in this way, their means of enjoyment were in no way diminished, and they doubtless found other ways of gratifyiug their luxm'ious tastes. To tax luxuries is to expose the government to such defeats as that which was encountered in the case of the powder- tax, and is really to give a great deal of annoyance for the sake of a very small gain. If the luxuries selected for taxation are, as they most commonly would be, only consumed by a small class, the first of Adam Smith's maxims is deliberately violated, and one part of the community which has done nothing to deserve it is singled out for an excei)tional burden. In order to raise a large revenue from a small class, a high rate must be imposed, and this would in all likelihood lead to the disuse of the taxed article, Avhilc, if the government where content with a small revenue, the expense of collection would be proportionally great, and in either case the government would l)e a loser, while no one would be a gainer. If the government transfers the tax fi-om one luxury to another, as each is successively abandoned it inflicts hardships on its sul)jects without deriving any advantage for itself, and does the very thing which it ought, as far as possible, to avoid. There are, however, a few cases in which a revenue may be derived from the taxation of luxuries to whicli those who enjoy them are too nuich attached to be induced to abandon them by any taxes which are not exorbitant ; and, in such cases, there is nothing to object to in this mode of raising a revenue. Tlie light tax which is imposed on those who keep men-servants in their employ certainly could never have the effect of inducing rich people to disuiiss their footmen rather than pay the tax ; and it is one which is cheerfully paid and easily collected. In this case, as in the case of liouses, a distinction should be made between ser\aiUs who arc kc'iit for pleasure and those who are kept for business, and it is singular that innkeepers should ever have been recpiired to pay for the waiters 588 LICENSE DUTIES. whom they are obh'gecl to employ. The number of men-servants kept in a private house may serve, Hke the size of the house itself, as an index of the wealth of its owner ; but the number of waiters in an hotel cannot be taken as a test of the landlord's wealth when compared with that of persons not engaged in business. The exemption which land- lords obtained a few years ago is therefore just and reasonable. Carriages and horses, when kept for pleasure, and not for business, are equally Avell suited for taxation, as the taste for these luxuries is too deeply rooted to be eradicated by such moderate taxes as are now imposed upon them, and the persons who have to pay them are certainly well able to do so. As much may be said of the tax on armorial bearings, though it Avould probably not admit of any considerable increase. The duties which are imposed on licenses to follow certain trades and professions, although, when moderate, they do not give rise to much complaint, are objectionable in principle, as they are almost of necessity unequal in their operation. If the license is uniform for all persons engaged in the business, it must obviously press hardly on those who are least successful, while those who are doing a good business will hardly notice its pressure. Not being regulated in proportion to the amount of goods sold, or services rendered, it cannot be transferred, like customs duties, from the dealers to the customers, for if the less successful dealers raise their prices in order to escape from the burden, their more fortunate rivals would be able, Ijy retaining the old rates, to drive them out of the market, and vvould be compensated by increase of business for the loss inflicted by the tax. The license duties imposed on auctioneers and a fev; other classes are liable to these objections, and though they are so light that no great harm can be done by retaining them, yet, as they are essentially unequal, they should be among the first selected for repeal whenever there is an opportunity for reducing taxation. The tax Avhich is levied on barristers at the time when they are called to the bar belongs to the same category as tradesmens' licenses, though, as it is only paid once, it does not produce very much inconvenience to the parties concerned. The class who are subjected to this tax are generally well able to bear it, and it is only in exceptional cases that it can do any harm by j^reventing a poor man from adopting the legal profession. If such cases do occur, the hardship is perhaps apparent rather than real, for it is scarcely possible that a man who is not able to pay the tax should be able to support himself during the time Avhich must elapse before he gets sufficient practice to support him. As a general rule, however, license duties, and all taxes imposed on particular classes, should be avoided, as it is neither possible to assess them fairly as regards individuals of the same class, nor as regards diflPerent classes. Each T.LSER OX CO:\riIERCIAL TRAXSACTIOXS. i)SO class \yhich is subjected to a special tax is prone to regard itself as uujustlj treated, aud to agitate for the repeal of the tax ; and it is better to trust to those imposts uhich press on a large numljer of citizens and in proportion to their vrealth. The taxes which are levied on the occasion Avhen sales are eil'ectcd and payments made are generally collected by means of stamps, a method which is extremely advantageous, as it in^-olves very little expense to the government and very little trouble to the taxpayers. It is only necessary for the government to declare that no transaction is valid unless the proper stamp has been affixed to the deed in order to insure that the tax shall be paid in almost all cases. Where no such precaution is taken, a great temptation is held out to evasion, and there can hardly be a more melancholy example of the want of public spirit in a nation than was afforded by the Italian Chamber of Deputies, when, in 1874, they refused to pass a bill invalidating all contracts which were not duly stamped. The sole motive apparently which prompted this refusal was the uuwilhngness of many of the Deputies to submit to the loss which they would have suffered as individuals if compelled to obey the law, aud a country where such a motive can sway the popular branch of the legislature is, indeed, in a pitiable condition. Taxes of this kind are not altogether free from objection, as they to some extent impede the transfer of property from hand to hand, but every tax must produce some inconvenience, and there are few wliich are less objectionable. In some eases, as in that of powers of attorney, the same stamp is required whatever be the amount of the transaction, and this is rather a hardship for holders of small amounts of stock who may wish eitlier to sell out or to empower a banker to receive their dividends for tliem. No stamp is required when fundholders go in person to sell out their stock or to receive their dividends, and there seems no good reason why they should be favoured in comparison with those who prefer to do the work by deputy. The stamp-tax on receipts is also unilbrm whatever the amount of the sum received, provided this exceeds a certain minimum, but its amount is so small that it cannot be regarded as a serious burden, even in the case of the smallest transactions which are subjected to it. It is not easy to say on whom this tax falls, for though it is always paid by the receiver, he may in many cases be able to transfer it to the pajK^r. Tradesmen are those who are most often required to use receipt stamps, and if they find that the sum which they have to spend upon them forms a serious deduction from their profits they will jio doubt raise their prices enough to throw the burden on their own customei-s. It may, however, be generally, considered as a direct tax. CHAPTER III.— INDIRECT TAXATION. CUSTOMS — EXCISE — DUTIES ON f^TIMULANTS — TITHES — FINANCIAL POLICY. The distinguishing feature of indirect tuxes is, that they are paid without the taxpayer feehng that he is paying them, and while this renders them popuhir with financiers and with those whom they have to govern, it is made a ground for objection by those who, looking beyond present convenience, desire to adopt a system which will secure judicious and economical administration. If people do not know how much they are paying, they may be made to pay a great deal without complaining, and a system which keeps them in ignorance is favoured by those who recognise the necessity of certain expenditure, but doubt the willingness of the people to provide the means of incurring it. The advocates of economy, on the other hand, say that no real check can be put on lavish expenditure, while financiers can resort to expedients which conceal the extent of the burden from those who have to bear it, and that if the whole revenue were raised by direct taxation, the extravagance which has hitherto prevailed would soon be put an end to by the resistance of the taxpayers. Each of these arguments has a good deal of truth in it, but neither can be safely relied on as a general principle without regard to the character of the nation whom it is proposed to tax. Almost every civilized country now possesses a funded debt, and if it were true that the means of providing for the payment of the interest could not be drawn from the people by direct taxes, a sufficient case would be made out for resorting to indirect ones. But it would be rash to assume that this is the case in all countries. In England the number of fundholders is so large, and so large a proportion of them belong to the rich and influential classes of society, that any project of complete or partial repudiation would be sure to be stoutly resisted. Nor does it argue much national partiality to assume that the general standard of morality is too high for such a project to find any favour even among those whose interests are not bound up with the security of the funds, and that the maintenance of our public faith is independent of any particular method of taxation. In a country where the government has borrowed a large amount from foreigners, there is a greater temptation to repudiation, but the experience of Peru, as well as of other States, shows that an indirect tax, even when specially hypothecated to the bondholders, affords no sohd guarantee against it. Nor, on the other hand, is it safe to assume CUSTOMS. 591 that indirect taxation leads to extravagance which direct taxation would prevent. Some nations like their government to perform functioiLs which are elsewhere entrusted to private enterprise, and though each individual can see that he is paying taxes in order that it may be per- formed, yet each may think that his share of the bnrden is lighter than it would be if the government did not meddle in the matter. In countries where education is proNided by the State, a school-rate of some kind is generally imposed, which must be obvious enough to those who have to pay it, and yet they show nu disposition to forego the advantages of State education in order to be subject to lower taxes. In a country where the people or their rulers are really disposed to extravagance, direct taxation would rather have the ett'ect of i)lunging them into debt than of preventing useless expenditure from being incurred. They would sanction expenditure upon railways or other public works on tiie plea that these would pay their expenses, and when these expectations were disappointed, would raise a loan, and, in due course, fail to provide the interest on it, and end, at last, in defeult or repudiation. But though neither system of taxation can be regarded as a panacea lor all the ills to which finance is liable, the advantages of the direct method are such as to make it preferable whenever it is possible to resort to it. Its adoption does not entail any beyond the slightest possible interference with the industry of the people, and this is the principal object to be kept in view in devising a scheme of taxation. The two principal heads under which indirect taxes are classified are those of customs and excise, the former embracing those duties on com- modities which are levied at the frontier, and tlie latter those which are raised in the country where the commodities are produced. One argu- ment which is always used in favour of customs duties is, that they are collected at a very small cost, which in this country does not nuich exceed 3 per cent, on the amount collected. But Mr. Cliffe Leslie, whose essay on Financial Reform* is an exhaustive statement oi" all the arguments against indirect taxation, has taken pains to show that this low ])er centage does not prove that tlie cost to the country is really small. If there were no customs duties, every ship would be free to load and unload at any part of our coasts or of our navigable rivers where such operations could possiljly be carried on, but to allow this would be greatly to increase the cost of collecting the duties. It would be necessary that Custom House officials should be stationed at every place whci-c a ship could possibly di-scharge its cargo in order to Iw ready to examine it immediately on arrival, and to decide whetiier any and what duties * Cobdeu Club Essays, 2nd scries, 1871-2. 502 CURTOMS. should bo paid. The expense and difficulty of providing such a number of officials would be enormous, and it is therefore provided by law that no ship shall load or unload at any place which has not previously been declared a [)ort. There are no v.', or there were in 1871, 133 ports in the United Kingdom ; but even at these privileged places the importation of some taxed articles is not permitted. Thci'e are only 59 to which vdne can be brought, and only 11 where it can be tested for the purpose of decid- ing how much duty is to be paid on it, and there are only 85 at which tobacco can be imported. It is obvious that these restrictions force trade into channels into which it v>'ould not naturally flow, and as the course which men naturally take in pursuing tlieir own interests is that which meets with the least resistance, it follows that the artificial direction thus given to trade must be more troublesome, or, in other words, more costly. i\Ierchants maist send their goods to those places which have been selected by the Custom House authorities ; and these places must therefore be selected as the termini of roads or railways along which the goods are to be conveyed to the consumers. Instead of sending goods to the part of the coast nearest to their ultimate destination, merchants must send them to a port, however circuitous the route may be, and this diversion forms an addition to the cost of commodities of which no account is taken in Oastom House calculations. From time to time new places are declared ports, bat applications for the purpose are always resisted by the officials of the Castom House, on the ground that the trade of the place is inconsiderable and that they have no reason to expect much profit from the concession. To these arguments, Mr. Leslie replies : — " The Commissioners of Customs are accustomed to reply to memorials for privileges of importation and warehousing that the places from which they proceed have but little foreign commerce and no con- siderable consumption of dutiable commodities, as though their own restrictions miglit not be the cause, of that state of things, as though this were not an age of progress in whicli places may suddenly rise from obscurity to opulence and eminence, and as though the foreign trade of any place could be great at the beginning." (p. 198). If vessels ■were allowed to unload wherever their owners pleased, every place would have a fair chance of becoming a centre of trade ; but now that no use can be made of a bay or estuary until it has been declared a port, the trade of many places is nipped in the bud. It is not worth Vi'hile to deepen a harbour, because the town has no foreign trade ; and the fact that the liar]3our has not been deepened prevents it ft'om being declared a port, and, therefore, from acquiring any trade. It is not unreasonable to suppose that many shipAvrecks might have been avoided if our coasts were more thickly studded with harbours, as they certainly would be if CUSTOMS, 51)3 it were not ibr Custom House restrictious, but the loss thus occasioned is incalculable and does not figure in official statements. The great objection to all interference ^-ith industry is, that what appears to be a slight restriction, may, and frequently does, produce uutbreseen evils of a serious kind ; and this applies as strongly in the case of purely fiscal regulations as in that of restrictions imposed for the protection of native industry. London is especially favoured by the Custom House officials, but the concentration of foreign commerce in London is a questionable benefit to its inhabitants, and is certainly an injury to the rest of the country. Even in the particular to^Mis which are favoiu'ed in compari- son with others, there is not perfect liberty for ships to load and unload at the places most convenient to the owners, but these operations must be performed at the places where they can be overlooked by the Custom House officials. The space is confined in order to faciUtate supervision, and the crowding which is the necessary consequence imposes much delay and incon^•enience on the merchants, which umst be in some way or other paid for by their customers. The inconvenience of Custom House regulations is very little diminished by the repeal of duties as long as any are left unrepealed, for all ships and railway trains must be inspected to see whether they contain any taxed articles. The whole coast must be guarded by a complete cordon of revenue officers, in order that smuggling on any part of it may be detected and suppressed, and the luggage of non-commercial travellers must be inspected for fear it should contain any contraband articles. It has often been objected to these duties that they require each trader thi'ough whose hands the goods pass to employ a larger sum of money in his trade than he would otherwise do in order to pay the tax, and that his customers must reimburse not only his actual outlay but the profit which he might have made on his money if he had not been compelled to advance it to the government. J. B. Say was of opinion that the increase of the burden thus occasioned was not compensated by any corresponding benefit to the Treasury, but Eicardo shewed (chap, xxix) that this is incorrect, because such a method of collecting the revenue enables the government to get the money earlier than it would otherwise do, and practically to gain as nuich in the form of interest as the merchants and manufacturers lose. Either the government wants the money immediately, in which case it is spared the necessity of issuing exchequer bills or raising some other kind of loan on which interest would l)e paid, or it does not want the money, in which ciise it can make a profit by redeeming some of its own stock, or lending directly to the manufacturers whom it obliges to advance the duty. Another French Economist, Simonde, is also noticed liy llicardo, who fell into 504: cua'ioMjs. the error of calculating the additional expense as if- it were a charge of 10 per cent, every time the goods changed hands, and by reckoning this at compound interest, greatly magnified the extent of the burden. As Eicardo pointed out, the rate of profit should not be reckoned at more than 10 per cent, per annum, and if the goods change hands six times in as many months the addition to the price would not be 60 per cent., but little, if at all, over 5 per cent. The direct loss moreover resulting in this way may be reduced almost to nil by a proper method of collecting the duty. The system of bonding, which has long been in use in this country, aflFords gTcat relief to the dealers in taxed articles. Instead of the duty being levied as soon as the goods are imported, they are allowed to be stored in bonding warehouses, and no duty is charged as long as they remain there, nor is it charged at all if they are again exported to foreign countries. By this system the importer is allowed to defer payment of the duty until the time when he is prepared to sell the goods to other dealers, and the extra expense which he incurs must be very slight when he takes full advantage of the facilities aflbrded. The system is far from perfect, and there are many places where it is difficult to procure warehouses, which, at the same time, suit the mer- chants and comply "\\'ith the rules which must be made hj the Custom House authorities, in order to prevent evasion of the duties ; but, so far as it goes, it affords a relief to the trade without inflicting any loss on the revenue. In Norway, it is carried to a still greater extent, for dealers are allowed to import goods on merely giving security that the duty will be paid, and to pay it by instalments as the sales are effected. In Xorway, therefore, import duties can hardly produce any disturbance in the distribution of mercantile capital, which is more than can be said for England. For a longer or shorter time merchants and manuftic- turers are required to advance a large sum of money, which they would not have to do if these duties did not exist, and this necessity gives an advantage to the wealthy capitalist over his poorer rivals. The conse- quence is, that there is a constant tendency in those trades which relate to taxed articles to get into the hands of a few large dealers. Thus the number of maltsters is found to be diminisliing, and the whole number of distillers in England is said to be no more than eight. This concentra- tion must be to some extent injurious, for the fewer the competitors the less is the chance of one of them introducing an improvement, and the process almost necessarily entails the ruin of many unsuccessful com- petitors. As, however, it is advantageous to those who do succeed, it is not to be wondered at that few complaints are heard from the traders themselves. When a particular article is selected as the subject of an import duty^ CUSTOM.S. 5U5 there always arises the question whether all qualities shall be taxed alike, or an attempt made to vary the duty according to the real or supposed value of the article. The former course is more popular with the dealers themselves, but it obviously makes the tax press very unequally on poor and rich consumers. The tobacco duty is cited by Mr. Leslie as an instance of this inequality, the duty amounting to about 25 per cent, on the best cigars, and to 500 per cent, on the inferior tobacco used by the working classes. This, however, is not of so much conse- quence in itself, for an inequality in respect of one tax is not enough to condemn it if counteracted by another inequality in other taxes, and there are several from which the working classes are practically exempted. But so high a duty as 500 per cent, constitutes a great premium on smuggling, and all uniform duties must on this account be more or less objectionable. If an attempt is made to vary the duty according to quality, complaints at once arise of the inconvenience which is thereby caused to importers. The sugar-duty, which has been repealed since Mr. Leslie's essay was written, is cited by him as an instance of the great annoyance and uncertainty ^\'hich such attempts introduce into the trade. Sugar producers complained that they found it impossible to tell before- hand liow much duty would be charged on any particular quality, and even when samples were sent out to India, in order to guide the manufacturers on the point, they were so much altered during the voyage as to bc'quite Avorthless. Being constantly exposed to loss on account of a higher duty being charged than had been expected, the manufac- turers found that the most convenient course was to send none but the lowest qualities to the English market. In spite of all the precautions that could be taken to secure uniformity in the decisions of the officials employed to examine sugar, there was always some room left for differ- ences of opinion, and the merchants thought it hard when a doubtful case was decided against them. Although Customs duties are certainly indirect taxes, as the dealers recoup themselves by raising their prices, they do, as Mr. Leslie argues, fall, in many cases, on producers and dealers, and on them alone. It must often happen that a commercial venture leaves no profit, or cvvn leaves a loss, and ^hcn the duty has been paid the merchant is not compensated at all ; and this more particularly applies to such cases as that oi" sugar, where the amount of the tax was a most uncertain quantity. Tiie system vn which the wine duties are now levied appears to combine the disadvantages of both systems, for, while it renders it necessary that all wine shall be tested, it does not vary the rates in any proportion to the value of the wine Tlic duty is levied according to the quantity of alcohol in the li(iuur, though wiiy this should Ije taken !i8 a basis has never been satisfactorily explained. (.» t; L' 59 G CUSTOMS. It wag assumed, when the system was introduced, that no natural wine ever contained more than 2G per cent, of alcohol, and that any excess above that point must be due to the artificial introduction of spirits ; and this assumption is still acted on, although it has been abundantly proved that many unadulterated wines contain as much as 30 per cent, of alcohol. All wines which contain less than this are subjected to the lower duty, while the higher is charged on all which exceed it and do not exceed 45 per cent., above which latter point the liquor is regarded as spirits, and taxed accordingly. This classification has the eifect of encouraging the importation of French wine, and of discouraging those of Spain and Portugal, and, of course, gives rise to complaints from the latter countries against what they consider as the partiality of the Eng- lish system. It is, of course, made an excuse in Portugal for keeping up duties on English goods. The adoption of the alcoholic test makes it necessary to limit the number of ports at which wine can be imported and tested, in order that uniformity may be secured in the decisions of the official testers ; and this, as before mentioned, is a great impediment to the growth of many of the smaller ports, and must be an injury to the consumers. An uniform duty, which has often been recommended, would do away with these objections, but would still leave the inequality of the tax untouched. Duties on exports, which are imposed in some countries, can only succeed in exceptional cases. If the article is one which is produced in several countries at a nearly equal cost, an export duty can have no other effect than to deprive the country which adopts it of a foreign market for its produce, and thus fails to yield a revenue while doing no good to any one. There are, however, a few cases in which one country has so great an advantage over others in the production of a particular article that a reasonable duty can hardly cause any falling off in the foreign demand. Cotton in the United States, gold in Australia, and coal in England, arc instances of this kind. By the Commercial Treaty with France England has bound herself not to levy an export duty on coal, and Mr. Jevous has expressed a strong disapproval of this clause. His object being to di-aw attention to the danger of the exhaustion of our coal supply, he is naturally disposed to object to any measure which encourages the consumption of coal, and he finds fault with the Govern- ment for resignmg its liberty of action in so important a matter. But in order that an export duty may check the exhaustion of the coal-fields, it must be high enough to deter foreigners fi'om buying it ; and if it did so it would cease to yield a revenue, and become a'matter, not of finance, but of public poHcy. For the present, at least, the imposition of such a duty could have hardly any effect, for the (juantity of coal exported is cuFiTo:Nrs. 597 but a very small part of the whole quantity produced, and if it were reduced to nothing the ultimate exhaustion of the supply would be hardly at all retarded. The export of coal is commonly spoken of as if it were handing over to foreigners what we may some day want for our- selves, but, in fact, a great part of what is exported is sent to various depots for the use of English steamers ; and English trade would sutlln- if the exportation was stopped. While the exportation is allowed to go on it is as advantageous to Englishmen as it is to foreigners, and it is a singular sort of philanthropy which would impose sacrifices on the present generation of Englishmen and foreigners in order that at some future time there may be an artiiicial inducement to our posterity to inhabit these islands rather than any other portion of the globe. Every one who has read Mr. Jevons' l)ook on the coal question must have been struck with the ability with Avhich the facts and arguments are arranged; but there is, it appears to mc, one oversight which takes away the value of the conclusions arrived at. The author proves that the manufacturing supremacy of Great Britain has been chiefly owing to the development of the coal-fields, and that if the consumption of coal increases at its present ratio the whole supply will be exhausted in less than a century. This is enough to show that we cannot , expect that Great Britain will continue to keep ahead of other countries, or to make such rapid progress as it has done during the last century ; but he goes further, and concludes that it will be poorer, absolutely, than it is now, and not merely relatively to other countries. This by no means follows, for as the country made progress before coal was used, and as other countries which have no coal make progress, so Great Britain may continue to progress at a slower rate when the production of coal has slackened or altogether stopped. The speedy exhaustion of which Mr. Jevons speaks will only take place if the consumption continues to increase at its present geometrical ratio, while if the annual production remained at double its present figure the coal would last for more than three centuries, and it is hardly necessary to forecast what would happen at so remote au epoch. The area of the British coal-fields far exceeds that of all the rest of Europe, and as Con- tinental countries contrive to advance while under this disadvantage, so Great ]k-itain may do the like, though its progress may, and i)robably will be, slower than it has hitherto been. Any check on the export of coal, while it would fail to do more than postpone for a few yeai-s the ultimate exhaustion of the su^jply, would, l)y iiiijteding the free expansion British commerce and industry, impede the introduction of those improvements in farming and manufactures which aiVord the best means of enabling a people to contend against the disadvantage of diminished mineral resources. 598 EXCISE. A system of Excise naturally, and almost of necessity, accompanies the establishment of Customs duties. If a duty is levied upon articles imported from abroad, it would obviously fail to yield any revenue at all if similar articles could be produced in the country \^athout paying any duty. Hence the best subjects for an import duty are such articles as cannot be produced in the country, or can only be produced at such an exorljitant cost as to render competition with the foreigner a hopeless enterprise. Tea answers to this description, and the duty on it yields a large revenue with about as little inconvenience as any Customs duty can cause. It is not necessary that any precautions should be taken to see that tea is not grown in the country, for it is well knoA^^l that no such attempt will ever be made. But in the case of spirits it is ob- ^ionsly necessary to levy a duty from native manufacturers corresponding to that levied from importers ; and neither duty would be sufficient with- out the other. Great as are the inconveniences which attend the levying of a Customs duty, they are shght in comparison with those which an Excise duty causes to producers. It is bad enough that merchants should be compelled to send their goods to places which are inconvenient to themselves because they happen to suit the officials of the Custom House, but it is far worse that producers should only be allowed to produce at the times and places and in the manner which suits the Excise officers. It is ]jut fair, however, to admit that there are cases in which an Excise duty actually leads to an improvement in production, although, as a general rule, it has the contrary effect. A remarkable instance of this kind is given by McCulloch in his work on Taxation (pp. 156-7, 3rd edition). "In 1786, in order to prevent Scotch distillers from evading the payment of a spirit duty, a calculation was made of the amount of spirits which could be produced in a still of a given size, and the license duty was imposed on every still in proportion to its cubic contents. This held out an inducement to distillers to discover some means of making a still do its work in a shorter time, and it was soon discovered that by lessening the depth of the still and increasing its diameter, a larger surface would be exposed to the action of the fire, so that its contents would be run off in considerably less time." A few hours then sufficed to do what had taken a Aveek under the old system, and the improvement having been generally adopted the government found it necessary to increase the duty. This was done more than once, but each time the distillers adopted a fresh improvement, until at length they were able to do in three minutes what had taken a week before their inventive powers were stimulated by the imposition of the duty. Every trade which is subject to an Excise duty must be exposed to constant supervision by the collectors, in order that nothing may be EXCISE. ;")90 produced witliout tlie duty being paid on it ; ] nit even at the best the visits of these collectors are a constant source of annoyance, and the restrictions which they impose act as a great hindrance to improvements in production. "\Mien a duty was levied in this conntry on glass the manufacturers were not allowed to make experiments without having received special permission, which was seldom granted, and an improve- ment which was discovered was actually forbidden becanse it might have led to some evasion of the duty. By successive additions, moreover, the duty was made so high as greatly to check the consumption, which was actually less in 1813 than it had been ui 1794. Not only were people discouraged from using mirrors and building hothouses, but a very serious obstacle was placed in the way of producing the glass instruments required for chemical and other scientific experiments. "When the duty was repealed in 1845 a distinguished astronomer expressed a belief that many discoveries in astronomy and other sciences might be expected to follow, the benefit from which is, of course, incalculable. A large num- ber of Excise duties have been repealed during the last 40 years, but the few which are retained still cause great inconvenience ; thus Mr. Leslie tells us that " A manufacturer of glucose Avas lately stopped in the execu^M?*'!- of important improvements, lest the use of that species of sugar in brewing in the mode designed should lead to evasion of the malt duty " (p. 224). The duty on spirits not only raises the price of strong drinks but impedes the growth of a number of manufactures. When methyllated spirits, which contained a mixture of wood naphtha, were admitted duty free, they were at once used for the following purposes : — " jMaking furniture polish, varnishes, and lacquers, dissolving gum resins for hat manufacturers, manufacturing hy[:;ersperm oil, chloroform, sulphuric, nitric, and chloric ethers, sweet spirit of nitre, ftilminating powder and transparent soaps, extracting vegetable alkaloids, such as quinine, morphia, &c., making soap liniment and extracts required in veterinary medicines, preparing goldbeaters' skins, floating mariners' compasses, and filling spirit levels, preserving objects of natural history, in chemical and anatomical researches, and as a source of light and heat for domestic purposes in a great variety of appliances of luxury and comfort, from the spirit lamp on the breakfast table to the singeing apparatus in the stable." As regards transparent soap no ]3ermanent benefit was derived from the permission to use methyllated spirits, for their odour proved so disagrce- aljlc to the public that the experiment had to be abandoned,* and I believe that all the soap of this kind which is now used in this country is imported from the Continent, where lower duties arc imposed on spirits. Cliffe Leslie (}>. 225). GOO EXCISE. "The Excise Department," says Mr. Leslie, "prohibits the cultivation of tobacco in the United Kingdom, forbids farmers to steep grain, save on the farm on which it is to be consumed, and a quarter of a mile at least from any malt-house or kiln, disallows the manufacture of sugar, unless on the same premises through every stage of the processes, denies to the l)rewer the use of sugar, unless in a solid form, prescribes the course of manufacture minutely in certain industries, with heavy penalties for the smallest deviation from regulations which are sometimes grossly wasteful and always obstructive " (p. 220). When we consider that every duty, whether levied at the Custom House or at the Excise-office, gives rise to some such obstruction or annoyance, it appears singular that McCulloch should have thought it right to protest against the policy which has been pursued by the English Government, both before and since his death, of repealing duty after duty, and reducing them to an insignificant number. He argues, that in order that a large revenue may be secured it must stand on a broad basis, and that if a few articles are heavily burdened public attention is concentrated upon them, and continual complaints are made of the pressure of each duty until it is repealed. But there is nothing really safer in raising a revenue from a great number of articles than fi'om a few which are universally consumed. It is the wealth of the people which enables them to bear taxation, and if the articles selected for taxation are such as they cannot do without the government can depend on receiving a large and certain revenue fi'om them. Com- plaints are just as likely to arise when many articles are taxed as when only a few are so, but the government is better able to resist the clamour against a particular tax when it is able to refer to its pro- ductiveness, and to challenge the objectors to provide a substitute. Much has been said of late years in favour of " a free breakfast-table," but the fact that the sugar duty has been repealed does little to strengthen the hands of those who would repeal the duty on tea. This latter duty is exceedingly productive, and causes as little inconvenience to the dealers and consumers as any Customs duty can do, and the repeal of the sugar duty is more likely to be adduced by statesmen as a reason for taking off some direct tax than for continuiug still further to reduce the number of indirect taxes. Those who object to a particular tax are too apt to argue as if it was a question bet\yeen it and and no tax, and to forget that it is really a question between it and some other tax. The paper duty, for instance, was persistently attacked and eventually repealed on the ground that it was a tax on knowledge, though in point of fact there was no greater obstacle placed in the way of the spread of knowledge by raising the revenue in this way than there would have been if an equal amount had been raised by any other tax. It is true that the paper EXCISE. 010 duty raised the price of paper, although the difference was hardly per- ceptible to the consumei"s, but even if books and newspapers had been made perceptibly dearer by the tax, it would by no means have followed that any check was put to the spread of knowledge. If there had been no duty on paper some other tax must have been imposed, and the reading public, though they would have had less to pay for their books, would have had more to pay for other taxes. Whether they paid their taxes at the same time that they bought their books, or at diti^rent times, could not make much difference to them, since in either case they would have the same sum to spend on boolcs and taxes together. While I cannot share the regret expressed by McOulloch at the repeal of the paper duty, I must admit that he has made out a good case for its retention, and that its re-imposition v;ould be fully justified, if at any future time it were found difficult to raise a sufficient revenue from existing taxes. There is generally some difriculty in raising a revenue by taxing any article which is produced in the country as well as imported from abroad. The volume which contains Mr. Leslie's article contains another by Herr Julius Faucher, whose object is to show that the slight difference between the duties on home-made spirits and those imported from abroad acts as a protective duty in favour of English distillers. The higher rate on foreign spirits is adopted as a compensation for the restrictions imposed on native distillers which, according to them, placed them at a disadvantage in competing with foreign rivals, but H. Faucher disputes the validity of the excuse. One of the Excise regulations which is compensated in this way is the prohibition against brewing and distilling at the same time, but he denies that there are any manufac- turers on the Continent who, by being allowed to brew and distil at the same time, gain any advantage over their English rivals. If this is so it is obvious that the difference between the Customs and Excise duty on spirits acts as a check on importation, and must to some extent relieve the native manufacturers from the wholesome influence of competition, and subject the consumers to a corresponding loss. In some cases, Avherc a difficulty has been met with in levying both a Customs and an Excise duty on a particular article, the knot has been cut by prohibiting its production within the country. So barbarous an expedient has very naturally excited more indignation than it really deserved ; but, e\'en at the best, it is a perilous undertaking ibr a government to debar its sub- jects from engaging in i'.u occupation which may turn out to be an extremely profitable one, though, of courso, it cannot at first be thought of much importance. The celebrated order of the Dutch goA-ernmeut to destroy the spice trees in certain i^arts ol' its East Indian jiossessions GO'2 EXCISE. has always been cited as an instance of the prompting of a narrow com- mercial selfishness, and Hnmboldt could give no stronger instance of the arbitrary tyranny of the Spanish government than its order to the Viceroy of Mexico to destroy the vines and olive trees which had been planted in that colony. Yet the first of these was certainly, and the second may possibly have been, not a wit more tyrannical than the pro- hibition which is still enforced by our own government against the cultivation of tobacco in the United Kingdom. It is not simply the legacy of a distant age, but the experiment of allowing its cultivation has been fairly tried and abandoned for fiscal reasons. In England, indeed, it was prohibited almost as soon as it had commenced, but in Scotland it was permitted down to the middle of the last century, and was suppressed on account of the difficulty of enforcing the payment of the Excise duty upon home-grown tobacco. Ireland still remained free in this respect ; but here again, as in the case of Scotland, as soon as the cultivation of tobacco assumed any large proportions it was pro- hibited by the government. It was finally suppressed by the Act 2, William IV., cap. 20, " the vigorous enforcement of which," says Mr. McCulloch, "notwithstanding the clamours it occasioned, was highly creditable to the government (p.238)." This prohibition is still made a matter of complaint by Irish politicians ; and as some parts of Ireland are well qualified for tobacco culture, it is much to be regretted that so poor a country should have been deprived of one chance of retrieving its fortunes. It does not appear why English officials should find it more difficult to levy an Excise duty on tobacco than their brethren in France, Avhere the culture of tobacco is permitted. Perhaps the real secret of the difficulty is the exorbitant height of the duty which, as it amounts in some cases to 500 per cent., holds out a great temptation to smug- gling, and as long as this temptation remains the revenue will always be defrauded, whether it is collected by Custom House or by Excise officers. All the inconveniences of indirect taxes are due to the desire of men in general to evade, by fair means or foul, every tax which they possibly can, and the difficulty in selecting the subjects for taxation of this kind is the same as besets the choice of direct taxes. If the general standard of morality were high enough to render it safe to trust the statements of merchants and travellers as to the amount of taxable goods which they brought into the country, all the delay and annoyance and and half the trouble which attend the establishment of a Custom House would be dispensed with, and duties on wine and tobacco would be as easily collected as the revenue of the post-ofl[ice. Taxation, however, must be made to suit men as they are, not as they ought to be ; and as, in point of fact, indirect taxes do more than direct ones to divert capital DI'TIER ON ^iTIMULAXTS. (]03 aud labour into channels where they would not naturally flow, and to dry up the sources of national wealth, they ought 'never to be resorted to when it is possible to raise a revenue by direct taxes. Duties on spirits and other intoxicating liquors find favour with certaiu sections of politicians, because they appear to combine the advantage oi" discouraging intemperance with that of yielding a considerable revenue. These two objects are quite incompatible, and it would be much better if financiers confined themselves to the proper function of raising a revenue without trying at the same time to improve the habits of the people. In order to raise a large revenue from an indirect tax, a mode- rate duty should be imposed on some article which is consumed by great numbers of people, and which is so popular with them that they Avill not consume less even when its price is higher. Intoxicating liquors are a very proper subject for such a duty, but when the desire of discouraging intemperance is allowed to affect the judgment of financiers the duty is raised to an exorbitant height, aud the falling ofi" in the revenue is supposed to be compensated by greater sobriety. The high duty leads to smuggling and illicit distillation, and the diminution in the amount of liquor which pays duty is gravely quoted, as if it showed that the people were actually drinking less. It is much like the belief attributed to the ostrich, that it is out of sight of its pursuers when it has buried its head in the sand. The list above quoted of manufactures in Avhich methyl- lated spirits are used is enough to show that diminished consumption implies anything rather than less drunkenness. In order that the minority who drink too much may be prevented from doing so, the majority who drink in moderation are made to pay more than their due, and the whole community is made to suffer from the increased cost of all articles in whose nianuiacture spirits are used. But even as regards the diminution of drunkenness such expedients always fail. It has been alnmdantly proved that no penalties and no taxes are sufficient to prevent those who want strong drinks from getting them, and that the more severe the law is made the more determined is the resistance opposed to it. When exorbitant duties have been imposed on spirits smuggling has been carried on on a large scale, and so well organised as even to defy the military force of the government, and it is only when moderate duties are substituted that snnigglingcan be kept witliin mode- rate limits. Even where the duty is paid it does not follow that it is made more dilficidt for drunkards to obtain drink, for ])eople of this class will part with anything else in order to get drink, and a high price may prevent them from getting other things, but not from getting the one thing of which it is sought to deprive tlieni. A high ])rice, moreover, encourages adulteration, and adulterated drink is more injurious, and 004 DUTIES ON STIMULAXTR. causes more drunkenness than what has been honestly made. Nor is it true that by making it difficult for the poor to get spirits we prevent them from drinking to excess, but, on the contrary, there is every reason to believe that if they were able to get as much as they wanted they would be less likely to drink to excess, than under a system which makes their opportunities few and far between. It has often been observed that the inhabitants of wine-growing districts are habitually sober, and Laing's account of Norway points to the same conclusion. Norwegian farmers are all allowed to distil on their own account, the duty on spirits is a very light one, and it is extremely easy for the labourers to get spirits whenever they choose. The consequence is not, indeed, that the Norv/egians are a sober people, but that they drink more regularly, and are not, like English labourers, unable to work for two or three days after they have received their weekly wages. Every one being able to distil for himself, there is little temptation to adulterate, and the people, being allowed to drink when they please, learn to control themselves, instead of suljmitting to the control of a paternal government. The practice pursued in Australia of entirely prohibiting the use of drink on the stations has a very injurious efl'ect on the shepherds, as it produces a craving for drink which leads them, when they get a holiday, to pass all their time at the publichouse, and to spend in a few days the savings of a whole year ; but as it does not unfit them for doing their work when they return, it is a convenient one for their employers. How much better it would be if the simple and rational system pursued in Norway were imitated in England and English colonies. Even if it should bring a little more drunkenness, such a result would be a light price to pay for the advantage of treating men as responsible beings. It is sometimes said that it is dangerous to trust for revenue to a tax on intoxicating liquors when the growth of temperance may at any time put a stop to their consumption. The opium-tax, which is levied in India, is sometimes objected to on this account ; but, in point of fact, a habit which has once taken possession of millions of men cannot be eradicated, except by a long and gradual process, and financiers will have plenty of time to devise some new tax before this class of duties ceases to be productive. C'hina is the principal market for Indian opium, and some dread is expressed lest the Chinese Government should prohibit its importation, in order to protect the interests of native opium manufac- turers. But the large extent to which the trade has now grown makes it very improbable that the Chinese Government would venture to brave the complaints Avhich any attempt to interfere with it would be sure to excite, and the resource of smuggling would still be open if importation were prohibited. As regards our own revenue, there is still less reason TITHES. GUf) to fear that a deficit will be caused by our depending- in part on duties ou stimulants. If tlie whole revenue Avere derived from this source, there might be some reason to fear, lest the falling- off in the consumption, such as actually followed the crusade of Father j\Iatthew in Ireland, should cause a serious deficit. But as this is not the ease there is every reason to expect that a deficiency under this head would be compensated by an increase under some other. The arguments on this point have been weU summed up by Sir Stafford Northcote. If there is a falhng off in the consumption it nnist be either because people cannot, or because they will not, buy stimulants. In the ibrmer case, it must be because they arc poorer, and, if so, all taxes, from wliatever source derived, will yield less; aud there is no peculiar danger in trusting to this particular source. In the latter case, it must be because people are becoming more sober ; and, if so, they will become more industrious, and the yield of all other taxes will be increased. The tax on corn, which is known as tithes, belongs to the same class as Excise duties, though its peculiar character entitles it to be considered by itself. The distinction between agriculture and manufactures, that in the former the producer does not know how much he will produce, while in the latter the exact amount of the product is known before- hand, makes a great difference in the matter of taxation. If a tax were imposed on corn which did not vary with the price, it would be very burdensome in years of plenty, and very light in years of scarcity, and the farmers would be kept in a constant state of uncertainty as to the amount which they Avould have to pay. This difficulty is avoided in the case of tithes by requiring farmers to pay in kind, that is to say, to give one-tenth part of their corn to the tithe-owner who is left to dispose of his share as best he can. The collection of such a tax necessitates the same kind of interlerence with the producers as Excise duties, and, as in their case, the mode of levying it has far more to do with its oppressive- ness than its actual amount. The late Sir. E inlay, whose letters in the "Times" afforded so valuable an account of the condition of modern Greece, pointed to the oppressive manner in which the tithes were levied as the chief cause which hindered the development of that unfortunate country. In order that the tax may not be evaded the government jire- vents the farmers from removing their corn from the fields until the collector has given permissi(jn, and no improved process is allowed to be introduced. 'I'lie actual destructiuii ol" corn w]ii(;h is caused by these vexatious restrictions is considerable, and (be check to the prosperity of the country caused by the prohil)ition of all agricultural improvements is disastrous beyond calculation. The irritation which the system of collection causes among the farmei-s is so great that the assistance diixcJ^ OUG TITHES. of soldiers is necessary in order to enforce it, l)ut as the tax yields a large revenue the statesmen of Greece have not yet summoned up courage to abolish it. It has never been contended that tithes have been as oppressive in England as they now arc in Greece ; but when they were levied in kind they were a fruitful source of vexation, and in Ireland, where the difficulty was aggravated by a difference of creed, it was found almost impossible to collect them from the tenants. As the farmers were obliged to pay more for tithes, according as their land produced more, the tax must have acted to some extent as a discourage- ment to industry. It would, indeed, cause a cori-espondiug rise of price, but in the case of an article whose price fluctuates so much as that of corn it must be often impossible for the producers to compensate them- selves at the expense of consumers. The loss caused by the payment of tithes is certain, while the gain fi'om a rise of price is only probable, and in many cases is never realized, so that it is no wonder that the farmers sliould regard the tithe-owners as interlopers, who intercept the reward Avhicli has l^een fairly earned by efforts to ■\\'hich they have not con- tributed. All the difficulties attending the collection of tithes have been removed by the system of commutation, which has now been carried out in almost all parishes, which substitutes a money payment, varying according to the average price of corn for payment in kind. As the payment does not depend on the produce of the particular land Avhich is charged with it, it in no way discourages industry ; and as it is based on the average of seven years, its variations are restrained within narrow limits. The tithe-owners have lost something by the change, for they do not now receive anything when waste land is brought into cultiva- tion ; but, on the other hand, they do not, as formerly, lose their tithes when cultivated laud is built over. Altogether, the system of com- mutation may be regarded as a most satisfactory settlement of a serious difficulty. The question respecting the incidence of tithes when levied in kind, now possesses little more than an historical interest, received much consideration fi'om Adam Smith and Ricardo. The former supposed tliat they fell Avholly on the landlords, because a tithe-free farm would fetch a higher rent than one which was subject to the charge. This, however, does not show that no part of the burden fell on the con- sumers. If the charge was an onerous one it would have the eifect of discouraging cultivation, and, in such a case, the price of corn might be raised, though, of course, a farm which was free from the charge would be better worth taking than one which was not. Ricardo, on the other hand, held that tithes fell wholly on the consumers, his argument being that, as they were imposed on good and bad land alike, the cost of pro- TITHKff. (iU7 ducing corn on the margin of culti^•ation was increased by one-tenth, and that the price of corn must therefore rise in the same proportion. This argnment wonld be conchrsive if the imposition of tithes made no diflFerence in the habits of the people, and if the same quantity of corn was produced from the same land as before, bnt it is hardly likely that no change wonld follow the imposition of such a tax. Although a rise in the price of corn does not diminish consumption in the same propor- tion, it does, to some extent, check it, and the effect of this must be to raise the margin of cultivation, and thus to reduce rents. Thus, part of the l)urden would be borne by consumers, who paid higher prices, but part would fall on landlords, who would receive lower rents. Senior, who devoted uracil thought to the elucidation of this subject,* contends that the effect of the imposition of tithes has been to diminish cultivation, and practically to keep back the population and ^\'ealth of the coun- try, and place it in the same position as if its geographical extent had been smaller than it is. As all waste land paid tithes when taken into cultivation, its reclamation was practically discouraged, and the production of food, to some extent, diminished ; but if there had been no such tax, the increase of population would have kept pace with that of food, the cost of which would have remained the same. AVhile, therefore, the immediate effect of their imposition was probably to raise the price of food, this cannot be regarded as a permanent burden on the consumers, since the increase of population would have produced the same result if they had never been imposed. In a country which has only recently been colonised, and where con- sequently hardly any land pays rent, it is difficult to impose any productive tax on the land, except by making it proportional to the produce ; but in a country where nearly all land yields rent it is much better to tax it according to the value as shown by the rent. By this means all interference with farming is avoided, and, if proper care be taken, the tax may l^e so adjusted as in no way to discourage landlords from applying capital to the improvement of their property. As agricultural produce is not all raised at the same cost, a tax upon it does not ^n-o- duce the same effect as one on manufactured goods, and there is not the same necessity lor compensating a duty on native produce by one on foreign imports. Senior, alluding to a tax now repealed, says, " If our present heavy tax on the domestic production of glass were nnl)alanced by any duty on importation all the English glass works would in time be abandoned. Or, if some of our glass works were free from the tax, and others subject to it, all those which were taxed would be ruined. * •' Pulilical Econoiiiy." 1th cdilioii, 1858. pp. 124-ti. 00^ TlTHEti. Uut the lands in England which are subject to the payment of tithes are not thrown out of cultivation by the competition of those which are free from that burden, or by the importation of the tithe-free corn and cattle of Scotland, or of the comparatively tithe-free produce of Ireland. The estates which are subject to tithes continue to be productive, they continue even to afford a rent, though the burden diminishes the pro- ductiveness and diminishes in a still greater degree the rent" (pp. 125-(;). There is, therefore, nothing inconsistent Avith the principles of Free Trade in allowing foreign corn to come in duty free while the corn- growers of this country are subject to this burden. Without going into the question whether foreign corn-growers are subject to equal burdens, it is enough to say that the charge imposed on natives does not prevent them from engaging in the business and competing with foreigners, and that it is only imposed on them by the government in order to provide for an expenditure which, whatever may be thought of its propriety, is engaged in for the benefit of its subjects, and for which landowners may be fairly called on to contribute. Whether foreig-n corn be imported or not this country will probably always depend in part on its own harvest, and the price of corn Avill always be high enough to make it profit- able to raise it on land which is subject to tithes and other charges. As long as this is the case farmers can have no reason to com- plain of partiality shown to foreigners by admitting their produce duty free. If the tithes have prevented some land from being farmed the loss has been incurred in order that the government might raise a revenue for a particular purpose, and all subjects must submit to some loss in order that this object may be obtained. The commutation of tithes has made so great a difierence in the mode of their collection that hardly any of the arguments which were applicable to the old system are applicable to the new. As the charge is now imposed only on land A\iiich Avas formerly subject to them, and is of nearly the same amount as Avhen the commutation Avas settled, varying only according to the price of com, they have now become a mere incumbrance on certain lands, to be regarded by the purchaser in much the same light as a mortgage. As land subject to a mortgage or an annuity would fetch less than similar land unencumbered, so tithe land fetches less than that Avhich is tithe free ; and the State has, as it were, constituted itself part owner of certain lands, and applies its share of the produce to its oAvn purposes. When it is decided to disestablish the Church of England the tithes should not be regarded as a tax on a particular class who ought to be relieved of the burden, but as a portion of the national domain which has been applied to one purpose and may justly be used for any other. If it be thought undesirable to retain the present mode of assessing the FINAXCIAL POLICY. 609 tax, some correspouding burden should be laid on tithe land, by taxing it in proportion to the rent. As so many of the taxes from which tlie revenue of the English GrOYernmeut is derived have been objected to, in the ]3receding pages, on various grounds, it may be thought that the argument serves rather to show how a revenue canuot, than how it cau, be raised. A practical answer is, it may be thought, supplied to all these objections by the simple plea that a revenue must be raised somehow, and that it is better to bear the ills 'we have than to fly to new modes of taxation, which may cause other ills which we canuot foresee. There is, no doubt, much force in this plea, and no one will suppose that the abolition of indirect taxes can be brought about except by a slow and gradual process. But in order that the means may be found for carrying out this, or any other change, the first thing to be done is to convince people that it is desir- able, and when this has been effected statesmen will be found capable of carrying the popular wish into practical effect. Already many duties, which once yielded a large revenue, have been abolished, and the English tariflf is wonderfully narrow in comparison with those of other countries. Mr. Leslie proposes that the duties on intoxicating liquors should be retained for the present, but as the trouble and annoyance of a Custom House system will endure as long as any duties are retained such a partial change would do very little for the relief of industry. There are three sources to which we may look to provide the means of dispensing with indirect taxes altogether. "We may reduce expenditure, we may obtain more from existing taxes, or we may impose new taxes of a direct kind. Very little can be expected from the first of these, as so large a pro- portion of our expenditure is devoted to the interest of the national debt, and to the maintenance of the army and navy, which cannot be dispensed with. There is, indeed, some reason to hope that the amount of the debt will l)e permanently reduced, but the reduction will be too small to allow of any great reduction of taxation. Measured in money, the expenditure under other heads is pretty certain to increase as the depreciation of gold continues, and as the increase of population and wealth makes a larger staff of officials necessary. There are, indeed, some functions which the government undertakes which might be much better performed by private individuals, but even if all these were abandoned there would still remain the necessity of spending a large revenue in protecting the people against domestic and foreign violence. The increased yield of existing taxes can be relied on with more confidence, as the revenue has steadily increased, in spite of the repeal of so many taxes, during the last ten years. Even if no change were made in our financial system, the natural progress of industry would increase the yield of the taxes, and 610 FINANCIAL POLICY. this might be expected to take place in a still greater ratio if trade and raannfactures were freed fr-om the trammels to which they are now sub- jected. No duties being levied on native or foreign products, there would be no reason for the government to single out certain places in which production or trade should be carried on. Every one would be free to make whatever goods he could dispose of, and to dispose of them in the place, time, and manner most convenient to himself and his customers. Many parts of the country in which it is not now worth while to make railways, or to set up work- shops, would become centres of trade and industry, and these would bring in their train the intelligence and education which fit people to produce wealth and enaljle them to bear taxes. There would not be a mere shifting of population and wealth fi'om one place to another, though even that would be a gain to the country, but there would be an actual removal of all the obstacles which now prevent improve- ments m so many branches of manufacture. While fi-ee play would be given to native enterprise the stimulus of foreign competition would be ever acting to force the more indolent producers to adopt improvements or abandon the field. Something, though not very much, may be set down for the effects which the example of England would produce on foreign countries. As long as duties are imposed on foreign products it is reason- able to expect that English goods will be taxed in foreign countries, and, though it by no means follows that the abandonment of the Custom House system by England would be imitated in foreign countries, it would at all events weaken the arguments in favour of retaining it. The partiality alleged to l^e shown to native distillers in the assessment of the English spirit duties is referred to in Germany as a reason for retaining protective duties on English iron, and the wine growers of Spain and Portugal urge in like manner that as the English wine duties are unfavourable to them, their governments ought not to make any concession for the benefit of English manufacturers. With the abohtion of import duties, all such complaints would cease, and if the practical example were sho^Ti of the possibility of raising a large revenue, without putting any obstacle in the way of trade, it could hardly fail to have some efFect ; and, even if no other government were bold enough to go to equal lengths, a great reduction in the number of articles liable to duty might be expected, and would be a great benefit to English producers. With the repeal of every duty some fresh outlet for English industry would be opened, and the capacity of the country to bear direct taxation would be daily increased. There, remains the third resource for filhug the gap created by the abolition of indirect taxes — namely, increased direct taxation. The chief difficulty in the way of raising the whole revenue FINANCIAL POLICY. Gil by direct means is that ot collecting taxes from tlie poorer classes. It is so mncli more easy to collect a few large sums from a small number of people than many small sums from a large number, that a system which admits of the easier couree being adopted naturally finds favour with financiers. It is, however, quite possible to establish a system of collect- ing direct taxes which will reduce the cost to a very small figure. Direct taxes on labourers would most probably be levied either on their wages or on their houses, and in the former case, their employer, and in the latter, their landlord might pay what was due fi-om a great number, and deduct the amount from their wages, or add it to their rent. The tax, although not immediately paid by them, would make itself felt as forcibly as one which was actually paid to tax collectors, and they would know exactly how much they paid, and why they paid it. It cannot be said that the labourers caunot bear direct taxes, for the burden which they now submit to when they buy tea and tobacco is quite as heavy as would be imposed on them if an equal revenue were raised by direct taxes. An increase of the Income-tax, in its present form, cannot be recommended ; for, though it is extremely productive, it leads to much evasion, fraud, and discontent, and inflicts as much annoyance on traders as the indirect taxes from which they seek to be relieved. But if some system like that employed in assessing the " Klasscnsteuer " in Prussia were adopted, by which incomes were divided into classes, taxed at different rates, some approximate equality might be obtained without the inquisitorial annoyance which our present system involves. There is still much to be done in the way of improving and equalising the taxes on succession to real and personal property, both of which, especially the former, would bear some increase. Something might be obtained by a higher tax on houses, and, speaking generally, the relief afforded to the taxpayers by the lower prices which they would have to pay for the chief articles of their consumption would make them both able and willing to bear much higher direct taxes than can now be imposed. The system of levying indirect taxes conceals from the people the amount which they really have to pay, Ijut when the veil is removed, and every one knows exactly what he is paying, the burden may seem heavier, but will, in reality, l)e much lighter. i; i\2 CHAPTER IV.-~NATION"AL DEBTS. NECESSITY OF NATIONAL DEBTS — METHODS OF FUNDING — REDUCTION OF DEBT. As nearly eTery tax which can be proposed is open to some objection^ and many which are actually tried are extremely injurious, it is natural that some attempt should be made to devise a plan for raising an extra- ordinary reyenue without resorting to fresh taxes. There are two Avays in which they may to a certain extent be done — namely, selling landed or other property belonging to the State, or by borrowing money from natives or from foreigners. Neither expedient can do away with the necessity for raising fresh taxes, but they both secure the object of raising a large sum without at the same time laying a heavy burden on the taxpayers. If the public domains are sold, the government loses the rents which they afford, and fresh taxes must be imposed to supply the deficit. There are a few cases in which this mode of raising money is a positive advantage to the country, for the management of public domains being generally worse than that of private estates, their transfer to pri- vate individuals or companies has the effect of rendering them more productive, and increasing the total wealth of the country. This course has been pursued by the Spanish Government during its recent struggle with the Carlists, and the effect has been that many of those parts of Spain not actually touched by the war have been quickened into industrial activity by the English and other capitalists, who have bought valuable mines which the goverment was unable to utilize. Such a com'se, how- ever, can obviously be only pursued for a time, and there are few countries where the public domains have not already been too much curtailed for much dependence to be placed on them in the time of need. It is, moreover, a short-sighted policy, as it makes the [government part with Avhat is always mcreasing in value, and might, if kept unimpaired, supply the whole, or nearly the A\hole of the revenue. The other course, that of borrowing, equally requires some increase of taxes, for no loan can be obtained for any length of time without interest being paid to the lender. But as the amount of the interest is very much smaller than that of the loan, its payment entails a much smaller sacrifice, and the system is naturally popular both with financiers and Avith taxpayers. As in the case of indirect taxes, this very popularity makes borrowing a dangerous expedient, and the mere fact that the NECESSITY OF NATIONAL DEBTS. .018 burden is not visible makes it easy for statesmen to incur expenditure which they might never have ventured upon if the taxpayers liad ])een able to see how much they were paying, and why they were paying it. It is needless to cite contemporary instances of foreign countries, where the system of borrowing, once commenced, has encouraged extravagance, which has ended, at last, in repudiation or bankruptcy ; but our own recent history furnishes a warning of the same kind. If, when the pro- posal was made to purchase the telegraphs, there had been no other way of raising the money than by imposing taxes to the full amount in the years over which the payment "^as spread, it is most likely that they would be still in the possession of private companies. But when it ^^■as known that the required amount could be easily raised by a fi-esh issue of consols, the interest on which, being confounded with that of the rest of the debt, attracts no particular attention, it was very easy for the ministers to persuade Parliament and the public that the profits of the concern would pay the interest on the loan. We have now to bear the burden of the interest, while the receipts scarcely do more than pay the working expenses, while any proposal to raise the charges for tele- grams, so as to make them profitable, is denounced as "retrograde." But as there are cases in which a great outlay is absolutely necessary, it is fortunate that there is a method of providing for it, without imposing so severe a burden on the people as would be necessary if the whole amount had to l)e raised by increased taxes. The principal, if not the only, case in which borrowing is uecessary, is where a country is engaged iu a costly war. Very little importance can be attached to the plea, that if the resource of borrowing were cut off nations would not engage in useless wars, or would conclude peace after a short struggle. When a people are engaged iu war the passions by which they arc swayed are hardly ever checked by financial considerations, and the difiiculty of borro^^aug tends not so much to prevent governments from contiiuiing the struggle as to make them use more unscrupulous and arbitrary measures in carrying it on, as is exemplified by the recent history of Spain. The expenses of the war in Navarre and Cuba have compelled the Spanish Govermnent to let the interest on its debt fall into arrear, and, in fact, to leave unpaid almost every claim which it could possibly evade ; but the determination of the Govern- ment to suppress both insurrections remains unshaken, and moucy is still found for supplying the armies with provisions and ammu- nition. The practice of funding is not the cause of wars any more than it is the cause of debts, l)ut without it wars would bo more disastrous, and deljts would be left unpaid. The question whether it is better in a particular case to raise a loan, or to obtain the required 614 NECESSITY OF NATIONAL DEBTS. sum by taxation, depends on the question whether the imposition of a new tax would impede the growth of tlie national industry, and deprive the people of much more wealth than the tax transferred to the govern- ment. The practice of raising loans in time of war is justified, because at such a time the people are impoverished by the interruption of the natural course of industry and trade l)y the closing of some foreign markets for their produce, and by the withdrawal of numbers of able- bodied men from productive labour. To impose a new tax is always a hazardous undertaking, and to do so on a large scale in time of war would be to cripple the resources of the country, and to make the peo]3le not more but less able to make head against the enemy. At such a time very little care can be taken to select proper taxes, and if this be not done the new imposts serve merely to cripple industry and to encourage smuggling, and thus at the same time to impoverish the people and waste the energies of the government in counteracting its own blunders. If the war be a costly one, a government which refrains from borrowing has hardly any other resource than that of levying contributions in kind from the inhabitants of the invaded districts, and the misery which such a system produces is far greater than what is caused by large loans, the interest on which is spread over a long series of yeais. Frederick the Great contrived to carry on the seven years' war without resorting to loans, but the condition of his people at the end of the struggle was far worse than it would have been had he followed the example set by England. One obvious advantage of the system of borrowing is, that it enables a government to derive assistance from foreigners, who could not be made to contribute if all the money were raised by taxes. It is well known that the United States, during the civil war, and the French, during their more recent war, were greatly aided by loans subscribed in London ; and the facilities Avhich are now afforded for the transmission of money from one country to another render it possible, and even easy for a government to get help of this kind from the people of the very country with which it is at war. When the whole loan is subscribed by natives the immediate advantage, though not so great, is still con- siderable. In whatever way the money is raised the loss to the country is the same, for it consists in the destruction of the provisions, ammuni- tion, buildings, and other things which war makes necessary, and in the employment of large numbers of men in unproductive labour. But though borrowing does not diminish the loss it spreads it over a larger surface by pledging the whole people to compensate, by slow degrees, the loss which a few individuals are content to bear. If the government, after raising a war loan, neglected to pay the interest, the eficct would be that the individuals who had subscribed to it would be made to bear the NECESSITY OF NATIONAL DEBTS. 615 whole expense of the war from which • they derived no greater benefit than the rest of their conntrjmen. Tlie payment of the interest is the compensation which the whole nation pays to those who have come forward in time of need, by allowing them henceforth to live wholly or partially at the expense of their fellow-citizens. The system thus creates a body of nnproductive consnmers, Init such a class is sure to exist in a country where labourers have enough strength and skill to support others besides themselves, and the burden imposed on the productive classes is less than they would have had to bear if no loan had been raised. "When the whole of the interest of the national debt is due to natives it is obvious that it makes no difterence to the wealth of the country whether it is paid or not, and that repudiation, scandalous as it would be, would merely transfer a cer- tain amount of property from a part of the nation to the whole. The amount of the national debt camiot be reckoned as a part of the nation's wealth, for it is simply a sign that a certain portion of it has been assigned to certain creditors, and to suppose that its existence shows an increase in the wealth of the country would be as absurd as to sup- pose that a parish is enriched when one of the landowners mortgages his estate. If part of the interest is due to foreigners, repudiation Avould, of course, increase the wealth of the country, by relieving it from a Ijurden, but there would be no addition to the wealth of the world. It has been urged that the practice of raising loans, the interest on which is to be paid in perpetuity, is wrong, because it imposes a burden on posterity, which the present generation has no right to call on them to bear. But, in fact, when a loan is raised for the purpose of carrying on a just war, it is quite as much for the sake of posterity as for that of the present generation that the sacrifice is submitted to. The present generation sacrifice their lives, and they may fairly call on posterity to submit to some sacrifice of money, A\'hich is the only way in which they can contribute to the common object. It is not the generation which fought under Grant and Sherman, but the children now growing up in the Southern States, and the emigrants who will hereafter settle in America, who will reap the full l)enefit of the anti-secession war ; and they can have little right to complain if, by paying double taxes, they can be admitted to the fruits of that momentous struggle. As a mere question of money, it must be borne in mind that what justifies recourse to loans is the difficulty of raising fresh taxes without shackling pro- duction, and that if posterity have to pay the annual interest they have been enabled to keep unimpaired the capital and industrial appliances, which afffjrd the means of providing for the payment. "When a govern- ment raises a loan, for the purpose of carrying on a railway, or any other (516 NECESSITY OF NATIONAL DEBTS. industrial undertaking, it simply does what private capitalists do in like circumstances ; and if a proper selection be made, the profits of the concern will pay the interest on the loan, and no burden be imposed on the taxpayers, whether present or future. It is, however, unusual and difficult for a government to make a good selection, and it would be well for many foreign countries if their rulers would cease from making the attempt. The phrase, so common in prospectuses, of " developing the resources " of a country, is nowhere more delusive than when it appears in the speech of a minister proposing a new loan, which is almost sure to develop a deficit, while leaving the resources of the country in much the same state as it found them. Such loans impose a burden on posterity, without doing any good to the present generation, and it would be well if statesmen would understand that if the resources of a country cannot be developed by private enterprise it would be better to leave them undeveloped. Unwise as it is to raise loans for such pur- poses, there is another class which are even more foolish and injurious — those which are raised in time of peace, simply in order to make np for a deficit. It is often absolutely necessary that a government should borrow for some temporary emergency, when the revenue has not come in as fast as was expected. But when this happens fi'esh taxes ought to be imposed, in succeeding years, to pay off the debt. But to raise a permanent loan, in order to supply a deficit, is as useless as it is for an individual Avho lives beyond his income to supply his wants by boiTOW- ing. Not only is the deficiency increased in succeeding years by the amount of the interest of the loan, but the practice, once indulged in, is sure to be carried further, and no effectual attempt at economy can be made while such a resource is open to improvident financiers. The recent history of Turkey and Peru is enough to show how futile are all such attempts to evade the necessity to which governments and indi- Tiduals must submit, of keeping their expenditure within their income. But the mere fact that the system is liable to abuse does not show 'that there are not cases in which it may be used with advantage, and resorting to it, in time of war, is often the only way of saving a country from very severe disasters. There is another plea which is sometimes put forward in favour of main- taining a national debt, which, although not altogether unfounded, will not bear serious examination. When the credit of a government has been established by punctual payment of the interest on its debt for a long series of years, the funds come to be regarded as the safest of all investments, and it is so useful to have some stock in which such general confidence is placed that it is sometimes urged that it would be vrorth while to main- tain a national debt, even if the government were able to dispense with NECESSITY OF NATIONAL DEBTS. 617 it. McCuUoch goes so for as to admit tliat it is difficult to see how the trades of banking and insurance could be carried on unless the compa- nies engaged in them were able to invest in the funds some of the money which they may at any time be called on to pay. As for the practical question, it is enough to reply, that banking and insurance were carried ou with success in the United States during the period of 183G-60, when that country was free from a national debt. But, even granting that if our national debt were paid off, there would be no suitable investment for the spare funds of banking and insurance com- panies, the worst result that could happen would be that they would have to keep a larger store of gold and notes, and would pay lower dividends than at present. It is not tlie business of the government to see that these trades are carried on at a profit, and if the customers were made to pay more for the accommodation they receive they would have at the same time to pay lower taxes. But, in fact, there is every reason to believe that if the national debt is ever paid off some other fund will be provided which will serve this purpose. As its amount is smaller now than it was sixty years ago, it is obvious that much of the work which it formerly did must now be done by other funds ; and it is well kiiOA-STi that trustees have largely availed themselves of the gTeater latitude which is now allowed them in the choice of investments. What is it after all that makes tlie funds such a safe investment ? It is the certainty that whatever misfortunes may overtake particular trades, or particular parts of the country, the industry of the whole country will produce enough to meet a certain fixed charge, and that the people will 1ie lionest enough to keep their pledged word. Private companies are quite able to give equally solid guarantees, and if there were no public funds to supply the want, it might, and probably would, be done by some of the principal companies acting singly or in consort. It may be looked on as certain that the principal railway companies, whatever their success iu parti- cular years, will always earn much more than their working expenses, and a first mortgage on one of these lines, the interest on which would take precedence of every other charge, might be regarded as a perfectly safe investment. Already the leading lines are able to borrow money at 4 per cent, by means oi" debentures, and a purchaser of Bank of England stock receives less than this percentage on the money invested. If the transfer of debenture stock were made, as it might easily be, as cheap and easy a. per cent, stock, and crediting the subscriljcr with twice as large a sum as he actually advanced ; and the Government precluded 620 METHODS OF FUNDING. itself from reducing the interest ; unless it could offer the holders the repayment of this larger sum. Thus the nominal amount of the debt was doubled, stock being issued at 50, which has since risen to more than 00, and the government is precluded from reducing the interest. It might, indeed, and often does, purchase its o\\m stock below par, and cancel it, but even when it does so the price is so much above that at which it was issued that the taxpayers are made to repay more than was ever received. The nominal amount of the English debt is one- third more than the actual amount received by the Government, and the permanent addition thus made to the taxes is no inconsiderable burden. A similar system has been pursued in France, the latest instance being that of the loan raised, in 3 872, to pay off the war in- demnity. France had not then recovered from the eflFects of the borrowing which had taken place during the war, and even if there had been no recent loans, the issue of one for three milliards would have been enough to raise the rate of interest. Instead of being able to borrow at 4^ per cent., the French Government was obliged to pay six, and the best course, in such circumstances, would have been to issue a 6 per cent, stock at par ; or, at least, but little below it. Instead of this, a 5 per cent, stock was issued at 84, and the consequence is that whenever it is paid off the government must return 100 francs for every 84 which it has received. The price of the stock rose to par within three years from the time of its creation, but the tax- payers derived no benefit from it. Had a 6 per cent, stock been created it would by this time have been possible to redeem it by a new stock, bearing interest at the rate of 5 or, perhaps, even 4J per cent., and a saving would have been effected of one-sixth or a quarter of the interest, which, on so large a loan and in so heavily taxed a country as France, would have been a gain of no slight magnitude. It is objected that to issue a stock at par is to deprive those who invest in it of the advantage to be gained from a rise in the price, and that stocks issued in this manner would not be so readily taken up. There is no doubt some force in this objection, but, in point of fact, there must always be room for some fluctuations of price, even when it is known that the stock may be redeemed at par. The French G per cents., and more recently the 5 per cents., did rise above par, although it was well kno^Mi that both of them might be redeemed, as the former actually has been. The Government cannot well undertake to redeem a stock unless it is able to raise a fresh loan at interest at least a half per cent, lower, and the price must rise 5 or 6 per cent, above par before such a step can be ventured upon. There would, moreover, be no harm in issuing a stock at one or two below par, and thus allowing some chance of profit to those who are REDUCTION OF DEBT. 621 not content with high interest. Even if it were necessary to pay an additional quarter or half per cent., in order to place the whole loan at par, such a temporary loss would be far outweighed by the advantage of bemg able to reduce the interest as soon as the particular emergency was passed. The point to attend to is that those who advance money to the government in time of need make a temporary sacrifice, and that care should be taken that they only receive a temporary reward. By issuing a stock bearing high interest, and subsequently replacing it by others bearing lower interest, the government pays in time of need as much as the lenders can exact, and, as soon as the emergency is over, gains the full benefit to which it is entitled by its character for stability and honesty. Although experience has shown that the best course for a. government to pursue, in raising a loan, is to sell perpetual annuities, it by no means follows that no attempt should be made to reduce the amount of the debt, English financiers have, indeed, never lost sight of this object, although their attempts at reduction have not yet produced, and are not likely for a long time to come to produce, much effect. The same reasons which make it desirable to incur a debt aj^ply wdth more or less force against all attempts to reduce its amount. Borrowing is resorted to in order to avoid the necessity of imposing taxes, which interfere with industry ; and to impose injurious taxes, in order to pay off the debt, would be to shackle production in order that at some future time it may be left unshackled. The unpopularity which attaches to every proposal for a new tax makes it extremely difficult for one to be imposed for the sake of so remote a gain as would be derived from a future reduction of taxa- tion ; and hence it is generally found that the eagerness of the people to reduce the debt soon melts away after a few years' experience of heavy taxes. Thus, immediately after the termination of the American civil war, the Federal Government made astonishing progress ui reducing its debt ; but after six or seven years of peace the impatience of the tax- • payers became too powerful for the government to resist, and it has since almost confined its attention to the reduction of the interest. There is every reason to believe that every country which now possesses a con- sidcraljlc debt will continue Ijurdened with it, if not for ever, at least for as long a period as it is possible for the present generation to look Ibrward to. Some of the attempts which have been made in England and France to reduce the debt have been better calculated to inveigle the public into a beUef that a great reduction had been cflected than to confer any real benefit on the taxpayers. If the debt is to be really reduced, a sum must be taken out of the surplus of revenue over expen- diture, and employed in paying off the fundholders, or in purcht^sing 622 REDUCTION OF DEBT. stock on wliicli no further interest should be paid. Where this course is adopted, the amount of the debt is really reduced, and the surplus of succeeding years is increased by the diminution of expenditure under the head of interest. But the scheme which was devised by Dr. Price, and carried out by Pitt, was an attempt to make a single payment do the work of twenty. Commissioners were appointed, who were first credited with a sum of money to l)e invested in the purchase of stock, and were then ordered to employ the interest in further purchases, and it was supposed that the whole amount of which they thus became possessed was subtracted from the total of the debt. It is clear, however, that by reinvesting the interest no greater reduction of the debt is eflected than would have been if the amount originally purchased had been immediately cancelled. The taxpayers got no relief, for the interest on the stock held by the commissioners was as regularly paid as that on the rest of the debt, and the expense of the office was, of eourse, defrayed out of the taxes. When the system was abolished some relief was obtained, for the payment of the interest was discontinued, but this might have been done quite as well if the stock had been cancelled in the first instance. A somewhat similar system, though, perhaps, even more absurd, was carried on in France under the second empire. A very large sum, about 200,000,000 francs, was paid over each year to commissioners for reducing the debt, but as the revenue did not afford any such surplus the Government was obliged to borrow money to defray its expenses, and it borrowed from the commissioners, who were thus professing to reduce the debt while they Avere really filling up an artificial deficit created by a payment made to them ; thus the govern- ment lent with the right hand and borrowed with the left, and it is unnecessary to say that such a system is not only useless, but wastes the taxpayers' money in keeping up the office which carries it on. The system which is still pursued in England, although not so absurd as the two which have just been described, is yet arranged so as to appear more advantageous than it really is. It is provided that a quarter of the surplus revenue of each year shall be paid over to the commissioners for the reduction of the national debt, -who are to invest it in stock, which is thereupon to be cancelled. In order that such a system may be properly carried out, the surplus ought to be ascertained at the end of each financial year, and a fourth part of it should then be paid over to the commissioners. But, instead of this, the accounts are balanced once in three months, and the commissioners are credited with a quarter of the surplus of the preceding twelve months. If the revenue came in, and the expenditure continued at the same rate all the year round, it would not matter whether the accounts were balanced once a quarter or REDUCTION OF DEBT. 623 oiice a year ; but there is much h-regularity under both these heads, and the consequence is, tliat if the commissioners received all to which they are entitled there would be a deficit in some quarters,' which could not be made up by the superabundance of others. It has accordingly been provided by a later x\.ct that the Treasury may suspend the operation of this sinking fund whenever the state of the revenue requires it, and this power is constantly exercised. Still, however, the amount transferred to the commissioners is published every quarter, while the order of the Treasury, which prevents them from applying it, is not published, and the public are misled into the belief that a larger reduction of the debt has taken place than is really the case. As the great difficulty which besets all attempts to reduce the debt is the unwillinguess of the taxpayers to submit to a present sacrifice in order to avoid the necessity of a future sacrifice, financiers are obliged to resort to various expedients in order to make it appear that the persistenqe in a particular plan of reduction is required by public fiiith. AVheu the method adopted is that of drawing a certain number of bonds every year and paying them oflF, there are the bondholders who have invested their money on the understanding that their bonds will be drawn at some time or other, and financiers can refer to them as persons who would be injured, if the process of cancellation were stopped. As, however, the difficulty can be met by the issue of a fresh loan, the adoption of such a system does not secure the imposition or retention of taxes for the purpose of reducing the debt. The system of devoting a portion of the surplus of each year to the purpose does not produce much effect, because, whenever the surplus is large, the taxpayers naturally wish to benefit by the abolition or reduction of taxes. It is of little use to enact that a certain definite sum shall be set aside every year for the reduction of debt, because, whenever it is necessary to impose fresh taxes, it is at once suggested that the necessity may be dispensed with by stopping the process of reduction. Nobody is entitled to have his stock paid oflP, and nobody therefore loses, when the process is stopped ; while the taxpayers gain by l)eing spared the imposition of fresh taxes. It is thus that all attempts which have been made in this country to set aside a definite sum to the reduction of the debt have been abandoned as soon as any financial difliculties have arisen. The last instance in wliich Mic attempt Avas thus abandoned, was immediately after the Crimean \\ar; but, in spite of such recent experience, Sir Staffi)rd Northcote, the Chancellor of the Exchequer, induced Parliament, in 1875, to agree to another, by fixing a certain sum to be paid every year towards the interest and extinction of the debt, more to be applied to the latter object, as less was wanted for the former. It was pointed out by Mr. Gludstoue at the 624 REDUCTION OF DEBT. time that all such attempts had failed, on account of the impossibility of binding future Parliaments ; but the Chancellor and the House deter- mined to make the experiment once more, though Mr. Disraeli admitted that an exceptional case might arise in which it would be proper to abandon it. Looking at the experience of the past, it is to be expected that such exceptional cases certainly will arise, and that, when they do, the Parliament of that day will act as its predecessors have done. It must be admitted, however, that the system which Mr. Gladstone has car- ried out with so much success differs very little from that of Sir Stafford Northcote, and was very nearly shipwrecked on the same sand-bank. His system consists in exchanging consols for a terminable annuity, paid to commissioners, who are bound to set aside a certain sum every year for the purchase of stock. The difficulty of exchanging consols for a terminable annuity is avoided by using the money deposited in the post- office savings' banks, while the depositors are protected from loss by the setting aside of a portion of the annuity. Under this system, as under that of Sir Stafford Northcote, there is really no one who would be injured if the payment were stopped, and it was not without difficulty that Mr. Gladstone contrived to save it on the first occasion when an increase of taxation was required. Its only merit is that it presents the appearance of a claim on the part of certain creditors, but this ajDpear- ance is strong enough to have preserved the system in operation for many years, and there is every reason to believe that it Avill survive that which has been revived by Sir Stafford Northcote. It may be hoped that as the wealth of the country increases the taxpayers will be more inclined to submit for a time to moderately heavy taxes for the sake of obtaining the much greater relief wliich a great reduction of the debt would bring them, and that it will not be necessary to resort to any disguise to induce them to do so. The desirableness of reducing the debt, if it could be done, v^ithout any great sacrifice, hardly needs to be further pointed out. Every tax inflicts some loss on the people beyond the actual abstraction of so much money from them, and the relief Avhich would be afforded by paying off the whole, or even half, of our national debt would be enormous. There is, however, a plu-ase, which has been frequently used by Mr. Laiug-, which implies that reduc- tion is in itself undesirable. Instead of applying money to this pur- pose it would be better, he tells us, to leave it "to fructify in the pockets of the people," He seems to think that those fund-holders Avho were paid off Avould not make their money fructify, though why this should be assumed is by no means apparent. Those who have invested in the funds are not the class of people who waste their money or allow it to lie idle ; and if they were paid off they KEDUCTIOX OF DEBT. 625 would take care to liud some other investment wliicli ^Yould fructify, as far as they were concerned. Perhaps Mr. Laing thinks that it is unwise to employ, in paying off a loan at S per cent., money which, if employed in business, will yield 5 or 10 per cent. ; but the reduction of the debt does not imply that any such losing process would be carried on. The capital which is represented by the amount of the debt has been already destroyed, for it was consumed in maintaining our fleets and armies, when the debt was contracted. Whatever may hereafter be paid to the fundholders will not be so much capital withdrawn from production, but will simply be taken fi-om the large surplus which is annually produced beyond what is required to maintain production in full activity. The reduction of taxation, which would follow on the extinction of the debt, would remove so many obstacles to trade and industry that the capital possessed by the people would fructify even more than it does at present. UNIVERSITY OF SOUTHERN CALIFORNIA Ll^ilARY INDEX. INDEX. Africa, trade conducted by exchange of presents, 252. Agi-a, stoppage of bank of, 465. Agricultural wages, table of, 20i. Alabama, price of wheat in, 110. Albv, M., protection, 52.3. Algeria, cost of, to France, 415. America, commerce of, 27. Division of estates in Southern States of, 88. Dearness of cotton caused by civil war in, 108. Productiveness of land in, 109. Rate of discount in, 177. Price for waste laud in, 194. Cause of higher wages in, 208. Cheapening of silver after discovery of, 292. Double standard in, 297. Crisis in, 1873, 402. American Government, reduction of debt, 621, Amsterdam, bank of, 32G. Anderson, Dr., cause of rent, 188. Anderson, Sir James, telegraphy, 183. Ansell, Mr. G. F., private and public mints, 267. Automatic balance, 268. Aristophanes, double standard at Athens, 299. Aristotle, money desired in order to be exchanged, 12. Prejudice against retail dealers, 29. ileaniug of stamp on coin, 263. Proposed suppression of trades- men, 258. Condemned usury, 436. Arnold, Mr. M., efficiency of chemists of Germany, 45. Arrian, population of Tyre, 75. Athens, double standard at, 299. Australia, importation into, 25. Effect of gold discoveries on value of gold, 114. Rent in, 194. Commerce of, 224, 253. Rise of wages in, 276. Gold of, coined in England, 279. Seigniorage in, 283. Effect of protective tariff in, 413. Gold of, sent to England, 512. Production of wine in, 526. Australia, South, rate of wages in, 156. Impoverishment of soil in, 510. Austria, trades' unions prohibited in, 249. Privileged bank of, 377. Babbage, advantages of division of labour, 31, i.lO ; of machiney, 37. Hostility to machinery in Rhenish provinces, 52. Reduction in price of bed-screws, 108. Rate of profit, 165. Pa^ehot. Mr., profits of English banks, 180. Use of credit in England, 316. Joint stock banks, 367. Position of P.ank of England, 381. Baird, Mr. H, Carey, protf.'ction in America, 513. Monopoly, 519. Bank Act of 1844, 274. Bank of England, inconvertibility of notes of, 3, 17, 101, 345. Dividends of, 162. Sovereigns weighed at, 266. Purchase of bullion, 278. IV INDEX. Bank, London and Westminster, 366. Bank, National and Provincial, issue of notes, 330. Barbadoes, trade of, 388. Bartley, Mr., out-door relief, 548. Baxter, Mr. Dudley, table of rates of interest, 441. Belgium, peasant proprietors in, 86, 103. Bentham, uselessness of usury laws, 440. Berlin, rise of builders' wages in, 207. Bessemer, Mr., Bessemer rent, 19.5. Bilbao, iron ore imported from, 114. Trade of, 395. Birmingham, reduction in price of bed-screws, 108, 111. Blanc, M. Louis, remarks on over-production, 25. Bohemia, wages in, 234. Borneo, laziness of inhabitants of, 24. System of fallows in, 43. Bosanquet, Mr., bank notes, 350. Bowen, trade of Barbadoes, 388. Brassey, Mr., paid labourers in bank notes, 325. Brassey, Mr. T., cost of railway construction, 155. Rise of wages, 205, 206, 233. Demand for labour, 208, 236, Trades' unions and wages, 227. Foreign competition, 529. Brazil, railways in, 41. Gold standard in, 294. Bremen, commerce of, 27. Briggs, industrial partnership, 247. Buckle, rate of profit, 166, 169. Buenos Ayres, opening of trade with, 25. Burke, denunciation of assignats, 343. Depreciation of assignats, 378. Bm-net, Bishoj), state of poor law in Scotland, 547. Burnett, Mr., wages of engineers, 155. Cause of Newcastle strike, 241-. Caird, Mr., rates of wages, 203. Lowest wages in England, 208. Labourers' wages, 214. Impoverishment of soil in Dui-ham, 510. Cairnes, depopulation of Ireland not due to famine, 81. Definition of supply and demand, 126. Examination of Mr. Thornton's theory of the wages fund, 143. Slave labour, 181. Rent in Australia, 194. Effect of Australian discoveries, 210. Fall in value of gold, 219. Commerce of Australia, 224, 253 ; of Cali- fornia, 224. Foreign trade, 388. International values, 407. Effect of corn laws on Ireland, 499. Protection in America, 518. California, quicksilver mines discovered in, 114, 129, 217. Bate of interest in, 177. Wages of miners in, 209. Commerce of, 224. Rise of wages in, 276. Cambridge. College rents based on price of wheat, 260. Cardiff, trade of, 394. Carey, Mr., rise of rent, 196. Fxee trade in banking, 357. Defence of protection, 607, Carlyle, Mr., paternal government, 7. Carolina, direct trade with, 258. Cazenove, Mr. J., definition of value, 93, 95. Chalmers, Dr., margin of cultivation, 116. Chaptal, calcxilation of produce^of Franco, 77. Cherbuliez, M., markefprice, 125. Uncertainty of success in a profession, 153. Cause of fall of profit, 172. Gold less variable than silver, 292. Free trade in banking, 359. International. values. 406. IXDBX. V Chevalier, M., recommends adoption of silver standard, 207. Value of gold, 21."). Change in value of precious metals, 218. Proposed to lower nominal value of gold coin, oOo. Gold standard, 30."). Proposed new system of coinage, -131. Commercial treaty between England and France, 505. Chili, gold standard in, 294. China, stationary state of, 41. Increasing population of, 67. Silver the medium of exchange in, 256. Silver ingots used in, 261. Silver standard in, 295, Carolus dollars used in, 308. Bank notes in, 328. Trade with, 389. Commerce of, 394. Chubb, Mr. Hammond, defence of Bank Act, 372. Cobden, supported Bank Act of 1844, 357. Code Napoleon, effect of, on estates, 87. Comte, impotence of Political Economy, 4. Objection to method of Economists, 6. Paternal government, 7. Considers Political Economy to be in meta- phj'sical stage, 69, 99. Conway, Mr. M. D., labour notes in " Modern Times," 123. Cork, Mr., exports of Australia, 400. Corn laws, account of, 78. Cornwall, co-operative tin-mines in, 249. Cotton, Mr., automatic balance of, 37. Creuzot, rise of wages at, 206. Crossley, Messrs., firm of, converted into joint-stock company, 248. Crump, Mr., panic in 1873, 380. Stock Exchange speculation, 463. Davies, Sir Jonn, export of silver from China, 217. Demerara, rate of wages in, 182. Denmark, gold standard in, 295. De Quincey, value, 89, 90. " Value of labour," 102. General rise of values, 104. Diodorus Siculus, population of Western Asia, 74. Disraeli, Mr., sinking fund, 624. Dorsetshire, wages in, 154. Inefficiency of labourers in, 190. Duff, !^Ir. Grant, foreign investments, 308. Dun, Mr. J., Bank Act, 384. Dunning, Mr. , trades' unions, 240. Durham, impoverishment of soil in, 510. East India Company, censured for exporting silver, 10 ; for importing silk goods from India, 11. Egypt, population of, 75. England, commerce of, 27. Rate of profit in, 176. Wages lower than in United States, 208. Gold standard in, 291. Standard of gold in, 423. National debt of, 443. Export of coal from, 596. Prohibition of tobacco culture in, 602. liaising of loans in, 619. Reduction of debt, 621. English debt, 020. Fane, Mr., rise of wages of French labourers, 206. Farr, Dr., inconvertible p.aper money, 344. New system of coinage, 434. Fauchcr, Ibjrr .J., Prussian tariff, 522. Duty ou spirits, 601. Fawcett, Mr., definition of capital, 47. '• Demand lor labour," 55. W.ages in Australia, 175. Value of gold, 200. Power of trades' unions to raise wages, 2 in. V(>Y<''.C>. Rate of interest in, 178. Rent in. 198. Changes of slandard in, 21"). Silver tlie medium of exchange in, 2.")(i. Silver standard in, 21»1, 21)."). Commerce of, 394. Indian Government, railways guaranteed by, 018. Ireland, effects of conversion of arable land into pasture, 53. Population of, dimi- nishing, 54, 80. Large emigration from, 72. Bank notes in, 325. No privileged bank in, 3(55. Absenteeism, 395. Effect of foreign competition on, 410. Converted into agricultural country by the corn laws, 499. Prohibition of tobacco culture in, 602. Italy, Ancient, population of, 75. Paper currency in, 345. Issue of small notes in, 370. Jevons, Mr., definition of capital, 47. •• Demand for labour," 55. Value, 89, 94. Utility, 128. Mathematical theory of Political Economy, 131. Capital, 141. "Wages fund, 144. Cause of profit, 158. Condemns Ricardo's theory of profit, 170. Worn coins,. 2G7. Quantity of coin, 275. Necessity- of r£-coinage of gold, 285. Coal, 410. Cost of management of the telegraphs, 561. Export of coal, 596. Japan, ratio of gold to silver, 130, 218. Oblong coins used in, 262. Jay, Cooke and Co., failure of, 364. Jeft'ery, Mr. W. S., difference of coinage in different countries, 419. Jones, Rev. R., balance of bargains, 11. Efficiency of English labour, 31. Justin, military force of Greece, 75. Kennedy, Mr., price of gold in Queensland, 280. Effects of gold discoveries in Queensland, 458 King, Lord, letter to his tenants, 3, 352. Kiuuaird, Lord, demanded enquiry into the management of the mint, 268. Labour notes, used in '• Modern Times," 123. Laing, Mr. S., reduction of debt, 624. Lancashire, wages in, 154. Lane, Mr., population of Egypt, 75. Lavergne, M. Leon de, complains that the French Revolution retarded agriculture, 48. Rambouillet breed of sheep, 61. Large estates in France, 88. Rise of wages, 206. Cost of Algeria to P' ranee, 415. Lea, Mr., working of railways by Government, 560. Leclaire, M., industrial partnership, 250. Leslie, Mr. Cliffe, effect of gold discoveries, 201. Fall in value of gold, 207. Customs duties, 591. Tobacco duty, 595. Excise system, 591t. Duties on stimulants, 609. Levoi.sier, calculation of the produce of France, 77. Liverpool, liord, seigniorage, 283. Ratio of gold to silver, 297. Double standard, 301. Locke, quantity of money re