MODERN ECONOMIC TENDENCIES SIDNEY A. REEVE MODERN ECONOMIC TENDENCIES MODERN ECONOMIC TENDENCIES An Economic History of America BY SIDNEY A. REEVE NEW YORK E. P. BUTTON & COMPANY 681 FIFTH AVENUE COPYRIGHT, 1921, BY E. P. DUTTON & CO. All Rightt Reserved I Printed in the United Staffs of America, TO THE MEMORY OP i PREFACE IN a work portraying economic evolution from a time genera- tions in the past down to the latest practicable moment, in order to form a basis as accurate as possible for predicting the future, it is important to know the date of actual writing. The procession of events during the last six years has altered so drastically, and has transformed so many times, the complexion of public opinion, that words must be interpreted in the light of the date of their utterance. This book was begun in the winter of 1912-13, as soon as the data from the census of 1910 had become available, and some portions remain unchanged since then. On the other hand, some statistical features have been brought down to the fall of 1917, with views in the text to correspond. During 1918 and 1919 the diction of the entire book was revised, and in the latter year the order of chapters was shifted. Occasional foot-notes or paragraphs were added which carry with them evidence of their later date. But, since it was manifestly impossible to bring the entire book into consistency with the viewpoint of these later years, unless it were to be entirely rewritten, care was taken to preserve all of the sentiments of the book in substance as they had been written in 1917 or before. The subdivision of the book into four Parts, namely, Back- ground, Economic Principles, Data and Social Reactions, was an afterthought. Each of these four parts comprise references to all four of these topics. In essential, the structure of the book remains that of a history of American economic evolution from early in the nineteenth century down to the entrance of this country into the Great War of 1914. As to the huge economic changes wrought by the war itself, then not only unfinished but regarded by many as hanging precariously in balance, barely an attempt at their in- clusion has been made. The still more significant changes which have occurred since the armistice of November, 1918, are vii Vlll PREFACE represented only as sheer predictions, made from the basis created by the book for that purpose. So far as these latest changes have proceeded they corroborate not only the predictions made in the book, but the principle on which those predictions were made, namely, history's repetition of itself. The results of the Great War in matters economic have been a close parallel with those resultant from the Civil War, and from the Spanish War of 1898, except that all scales of magnitude have been increased. But, just as those basic economic tendencies which this book reveals as having proceeded steadily ever since long before the Civil War, and continued down to the latest moment, with a scarcely perceptible waver in deference to either that war or the war of 1898 with accelera- tion, indeed, by each of those wars so it is only natural to remark now how slightly this path of social evolution has been altered by even the Great War of 1914, except in its accelera- tion thereby. We have no excuse for doubt as to what is coming. The material embodied in this book was originally collected to form only the first volume of a two-volume work. But it has so expanded in amount and importance during its preparation, and the doubt as to when the second volume might be completed has become so great, while the urgency of the times for remedial information has become so intense, that the second volume will appear later under an independent title: "The Evolution of Social Crises/' Its task is to trace the growth of social crises of the past, in other lands as well as our own, as another step toward the formulation of a natural science of cause and effect in social evolution. For our possession of such a science would equip us for the prediction of all future crises before they become acute ; and with accurate prediction their violence might be much softened, even if they might not be altogether prevented. The chapter of the present book upon Unemployment also comprises some allusions to the author's past work in the field of thermodynamics and energetics, as set forth in his volume entitled: "Energy" (1909), from which viewpoint all prob- lems in sociology must be stated if they are ever to receive accurate solution. This correlation of the natural energetic sciences into a circle destined to be crowned by their highest development of all, sociodynamics, has already been mapped out and partly committed to paper, to form later a separate work entitled: "The Elements of Social Energetics." It is as a PREFACE IX foreshadowing of this later work that some of the technical passages in this present book can be better understood. The author wishes to acknowledge the invaluable assistance of Mr. W. W. Harris, formerly city-editor of the New York Tele- gram and Evening Sun, in guiding the manner of presentation of so technical a subject as social evolution, so as to be accept- able to the largest number of readers. But it would not be fair nor correct to make Mr. Harris responsible for any of the specific and somewhat radical views set forth herein, however he aaay be in sympathy with their general tenor. This book represents what the author believes should have been the major duty and official business of the entire profession of economists and sociologists during the last quarter-century. It was during the winter of 1889-90 that the author, instigated by reading Henry George's "Progress and Poverty" and Edward Bellamy's "Looking Backward," and having just reached the age of interest in public affairs, perceived the striking crudities of the commercial system as the one crucial problem destined to form the nucleus around which the next generation of prog- ress must gather shape. So vast are the aggregates of human effort involved in this question that it was to him indubitable at that time although then one saw the >word socialism in print not twice a year that those men who were busying themselves with the formation of such enterprises as the Standard Oil Company, the Pennsylvania Railroad or the United States Steel Corporation were playing at tops and marbles, in comparison with the man's job of straightening out our world-system of economics as a whole. This opinion every day's news since then has corroborated. The author cannot understand how the men whom he meets in daily life, and still less those who are charged with national affairs or professional sociology, can live and delve and die with eyes and minds sealed to this vast, protuberant, overwhelming fact. Yet still one is forced to argue that there is something there worthy of notice ! Circumstances have required the author to handle this vast topic during the spare time of a life which had first to support a family. The task which should have been shared with the entire profession of economists he has had to compass single- handed. It is hoped that this fact may serve as pardon for those errors sure to be revealed in a work which has been con- X PREFACE scientiously compiled. It should also excuse the lateness of its appearance in the face of a crisis so great that, judging mathematically from previous crises, each minute of delay in effective action, on the part of this great energetic nation, con- demns one additional wretch to writhe and die in the throes of the coming world-revolution. NEW YORK CITY, December, 1920. CONTENTS PART I THE BACKGROUND CHAPTER PAGE I. THE APPROACH 1 II. THE SOLE AIM OF INDUSTRY: LIFE- SUPPORT ... 37 III. THE COTTAGE-SYSTEM AND THE FACTORY-SYSTEM 45 PART II ECONOMIC PRINCIPLES IV. PRODUCTION 55 V. CREDIT 71 VI. THE BASIC CONTRAST IN ECONOMICS 127 VII. THE MARKET-SYSTEM, OR COMMERCIALISM 159 VIII. THE EFFICIENCY OF SOCIAL ORGANIZATION 178 IX. THE WEAPONS OF COMMERCIAL COMBAT 191 X. INTEREST AND DIVIDENDS 204 XI. ECONOMIC EQUILIBRIUM, OR "CHARGING ALL THE TRAFFIC WILL BEAR" 232 XII. OTHER FEATURES OF INTEREST 254 XIII. THE IRREVOCABILITY OF INTEREST 332 XIV. COMMERCIAL COMPETITION AND ENTROPITS 343 PART III DATA XV. RECENT ECONOMIC HISTORY 357 XVI. WAGES AND SALARIES 441 XVII. WEALTH, INTEREST AND AGGREGATE COMMER- CIALISM 458 XVIII. INDIRECT LIGHT UPON THE GROWTH OF COM- MERCIALISM 484 XIX. THE COST OF LIVING 524 xi Xll CONTENTS PART IV SOCIAL REACTIONS CHAPTER PAGE XX. UNEMPLOYMENT 579 XXI. PANICS AND CRISES 648 XXII. MISCELLANY 672 XXIII. THE EVOLUTION OF AMERICAN Civic CONSCIOUS- NESS 703 Mezzanine Chapter. THE AUTHOR'S POINT or VIEW 711 XXIV. THE REMEDY CONSUMERISM AND CONSUMERA- TION 723 XXV. THE PATH BEFORE Us. . 775 NOTE 1. THE MATHEMATICAL LAW OF CHARGING ALL THE TRAFFIC WILL BEAR 839 2. THE ORIGIN OF BOLSHEVISM. . , 843 SYNOPTICAL TABLE OF CONTENTS PAET I. THE BACKGROUND CHAPTER I: THE APPROACH. An outline of the material development of the United States from colonial times to the middle of the nineteenth century. Diseases of nations more important than those of individuals; solu- tion of present ills to be found in a study of the growth of the past into the present; contrast between 1815 and 1915; cotton-culture; trans- portation and communication; the era of anthracite; the dawn of modern technical development; engineering history of the nineteenth century; the blunder of 1840 in economics. CHAPTER II: THE SOLE AIM OF INDUSTRY: LIFE- SUPPORT. Settles at the start the aim of all economic effort: "Feed the Ultimate Consumer!" Judges all in- stitutions in terms of this criterion and ascribes all con- fusion of mind to its neglect. Economic institutions underlie and control political ones; the aim of all economic institutions : ' * Feed the Ultimate Consumer ! ' ' Our economic motor-nerves; the Ultimate Consumer the sole sovereign of all industry; value and valuation. CHAPTER III: THE COTTAGE-SYSTEM AND THE FAC- TORY-SYSTEM. Draws contrast between the indus- trial system prevalent in the eighteenth to early nine- teenth centuries, and that which had replaced it by the end of the nineteenth. The cottage-system that which replaced the feudal system ; the cottage- system in turn replaced by the factory-system; this replacement results in a marvelous development of material wealth; the characteristic of the cottage-system is ownership-in-industry, while that of the factory-system is the abolition of all ownership-in-industry; the cottage-system based upon universal competition, while the factory-system is based upon enforced monopoly ; the cottage-system based upon commercial, interest- bearing credits, while the factory-system is based upon free, non- interest-bearing credit. xiii XIV SYNOPTICAL TABLE OF CONTENTS PART II. ECONOMIC PKINCIPLES CHAPTER IV: PRODUCTION. Explains the organization of production and debates the laws governing its current volume; this not determined by free will or voluntary preference, but by relentless, automatic laws of economic equilibrium. First lesson in involuntary soeial sub- consciousness. Definition; specialization of tasks and interchange of work; factory- credit; the national factory-system; volume of production; personnel of the factory-system. "Nothing can be produced Unless it can be Sold." CHAPTER V: CREDIT. Explains the vital function of credit in either permitting a community to exert itself for its own life-support and prosperity, or, by its absence, para- lyzing all effort and impoverishing a potentially rich nation; also traces the history of credit. Credit the economic catalytic; the function of a catalytic; the nature and function of credit ; the function- of gold ; the vital importance of credit; the transforming power of credit; history of commercial credit; English " tallies"; classification of forms of credit; commercial authorities quoted; recent instances of credit-expansion; first glimpses of the nature of interest; the true owners of credit; commercial credit versus factory-credit. Second lesson in involuntary social subconscious- ness; effects upon society independent of moral intent. Re-invested credits; the expansion of 1901; Kussell Sage and other commercial authorities ; confiscation ; the century 's accumulation of interest -bearing securities; insurance-credit; commercial insurance versus natural insur- ance; credit-bases; economic reform necessarily embodies a new system of credit; the function of ethics in economic reform. CHAPTER VI: THE BASIC CONTEAST IN ECONOMICS. Shows the dual nature of the modern industro-com- mercial system, in parallel with duality everywhere else. Production versus negotiation; the factory-system versus the market- system; deadly parallel between the two; the economic despot; charg- ing all the traffic will bear; the equities of ownership-in-industry ; the ethics of commercialism; the true source of all material wealth; ownership-in-industry a parasite upon productivity; industrial anarchy; the great economic question of the day is ownership-in-industry growing upon us ? The dual progress of economic evolution ; centralization through consolidation versus decentralization through invention; the modern factory-system; economic motive forces; profit-sharing; discontent; the basic contrast running through all energetic sciences. SYNOPTICAL TABLE OF CONTENTS XV CHAPTER VII: THE MARKET-SYSTEM, OR COMMER- CIALISM. Defines the modern development of that antiquated feature: ownership-in-industry, which was peculiarly characteristic of the obsolete cottage-system. The ramifying intricacy of the market-system; transportation and communication the creators of modern commercialism; human demand unlimited; artificial enticements to buy unnecessary; retail commercial- * ism; the Ultimate Consumer the sole source of economic power; con- tributory commercialism; the national market -system ; commercialism always antagonistic in nature; human nature and social reorganization; the basic economic contrast again; futility of welfare-work: the com- mercial tourney; emulation and competition. CHAPTER VIII: THE EFFICIENCY OF SOCIAL ORGAN- IZATION. Debates the efficiency of the industro-com- mercial system of the nation, when considered as a unit. Eelationships versus components; sociology astray on individualism; social architecture; bitter social philosophy; social versus individual evolution ; the basic economic contrast again ; natural cost ; value ; valua- tion; efficiency of economic organization; the one-hundred-per-cent com- munity; polling the economic community; personal efficiencies; aggre- gate economic energies. CHAPTER IX: THE WEAPONS OF COMMERCIAL COM- BAT. Discusses the mechanism of offense and defense employed by the commercial world in its unremitting internal warfare. DEFINITIONS: Productivity and wages; commercialism and diluits; rent; interest and dividends; entropits; costs of doing business; rent again. CHAPTER X: INTEREST AND DIVIDENDS. Opens de- bate as to the one most formidable weapon of all the accoutrements of commercial militarism. The Ultimate Consumer the sole source of all interest; expansion of facilities; initiative; investment an opportunity rather than a burden; risk in commercialism; commercial privateering; initiative and expan- sion in the factory-system ; capital versus capitalism ; theories of interest ; interest warranted by original act! interest as a promoter of thrift? income and outgo of interest; depreciation; commercial authorities on the origin of capitalism; interest as a fruit of unproductivity f oppor- tunity for investment; water or dust; economic hypnosis; economic equilibrium. XVi SYNOPTICAL TABLE OF CONTENTS CHAPTER XI: ECONOMIC EQUILIBRIUM, OR "CHARG- ING ALL THE TRAFFIC WILL BEAR." Discusses the forces the balance between which determines quanti- ties and qualities at each point in the economic system. One of the four most important chapters in the book. Gravitation of economic phenomena toward a stable balance; increase of profits with decrease of trade; illustration of the flour-supply; com- petition no bar to raising prices, but a compulsion to raise them; in- creasing costs of doing business; character of forces at work; psy- chology or morality not a factor; the seller hired by the community to raise prices; higher prices restrict trade; computation of the point of maximum income to the seller; community -nutrition ; mathematical law of charging all the traffic will bear; trade everywhere paralyzed by com- mercialism; competition the death of trade; factors determined auto- matically by economic equilibrium; society's universal automatic brake; the fluidity of economic forces; the commercial brake upon civilization; life under adversity; social erosion; modern patriotism; modern lack of liberty. CHAPTER XII: OTHER FEATURES OF INTEREST. Carries the debate as to the nature and effect of interest into many important questions of the day. Bonds; preferred and common stock; gradation of commercial risk; stock without face-value; watered stock; the origins of capitalism; thrift and capitalism; reinvested dividends; surplus; the Ultimate Con- sumer the sole source of all capitalism; recent acceleration of surplus- looting; who owns the surplus? surplus the foundation of commercialism; cost of replacement; prices of materials, interest-charges and valua- tion of principal always mutually linked in balance; watered stock; commercial authorities under oath; the railway-corporations and the surplus; commercial "costs"; the Kansas City Union Depot; economic liberty; the true equities of commercial ownership; the true origin of all capitalism; principles underlying price-making; charging all the profits will bear; passive and active capitalism; Professor Fisher's theory of interest; who loans, and who pays interest? factory-system capital for expansions; pioneering under commercialism; submarine economics; foresight and commercialism; proprietary rewards and progress; the blunder of 1840; economic patriotism; capitalism and immigration ; commercialism versus socialism ; the ' ( use ' ' or pro- ductivity theory of interest; dependence of capital-valuation upon in- come; the Ultimate Consumer again proved the sole source of all capitalism; zero interest-rates; the railway-problem in outline; stock- watering; dividends on dead horses; recent expansion of capitalization; normal commercialism; summary of the essential factors in the nature of interest. SYNOPTICAL TABLE OF CONTENTS XV11 CHAPTER XIII: THE IRREVOCABILITY OF INTEREST. Can a charitable destination of interest redeem the evil of its birth ? Income versus outgo of interest; petty capitalism breeds petty ethics; wealth and charity; ineffectiveness of charity; basic economic contrast again. CHAPTER XIV: COMMERCIAL COMPETITION AND EN- TROPITS. Discusses the active, energetic, aggressive friction and impact of the commercial world, with ac- curate definitions of itself and its effects. Subdivisions of entropits; does advertising increase trade! Trade de- pressed by all forms of commercialism; advertising as an educator; advertising as a false stimulant of journalism ; the fetish of the twentieth century; commercialism consists in acquiring what one doesn't want, because others will be sure to want it. PART III. DATE CHAPTER XV: RECENT ECONOMIC HISTORY. Reviews the statistical data available as to the economic develop- ment of the United States during the seven decades from 1845 to 1915. Per-capita data; density of population; drift from agricultural to technical vocations; drift from domestic to wage-earning vocations; these drifts as worldwide tendencies; congestion in cities; distribution of urban population; average growth versus individual growth; the world-drift into cities; migration enforced by commercialism; editorial acumen; social involuntariness again; growth of the nation's life- support; program of analysis of the nation's efficiency of economic organization; evolution of life-support in the United States; prosperity, disparity and discontent; the nullified law of supply and demand; futile reforms; traffic charged all it will bear; national vanity; automatic in- voluntariness again; increase in technical wealth; women in gainful employment; the nation's occupations analyzed; classification of occu- pations ; basic statistics, as to production and commercialism, in con- trast; the quantity x; America in 1850; the quantity y; relative growth of technology and commercialism; subconscious social versus conscious individual forces; competitive or commercial occupations; a factory- eystem metropolis; economics and esthetics; opera under commercialism; esthetic decadence through commercialism; confusion profitable under commercialism ; economic versus moral dissipation ; indirect commercial waste ; social metabolism ; relative rates of growth ; non-combatant costs; commercialism becoming critical; science and technology as aids to commercialism; automatic involuntariness again; wanted a science XVlil SYNOPTICAL TABLE OF CONTENTS CHAPTER XVI: WAGES AND SALARIES: Chiefly Statistical. Population versus personnel; statistics of wages; maxima and minima of wages; wage-coefficients; salaries; general trend of wages and salaries; aggregate wages and salaries paid by the Ultimate Consumer, 1850 to 1910; dilution of the Ultimate Consumer's purchasing-power. CHAPTER XVII: WEALTH, INTEREST AND AGGRE- GATE COMMERCIALISM. Brings together the data as to classification of individuals accomplished in Chapter XV, with that as to relative ability collected in Chapter XVI, to a synthetic determination of thtf effi- ciency with which the nation's industro-commercial sys- tem makes use of the Ultimate Consumer's dollar. One of the three or four pivotal chapters of the book. Interest paid upon all forms of property ; the interest-rate ; aggregate interest-burden upon the Ultimate Consumer; the heart of the body- economic; current commercial dissipation of economic energy; our mysterious economic cancer identified; struggle between capital and labor a side-issue; national economic efficiency; unimportance of the personal factor; the author's estimates; graphs of our degradation of economic efficiency; increase in our material basis for enjoyment; our loss in social vitality exceeds that measurable in economic energy; our social evolutionary air-brake; concrete applications; the reader's responsibility. CHAPTER XVIII : INDIRECT LIGHT UPON THE GROWTH OF COMMERCIALISM. A Review of various side- aspects of modern economic society. Transportation and communication; invention; commercialism and journalism; automatic involuntariness again; modern muzzling of free speech; history of journalism; " boiler-plate "; growth of advertising; charging literature all the profits will bear; outdoor display; manu- factures ; centralization or decentralization ; the latter our real problem ; decentralization in series and in parallel; the high cost of buying; growth of factories in size; the " harvester -trust "; particular manu- factures; ethics and social evolution; the time-factor in social evolution. CHAPTER XIX : THE COST OF LIVING. Chiefly Statistical. The price-index; general principles of price-determination; technical education and prices; effect of gold-supply upon prices; price-variations during past centuries; professional economists and the gold-theory of prices; density of population and prices; supply and demand as de- terminants of prices; commercial distortion of natural supply and SYNOPTICAL TABLE OF CONTENTS XIX demand; the function of psychic forces; summary; influence of war upon prices; identity of war and commercialism; source of credit- expansion; the tides of war; war-credits and prices; peace and com- mercialism; cost of war; replacement of martial by commercial mili- tarism; cumulative nature of commercialism; credit as the social cata- lytic; taxation. PART IV. SOCIAL REACTIONS CHAPTER XX: UNEMPLOYMENT. Offers the only treat- ment of this subject as a natural phenomenon, subject to natural laws, which is known to the author. Another of the pivotal chapters. The right to employment; the deficit in employment; efficiency in social hiring-power ; the natural economic society; insane economics; purchasing-power and hiring-power; economic walls and wall-builders; the sovereignty of interchange over production; real and imaginary demand; exertion no criterion of economic worth; over-work; concen- tration of the deficit in employment ; arterial and venal economic circu- lation. The Basic Law of Employment and Unemployment. Cherished delusions as to unemployment; competitive wage-system; impotence of the oppressed; quantitative and qualitative unemployment; automatic involuntariness again; character and unemployment; the employer's deficit in purchasing-power for labor; universal economic paradox; life, labor and hope, all charged all the profits will bear; the "starvation- wage"; the "submerged tenth"; basis for true optimism; basic economic contrast again; the manufacture of ethics; function of credit in employment and unemployment; statistics of unemployment; natural gravitation in unemployment; true nature of "surplus labor"; auto- matic involuntariness again ; unemployment in the commercial world ; unemployment in trades-unions; recent history of unemployment the "silent panic'' of 1913-1914; unemployment and seasonable trades; deficit in employment indubitable; inanimate unemployment; economic paradoxes again; intellectual responsibility and patriotism; unemploy- ment not due to surplus labor, nor to labor-saving machinery; modern rights of man; technique of the energetics of unemployment; social energetics ; relativity. CHAPTER XXI: PANICS AND CRISES Chiefly historical and statistical. The economic barometer; inevitable fate of any cumulative expan- sion; historical; maximum periods of commercial failures; bank-failures; railway-receiverships; fractional versus fundamental crises; gradual dis- appearance of currency-weakness as a source of panic, with simultaneous rise of high prices as irritant; stocks and bonds; the "Silent Crisis" of 1914; the modern economic detonator high prices due to growing cost of commercialism. XX SYNOPTICAL TABLE OF CONTENTS CHAPTER XXII: MISCELLANY. Touches a series of high spots in current economic progress. Capital and labor; strikes and lockouts; the minimum wage. Auto- matic social involuntariness. Congestion in cities; rapid transit a creator, rather than a cure, of congestion; history of New York's rapid transit. Incomes. The census. Public ownership. CHAPTER XXIII: THE EVOLUTION OF AMERICAN CIVIC CONSCIOUSNESS. A historical review of the larger aspects of American public opinion. Ethics in 1850; the rise of the slavery-issue; Northern indifference to it; slavery as a big business; its menace to the Union effective where its cruelty failed to impress; reconstruction; the tariff; the mugwumps; rising influence of conscious commercialism; organization of both capitalism and labor; our attitude toward the impending conflict parallel with that toward the slavery-issue a topic resumed near the end of the Mezzanine Chapter. MEZZANINE CHAPTER: THE AUTHOR'S POINT OF VIEW. Written in response to the wave of anti-radical hysteria which swept this land during 1919 and 1920. History of the central idea of this book; Edward Bellamy; the rise of economic issues out of the academic into vital importance; the author's genealogy; his loyalty to American political ideals; contrast between our political democracy and our economic oligarchy; domination of the former by the latter ; reform versus revolution ; the nucleus of our social cancer; surgery requisite for its cure. Parallel between political and economic liberty; the slight power of social will; social prediction; Abraham Lincoln and negro-slavery; Buchanan and Harding; treason versus loyalty to civilization. CHAPTER XXIV: THE REMEDY CONSUMERISM AND CONSUMERATION. Outlines the field in which alone permanent reform can be found. Sets up a competent reply to socialism. Dominant forces; economic democracy; consumerism; socialism; the Intercollegiates ; American socialism ; consumerism versus socialism ; automatic social involuntariness again; class-consciousness; consumera- tion; jewishness; economic reform; public ownership; fluidity of eco- nomic causes and effects; confiscation of property. CHAPTER XXV: THE PATH BEFORE US. Adds the author's personal recommendations to the virtually im- personal chapters which have preceded. SYNOPTICAL TABLE OF CONTENTS XXl "Organize as Ultimate Consumers!" The pivotal fact of the imme- diate future; the detonator of social high explosives. Education as to the truth a vital necessity; futility of inadequate reform; free speech in college and press ; liberation of the press from domination by adver- tising; advertisements mixed with reading-matter; modern town- meeting; self-supporting advertising. The universities. French Revolu- tion in a nutshell. Inspection of the social structure against flaws; function and responsibility of our schools of sociology ; ' ' social control ' ' ; intellectual poltroonery. Does social control exist? The supreme value of candor; university-militarism; modern patriotism; greatest question of the day; recent social evolution; "over the top" in social reform; true optimism; modern. Christianity and social reform. DIAGRAMS FIG. PAGE 1. Growth of Credit-Securities 110 2. General Trend of Wages 444 3. Decline in National Economic Efficiency 475 4. America's Lost Opportunity. 477 STATISTICAL TABLES TABLE PAGE 1. Cotton Eaised per Capita per Annum : 1790-1915 10 2. Eiver-Steamboats Built: 1815-1915 13 3. Foreign and Great Lakes Tonnage: 1800-1915 14 4. Imports and Exports, including Gold and Silver: 1790-1912... 15 5. Kailway-Facilities in the United States: 1830-1914 20 6. Eelative Growth of Railway-Mileage and Locomotive-Power: 1904-1915 22 7. Growth of Insurance : 1879-1913 89 8. Finance and Credit : 1865-1915 Ill 9. Banks and their Resources : 1896-1916 112 10. Insurance per Capita: 1850-1914 115 11. Credit-Bases and Price-Indexes: 1865-1915 123 12. Charity versus Commercialism: 1877-1918 341 13. Population and its Density: 1790-1910 359 14. The Nation's Broad Classes of Vocation: 1820-1910 360 15. Occupations in Prussia: 1843-1895 361 16. Growth of Cities in Number: 1850-1910 362 17. Distribution of Urban Population: 1850-1910 364 18. Average Size of City: 1850-1910 365 19. Relative Per Cent of Urban Population in Each Clasg of City: 1850-1910 365 20. Food-Supply from Farms: 1840-1915 374 21. Stock on Farms and Ranches: 1880-1915 375 22. Growth of Farms : 1850-1910 375 23. Meat-Supply per Capita per Annum: 1880-1910 376 24. Increase in Supply of Mechanical Raw Materials per Capita per Annum : 1820-1915 385 25. Women in Industry: 1870-1910 387 26. Classification of Occupations 390 27. Total and Productive Occupations: 1850-1910 392 xxiii XXIV STATISTICAL TABLES TABLE PAGE 28. Commercially Combative Occupations : 1850-1910 396 29. Various Totals of Classified Occupations: 1850-1910 404 30. Electric Central Power Stations: 1902-1912 421 31. Relative Growths: 1850-1910 432 32. Eelative Growths: 1870-1910 433 33. Wages in Europe and America: 1890-1907 444 34. Maxima and Minima of Wages: 1770-1914 445 35. Wage-Coefficients: 1850-1914 446 36. Wages : Average per Annum : 1850-1914 447 37. Wages according to Dr. Spahr : 1890 448 38. Salaries per Annum: 1890-1914 449 39. Wage and Salary Coefficients : 1850-1914 451 40. Aggregate Wages and Salaries : 1850-1920 454 41. Percentages of Total: 1850-1910 456 42. Aggregate Wealth per Capita: 1850-1920 465 43. Relative Rates of Growth of Wealth: 1880-1920 466 44. Commercial Dissipation of Economic Energy : 1850-1920 468 45. The Expansion of Commercialism: 1850-1920 469 46. Expansion of Commercialism (Author's Estimate) 474 47. Relative Growths (Author 's Estimate) 474 48. Increase in Material Basis for Enjoyment: 1850-1910 478 49. Growth of Invention: 1840-1915 487 50. Growth of Communication : 1800-1915 489 51. Growth of Periodical Literature: 1790-1910 496 52. Periodicals : Classes thereof: 1790-1910 497 53. Growth of Advertising in Periodicals: 1863-1910 498 54. Increase in Advertising-Space in Newspapers: 1880-1916 500 55. Growth of Advertising in New York Times: 1896-1916 502 56. Manufacture in terms of Population : 1850-1910 507 57. Manufacture : Relative Tendencies: 1850-1910 508 58. Number of Business-concerns per Capita: 1881-1916 511 59. Relative Rates of Growth in Manufacture: 1850-1910 515 60. Agricultural Implements: 1870-1910 516 61. Manufacture: Particular Industries: 1860-1910 518 62. Relative Variation in Prices : 1841-1884 525 63. Relative Variation in Wages and Prices: 1800-1915 527 64. The Internal Factors in Price-Determination 529 65. Variation in English Prices: 1050-1800 540 66. Wars and Revolutions : 1850-1914 559 66a. Relative Cost of War, per Capita 567 67. Proportion of Public Revenue and Taxes to the Ultimate Con- sumer's Total Expenditure: 1915 576 68. Relative Unemployment: 1890-1900 624 69. Unemployment in Trades-Unions: 1897-1911 626 70. Unemployment in New York City and Vicinity: 1914-1915 629 71. Unemployment and Seasonable Trades: 1915 630 72. Commercial Failures: 1857-1916 659 73. Maximum Periods of Commercial Failure 660 74. Bank-Failures: 1865-1916 661 STATISTICAL TABLES XXV TABLE PAGE 75. New York City Bank-Clearings : 1854-1916 662 76. Railway-Receiverships : 1876-1916 '. . . 664 77. Stocks and Bonds: Volume of Sales: 1892-1916 666 78. Maxima and Minima in Stock-Prices: 1911-1917 668 79. Growth of Strikes and Lockouts : 1881-1905 676 80. Growth of Elevated-Railway Traffic : 1872-1877 685 81. Growth of New York's Transit-Facilities: 1872-1916,, . 689 MODERN ECONOMIC TENDENCIES PART I THE BACKGROUND CHAPTEK I THE APPROACH "// there exists a science of predicting, of directing or of ac- celerating the progress of the human race, the history of its past should l)e the first foundation therefor." CONDORCET, "Progres de Tesprit humain," 1793. The Diseases of Nations. Since the opening of the Great War it must have become plain, if never before, that the menace of death and misery which hangs always over the heads of the human race is not primarily due to disease or accident. In spite of our scientific conquests over mountain, sea and air, our victories of microbe and serunij we are yet forced to admit the presence of another unbeaten adversary to happiness than topog- raphy or disease that of social or political upheaval. When it comes to a comparison of relative sources of death- rate, or of magnitudes of human misery, then disease must take a back-seat in favor of war or revolution. Whether we consider disfiguring small-pox, the "white plague" of tuberculosis, in- sidious typhoid or racking cancer, of all the fields of pathological science needing attention most urgently, that of the diseases of nations must surely come first. In this field, as in other departments of biology, we find at work two distinct sorts of enemy to health and happiness. There is first the assault from without the ruthless invader of our domain with piercing, maiming violence. There is also the organic or microbic internal disease the internal develop- ment of a poisoning microbe, bringing on an automatic con- i MODERN ECONOMIC TENDENCIES vulsion in life's efforts to readjust itself into harmony with this novel demafld upon its vitalities. It is impossible to say that either of these is worse than the other. Often each co-operates with the other. In the present Great War, for instance, both are at work, side by side. Each of the belligerents has had to maintain combat with dissension at home as strenuously as with the enemy outside its borders. Indeed, in the final fate of the struggle there is every promise that, in all lands, the former may be a factor overshadowing the latter. Of the problems which promise to loom large and menacing after the war there is none so threatening as this of internal economic strife. It is with the purpose of laying a foundation for future peace and stability, at home as well as abroad, therefore, that this review of recent American progress has been undertaken. To accomplish this our analysis must be both penetratingly an- alytical and boldly synthetic. No superficial glance at what everybody knows, nor any parrot's repetition of worn-out formulae will suffice. Henceforth, we hope, the price of peace is to be one of mere intellectual vigilance and daring, rather than of bodily sacrifice. There is little evidence that we are now, or ever have been, in danger through physical cowardice; but our civi- lization is already a-tremble through intellectual timidity. If we are not to be taken by surprise, too late for remedy, by an uncontrollable crash of unexpected events, we must promptly acquire new, bold, drastic and adequate ideas, competent to meet the impending crisis. Yet one must begin at the beginning. In order to start aright we must first summarize some more or less superficial and ob- vious facts which may be familiar to many. The astounding changes which have occurred visibly during the last century are a trite subject for eloquence. Between the America of 1815 and that of 1915 the contrasts are so spec- tacular that the frequent attempts to portray them have be- come melodramatic. Nevertheless there exists a real, even a dire, need for a more penetrative analysis of this mushroom- like growth of society than has yet been made; for it is now more than suspected by serious minds that modern society, like a too rapidly grown mushroom, may yet embody beneath all its glory of outward coloring some subtle hidden poisons. THE APPROACH 3 Obviously modern civilization is not breeding happiness in proportion with its outward display. The contentment and stability of mankind is not commensurate with its technical intelligence. Wisdom lags far behind knowledge. War or revo- lution bursts forth too frequently and unexpectedly. The quieter and less dramatic, but often far more tragic, tides of daily misery and discontent, rising as in a vast worldwide sea, upon the surface of which wars disport themselves as porpoises at play, warns us even more urgently of the need for careful thought. Early Economics. The aspect of this land about a century ago, barely beyond the span of some lives still hale, forms a contrast with to-day such as the young of the present genera- tion can scarcely grasp. Then the chief occupations of this now great, rich and most intricately diversified industrial and tech- nical nation might be listed upon the fingers of one hand, namely: (1) Fisheries; (2) Ship-building and navigation; (3) Agriculture; (4) Lumbering, and (5) Hunting. For the eastern mountains still supplied furs in quantity. Salem (Mass.) was still a chief seaport, overtopping Boston and rivaling New York. Ohio was an Indian frontier. Penn- sylvania was still a purely agricultural state, its vast mineral resources only barely suspected. Although coal and iron had been mined in small quantities since before the Kevolution, yet the first real cargo of anthracite was shipped down the Schuylkill only in 1804, while the real era of anthracite did not begin until about 1840. 1 Communication. In industrial lines New England's water- powers and mechanical genius were only just budding into life. Transportation and travel, up to about 1810, were confined wholly to horses or sails, often consuming a week from New York to Albany, or ten days to Boston. The news of Washing- ton's death was three weeks in reaching central New England. Where horse-travel failed to prove more expeditious, the mails were carried in square-rigged sailing-vessels usually of the cumbrous, unseaworthy and now obsolete brig-rig beating labo- riously up and down the narrow waters of Long Island Sound, or skirting precariously the unlighted coast. While by eighteen- ten or fifteen this torpidity of transit had been much enlivened along the coast by the early steamboats, yet the interior had iBogart, " Economic History of the United States, " 1912. 4 MODERN ECONOMIC TENDENCIES not yet dreamed of anything better than horses, and usually even these could be used only for riding or packing; for roads fit for wheeled vehicles were few and very poor. The advent of the railroad was then as far ahead in the future as the Cuban War is now behind us of to-day. Travel was then a nightmare of labor and discomfort, accord- ing to present standards. Cooped up in the tiny cabins of sloops, or jolted from dawn until dark in crude stage-coaches over unspeakable roads, with still less mentionable taverns the only havens of rest, the day's program of the traveler of 1815 sounds more like the diary of a modern war-correspondent or arctic explorer than it does like anything a part of civilized life. Physical comfort or rather, modern sensitiveness to the slightest discomfort was then unknown. The common lot of man in those days was serf-like toil, a bill of fare meager in variety if plenteous in volume, occasional famine, and a Puritan sabbath for all except those who dared openly to defy public opinion. 2 Population and Productivity. Should the reader carry with him any taint of the commonly prevalent error that modern stress of life arises from too great population, dividing up too finely the opportunity for each, a mere glance at the good year 1815 will suffice to dissuade him. With all the resources of a rich virgin continent then wide open to a sparse population, with a form of government then farther in advance of anything known in Europe than is true to-day, and with a frank naked- ness of any hampering tradition or caste, life then was, never- theless, a dire struggle with hunger, cold, disease and poverty. It was habitually pursued, even by well-to-do people, through a length of working-day well exceeding that of most modern factories. The striking contrast with to-day was that then life was free and certain independent of one's neighbor except by ac- cident. Odious contrasts in wealth were few and slight. Dis- content might free itself in an active search for a better chance. Happiness was apparently rife. The problems of 1815 were physical and personal ones, as 2 For a graphic description of these good old times read the diary of an educated New England girl's trip from Connecticut to Ohio in 1810, in the Atlantic Monthly for September, 1912; or see Bogart and (Thompson's " Readings in Economic History, " 1916, THE APPROACH 5 those of 1915 are economic and organizational. Just as our forefathers stood face to face with a stark, untamed wilderness of savage forest, so we to-day face a similar wilderness of myriads of unknown, unorganized fellowmen. But already this cheery contentment of 1815 with unremitting toil and pioneer hardship was rifted by the lure of more facile ways. The men of that day marveled as much at its wonderful novelties and achievements, its glorious advances in speed, power, comfort and solidarity over previous times, as we do to-day over our palatial cars and ships, our airplanes, wireless telegraphy and gasolinic warfare. The period of the birth of our land as an independent nation happened also to be one of phenomenal progress in the mechanic arts, on both sides of the Atlantic. It was in 1781, the year peace was declared with England, that James Watt first made the steam-engine which had been in use for pumping water since 1700 available for the task of rotating machinery. It was in 1783-4 that Henry Cort advanced the iron-industry by two huge strides at once, by the introduction of his puddling-forge for making wrought iron, and by the use of grooved rolls for forming bars of various shapes. In the textile industries Arkwright's spinning-frame had been in use since 1760, but its full value first became available with the introduction of Cartwright's power-loom in 1790, and with the later development of rotative steam-power and water- power. In 1791 New England had built its first cotton-mill, and by 1804 there were fourteen in operation there. In 1793-5 Eli Whitney, of New Haven, invented his cotton-gin. About 1805 Oliver Evans, of Philadelphia, introduced the practice of using "high-pressure" or non-condensing steam-power, as an im- provement over the more cumbrous condensing type which the prestige of Watt had mistakenly kept in use in England a step in advance in practical steam-engineering which for over half a century was of the greatest advantage to America, in the conquest of her wilderness and the development of her industries. Invention and Politics. The history of America cannot be understood without a comprehension of this remarkable coin- cidence if indeed it were such whereby the American con- tinent was liberated politically at virtually the instant when man's inventive powers were freed to a degree never before 6 MODERN ECONOMIC TENDENCIES recorded in history, and his muscles thus equipped with mechan ical aids adequate to the invasion of the wilderness. All of the conditions for a brilliant expansion of industry lay ready. They were soon to bear rich fruit; but not by use in the way then honored by tradition. Man could not employ these new tools in his individual capacity, in isolated efforts, as he had those of earlier times. The value of these recent acquisitions must remain largely potential only, until their powers might be released by the organization of men into unitary economic bodies, each formed of many individuals. Transportation. But this, in turn, might not be accom- plished without much better means for transportation and com- munication. These factors were fated, indeed, to bear cogent influence upon the political as well as the economic destinies of the nation. It was the steadily improving means for internal communication between the colonies, really initiated and en- forced by the needs of the French and Indian War, which had much to do with precipitating the Kevolution of 1776. It was only as the colonies approached physical unity, through road- making, that they acquired that sense of political unity and power which, weak and jealous though it might be, yet made independence of England a possibility. Previous to 1750 there were virtually no wagon-roads in America. Transportation of bulky commodities was possible only by sea; and by sea, piracy united with small ships and lack of charts and lighthouses to make the risk great. On land people traveled on horseback, or very commonly afoot. In Europe the eighteenth century was a period of building coach-roads, but in America this policy was copied somewhat tardily to be accelerated later, when the mistake had been recognized. The colonies were mutually jealous, and uncon- scious of their common interest in economic reciprocity. In- tercolonial trade was not encouraged at home, and was actively repressed by England. Local war frequently threatened. It was only after the year 1800, following more than a dozen years of political independence and free interstate commerce, that stage-routes became continuous from Boston to Charleston, or penetrated as far west as Pittsburgh. 3 As late as 1825 reliance was still shown to be upon com- munication by water, in the building of the Erie and the Chesa- 3 Bogart. THE APPROACH 7 peake & Ohio canals. This was possibly aided by the fact that it was only at this date that the first wagon with springs ap- peared. As late as the Centennial of our Independence the term "spring-wagon" was still in common use throughout the Middle West, as indicating a wagon distinctive from the usual sort. It was as late as 1838 that the federal government com- pleted its "Xational" turnpike, or "Cumberland Road," begun in 1806, across Maryland, Virginia, Ohio, Indiana and Illinois to the Mississippi an institution familiar to every American who has happened to grow up near its route, but unknown or forgotten by all the rest. Yet amelioration of this situation was potentially at hand at a very early date. As far back as 1786 John Fitch had actually driven a boat by steam on the Delaware River, and Symmington and Miller had done the same thing in England in 1788; but it was not until 1807 that Fulton achieved the first success of immediate practical value, on the Hudson more by reason of a general advance in public intelligence and the arts, and in urgent demand for speed and certainty in transportation, than by superiority of mechanical genius. Quickly thereafter the steamboat crept into a position of im- portance in American life. The Hudson became the greatest of all highways into the interior. The main route to the West was shifted from the Ohio river to Lake Erie. Steamboats from New York through Long Island Sound made Fall River, at the head of Narragansett Bay, forty miles from Boston, in little more than a day, cutting the earlier trip of a week or ten days of torture by stage-coach down to two nights out. The Perth- Amboy water-route to Philadelphia, now forgotten, replaced by boat some forty miles out of ninety by stage, and within a few years steam was making the longer outside trips to the Chesapeake and even challenging Cape Hatteras. Progress. We have little to show to-day which can compare with such marvelous advances as these in bringing distant com- munities into prompt touch with each other. It is not that we have not improved inconceivably over these methods of a century ago, but that our last dozen years have shown, with the doubtful exception of aviation, nothing like the rate of ad- vance in speed and volume of communication between man and man that theirs did. For it is difficult nay, impossible for the younger genera- 8 MODERN ECONOMIC TENDENCIES tion of to-day to comprehend the isolation of community from community which underlay the political life and the ethical institutions of the days of Washington, Franklin, Adams, Jeffer- son and Hamilton. That they, working from such meager instances of solidarity of population as then prevailed, should have been able to enunciate political principles so pure and exalted, is as much a marvel as is the now common idea that those principles (unless interpreted far outside their original form and intent) should suffice for the gigantic extent and in- tense, intricate solidification, of modern populations. Cotton and Carriage. From the opening decade of the nine- teenth century the history of American economics and politics centers chiefly about two industries: (1) Cotton-growing in the South and cotton- weaving in the North, and (2) trans- portation, both North and South. While the North, of course, possessed a greater variety of industry than the South, yet even there these two industries wielded prime influence. They ad- vanced hand in hand. Both of them bore directly upon the approach of the Civil War. The prime influence of internal and oversea transportation in promoting the' cultivation of cotton is visible both in the gross statistics and in the local distribution of this industry. In the first years of our national history little is known as to our production of cotton. Even the records of export to England are untrustworthy, because of the frequent transshipment from our seaports of cotton grown in the West Indies. But it is reasonably sure that exportation of cotton began only in 1787, increasing thereafter to thirty times as much in 1793. The figures as to later growth are tabulated below. As to the distribution of cotton-culture, Bogart says: "At the time of Whitney's invention [of the cotton-gin, in 1795] cotton was raised only in Georgia and South Carolina; thence it spread to North Carolina and Virginia during the early years of the nineteenth century, but for more than twenty years it was confined to the Atlantic seaboard. By 1811 a beginning had been made in Tennessee and Louisiana, but together they produced but one-sixteenth of the cotton raised in the United States. . . . By 1821 these four States [Tennessee, Alabama, Mississippi and Louisiana] raised one- third, by 1831 nearly one-half, and by 1834 over two-thirds of the cotton grown in the United States." THE APPROACH 9 But it is not appreciably by reason of soil, nor by mere parallelism with the western spread of settlement, that these States became pre-eminent in cotton-culture. It is because they are pre-eminently the States of cheap internal transportation. A commodity like cotton, bulky in form and limited to one short season, cannot well support railroads. These must be supplied with traffic fairly evenly the year around, in order to pay interest upon investment in track and other plant. Nor is it practicable to carry cotton far by wagon. But the many sluggish rivers of the South, with their cheaply built, light- draft steamboats, burning cordwood for fuel, formed ideal high- ways for the shipment of the annual crop to the seaboard with- out incurring burdensome charges during the idle season. Although Fulton's first success was attained on the Hudson in 1807, it was not until 1811 that Nicholas Eoosevelt took the first steamboat down the Ohio and Mississippi, from Pitts- burgh to New Orleans and return; 4 and this is just the year when, according to Bogart, a "beginning" in cotton-culture had been made in the interior States. For the rivers had afforded meager means of transportation, enough to start the industry, before steam came to the aid of the flatboatmen. In 1820 (also according to Bogart) it took only ten days for the full length of these rivers going down, and thirty-five days coming up; and during this interim of nine years the cotton- culture of these interior States had grown eightfold. Savannah, Mobile and New Orleans were seaports early shipping large quantities of cotton to New and Old England, and they were fed chiefly by their river-traffic. Railroads were being built throughout the South, it is true, during the decades following the start in this line, and they accentuated the growth due to river-navigation. The first steam passenger-railroad in America was built in South Carolina in 1830. But up to the time of the Civil War the influence of the railroads was much less marked than that of the rivers. Thus river-travel grew rapidly into a great institution, creating as it went a new school of marine architecture and engineering which has since been copied in all the continents. It was then surrounded by a halo of prosperity, racing, gambling, romance and risk of boiler-explosion or conflagration which forms one of the most picturesque and tragic of all aspects of our early ^Thurston, " Growth of the Steam-engine." 10 MODERN ECONOMIC TENDENCIES history. Unfortunately, no reliable statistics remain as to the aggregate of this river-tonnage during the early decades. TABLE 1 POUNDS OP COTTON RAISED, PER INHABITANT PER ANNUM, 1790-1915 Averaged for Periods of about Five Years Each. For the United States 1790. 3.8 1832-36. . 28.7 1862-66 16 9 1892-96. 55.6 1795 9 1837-41.. 36 9 1867-71 . . 32.0 1897 -01 i . 68*8 1800 6.6 1842-46.. 43 4 1872-76 . 39.9 1902-06. . 69.1 1805-09.. 12.2 1847-51.. 44.7 1877-81.. 48.3 1907-11. . 67.4 1810-25.. .... 1852-56.. 48.7 1882-86.. 51.3 1912-15. . 70.2 1826-31.. 22.3 1857-61.. 57.1 1887-91.. 59.4 The steady growth in rate of cotton-raising per capita, except where interrupted by the Civil War, will be seen at a glance from Table 1. It is stated in pounds of cotton raised per annum per capita of the entire United States not as a measure of individual productivity in the States growing cotton, but as one of average individual supply throughout the entire nation. Per-Capita Data. For it is the prime purpose of this work to investigate the facts bearing upon the average welfare of each individual citizen; and for this purpose the first requisite is knowledge as to the average supply of the material means for life and comfort per individual throughout our entire terri- tory which is constituted a single economic unit by its internal free trade and throughout as much of its history as can be brought under exact analysis. For population is growing so rapidly that gross statistics mean little, or may actually mis- lead. What is needed is a reduction of the vast intricacy of our economic and industrial problems to the simplest possible terms, namely, each individual's daily life and wants; and this can be accomplished only with data reduced to a per-capita basis. Thus the thing of prime importance shown by Table 1 is the virtually steady growth in the supply of cotton to each person, on the average. This has occurred in spite of our phenomenal growth in population, and in spite of the general retreat of agriculture in proportion to the other arts, and of cotton in proportion to other staples. We each of us now have available for our enjoyment much more cotton than in the palmiest days of "King Cotton" before the Civil War; but we THE APPROACH 11 have ceased to have our lives and institutions vitally affected thereby, because it is no longer the basis of a huge enterprise for the exploitation of cheap slave-labor. The point of only secondary importance in this striking record of cotton-culture is the marked influence upon it of power-ginning, of steam-transportation and of steam-driven tex- tile machinery. The cotton-gin, appearing in 1793-5, the steam- boat in 1807-12 and the railroad in the eighteen-thirties, each left its plainly visible mark. Thus at the very beginning of our economic evolution, guiding us irresistibly toward our first great political convulsion due to economic causes, the Civil War, appears that factor which all further study must increas- ingly emphasize as the prime controlling one in all social de- velopment: transportation and communication. For the steam-driven textile machinery of that day could be used profitably only in New or Old England, and chiefly the latter. In this way the importance of transportation became accentuated; for the cotton-mills could be reached cheaply only as ocean-going steam-navigation developed. In 1819 the first transatlantic vessel carrying steam-engines sailed from Savan- nah to Liverpool and Petrograd; but her paddle-wheels were folding ones, made largely of canvas, and her engines were used only a small portion of the time. Then the coal-consumption of these early engines was too enormous to permit their con- tinuous use, even had there been no fear for the destruction of the paddles by the waves. Hence the experiment was not a commercial success. It was not until- 1837 that transatlantic ships relying continuously upon steam to aid their sail-power came into use, under the Cunard family, and not until a full half-century later that it was found practicable to dispense entirely with sails. Canals. Another immediate effect of the steamboat was the stimulation of canal-building, which had been a practical art since 1767, at latest. This was done not so much in the hope of using steamboats directly upon the canals, although this was considered, but because the traffic made available by the river and coastwise steamboats demanded better means for in- terior transportation than the wagon; for the railroad was not introduced until after 1830, and even then was expensive to build, in terms of its limited tonnage-capacity. The landmarks of this form of progress are the opening of the Erie Canal 12 MODERN ECONOMIC TENDENCIES (1817-25) at a first cost of over ten millions, the completion of such trunk-canals as the Ohio & Erie and the Miami Canals, in Ohio, joining Lake Erie with the Ohio River, in 1830-32, and the Chesapeake & Ohio Canal, opened in 1839, giving another route across the mountains to the Middle West. For twenty years after the railroad became generally adopted a large portion of all rail-traffic was carried, over sections of the route, by canal. There were no through rail-routes until after the Civil War. Between the Susquehanna River and Pittsburgh the only portion of what is now the trunk-line of the Pennsylvania Railroad was the cable-hauled inclined-plane railway over the summit of the mountains; the rest was all canal. The traveler of to-day may still see from his dining-car window remnants of the canals on which his grandfather of 1850, when traveling nominally by rail, must have spent days and nights in a canal-boat to cover what the grandson now passes in as many hours. As late as 1854 the total length of canals in operation was almost one-third of that of the railroads. Canal-traffic did not decline to the point of open surrender to the railroads until the time of the Civil War that great stimulator of so many changes in our industrial and financial ways. Indeed, for passenger-service, the canals were far more com- fortable than the early railroads, while their greater cheapness for bulky commodities was obvious. It was in speed alone, that they failed. The pictures which have come down to us of summer travel by canal, with the passengers seated in groups in comfortable chairs on the broad decks, enjoying the quiet coun- try beauty all around, suggest a pang of regret even in com- parison with the palatial comforts amidst which we are hurled through the land by the modern railroad, too rapidly to see it. In comparison with the inconceivably rough and dirty service of the early railroads, with the chance of a "snake- header" end of a loose rail coming up through the floor of the car at any moment, to maim or kill, in addition to the frequent collisions and horrible burnings of wrecks, canal-travel must have been a thing very hard for our forefathers to relinquish for the sake of speed. Western River-traffic. As to traffic on our western rivers no exact data are available, nor as to total tonnage in commission; but the tonnage built each year is known. It is stated in THE APPROACH 13 Table 2, in which all but the first item are averages for five- year periods. All columns of Table 2, except the last, refer to the Mississippi River alone. The last column includes its tributaries. From these figures it becomes plain that western- river steamboat-building fell from its maximum before the war, as a result of railroad-competition, and not as a result of the war itself. It is also noticeable that the war brought no immediate paralysis of steamboat-building; but much of the new tonnage must have been used for military purposes. TABLE 2 RIVER-STEAMBOATS BUILT PER MILLION INHABITANTS, 1815-1915 All Year. Tons. Year. Tons. Year. Tons. Year. Tons. Western Rivers. 1815 128 1836-40 890 1861-65 916 1886-90 181 1816-20 275 1841-45 926 1866-70 768 1891-95 155 1821-25 190 1846-50 1133 1871-75 609 1896-00 161 214 1826-30 445 1851-55 1250 1876-80 520 1901-05 106 151 1831-35 506 1856-60 990 1881-85 361 1906-10 54 71 1911-15 . . . 68 Lake and Ocean Shipping. The country's growth in ship- ping on the ocean and the Great Lakes proceeded as stated in Table 3. The first steamboat of the Great Lakes was launched in 1816 (Thurston). The noticeable features in Table 3 are the continuous and marked decline in our foreign shipping under the American flag (until stimulated by the Great War of 1914), the virtual constancy of our coastwise and fishing fleets per capita, and the tremendous increase in internal shipping on the Great Lakes. The momentary drop in the fourth column between 1870 and 1880 is due merely to a change in the classification. It is also to be noted that the actual growth on the Great Lakes is not so large as that indicated, because an increasing portion of the tonnage of recent years has been in coal and iron-ore, cargoes which figure tonnage per dollar of value far beyond the average for general merchandise. 14 MODERN ECONOMIC TENDENCIES TABLE 3 FOREIGN, COASTWISE AND GREAT-LAKE SHIPPING Tonnage per Ten Thousand Inhabitants, 1800-1915 Foreign Coastwise Through Year. Trade and Trade and Great Lakes. Sault Ste. Whaling. Fishing. Marie Canal. 5 1800 1263 569 1810 1341 608 1820 643 685 3.6 1830 448 477 8 6 1840 527 750 31.8 1850 684 841 85 4 1860 810 892 148 12.8 1870 393 708 177 17.9 1880 270 551 132 34.6 1890 150 552 169 134 1900 108 568 205 292 1910 86 730 315 542 1915 185 645 279 558 6 This column gives tonnage passing; all other columns tonnage afloat. American Merchant Marine. In view of the widespread editorial and stump-speech complaint over the decline of our ocean-carrying trade under the American flag, with agitation for the governmental subsidy of American-registry shipping a topic sure to revive with renewed virulence after the war it is particularly to be noted that the second column of Table 3 bears no visible relation to the evolution of our foreign trade. This last has increased fairly steadily per capita, however it may have been carried in foreign ships. To throw light upon this matter Table 4 gives the figures as to our total imports and exports, including gold and silver, with the excess of either imports or exports stated as a percentage of the whole afterwards. Unfortunately these data appear in terms of dollars of valuation, instead of in mass of commodities, which breaks the rule for this book; but this is inevitable in this case. All figures in Table 4 except the first and the last state the average for the decade extending on either side of the year THE APPROACH 15 stated. The first figure gives the average for the years 1790- 95 and the last that for 1906-12. If "the disappearance of our flag from the seas" has had any detrimental influence upon the volume or direction of our foreign trade per capita, it is certainly not apparent from the statistics. Taking the figures as they stand, the lowest for the 122 years is that for 1840. But this is just the time when the American clipper-ship reached the very zenith of its pros- perity, when the American flag floated most prominently and commanded relatively the highest rates in the most distant ports! TABLE 4 TOTAL IMPORTS AND EXPORTS (INCLUDING GOLD AND SILVER) WITH EXCESS PERCENTAGES, 1790-1912 (Dollars per Capita per Annum) Year. Imports. Year. Imports. Year. Exports. 1790 $16.30 13.5% 1800 29.50 8.8 1810 17.80 16.3 1820 17.80 7.8 1830 $14.50 7.7% 1840 13.90 3.7 1850 17.10 1.7 1860 19.20 0.3 1870 26.00 2.4 1880 $27.90 10.6% 1890 27.10 6.0 1900 31.10 19.5 1910 39.20 13.0 Conversely, the highest figure is that for 1910, when American registry, as shown by Table 3, was almost at its lowest ebb. Yet the volume of trade (per capita) for that decade is almost three times that for 1840. Moreover, the balance of trade during that entire period drifted markedly toward that side of the ledger which economists generally regard as in our favor. In recent decades the large excess of imports over exports which prevailed at the time of our national birth has been reversed, during the very period when our flag was gradually disappearing from the seas, into an equally large excess of exports over imports ! In reality the figures may not be taken quite as they stand, for they record only valuations, and hence need interpretation in terms of the general scale of prices prevailing at each period stated ; but this will alter merely the degree, and not the nature, 16 MODERN ECONOMIC TENDENCIES of the deductions enforced. The contrast of Table 4 will still show that our foreign commerce per capita has increased fairly continuously with time, as the several continents became more and more closely united by the steamship, the cable and the wireless, and quite independently of what flag might fly above the carriers. The reasons for the decline of American registry are simple and natural, and have nothing to do with our economic pros- perity, either internal and external. These reasons are quite in parallel with our economic development in other industries than ocean-carrying. They are these: In the old days of sails, speed, which was and is the prime factor in determining both costs and profits, depended primarily upon the skill of the skipper. Merchant-navigation was then much like a modern yacht-race. In those days the sailor who knew how to crack on sail, night as well as day, without losing a lot of costly top-hamper to every squall which blew in out of the darkness, could make the long voyages in much less time than others. Sail must be carried to the last possible moment; and a proverb among mariners runs to the effect that^"any lubber can spread canvas, but it takes a sailor to shorten sail/' In the China-trade of clipper-days American bottoms often commanded twice the freight-rates, in competition with other nationalities, just because of the combination of skill, daring and alert good judgment typical of American commanders, in seas almost devoid of aids to navigation. Therefore in those days navigation was justly and naturally a profession of prominence and honor. The young men of the best families officered and part-owned our merchant marine. But they almost universally retired from so arduous a vocation before the age of forty. In colonial days at least one instance is reported of a ship sailing the twenty-months' voyage to the China seas with every officer on board still in his teens. The whole thing was an adventurous gamble against weather, uncharted seas, pirates, and fluctuating and unknown markets; but a gamble in which skill and courage played a large part. Both profits and losses were commensurate with those custom- ary in Wall Street to-day. A cargo of pepper landed at Salem in the eighteenth century is said to have netted a profit equal to four times the entire cost of the ship and the voyage. But now all this has been changed. The speed of a modern THE APPROACH 17 steam-freighter has been determined for her beforehand by her designers. Neglect or stupidity in the engine-room can spoil it, of course; but skill on the bridge cannot mend it. Navigation, as a profession, has been reduced to computing ob- servations by rule of thumb, and counting engine-revolutions from one to another of the lighthouses and light-ships which dot our shores and coastal waters like lamp-posts on a street. All distinctive honor and appreciable profit have passed out of the hands of the commander. Competition now succeeds or fails in the offices ashore, not on the high seas. The profit goes to the owner having skillful commercial judgment and alertness in watching a market re- ported hourly to him from Argentina to Manchuria, rather than to anyone possessing mere nautical efficiency. Whether the ship be sailed under domestic or foreign flag is little more than empty sentiment. It has nothing to do with our supply of carriers. Our ports will always be filled with all the bottoms for which cargos are offered. The unusual demand for ships occasioned by the present war has brought into New York harbor flags from South America and Asia which were all but strangers to the most experienced marine authorities. The profits made in using them will go to the owners or to those clever enough to control them temporarily, through charter whatever the flag flown. Conversely, if the ship be owned abroad the profits will go abroad, in spite of stars and stripes floating above the taffrail. It is just as natural and inevitable, under modern conditions, that our ships should be officered by middle class Scandinavians as it is that our steel-mills should be manned by Slav laborers and superintended by technical Teutons while the ownership, control, enterprise and profits all remain in American hands in both cases. Americans are better occupied in the commercial offices at home, it should be plain, than they would be com- manding tramp-freighters in the far seas. Yet, if the navigators and crew be foreign-born, what pride may we take in the fact that our flag is flown? Our satisfac- tion over our supremacy in international yacht-racing, for in- stance, needs be tempered by the fact that nearly every winning American boat has been skippered and manned by foreign talent. Only for the design is credit due to us. Railroads. The growth of steam-transportation on land has 18 MODERN ECONOMIC TENDENCIES progressed more slowly and with greater difficulty than that by water. Although steam-locomotives came into use for hauling coal wagons (on the same railroads with horses), soon after the appearance of the first practicable steamboat, in 1807, yet it was not until almost 1830 that Stephenson attained his dramatic triumph with the famous "Kocket," and established the railroad, which had long been used for freight, as a thing properly to be operated exclusively by steam, and fit for pas- senger-traffic. For it is difficult now for us to realize how gradually the modern combination of fairly level railroad, steam-locomotion and passenger-coaches, now so familiar and universal, came into recognition, after a long previous history of each as a separate appliance. Before about 1840 the railroad, as a means merely for aiding the horse-traction of goods-wagons (chiefly for coal or stone), and the steam-locomotive, then regarded as merely a competitor of the horse-drawn stage-coach on ordinary high- ways, had developed quite independently. In fact, the railroad had developed fairly completely from thirty to forty years ahead of the locomotive. What is said to be the first railroad in America ran from granite-quarries of Quincy, Mass., down to tide water on the Neponset Eiver, and is said to have been in operation (with horses, of course) during the Revolution. Yet no steam-locomotive was in use in Massachusetts until in the eighteen-thirties. Conversely, the locomotive, when it did appear (which was in England, about 1814) was accepted without question as be- longing as much to the highways, to compete there with horses in maintaining the passenger-traffic (which had never dreamed of boarding the slow, rough and dirty railway-coal-cars), as it did on the railroads, where it would be equally obliged to compete with horses. For on the railroads the horses had the right-of-way over locomotives by nearly a half-century of prec- edence. On the highways they had had only about twice that. Stephenson's great genius, therefore, lay not in the fact that he "invented" the locomotive, although he added to it features which have formed a part of its success down to the present day; for the locomotive was a pretty widely used machine for a dozen years before he touched it just as the stationary steam- engine was used all over Europe for sixty years before James Watt, the commonly accredited inventor of it, began his ex- THE APPROACH 19 periments. Stephenson's great achievement was to see that the railroad and the steam-locomotive belonged together, each being properly built to suit the other, while horse-drawn individual carriages belonged exclusively on the high-roads. For at that time the general expectation from steam-power, when applied to land-transportation, had been that it should replace horses in the private carriages of the highways, just as marine steam-power had replaced oars and sails, without other alteration in the industry. And the art had made surprising progress in that direction. It is somewhat startling to one who has taken for granted that the automobile is a product only of the twentieth century to learn that in 1834-5 there were a half-dozen commercial lines of steam-propelled omnibuses running in and about London, extending even so far as Brighton, sixty miles away. But even Stephenson's mechanical triumph, in his improve- ments over previous or competing locomotives, did not earn for him an easy or immediate recognition. Both popular prejudice and vested interests fought hard, in Parliament and out. It was not until fully 1840 that the graded railroad, fit for high-speed locomotives drawing long strings of carriages without toothed drivers, first won out in the battle against the traditional be- lief in the single stage-coach as the natural interurban vehicle, whether propelled by horse or by steam. It was not until late in the eighteen-fifties that the Pennsylvania Railroad had cut out the last of its inclined planes and stretches of canal between Philadelphia and Pittsburgh, running trains right through by means of locomotives, over grades which they could pull with- out dependence upon cable or rack-and-gear reducing the time of transit from three or four days in 1835 to less than twenty hours of comparative comfort. Quoting Bogart: "About 1850 Mr. Henry C. Carey wrote: 'Twelve years since the fare from Chicago to New York (1500 miles by lake and rail) was $74.50. It is now but $17.' ?; The last twelve years preceding the publication of this present book show no advance in facility of communication at all com- parable with this. The development of the automobile and the airplane have been marvelous, but they have not cheapened transportation or communication appreciably, if at all. 20 MODERN ECONOMIC TENDENCIES Figures as to the growth of our railroad-system in mileage are given in Table 5. As before, we are not interested in the gross mileage, but only in that per million inhabitants; for this alone is a true measure of the degree to which people have been aided in living, as the country grew, by increasing access to railway-facilities. The mileage is stated for the median year of the period stated, while the annual rate of increase is averaged over the period. The figures up to 1892 refer only to main-line track. Those since 1892 include also sidings; and since progress of late has been chiefly in the expansion of terminal facilities, rather than the building of new lines, this is only a fair way to state it. TABLE 5 RAILWAY-FACILITIES IN THE UNITED STATES, 1830 TO 1914 Period Mileage per Million Inhabitants Rate of Increase, Per Cent per Annum Period Mileage per Million Inhabitants Rate of Increase, Per Cent per Annum 1830 3 1872-77 1670 4.0 1832-37 73 89*0 1877-82 1860 2.2 1837-42 165 17.7 1882-87 2268 4.1 1842-47 231 7.0 1887-92 2657 3.2 1847-52 389 11.0 1892-97 3352 6 1852-57 673 11.6 1897-02 3390 0.2 1857-62 974 7.7 1902-07 3664 1.6 1862-67 1002 0.6 1907-12 3820 0.8 1867-72 1372 6.5 1912-14 3898 1.0 6 Change in classification. These figures show the enormous growth in transportative facilities in use for the support of each individual. The average citizen to-day makes use of, or "consumes," as a part of his daily needs and luxuries, over two hundred times the amount of transportation, measured merely in miles of railway-track, as compared with the average citizen during the childhood of men still living. Measured in ton-miles or passenger miles, and including electric-railway and other forms of transportation, the actual contrast is far greater still. THE APPROACH 21 Life and Transportation. This is the one most significant fact of modern social life, in its mechanical aspect. The funda- mental importance of our present reliance upon transportation and communication, to supply daily food, shelter and work for tens of millions who otherwise never could have been born or who, having already been born, must die soon after this transportation is interrupted cannot be over-emphasized. Therefore it is absurd to assume that the hundred millions of people now cemented together by our present intensity of com- munication do not need a form of social organization basically different from the population one-seventh as great, using but one-fiftieth of the modern amount of railway-mileage per in- dividual, of 1832, the earliest year in which the railroad had become a social factor. Still less is it reasonable to expect modern economic conditions to be met by the simple political formulas of a generation earlier still, when communication was far more crude than in 1832. Not only is the mileage of track in use significant, but also the widely varying rate at which this mileage has been built, shown also in Table 5. Between this rate and the degree of commercial prosperity prevailing at the time there is a close connection. At the same time, it is only natural to find a continual decrease in this rate of addition to our track-facilities, as the country became properly provided. Our later development has been directed more toward a more intensive use of what track we have. Nevertheless, up to the latest hour concerning which we have data, we are still increasing our trackage faster than our population. Intensity of Railway-traffic. This increase in intensity of traffic, while it has been active from the beginning, can be traced statistically only during recent years. Of the several means for measuring this growth amongst which selection must be made, the one chosen as the best indicator is the aggregate locomotive heating-surface of the country. Other things being equal, the power of a locomotive is proportional to its heating- surface. Data as to number and size of cars moved would show approximately the same rate of growth, but are not so accurate a measure of traffic as heating-surface. For value as well as weight of freight must be considered, and power includes both items; because the higher priced freight, as a rough rule, is 22 MODERN ECONOMIC TENDENCIES moved with a speed proportional to its value, and speed, as well as weight, calls for power. TABLE 6 RELATIVE GROWTH OF RAILWAY MILEAGE AND LOCOMOTIVE POWER PER CAPITA, 1904 TO 1914 Year Single-track Mileage Aggregate Locomotive Heating-surface Rate of Increase, Per Cent 1904 1000 1000 1905 1012 1055 5.5 1906 1026 1165 10.5 1907 1040 1278 9.7 1908 1039 1327 3.9 1909 1046 1328 0.1 1910 1055 1385 4.2 1911 1069 1462 5.6 1912 1073 1501 2.7 1913 1077 1579 5.2 1914 1079 1625 3.0 Table 6 gives the comparative rates of growth in mileage and locomotive-power per capita since 1904. Since relative rather than absolute rates of growth are what interest us here, the figures are all stated in terms of 1000 as the arbitrary standard for the year 1904 except in the case of the last column, which gives ordinary percentages. Since 1904 the increase in locomotive-power per capita. has been eight times that of the mileage per capita. Since the Cuban War the locomotive-power available for the support of each citizen has been virtually doubled. Railway-accessories. Returning to the broader aspect of the railroad in its relation to the material growth of the nation, five most important, if not absolutely essential, features had to be added to the railway-system with which the wilderness had been penetrated, up to about 1870, before the great fertile territory of the Middle West not to mention the mineral treasures of the Rocky Mountains, the lumber of the Sierras and the fruit-supplies made available by irrigation in the valleys of the Pacific coast could be reached from the Atlantic seaboard THE APPROACH 23 in what might be called comparative speed, ease and comfort. These features were : (1) The sleeping-car; (2) The air-brake; (3) The modern coupler and buffer, developed later into the vestibule ; (4) Steam-heat, and (5) The modern signal-system. All of these innovations appeared soon after the Civil War, coincidently with the extension of rails across the plains and mountains to the Pacific, in 1869, although the general adop- tion of steam-heat was slower than the others. Without the modern coupler a parlor or sleeping-car could not have been made appreciably more restful to the passenger than a freight- car. Without the air-brake speeds could never have approached modern figures. Locomotives could easily be built with power enough to draw the trains rapidly, but without prompt and powerful brakes such speeds would insure only disaster. Until steam-heat was adopted the frequent horrible holocausts in- volved in railway-accidents, from fires started by the "deadly car-stove," were such as are best forgotten. Without modern signal systems the growth in traffic (per mile of track) just noted would have been quite impossible. Inventional Lag. But it must not be supposed that the adop- tion of useful inventions follows always immediately upon the date of their introduction. Their success may be steady, and rapid enough to mark its effect statistically, yet there is much inertia to be overcome. In textile matters, for instance, although the power-loom was introduced in 1790, yet far into the nine- teenth century the use of hand-looms still prevailed widely. Bogart, quoting from Webster, says: "In 1815, when cotton-cloth was still woven chiefly by hand the family-weaver finishing only four yards of cloth per day the price of ordinary cloths for sheeting was 40c. per yard. In 1822 it had fallen to 22c., and in 1829 to 8i/ 2 c. In 1850, when factory-manufacture had completely abolished the old-time system and when the power-loom was in full operation, the price was reduced to 7c. as the result of machine-labor. That this price was due chiefly to machinery, and not so much to a fall in the price of cotton, is evident 24 MODERN ECONOMIC TENDENCIES from a comparison of the prices of cotton and cloth. ... A mule-spinner of 1830, carrying 300 spindles, could be operated by a single person, who could thus, with the aid of machinery, accomplish as much as 300 girls spinning by hand a single thread at a time on the old-fashioned spinning- wheel." The same is true of agricultural machinery, a line of inven- tion in which the United States led the world and one which had a vital influence upon the development of our country during the first half of the nineteenth century. When the first cast-iron plow was introduced, in 1797, it was disapproved by the farmers on the score of its "poisoning the soil," and it was not until about 1825 that there arose any general tendency to use improved agricultural implements. In 1834 McCormick brought out his now world-famous reaper, and in 1837 the Pitts brothers their threshing-machine. The decade of 1840- 50 witnessed the wide introduction of plows with interchangeable parts, soon to be followed by the use of chilled iron or steel as material. "Just before the Civil War a bushel of corn represented more than 270 minutes of human labor, at a cost of 35% cents, while to-day (1904) the same amount is produced with 41 minutes of labor for 10^ cents." (Encyclopedia Ameri- cana.) The way in which our path of progress, entered by such strides as these, led on through the intricate and brilliant record of invention which characterized the last half-century must be reviewed briefly. Reference to a few of the principal land- marks will suffice. Stationary Power. In the field of stationary power, which, after transportation, is the one most intimately linked with our growth in material prosperity, the first of these land-marks is the invention of the hydraulic turbine, about 1825. This device freed the water-powers of both continents, and particu- larly those of our own New England states, from the limitations of the old-fashioned overshot or breast wheel slow, cumbrous, and narrowly limited in its ability to handle high heads or large flows of water. About the year 1850 appeared the drop-cut-off steam-engine, THE APPROACH 25 in the hands of Sickels and Corliss, reducing the intolerable steam-consumption of the earlier engines so that they could be used for many purposes previously impracticable. There are few inventions which have had more permanent value than this, though largely unknown to the public. The development of New England's textile industries depended largely upon it. Efficiency versus Economy. Here we should stop a moment to consider one economic effect of these advances. The history of coal-mining, for instance, cannot be understood without knowing that nothing has so stimulated the gross consumption of coal as these improvements in the fuel-efficiency of the steam- engine. Each additional economy in the use of fuel, as measured in pounds per horsepower-hour, immediately made steam-power available for a wide range of uses from which it had previously been debarred by its cost for fuel. Therefore the number of horsepower in use rose much more rapidly than the fuel-rate per horsepower fell resulting in a steady increase in the gross consumption of coal for power. While this was true of every step in advance in steam-en- gineering yet it had its most marked instance in marine en- gineering, because of the multiple value of coal on board ship (as a displacer of cargo), in addition to its original cost. Hence there is no one item in the evolution of technical science which has so increased our drafts upon our coal-fields as the invention of the compound marine engine, which all but halved coal-rates per horsepower. Nor is there one which did more material good, for all these factors grow with length of voyage. Hence the compound engine was able to propel ships profitably on voyages into far seas where sail alone had been practicable before. To return to stationary steam-power, on land, about 1875 entered the high-speed automatic steam-engine, offering the user a gain in the way of space and first cost, in both of which items the Corliss engine was extravagant, which paralleled the gain in current fuel-consumption made available by the Corliss. Both types have had a wide field of usefulness, surrendering finally their leadership to the steam-turbine (coupled with the electric generator) during the last years of the nineteenth and the first of the present century. Gas Power. In parallel with this development arose the use of the gas-engine. Although the invention of illuminating-gas 26 MODERN ECONOMIC TENDENCIES in 1801, by James Watt's assistant, Murdock, had started by 1825 a steady creation of suggestions on paper for deriving power from gaseous fuel, yet the first commercially practicable machine appeared only in 1860, at the hands of Lenoir, in France. But illuminating-gas, which was first distributed in America in Baltimore in 1816, has always been too costly to serve as a basis for power in appreciable quantities. Up to about 1890 engines driven thus had necessarily been confined to small units for isolated purposes. It was only as the use of "producers" of cheaper fuel-gas of various sorts, in which Dowson was a pioneer, became common, that the gas-engine became an appreciable factor in our material development. The discovery of its usefulness when run upon the waste-gases from the blast-furnace as fuel, in Belgium in 1901, and the wonder- ful development of gasoline-driven engines for automobiles, motorboats and airplanes since that year, is personally familiar to all adults of to-day. The Locomotive. In the application of steam to land trans- portation there are few milestones to record. The locomotive itself was left in so perfect a state by Stephenson, and by the early American designers who concurrently developed the flexible form of running-gear adapted to our rougher roads and heavier traffic, that throughout the half-century from 1840 to 1890 there was virtually no change except in dimen- sion. Since then the introduction of compounding, super- heating and mechanical stoking, with the piston- valves enforced by higher steam-pressures and the radial valve-gears enforced by the crowding of more power within the unyielding track- gage, have permitted a tremendous increase in size and power of machine, with corresponding increase in train-load. But aside from these features, and the introduction of electric trac- tion upon a few lines of relatively congested traffic, or accessible to cheap mountain water-power, the growth of the railroad has been one of dimension only. The Marine Engine. In marine propulsion the advances have been more spectacular. The substitution of the screw-propeller for the paddle-wheel by John Ericsson (1845-60) instituted a marked gain in the appearance, sea-worthiness and carrying- capacity of ocean-going steamships. The introduction of the surface-condenser and the compound engine (1860-70) opened up to steam-traffic distant seas hitherto accessible only to slow THE APPROACH 27 and uncertain navigation by sail, and insured the decline of prosperity for the world-famous American clipper-ships. This conquest by steam was clinched by the entry of the triple- compound engine, in 1875. Not even the steam-turbine, invented by De Laval and Par- sons in the eighteen-eighties, and which reached recognition in marine propulsion about the year 1900, has yet made so marked an impression upon the character of our ocean-carriers as did these earlier inventions. The turbine has permitted a size and speed of modern passenger-liner which would have been im- practicable without it, but has produced no other alteration. For freighters of moderate size the Diesel oil-engine has made some splendid records in low fuel-consumption in voyages of great length, but to date it has not excelled the geared steam- turbine in general advantages. The Sailing-ship. Each advance in efficiency or power of engine diminishes further the relative importance of the ap- parently dwindling fleet of sailing-ships. Yet it is to be noted that the last two decades have witnessed a wonderful advance in the building of huge four to six masted, steel-hulled sailers schooner-rigged for coastwise and square rigged for deep- water voyages. While diminishing relatively, our sailing-fleet may be holding its own absolutely; and sail-power is a very efficient propeller for ships carrying bulky cargo. As to steam, the fuel-consumption of a modern ship has been brought so low so that, as remarked several years ago, "a sheet of note-paper burnt in the furnaces would carry a ton a mile" that further progress in this direction does not promise much. The chief costs in ocean-freight are now the fixed charges, labor, insurance, etc., rather than fuel. It is in this "line that an unmeasurable stimulus to foreign trade and travel has been felt from the invention of the wireless telegraph and the gyroscopic compass. We are told that transatlantic travel now loses, by reason of these aids, not' one-fifth the annual toll exacted by the sea only a generation ago. The Telegraph. There is probably no other feature of the modern arts (possibly excepting the steam-engine) which has made such profound, albeit unconscious, changes in our civiliza- tion as did the telegraph, which came into use in the eighteen- forties. Up to that time the slow and disconnected railway- service had been the fastest means of communication available. 28 MODERN ECONOMIC TENDENCIES Marvelous as was the change wrought by the railway over stage-coach days, yet the former was but an improved stage- coach. Messages could still be transmitted only so fast as the human body could travel. But the telegraph was really a marvel. It consumed no time at all. It disembodied the soul from its cumbering flesh and projected it through space regardless of time. According to the vernacular of a later day, whereas the telephone might boast : "What I say goes" ; the telegraph might retort : "Huh ! What I say goes without saying." It linked together people over larger areas than ever before were imaginable. In many ways days were reduced to hours, and states to counties. When the first Atlantic cable was opened, in 1869, New York was jocosely styled a suburb of London ; but that, or its reverse, has since become a fact. It was inevitable that so basic an advance in the solidarity of life as this should find reflection in an equally basic alteration of our political ideas and institutions. Unity of contact and freedom of intercourse between previously dissevered communi- ties necessitates an aggregation of their political powers. It was this, primarily, which enforced drastic change in our domestic politics in 1861. It was this which compelled a revo- lution in our traditional foreign policy in 1917. Before this great new fact of human cementation by electric telegraph might become a digested part of our American body politic, two generations ago, the time-honored tradition of "sovereign state's rights," inherited from the crude jealousy of the early colonies, had to be "trampled to death beneath the feet of a million marching men," in the horrors and inspirations of the Civil War. But digested it was. As soon as the railway and telegraph had been appreciably adopted the country had become mechan- ically a real unit. It must be one politically also. Invention the Dominator of Politics. Politics is nowhere the result of freak or whim, but always a consequence of physical and mechanical environment. Always and everywhere, in social evolution, it is improved means for transportation and com- munication which have been the foremost factors in guiding and promoting in sheerly coercing social advance. They unite into living, interacting organisms fragments of population or territory which were previously dissevered, and therefore inert. THE APPROACH 29 They release sources of social energy hitherto unsuspected, the magnitude of which is not understood even after their presence has become familiar. Without the railway and telegraph slavery and secession would probably have become permanent, for some decades after 1860 at least. The North would have protested morally and ethically, as it had been doing for a generation before; but it would have been living too far away, too indirectly affected by the South, to go to war about it. Certainly this would have been so without steam-transportation. Without the Pacific railways, first really operative in 1870, California must inevitably have regained her original political independence of the states east of the Missouri. It would have been too far distant, in time and effort, for political unity. Under local and Asiatic influences widely different from those at work upon the East, "the Coast" would surely have drifted away from its earlier slender allegiance, which was hardened into true unity only by the telegraph, the railway (which in this case arrived second), and the Civil War which they aroused. Communication Causes Consolidation. Easy physical access and communication is the one cement by which peoples are first bonded into actual consolidation. If this actual solidarity be recognized properly and promptly in their political institu- tions, all is well. If not, the bonds will irritate rather than unite, and war or revolution must occur. Institutions must be accurate and harmonious expressions of natural facts, else readjustment of an earthquake character must ensue. This is the fundamental law of modern social evolution. No history can be understood without this law. There is no place in history in which it stands out more plainly than in the American development of the telegraph, the railway and the Atlantic cable. More Recent Inventions. The still more penetrating, if less spectacular, influence of such inventions as the typewriter (1872), the telephone (1878), the electric light (I860) and the trolley-car (1885), in the rapid development of modern civic conditions of size, congestion and activity of cities, can receive only bare mention. To many readers the changes which they wrought have been matters of personal experience. To the young they are already of the mysteries of the past. 30 MODERN ECONOMIC TENDENCIES Solidarity, Diversity and Civilization, The telephone and the trolley-car (using the latter term generically to cover all forms of urban electric traction, including elevated and subway lines) contributed to the solidarity of the modern city. The electric light equipped it with that first requisite for social development, after solidarity namely, diversity by making the new, third "half-day" of city-life, the evening, almost the most important of the three. The attempt to imagine what would happen to modern social, theatrical, club, art and lecture circles if they should be forced to return to reliance upon the yellow, flaring, vitiating gas-flame, which formed the finest illuminant available when people now middle-aged were young, constitutes a reduc- tion to absurdity. The Elevator. One other most important, though commonly overlooked, department of transportation deserves special men- tion. This is the elevator. The wonderful modern mushroom- growth of skyscraper office and apartment buildings is due to, or is permitted by, the modern elevator alone. Thirty-five years ago the sky-line of lower Manhattan was a virtual level of four or five story flat roofs, broken only by the church-spires, the shot-tower and the then Equitable Building. Such Man- hattan would have had to remain had not elevators of a type then undreamed made it profitable to rent offices forty or fifty stories above the sidewalk. The congestion of the slums has been paralleled by, and ap- parently enforced by, the congestion of business in the sky- scrapers. The slums will not disappear until the skyscrapers come down. But this, if history repeats itself, will be quicker than they went up. Invention in General. Of progress in the more general manu- facturing arts still more cursory disposal must be made. We are concerned with their effects rather than with themselves. The one of prime importance is undoubtedly that of rapid printing by steam-power, chiefly at the hands of Hoe. The speed and ease with which this process permits ideas to be disseminated among large numbers of people stands on a par with the rail- road and the telegraph, or telephone, in its effect for solidarity and stability in modern communities. Either our nation as a whole or any of its large cities, if suddenly deprived of modern printing, would die of anarchy and riot, due to mutual mis- understanding between individuals and classes, almost as soon THE APPROACH 31 as it would starve bodily if all steam-transportation were to cease. Almost the same is to be said of such an invention, for in- stance, as the Bessemer process for the cheap production of steel in large quantities, for rails, bridges, buildings, etc. Such mate- rial accomplishments stand as the very skeleton of our modern community-life, just as the railways stand as its blood-circula- tion and the telegraph and telephone wires as its nerves. Indirect as may seem the connection between such uninter- esting mechanical achievements and the ideas or tastes of modern civilization, they are in fact as closely interdependent as is the work of an artist with a healthy development of his bones and arteries. Our understanding of all the finer metabolic and psychological processes of the human body was impossible until the mechanism of the body in its grosser aspects had be- come understood. As one of the foremost instances of such may be mentioned Harvey's discovery of the circulation of the blood a fact now so familiar a basis for every biological deduction that it is incomprehensible how any progress in medical science had been possible without it. Yet Harvey discovered merely the hydraulic fact of circula- tion. The far more significant discovery of the alteration of the blood from arterial to venous in the capillaries had to follow that. The still more important hydrodynamic fact of blood- pressure must await both of these. The parallel in social metabolism is perfect. We cannot un- derstand that mysterious, yet all-explaining, transformation of human energy between the processes of production and consump- tion as significant as the capillary transformation of the blood unless we first understand accurately the grosser facts of invention, transportation, distribution, etc., which form its mechanical basis. It is to parallel somewhat for the economic and ethical community such pioneer work of the early anatomists of the physical body, that this book proposes now to trace roughly the connection between material invention, the data as to which have just been given, and the resultant evolution of American politics, economics and ethics. Nineteenth-century Evolution. It is against such a back- ground of wonderfully rapid material accomplishment as the fore- going, then, that those less easily discernible but far more important changes in our economic institutions during the last 32 MODERN ECONOMIC TENDENCIES half -century must be viewed in contrast. During the first half of the nineteenth century these changes, while already under way, had attained little significance. The beginnings of later growth were there, plainly enough; but their modern luxuriant devel- opment had not yet been effectively fertilized by the wide adop- tion of mechanical devices, some of which were even then already invented. The steam-engine, the turbine water-wheel and the factory were already existent, it is true, long enough ago to have pro- duced the economic crisis in England of 1830; but they had had little effect in America as yet. This country was growing too rapidly, land was too free and the factory too small a feature relatively to the rest of the country, to permit economic forces to be emphasized. We were still a nation of pioneers. Our obstacles were still chiefly physical, rather than organizational, as now. Although invention was exceedingly active throughout the two decades preceding the Civil War, at which time we first became conscious of ourselves as a technical, rather than an agricultural, nation, laying the foundations for a later world- recognition as such, yet it took some time for this inventive outburst to exert appreciable economic effect. Even our rail- roads, the first feature of a pioneer land to assume economic importance, did not attain physical vigor until the eighteen- fifties, and other inventions of basic importance passed their adolescence still later. The first reaction of invention upon American social evolu- tion took the form of the development of slavery a form of domestic servitude which, previously to the opening of the nine- teenth century, had been comparatively unobjectionable into a vast money-making system, embodying all the cruelties which always accompany profit-making on a large scale. The cotton- gin, the power-driven cotton-mill, the steamboat and the rail- way had together made cotton-growing practicable upon a scale of quantities and profits before unattainable. It was these sub- conscious innovations, and no peculiarities of Southern cruelty or Northern altruism, which, by the middle of the last century, had forced slavery into such prominence that all other interests must give way before it. It is these mechanical wizards which cast over America a spell which could not be dissolved until slavery had been abolished. THE APPROACH 33 Thus our economic reactions from mechanical invention, dur- ing this earlier period, were devoted, first, to the development of slavery, and then to the dire struggle over its abolition. It was not until this political spasm was over that our modern economic history really began, in the credit-issues of the Civil War, in the boom times of 1864-72, in the rapid commercial and railway expansion of these years, and in the final collapse of inflated values in 1873. Then again, even where economic forces are known to have been at work at earlier dates, we have no reliable knowledge as to their extent. Statistical science, as well as other arts, experienced a marked stimulus about the year 1850. Therefore, while data will always be carried back as far as appears safe, yet what follows herein concerns primarily only the last seventy years or so of American economic history. The Blunder of 1840. Of these early beginnings in economic development one incident in particular demands mention here, before the analysis of any details may be attempted. The early eighteen-forties witnessed a change in national methods and beliefs which, although quite subconscious at the time, and largely unnoticed in the histories written since, now assumes a prime importance in the light of facts and doctrines only recently become prominent. When this youthful nation had first well awakened to the realization, during the first quarter of the nineteenth century, that development of natural resources was especially its duty and privilege, it was universally assumed, without discussion, that all enterprises of magnitude, such as highways, canals and finally railroads, should be organized, financed and built by the political government the federal, state or county government, as might be. Even banking was undertaken by the federal government. But the results of this policy, reviewed in a word, were financial disaster. However this result may be explained, as due to the youth and inexperience of the country or otherwise, there can be no question as to the fact : disaster. The resultant reaction of public opinion was as complete as it was inevitable. Instead of the country's realizing that its principle of action might be correct, mere details of method being wrong, and setting out to educate itself in the public handling of public enterprises, it reverted into an equally tacit 34 MODERN ECONOMIC TENDENCIES assumption, which has prevailed ever since, that private re- sources should be relied upon to finance and direct virtually all large public matters. Perhaps through the genius of Franklin or perhaps through mere freak of fortune, one gigantic public service, that of col lecting and assorting mail-matter, has remained public in method as well as in character. This is in addition, of course, to military defense, which has always been recognized as a public duty. But aside from these exceptions, and including even the transportation of the mails, all large enterprises have been financed exclusively upon the plan of private ownership with reliance upon private profit, rather than public service, as both the motive and the controlling forces. The further policy in this same direction, of having all small enterprises, down to the most modest corner-grocery or sidewalk fruit-stand, initiated and controlled in this same manner, is one inherited from the past in a manner still more subconscious. There has been even less question as to this than has applied, of late, to the private ownership of the "quasi-public" services. Yet, as will develop as we proceed, this systemless policy of free license to individuals to embark upon any and all economic ventures, without other responsibility to the community than to apply for a permit and pay their taxes, is one fraught with an even larger significance of modern tendencies, if not with menace of coming crisis, than the other. We shall see that this general policy, reacting upon a phe- nomenal growth of invention to produce as startling a social change as did slavery in the same way, has had a fundamental bearing upon the economic history of the seventy-odd years succeeding 1840, stamping the . civilization of which it has formed a part with those ear-marks by which it will be known, in all probability, throughout later centuries. Begun in the early 'forties, this distinctly modern policy of commercialism had already had time to leave its first imprint upon the statis- tics of 1850. By 1864 its growth, although still obscure, had sufficiently impressed Lincoln as a sign significant of the times so that, in his second inaugural address, written in the days of direst national distress due to the wavering issues of the Civil War, he took occasion to warn the country against its menace, as boding a crisis possibly worse than that of slavery itself. Lincoln of course did not see this problem in the light which THE APPROACH 35 has since been thrown upon it; nor was it then obscured by its present intricacies aided by the deliberate camouflage always accompanying huge profits and gigantic prestige. But his mar- velous insight warned the country thus early against the dangers involved in issues which were purely internal and economic, rather than political; and in so doing he planted an invaluable milestone for our guidance in fixing dates of development of public recognition of this huge problem. It happens, too, that the year 1850 furnishes us with about the earliest economic statistics of a national character approach- ing completeness or reliability, in the seventh United States Census. What follows herein will therefore be an analysis of that economic evolution of our land, recorded primarily in the Census reports, which began visibly to take form about 1840, as a result enforced by the physical, and particularly the in- ventional, history of the latter half of the eighteenth century; which gathered headway quickly thereafter; which experienced marked acceleration at the close of the Civil War and continued to accelerate irregularly thereafter until the close of the century ; which witnessed a most phenomenal outburst, as the result of the Cuban War, as the present century opened; and which now shows signs of undergoing its most wonderful stimulation of all, as a fruit of the as yet unfinished Great War. As the physical and inventional growth which played the role of cause in this development has been accelerated, as the decades passed, in arithmetical ratio, so its accumulating resultant modern com- mercialism should naturally be expected to have accelerated in geometric ratio. This, we shall see, has plainly been the case. So marked has this acceleration become of late that condi- tions are now fast approaching the critical point. There is indubitable evidence that in 1914, had not the Great War in- tervened with its artificial stimulus, diverting us from the smaller domestic to the greater world-problems, we should even now be grappling this internal crisis in one of the greatest struggles of our national life. The economic situation prevailing in the winter of 1913-14 and the following spring, when there were over a quarter-million of enforcedly idle in New York City alone, and when securities had fallen to near half of their normal value, with railway-traffic and mill-outputs relentlessly restricted although no one here then dreamed of any impend- 36 MODERN ECONOMIC TENDENCIES ing world-war was quite without a parallel in our economic history. This present analysis of American history, then, will be based primarily upon the seven United States censuses from 1850 to 1910 inclusive. Our aim must be not merely to see what is our economic condition to-day, but what it was seventy years ago, and in which direction we have been tending since then. CHAPTER II THE SOLE AIM OF INDUSTRY: LIFE-SUPPORT IN turning from the tangible and visible to the institutional development of our country it becomes necessary, before resum- ing our narrative of facts, to determine carefully our concept of the fundamental aim of all industrial effort. For conclusions as to the significance of the historical facts as to the nature, the success or the failure of our institutional progress must vary widely, according to differing views as to these premises. Accuracy at just this point will prove to be, as to later con- clusions, what the aim of a gun is to the flight of the bullet the prime determinant of hit or miss. In economics as else- where, no conceivable diligence in the final sorting of micro- scopic data, after an inaccurate start in the statement of basic principles, can ever convert into success the inevitable failure to hit the mark. Here is where the average professional econ- omist goes far astray. The task before us is the study of American economic in- stitutions, their nature and their growth. In order to narrow this gigantic task we must begin by eliminating all debate of political issues. These last are not merely irrelevant. The prime lesson needed to-day is that they are impotent. We are no longer ruled by the political powers which we have built up at such painful cost in the past, but by those far more powerful economic forces to which Congress must give a most attentive ear, or which work their will regardless of political restraint not that they defy the laws, but that we cannot frame laws tight enough to stop escape. Our political govern- ment now rests upon, is supported by and is controlled by our economic institutions, not our economic institutions by our political government. The evolution of purely political institutions is now fairly complete. With the enunciation of the principles of democracy in our Declaration of Independence and the adoption of our 37 38 MODERN ECONOMIC TENDENCIES Constitution,, with later ratification and extension incidental to the abolition of slavery with the advent of woman-suffrage, and particularly with that extension of political democracy to cover all small nations under some form of world-government which promises to be the result of the present war political liberty has now reached a culmination to which little may be added, and one in which this continent has led the world. Proportional representation, the initiative and referendum, and a few other such minor measures which, however important in themselves, are plainly secondary to what has been accom- plished, and plainly fail to touch the big economic issues, are the only political refinements still in the air. Our political campaigns and legislative sessions have descended from their early dignity into the commonplace, if not the sordid, because they no longer concern issues vital to the people, nor to the progress of the hour. That our political evolution is complete is proven by the fact that political issues have been overwhelmed by economic ones in every form of public debate. The sole apparent exception to this is the common, but mistaken, effort to answer economic demands with futile political remedies. The Economic Problem. The basic question of all economics is : What is the real aim of the industrial system of any land ? This is the crux of the whole problem. Society to-day is doing certain things with marvelous skill and amazing energy, only to find, after they are done, that they have not brought happiness, nor even material comfort. Economic literature is full of discussion of more or less efficient methods for the ap- plication of human effort to certain ends, without a word as to the comparative wisdom of ever undertaking the enterprise in question, nor as to the value of the result when gotten, however efficiently. In spite of all our increasing scientific and technical ac- curacy and efficiency, world-wide discontent and turbulence are increasingly rife. Our wonderfully systematized factories are not keeping up our productivity of contentment. Men are everywhere trying to make new records of speed or accomplish- ment, yet instead are making fools or brutes of themselves, by the folly of the thing attempted. The Natural Economic Aim. No apology is needed, there- fore, for recurrent emphasis upon the proper aim of all economic THE SOLE AIM OF INDUSTRY! LIFE-SUPPORT 39 effort. The economist must keep his mind fixed upon this guiding question as the sailor keeps his eye upon the compass. It must never be forgotten, then, that all modern systems of industry and commerce are but the intricate developments of the simple, primitive processes by which the isolated savage or hermit procured for himself, from the soil, the sea or the forest, what he wished to eat or wear. However complex these modern systems may become, to meet modern conditions of enormous populations, united over vast territories by intricate facilities for communication, this basic purpose remains ever unchanged. It cannot be changed, however lost to view it may at times become. The sole natural aim of all industry and commerce is to Feed the Ultimate Consumer. The sole object of all wholesome economic effort is to support and elevate individual human life. Any other devotion of effort than that, amongst an industrial or commercial people, is a sheer waste and dissipation of energy, whatever may be its solemn sanction by law or tradition, or its apparent pecuniary profitableness. This is the acid-test by which each atom of economic effort must be identified, as either productive or unproductive of human happiness, and hence to be encouraged or abolished. Natural Production. Imagine, then, a hermit living in the edge of a wood, with a meadow and a river near by. All the natural resources for agriculture, forestry, hunting, fishing, herding, etc., may be supposed to be available. But all of these, we will imagine, he must develop alone. In this work what must be his guide? In which direction shall he exert his strength and skill? The only possible answer is : His own desire. For his desire is supposedly a prudent, natural one, tempered by experience, rather than the untutored impulse of a child. Hence the value or efficiency of his own efforts in behalf of his own happiness is measured solely by the accuracy with which he permits his desire to guide his labor. If, for instance, he proves a most industrious and successful farmer at raising turnips, yet he detests turnips, or a most fortunate fisherman, when he prefers game to fish, his labor will not feed him. Although he may be rich in commodities he is 40 MODERN ECONOMIC TENDENCIES poor in happiness. Through ignorance or perversity or super- stition, he is starving in happiness amidst material plenty. Social Motor-nerves. In the case of the hermit it is difficult to imagine what motive should lead him thus to disregard his own desires; for the one delight of the hermit-life is the free- dom to do exactly as one pleases. But in the case of modern society, wherein the impulses which guide each individual act are but crude transmissions, through a clumsy, intricate social mechanism, of a most remote and composite individual desire, originating with a myriad of unknown persons lost to view amidst the intricacies of the Consuming Public, there is grave doubt as to this accuracy of transformation of basic biological desire into actual social accomplishment. A prime character- istic of modern society is its proneness to find itself developing acts and institutions which it did not intend and does not want. The one objection to life in modern congested society is that, whatever may be the consolations, one cannot do as one naturally pleases. Desires no longer guide actions. Effort is constrained by environment and necessity, rather than by sentiment; and environment is determined for us by fixed institutions which cannot be changed by individual will. This is most obviously true in the economic field. There people normally work long after they are wholesomely tired long after they would prefer rest to pay, if only the rest might be had without losing the job. Conversely, they often idle when they are hungry and anxious for work. Yet the modern economic system is merely the latest develop- ment of the muscles of the primitive hermit. The modern Ultimate Consumer corresponds with the palate of the hermit, as to food, or to his back as to clothing. In between palate and muscles, in the hermit, lie merely his motor-nerves, trans- lating demand into supply. Yet if their action be perturbed by the presence of some false superstition in his brain they will not transmit truly. He will act insanely. Similarly, in between the producing factory-system of modern society and the Ultimate Consumer, whose desires alone must guide it, lies the whole intricate fabric of sale and purchase, resale and repurchase, attempting to translate the demands of a myriad of distant, scattered and unidentified Consumers into productive activity within the factory. How much more easy is it, in such an indirect transmission as that, that, if there THE SOLE AIM OF INDUSTRY: LIFE-SUPPORT 41 should lie in the brain of society some false economic super- stition, our ultimate distortion of these originally wholesome demands may become as erratic and inefficient as the vagaries of a crazy hermit? As, in the individual, it may be either the originating brain or the transmitting nervous system which develops erratic action, still more is this true of society. Therefore, the social question now pressing this generation to the wall for a reply is: Are our economic motor-nerves working truly? Does our selling-system transmit truly to the producer either the desires or the payments of the Ultimate Consumer? Is modern commercialism doing what the Con- sumer really needs or desires? Or may it not, on the other hand, be directing its best energies into other acts, which may net it good profit but which starve the Ultimate Consumer? Value. It is only in the market that these questions may be answered. It is only where produce is consumed in the Ulti- mate Support of Life that criterion may arise as to whether value has been produced in the making of it, or whether effort has been dissipated in the creation of sheer rubbish. This is the supreme economic test. That thing alone has value which, because it nourishes and pleases the Ultimate Con- sumer, stimulates his motor-nerves and muscles into a renewed activity capable of producing in turn the equivalent of that consumed, or more. Economic Sovereignty. It is at this point alone, also, that arises the sole authority for directing production. The poorest in the land, if he have but a dime to spend, rises, during the spending of it, into supreme authority over the industrial sys- tem of the land. For he is a free agent in selecting what he shall purchase, and the thing thus selected from the shop- shelf must then be replaced by some factory; while the thing next to it is, for that moment, unwanted, worthless rubbish. In all economics it is the desire or need of Him-who-Spends- Money which exercises supreme control over all industry. That authority each producer must obey absolutely. Just as the most solitary recluse in the world is a slave to his own desires, so, in the most congested society, the producer is the slave of the Ultimate Consumer not in an unnatural, oppressive sub- jugation, but in a natural wholesome submission which forms the sole natural foundation for social happiness. As producers, neither recluse nor factory-hand have anything 42 MODERN ECONOMIC TENDENCIES to say as to what is to be done. Each must work at what is wanted for consumption. It is only when the consumer-half of either the hermit or the factory-hand comes into play that he becomes Absolute Sovereign over all who work. So long as the Ultimate Consumers like and can subsist upon what a workman makes he produces value, and is prosperous and happy. Just as soon as they reject his produce although it in itself may not have changed he ceases to be a producer, or to be happy and prosperous, whatever may be his industry or skill. A factory of ten thousand able artisans may work industriously for a year; yet all they will have produced, if it does not meet with the Consumer's approval if it cannot be sold will be sheer rubbish. Social Perfection. It is the degree to which this sovereignty is embodied in the economic organization of a nation that that nation preserves to its people effective justice, true prosperity, social content and permanent stability. It is the perfection or imperfection with which a society guarantees to each Sovereign Consumer this right, authority and opportunity to control and direct most accurately the productive effort which supplies him with that upon which he subsists, which measures that society's efficiency or inefficiency in the development of human happiness, domestic peace and social stability. Just as all political liberties rest inalienably upon the consent of the governed, manifested in a jealously guarded equality and freedom of ballot-franchise for the individual Voter; just as the autonomy of the individual conscience in all matters of divine worship lies at the bottom of that religious liberty which men have found, by centuries of bitter experience, to be the first requisite for a stable, civilized society; so the no less im- portant economic liberties are founded upon the breadth, purity and freedom with which the Ultimate Consumer exercises his naturally sovereign right of control, at the point of retail pur- chase, over all industry of production and distribution. Orthodox Error. So simple and obvious is this truth that its emphasis seems silly. Yet the bulk of all present economic discussion wanders away into impotent irrelevancy through care- lessness or error at this one elementary point. Not only whole volumes, but whole libraries of treatises, have been published, and are regularly accepted by our universities, although they are based upon the arbitrary, unnatural and unjust assumption often made unconsciously that some other thing than the THE SOLE AIM OF INDUSTRY: LIFE-SUPPORT 43 support of life, or the gratification of desire, in the Ultimate Consumer, is the criterion of value in industry, or that such other thing is equivalent to human life, or that economic sovereignty should be centered somewhere else than in the Ultimate Consumer. Thus, to most economists, the possession by a thing of "value in exchange" stamps it as having value. Yet how can this be cogent? There are many things, such as lottery-tickets, or seats at a prize-fight, or bottles of whisky, or lumps of opium, which possess high valuation in exchange; yet all agree that they are biologically destructive of life, and therefore cannot be conceived as having real value. Why does not this same criterion apply economically? Why does not this same question attach with equal force to some other things, such as stocks, bonds, franchises, etc., which are everywhere admitted as having great valuation in exchange ? We must have some criterion of true value which is much more reliable than "value in exchange." The Sole Economic Criterion. In the present work no hazi- ness upon this issue will be tolerated. It is the life of the Ultimate Consumer which alone counts as of value. Com- modities or services embody value solely as they contribute to that life. All else is dross, waste or poison. Therefore no middleman nor duplicator nor advertiser nor financier, nor any intermediate service whatever, between the original source of quite raw material and the Ultimate Con- sumer, possesses any economic rights whatever, except as he or it may actually contribute to the life-support of the Ultimate Consumer. Hence each of these may wield economic sovereignty only when, in his own function of Ultimate Consumer, he buys the produce of others. Similarly, no profit, nor income, nor credit-instrument, nor "security," nor commercial enterprise, nor instrumentality of any form whatever, will be admitted as being socially whole- some, or as having any value whatever to the community, except as it may actually create life-support for the Ultimate Con- sumer. In order to do that, any such an instrument or service must represent effort productive of life-support according to the taste of the Consumer; and to meet this test it must exist at the conscious behest of the Consumer, and not merely be accepted by him because it is thrust upon him. This gage of right or 44 MODERN ECONOMIC TENDENCIES wrong in the economic world must be supplied with the utmost sternness. Therefore, in the expression of this taste, society must guar- antee to the Consumer the fullest opportunity to inform himself as to all economic facts. There can be no secrets from the king. The natural will of the Ultimate Consumer must find itself in accurate, free control over all economic facts. The Basic Economic Contrast. This basic contrast between that portion of the industrial or business system which actually supports the life of the Ultimate Consumer and these various other things incidental or irrelevant to it, or parasitical upon it, pretending to an importance which is not theirs by right, may be crystallized within the terms "value" and "valuation" respectively, to which may be assigned these preliminary defini- tions : (1) Value is the ability of any human activity, whether exerted directly or stored potentially in the form of a com- modity, to support the life, or at least gratify the desire, of him who ultimately absorbs it. (2) Valuation is the measure in money which the existing economic system places upon this or any other act or com- modity what is commonly called its "value in exchange." Economics in Terms of Human Energy. A full understand- ing of these definitions will not be possible until a number of factors have been considered. For the present it suffices to note that all the quantities concerned and measured- are amounts of human energy. It is human energy alone which produces value. It is human energy alone which is to be produced as a result of its ultimate consumption. The energy may be either that of brains or of brawn, but it is always human. While we may at times be forced to use money as an ap- proximate measure of human energy, for lack of some more stable and penetrative standard, yet money is recognizable as of value itself only because it embodies, and therefore serves as a means for the transfer of, human energy. If it be true, as has been suggested, that no satisfactory measure of human energy can be found, then we can never have any exact science of economics, able to foretell manifestations of human energy as accurately as the science of astronomy foretells eclipses. But neither of these assumptions will be given credence here, in the premises. CHAPTER III THE COTTAGE-SYSTEM AND THE FACTORY-SYSTEM The Archaic Cottage-system. The standard productive sys- tem of a century or more ago was a very simple affair and needs little description. Known widely as the cottage-system, the term indicates approximately the nature of the "system." Yet work need not be done in a cottage in order to fall properly under the term cottage-system. The name implies merely that, whether done in an early, crude shop, or on a farm, or in the home, it was done upon the simple plan fol- lowed by virtually all our ancestors in making virtually all their household needs. That is, the thing was produced in fair entirety by a single workman, or a single household; it was consumed either by those who made it, or by Ultimate Consumers who bought direct from the producers; and all the tools, raw material and product involved were owned by those who did the work. Although by a century ago a beginning had been made in the replacement of this simple plan by the modern factory-system, yet it was only a beginning. Long after that time, even down to the year which has been selected here as representing the start of the modern period, 1840, the bulk of all the com- modities which are now regarded as exclusively factory-products were still made (if made at all) by the housewives, or by the men-folk in the shop attached to almost every farm, or in a village-shop which catered only to village-trade. Although no date can be set at which this plan gave way to the modern one, yet year by year, and industry by industry, the transfer has been made from the simple, primitive cottage-system to the intricate modern factory-system; and the bulk of this transfer has been effected since 1840 or 1850, the initial point of our statistics. Riches Follow the Abandonment of the Cottage-system. Simultaneously with this transfer there has arisen a marvelous, 45 46 MODERN ECONOMIC TENDENCIES a quite incomprehensible, rate of material productivity. Trite as is the effort to find adjectives fit to express the wealth of to-day, as compared with that of two generations ago, yet the duty may not be omitted here to impress upon the reader the fact that this increase, during the last seventy years, has been little short of the miraculous. Still more must it be empha- sized that this increase has been simultaneous with the shift from the cottage-system to the factory-system of production. Just how much richer we are to-day than seventy years ago we cannot say, for of many of the things in which we are now so rich we then had none. All we can do is to admit, as axiomatic, that the ratio of increase has been tremendous, and that it has been a result of the adoption of the factory-system. It is safe to say that not a serious mind in the land, in either commercial or professional life, would dare to doubt this re- lationship of cause and effect, nor to advocate a return to the pristine cottage-system of production. Certainly if any college- professor or theorist in economics should urge any such doctrine, he would be cordially attacked, or at least ignored completely, by every practical man of affairs. The Cottage-system Obsolete. It is first to be noted that the disappearance of the cottage-system is now, and has been for some years, practically complete. However we may discover, later in this analysis, that much remains to be done in the way of a complete adoption of the factory-system, its predecessor is surely already dead and gone. It is universally agreed amongst economists that no workman adhering to the cottage-system can possibly compete with his fellows in the factory-system, and live. In the sweatshop, it is true, there still persists a queer rem- nant of the forms of the cottage-system, carried on really under an impure form of the factory-system; but it is uni- versally regarded as an unwholesome and unwelcome survival of the archaic, in both its economic and its ethical results. In the fancy work of the lady of leisure, or in hand-knitting for the army, lies another fossilized specimen of the extinct system. But in every other walk of industry productive labor is synony- mous with special, undomestic premises, and all the other at- tributes of the factory-system. Even literature to-day is con- ducted usually in a business-like office, near the public library of a great city, instead of in a private library in a home on a THE COTTAGE-SYSTEM AND THE FACTORY-SYSTEM 47 shady street, as was true of the foundations of American letters. All this being so, it becomes of paramount importance to inquire most carefully as to the exact contrast between the cot- tage- and the factory-systems. The former, in its simplicity, has already been sufficiently defined. But what is a factory- system? The collection of mere buildings and machines called a factory is easy to see and understand; but just what is the modern factory-system, as an institution? The Modern Factory-system. The following definition of the factory-system is taken from Bogart, whose excellent history of American industrial progress may be relied upon for many facts, and represents the prevailing view of the most intelligent class of public opinion: "By the factory-system is meant the concentration of all the processes of manufacture in a factory, involving their withdrawal from the household and shop where they had previously been carried on; it involves also the organization of the workers under skilled management, for stipulated wages and fixed hours, with production for the general market and not upon order." But this definition is far from satisfactory. It is based in the first place upon a distinction as to locality; whereas locality, as will be seen shortly, is quite an incidental feature. The factory-system is universally relied upon, for instance, in busi- ness-offices; or it may be carried on in the home, as in the case of much dress-making and some literary work ; while the sweat- shop system, which is always carried on in the home, is a much nearer approach to the factory-system than to the cottage- system. The items of superintendence and stipulated wages are features essential to the factory-system, it is true, and "fixed hours" is usually so. But the distinction drawn between work for the general market, in contrast with working upon order, has naught to do with the real difference between the two systems. Origin of the Factory-system. Historically speaking, the factory arose originally from the cottage-system through the invention of power-looms, the steam-engine, accurate machine- tools, huge cranes, etc. To-day it comprises an all but incom- prehensible variety of costly, powerful or delicate appliances. 48 MODERN ECONOMIC TENDENCIES But it is the invention of these, and not any deliberate, in- telligent perception of the valuable possibilities of the factory as a system of industry, which forced society into its reluctant adoption. This automatic, involuntary adoption of the factory- system was one of the first of the many instances which this investigation will uncover, of society's taking its forward steps in evolution quite without any deliberate intent, or even any consciousness of the direction in which it was striding. For, this adoption of the factory, as a thing inevitable if we are to make use of modern inventions, once having been ac- complished automatically and blindly, society has only awak- ened gradually to the realization that the value obviously there was inherent in the factory-system, as a thing quite apart from the mechanism of the factory. In reality the greatest poten- tialities of the factory-system, as a system, rest upon features quite other than its tangible appliances. These features are ones of organization, rather than implement. Thus the factory-system is used to-day to impart efficiency to many enterprises which make no appreciable use of those appliances which forced that system into adoption. Steno- graphic and accounting forces, frequently involving hundreds or thousands of operatives, are universally organized upon the factory-system, although they use neither power nor costly tools. Libraries and colleges, the post-office and the public schools, and the rapidly expanding administrations of our cities, state and nation, are all now operated upon the factory-system. Everywhere this system has been tried its efficiency has been proven and its further adoption insured. It has spread over the entire face of the globe. The populations which have adopted it have everywhere multiplied like rabbits and flour- ished like the wicked. Distinguishing Peculiarities of the Factory-system. It is therefore very much in order to inquire most carefully what it is about the factory-system, as a system, which differs from other known methods of organizing production. To the steam, hydraulic and electric prime movers, the huge cranes, the ponderous tools, the hordes of noisy looms and the intricate delicacy of electric communicative apparatus due credit must be given. But this still leaves unexplained some huge gains which are peculiarly due to the particular form of organization THE COTTAGE-SYSTEM AND THE FACTORY-SYSTEM 49 adopted, which has now become the prime characteristic of the factory-system. Not only are these organizational advantages superior in im- portance to the mechanical features of the factory. We shall see later that the intricate collection of appliances could not function at all, unless backed by the peculiar method of or- ganization which has become linked therewith wherever factories are used, regardless of continent, climate, form of government, or literacy or illiteracy of personnel. The Factory-system a Matter of Organization. The signifi- cant contrast, then, between the archaic, obsolete cottage-system and the modern factory-system, explaining the all but incredible progress in material productivity accomplished during the last century or so, is not primarily one of form of appliances used, but rather one of organizational methods. This contrast in organizational methods is at least four-faced in its nature. (1) Ownership of tools, materials and product on the part of the workman has disappeared, and possession has taken its place. Whereas the workman under the cottage-system had to own both tools and raw materials before he could begin his work, and then owned the product also, which he must sell before he could enjoy what corresponds with modern wages, the workman under the factory-system is never allowed to own either tools, raw material or product. (2) Competition has been replaced by monopoly. Under the cottage-system the workman was responsible for finding his own work, and for keeping it. Under the factory-system, the workman once assigned a job is never allowed to engage in struggle to keep it. He is not allowed to struggle to secure it. No other workman is allowed to question his right to his job. The explanation of the success of the factory-system is that, under its peculiarities, and chiefly the first one listed above, no other workman is ever tempted to even try to get his job away from him. This is so because nowhere in any factory is duplication of service permitted. Only one of each department of effort one foundry, one machine-shop, etc. is permitted, as contrasted with twenty such, competing with each other, prevailing in the cottage-system. (3) Credit is universally advanced, in the form of costly appliances intrusted to workman for the good of society, without 50 MODERN ECONOMIC TENDENCIES the exaction of either security or interest-charge. The only thing required is proof of sobriety and industry of character, and suitable craftsman's skill. (4) Specialization of effort, and hence continual interchange of material, are carried to the extreme degree possible. But this last phase of the factory-system, it must never be forgotten, would be quite unattainable, in spite of the assistance of a whole profession of "efficiency-engineers" as designers of fluidity of effort, were it not for the presence of those features of organiza- tion preceding this last in the list. For instance, the size, power, speed and delicacy of the modern steamship has become possible only as we have adopted the policy of intrusting it to a non-owning, salaried commander, without waiting for him to acquire its ownership under hope of private gain. China, Australia and New York have come into intimate touch with each other not merely because steam has displaced sail. The steamship could never have replaced the sailing-vessel had we not abolished the all but universal prac- tice of ownership, in every step of construction and operation, which was . characteristic of our merchant marine of two gen- erations ago. Specialization and Interchange. In reviewing these con- trasts between the organization of the obsolete cottage-system and the successful modern factory-system, the order of listing given above will not be followed. This is done because the list runs in order of relative importance. But the degree of familiarity in the public mind is in exact reverse from this. The feature of specialization, which is quite dependent upon the features of ownership, monopoly and credit peculiar to the factory, is the one most familiar in debate. Therefore it will be considered first. Although labor under the cottage-system, or even under the feudal system which preceded it, was specialized to a degree, men being known even then as bakers, carpenters, etc., yet the modern factory-system carries specialization to a degree far beyond that possible in the cottage- system. Every factory-hand, even if unskilled, specializes upon less than what was formerly a single trade. The modern shoe-maker, for instance, knows nothing: of real shoe-makinsr. He may operate an "insole-tacking-machine" or the like, which performs only one little part in making a shoe, THE COTTAGE-SYSTEM AND THE FACTORY-SYSTEM 51 and he knows nothing about all the other steps in the process. A single publication of the United Shoe Machinery Company describes fifty or an hundred different successive machine- processes, combined to form the mere putting together of a shoe; and that, too, from ready-made parts, such as soles, uppers, vamps, counters, etc., each of which had been supplied from a factory of its own, and each representing its own string of distinct machine-processes embodied in it. The "hand" who operates any one of these several mechanical processes, in any one of the row of factories through which untanned leather (for the tannery itself is another such a com- bination of processes) passes upon its way to become a com- plete shoe, has been forced into a degree of specialization un- dreamed in the days of cottage-industry. It is a degree which is virtually unimaginable, even to-day, by that vast mass of readers whose lives have never carried them appreciably within factory-walls. It is unimaginable even to the factory-hand or corporation-official, because his work carries him into contact with as small a portion of this whole as an enlisted man sees of a military campaign in which he takes part. Ownership versus Possession. Since this degree of specializa- tion has become possible only as the feature of ownership has departed from our industrial system, replaced by possession and factory-credit instead, these topics must be given important emphasis. The prime characteristic of the primitive, inefficient and now obsolete cottage-system, in contrast with the far superior fac- tory-system which has superseded it all over the world, by survival of the fittest, is that in the former the institution of personal property was everywhere obvious and inseparable. It was intimately interwoven and identified with industry at every step. The shoe-maker, for instance, not only aways did own, but he always must own, his own tools, thread, lasts, etc., before he could enter upon the practice of his trade. Then he must buy his own leather before he might begin actual work. After he had completed it he inevitably owned the finished product. Finally, he himself must sell it, usually to its Ultimate Con- sumer, before he could enjoy any "wages" for his labor. His work was bonded at every step with his personal property-rights therein. To this rule there was never any exception, aside from the 52 MODERN ECONOMIC TENDENCIES gradual outcropping of the factory-system, in sporadic cases, as it began its extermination of the cottage-system. Indeed, so universal and basic is this distinction of ownership-in-industry as characteristic of the cottage-system, and of non-ownership as characteristic of the factory-system that it must be accepted as one of the two or three determinative tests for defining where one system ends and the other begins. In comparison with this criterion all tangible differences as to tools, materials, premises, power, and form of pay sink into a secondary position as accidental and unimportant details. Modern Abolition of Property-rights. For it is a universal characteristic of the modern factory-system, to which there is no exception whatever, that within its precincts All Property-rights Have Been Abolished, so far as concerns anything to do with the factory and its work. This is not saying that property has been confiscated. It is merely saying that the institution as a whole has been abolished. It is not needed. No one is conscious of its absence. No question of "mine" or "thine" is ever permitted to arise within the factory-premises. No one within the factory, so far as the conduct of the day's work is concerned, is ever per- mitted to own either the raw material worked upon, the tools with which it is transformed, or the product finished by the laborer's effort; and no one feels the need or desire for any such an ownership. Everything, it is taken for granted, be- longs to the factory, exists for the factory and is to be used by anyone who can contribute thereby to the good of the little factory-community. For the modern factory-system has adopted completely and exclusively that maxim of Prudhomme's so often half quoted, so universally detested by the conservatives in their philosophy, yet so sacredly treasured in the bosom of their industrial premises and their daily administrative acts: "Property is robbery ; possession is liberty." For every factory-owner or em- ployer of labor, on any sort of premises whatever, approves enthusiastically and maintains universally, just so far as his authority can be extended by law, a system by which free possession and use of anything in the factory is guaranteed to every man, provided merely that he be capable of making use THE COTTAGE-SYSTEM AND THE FACTORY-SYSTEM 53 of it, while property-ownership therein is absolutely denied to anyone. The men sitting at the benches or machines may own the money in their pockets, of course, or the home left behind them ; but these form no part of the factory and have nothing to do with the day's work. The factory-system begins where ends the institution of ownership on the part of the worker. So far as the function of the factory is concerned, private ownership has already been abolished as completely as has the cottage-system of industry. Community-use, as a basic institu- tion, has been substituted for that of private property, by the authority of all employers of labor. To this statement there can be no exception. We are refer- ring here not merely to a major sentiment of the business- community. This policy initiated and adopted by the proper- tied men-of-affairs of the country, to prohibit all ownership- in-industry on the part of those engaged in it, is universal. There has never been a tenet of orthodox religious faith which has been regarded with greater or more universal sanctity than is enjoyed by this rule that of exclusion from modern in- dustry of all ownership by the workers. Sporadic Cases of Profit-sharing. The relatively slight introduction of the plan of profit-sharing, it need be merely remarked here, has not been overlooked in making these state- ments. It will receive attention later. Competition versus Monopoly. The second characteristic of the cottage-system, as contrasted with the factory-system, lies in the fact that every workman under the cottage-system had to fight for his job. He had no certainty of tenure of it when secured, nor certainty of pay for his work when done. Any other workman was free to strive to parallel, invade or under- mine his efforts. Any honest, skillful workman was liable at any time to find that his labor had become worthless upon his hands, because some other workman had duplicated, in part or whole, his efforts, or had surpassed him in ability to find a customer, if not in doing the work. The result of this universal license to compete was that the workman often suffered from work unpaid not because the Consumer would not pay, but because he would not buy while the community suffered from duplicated and wasted efforts. The first lowered the average "wage." The latter entailed high 54 MODERN ECONOMIC TENDENCIES prices. The only thing gained by this competition was a rough assurance that the price would rise no higher (above the natural price) than was compatible with the presence of these two costly wastes. In the factory-system, on the other hand, this situation is exactly, deliberately and carefully reversed. The factory-system and its efficiency rest basically and openly upon universal monopoly. Every workman, when once assigned a job by the Central Office or Superintendent, performs it uninterrupted in his tenure thereof, unparalleled by any other workman, and undisturbed by doubt as to his pay. No one may take his job away from him, nor may even try to do so. No one may deny him his wages when done. His protection in these things is maintained with scrupulous care. Whatever deficiencies may be discovered in the factory-system in other lines, as this analysis progresses, or whatever oppres- sion of the workingman may be found to arise through uncer- tainty as to his admission into the factory-system at all, or in continuity of employment, or whatever may be the deficiencies in the purchasing-power of his wages after he has gotten them, these points of superiority over the old cottage-system in pro- ductivity, just listed when once the workman is at work within the factory must be admitted and emphasized. There he enjoys assurance of a monopoly of his job. The community enjoys the efficiency of having him work undistracted and un- interruptedly, without duplication of his efforts by one, ten or fifty others. He is certain of his pay, whatever it may be, whenever honest effort may have been completed, and without awaiting the collection of the value of what he has produced from its Ultimate Consumer. In all of these respects the factory-system has proven itself a great advance over any of the systems of organizing effort which have preceded it in history. In assigning credit for the wonderful modern expansion of human productivity, the bulk of it must be allotted to these and other features, to be described later, which are broadly peculiar to the factory-system. A better understanding of these will be given in the next chapter. PART II ECONOMIC PRINCIPLES CHAPTER IV PRODUCTION Definition. The word production will be used in this book to include all effort, whether of brawn or of brains, which aids in transforming the raw materials of the soil, the sea, the forest and the mine into commodities or service which are of real life-support to the Ultimate Consumer, and their transporta- tion and subdivision into retail-units delivered into his hands, for his destruction thereof in the conduct of his life. It applies to everything needed for the support and growth of human life food, clothing, shelter, transportation, communication, educa- tion, amusement and inspiration manual labor, superin- tendence and invention alike. It must include not only all effort expended in maintaining the necessary current supply of things of standard kinds, but also all effort aimed at the extension of facilities or appliances into new scales of operation. Criterion as to the true production of life-support for the community plainly must pivot upon the reality of the aid embodied in any commodity or service, for supplying to the Consumer what he selects at the retail-counter, and must not be misled by any mere supposition, upon any person's part, that a thing aids when in reality it does not. That is to say, we are dealing here with physical realities, rather than with human delusions concerning them. We shall exclude from this discussion, however, all moral 55 56 MODERN ECONOMIC TENDENCIES delusions, as contrasted with economic delusions. This book is a study in sociology, not one in psychology or morality. Thus, for instance, alcoholic drink and horse-racing are re- garded by many as immoral and dissipative. Yet in this book the effort directed toward producing alcohol or race-horses will be classed as productive. This is not because these things necessarily promote life, but because the Consumer thereof, when he patronizes them, knows that he is doing so. He has therefore asserted a true economic demand for them. Whatever delusion as to their value for his life-support may be involved, is housed within his own brain, and not in the social structure. But, on the other hand, effort directed toward the printing of the appurtenances of stock-gambling, for instance, will be classed as unproductive and dissipative of social energy. This is not because either the printer or the broker is necessarily immoral, but because the man who pays the cost of stock- gambling who is neither the printer, the broker nor even the lamb, but some "Ultimate Consumer of coffee-mills in Montana is not aware of that fact when he devotes his money to en- couraging stock-gambling; nor has lie the power to stop it if he would. Subconscious Social Action. His economic act is therefore neither free nor conscious; it is automatic and subconscious. His delusion is not a personal one, due to willful ignorance or immorality, as many believe is the . case with the patron of alcohol or horse-racing, but is one enforced upon him by our lack of organization of our economic community. Both his ignorance of the true result of his act, and his impotence to remedy or modify that result, are thrust upon him by society. It is this sort of subconscious economic dissipation of pro- ductive possibilities in which we are alone interested here. That involved in personal immorality is to-day distinctly sec- ondary to this, and is the concern of preachers, teachers or psychologists, rather than of sociologists. We are not arguing that it is harmless, but that it lies outside our topic. The Motive Force of Production. Modern material produc- tivity, in this sense, is virtually all of it carried on in response to the stimulus of pecuniary income. That is to say, however a man may disregard pecuniary considerations in order to be a scientist, an artist, a patriot or a preacher and however these PRODUCTION 57 callings may be of great productivity in the broader sense of the term it is still true that whatever effort he gives to pro- duction in its routine sense is in defiance of these personal, non-economic preferences. Conversely, whatever he gives to altruistic aims must be done in defiance of economic considerations. However profitable to society in general altruism may be in the long run, in the short run it is never profitable to the individual. Those things which we do solely in order to gain money may be devoted to society's good in one sense, it is true, but it is wholly a subconscious sense. For the body economic has its subconscious functions as surely as the physical body has. These automatic, routine, subconscious, productive processes of eco- nomic society bear the same important relation to its conscious altruism as the subconscious heart-beats of a preacher bear to his inspiring sermons. Economic Determinism. When one turns away from his ethical or altruistic instincts, to heed this economic pressure for the daily necessities of life, he will always, in the long run, turn toward those tasks which are best rewarded in the pecuni- ary sense. The day has long gone by when economic produc- tion, in any appreciable degree, is guided or promoted by the desire of the doer for what he produces. The worker who clings to this idea starves, however he may help humanity. All modern degrees of productivity are attained only through the specialization of each worker to an extreme degree, whereby he produces enormous quantities of some single thing for which he has no desire whatever, in order to interchange this produce for an equally enormous variety of smaller quantities of other commodities, made by other producers. This is the modern system, which no man may defy and long survive. In its operation psychology and ethics enter scarcely at all. The producer does not move, in his selection of work, in response to his sentiments, but under command of his intellect, guiding him whither the pay is best. His tastes, it is true, find proper outlet when, in the role of Ultimate Consumer, he comes to select his purchases; but in the selection or performance of his productive work his psychology falls into a place quite sec- ondary to his reason. Modern Automatic Invohmtariness. When one turns to the question: What is it which determines the aggregate volume 58 MODERN ECONOMIC TENDENCIES of energy devoted to production? one gets his first lesson as to this involuntariness of all modern social phenomena. And also as to their subconsciousness. That is to say, in the simpler life of the individual hermit the motive forces of life are all simple, obvious, direct and voluntary. When one is hungry, one works; when tired, one rests. That is the delight of the hermit-life. At every turn the will decides its preference, and then executes it. The result is what was consciously intended. But under modern social conditions life is quite otherwise. It is almost the exact opposite from this. To-day it is obvious at a glance that very few, if any, do what they please in the industrial world. Those who are plainly suffering from fatigue continue to overwork until they drop for the alternative is complete idleness and want. Those who direly need supplies, and who plainly are sincerely seeking work, often are forced to remain idle. Those who need exercise above all things continue in overfed sloth in spite of splendid gym- nasiums, sanatariums and "health-farms," built expressly to tempt that muscular exertion which never ought to need tempta- tion until they die of apoplexy or hardened arteries. In no direction are the reactions of the individual motor-nerves to the visible, external stimuli either natural or free. Volume of Production. Such is also plainly the case with production as a whole, as carried on within our aggregate na- tional factory-system. It is not spontaneous and natural, but forced. Let society once adopt an economic system in which interchange is made a function pre-essential to production and consumption as society has done subconsciously and perforce when it encouraged modern invention and from that time for- ward it is irrevocably and uncontrollably the possibility of in- terchange, and not the mere human desire for production or consumption, which becomes the determining, dominant factor in all questions of industry or idleness. This is distinctly true of all modern production. To-day Nothing Can Be Produced Unless It Can Be Sold. It is the selling-office and the retail-agency which dominate and direct the activities of every factory, large or small. It is the PRODUCTION 59 particular quality and quantity which can be sold which alone can be made. Let any person or factory attempt to defy this law, by pro- ducing that which cannot be sold, and loss to all, rather than gain, is the result. Production has not been performed. Life- support has not been created. The thing thus produced cannot enrich society, because so- ciety cannot make use of it. It cannot enrich the producer, because every producer starves on his own produce; he needs something quite different. Whether it be apples and cabbages rotting on the ground within a few miles of congested, starving cities, or vacant-lot truck-gardens which force the professional farmer to leave some of his produce unsold, or labor often enforcedly idle, it is alike an illustration of the modern fact that that which cannot be sold might as well never have been created. The Determinant of Volume of Production. The law which determines the aggregate volume of production at any time, therefore, is the quotient reached by dividing the aggregate purchasing-power of the people by the average price of com- modities. This law is rigid and relentless. Unless we either increase the purchasing-power of the people, or lower the price of things offered on the retail shop-counter, we are helpless to increase the volume of production. Exhortations by the government to "produce and save," the stimulus of ambition, the prod of hunger, the pride of ap- pearance, the keen stab of suffering on the part of loved ones all of these ethical forces, and every other such imaginable, all alike have their edges turned and dulled into impotence against the steel-clad walls of this law. From it there is absolutely no appeal. In short, we are constantly being exhorted to economize in the use of some commodity or other, such as coal, sugar, etc., upon the unquestioned assumption that the volume of production is either fixed, or is determined by some mysterious, unknown factor. Hence, it is argued, the less we use the greater surplus shall we possess, and hence the greater the tendency for prices to drop and supplies to increase. Yet for all this assumption there is to be found not one grain of support in the economic facts. To the economist it seems really fantastic. Our volume of production is not fixed, but 60 MODERN ECONOMIC TENDENCIES fluctuates widely, wildly, in response to purely human (al- though not individual, conscious nor voluntary) forces. In its determination the prime factor is actually the current volume of consumption. Our rate of production is determined by the volume of our consumption, not our consumption by our pro- duction. Outlining briefly a complex situation which will be studied in detail as we proceed, it may be stated that, always remem- bering the fact that only that may be consumed which first can be purchased, the dependence of production upon consumption is one of the basic laws of economic equilibrium. Price, we shall see in the later chapter devoted to that topic that is, average price-level in general, as contrasted with relative price of one commodity in terms of another is not determined by supply and demand, and therefore controllable by the surplus of a voluntary supply over a voluntary consumption, at all. If that were so, our problems would be simple. Instead, prices are determined first by factors, yet to be ex- plored, which are all but independent of supply and demand. So is the purchasing-power of the people. The balance between these two factors then determines the volume which can be bought and consumed. This determines the volume which can be produced and sold. None of these factors is voluntary, nor conscious, nor subject to control by exhortation. The people always desire to consume far more than they can. They always buy up to the limit of their purchasing-power. The producers always desire to earn and spend all they can. The restraint upon each of these func- tions has never resided in the will, but solely in those abstract, subconscious, relentless laws of economic action and reaction just outlined. These laws it is our duty to explore with care. To-day, since businessmen are everywhere finding themselves forced to raise prices, and since no portion of society is troubling itself even to try let alone succeed in increasing the people's normal, current purchasing-power, naturally the aggregate volume of production, in proportion to our normal productive capacity, is steadily upon the wane. For this there is no remedy in sight, because there is no slightest prospect either of busi- nessmen voluntarily and generally lowering prices, or of society's increasing the people's purchasing-power, in any normal, per- PRODUCTION 61 manent and stable way. In the face of such a situation as that, exhortation to produce is silly. 1 Our National Factory-system. From this review of the basic economic principles which govern the broad processes of production, we must turn to a little further consideration of the mechanism through which they find expression in our daily life. What is the modern factory-system, as a national in- stitution ? The real factory-system, as defined by the above broad con- siderations, is a very wide and inclusive institution. It is virtually co-extensive with modern industry, whether associated with what is commonly known as a factory or not. A railway, for instance, is a factory-system. Its raw material is coal, rails, cars, etc. These it grinds up into a finished product fit for consumption in the support of life, namely, transportation. In this same sense a telephone-exchange, a city street or sewer department, or a university, or a mission-board, is or may be a factory-system. The four criterions for determining whether any given en- terprise forms a part of our national factory-system or not are: (1) Does it produce something which supports the life of the Ultimate Consumer, (2) Do its members work without owning the tools, raw material and product concerned? (3) Do they each work in undisturbed monopoly of their jobs? (4) Does it extend credit, in the form of loaned appliances, to its members, without the exaction of interest thereon? The World-factory. Not only do the individual workmen of a given shop, or the several- shops of a larger factory, co- i Since this was written the commercial world, chiefly comprised by this country, England, France and Italy, has issued for the purposes of the Great War some two hundred billions of dollars' worth of gov- ernmental loans. The bulk of this enormous sum has been expended in America. It is the expenditure of this vast fund, by those for- tunate enough to have shared in its distribution, which explains that lavish disregard of prices which excites comment on every hand. But it must not be forgotten that all of this fund is fiat-money, printed off on paper against the assurance that patriotism would make it good. But patriotism is a thing which can wane, and the day for paying the interest upon this huge loan amounting to some ten bil- lions per annum in addition to the principal of the debt has yet to make itself felt. (December, 1919.) 62 MODERN ECONOMIC TENDENCIES operate to produce what supports the life of the Ultimate Con- sumer, under the factory-system, but all the separate factories of the nation, or the world, must be regarded as component parts of a unitary factory-system, in so far as they interchange partly finished commodities without negotiation over price or ownership. Of course, as a matter of fact, such negotiation always does accompany such interchange, when between factories which are separately owned. But what is emphasized here is that these two functions the interchange of materials, on the one hand, and the negotiation, on the other are parallel, distinct, and not necessarily associated functions. For it is obvious that between the workmen within every shop, and between the shops within every factory, most efficient interchange of commodities is now proceeding upon an enormous scale, quite without negotiation. It is also a common phe- nomenon for a shop which had previously been separate, and so conducting its interchange only after negotiation, to enter a consolidation; and after that the same men interchange the same commodities, even more actively, yet quite without negotia- tion. Therefore, leaving to the future all debate as to ways and means, it is obvious that material interchange, on the one hand, and negotiation as to ownership or price, upon the other, are distinct and, to some degree yet to be determined, inde- pendent functions. What we are emphasizing for the moment is that it is the worldwide co-ordination of material inter- change, whether accompanied by negotiation or not, which actually constitutes the factory-system which supplies us with all which we consume. In the above broad sense, it is the office of the factory- system to extract raw materials from the soil, the sea, the mine and the forest, the world over, and to subject them, without raising question as to ownership or price, to those intricate processes of transformation, aggregation, transportation and subdivision which, interwoven in an inconceivable complexity, result in placing in the hands of the Ultimate Consumer all those things and services which he consumes in the support of his life. This classification includes everything which actually supports or elevates life instruction, amusement and religious inspiration, just as much as the more tangible commodities PKODUCTION 63 wherever their existence is the result of an unbiased, conscious demand by the Ultimate Consumer. Consumption. Within the Ultimate Consumer these supplies of material and inspirational life-support lose their existence in the development of a fresh fund of human energy. But now this energy is biological and individual in character, rather than social or economic. This individual energy is then destined for one of three goals. It is either re-invested in fresh productive effort, which pro- duces all, or more than, it consumed. Or it may be morally dissipated in wrong individual life. Or it may, quite con- sistently with moral integrity upon the individual's part, be dissipated economically, through some mistaken idea as to the effect of certain sorts of social activity. It is this last sort of dissipation which interests us in this present investigation. Modern Intricacy. Both of these productive processes men- tioned above the transformation and transportation of origi- nally raw materials which were simple processes in the ob- solete cottage-system, have now become incomprehensibly in- tricate. No mind except that of the specialist can fathom the complexities of the transformative processes occurring within even a single line of production. No mind can grasp it in its aggregate. Transportation has also become inconceivably intricate. The number of geographically separated steps in production has multiplied tremendously. The Ultimate Consumers of the fruits of any particular factory-process are now scattered throughout the hundred million people of this nation, or the billion Consumers of the four quarters of the globe, as needles in a hay-stack. The aggregate amount, and the number of different steps, of transportation requisite for reaching them is quite beyond human comprehension. We may state it in figures, as we do the distances of the stars, but we cannot un- derstand it. Specialization and Interchange. This modern intricacy of industry cannot be understood without a further word as to the visible aspect of the modern factory, aside from its peculiarities of organization. First in these aspects comes the feature of factory-interchange, and secondly factory-credit. The modern factory, it apparently needs to be pointed out, is a field of the most constant and active interchange of com- 64 MODERN ECONOMIC TENDENCIES modifies and services between individuals, each of whom special- izes upon some small detail of the ultimate product. In the wonderful efficiency of the final results of the modern factory- system, individual "production/' in the sense of what the work- man does by himself at bench or machine, is quite a minor factor in its true production, namely, the finished output ready to be sent into the world. For this last depends primarily upon the maintenance, first, of the one condition requisite for efficient production extreme specialization and secondly, of the factory's most important active function constant, rapid, easy interchange of materials and services, as the handmaiden thereto. Specialization, of itself, has been known in industry ever since the feudal system collapsed, if not before. Men have always been specialized as carpenters, bakers, armorers, etc. But these specialized trades, in the old cottage-system, did not interchange. They sold direct to the Ultimate Consumer. In the factory-system, on the other hand, these trades interchange their output with each other, without sale or purchase. Factory Co-ordination. Thus in all factories of modern dimensions there exists a whole array of different shops machine-shop, pattern-shop, foundry, tool-room, carpenter- shop, paint-shop, drafting-room, etc. all united and co-ordi- nated into a whole by the Central Office; and between these several departments, as well as between the individuals within each department, occurs this continuous interchange of com- modities and service which constitutes the life-blood of the factory. Every effort of the designer of the factory and of its superintendent, aided now by specialized "efficiency-engineers," is devoted to shaping this circulatory system so that it shall absorb the least time and effort, and shall be the least liable to interruption or derangement by the ordinary events of life. In the most modern development of the factory this circula- tory interchange is so rapid and constant that often the partly finished work is not even allowed to stop while any one work- man performs his function upon it. In many factories the material is not touched by human hands during its progress through long series of steps in manufacture. Raw material enters at one end of the factory and comes out finished at the other sheared into blanks, stamped into forms, drilled, turned, punched, threaded, spun, moved from building to building, PRODUCTION 65 baked, polished, painted, counted and packed in boxes in the meantime all without human touch. The tools which do all these things usually move with the material while at work upon it, in order not to stop and delay the latter. In factories where machines have to be assembled, as in the manufacture of automobiles, for instance, this circulatory proc- ess becomes even more striking. An endless chain, moving slowly along a wide, low bench, drags along, at first, only the first elements of a frame. As this passes workman after work- man, each assigned to perform some single task, he steps for- ward and does it adds a brace or a bolt or a rivet, or attaches a wheel until soon the chassis is rolling upon its own wheels. Then slides down from overhead a tonneau which had been manufactured upon the same plan on the floor above, and the assembly begins to look like a car. Before it has reached the end of the building every detail and accessory has been con- tributed, the tanks have been filled with water, gasoline and oil, an inspector steps aboard, and the completed car rolls away from the end of the chain under its own power! It is uncanny ! The observer cannot long stand and watch these automatic machines, tossing out finished articles by the hundred or thousand per minute, or rolling cloth or photogra- phic films into bolts continuously, night and day, by the mile with floor after floor and building after building filled with such machines that he is not forced to ponder where can be found the population to consume all that output. Yet the economic problem of the day is not to consume what we pro- duce, but actually to expand our rate of production to meet our needs ! There is absolutely no limit to human demand. Purchasing- power, it is true, is often narrowly limited. It is commonly exceeded by supply, developing what is carelessly called "over- production." But of real overproduction, in excess of true human demand, there has never been any evidence of a particle. Factory-credit. There is another feature of the factory- system the importance of which must not be inferred from its being mentioned last. This is its universal extension of credit to individual workmen, in material form the arrangement whereby a costly machine-tool, or a railway-train, or a palatial steamship, or a hospital full of invaluable lives, is entrusted to a craftsman competent to handle it, who is given full 66 MODERN ECONOMIC TENDENCIES autonomy in its control and use, for the good of the entire factory or community. The use of the word credit in this connection is unusual, because of our habitual reservation of the word to indicate commercial credit a special form of credit in general a loan executed between individuals for the purpose of enabling one or both of them to acquire pecuniary profit. Yet it is one of the major lessons to be instilled by this book that this special reservation of the word credit is misleading. It is mis- leading because the fact will develop, as we proceed, that the only really useful function of the commercial loan or credit lies not in what pecuniary reward it may bring to either of the contracting individuals, but solely in the fluidity which it contributes to the productive processes of the land, by enabling costly appliances to be placed more freely in the hands of those competent to use them productively, whereby the Ultimate Consumers are the better supplied with life-support. But because of this widespread misapprehension it must be emphasized here that the sole value resultant to society from the assignment of a railway-train, for instance, to its driver, is quite the same as that resultant from a commercial loan in so far as the latter may aid the former process in either case, the carriage of freight or passengers. That is to say, the factory- loan is the pure, natural and only useful credit- function. The commercial loan may or may not aid this sole true credit- function the facilitation of life-support for the Ultimate Consumer. Thereby pivots criterion as to the social value of the com- mercial loan. For only in so far as commercial loans may be found to aid the fluidity or volume of factory-assignments of appliances to workmen, may they be regarded as socially help- ful. In so far as they may be found to hinder the true credit- function factory-loans they must be condemned, as an in- stitution deterrent or destructive of production. In other words, the factory-system, besides being all which has already been described, is a gigantic arrangement for the extension of loans or credit to producers. All the superficial appearances of its method of doing this, it is true, are con- trasted diametrically with those surrounding the commercial loan. Yet the productive aspects of the two, so far as they have anything in common, are the same. PRODUCTION 67 In this the factory, indeed, is a far greater machine for the extension of credit than is the bank, because of the number of its assignments. It loans to millions where the bank loans to thousands. Nor are its loans insignificant in amount per loan. For when, for instance, a seacaptain navigates to sea a liner worth several millions of dollars, which has been en- trusted to his command, he has in reality contracted (for the good of society) such a loan as no bank would ever have granted him, in the form of money or commercial credit, had he lived next door to it all his honest, able life. Factory and Commercial Credits. Society thus relies, for its economic circulating-medium, upon two contrasted forms of credit-instrument. These two forms of paper instrument are alike in that, in each case, their sole useful function is the facilitation of the actual circulation of physical commodities or useful services between man and man. But in every other respect, they are diametrically contrasted both in form and in economic effect. These two forms are known, respectively, as factory-credit and commercial credit. The paper instruments currently relied upon in the factory- system for carrying out this policy of loaning appliances or commodities to individuals for productive purposes are called requisitions or shop-orders. They never bear interest. They are never personally owned. Yet they illustrate in maximum, 100-per-cent purity and efficiency the only beneficial function attaching to any credit-instruments whatever, namely, the facilitation of the circulation of commodities between man and man, as an aid to production, interchange, specialization and distribution, and hence to life-supporting consumption. The paper instruments currently relied upon outside the factory-system for promoting or permitting the circulation of economic energy are called, on the other hand, interest-bearing securities. While they appear in most diverse form, bearing many different names, yet they all fall under this broad title. They are all alike in these following peculiarities, namely: (1) They always bear interest. (2) They are always personally owned. The Prime Function of Commercial Credit Pecuniary Gain. Indirectly and incidentally these securities, by their nego- tiable fluidity, do aid the actual circulation of commodities and service. But since this latter phenomenon is confined to the 68 MODERN ECONOMIC TENDENCIES factory-system, from which commercial credits are rigorously debarred because the factory has its own credit-system these interest-bearing commercial credits are obliged to effect this aid through an indirect influence, exerted within a field distinct from the factory-system. This external field will be considered later. Moreover, the influence of these commercial credits over the circulation or interchange of actual commodities is not merely indirect. It is so secondary and incidental that it is often difficult to ascertain whether it be positive or negative. For the prime purpose in mind in the issue of commercial credits is not to free some appliance for use, however vehement may be the asseverations that it is so, but to bring its owner a divi- dend, rent, interest-payment or similar pecuniary gain. The truth of this statement need not rely, for proof, upon any observation of result, for that is physically impossible; nor upon proof of the motives of the issuer, which is psycho- logically impossible. It rests, instead, upon the universally unquestioned fact that the valuation- of these commercial credit- instruments in exchange, and hence their useful fluidity, depends solely upon this pecuniary return. If they fail in it no one will consent to buy, own or use them, however dire may be the people's need for the appliance which they control. Hence this must be their prime function. Whatever aid they may happen to lend to the actual circulation of life-supporting commodities must be secondary and incidental to this, their prime function pecuniary gain. We shall see later that this secondary function can be performed only to the degree which proves to be compatible with a maximum performance of the prime function private profit. Credit and Interchange. So important is the natural func- tion of any circulatory system of paper credit-instruments in the life-supporting processes of a community, wherein they make possible that parallel circulation of materials and services which are vital to the life of the economic body, that the next chapter will be devoted exclusively to the topic of Credit. In the meantime it is important to emphasize the broad fact that this interchange of materials and services, which is as vital an economic function as is bare manufacture itself, is one of the most prominent functions of the national factory-system. In- PRODUCTION 69 deed, in modern life it is by far the most vital portion of production. The factory-system performs this circulatory function far more actively than any market does, in spite of the common regard of the latter as the sole habitat of interchange; for the market bargains much and trades little, whereas the factory trades all the time, and never wastes any time or effort in bar- gaining at all. This fact is made possible by the fact that the factory-system continually extends credit upon an enormous scale, probably far surpassing the banks in aggregate, and that ownership-in-industry is religiously excluded from its borders. The Personnel of the Factory-system. This great co-op- erative, monopolistic, non-owning, free-credit, national (or world) factory-system method of industry now enrolls, it is to be noted, a major portion of our active population within its ranks. More than nine-tenths of all our people now actually work, live and die and have done so for a generation or two under a system from which was eliminated at the start all hope or promise of their ever owning aught beside that which they may purchase outside the factory for Ultimate Consump- tion; one from which all competition for the securing of work has been rigidly excluded; one in which the use of costly ap- pliances is continually being allotted to propertyless men, with- out the exaction of interest; and one in which interchange of materials and service, under the guidance of a Central Office, is everywhere and at all times most active, yet without the slightest accompanying negotiation as to price or ownership. Yet this great and most efficient propertyless system so diametrically opposed to that idea of license to own anything in sight, and of sacredness of everything against use except through ownership (or upon payment of interest thereon), which has come to be misunderstood as the essence of property- rights was first inaugurated, has been steadfastly maintained, and is being sedulously extended, not by the radical element of society, but by that very employer-capitalist portion of society which is daily asserting most vociferously the sacredness of the institution of property. There is some deep-seated confusion of mind here which must be clarified, before any of the economic issues of the day may be understood. To those who regard all propositions look- ing toward any restriction of the license to own property-in- 70 MODERN ECONOMIC TENDENCIES industry as revolutionary, or anarchistic, or as originating only with irresponsible, unpatriotic agitators, this historical aspect of the modern factory-system, originated and controlled by the capitalist-employer class, calls for most careful considera- tion and courageous avowal. CHAPTEE V CREDIT Catalysis. Credit is the great economic catalyst. Even in physics or chemistry catalysis has not been explained in detail, although continually being relied upon in greater measure for results. But in economics we can follow its action somewhat further in detail, aided by the following simile quoted from some unknown wit. In marital affairs no new family can be inaugurated without the consumption of a bride and a groom for each family. The creation of an hundred families requires the supply of an hun- dred brides and an hundred grooms; and none of these may be used over again at least, without detriment. Similarly, no new family can be inaugurated without the presence and activity of a minister, or equivalent. His func- tion is indispensable. Yet here the parallel between principals and minister ends; for the development of an hundred weddings, uniting an hun- dred brides with an hundred grooms, still calls for only one minister, and at the end this minister has not been consumed, nor even depreciated. Given reasonable time, he can continue indefinitely to unite couples into indissoluble wedlock. In this the minister is a marital catalyst. For a catalyst, in physical or chemical action, is a substance which by its presence makes possible some interaction between other sub- stances or energies, yet without itself taking any part in the phenomenon, in the sense of being consumed or impaired. In electrical engineering, for instance, magnetism is the catalyst. Steam or water-power cannot be converted into electric current without the aid of magnetism. Yet the magnetism is not consumed in the process. Economic Catalysis. Credit is the great economic catalyst. Credit, in its broadest sense, is a simultaneous, social attitude of mind expressed in economic form an abstract belief on the 71 72 MODERN ECONOMIC TENDENCIES part of the community in the usefulness of certain tokens, as instruments for enabling social co-operation in search of future returns to be had through the use of these tokens. Yet the tokens themselves are not consumed nor impaired by this use. Still less is the public sentiment which gives them value. Thus, imagine twenty- men, each of whom stands ready to purchase one dollar's worth of goods or service from some one of the others each having confidence in the value to him of the goods or services desired, and in his ability to develop, with their aid, an equivalent amount of life-support in return. Imagine these men as standing in a circle, each man next to his would-be creditor. The aggregate mutual indebtedness of the little community is then, or it might be, twenty dollars. The actual circulation of economic life-blood interchange of commodities or service might be twenty dollars. But if no one among the twenty happened to possess a dol- lar's worth of gold, nor any other substance the value of which was agreed upon by all, making it universally acceptable as a means for payment, then trade is impossible. All are para- lyzed socially and economically, although each is well able physically to serve or supply. In that case each must remain content with his own peculiar individual productivity. Yet this, we know from practical con- siderations, is real starvation to-day, in comparison with what may be enjoyed through co-operation in exchange. Barter. As to barter, that may be excluded from the simile, because barter is also impracticable in any modern community, and would be impracticable in the illustrative community of twenty if it had not been supposed that all were equally in- debted simultaneously, to the amount of one dollar each. The Monetary Standard. Nor need the argument be diverted here into any debate of the essentials of a money-basis, whether gold, bimetallism, multi-standard or what. It need merely be explained that gold is now the accepted world-basis for money. Earlier panics and hard times for the people, it is true, were due largely to defects in our currency and banking systems. They were distinctly currency-panics, characterized by wide- spread bank-failures and the elevation of gold to a premium. But now this has virtually ceased to be true. The panic of 1907 involved hardly one- tenth the bank-failures of that of 1873, in spite of the larger number of banks, and was accom- CREDIT 73 panied by scarcely any appreciable disturbance of money-values. The adoption of the gold-standard between those two panics, and of the federal reserve banking-system since the last, has virtually removed the bank and the currency from the list of sources of economic danger except in so far as the banks still constitute one section of active and passive commercialism, in the same sense that a corner-grocer or a manufacturer may also be one, in the way defined and condemned herein. It is for all these reasons that the institution of credit will be analyzed here without entrance into debate as to the exact nature or the minor imperfections of the gold-basis and the present banking-system. Whatever these may be, the imper- fections of our credit-system are far greater. Credit-instruments. Let it now be imagined that, in our community of twenty men, one man did possess a single dollar's worth of gold. Then immediately the twenty dollars' worth of debts can be paid by means of this one lump of gold, which is passed from man to man as rapidly as possible, being equally acceptable to all. Or, to introduce paper-currency, the gold may be supposedly placed in the custody of one man, who issues a slip of paper which he agrees to accept in exchange for the lump of gold, whenever it may be presented. The exchanges may then be transacted with increased facility, due to the superior conveni- ence and cheapness of the paper ; and the paper may be renewed, when worn or soiled, with a thousandth part of the cost -of replacing the gold itself. The Function of Credit. Thus, by the simple fact of public agreement upon and faith in the gold as a circulating medium, the all-important factor of an economic catalyst credit has been added to the community. The twenty men previously paralyzed industrially have thereby been galvanized into eco- nomic activity, usefulness to each other, and individual happi- ness. All this has been accomplished, to the extent of twenty dollars' worth of interchange each time that the dollar can be passed around the circle, by a single dollar's worth of gold or perhaps by a mere slip of paper which all believe to be exchangeable for gold. Yet, in the accuracy of thought of a scientific analysis, it must be remembered that the gold is just as much a credit- instrument as is the paper slip issued against it. For the 74 MODERN ECONOMIC TENDENCIES gold, of itself, cannot support life. It is merely as an accepted symbol of the belief or credit, on the part of each man that his neighbors are capable of serving him usefully, that the gold has value. But the same is true of the paper. Both gold and paper are merely credit-symbols. It is only as an unfortunate convention or tradition that we have styled the paper a "credit-instru- ment," in supposed contrast with gold, which latter is regarded as having some sacred value inherent in itself. Stability of Credit. It may next be supposed that the com- munity of twenty observes that, since there is little likelihood of everyone's wishing to exchange paper for gold at the same time, more than one slip of paper may be issued against the single lump of gold without harm. The labor-cost embodied in the gold then determines the valuation of each slip of paper ; and this valuation it usually retains, in spite of the fact that everyone knows that if all demanded gold at once only one could be satisfied. Occasionally, however, this faith collapses, and then there occurs a currency-panic, with gold soaring to a premium. Thus the relative quantities of gold and paper affect the stability of the latter, but not the price of either. When paper- money depreciates in valuation, through its issuance in too great quantity, it is not as a commodity-value that it depreciates, from mere plentif ulness ; but solely because public faith in the chances of its not being presented for gold, beyond the quantity of gold available, wanes as the volume of paper-money increases. A plentiful commodity including gold as such depreciates because of its ease of production or acquisition. A too plentiful token-currency depreciates because of the growing chances that it may prove not to be money at all. The first is a symptom of labor. The latter is one of credit, or belief. Thus the limits in proportion of paper to gold which must be observed, in order to maintain a reasonable stability against currency-panic, obviously depend upon the general peace and stability of the economic world. Faith in the currency depends, both positively and negatively, upon a general atmosphere of faith in other things economic. Until men learned to be wise and conservative in guaging this danger of collapse, which they have now apparently succeeded in doing, general economic stability depended largely upon CREDIT 75 stability, of the currency. Commercial panic ensued only after currency-panic had developed. Now that our currency has been thoroughly stabilized, general economic stability has been freed from menace in that direction. But it has simultaneously incurred threat from quite another factor, namely, the decreasing purchasing-power of the dollar. That factor has long been at work obscurely, it is true ; but now for the first time it is left bare and alone, to work its will upon the situation, without regard to the strength or weakness of the currency. The Dual Nature of Credit. To return to the illustrative community of twenty, under the more advanced plan of issuing more than one slip of paper against the one dollar of gold, there may be twenty such slips, it may be supposed. Each man may then possess one paper dollar. To that extent he commands real wealth, although he owns no gold, nor anything else useful in the arts of life-support except his hands and faculties; although, too, his slip of paper may conceivably re- sume its trifling value as such at any time, if conditions be too violently disturbed. Yet each man in reality cares little or nothing about the gold itself. What he desires are the services of his neighbors, for which he is anxious to exchange his own. Yet this he cannot do unless all agree, first, upon some one thing, such as gold, which will always be acceptable merely because it is fairly uniform in cost of production, not subject to corrosion or decay, subdivisible or aggregable without deterioration, compact per unit of value, and useful to a slight degree in the arts. Secondly, all must agree upon the issue of certain slips of paper in representation of this gold, the amount of such paper- currency being in excess of the gold, yet with proper safe- guards against abuse. The gold then contributes value to the paper; the paper contributes fluidity to the gold. But neither of them possesses any appreciable value to the community, except in so far as the community contributes that value by its entertainment of a sentiment of simultaneous faith in each other. This faith is called intangible economic credit. Economic credit, therefore, plainly consists of two factors. The primary of these two factors is the intangible sentiment of faith felt by the average citizen, partly in the individual character of his fellows, but most of all in the general social 76 MODERN ECONOMIC TENDENCIES conditions of the moment, which unite them all in relationships which may be good or bad quite independently of such qualities within each individual. The secondary factor in economic credit is the tangible instrument, or system of instruments, relied upon to give public expression to the intangible senti- ment. In such a dual system as that, failure may occur from defects either in the intangible sentiment or in the tangible instrument. In the earlier history of our land periodic collapses of credit and economic interchange were plainly due to glaring faults in the tangible instruments of credit, begetting consequent lapses in the intangible sentiment. But now, in so far as con- cerns merely the currency, and the banks in their function of reservoirs thereof, this trouble is apparently past. On the other hand, if history is to repeat itself in the near future, in any such a collapse of intangible confidence through a fault in the mechanical instruments now relied upon for its expression, it must be due to defects in the instrument which modern finance has substituted for the currency of earlier days, while it was reforming the latter. For we now no longer rely, to any appreciable degree, upon the circulating instruments of credit which only a generation ago were still prominent as such, and which two generations ago formed virtually our sole medium for interchange, namely, bank-notes and currency. Interest-bearing Securities. Instead, our present reliance is almost wholly upon privately issued, interest-bearing securities. Although these were nominally present in the financial system of 1850, and although currency still forms a part of it to-day, yet during the interim the relative proportions of these two have been completely reversed. In 1850 bank-notes and other currency formed the mainstay of commerce, with securities obscurely in the back-ground ; and at that time it was the defects in our system of state and other banks, with their over-issue of notes, which alone threatened economic stability. But to-day interest-bearing securities are relied upon as the major portion of our circulating-medium, to a proportion ex- ceeding currency certainly by a tenfold, and perhaps by a twenty-fold ratio. It is they, and not our currency, which we must fear. Mr. William Ingle, chairman of the recently created Federal CREDIT 77 Keserve Board, in an article upon "Credit Reform" contributed in 1916 to the American Academy of Political Science, says: "In the presence of conditions in this country approxi- mating normal, money or currency cares for just about four per cent of the average daily amount of its business. Credit, in open account or credit-instruments such as checks, notes or bills of exchange, liquidates the remainder, either im- mediately or at some future date. Seriously disturb this usual relation and for any reason impose upon business a settlement in cash of ten per cent of its volume, and we have panic, whether severe or mild being dependent upon conditions developed from the use, or more properly the abuse, of credit/' Yet in the list of credit-instruments given by Mr. Ingle he makes no mention of stocks, bonds, mortgages, insurance- policies, warehouse-receipts, etc, which constitute the chief basis for the circulation of credit in the financial district. This is probably because he had in mind only retail transactions, a class which employs these latter forms of credit-instrument to an inappreciable degree. But in the downtown business of financing the expansion of the larger corporate activities, stocks and bonds, etc., constitute virtually the sole reliance for fluidity. Probably no one can say positively what is the exact ratio to-day of credit-instru- ments to currency in the business-world, but it is safe to assert that it cannot be less than twenty or thirty to one. It may easily be fifty to one. As this fact has gradually come into being, the function of the banks has been correspondingly transformed, from their pristine concern merely in the maintenance of a reservoir of currency, with means for financial exchange with distant points, into one concerned primarily in the making of loans, discounts, sales or purchases of interest-bearing securities, notes, etc. The banks have now become distinctly dealers or merchants in credit, making their profits from its supply to the public quite as a grocer does with sugar. The subservience of the people to the banking-system now rests scarcely at all upon the latter's control of our stock of gold, of which we now make little use, but upon its monopoly of our stock of fluid credit, upon which the very life of industry is increasingly coming to depend. While it is true that the banks have always dealt in credit, 78 MODERN ECONOMIC TENDENCIES to a degree and to that broad fact can be attributed their every past failure yet the manner of their doing so, and the instruments created for the execution of that policy, have been basically transformed. Thus the banking-system has recently incurred, during the very period of its reform from the cur- rency-follies of its youth, this new and greater need of reform, inherited gradually and subconsciously from its self-indulgence in the merchandising of credit in modern form, however con- servatively restricted. It is to trace in outline this gradual transformation in our tangible system for expressing our economic faith in each other which forms the topic for this present chapter. In every phase of that history, we believe, it will appear that it has always been a defect on the part of the tangible instrument which has taken the initiative in causing a collapse of the intangible public sentiment of credit. But when it came to recovery, it has always been the intangible sentiment which took the lead in building itself up again through that mystic force of growth which is inherent in all forms of life so soon as some remedy of the original disturbing defect had become apparent. The Transforming Power of Credit. Returning now to the imaginary community of twenty, it is seen transacting all its interchanges of service and commodity by the circulation of mere slips of paper, representing an unseen and little wanted lump of gold. These slips now travel as rapidly as possible from man to man, or rest with one or another as his stock of reserve-money. With this tangible system of mutual credit in operation, all are busy, fed and happy. Without it, all are virtually idle, and starve in misery. Yet, after such an important and active function in the main- tenance of the current life of the community, each slip of paper remains in the hands of the man who first held it, un- impaired in usefulness ! Such is the marvelous potency of the mere presence of mutual credit in modern economic re- lationships. The system of paper slips (and the public's faith in them) is the absolutely necessary and all-powerful economic catalyst requisite for social life. Credit is as essential in the body economic as unnutritive salt and water are in the in- dividual human body. The extent to which this situation of the little community of twenty must be magnified, before it becomes possible to CREDIT 79 picture the absolute dependence of our modern communities of tens, hundreds or thousands of millions, not only in their effi- ciency of provision of daily life-support but in the basic stability of their governments and their mutual civilization, is beyond the possibility of immediate expression in words. So startling is the contrast between a community possessing an adequate system of credit-instruments, and the same people lacking it, that it is difficult to convey to the reader. Those violent con- trasts which we observe in history between impoverished, im- potent societies, and that same population, often only a few years earlier or later, in a state of affluence, are only this. In social energetics poverty does not arise necessarily from the destruction of tangible wealth, as in war, nor prosperity await the slow accumulation of visible property. Instead, the transition occurs suddenly, in either direction, according as adequate, acceptable credit-instruments, in proper volume, ap- pear or disappear. Thus France, in 1871, was poor to the extent of famine. Dog- meat commanded fabulous prices in Paris. The city was in- vested by Prussian troops, and a huge indemnity must be paid before they would leave. Yet Thiers accepted the situation with courage, issued credit- instruments wisely, stood back of them with determination, and the people responded with faith and works. Within a few years the indemnity had been paid, the soil had been freed of foreign troops, and France had become the banker of Europe. The Confederate States of America, on the other hand, had been left by our Civil War, only five years earlier, in a similar condition. Their country had been laid waste in some parts, it is true, as France had not ; but the South was an agricultural district, and therefore not so sensitive to destruction of ap- pliances as a thickly settled, industrial region like France. Moreover, the South had no indemnity to pay. But the South had the commercial folly to repudiate its war-debts. Hence credit was lacking, cash feared to enter the country, there was no circulating-medium upon which to con- duct trade, and for decades the land was paralyzed by its forced dependence upon barter for its feeble domestic interchange. Both its foreign intercourse 1 and its internal productivities were asphyxiated by its lack of a circulating credit-medium. Had the South but shouldered its war-debt with shrewd- 80 MODERN ECONOMIC TENDENCIES ness as well as confidence, issued credit-instruments to cover it, and announced its determination to pay, it would immediately have possessed a huge fund of circulating-medium. This would have liquidated the blood in its economic veins, brought in cash from the North, and landed it in solvency many years before it actually arrived there, some four decades after the war. Moreover, according to the best traditions of modern finance, it would never have had to pay the principal of this debt. By paying the interest regularly the principal could have been refunded periodically, in ever increasing volume, as a suitable opportunity for the South's financiers to invest. The History of Credit. In order to secure a proper per- spective at least a glance must be taken at the history of this all-important social feature, economic credit. Yet a glance will suffice, for its history is comparatively brief. While pro- totypes may be found centuries back, yet credit in its modern sense and effect is very much a modern institution. In medieval days business could be, and had to be, transacted either by barter or by cash either coin or bullion. There were no banks. Individuals, usually of the Jewish race, assumed their functions as best an individual might. Apparently, after the disappearance of the ancient banking institutions of Babylon, Phoenicia, Greece and Borne, it was not until the twelfth century that the first real bank made its appearance in western Europe. Even then these banks were wholly magazines of deposit, issuing no notes, knowing no check-system and making their loans to titled individuals rather than for the promotion of industrial enterprise. Mr. Robert Howe, in his "Evolution of Banking/' 1 states the situation as follows: "Modern banking can be said to have had its origin with the establishment of the Bank of England in 1694 and the Bank of Scotland in 1695. Previous to that date the banks, such as the Bank of Venice (1191-1797), Bank of Genoa (1407-1797), Bank of Hamburg (1619), Bank of Stockholm (1668-1754) and the Bank of Amsterdam (1609-1790) were banks of deposit. Payments in business-transactions during the medieval period were made by means of coins; but the inconvenience of handling and storing large numbers of coins, with the risk of loss through overvalued or debased coins i Permission of C. H. Kerr & Company, Chicago. CREDIT 81 and the risk of theft, led to the establishment of these banks of deposit, where the coins were valued once for all and were then locked up in the bank-vaults and never withdrawn, but the title to the same was transferred on the books of the bank. . . . The banks of deposit made no loans, but their income was derived from a charge that was made for each transfer of funds on the books of the bank. "Our modern banks are Banks of Discount, as distinguished from their predecessors, the Banks of Deposit, and have given an enormous impetus to commerce. They have been able to do this because they can and do create credit that circulates the same as money, and in a far more convenient, safe and economical form." While there were doubtless many minor instances of the private devising of instruments of credit, one of the earliest and virtually the first governmental system of credit was that of the "tallies" which played so important a part in English history. Howe is quoted again: "One of the most interesting instances of the use of repre- sentative money is found in the English Exchequer tallies, which circulated in England for over six hundred years. These were adopted as a means of financing the English treasury by the fourth son of William the Conqueror, who ascended the throne as Henry I in the year 1100. The tallies were of wood and were issued by Eoyal Warrant. All who served the King or State were paid with them. Sup- plies for the Eoyal Household and army were purchased with them and they circulated among the people as money and were used as such in exchanging commodities. They were four-sided rods of hazel or linden wood about an inch in diameter. The amount due from the State to the creditor was designated by notches cut into one of the flat sides of the rod. . . . The amount was also written in ink on two op- posite sides. The rod was then split by knife and mallet lengthwise through the notches. One-half of the stick, show- ing the inscription in ink and one-half of the notches was given to the creditor and one-half was placed in the treasury. . . . They did not pretend to be based upon gold or silver. They were redeemed by the Government only by being ac- cepted in the payment of taxes. When the time came for the collection of taxes . . . they were matched with the counter-tallies and where the two edges fitted each other they 82 MODERN ECONOMIC TENDENCIES were said to 'tally/ After being accepted in payment of taxes they were broken in half and were thus cancelled. "When the Bank of England was established in 1694 there were about $70,000,000 in wooden tallies in circulation in England. The Bank enjoyed the privilege of issuing paper- currency for the first time in England. . . . The use of the paper bank-notes and the exchequer bills gradually displaced the wooden tallies in the more important business-transac- tions, but it was not until 1783 that their use was abolished by act of Parliament. In spite of this act their use was not finally abandoned by the government until 1826." Up to about 1780 the Bank of England enjoyed a monopoly of the privilege of issue of bank-notes as a form of credit for circulating-medium; but at that time the check-system was devised by other banks, as a means for competing in this service, and soon came into adoption. As Howe says : "The banks that began to be established in the United States about the year 1800 followed exactly English methods." Stock-trading. Up to this time, too, public subscription to the stock of corporations was virtually unknown. It is true that bank- shares were bought and sold, but the owners of such shares were still a small minority, although already a step away from the more exclusive ownership of banks of earlier days. It is also true that public speculation in such corporations as the great "South Sea bubble" in the eighteenth century was one of the picturesque signs of early progress toward commercialism. But such enterprises were purely gambling-swindles, based upon property in unknown parts of the world. The second half of that century also witnessed the formation of the great "British East India Company," which until 1833 enjoyed complete monopoly of trade between England and India, including largely the China trade ; and in this the public invested. But none of these limited instances parallels in de- gree our modern reliance upon public trading in the securities issued by corporations performing every local or domestic service. While the growth of public stock-trading was gradual, of course, yet its modern form really arose in this country only about the year 1840. At that time the recent invention of the CREDIT 83 steam-passenger-railway, in 1829, and the inception of steam- transatlantic service in 1837 following the earlier growth of the factory promoted by stationary steam-power and the hy- draulic turbine, and the rapid development of canal and river navigation had initiated an outburst of enterprise in building facilities for communication which created heavy demands for credit. At first this was secured, as a matter of course, by gov- ernmental (federal, state or local) issue. But these public en- terprises failing financially, private enterprise and credit re- placed them, and the modern system was fairly inaugurated. It was in pursuance of this original tradition that, until almost the close of the nineteenth century, public opinion contented itself almost entirely with speculation in the securities issued by railway or mining corporations; and the history of "wild- cat" railroads and "salted" mines which followed is as varie- gated and tragic reading as one could wish. But about 1890 the "industrials" securities issued by corporations conducting the utmost variety of manufacturing or other service also be- came fully recognized as fit subject for public speculation; and since then the modern system of negotiable commercial credit may be regarded as completely in force. It is only since 1900, however, that the rate of issue of such securities has proceeded at a rate which may be called modern. Returning to the banks, while their part in public credit was at first confined to the issue of bank-notes, loans being confined to personal relationships on the part of members of the bank, yet gradually the general business of loaning against deposits by the bank itself, of purchasing mortgages, investing in bills of exchange, promoting bond-issues, discounting private notes and trading in "commercial paper" of all sorts by the bank itself, has become the major interest in modern banking. Since the opening of the present century this aspect of banking has completely revolutionized the standard practice in financing new corporations, big industrial enterprises and vast governmental needs. The modern social problem cannot possibly be comprehended correctly without recognition of this recent transformation in our financial foundation credit. Again quoting Howe : "At first the liabilities of the banks for notes in circulation far exceeded the liabilities under the head of deposits; but, 84 MODERN ECONOMIC TENDENCIES as the use of bank-checks in place of currency grew, the ratio changed and has resulted in the present condition, where the circulation-liability of the National Banks is about $750,000,000 while the liability to depositors is upwards of $15,000,000,000. "A most profoundly erroneous impression is made on the mind of the public by the published statements of the amount of liabilities of the banks under the head of 'Deposits.' It is almost, if not quite, universally believed that the so-called deposits are deposits in actual cash, while the truth is, in so far as the deposits exceed the cash on hand, they are the proceeds of discounted commercial paper. Banks do not loan money. They loan credit. They create this credit and charge interest for the use of it." Classification of Forms of Credit. The present credit-system, therefore, may be taken as made up of the following general classes of credit-instrument, in chief; but a complete list of all the varied forms of paper representing merchandise or the hope of merchandise, or profits or the hope of profits, which are made the subject of negotiation and loan in the financial world, would be unending. (1) Governmental paper-currency, issued against gold coin or bullion, with a minor proportion of silver-certificates. (2) Bank-notes issued more or less directly against the same base, as specified by law. The stability of these two classes of instrument depends, first, upon the proportion of gold to paper issued against it, and secondly to the general stability of other economic conditions. In a quiet, prosperous period the pro- portion of paper to gold may be high without collapse; but as disturbances arise from without, these will find reflection within, in a collapse of the currency, unless the proportion of paper to gold is low enough to reassure even the timid. As already noted, we are not likely to have again a panic due to the inflation of paper currency, although we are most likely to have one from the over-expansion of other paper instruments of credit. (3) Governmental bonds: federal, state, county or municipal. The stability of this class depends upon public faith in the ability of the government to tax the public itself to the amount requisite for redemption. In this indirect way this class falls into identity with the following classes, in resting upon the general wealth of the land. But it must not be forgotten that the stability of governmental bonds stands also upon the public CREDIT 85 faith that the money expended under them went for public improvements which are wise, productive and profitable. The widespread doctrine that a governmental tax is a pure loss to the tax-payer is most misleading. Most taxes are investments much more wise, from the viewpoint of good to the greatest number, than any investments in business. (4) Bonds issued by private corporations, based upon mort- gage of plant and earning-capacity. (5) Stock and short-term notes issued by private corpora- tions, based upon earning-capacity. (6) Bank-loans, issued against deposits or against the above securities. (7) Loans by pawn-brokers or private capitalists, based upon merchandise. (8) Mortgages upon land, buildings, etc. (9) Savings-bank deposits, postal savings, etc. (10) Certificates of building and loan associations, benevolent societies, etc. (11) Insurance-policies and loans thereon. (12) Letters patent, copyrights, etc. (13) Bills of exchange, warehouse-receipts, etc., based upon merchandise and usually endorsed by two names called "com- mercial paper." (14) Checks and clearing-house certificates, issued against deposits. (15) Promissory notes issued by private corporations or in- dividuals, based upon the most general aspect of the issuant's business-record and prospective ability to redeem sometimes endorsed by two names and called "commercial paper" and sometimes merely "one-name paper." (16) Open accounts between seller and buyer still more vague in their basis upon the general probability of their being redeemed. Beyond this general classification lies an intricacy of detail of "margins," "shorts," "call-money," discounts, etc., etc., into which we need not enter. In some respects some of the above issues of credit-instrument are duplications of others as when, for instance, the United States postal savings-bank pays a small interest-rate to the depositor and then redeposits the savings in a private bank paying somewhat higher interest, against which deposits the private bank deals in securities paying a still higher rate. But this duplication is only partial. It is mentioned only to assure that it has not been overlooked. 86 MODERN ECONOMIC TENDENCIES Credit-agencies. In order to place before the reader the aspect in which all this intricate system of credit-instruments appears to those whose lives are spent in its maintenance, before drawing our own picture of it from the Consumer's point of view, the following quotations from financial authorities are offered. First from Mr. Ingle, quoted above : "While credits in one form or another, aggregating an enormous total, are granted by sellers to purchasers, the banks of the country are, shall we say, the impersonal agencies which, in undertaking the responsibility of collecting free capital into reservoirs, loan it to that part of the business- public needing accommodation. The measure of ability of any bank to extend credit, generally speaking, is the net liability of such bank to its depositors. Withdraw deposits to any material degree and a bank is required to demand pay- ment of outstanding loans or reinforce its cash by borrowing. In normal times and in local situations either remedy is usually available, but when times are out of joint, as for instance when over-expansion of credit becomes all too ap- parent and is evidenced in country-wide conditions, this ability either to collect maturing obligations or to borrow in order to meet deposit-withdrawals is seriously abridged or alto- gether lost. As actual cash-reserves held by the banks hardly average more than seven per cent of their deposit-liability, it is easily seen that a relatively small demand for the pay- ment of deposits in actual lawful money must so deplete their resources as to compel suspension of payments, some- thing which has occurred several times, making it imperative to resort to extra-legal and unsound practices, tolerated simply as a matter of immediate necessity. . . . For many years this country, in developing its business of all kinds and, under the impetus of keen and oftentimes unsafe competition in very many lines, in too heavily discounting the future, has been greatly abusing credit-rules accepted as sound by every other commercial nation. It is true that in owning only a most incomplete and inefficient code of banking-law, which pro- vided no means of serving many and most important situa- tions requiring the aid of the money-lender, the commercial banks have been called upon and used in a manner never contemplated fifty years ago. . . . Years ago, when a merchant sold a bill of goods he would receive from his customer either a note or acceptance for the value of the invoice, when both parties to the transaction would expect the account to be closed by payment of the obligation at its stated maturity, CREDIT 87 made in conformity with trade-practice. Such a merchant when needing credit would offer a bank his customers' obliga- tions bearing his endorsement, two-name paper reflecting a bona fide sale and purchase. As the result of competition, which took the form not only of price and profit cutting but of settlement-terms, the one time usual note or acceptance has practically disappeared from many lines of trade, and in its place we have on one side of the ledger "open accounts due from customers," while among the liabilities appear "bills payable," the direct and generally unsupported obligation of the merchant. Such notes issued against the general as- sets of their makers are what is known as "single-name paper." If one could be sure that the average merchant would be proof against the temptation either to over-trade or to inflate reported value of assets, a single-name note against liquid assets, such as good book-accounts, would be just as good and as readily collectible as would be the note of one or more debtors endorsed by the merchant. Unfortunately, however, a very great number of traders do not limit their borrowings to an amount fairly related to the total of quickly realizable inventory and book-accounts made for settlement at a de- termined date. . . . Many merchants enjoying good credit on their single-name paper are averse to returning to old-time practice, as under existing conditions such merchants really are doing a banking-business on quite a generous scale. They are able to borrow on close terms, when they extend open credit to their customers on terms which many times yield not only two to four per cent profit on the credit itself, but higher prices for goods than would otherwise be paid. Not only is the banker's field thus usurped, but the customer is trained to postpone pay-day. ... In practice the banks handle a great volume of single-name notes and only an in- significant quantity of real commercial paper, . . ." Mr. Edmund D. Fisher, Deputy Comptroller, City of New York, in a recent address upon "The Relation Between Fixed and Fluid Credit," before the American Bankers Association, said: "Credit is the chief element in modern exchange through the credit-currency of banking. ... It is the medium through which commodities are virtually enabled to exchange them- selves in terms of actual money. . . . Recent banking prac- tice has developed large volumes of deposit-currency based upon fixed forms of credit, and the use of this currency has dis- 88 MODERN ECONOMIC TENDENCIES turbed price-relations. . . . Through the loan, deposit and check process of modern banking, the proceeds of loans upon shares of corporate business and on dwelling-houses and other evidences of fixed value are added to the volume of basic currency. . . . The vast growth of the non-commercial forms of banking-enterprise during the last fifteen years, manu- facturing deposit-currency mainly through loans on the col- lateral security of new corporate enterprises, probably has been the chief element in price-inflation." Finance and Ethics. A glimpse at the corresponding change which has come over our ethical standards to correspond with the progress in banking-methods is given by Professor E. D. Howard, of Northwestern University, in his "Money and Banking" : 2 "It is a curious fact that this most vital part of civiliza- tion and commerce money and banking has not been un- derstood and appreciated until recent times. A few centuries ago the merchant was regarded with suspicion and placed not far above the thief in the social scale. The merchant who bought an article for $1 and sold it for $1.50 was thought to have robbed the purchaser of fifty cents. The banker who loaned money at interest violated one of the laws of the church which forbade taking of usury, as interest was called at that time." Strange how prone is the most serious and careful of modern public thought to regard those early and primitive moral scruples as correct! We are rapidly re-approaching the point, not of saying that all merchants are thieves, but that if their profits really represent a useful service then it is inconceivable that they should object to receiving their pay in the form of a salary proportioned to the Consumer's estimate of the service performed. Insurance-credit. If doubt should exist in the mind of the reader as to insurance-policies being a part of the credit-system, the following quotation from "Relation of Life-insurance to the Credit-fabric," an article by Mr. A. B. Hepburn, Chairman Board of Directors, Chase National Bank, in Rand-McNally's Bankers' Monthly for March, 1915, will reassure: "The aggregate resources of the New York Life, Mutual, Equitable, Prudential and Metropolitan were in 1879 $166,- 2 Permission of Alexander Hamilton Institute, New York City. CREDIT 89 296,822, and their aggregate outstanding insurance was $603,553,606. According to their reports for 1913 the ag- gregate resources of these companies had grown, in the in- tervening thirty-four years, to $2,694,591,746, and their outstanding insurance had reached the enormous total of $7,325- 711,135 of ordinary insurance, and including the industrial insurance of the Metropolitan and Prudential, the grand total reaches $10,566,042,247. "I have presented these figures in this way in order to emphasize the fact that these institutions are the greatest investment-banks in the world; and indeed they practice a measure of commercial banking, since life-insurance com- panies have adopted the policy of loaning to the insured upon their policies as collateral. . . . Life-insurance companies and banks both deal in credit and subsist upon credit, and both draw from the public the financial resources with which they in turn serve the public." These data, reduced to terms of population, show the relative increase of insurance of this sort per capita in Table 7. It is certain, however, that this average rate of increase has not been evenly maintained. Since 1898 it has undergone marked ac- celeration. TABLE 7 GROWTH IN INSURANCE (DOLLARS PER CAPITA), 1879 "TO 1913 1879. Resources $3 . 39 Insurance in force $12 . 30 1913. 27.67 " " " 108.50 Average increase per annum, in per cent: Resources 6.4 Insurance in force 6.6 Aggregate Credit. The task next in order that of a statis- tical measure of the recent increase in aggregate volume of credit from all the sources listed above is again one fit for an entire corps of professional investigators, publishing a special treatise, rather than for a private author with only a few pages at command. Yet here again the need is imperative for doing the best possible within the limits of a single chapter. The prime obstacle to any accuracy in estimate of the volume of credit-instruments afloat at any one time is, first, their con- stantly varying market-value, and secondly, their apparent duplication. Thus a given amount of gold, or value of plant, may serve as a basis for the issue of bonds or stock, or both, to an aggregate face-value far greater than the value of the basis. 90 MODERN ECONOMIC TENDENCIES The difference rests upon the faith that, when time permits, the paper can be made to represent an earning-capacity equal to its face. These bonds and stock-certificates may then be deposited as a basis for a bank-loan of, say, double or thrice the original sum, and this loan may then be used in a business which grants to its customers open-account credits amounting to four or five times the original sum. In each case the interest-rate rises as the risk increases of failure to make expectations good; but the negotiable value of the credit-instrument in each case stands in the proportions stated, nevertheless. And in this sense there can exist no duplications. The extent to which this process, in one form or another, actually prevails in normal, legal business is beyond the realiza- tion of even the average businessman, and far beyond the ken of the lay reader. It is accomplished in many, many different ways, some of which look little alike; yet they all amount to the same end in effect, namely, the expansion, under legal title as the property of the commercialist promoting the "deal," of credit-instruments which rest their value upon a state of mind, or activity of body and brain, on the part of millions of people. The Normal Expansion of Commercial Credits. It is of the utmost importance, if one is to understand the economic trend of the times, to secure some adequate picture of the manner and the rate in which this modern commercial form of national circulating-medium finds that expansion which is requisite for the increasing population and the growing volume of business per capita. Yet, in seeking this picture, we shall not have re- course merely to the columns of statistics which accompany this chapter in their proper place; for while they may tell amounts most accurately, they give no inkling as to manner. Indeed, in this particular quest it is best to rely merely upon the news-columns of the conservative daily press for reports of typical daily instances, rather than upon official reports of ag- gregates; for our aim is not merely to ascertain the hidden facts, but what the people fully know as to those facts if they would but open their eyes as they read. For this reason we quote below typical press-reports of commercial expansions, chiefly from the columns of the New York Times, a sheet avowedly favorable to commercialistic philosophies, and con- servative and reliable as to news. CREDIT 91 The data thus published are probably as accurate as the official reports from which they purport to come ; while the fact that they are put forth by a staunch advocate of commercialism, yet without adverse comment even from the public to which they are thus advertised is worth as much as the data them- selves. For this proves that they are illustrations of normal or even praiseworthy business-practice, rather than sporadic instances of abuse selected to bolster up our argument. They stand as proof, also, of that public indifference to these acts which is itself a far more tragic menace for the future than are the acts themselves. Nor are these instances adduced below to be misunderstood as condemned herein because their profits are big. Big in- stances are chosen only because they can be seen. But the real problem of the land lies in the fact that all over its territory smaller men are doing this same thing upon a smaller scale, but multiplied by millions into a gigantic aggregate. If com- mercialism be an evil, then the petty variety of it embodied in the myriads of small tradespeople scattered over the land forms, in aggregate, an evil as great as that of the few large corpora- tions in the big cities. Thus in January, 1913, an investigation as to the alleged "money-trust" was conducted by the so-called Pujo Committee of Congress. According to reported testimony from Chairman Baker, of the Board of Directors of the First National Bank, of New York, that institution had made in less than fifty years a profit of $86,504,901 upon an original capital of $50,000, or at an interest-rate of over sixteen per cent, compounded! During the decade preceding 1913 the bank had participated to the extent of $281,000,000 in syndicate-deals aggregating $2,248,000,000. According to the same authority, during the sixteen years preceding the inquiry the National City Bank had distributed over $25,000,000 of profits, including at least one dividend of forty per cent, and had enjoyed the accumulation of a surplus and net profit of over $240,000,000. Again, the United States Currency Bureau report for 1913 revealed aggregate "earnings" by the national banks of the country of $160,980,084 within the year. According to the public press, the year 1911 showed an accumulation by the Lackawanna road of a surplus of $9,632,000, 92 MODERN ECONOMIC TENDENCIES or 32 per cent upon its capital stock, as compared with a rate of 35.4 per cent for the year before. In 1916-17 this same road earned 38 per cent, distributing 20 per cent in dividends, without a whisper of protest anywhere outside the socialist press, revealing any public opinion that such acts were out- rageous. The earnings for the White Star line of transatlantic steam- ships are reported as 60 per cent, a rate which was reduced only to 30 per cent in 1912 by the fearful tragedy of the Titanic. Testimony before the Interstate Commerce Commission in November, 1913, was to the effect that a syndicate which in- cluded several officials of the St. Louis & Santa Fe company had sold to that system a small road at a profit of $3,891,000 upon an investment of $3,000,000, or nearly 130 per cent of profit in a single turn-over and that, too, in selling a property virtually to themselves, so that every stockholder not in the syndicate was swindled as thoroughly as was every Consumer using the system. In 1916 was announced the doubling of the capital stock of the Chase National Bank, with the simultaneous distribution of a cash-dividend of $500 per share. In 1916 the Vanadium Company, an obscure corporation formed ten years previously with a declared capitalization of only $700,000, and in all probability actually funded far below that figure, was reported as sold for $7,000,000, on a stock- issue of $13,500,000. The profit of one operator in this deal was reported as between $1,500,000 and $2,000,000 during a single night. In 1917 the properties which originally formed the Standard Oil Company of New Jersey, before its dissolution under the Sherman anti-trust law, were reported as having distributed $629,000,000 since the dissolution $406,000,000 in cash and $223,000,000 in stock or over six times the capitalization. In September, 1916, the fluctuations in valuation of stock on 'change were reported as adding eight millions to Mr. Rockefeller's for- tune in a single day, making him America's first billionaire. The earnings of the International Mercantile Marine for the first five months of 1917 were reported as $26,000,000. The New York Herald for June 9, 1917, reports that the New York Edison Company had built up a "contingent fund" correspond- ing with what the railroads call a "surplus" of $22,000,000 CREDIT 93 since 1904, and that it refused to use any part of this money to meet the present increases in cost of operation. The Times for Oct. 1, 1915, reports a "curb-broker" who made $500,000 in less than a year, from $650 as a starter. On Nov. 30, 1915, it reports an increase in the stock of the Saxon Motor Company from $350,000 to $6,000,000. On Feb. 6, 1916, it reports a shipping-company established by Mr. C. W. Morse, the ex-banker, as paying a cash-dividend of 100 per cent to its stockholders within less than a month from the date of formation! On January 26, 1915, the Fidelity Trust Company, of Newark, was reported as declaring a dividend of 375 per cent. On June 4, 1915, the stock of the Ford Motor Company was re- ported as increased from two to one hundred millions, with a simultaneous declaration of a stock-dividend of forty-eight millions. Easy, isn't it? Mr. Ford, no doubt, did an extremely valuable thing for his country when he judged rightly as to just what grade of car would suit the largest number of purchasers, and then built it well. Our point is not that he may not have rightfully earned the sum reaching him. That is for the Consumers to decide. The point is that, if he did earn it, he earned it when he built the cars, and not when, by simply "declaring" a stock- dividend, he and his directors expanded the country's indebted- ness to them in a breath, in a manner lacking all responsibility to those who must pay these moneys thus created by private dictum. On April 26, 1916, the stock of Tiffany & Company was appraised, upon affidavits by one of the officers of the company, at a premium of 668 per cent above par. From 1891 to 1906 the Fifth Avenue Bank was reported as paying a regular divi- dend of 100 per cent per annum, with an additional dividend of 100 per cent in 1903, 120 per cent in 1904 and 150 per cent in 1906. Finally a stock-dividend of 400 per cent was declared, increasing the capital from one to five millions. Simultaneously the dividend-rate in cash was reduced to a smaller figure, netting to the stockholders about the same sum as usual. The Rate of Interest. This case stands as an illustration of the fact noted later in the chapter upon Interest, namely, that the financier can shift at any time from a high rate upon one 94 MODERN ECONOMIC TENDENCIES valuation to a lower rate upon a higher valuation which lower rate can afterwards be made to be high again at will, without coercion by any natural law of interest-rate whatever. The sole limit to interest-rate is what can be abstracted from the people. The sole reason for such a move as just noted is to blind the public by a nominally lower rate, although it involves exactly the same burden upon the Consumer as before. As incidental evidence that the problem of commercialism is an international one, and that America does not monopolize these instances, it may be noted that on June 12, 1914, the catering firm of J. Lyons & Company, London, declared a dividend which completed 42 y 2 per cent for the preceding year. But this is not much. England or any other country must acknowledge us to be without a peer, when it comes to com- mercialism. On Sept. 16, 1914, the Times reported the surplus of the Interborough-Metropolitan Company, a corporation holding nearly thirty-four millions of Interborough Eapid Transit stock, as having grown from $788,514 to $1,860,765, within a year. On Feb. 11, 1916, it tells how this latter company had paid, a decade before, $1,500,000 for a tramroad (Pelham Bay & City Island) which afterwards sold for $40,000. "Mr. - - said that $350,000 was paid for the rail- road, while the remaining $1,150,000 was paid to Mr. - for his services in supplying the 'necessary strength' to finance the building of the old subway." Social Control. In order to show how complete and demo- cratic is our control, at present, over this constant expansion of capitalism and its resultant elevation of prices, reference may be made to the history of the legal restraint of the Standard Oil Company. It was in May, 1911, that this corporation, in submission to the Sherman anti-trust law, was dissolved into some thirty-six component companies. Of course all these thirty-six companies then maintained a competition for the privilege of keeping down the price of oil which can only be called cut-throat! For in May, 1915, gaso- line retailed on the road for 12 cents. By six months later it had risen to 18 cents, and by three years later to 28 cents. This was in part due to the war; but on the other hand must be kept in mind that supplies were also increasing rapidly during that period. CREDIT 95 On Nov. 30, 1915, the Times reported that the stock of these thirty-six companies had increased in valuation by more than $148,000,000 within a fortnight. During the year 1915 the Standard Oil Company of Indiana had earned 53 per cent on its outstanding stock, as compared with 22 per cent in 1914. On April 18, 1916, the Times reported in detail the plan for the doubling of the parent company's stock, the extra hun- dred per cent to be distributed to the stockholders in the com- ponent companies as "a melon" this being, when consum- mated, "the seventeenth distribution of stock among the former subsidiaries of the old Standard of New Jersey since that com- pany was dissolved." On Dec. 30, 1916, the same paper stated that the valuation of Mr. Rockefeller's holdings in oil-stock were then "two and one-half times greater" than when the company was dis- solved, stock which had been quoted at $1500 a share thirteen months before being then worth $2000. The increase in valua- tions in Wall street were reported as having added over $8,000,000 to Mr. Rockefeller's property in a single day! Yet this is a gain which, if made by that exceptional producer who might be able to follow Professor Fisher's rule, at the rate of saving $10,000 annually from his wages at the expense of consider- able stinting would yet require eight centuries for its ac- cumulation ! On July 1, 1915, the Delaware, Lackawanna & Western Coal Company announced that it had taken steps to comply with the recent order of the Supreme Court of the United States, that it should separate from the railroad-company of similar name. But simultaneously it declared a dividend of 52y% per cent, in comparison with its average of 23 per cent during the preceding six years, and in its report of a fortnight later revealed earn- ings amounting to over 90 per cent of its capital stock ! In 1916 the railroad-company earned over 38 per cent on its stock, nearly twice its usual dividend of 20 per cent, and an eighth larger than during the previous year. Public Acceptance of Credit-expansion. Yet the items listed above make no pretense of being either an exhaustive list of such instances, nor of being based upon a complete history of any of the enterprises cited. They are merely illustrations culled from leading daily papers, as they happened to come to hand, to show not only what is regarded as quite customary 96 MODERN ECONOMIC TENDENCIES within the financial world, but also what is frankly revealed to the public. That is to say, the public knows of the expansion of com- mercial credit in private hands at the rates just stated. How much worse the hidden reality may be can only be guessed from the fact that all ledgers are rigidly sealed against inspection. If the commercialists find reason for complaint in what the public believes about them, it is plainly their own fault. The Literary Digest for June 27, 1914, quotes Sir George Paish, in the London Statist, as placing the "marvelous" growth of the United Kingdom in wealth as from about $12,500,000,000 in 1814 to about $85,000,000,000 in 1914 : "In France wealth has expanded about fivefold; that is, from under ten billions to nearly fifty billions. In Germany progress equally remarkable has taken place." Sir George gives for the United States a total wealth in 1814 of about $1,750,000,000 and a total wealth now of $150,000,- 000,000, or nearly ninetyfold increase! Then, after reviewing the marvelous contrast in visible conditions attained during the century, Sir George continues: "What are the forces to which we owe this great uplift of the whole race? Many things, both mental and physical, acting and reacting upon each other, have combined to bring about the new conditions; . . . But the greatest uplifting force of the past century has been the growth of a spirit of trust and of confidence between man and man and between nation and nation. This new spirit has infected men on every side of their activities, . . . One of the most noteworthy consequences of the new spirit has been the creation of a credit-system which embraces the whole world, and which has enabled countries to be populated, towns and villages to be constructed, agriculture extended, mines developed, and riches transported from the ends of the earth for consump- tion and use wherever they are needed." Yet within a week from the publication of these words broke forth the greatest war of history. The existence of an interna- tional credit-system forms no bar to war. 3 'But the collapse of credit may be worse than war. The winter of 1919-20 reveals central Europe a wreck of unemployment, starvation and misery, largely in districts which suffered no appreciable destruc- tion of tangible property. But what is gone is credit, both economic and political. CREDIT 97 These illustrations given above of the present method of expanding our volume of circulating credit-instruments, to meet expanding demands, have been drawn from the greatest variety of enterprises, in industry, invention, commerce and pure finance, from those promoted by individuals as well as those for which huge corporations or "trusts" are responsible. In Chapter XII some similar expansions of railroad-capitalism will be found quoted, directly from the sworn testimony of prominent railway-officials. The Modern Method of Making Money. The aim in ad- ducing all of these instances of rapid expansion of wealth is not at all to "muck-rake" proofs of individual malefaction on the part of the wealthy, nor to gloat over their horrid injustice. It is merely to gather, haphazard, fair samples of what is occur- ring daily in financial circles, as characteristic of the normal growth of commercialism, and to show, by instances so big as to be plainly visible, the character of that growth which now permeates every minute cell of our industro-commercial system, from corner-grocery to department-store. In this growth the aggregate of the myriad of small instances, each too obscure to attract attention, probably exceeds that of the few large ones. Each of these rapidly swelling credit-instruments in the cases listed, like the myriad of untold smaller ones constantly being turned out by the horde of petty commercialists, is measured in dollars, and has the same purchasing-power as the same number of dollars earned by productive labor. However impossible it might be to liquidate the whole, or even any major fraction, of these huge bulks of credit-securities at any one time, yet the entire credit-system and business-world de- pend, daily and hourly, upon the universal faith and fact that any reasonable portion of these instruments is convertible at any time into dollars; and the dollars thus procured will buy across the shop-counter exactly what the working-man's dollar will buy. In fractional degree such conversion of these credits into money for daily purchases is actually proceeding at all times. The Sole Foundation for All Forms of Credit-instrument. The real basis for all these expanding credits, as became plain from the illustration of the twenty men, and as actually was true of the English tallies for over six centuries, is not any particular amount of gold or silver, nor even any specific tangible property of any sort, necessarily, but merely the simultaneous 98 MODERN ECONOMIC TENDENCIES faith between man and man, amongst many millions, that each, co-operating with the others, and with the aid of the country's accumulation of cleared land and productive appliances, is able to serve or supply the other, that he is desirous of doing so, and that he will recognize the said security or tatty or greenback or what-not as a symbol of this readiness and ability to inter- change. Whatever may be the system or the basis, credit-instruments without instrinsic value may exist to the volume of this faith, and no more. The nominal basis gold bears to this useful, life-supporting faith merely the relation which the bushel- basket bears to a cargo of wheat. As a measure it is most useful, but otherwise it is valueless. Wheat without any bushel- basket may yet feed mankind ; but a bushel-basket without wheat will not feed a rat. In so far as this mutual faith is rationally backed by the existence of an array of tangible appliances for the creation of life-support, just so far these appliances, and not gold, form the major basis of value for the circulating credit instruments. Yet, as can be fully realized only when economic analysis has been traced to its uttermost, it is not merely the appliances which support public credit. It is the form of relationship embodied in society, as solidified in constitution, statutes, common law and economic tradition, whereby men are linked with each other and with these appliances in a way helpful or harmful, that a country's credit-system may alone be assured stability or in- stability. For, however more important the appliances may be than gold, nevertheless gold, appliances and labor may all be there together the gold pure, the appliances efficient and the men anxious to co-operate in production, interchange and consump- tion yet all these processes may be impossible. The nation may yet stand paralyzed, impoverished and destitute. Not only have we seen this phenomenon repeatedly in coun- tries foreign to our own and thanked God that we were not so stupid as they but it has repeatedly occurred, in partial degree, in our own land, in times of panic. Then has arisen the astounding spectacle of all this array of powerful and efficient appliances, in a land of natural plenty, standing unimpaired physically, yet quite useless, merely because men cannot agree upon a common symbol of value-in-interchange. CREDIT 99 To-day we rely primarily, for this symbol, upon a system of credit-instruments interest-bearing commercial credits the entire negotiable, circulatory valuation of which depends upon the prospect of drawing upon them continued future interest or dividend payments. With the variations in this prospect the valuations of these credit-instruments fluctuate up and down, from day to day and hour to hour, so wantonly that a vast machinery of exchanges, tickers, "Wall-street editions/' etc., is needed in order to keep the public informed. Occasionally comes a major collapse of valuations, in some "panic" ; and then factories shut down, railroads cut their schedules, and the public suffers inconvenience or hardships in manifold ways. Commercial Credit versus Factory-credit. But the student of economics, when considering the vital function of credit and credit-instruments in the maintenance of the country's current life, must never forget that, in parallel with this huge system of interest-bearing, constantly fluctuating, commercial credit- instruments, there always operates quietly, stably and efficiently another credit-system, forming a diametric contrast therewith. This is the equally vast aggregate of non-interest-bearing, non- fluctuating, non-negotiable factory-credits, in the form of shop- orders or requisitions, whereby our most costly appliances are continually being made available to our relatively propertyless skilled artisans. Two things in particular should be noted, in consideration of this most important contrast between our two accepted, parallel systems of credit, before the present economic situation can be at all understood. The first of these is that all credit- instruments, whether of the factory or the commercial variety, are needed solely in order to bridge gaps in ownership between the man-who-has and the man-who-needs-to-use. Some form of credit-instrument is requisite for extending to the man-who-has- not that opportunity to use some appliance which society most vitally needs to have him use. And we shall never understand the present crisis until we understand tfiat the favor embodied in this opportunity is extended to society, and not to the man. In the factory-system this opportunity to use is merely as- signed to the wage-earning or salaried worker who is fit to use the appliance. The only requisite for this assignment is proof of fitness to use. A huge machine-tool, or a steamship, or a hospital, is assigned to someone skilled in the use of such a 100 MODERN ECONOMIC TENDENCIES thing, and full control granted, without any thought of the issue of any credit-instrument (other than the order) being necessary. Still less is there any thought of necessity for its bearing interest. But in the commercial world, on the other hand, credit is constantly being extended, not to the man whom society needs to have receive credit, namely, the man-who-has-no-property- but-has-skill. Instead, it is issued in huge quantities to the man-who-has-property-but-no-craftsmanVskill. Secondly, commercial credits are not issued primarily for the facilitation of production. Usually they accomplish this pur- pose, to some degree, on the side; but it is a secondary function even then. Often this pretense is frankly dropped. The primary function of the issue of commercial credits upon which, indeed, their existence depends is the extraction of interest from the Consumer. For no commercial credit- instrument which fails to perform this primary function can remain long in the land of the living, no matter how efficiently it may aid production. The community's need for true credit may be never so dire; it gets none from the commercial system unless it first pays the tribute exacted for its issue, called in- terest or dividends. Social Effects Independent of Moral Intent. It is worth while, therefore, to examine the history of this modern accumula- tion of credit-instruments. In chasing this history relentlessly to its bearing upon social right or wrong we are not interested at all in any question whether, in its gradual erection, there existed any deliberate, malicious intent to exploit the Con- sumer, or not, although such conscious sentiment may at times have been present. We are interested solely in the aggregate, subconscious growth of the institution, amongst a mass of men the great majority of whom were unquestionably conscientious, upright and humane. They were merely unaware of all the economic results of what they did. The History of Credit-expansion. Just how old the process of creating and accumulating credit-instruments for private profit may be, cannot be said. In embryo it has probably pre- vailed for many generations, if not centuries. But it was not until comparatively recently early in the nineteenth century that the accession of the merchant, banker, broker and pro- moter to social recognition (which was one of the novel and CREDIT roi surprising fruits of the new American ethics of liberty and equality for all men), coupled with the beginnings of modern congestion in cities, had given this process an appreciable start into that prerogative and power as a national institution which is our most distinctive hallmark of Americanism to-day. Diagrammatic illustration of the principal phase of this growth since 1840 will be given later, with a tabular exhibit of banking- figures since 1865. These will show that, whereas the start must have been made not long before 1840 or 1850, and at first was gradual, yet progress since then has been as that of a snow-ball rolling down a mountainside cumulative and accelerating. Each fresh outburst of commercial activity, following some disturbance such as the Civil War, or the panic of 1873, has accentuated this process of expansion of our volume of interest-bearing credit-instruments. Each expira-. tion of some fund of time-limited paper gave opportunity for another refunding and these refundings have always been in the direction of expansion rather than of contraction. But it was not until after the Spanish War of 1898 that occurred that most phenomenal distention of credit of all, amounting almost to an explosion, which astounded even the financiers of that day and inaugurated what may be termed the modern era of credit. Capitalizations began to increase at a rate which was dazing to more old-fashioned minds. The volume of interest-bearing securities began to swell by methods which remind one only of our childish way of "counting one hundred" when we were "it" at "I spy" "Ten, ten; double ten; forty-five and fifteen!" How the commercialists ever ar- rived at their enormous increases in capitalism so quickly no one could ever understand ; but arrive they did, and their capitalism has stuck ever since. Professor John E. Wildman, head of the Department of Accounting in New York University, is reported as saying, in November, 1916: "The trust movement in the United States began in 1898. During the three years which followed, 149 large combina- tions with a total capitalization of $3,578,650,000 were formed. Many writers and some fairly prominent authori- ties predicted failure. It was agreed that no one man or Board of Directors could successfully administer such huge organizations. . . . But new methods of accounting made it 102 MODERN ECONOMIC TENDENCIES possible for the executives who were placed at the heads of these giant corporations, with their many constituent com- panies, to have laid before them information as to what was being done. Accounting made it possible to run a huge busi- ness as intelligently as a small business had previously been run." Here Professor Wildman's text is accounting, and this part of his lecture is quoted merely as an answer to those who find mechanical difficulties in the way of a more unified administra- tion of all the industries of a nation, as one factory, so great as to countervail all possible gains. These timid ones need to learn that, when new policies have been planned upon the right principle, mechanical difficulties have always proven subservient thereto as was true in this case of more modest consolidations. The world's progress has been accomplished by those who have dared to believe this general law. The real reason why some large consolidations have failed to be profitable and permanent, in the past, is that after some sixty per cent or so of an industry has become consolidated it proves so profitable to outsiders to create new enterprises in the same line, just for the purpose of selling them out to "the trust/' that no larger percentage of monopoly can ever be ac- complished. Thereafter the creation of new businesses to be absorbed proceeds as rapidly as the consolidation a process not profitable to the consolidation, nor to the country as a whole. But our chief interest here concerns not the mechanical diffi- culties of administration, but with the far more basic diffi- culty of comprehending whence might come these gigantic sums, apparently of real dollars, which figured in the capitalizations of these novel consolidations, or "trusts." In 1901, indeed, this aspect of the marvelous new policy became a public theme. The ablest minds in the commercial world were called upon for explanations. They responded, as we now can see, not with real explanations because they either did not realize themselves what was going on, or they hated to give the game away but with excuses and palliations which never approached the real essence of the situation. Thus, the North American Review for May, 1901, published a symposium upon this topic by six leading commercialists which should descend into history as a record of the state of mind regarding the current financial evolution of that day. CREDIT 103 The six contributors were Russell Sage, the Wall-street finan- cier; James J. Hill, the railroad-president and "Builder of the Northwest"; Charles M. Schwab, the steel-man; Charles E. Flint, merchant, banker and member of the Conference of American Republics; James Logan, the New England manu- facturer, and F. B. Thurber. Mr. Sage's article opens the attack by saying: "It is, perhaps, ungracious to sound a harsh note in a company so happy and well content as we are to-day in Wall street. My excuse must be that I honestly believe that we are liable to lose our heads; that we have entered upon busi- ness methods that may lead us to the brink of disaster, if, indeed, they do not land us over the brink. On the other hand, these business methods have been inaugurated, and are vouched for, by a company of men who have never known failure, and who may succeed in steering us safely over what appears to my old-fashioned eyes a very treacherous deep. "It is certain that under the direction of these men stocks are booming. Sales are making at a rate unprecedented in the financial history of the world. Everybody is making money. Millionaires are created almost over night. . . . The consolidations of to-day begin at the very outset with capi- talizations that cast all past experience into the shade, and that almost stagger the imagination. The steel combination is to start off with a capitalization of one billion dollars. [It actually did start with a tenth more than this.] That is more than one-half the national debt. It is one-seventh of the entire wealth of the United States. The total money in circulation in the United States ... is $2,113,294,983. This company's issue of securities will represent practically one-half of the entire volume of money in the United States. "To me there seems to be something very much like sleight- of-hand in the way in which these industries are doubling up in value, as at the touch of a magician's wand. Here we have a factory a good, conservative, productive investment turning out anything from toys to locomotives. It falls into the hands of the consolidates, and, whereas it was worth $50,000 yesterday, to-day it is worth $150,000 at least, on paper. Stocks are issued; bonds are put out; loans are solicited with these stocks as security. The man who owned the factory probably could not have borrowed $10,000 on it. Now, however, . . . bankers and financiers are asked to advance $60,000 or $70,000 on what is practically the same 104 MODERN ECONOMIC TENDENCIES property. . . . Under these circumstances a 'squeeze' seems to me inevitable. ... In fact, we have gotten away entirely from the old idea of making the money of the country the basis of our trading. Instead, there is thrown into the busi- ness-world, to be used as a trading medium, millions upon millions of new stocks the real value of which is yet to be determined. As soon as this is thoroughly realized we may look for trouble." Yet not until 1907 did Mr. Sage's predictions of catastrophe bear even partial fruit, and not even yet has the disaster pene- trated to the point of quelling this ever-bubbling fountain of fresh interest-bearing securities. Barring temporary ups and downs, inflation is proceeding to-day faster than ever before. Throughout the winter of 1914-15 it was checked by the stress originating in the European war, it is true, but by spring it had revived under the stimulus of orders for war-munitions and to-day is proceeding more rapidly than ever. Some instances of this most recent expansion have already been quoted. Even as early as August, 1915, comes word of the appearance of a new company with a maximum capitaliza- tion of ten millions, issuing eight hundred thousand shares of stock without face-value stated! With such an act the last vestige of pretense that stock represents actual value invested has been abandoned. Within a single year the shares of a preceding company, now merged into this new one, sold first at $20 and then, after the merger, at $420 ! Yet it seems strangely difficult for the ordinary mind to grasp the fact that $400 out of this $420 has been contributed solely by the public which purchases, not the stock, but any and every article of food, clothing or the like which is on sale. And if the final $400 obviously came into the possession of the capitalist in this way, is it such a radical or revolutionary or crazy thing for the public to inquire, very sternly, if the original $20 may not have arisen in the same way? Nor is the $420 at all likely to be the end of the story. This paper can be given any larger valuation imaginable, merely by permitting the corporation to charge prices which will pay dividends upon that sum. And if the rate of dividends becomes so high that the public becomes restive, it can be reduced at any time, as a rate, while keeping it undiminished in aggregate CREDIT 105 volume or even increased merely by refunding the obligations of the corporation in larger face-value, and distributing the surplus to the stockholders as a "melon." It is so easy that financiers are becoming almost ashamed of it, not because of its outrageous inequity, but because of its childish simplicity. Valuations of Commercial Principal Dependent Solely upon Income. If there be any fact which projects from the financial world so prominently that no man might be expected to miss stumbling over it, it is the law which has already been stated once, but which cannot be repeated and emphasized too often that interest-payments and profits determine principal-valua- tions, and not valuations interest-rates. Yet day after day, and year after year, in debating these questions, men supposedly in- telligent and experienced in finance trot out the ancient super- stition that interest must be paid at a certain rate, because of the "value" of the principal "invested." Yet there is not the slightest foundation in fact for that idea. It is pure superstition. The valuation of the investment depends wholly upon what it happens to earn in the future perhaps less, but usually more, than when invested. That fact is fully considered by every commercial investor before in- vesting. 4 Thus, regarding Mr. Sage's paper, the Outlook for June 1, 1901, says: "Mr. Sage's article furnished the text for five replies in defense of the trusts, yet not one of the defenders takes ex- ception to Mr. Sage's figures as typical of the way trusts are capitalized. The uniform reply to his criticism is that the value of the property is not to be reckoned by its cost, but by its earning -capacity." (Italics mine.) The orthodox authorities in political economy seem to see plainly enough the economic fact. It is strange that they cannot grasp the far-reaching ethical conclusions enforced thereby. Of the five replies to Mr. Sage only one seems to offer any- 4 The important question of the nature of interest, and the laws which determine interest-rates, will be pursued at length In later chapters. 106 MODERN ECONOMIC TENDENCIES thing pertinent, and this supports our own contentions as to the nature of interest and dividends. Mr. Flint says: "As a test of what is really behind the industrial stocks ... I have gone into the figures of forty-seven among the most prominent companies. These were selected at random. . . . The greatest industrial of all, Standard Oil, which last year paid 48 per cent on the par value of its stock, is purposely not included in the list. Nor need it be included, for without it we arrive at an average that will, I believe, astonish many even among those who have been most active in handling these stocks. ... He will find that the industrials, almost without exception, are worth a great deal more, judged by their earning -capacity, than they are selling for in the open market. Some are earning over 25 per cent a year on their market-values, and the average for the entire forty-seven is 13.6 per cent. ... A very popular impression exists that industrials are composed principally of water. The best answer to this is that forty-seven companies show an average earning-rate of 7.44 per cent on their total capitalization at par." (Italics mine.) This, it seems, was the equivalent of 13.6 per cent on their market-valuation. If Mr. Flint and the Ultimate Consumer are to agree, a new definition of stock-water must be developed. There could be no finer proof of water than that furnished by these figures. Nor could there be finer support for our later contention that, averaging all together, costs of replacement, capitalizations and earnings must always hang closely together, automatically, regardless of the source of the investment. 5 Yet from the start inflation worked successfully, and Mr. Sage's gloomy predictions were discredited by experience. The public has become accustomed to the magical growth of riches, and the topic is being neglected until post-war developments of a similar nature, but surpassing these earlier figures in scale as the Great War surpasses the Cuban War, shall have forced them again to the front. The younger financiers who astonished the more experienced ones of 1901 were not necromancers, but merely shrewd. Ac- cording to Mr. Frick, in court-testimony as reported in the 8 The proof of this law will be found in the chapters upon Interest. CREDIT 107 Literary Digest for Feb. 24, 1900, as to the Carnegie Steel Company : "The business from 1892 to 1900 was enormously profit- able, growing by leaps and jumps from year to year until, in 1899, the firm actually made on low-priced contracts in net profits, after paying expenses of all kinds, $21,000,000. In November, 1899, Carnegie estimated the net profits for 1900 at $40,000,000, and Frick then estimated them at $42,500,000. Carnegie valued the entire property at over $250,000,000 and avowed his ability in ordinarily prosperous times to sell it on the London market for $500,000,000." During 1901 the profits actually were at the rate of over one hundred millions per annum. The Literary Digest for Dec. 7, 1901, quotes the New York Journal of Commerce as saying: "Checks were sent on Wednesday to members of the under- writing syndicate of the United States Steel Corporation amounting to one-eighth of their nominal subscriptions, or to $25,000,000 in the aggregate, the syndicate being for the nominal sum of $200,000,000. As only one-eighth of this amount was called, however, . . . the current dividend or dis- tribution by the managers of the syndicate is practically the return of the entire amount actually paid in. In addition to this payment it is learned on reliable authority that the profits of the syndicate are largely in excess of the amount actually paid in. . . . these profits were estimated at about 261/2%, or say $53,000,000. It is now estimated, however, that these profits may equal or exceed 30%, or $60,000,000. This would be considerably over 200% on the investment." (Italics mine.) And on June 28, 1902, the same source of information states: "The true capitalizations of all the consolidations effected within the last twelve years is reckoned by this authority at about $4,500,000,000, while the increase of large and small independent corporations in the last seventeen months is reckoned at $5,000,000,000." These figures agree well with independent estimates as to the current rate of output of new securities at that time as at least one hundred millions per month, and as fully three times that rate now. 108 MODERN ECONOMIC TENDENCIES But what concerns us here is the fact that even fifteen years ago the evidence was not only ample it was overwhelming that there lies not the slightest shadow of connection between capitalizations, or interest-rates, and actual investment in ap- pliances. For here, in at least this one instance, after the in- vestors had been repaid their entire original investment in a single payment after a delay quite insufficient for productivity to be a factor in the earnings and with 200 per cent of profits on top of that, the world of Ultimate Consumers still owed them every dollar of that original indebtedness, and soon more! That the expectations of the founders of the Steel Corpora- tion were not visionary may be judged from the fact that its net earnings during three recent years, in round numbers, have run as follows: In 1914 $80,000,000, in 1915 $105- 500,000, and in 1916 $114,000,000, with every prospect of a still more prosperous year in 1917. According to Mr. Carnegie's most conservative estimate of the proportion of the valuation of the property to its net earnings the Steel Corporation was worth in 1914 $500,000,000, in 1915 $660,000,000 and in 1916 $715,000,000, and perhaps twice these figures ! 8 These are the gigantic sums which the Ultimate Consumers still owe these "investors" in this merger and upon which they must pay interest to these people and their posterity indefinitely in the future. Yet they "invested" only $25,000,000 in the first place with no probability that they did even that, in value produced by themselves which sum was repaid to them in full during the first year! Yet even if the Ultimate Consumers should now offer these people the $715,000,000 in cash for this property, the whole value of which has been created by the purchases of the public, in order to preclude paying further interest thereon indefinitely The Times for. July 31, 1918, reports that the net earnings of the U. S. Steel Corporation for the second quarter of 1918 were $153,273,641, or at the rate of over $600,000,000 per annum. Out of this quarterly sum over $90,000,000 were set aside as war-taxes. According to Mr. Carnegie's figures the Corporation is now worth at least $1,500,000,000 on the basis of its net earnings, accepting the war-tax; or, if it be assumed that the Corporation is capable of the same earnings after the war-taxes shall have been remitted, it will then have become worth about $3,800,000,000. Such is the latent possibility which was not understood by Mr. Eussell Sage, but which was partly grasped by the younger men of his day. CREDIT 109 in the future, the attempt would be futile. These people would probably not accept. They do not wish the debt canceled. It is too profitable. Moreover, even if they accepted the offer it would not relieve the Consumer one whit. For this seven hundred millions is now money. It is sacred "property." Its owners possess not only the right to invest it in other industrial enterprises, thereby collecting from the Consumer the same interest-tax through other channels than steel, but any attempt on the part of the public to restrict this opportunity for investment, or collection of tribute thereon, is immediately denounced by our most ponderous authorities upon the law as a confiscation of property. Yet it is obviously property which its owners never created; and upon it, even if they did create it, they have no right to collect interest without the request, or at least the consent, of him who pays it the Ultimate Consumer. Confiscation. Confiscation of property without due process of law steps right through the middle of the Constitution of the United States. Therefore we approach a most interesting crisis, when once the growing issue shall have come to a head as to whose property it is which has been confiscated. For every least inflation of the market-valuation of any security con- stitutes a confiscation of the property of the Ultimate Con- sumer, without the ghost of any process of law, or of any equity upon which to base one. Yet the Consumer's property is certainly just as sacred as is that of the promoter or capitalist, and perhaps far more so. Do the commercialists really dare to let come to a head the issue as to which form of property is the more sacred? Our Accumulation of Interest-bearing Securities. To-day the bank, originally solely a place of deposit for coin or bullion, has become, with its outlying tentacles of brokers and promoters, the natural habitat of our national fund of credit. The primal form of commercial credit-instrument is the bond or stock- certificate. All other forms are subsidiary to these. The approximate growth of our aggregation of stocks, bonds, etc., will be shown statistically in Table 42. These figures are here exhibited in graphical form, in Curve 2 of Fig. 1. The growth of banking-institutions, measured in various ways, ap- pears in Tables 8 and 9. 110 MODERN ECONOMIC TENDENCIES The data appearing in Tables 8 and 9 are derived chiefly from the United States Statistical Abstract. There appears to be a lack of agreement as to figures as to the state banks. Barnet, in his "Growth of State Banking," publishes the num- ber of such banks for each year from 1877 to 1899 as stated by the comptroller of the currency, and also as he believes the correct facts to be, in comparison. At the worst point there iSVo l85o 1660 l8j-0 1880 1990 1500 1510 l<)ftO Fig. 1. Rate of Growth of Interest-bearing Securities per Capita. is a discrepancy between the two of over seventy per cent. As late as 1886 it amounts to forty- three per cent. The state banks passed through a checkered career in their earlier decades, and even after the establishment of the na- tional banks they were reduced to unity of system only gradu- ally. For these reasons data as to state banks are largely omitted from Table 9. From the columns of the tables there stand out the following obvious and significant facts: (1) During the period since the Civil War the credit ex- CREDIT 111 ?-g j.S .2 i 5^ oooooooooooooooo I 3-: . STJ > 2 a* i-i (M (N (N CO CO CO CO r-H (N i-H H rf^ oqooiocscooQcorHrHO C^ C^ O5 "^ CO C^ ^^ *O CO 10 ClCO(N-^OcOI>.t>-OOcJ5 (N(N(N(N(N(NC^(N(Mc? ^iCl>O5OOOO5t>- fH (M* ,-i oi i-i rH (M* i-i rH rH s COiOCOi-HcOl^COO500 T-ieooOrHCit^iaooto rHif5O500CObOOOiO OOOJoirHrHCO^lOlOcd OOrHCOlOTHOJTt.CO O CO rH CO O rH rH O O O (N !&!?! .11 ^ fl2 P Fi o ia : :2 O CO t 00 t^ oooio ^H o o . . .000000,000000 : O rH ^H . W (N CSI CO O 00 ri< O iO O I> 00 00 00 O - O3 CO -^ U3 CO OJ O) O) O) O> O> O> 23 i 116 MODERN ECONOMIC TENDENCIES 1 1 *- Oi O5 O5 "" 1 1 2 S.2 11 l! CREDIT 117 are based really upon payments, but reduced to terms of com- parison with actual insurance in force. Briefly, the showing as to insurance is even more striking than that of banking. However the volume may be measured, it has plainly doubled in volume per capita since the century opened. There is no phase of our marvelously expanding com- mercialism which is growing more rapidly than that attached to insurance. Large insurance-policies, as a most approved means for making large fortunes hereditary without the pay- ment of an inheritance-tax, are daily becoming more popular as a form of investment. Commercial versus Natural Insurance. In arguing that this rapidly swelling aggregate volume of credit-instruments con- stitutes a dangerous burden upon the stability of our civiliza- tion, as will be done later, there must be no misunderstanding of this as an argument against real insurance, as contrasted with commercial insurance. Real insurance, in its essence, is a very simple and useful thing. Its sole function is to dis- tribute harmlessly over many people the burdens due to be- reavement, fire, accident, etc., which would otherwise fall upon the individual with an intensity stunting to his own life and unprofitable to society. Viewed from any factory-system standpoint, this function in- volves merely the clerical activities of recording the risks, measuring the losses, and distributing the assessments. It in- volves no appreciable financial questions whatever. The author knows well that, under existing commercial condi- tions, insurance by assessment-society has failed to protect. The private assessment-societies failed for two reasons. First, they could not get the business, in competition with the drummer- equipped commercial companies. Secondly, they could not stay solvent. Under commercial standards of money-making every- where, it was inevitable that risks should be assumed faster than a proper fund was maintained for their liquidation. Money appeared to be coming in rapidly, and was therefore distributed and spent when it should have been conserved, to the ultimate bankruptcy of the enterprise. But this was only because it was not insurance, but the private profit of the society-members, which was the accredited aim. Success may be had for assessment-societies only when (a) every citizen is forcibly included and insured, not because he 118 MODERN ECONOMIC TENDENCIES necessarily desires it but because society needs to have him insured; and (b) all commercial features, such as stock-holders, dividends and banking, are excluded. Such a form of insurance, chiefly against want in old age, is in successful operation in most civilized lands foreign to the United States. Such a system is just what every businessman would design, if he were once placed in supreme command of all insurance in the country, having no competition to meet anywhere and sworn to keep his administration unsullied by a single dollar's worth of profits or dividends. For such a national commissioner of insurance would be troubled by no responsibility for finding business, nor for find- ing capital, nor for paying dividends. He would be responsible only for seeing that no person in the land might die, nor any building burn, nor any ship sink, that the burden due to the event were not distributed over society as evenly as statistics and a sense of patriotic duty can do such a thing. The worst risks would be his first duty. Quite aside from all the inefficiencies of commercial insurance which are visible in its price (which it possesses in common with all other com- mercial enterprises) the prime failure of commercial insurance is its inefficiency in insuring. For it fails completely to insure the very person or things which society most needs to have insured, namely, the worst risks. For competitive commercial insurance cannot afford to assume any risk which will not pay a dividend. Consequently the first precaution is to exclude all those unusually liable to disaster. Thus commercial considerations restrict our volume of insurance below its proper normal just as (as will be shown later) they restrict our natural volumes of production, trade and esthetic enjoyment. Yet these worst risks are just the ones which should be brought in first. For society is interested wholly in the in- surance, and not all in the dividend. Thus the real basis for life-insurance is that society cannot afford to have any family of children grow up in poverty and ignorance. It cannot afford even to be brutalized by the sight of a widow toiling as in a penitentiary, and no better cared for than a convict, when her only crime has been to lose her husband. Therefore it is the family of the man sure to die soon which CREDIT 119 society should insure before all others. Yet it is just this sort of family which commercial insurance never insures. This basic failure of insurance when distorted by commer- cialism has not been included in any of our later statistical estimates of the current waste of life by commercialism. Yet it is a gigantic and immeasurable loss to the community each year. Even in a cold-blooded, pecuniary way it is a tremendous loss, for three-quarters of our prison and reformatory facilities are required by men under twenty-five ; and much of their error is traceable directly to accidental poverty of opportunity dur- ing childhood and youth. In addition comes the far greater, if potential, loss of what these boys and girls might have done during life, if they had had proper education of their faculties. From their deficiencies every person in the land' suffers, in general standards of com- munity-life or in direct disaster if in no other way, in the decreasing purchasing-power of the dollar. Yet all that is needed in order to remove this social defect is to eliminate the ownership from insurance, recognizing it as a function as essential to society as is that of the Supreme Court, place everyone involved upon a salary, include all in- surance as a government-monopoly, and then let premiums merely balance losses, plus surplus. In one form or another most countries now maintain a system more or less approach- ing this plan. But the motto of America is: Free license to commercial anarchy, else our liberties are invaded ! Credit-bases. Returning to the question of volume of credit, it must be understood that the most accurate statistics as to banks, insurance, etc., can give only a rough measure of the aggregate credit extended thereby. There is no one set of items which is used exclusively or wholly as credit-instruments. Any paper representing any of these phases of banking or insurance may be made the basis for a transfer of credit. Some is merely more convenient than others. Again, the price which each will bring is also varying con- stantly. During the period from 1907 to 1914, for instance, the average price of securities in Wall street fell some forty per cent, involving an apparent shrinkage of credit of tens of billions. Yet so great was the issue of new securities during these seven years that the net shrinkage amounted to only about thirteen per cent, or five or six billions of dollars. 120 MODERN ECONOMIC TENDENCIES The effect of even such an item as this scarcely shows in the tables. Nevertheless the data as to nominal issues and values are the only possible means toward a more accurate estimate of the volume of credit. Taken in conjunction with the recovery of prices of 1914-16 they show a tremendous, if not a steady, expansion in credit per capita since 1907. This is especially true of the longer period since 1898. The collection of data as to aggregate bases for the issue of credit-instruments must also include some estimate of the volume of commercial paper put forth, in addition to that indicated by Tables 8, 9 and 10. Commercial paper, using the term in its broadest sense to include mortgages, etc., is based upon: (1) Static wealth in general, such as land, buildings, etc.; it is this class of wealth which is undergoing the most rapid expansion of all, as these pages go to press not through new construction, but from the exact opposite the increased de- mand for buildings due to a temporary cessation of construc- tion, coupled with increasing pressure of population towards congestion in cities ; (2) Floating wealth, consisting of the interchange of com- modities in an unfinished condition, indicated by bank-clearings ; (3) Bills of exchange and warehouse-receipts, based upon ex- change of commodities with foreign lands, indicated by exports and imports; and (4) Retail trade, based upon the sale of finished commodities to the Ultimate Consumer. If any doubt should exist as to the propriety, from the com- mercial! st's side of the argument, of including all these items, the following quotation from an address delivered before the New Jersey Bankers Association on May 3, 1912, by Mr. J. Herbert Case, vice-president of the Franklin Trust Company, upon "The Desirability of Commercial Paper as an Invest- ment," will reassure. "We have a wonderful and tremendous country, with a population now of nearly ninety-five millions of people and constantly increasing, possessing the greatest amount of wealth per capita of any people on the globe. They constantly require things to eat and drink and wear, . . . This enormous daily consumption of commodities . . . constitutes then the real justification for the issuance of notes by the merchant CREDIT 121 and manufacturer, the individual firm or corporation, through whose hands these commodities are steadily passing on the way to the ultimate consumer. The annual value of our farm-products alone in 1911 is said to have exceeded nine billion dollars. Think of it, an amount equal to the entire resources of all our 7200 banks ! Does not this in itself explain in some measure the legitimate need of temporary capital to plant, to cultivate, to harvest, to transport and to market this enormous annual yield of our farms; and does it not also constitute a fairly sound basis for the issuance of such notes ?" Mr. Case is also authority for the statement that a single bank in New York City purchased within ten years over seventy millions of dollars worth of commercial paper, with loss in only a single instance, and that amounting to less than one three- hundredth of one per cent of the whole. He cites the address of Mr. James J. Cannon before the Finance Forum, stating that, of the $453,000,000 of securities held against the Clearing House Loan Certificates at the time of the 1907 panic, 73 per cent consisted of commercial paper and 27 per cent of stocks, bonds, etc. Yet much of this has escaped our tabular statistics given above. Farm-credits. The issue of credit-instruments based directly upon farm-property is itself a huge business, with a huge literature. Other countries than this have proceeded much further by governmental action in this direction than we have. Our own land experienced an agitation for such federal action in the "sub-treasury" scheme of the populists, about the year 1890, but the commercial spirit of the land was too strong for its adoption. We have continued to rely upon the indirect method of farm-mortgages discounted by the banks, a system in which indirectness furnishes better opportunity for com- mercialism. Industrial Credits. As to the use of the ordinary valuation of factories and their products, and of the current business of merchants, jobbers, etc., as a basis for credit issued by banks, that is too familiar to every reader to need argument. Retail Credits. Even between the retailer and the Ultimate Consumer there occurs a constant extension of credit roughly proportional to the sales effected. Every merchant must count upon the skillful handling of huge volumes of small credit- 122 MODERN ECONOMIC TENDENCIES accounts, as one of the most important elements in success. Mr. James B. Griffith, writing of "Credit Organization/' says : "Acknowledged specialists may be employed in every branch of an enterprise, the shrewdest brains may be engaged in buying, producing and selling, but the final conservator of the business is the credit-man; others may be the profit- makers, but he is the profit-saver. . . . He is on guard con- stantly always on the lookout for the slightest sign of danger, ever ready to take prompt and vigorous action to avert disaster to his house or to lend a helping hand to a customer. His duties make him the most misunderstood man in the entire organization. . . . On no man in the or- ganization is there such tremendous pressure brought to secure favors; on no man do the consequences of his own mistakes come back so surely." In Table 11 the aggregate volume of such credit currently extended is estimated by assuming that the aggregate wages and salaries of Table 40 are all expended in retail trade, with an average extension of credit of thirty days. It is, of course, true that not all of these incomes are expended entirely; some are saved. But as there exist no statistics as to the vast sums currently expended for retail purchases by persons enjoying incomes other than wages or salaries, and since wages and salaries are usually spent upon much longer terms of credit than thirty days, the above method results in an estimate which is certainly conservative. Not only is the average term of credit upon purchases, even from wages, more than thirty days but, contrary to natural expectation, it develops that purchases made from unearned incomes average much longer demands for credit than those from wages. It is specifically to be noted that Table 11 does not pretend to give actual volumes of credit issued, but merely barometric index-numbers of the possible bases for the issue of credit- instruments. The actual issue bears some proportion thereto which is probably roughly constant, but never exactly so. The issue of credit has never been a function which shrank modestly from expanding to the utmost limit of its basis. The figures in parenthesis represent interpolations between census-years, or estimates inexact from other reasons. The figures for "States, etc.," for the earlier decades are only ap- CREDIT 123 8 o 00 ta/ I fi rH tO CO ^D ^^ CO & CO O CO CO "^ CO !> rH Oi t^ rHb. =rH 00 -^ t^ ^O ^^ ^^ O CO rH C1 r7 22 c O5 00 . v- v ^ per es . 02 ' -2 -i*:. Jflll C^<~ C-T3 ^ - g n (2 S II Iliii i iJiiHii* ^> x j f & >~^ ^ W fe O Ba Wa B 8 & 9 1 s .. &l Oj -*J t 1 II 4^ 124 MODERN ECONOMIC TENDENCIES proximate. For the later decades these figures rise rapidly, owing to the increasing economic activities of the larger cities, a feature which has arisen chiefly since 1890. The Evolution of Credit. The history of credit thus shows it to have been an institution which has developed as thoroughly as have any of our other appliances of modern existence. While our vehicles have been growing from saddles or ox-carts to Pullman trains while our boats have been evolving from un- decked wooden vessels, with oars and a single sail, into the power and intricacy of steel, steam and electricity in the modern liner our credit-system has likewise been experiencing a parallel evolution in magnitude, complexity and power fully equaling that of its mechanical contemporaries. Our financial tools have developed with, and as a result of, our physical ones. Perhaps in speed, power, intricacy, and faculty for destruction of human life, when incompetently guided, our commercial and financial inventions have even outstripped our mechanical ones. For the parallel evolution of physical appliances, technical knowledge and financial instruments has been mutually and closely interdependent, rather than merely accidental. It is far more than a chance coincidence, for instance, that the first bank-check in modern history was draw r n within two years of the date (1781) when James Watt first made steam-power which had previously been available only for pumping mines free from water useful for the rotation of factory-shafting. It is more than mere luck that Lloyd's coffee-house, in London, sheltered the first underwriters of marine insurance as they met at lunch afterwards to become their headquarters and to supply the business with its name just at the time when appeared the first ships with rigs sufficiently developed (by the com- bination of square with fore-and-aft sails in modern fashion, and by the abandonment of the lateen mizzen) to open distant seas to profitable trading, upon a scale mechanically impossible before. Economic Reform. Therefore, whatever suggestion for an economic system better than the present one may be offered, a first requisite for its success is that it must center its mechanical design upon an adequate provision for the fluid cir- culation and elastic expansion of credit, based upon the general wealth of the country. This design must be as highly developed financially as is the modern factory-system mechanically. CREDIT 125 Yet this far and apparently impossible accomplishment would be attained by the mere replacement of the commercial system by a completion of our long familiar, but only partially de- veloped, factory-system. For this would necessarily involve the substitution of non-interest-bearing factory-requisitions for interest-bearing commercial securities, as circulating-medium. These requisitions would then circulate in a perfectly elastic volume, expanding and contracting automatically in perfect accord with the volume of trade. They would possess ideal stability, from being founded upon the entire wealth of the country. They would be insensible to fluctuations in the supply or price of gold. They would offer no one the slightest tempta- tion to expand them unduly. They would contract without collapse when need for it arose. For it is the immanent presence of a perfection of mutual credit throughout our vast national factory-system which (in connection with the co-operative spirit resultant from the elimination of all owner ship-in-industry) explains that mar- velous efficiency and productivity which has flooded the world with a volume of commodities and riches unknown in human history. That is the central fact of past history and of present problems. As the social topic is pursued further and further into detail it will increasingly appear that our conclusions must be guided by an unremitting alertness to the basic importance of credit, in all sorts of economic interaction, as the one solvent catalytic essential for reducing the clashing solidity of un- organized community-life into that fluidity, energy and del- icacy, combined, which we now dimly discern to be the attributes of civilization. Our Opportunity for Voluntary, Ethical Aid to the Eco- nomic Situation. Credit, in this connection, means both the intangible and the tangible. We need a far better tangible in- strument than the interest-burdened privately-owned security. That we shall find in the requisition-papers of a nation-wide factory-system. But we also need, in order to attain to any such an ideal, common-sensible system as that, a far better intangible con- fidence in one another than now prevails. We need a far better mutual confidence than can possibly be attained by starting off with a worship of, and a cultivation of faith in, selfishness 126 MODERN ECONOMIC TENDENCIES as the prime and only reliable motive force within the human race. There are too many people preaching brotherly love who fail to realize that love and faith are synonymous. Our boasted love of our fellowman, whether religious or patriotic, is barren, unless we have far greater faith in him than to believe that he is sensitive to no higher appeal than that afforded by profits, interest and dividends. We are blind ourselves unless we have greater faith in his ability to see that even his selfish interests are best conserved under a system which makes him richest when he is enriching his neighbors. We do not really respect the flag unless we have the same high and courageous faith in things not yet embodied in suc- cessful statecraft as that faith which sustained those who first wrought the flag, when we and our accomplishments and our problems were undreamed. We are no patriots at all if, every time we bump into a strike, or a slum, or a "trust," or a piece of graft, or any other manifestation of commercialism, we malign our political government as the cause thereof, and decry democracy as inferior to what? Still less are we consistent, or democratic, or patriotic, if, every time that commercial se- curities, which are based upon mutual antagonisms and embody organized hatred, threaten to collapse, we fall into a panic and declare that the heavens are about to descend. At such times, if we fail to realize that all these things were made by and for man, not man for them, we can have no true love of God, nor faith in man, in our hearts. Without those sentiments we can never build a successful, stable system of economic credit-instruments; and, lacking this, we can never have a truly civilized state. CHAPTER VI THE BASIC CONTRAST IN ECONOMICS THE archaic and now obsolete cottage-system of industry, we have seen, comprised two distinct functions, namely: (1) That of production proper, including superintendence and useful transportation; and (2) that of negotiation incidental to the selling of product, or the procuring of tools and mate- rials. Thus the pristine fisherman, for instance, had first to catch his fish, then peddle them along the village-street, and then bargain for gear, bait, etc. Thus industry then had to be carried on under a system wherein no commodity might shift from man to man without a simultaneous, parallel shift of a something called "owner- ship." Nowhere in this archaic system did industry appear divorced from ownership, as everywhere in the modern factory- system. But the cottage-system, with its ubiquitous ownership-in- industry, was barren, we all agree, of any potentiality for the support of modern populations, in anything approaching modern standards of comfort and luxury. Efficiency and pro- duction, in any modern sense, appeared only with the factory- system. The fertilization of this barren cottage-system of industry by the invention of modern appliances has developed amazingly both of these, its two contrasted functions, along two increasingly contrasted lines of evolution. In this recent social evolution the first, or productive function has developed into the modern factory-system. The second, or ownership-in-industry and negotiative, function has become what we shall here call the modern market-system or, more generally, commercialism. The Modern Basic Economic Contrast Production versus Commercialism. Whereas in the obsolete cottage-system these two functions were merged and confused within a single in- dividual, now they have become differentiated and specialized. 127 128 MODERN ECONOMIC TENDENCIES The two basic classes of economic society specializing upon these two functions have become differentiated into increasingly contrasted habitats, manners and customs. The contrast between these two departments of modern ac- tivity is even more basic in character in their internal organiza- tion, and their effects upon our social welfare, than they are in outward form. Although we shall find occasion, later, to emphasize the fact that, in drawing the line between these two functions, we are classifying activities, rather than individuals because sometimes the most opposite activities are manifested by a single individual within short periods of time yet, that once said, it may be noted that these contrasted activities are usually embodied in separate individuals, in quite different walks in life. It should be stated at the start that all occupations and also all passive economic functions, such as the holding of interest-bearing securities must be capable of identification either as productive of life-support for the Ultimate Consumer, and therefore forming a part of our national factory-system, or else they must belong to the commercial or market-system. That is to say, we recognize here only two divisions of all ac- tivities or passivities which are social-economic in character, namely, productive and commercial respectively. Our warrant for taking this sweeping position will appear in the next few pages. Its foundations were laid in Chapters II and III. In some cases it may not be obvious whether an occupation is productive or not; but if it obviously concerns ownership- in-industry or negotiation then it must be classed as com- mercial. Conversely, if it obviously has nothing to do with ownership-in-industry or negotiation, then we may conclude that it is productive, and a part of the factory-system, even if we may not be able to discern just what it produces. Such, for instance, is the case with education. Fish or Cut Bait. It has been stated above that everything now produced for the life-support of the community of Ulti- mate Consumers is the result of the activities of the factory- system department of social energy. If so, then all those other activities devoted to negotiation and other commercial destina- tions must be regarded as non-productive. This is a sweeping statement. Yet its truth is incontro- vertible, because founded upon an equally sweeping fact of THE BASIC CONTRAST IN ECONOMICS 129 modern industry. This is that not a single capitalist-employer of labor ever permits any form or feature of commercialism to find lodgment, even for a moment, upon the premises which he controls. To this statement there is no exception to be found, across all the continents and nations yet modernized by commercialism. That is to say, we are dealing here not with some majority- opinion, or preferred policy, on the part of men of affairs, but with a unanimous, rigid, basic tenet of the businessman's faith. He everywhere excludes rigorously all ownership-in-industry and all negotiative effort from the precincts of his authority. He does this because he knows that the instant such institu- tions were permitted to enter at the door, the efficiency of his factory would fly out of all the windows at once. He does this because he knows subconsciously, although he may not have given the matter conscious thought, that the modernized nations of the globe have prospered in material wealth and power beyond any precedent of history, just as rapidly and in so far as they have adopted this rigorous exclusion of all com- mercialism from within their productive organizations. This universal tenet of all capitalist-employers and men of affairs we shall accept at its face-value, as the one basic founda- tion for all material welfare and prosperity, as the one basic guide for understanding political economy. The only thing radical about these following pages is that we propose to follow this tenet to its logical conclusions, just as rigorously as the commercialists lay it down in their de facto premises. A Deadly Parallel. For, if there be any doubt as to the basic character of this distinction between the obsolete cottage- system and the factory-system, or between modernized commer- cialism and the factory-system, on the score of relative efficiency, it must be dispelled immediately upon any serious proposal for the abandonment of the factory-system, even while retaining modern factory-appliances and superintendence, for a return to the cottage-system made up of ownership-everywhere-in-industry. Let us imagine, for instance, that in a modern factory compris- ing several different departments, between which interchange of materials and service is occurring constantly, the now ob- solete cottage-system is again installed, requiring individual ownership in things as a prerequisite to their use. All the other attributes of a modern factory unity of superin- 130 MODERN ECONOMIC TENDENCIES tendence (so far as it can survive the change), supplies of power, the latest tools, modern raw materials, etc. to which exclusively the marvelous efficiency of the modern factory- system is now usually attributed by the authorities upon political economy are to remain as now. The only change is that property in industry, as an institution, is to be re-in- augurated within the modern factory, as it prevailed a century or more ago everywhere in industry. This imaginary situation would be exactly what would have resulted if the last century had been devoted solely to the inven- tion of appliances, without creation of the factory-system. In the first place (we are supposing) each workman mast now actually own every tool before he can use it. This of itself immediately throws out of use the greatest majority of all modern appliances and the majority of all workmen. The average modern tool is far too costly for the average modern workman to acquire it. But a minority of the workmen would still be able, under our imaginary system, to acquire some one or other of the less costly appliances, to use them as best they might alone. With time, we shall see, groups of workmen would inevitably be formed for the purpose of owning the more costly tools. Next, each workman must actually buy his supply of raw material before he can begin work upon it. Even where these materials are fairly raw in fact, as with lumber, bar-iron, etc., he can of course buy only at a disadvantage. But we will not hamper him at present, in our supposition, with any demoraliza- tion of his external sources of supply, such as must inevitably occur with the extension of our supposition to other factories than his own. His market for supplies may be assumed to be what it is now. But in this market he appears as an individual buyer. Any businessman or purchasing-agent knows what that means. He buys at a tremendous handicap, as to both price and quality. He uses only small quantities; hence he cannot command favors. He gets merely the leavings, the haphazard remnants, of no standard quality; or, if he insists upon cutting into a standard lot, he pays double price for the privilege. One of the prime sources of efficiency of the modern factory, its ability to purchase and handle materials in large quantities, has been lost at the outset. THE BASIC CONTRAST IN ECONOMICS 131 But in modern factories each workman usually gets his "materials" in a far from raw state. Not only are they worked up for him by outside factories, as lumber and bar-iron are, or still more as we have seen the materials of the shoemaker to be, but they have already been worked upon by other workmen within his own factory. Again, when he finishes his task his produce is still a long way from the Ultimate Consumer. It goes, instead, to a long line of workmen each of whom must develop it a step farther before it can be of use. As emphasized in a preceding chapter, this constant, active flow of partly finished materials from workman to workman constitutes the very life-blood-circulation of the modern factory. Yet scarcely any conceivable phenomenon could so completely derange, block, demoralize and paralyze this factory-circulation of goods and service as would the permeation throughout the factory of the commercial institution of ownership-in-industry. A modern factory-equipment clogged with the property and ownership ideas of the cottage-system would be just about as useful and efficient, and would be just about the same sort of an anachronism, as would be the steamships "Olympic" or "Leviathan" when manned by a crew of coracle-paddling pre- historic Britons ! For, in such an imaginary factory, whenever a workman fell sick, etc., his part of the work must stop until he gets well, or until some other waiting and idle workman might be found to buy out his collection of tools. But meantime the product of workmen preceding him must pile up in the shop, which these preceding workmen cannot afford to have it do ; for they receive "wages," turn over their capital and buy fresh raw material only as this sick workman ordinarily buys up their product. Similarly, the workmen following the sick one must soon cease work, for with his illness their supply of raw material ceases. Nor may any other workman replace the sick one temporarily, because the requisite tools are "his" and could not be subjected to the control and use of another without incurring the most intricate questions as to title, share of the reward, responsibility for wear, damage, accident, etc. Plainly a first requisite, although a costly and wasteful one, for keeping matters moving at all, under the ownership-in-in- dustry system, is to have at every point a duplication or 132 MODERN ECONOMIC TENDENCIES multiplication of men and facilities, beyond the natural need, so that should one fall idle the others may carry on with the result that whenever all are well some must be idle anyhow. This is in direct contrast with the factory-system, where monopoly prevails everywhere. Only one appliance is provided for each job, and that is entrusted to one man or another, upon full credit, as need may arise. No unnecessary duplication in parallel is ever permitted. To the modern superintendent of industry the prime requisite for efficiency is to have each tool, or job, or lot of raw material equally available for any man, and each man ready to undertake any job or use any tool at need all question as to who or what being determined solely with a view to getting out the work. But under any "system" of ownership-in-industry, man and machine are linked together as rigidly and helplessly as were the peasant and the land under the ancient feudal system. And these two systems are about equally paralyzing to progress in civilization. For instance, American engineers erecting bridges or the like in oriental countries found their worst obstacle neither in the geographical remoteness of locality nor in the inherent ignorance of the natives, who proved ready learners and good workmen. They found it, instead, in the prevalence of caste, which shackled certain men to certain jobs. Thus a native hired as a riveter, who happened to drop his rivet, might not stoop to pick it up. To do so would be to lose caste. Unless an otherwise unneeded helper of low caste were kept constantly on hand, the job must be interrupted and the rivet cool until a low-caste man might be found to pick up the rivet. Such a situation, the direct opposite of American cheery readiness to undertake any task needed, without regard to con- vention, is intolerable to the spirit of American men of affairs. Yet its inefficiency in actual India is as nothing compared with what would prevail in our imaginary factory, if once permeated with the antiquated cottage-system ideas of ownership-in-in- dustry. But our picture of this inefficiency is barely begun. For each workman, before he can receive "wages" for his productive effort, must find a market for his goods. He must divide his time between factory-work proper and peddling his produce, THE BASIC CONTRAST IN ECONOMICS 133 just as the pristine fisherman had first to catch his fish and then hawk them along the village-street. And while he is peddling his goods the appliances "belonging" to this modern workman (under our imaginary ownership-in- industry system) must remain idle, just as the fisherman's boat must lie idle upon the beach until he succeeds in selling his catch. For these appliances are supposedly "his," and when any question of title, or of responsibility for what belongs to another, is raised between one owner and another, it takes an army of expensive lawyers to keep matters even half straight. The rights of property are sacred ! To any reader enough of a businessman to have had ex- perience in selling, this peddling part of our imaginary work- man's duties will plainly be done with an inefficiency appalling to modern minds an inefficiency far exceding that of his productive work. The limited number of people whom he can reach, their limited and varying demands, the fluctuations of demand with season, the many reasons for spreading produce over wide areas, etc., are all vast reasons against his ever being able to accomplish alone a hundredth part of what is accom- plished by a modern selling-force. These reasons can receive no more than mention here. Commercial readers can easily fill out the blank from their own experience. Non-commercial ones must try to imagine. But the bulk of all output by individual workmen is not in a form for use by an Ultimate Consumer. It is merely a thing advanced one step toward that remote end. Therefore the majority of all workmen in our imaginary factory must find a market for their goods among their fellow-workmen, who w r ill buy not to consume, but to manufacture further. In the actual world this forms the greater portion of what is wrongly called consumption the purchase of goods for further manu- facture, or for resale, and not for consumption at all. In short, no workman under this imaginary system of own- ership within the factory could ever secure either a supply of material on which to work, or a destination for his produce, without himself seeking some other workman happening to occupy the particular stage in manufacture which fitted in before or after his own, then selecting which one among several such might best serve his own ends, and finally haggling with him, or with first one and then another, over price and quality 134 MODERN ECONOMIC TENDENCIES praising his own goods, decrying his opponent's, cajoling his man, making offers or "propositions," rejecting others, bluffing, retiring from the market while he still desired to buy or sell, returning after waste of time to seek a better offer, or to accept that which he had hoped might be bettered but which was not. All unity of superintendence and efficient co-ordination must disappear, with the authority of the Central Office, as soon as each workman becomes an independent owner of industrial appliances or materials. But these evils already recounted form only the beginning of the trouble. Because of these very obstacles to progress human nature will attempt to overcome them by organizing against them, to what degree is possible. But this sort of organization only makes matters worse. Organizing an error makes the evil worse, just as organizing truth multiplies good. The Modern Economic Despot: Ownership Synonymous with Opportunity. For two things will quickly become clear to the workmen of our imaginary factory permeated with owner- ship-in-industry, namely : (1) That ownership of tools or materials, having now been artificially elevated not merely into a peerage with productive use, but beyond, into an overlordship, because needlessly made a prerequisite to use, has speedily become master and despot over that latter sort of effort; and (2) That interchange of materials, being naturally the soul of factory-production and a pre-essential to all productive effort, but now become possible only after negotiation as to price and quality at each step, the negotiation of opportunity for inter- change must similarly rise in relative importance, to become a line of effort held superior to production itself. Economic Caste. Consequently two new and highly special- ized vocations will add themselves promptly to the usual list of factory-duties, or crafts; and these, instead of taking their place beside the others upon a footing of equality, will assume a controlling dominance over all others, commanding every- where a superior reward. These vocations will be: (1) Ownership, as a profession and a source of income, and (2) Salesmanship, as a high art. Each of these vocations will soon prove to be far more lucrative than any of the branches of production proper. Therefore an inevitable migration of labor from productive crafts into these THE BASIC CONTRAST IN ECONOMICS 135 new vocations will have been set up thereby. Parity of craft and opportunity, now the keynote of the actual factory- system, will be gone from our imaginary one. The economic fields of human activity will have developed a disparity of place in life such as we have always jealously excluded from our political organization. "Liberty and equality," of which we are now so proud in our political traditions, will have become foreign to our economic standards. 1 Further, since production will now be unable to proceed except in the train of these overlordly vocations, it will be per- mitted by them to develop only to that degree which results in, not the maximum output from the factory which had been physically practicable before this innovation arrived, but only that output which results in a maximum income reaching the non-productive ownership of the appliances of production; or, secondly, in a maximum income from the negotiation of op- portunity for interchange of materials. Hence the law of supply and demand, as a natural balance of wholesome psychic im- pulses, will have been needlessly dethroned from its normal sovereignty over industry, and productive effort made sub- servient to an abstract, indirect, unnatural and soulless institu- tional determination. Charging All the Traffic Will Bear. Thus, once admit into the most modern factory the ancient cottage-system principle of ownership-in-industry, as an institution upheld by law, public opinion and tradition, and all interchange and produc- tion proceeding within that factory will thereby have been re- stricted, automatically and uncontrollably, to that point where the return to the owner or negotiator attached to each productive process, rather than to the producer or the Ultimate Consumer, is a maximum. 2 Thus, in our imaginary factory, one man with a keen eye to personal advantage will secure control, through ownership, of the boiler-room. He knows that all need steam. Hence he concentrates his brains and brawn and nerve upon acquiring possession of the source of supply. This is what is called com- mercial "initiative." 1 See the later chapter upon Unemployment for a development of this idea. 2 See the later chapter upon Economic Equilibrium for a development of this idea. 136 MODERN ECONOMIC TENDENCIES He does not do this from any natural affection for steam- making, nor from a weak indulgence in its excessive consump- tion. He does not consume a particle of it. He does not create any instrument for its production. He merely secures control. He does not do this evil, destructive thing because of any immoral or psychic impulse whatever, but merely because so- ciety has supposedly provided no properly organized way for supplying this factory with steam, by arranging a non-owning co-operation between steam-makers and steam-users, as in the actual factory-system. Indeed, in view of this imaginary lack in the social consciousness of his community, this owner of the boiler-house has done the best possible under the circum- stances; but he has incidentally stabbed the modern, efficient and lavishly productive factory-system to the very heart. As for the production of the steam itself, this enterprising boiler-house owner probably knows little, and cares less, about the art. He finds plenty of half-hearted, peace-and-work-loving wretches ready to shovel coal under his boilers for small pay. The talent, or "initiative," of this man is not for production at all, in any of its branches, but for commercial combat. His aim is control, not use; and ultimately tribute, not equitable ex- change. For if it were any of these latter he would promptly abandon his policy of ownership-in-industry, which obviously only interferes with both production and exchange, and enroll his services in the normal, familiar factory-system, which pro- vides for a steam-supply without any separate ownership of the boiler-house, and in which income always takes the form of wages or salary. The common idea that ownership of the boiler-house by someone usually the owner of the entire factory is a neces- sary pre-requisite to a steam-supply will not stand scrutiny; but that more penetrating scrutiny must be deferred until we can reach a broader stage of the analysis. For the present it is enough to note that, so far as all the processes occurring within the factory are concerned, human nature finds itself far better able to make and use steam efficiently without separate ownership-in-industry than with it. If we but extend that same idea to cover the making and use of boilers, as well as the steam made from them, we shall see that the ownership of the THE BASIC CONTRAST IN ECONOMICS 137 boiler-house, by anybody, is a function naturally extraneous and irrelevant to production. But, in our imaginary modern factory permeated with own- ership-in-industry, this boiler-owner is after a maximum in- come to himself, and not the maximum output of produce, concerning which latter he cares nothing. So his office is first to drive away from the boiler-room door all who would dispute his control (and these will inevitably be many) and then to say to every man in the factory: "Not an ounce of steam do you get unless each of you pays me tribute." Profit Is Tribute. Nor can this tribute claim to be merely the natural cost of the steam. For this natural cost is that which the normal, actual factory now pays for its steam, and his tribute begins only after all this natural cost of the steam has been met and exceeded. It is only as the price runs above the natural cost that the function of ownership can derive any income at all. Similarly the engine-room would be found to be in charge not of the best engine-runner, but of the best commercial fighter. He also announces calmly : "Not a wheel in the fac- tory may turn unless I get tribute from all!" Here again it is not costs which are demanded. The natural cost of power, in the form of wages, depreciation, fuel, etc., is now charged up against every workman in our actual, existing factory-system; and what we are debating now is something foreign to every factory in the land, something religiously de- barred by every employer of labor in America profits over and above natural, factory-system costs. So all, in our imaginary factory, will pay up this pure tribute, in addition to the natural cost of power, because to refuse is paralysis and starvation. Meanwhile the engine gets itself run somehow by strictly second-class talent, because all first-class talent is busy collecting tribute through ownership or negotiation. Equivalents. Nor is it relevant to reply that, even under the ownership-in-industry system, no man might secure such control of boiler or engine until he had first produced for society the fair equivalent in value of boiler or engine, with which equivalent he had honestly purchased the appliance in question whereby he has acquired a "right" to do as de- scribed. The actual modern employer of labor tells his men 138 MODERN ECONOMIC TENDENCIES (in effect) that they may save up and buy all the boilers and engines they wish, but that under no condition may they bring them into the factory for the efficiency of which he is re- sponsible, there to be set up in unity of use under heterogeneity of ownership. Ownership-in-industry. For ownership and ownership-in- industry are two very different and directly contrasted things. If our imaginary workman who had saved up and bought the boiler-room had contributed directly to society all which he ever produced in his life, he could never make good to it the loss which he imposed upon it when, as an individual inde- pendent of the organization of the factory, he intruded into the factory-system his private ownership of boilers which other men must use in their daily work. But the public opinion of this imaginary factory-community, permeated with eighteenth-century ideas as to the necessity of ownership-in-industry, would not only tell all owners of boilers and engines that they had full right to intrude them into the productive system, by installing them in bodily asso- ciation with the machines owned and used by others, but it would tell all workmen that there was no other way of securing the privilege of steam-power than this of bargaining with these owning fellows as to the tribute over and above natural cost to be exacted for it. But actual modern society, of course, having everywhere be- fore its face the familiar factory-system, and knowing there- from that the fullest use of steam-boilers is not only com- patible with, but depends upon, their non-ownership by the man who makes the steam, or by any other agency dissevered from the factory-organization, knows that the separate owner- ship of the boilers was an egregious error in management such as could not conceivably occur amidst our modern ideas as to refinement of factory-efficiency and that the statement that there was no other way to procure steam is a huge mis- conception, a community-delusion. But our imaginary public opinion, supposedly existent before there were any true factory-system standing ready to teach it, must be excused for its inability to grasp these facts. The Equities of Ownership-in-industry. Therefore the de- bate between the archaic cottage-system of universal ownership- in-industry, on the one hand, and the modern factory-system THE BASIC CONTRAST IN ECONOMICS 139 purged of all ownership-in-industry on the other, pivots when one turns to questions of equity, social efficiency and rule of conduct upon two basic questions. It is true that both of these questions are swallowed whole by every man-in-the- street, or professional teacher of sociology,, who now upholds the present form of society as basically right, although possibly wrong in detail. Nevertheless, in any sincere analysis of the evolution of American economics these two questions must ever be kept to the fore, as shedding first light upon our past path and our future goal. These questions are : (1) Is it wise or right to permit any man to invest his savings in ownership-in-industry, as contrasted with mere own- ership of that which he intends to consume*? (2) Is modern ownership-in-industry normally purchased with savings from productive industry, or from re-invested tribute from previous ownership-in-industry? Full answer to these questions must be deferred until later in the book. But since it is a rule in mathematics that the ac- curate statement of a problem amounts to three-quarters of its solution, it must be recognized here at the start that the obvious absurdity of the modern factory imaginably permeated with ownership-in-industry throws straight into one's face these two basic, sweeping questions. The real absurdity of this incongruous imagining, of a modern factory poisoned by infiltration of ownership-in-industry, cannot be fully depicted here. The situation is quite a parallel to, and not one whit more absurd than, the imaginable tradi- tion in domestic economy which might declare that the only way to determine the preferred cook was to open the kitchen to all applicants for the place, provide all of them with fuel, raw materials and dishes for a simultaneous, continuous ex- periment in cooking, and then select daily the best cooked dinner for consumption, but paying the cost of all. Or the equal absurdity of asking each applicant for the job to bring her own cook-stove, dishes and materials, knowing that you would have to pay her the full cost thereof, plus a profit, whether you ate her dinner or one of the others. Evils Multiplied. So (to continue the simile of the factory imbued with ownership-in-industry), the foundry, the machine- shop or perhaps each one of its expensive tools owned sepa- rately the tool-room, the pattern-shop, the paint-shop, etc., 140 MODERN ECONOMIC TENDENCIES would each be found to be "owned" by some person who made, or needed to make, no other effort at life-support than that involved in maintenance of control. In each case skill in re- lation to the thing owned, or to the work performed with its aid, has nothing to do with the identity of the owner. It is combative commercial ability which alone determines who shall enjoy authority and tribute. The methods by which these negotiators might maintain their personal control over production would be various. Some would win by a steely eye which no man could outstare; some by a skillful mention of half -truths; some by a magnetic per- sonality, hypnotizing the victim into a belief that anything which so magnificent a specimen of humanity as this might espouse, must surely be all right; some by overbearing perseverance, inducing submission as preferable to annoyance; some by a keen perspicacity as to personalities, or as to weak spots in his adversary's armor; some by mere endless, persistent circula- tion of themselves among those who may happen to need in- terchange at the moment when they appear. To either the student who is trying to understand these things or the Ultimate Consumer who has to pay all the bills for this wasteful confusion, it makes not the slightest difference whom fate may select for these despotic offices, nor what psychological peculiarities may determine the choice. The supreme fact is that, once having admitted ownership-in-industry as an institu- tion, then the despotism and the waste and the blocking of production become inevitable. Let us forget personalities and observe institutions and their fruits. Multiplicity of Agencies. Then the worst of this poisoning of the modern factory by this imaginary ownership-in-industry lies not in the mere fact that each separate tool and depart- ment must inevitably be separately owned, so that interchange can be effected only through costly and wearisome negotiation. It is that, owing to the relative profitableness of effecting this interchange, as compared with either production proper or even passive ownership, men would flock into purely negotiative callings, without necessarily owning anything except the things they bought or sold, and would devote themselves to quarreling over the privilege of effecting interchanges between craftsmen of different trades. Thus no machinist might need a reamer from the tool-room, THE BASIC CONTRAST IN ECONOMICS 141 nor a molder a pattern from the pattern-shop, that he did not find himself confronted by a horde of competing agents, each pretending to help him secure his reamer or pattern. Not only would he find himself forced to select some, one among a dozen separate, competing tool-rooms or pattern-shops, but he would find each of these represented by a dozen different agencies for interchange, or brokers some of them authorized and some not. Each would assure them that his agency was the best and the cheapest. Yet the only result of all their combative efforts would not be to aid the poor machinist to secure more or better tools than now, but actually to force him to rest content with less, with an impoverished supply of tools, as compared with what is made available to him in every actual factory; and further, he must pay the aggregate cost of all these unwanted inter- mediaries, in addition to the natural cost of the tool itself, before he may enjoy even that. The Ethics of Commercialism. The reader will note care- fully that to none of these agents of ownership-in-industry has been attributed dishonesty or malice. These evils, while doubt- less more or less present invited, indeed, by the very nature of negotiative vocations are not the topic of these pages. Our duty is merely to draw a fair comparison, from the point of view of the Ultimate Consumer, between two at present equally lawful and respected methods for effecting or influencing in- terchange between different trades or individuals, as an incident to supplying him with the necessaries of life. These two methods are: (1) That of the actual modern factory, from which owner- ship-in-industry has always been universally and rigorously ex- cluded; and (2) That of ownership-in-industry itself an institution originally instanced in its pure form in the cottage-system, but now developed by modern invention into the intricacies of the vast commercial system of the day. We are inquiring here as to the inherent economic natures of these two methods of organizing effort, as systems or institutions, with a view to learning which is productively the more effi- cient, and not at all as to the moral character of individual found in either. At present we are not even inquiring as to what sort of individual naturally gravitates into either system, 142 MODERN ECONOMIC TENDENCIES nor what may be the reaction of the system upon his moral nature after he has landed there. We are studying activities mnd institutions, not men. Human Gravitation under Commercialism. Within our imaginary factory permeated with ownership-in-industrj- it is certain that, because of the abject dependence of productive effort upon that privilege of interchange which has now become dominated by negotiative skill, the best of all the brains, nerve, skill, energy and proceeds available would soon be going, not to the productive part of the dual system, but to the professional owners and bargainers. For bargaining is an exceedingly profitable calling. In a given amount of time and effort a sum may be acquired, by skillful or energetic or ruthless bargaining, which is stupendous in comparison with what can be produced, by the same time, effort, skill and energy, when directed against the natural obstacles to the development of life-support. The cogency of this fact in assorting the several sorts of ability within our imaginary factory is obvious. Not only those who were adapted by nature to bargain successfully would turn to that calling, but many less skillful must inevitably swallow the tempting bait, and be lured from the ranks of production into those of commercial combat over the privilege of exacting tribute, there to swell the statistics of commercial failures by their casualties in battle due to inaptitude. But these failures are not really due, as they are commonly attributed, to inherent human incompetence. They are due to the fact that the unnatural prizes of commercialism must be continually deluding a steady current of the commercially inapt into commercial callings, there to suffer or die before learning their error, whereas in production they might have succeeded, even if only modestly. The Sole Source of Life-support. There would thus be at work within this imaginary factory two distinctly contrasted lines of effort. One of these lines, comprising all those sorts of activity which were prevalent in the original factory, before its permeation with ownership-in-industry that is to say, those alone found now within any actual factory would be solely responsible for whatever production might take place. For it is our actual modern agglomeration of factories which now produces all which we consume. There is not the faintest glimmer of evidence that the introduction into any modern THE BASIC CONTRAST IN ECONOMICS 143 factory of any of these activities inevitably connected with ownership-in-industry would enlarge in any way its productivi- ties. For, if this were so, then our actual factory-owners would long ago have made at least some progress toward the in- corporation within their factory-system of this desirable factor. But not only has no progress been made in this direction; their whole effort is actually exerted in the opposite direction, to effect consolidations, and so abolish competing ownerships- in-industry. Indeed, if any inference is to be forced upon us by the effi- ciencies resultant from the various sorts of industrial effort, this consolidation of industry, with its reduction of antagonisms and bettered co-operation, is the sole thing useful which the commercialists do. It is therefore pertinent to note that, while and in so far as they do it, they thereby cease to be commer- cialists, for the time, and become productive. No; the productivity of our existing factory-system plainly is maintained in spite of, rather than by aid of, all activities in ownership-in-industry. All which it may produce must be the result of those activities which are now characteristic of every actual factory in the land; and these activities are now everywhere guarded carefully, jealously, religiously guarded by our capitalist-employers from any taint whatever of owner- ship-in-industry. The Parasite upon Production. Contrasted with these fac- tory-like productive activities, in our imaginary factory per- meated with ownership-in-industry, there would be a whole array of vocations devoted purely to questions of ownership- in-industry not ownership for the enjoyment of ultimate con- sumption, which is the sole natural and beneficial ownership, but ownership-in-industry maintained for the sole purpose of collecting tribute, which is a far different thing. This array of vocations would inevitably comprise the most brilliant minds and the ablest characters in the factory. Its pecuniary rewards would be high. Its prestige consequently would be enormous. Either through fear or cupidity it would everywhere command obedience and assume authority. It could, and inevitably would, arrogate to itself the position of being regarded as the highest stratum of life within the factory. Yet from our better informed point of view, knowing orderly, 144 MODERN ECONOMIC TENDENCIES co-operative, efficient, non-owning factory-production as we know it, this whole array of antagonisms and duplications of effort over ownership-in-industry must be regarded as sheer waste a gigantic, dead-beat bluff parasitical upon, rather than contributory to, the real productivity of the factory, and de- serving not one iota of all that magnificence which was partly contributed to it voluntarily, in ignorance, and partly arrogated to itself by sheer tyranny. It would not only produce nothing itself, but its presence would so seriously interfere with the activities of those anxious to produce as to drop the output of the factory to some very small fraction certainly not over one- tenth, and possibly one-twentieth or one-fiftieth of normal. The Employer's Gospel. There is no class of public opinion in America to-day which should be so positive and unanimous in corroborating the author, as to this, as the businessmen, capitalists and employers of labor. For there is not a factory- owner nor businessman in the land who, upon reaching his factory, store or office some morning and finding that over- night this reversion to the cottage-system plan of ownership- in-industry had permeated his premises, would not im- mediately denounce the whole chaotic mess of confusion, cross- purposes, undesired multiplications, delay, antagonism of need- lessly egotized interests, injustice to productive skill, and ruination of aggregate efficiency, as sheer barbarism. He would promptly call in the police and clear the place of every professional owner and sales-agent on the premises, and return the function of guiding interchange to the disinterested, salaried hands of the non-owning Central Office. He would promptly, emphatically and finally abolish the institution of private ownership-in-industry, so far as his authority extended, leaving in its place merely the long familiar factory-system. The author challenges any reader to procure from any chamber of commerce, board of trade, association of manufacturers or other society of businessmen any serious refutation of this posi- tion. All that he demands of the business-world is that it shall have the manhood to preach what it everywhere prac- tices. Industrial Anarchy. Does any reader who loves law, order and efficiency regard it as too strong language to call such a chaos of artificial antagonisms, duplicated efforts, desertions from the ranks of production, decisions by force or silliness THE BASIC CONTRAST IN ECONOMICS 145 rather than by reason, guidance l)y short-sighted individual avarice rather than ~by far-sighted communal selfishness, and utter waste of opportunities as that of our imaginary factory, "industrial anarchy" ? Is it other than common sense, from the most practical standpoint of the man of affairs, to call the combative essence of all this intricate running to and fro, this seeking to gain advantage by force of nerve rather than by activity in pro- duction, by countervailing another's efforts rather than co- operating with them, by forcing down prices which are to be paid and forcing up prices which are to be received, "economic militarism" ? Is it extreme and radical "agitation," or merely fidelity to truth, to call "tribute" those moneys paid to owners who de- liberately block interchange by raising prices, until they have charged "all the traffic will bear"; or those received by sales- agents who subconsciously, but just as effectively, block inter- change by adding to the natural cost of production (in their retail-prices to the Consumer) the manifold costs of their haggling? Such moneys seem to the author just as plainly tribute, and exacted for precisely the same reasons, as were the shameful sums paid by the United States, about a century ago, to the governments of northern Africa. For in both cases the tribute was paid merely for the privilege of interchange unmolested by piracy. Only, when we paid the tribute, a century ago, to the barbarians, we got what we bought. But to-day, when we pay it into the commercial maelstrom, we do not. Or it may seem to some that this simile of a modern factory imaginably permeated with ownership-in-industry is too gro- tesque for practical force. Yet we shall see, as the historical facts are investigated, that the changes indicated in this sup- posititious case have been more than paralleled by the whole trend of American conditions throughout the last seventy-five years. Indeed, this inexpressible inefficiency of our illustration is really slight, because of the minor scale upon which the model is drawn, when compared with the gross inefficiency now prevalent throughout our land, upon a national scale, merely because no premises, no buildings, no materials, no appliances, nor any opportunity for work or trade whatever, may be utilized by the community for its life-support, except as it happens 146 MODERN ECONOMIC TENDENCIES to prove selfishly profitable to certain individuals, who are al- lowed to "own" them, to permit it. The Great Economic Question of the Day. The question before the patriotic student of American internal problems, therefore, is not as to the desirability or undesirability of own- ership-in-industry, as an institution. That must be considered settled by the unanimous sentiment of every employer of labor in the land. The sole question is as to its permanence. What is the direction of its growth toward disappearance, or toward exaggeration ? Is its present form some tattered remnant of the crude cot- tage-system of earlier days, which we have inherited from the past unwillingly, but of which we are ridding ourselves as rapidly as possible? Or is ownership-in-industry a modern in- stitution, new in economic history, which we have developed out of modern invention, and which is growing upon us un- controllably with time? Are we growing ahead of it, or is it growing upon us ? Which way are we headed? That is the prime question in the study of American economic evolution. That is the question to which all later investigation of facts herein will be directed. It is not the momentary facts which are of importance, but the direction and rate of our motion. American Caste. But, before we return to statistical history it should be noted that, so far as the opinions of the man-in- the-street are concerned, this American insistence upon owner- ship-in-industry, as a sacred and inviolable prerogative, does not appear to the candid observer to be any less of a national superstition than is caste in India. For there is seldom any disposition to reason as to its worth or unworth. It is accepted quite unthinkingly and then enforced as rigidly as if it were a part of our national constitution. The same men who enforce non-ownership-in-industry upon the nine-tenths of the whole population which works in their factories are also the ones responsible for the maintenance and defense of ownership-in-industry among themselves. Their attitude is hopelessly inconsistent and unreasoning. If we could only persuade our businessmen to preach what they prac- tice, we should have a new economic system in no time. The sole distinction between oriental caste and this na- tional American economic superstition of ours is that caste is THE BASIC CONTRAST IN ECONOMICS 147 hereditary and inviolable, whereas owner ship-in-industry is not wholly so. American commercialism, however founded upon inconsistency and superstition, is not a caste, nor does it depend upon anything inherent in individual character. This is ob- vious because every day thousands of individuals are crossing, in both directions, the invisible line between the productive and combative departments of economic effort. On the one hand there is not a factory-department to-day which was not, ten or twenty or fifty years ago assuming that its processes have been that long in existence a separately owned enterprise. There is not a day passes that somewhere a step from the cottage-system of separate ownership toward the factory-system of non-ownership is not taken, in the con- solidation under common ownership of what before were sepa- rate properties. Thus does separate ownership-in-industry dis- appear, and factory-system co-operation takes its place. Nor, on the other hand, is there a day slips by without a step being taken somewhere in the opposite direction, toward separate ownership-in-industry, not by a reversion from con- solidation to disgregation, but by the injection into some fairly unified industry of a new and intruding novelty due to inven- tion, multiplying steps in manufacture and hence disgregation in ownership. Thus does separate ownership arise from a con- tinuous source, decentralizing industry in spite of concurrent consolidations. Invention the Economic Perturbator. For invention is a prime characteristic of the day. It is now proceeding at a rate higher than ever before in history. While it is true that some invention is carried on professionally, by salaried men em- ployed by the larger corporations for just that purpose, yet the majority of successful inventions arise as the private property of the inventor. Each such leads to the formation of a new business-entity, built upon the monopoly inherent in the patent. Across the increasingly numerous gaps in ownership thus created between the new industry and the old ones, interchange must be effected as best it may, by the bargaining methods illustrated in con- nection with the imaginary factory poisoned with ownership- in-industry. The Dual Progress of Economic Evolution. Both of these processes: (1^ The aggregation and consolidation of separately 148 MODERN ECONOMIC TENDENCIES owned industries into unity under a single factory-system, on the one hand, and (2) the disgregation of ownership by the creation of new business-enterprises, through invention, on the other, are familiar to every businessman. Both processes are peculiarly characteristic of American economic life. Indeed, it is to trace the comparative evolution of these two processes in American economic history which forms the chief task of this book. But by some freak of fortune it is the former process alone which has happened to catch the popular, the editorial and the sociological eye, in the past, as being a brake upon progress and an offender against justice. It is this which has led to the constant clamor against "the trusts," as the source of every economic evil. But the equal or greater importance of the other tendency as an economic destructant the choking growth of anarchic commercial competition amongst multiplying hordes of separate, antagonistic ownerships, steadily raising prices has escaped almost without notice. American Economic Evolution. The economic history of America, then, has comprised three distinct lines of advance. These three lines must be accurately denned and properly re- lated in mind before our present social condition, or the direc- tion in which we are trending, may be correctly understood. They are: (1) Invention, considered purely as a mechanic art. (2) Continual Decentralization of Ownership, by the creation, through this invention, of new businesses, separately owned, be- tween which and all previously existing concerns interchange can occur only by the methods outlined in the illustration of the imaginary factory permeated with ownership-in-industry. (3) The Gradual Substitution of the Non-ownership Factory- system for the Separate Ownership of the Cottage-system, by Consolidation. Whereas the first two processes depend upon individual genius for invention, the last is purely a matter of organization. It prevails wherever inventions can be used independently of the inventors, by reason of either the expiration or the purchase of their patent-rights. It is the usual ultimate result of com- mercial competition, and involves often thousands of inven- tions, new and old, patented and unpatented, within the single resultant productive unit. THE BASIC CONTRAST IN ECONOMICS 149 The relative order of the three processes, as cause and effect, is shown in the order of their statement. Invention creates decentralized ownership. Decentralized ownership leads to ruinous commercial competition. Commercial competition ends in consolidation. Economic Lag. But it is an axiom in natural science that a result always lags behind its cause. There are always more inventions being created than can ever reach the status of commercial vitality. There are always more disgregated own- erships resulting from invention than can be consolidated into unitary, non-ownership factory-systems. Time is required for results to follow causes. Therefore the process of centraliza- tion always lags behind that of decentralization, and the net result is a relative decentralization. This general statement made from an inductive basis will be found corroborated by the facts of history. To anticipate some later quotations from statistics, American history has revealed activity in invention as its prime causative character- istic. The next largest of its great departments of effort is activity in questions of separate ownership (feeding upon this invention). Trailing after these come its various other depart- ments factory-production, technical progress, education, reli- gion, charity, etc., etc. Startling as has been the growth of the American factory-system or of American technology, the growth of American commercialism has far exceeded them both. Take, for example, the invention of the automobile, which was not controlled by basic patent. Its adoption has brought together, on the one hand, armies of skilled mechanics in fac- tories of a size and perfection of organization and efficiency never before known. But, on the other hand, it has created a hundred new business entities in the form of central auto- mobile-factories, and tens of thousands of smaller independent concerns each manufacturing or selling some one of the myriad of tools or accessories connected with the automobile-trade; and all of these new concerns, big and little, must interchange with each other, with all those existing before, and with the Ultimate Consumer, by bargaining over each transfer of a screw-driver, to a tremendous expansion of all that sort of activity which was condemned as obviously parasitical in the imaginary factory. A whole literature would be required to cover this single field of progress. 150 MODERN ECONOMIC TENDENCIES Consistency. To the impartial student, witnessing able men of affairs carrying order and efficiency to the marvelous degree visible in their own factories, in single portions of the auto- mobile-trade or elsewhere, it is incomprehensible that these same men should never have attacked by word, at least, if acts are impossible that nauseating anarchy of dissociation, an- tagonism, duplication or multiplication of effort, unstandardized result and general inefficiency toward the Consumer, which is obvious in the automobile-trade considered as a whole. It is still less comprehensible that they should never have recognized the larger, national business-world as this same anarchy ex- panded a thousand fold. Our Compass-course. Of these three lines of social advance mentioned above, it may be assumed that the first, invention, is wholly beneficial. The entire civilized world seems to be agreed that progress in invention is the one thing most to be desired and encouraged; and in this doctrine America leads. But because invention, and increasingly rapid invention, is involving us everywhere, willy-nilly, in an increasingly puzzling tangle of these two other processes of social evolution, it be- comes necessary to examine the latter most carefully. Which of these two processes dominates the other? Are we becoming gradually more centralized by commercial consolidation, or are we becoming more rapidly decentralized by invention ? Are we drifting toward a state of affairs wherein our national problems will pivot upon the tyranny of huge com- binations of capital, as so many believe and fear? Or is the coming crisis to be one characterized by a congestion of a myriad of undigested novelties, in an anarchy of ultra-decen- tralized commercial competition? The wisdom or the folly, not only of federal legislation but of world-policies, hinges upon the facts as to this alternative. It does seem as if the question deserved better attention at the hands of the professional sociologists than it has received. The facts are not difficult of access. Our Growing Minuend. Of course, if the number of business- enterprises in a land were fixed, then one might be justified in concluding, because consolidation is observed on every hand, that our decentralization must be diminished by this subtrac- tion, that our ownership-in-industry must be undergoing reduc- tion by concentration, through consolidation. These are the THE BASIC CONTRAST IN ECONOMICS 151 premises universally assumed by educated people and profes- sional economists to be the truth. But this assumption is quite without foundation. For if, while ten businesses are being consolidated into one, a hundred new ones are formed, wherein lies the resultant centralization of enterprise, and hence the reduction of antagonistic owner- ship-in-industry ? Into this basic question no entry will be made at present, beyond noting its importance, and that modern social science leaves it unanswered. The prime task now is to rid the field of false assumptions and prejudices, to clarify and define ideas, and thus pave the way for an intelligent inquiry later as to the historical facts. The Modern Factory-system. The true factory-system, then, becomes visible to modern eyes as the productive part of the primitive cottage-system, now magnified by modern tools, power, transportation and communication, but simultaneously purified of all owner ship-in-industry. It must now be understood as including superintendence, design, invention, interchange and transportation, as well as mere labor at bench and machine. It must, in its national sense, include every function of real as- sistance to the life- support of the Ultimate Consumer. Therefore in its national aspect it must also include, in addi- tion to the unitary factory proper, that intangible co-operation between the productive forces of separately owned factories, the selling-offices of which may be in active antagonism. For in their actual interchange of goods these factories do co- operate, to a degree, in spite of the hindrance to this function due to the commercial competition between their owners. In order to realize this the reader must recognize that the correlation of the many separate factories of the land as pro- ducers, interchanging goods and services, may and does con- stitute one distinct organization of economic energy a real, living, energy-producing entity while the correlation of the selling-forces of those same factories in commercial competition, as distinct business-enterprises, does actually constitute a sepa- rate and directly contrasted organization or disorganization. This is true in spite of the fact that each of these two great, national, parallel fields of action is split into thousands of nominally separate business-entities. It is true in spite of the fact that many a businessman may, and often does, shift his 152 MODERN ECONOMIC TENDENCIES activities from one to the other of these organizations without leaving his chair. We are engaged in classifying not individuals, but activities. Leaving the second of these two great organizations of social energy for discussion in the next chapter, a final word must be given in emphasis of the vital importance to modern life of the first : that great, intricate, international network of organiza- tions of individual effort which alone maintains, through what degree of co-operation it may find possible under commercial- ism, the life-support of the hundreds of millions of Ultimate Consumers, namely, the Factory-system. In the factory-system, in this broad but accurate sense, is found the sole source of all our visible material growth in worldly prosperity, and the main source of advance in knowledge, or even spiritual power; for it is by means of the factory-system alone that those intellectual and spiritual springs of inspiration, which are likely always to remain individual in character, find adequate communication, through books, periodicals, schools, lectures, etc., with the mil- lions which they otherwise could not reach. As we have progressed from the days of hand-looms, dip- candles and hand-cut nails to those wherein a nail is no longer worth picking up when dropped, the gradual adoption of this wonderful modern factory-system has permitted the countries employing it to multiply in population like rabbits, and their creature-comforts to increase in dazzling ratio. There is no other method of organizing industrial effort yet known, nor even suggested, which is comparable with it in efficiency. Every- thing which we now enjoy we owe to the factory- system. Economic Motive-forces. Yet this wonderful factory-system, it is noted, is quite devoid of any other incentive to industry than wages or salaries or royalties or fees which are merely disguised wages. The same is true as to all interchange within the factory-system. All of its functions proceed most actively when promoted only by the natural human desire to get a thing done, for the natural, life-supporting value thereof, rather than by any desire for pecuniary advantage over a fellow. It is indubitable from all this unvarying evidence, coming from our most active and gigantic field of production and in- terchange that field which comprises nine-tenths of all our active population, and which alone produces all which we now consume and enjoy that the mere natural desire to inter- THE BASIC CONTRAST IN ECONOMICS 153 change, for biological rather than pecuniary reasons, is a motive force quite sufficient to promote the act. No advertising nor hawking of any sort is found requisite, in a factory, for getting a pattern into the foundry, or a completed chair into the varnish- shop. The factory-system, too, never makes any appeal to ambition for riches, because riches are virtually never gained through salary or wages for productive effort, but only through profits or dividends won by commercial combat. It makes no appeal to enterprise or "initiative," in the sense of starting some new scheme for the exaction of additional profits or dividends from the Ultimate Consumer ; for all such enterprise it sternly outlaws, as destructive of efficiency of aggregate results. Its vigor and fer- tility and progressiveness rest solely upon the one hand, upon that love of craft which is inherent in every human being, and which will emerge productively whenever assurance prevails of an individual reward even approximating the value produced for society. It rests, upon the other hand, upon that endless demand of the Ultimate Consumer for life-support, which must ever grow endlessly upon what it receives. Profit-sharing. Not even the microscopic prevalence of the profit-sharing plan, when properly analyzed, stands in nega- tion of this statement; for no profit-sharing plan yet pro- posed has ever gone to the extent of incurring the slightest danger that the "hands" might share sufficiently in the stock to control the fight for profits and dividends. The control, and therefore the lion's share in the profits, has always been kept safely in commercial hands. There was never any intention that it should be otherwise. The profit-sharer is merely a minority-stockholder, upon the smallest conceivable scale; and the minority-stockholder is in- creasingly being recognized as a cat's-paw class, which loses at the commercial game almost as hopelessly as does labor. This fact labor is beginning to appreciate. It is beginning to realize that it is better off as undisguised labor than it is as a profit- sharer a sexless mixture of emasculated labor with barren capitalism. Moreover, even if this impossible extreme where the profit- sharer might imaginably control the business were ever seriously contemplated and adopted, as is sometimes true in so-called co-operative societies, it would not amount to any slightest an- 154 MODERN ECONOMIC TENDENCIES nulment of the contrast between production and commercial- ism which forms our text. Labor would thereby merely have come to mingle within a single individual portions of two con- trasted sorts of activity, as is true of so many officials of manu- facturing corporations. The profit-sharing wage-earners would thereby merely have ceased, temporarily, to be out-and-out producers, by becoming partners in the commercial fight for dividends, just as the corporation-official sometimes drops his combat for profits to give a bit of attention to production. Neither of them has thereby altered in any slightest degree the ineradicable characteristics of either the factory-system or the ownership-in-industry system, by their momentary shift from one to the other. The profit-sharer would merely have abandoned the former, for the moment, as so many are doing in a myriad of ways all the time, to increase the latter by their joining somewhat in its more lucrative occupation of fighting over the spoils. And thereby they must inevitably make both themselves and everyone else, on the average, poorer, by reduc- ing the purchasing-power of every dollar in the land. Summary. The factory-system, instead of relying upon those methods of appeal to the Consumer to exchange his money for goods, or to the capitalist to supply the appliances needed by labor, which are so familiar in the commercial world, provides merely, instead, for the universal privilege of use of all its facilities by any of its members, under proper superintendence, without other charge than for depreciation, and without im- portunity. It proffers to every workman the enjoyment of every appliance which he is fit to use, upon virtually unlimited credit. But it never permits him to own it. It also establishes ideally free interchange of materials, with- out negotiation as to price as a preliminary, under the guiding agency of a Central Office. Yet this Central Office itself never negotiates. It merely transmits from the Ultimate Consumer to the original producer (or, in the existing factory, so far in this direction as its jurisdiction may extend), and vice versa, the will of each. By this Central Office the willingness of the producer to labor is transmitted, to the person who next receives his output, in a form containing no tax beyond the clerical cost of trans- mission. Word as to the volume of goods acceptable to the THE BASIC CONTRAST IN ECONOMICS 155 Consumer goes back to the producer in a similarly efficient manner. These unhampered privileges of use and interchange have been maintained so long before us, as natural essentials to the welfare and efficiency of the little community within every factory, that we have become unconscious of their presence, their value and their significance. Although they are diametric- ally opposed, in principle, to the spirit of the entire business- world, yet their right has never been questioned by any busi- nessman, but has been upheld in fact by all. Yet the factory-system seems to have failed completely in public recognition, through our official agents for such matters the university-economists and the journalists of these its four most important lines of value, namely: (1) A system in which ownership-in-industry is everywhere prohibited ; (2) One in which monopoly is everywhere enforced; and (3) One where credit is universally extended without in- terest-charge; yet (4) One where the volume, rate and ease of production, inter- change and improvement of goods reaches the maximum known to human experience. Our Factory-system Incomplete. It is obvious, too, that a wide extension of our factory-system, into fields and popula- tions now strange to it, is possible. In view of the predominant proportion of the nation's activities which are now being absorbed in questions of ownership-in-industry, it is plain that such an extension might be made to include much of the best human material which we possess, which is now going to waste in business-offices. Indeed, the aim of this entire chapter has been to suggest that the proportion of what factory-system we now enjoy, rela- tively to that which we might just as well enjoy, is the same as that between the productive and the total energies respectively in our imaginary modern factory permeated with ownership- in-industry. This ratio, judging superficially, cannot be less than several fold, and easily may be ten or twentyfold. This ratio, it is to be remembered, is not one of populations, but of energies. Discontent. Along with the incalculable gains to society as a whole which have resulted from the adoption of the factory- 156 MODERN ECONOMIC TENDENCIES system, there has also been a simultaneous growth, it is true, of a worldwide, obvious and increasing discontent among those working under it. But further analysis is needed before re- sponsibility for this may be properly placed. In the first place, this discontent is shared by millions living outside the factory-system. In the second place, if the factory- system has grown enormously,, so also has the unsystematic fabric of contentious owner ship-in-industry and the latter, we shall see, at an even higher rate. There is no a priori reason why all social ills or labor-dis- content should be attributed to one rather than to the other of these diametrically opposed systems. Surely, if the former, on its face, is productive, while the latter is destructive and if both are growing fast, but the latter faster it is more natural to place responsibility upon the latter, until some opposite be proven. In the following chapters the contrast in character between these two inevitable results of modern mechanical invention the non-owning factory-system and the ownership-in-industry unsystem respectively will be traced further in detail. But, however deeply such a search may penetrate the labyrinths of modern industry and commerce, it must never be forgotten, amidst the distractions of intricate detail, that, however proper may be the institution of private ownership in its proper sphere ITltimate Consumption yet that ownership-in-industry is the direct opposite, in nature and result, of production. It is not itself productive; it lives only as a parasite upon production. This fact may not be questioned by any businessman, and least of all by any manufacturer or employer of labor; because every one of these, without even a single exception, rigidly excludes personal ownership of tools, raw materials or produce, and all commercial competition, from all the industry over ivhich he exercises control. This is as true, too, of the banker, the promoter or the sales-manager who has only a few book- keepers or stenographers in his working-force, or of the merchant having only a single "clerk" or a few hundred shop-girls, as it is of the owner of the largest factory, the deepest mine or the longest railway, controlling tens of thousands of men in overalls. The Basic Contrast Running through All Energetic Sciences. This contrast between industry-without-ownership, as in the factory-system, and ownership-in-industry, as universal THE BASIC CONTRAST IN ECONOMICS 157 throughout the commercial world, is the basic one in economics. It is only by means of this contrast that a path may be blazed into the deepest mysteries of the subject. It is only by planting our feet firmly upon this basic distinction that we may acquire a real science of social energetics, fit to stand side by side with the other energetic sciences and able to predict future events as they predict them foretelling a war or revolution as accurately as astronomy foretells an eclipse, or gauging a yet unbuilt conformation of society as nicely as we now estimate the performance of an unlaunched steamship. To readers who are scientifically inclined this definition of the field of scientific sociology may be supported by the ex- planation that, in this now formative science of social energetics, this contrast between production and commercialism plays the same basic, distinctive and guiding part as that between the two opposed factors conservative and dissipative respectively which give to every natural science its dual aspect. Such a basic dual contrast, for instance, is that between elas- ticity and impact in the science of mechanics of solids, or be- tween fluidity and viscosity in hydraulics and pneumatics, or between conductivity and resistance in electricity, or between translucence and opacity in radiation, or between adiabatic and isothermal in heat-action, or that between reversible and irreversible changes in any cyclical activity whatever, or that between the broader principles of conservation and degradation in cosmic energetics, or that between peace and war in politics that fundamental contrast which pervades every corner of the universe, which runs through all the natural sciences, which forms the guide for every effective laboratory-investigation, and which has led reliably to the solution of the most difficult problems, in each line of technical progress, which have been solved in recent years. Therefore from this point forward it will be assumed that political economy, if it is really to aspire to a peerage with the other natural sciences, in its foundation not only upon statistical fact but upon scientific principles relating fact with fact, and if it be ambitious to acquire that ability to predict which is the test of accuracy and reliability in every other science, then it must start from, be based upon and guided by this pame contrast that between conservative and dissipative activities which underlies all human knowledge of energy and 158 MODERN ECONOMIC TENDENCIES action. The only precaution needed is to define carefully for the special field of social energetics. Although what follows may confine itself to simple, concrete, economic facts, yet this high goal is the real end in view. At this point, therefore, the reader must select his allegiance and nail his colors to the mast. If he has followed and ac- cepted, in the main, this distinction between the crude anarchy of the cottage-system ownership-in-industry on the one hand, and the efficiency of the orderly, co-operative, non-owning fac- tory-system on the other, as the basic one between inefficiency and efficiency, between archaic crudity and rational progress, then let him proceed in this book. But if he has failed in this he might as well stop here. For the rest of this work is naught but a careful investigation of the relative growth in past Ameri- can history, and the relative bearing upon present problems, of these two huge and basically contrasted divisions of interna- tional economic effort. CHAPTER VII THE MARKET-SYSTEM, OR COMMERCIALISM THE modern market-system is a creature born primarily of modern transportative and communicative facilities. These have extended inconceivably the radius of action of not only every productive center, but also of every selling-agency; and the populations thus affected, we know, must have increased even more rapidly than the square of this radius. Simultaneously invention has multiplied inconceivably the number of steps in the productive processes of our factory- system. At every one of these rapidly growing number of steps of manufacture, and then of distribution to the multi- millions of Ultimate Consumers, interchange and transporta- tion must enter as a factor; and at every one of these in- numerable steps in transportation, and often when no trans- portation is involved, negotiation over price is necessitated by change in ownership. For instance, each bushel of wheat passing through the port of New York is said to be bought and sold over one hundred times. Yet think of the number of similar transportative steps involved in getting the \tfieat from farm to bread-eater in- cluding the many sales of the emery with which is ground the valves of the steam-driven mixing-machinery of the modern bakery, and every similarly remote accessory as compared with the simplicity of the neighborhood-mill and the domestic oven of a century ago. And at each of these steps may occur a multiplication of negotiations. Follow this picture through all the intricacies of corporation-law and patent-litigation involved in this myriad of technical processes, and you may approach some faint conception of the ramifying energy of the modern market-system. Transportation and Communication. Glance for a moment at the modern market of Ultimate Consumers, as contrasted with that of a century ago. Relatively speaking, in 1815 there 159 160 MODERN ECONOMIC TENDENCIES was no transportation of commodities except by water, and that at great risk, with wagon-traffic a remote second. Goods must find a market near their origin or else must remain unconsumed. A century ago manufacturing-processes were exceedingly simple. Therefore materials went through only one or a few transfers of ownership between raw source and ultimate con- sumption. Moreover, there was but a slender variety of choice in the goods offered for sale, or of choice between purveyors. The Consumer either bought what was offered by his nearest shop-keeper, or the first pedlar to pass, or else went without or made it at home. Production, then unaided by invention and power, was slow and difficult. It absorbed the bulk of the energy available. Selling, on the other hand, equally unaided by invention, unstimulated by variety of goods, shackled by lack of means for communication, and unenticed by modern congestion of population, absorbed little effort. Energy devoted to selling did not pay. The Ultimate Consumer was either found im- mediately, or else the search was abandoned. Now, on the other hand, these conditions have been reversed to an almost inconceivable degree. Transportation spreads commodities over wide ranges of territory, reaching enormous masses of population. Cold storage has annihilated the sea- sonal limitations of many goods. From the window, as I write, can be seen on a clear day the homes of more people than were to be reached by three weeks of travel in all directions in 1800. By the telephone at my elbw I can talk to a popula- tion larger than that of the entire civilized world when Adam Smith wrote his "Wealth of Nations." Both transportation and communication have multiplied in- conceivably the variety of commodities subject to the cus- tomer's choice, and have thus made immeasurably more profit- able the devotion of effort to influencing that choice. In no field has invention been so active perhaps because nowhere else so artificially profitable as in the fields of communication and display, which are the salesman's especial aids in the in- fluence of trade over a wide market. The Line between Production and Commercialism. So, between this obvious and unavoidable necessity for reaching myriads of remotely scattered Consumers with information THE MARKET-SYSTEM, OR COMMERCIALISM 161 as to goods, coining in the greatest variety from numerous and unsystematized sources which, when reduced to its lowest terms, is a productive task and the equally obvious destructiveness of personal ownership-in-industry, or commercialism, when in- troduced into the factory-system where is the dividing line? Which is the real and productive factory-system, and which the unnecessary, destructive market-system? Demand Unlimited. In considering this question the prime fact to be kept in view is that the Ultimate Consumer always desires to consume. He needs no inducement whatever. There is no limit to human desire. There is a limit to the people's purchasing-power, it is true a factor which will be considered later but none to their desire. The shoe-salesman, for instance, starts out into a world where everyone wants more or better shoes. Yet it seems to require a gigantic organization, . backed with ample capital and trained by specialists in salesmanship, in order to persuade the people to buy that which they keenly desire ! For many who attempt to sell excellent shoes fail. There is some deep paradox here. . But consider if there were not a shoe-salesman in existence would the people go barefoot? Is there a human being with so little enterprise that, being ill shod, he would not step into a shoe-store without the enticement of alluring lights and gaudy signs to draw him thither? If there were no shoe-shops at all would not the Consumers go, or collectively send a dis- interested agent, to bring shoes from the factory? Would there then be even a single pair of shoes less than now in use? Indeed, is it not possible that, if shoes could be had at factory-costs, without the far greater cost of selling, there would then be even many more shoes bought and there- fore made, sold and worn than now? For when one learns what a large proportion of the. price of shoes is mere selling-cost, and when one recalls that all the money available for spending is going to be spent anyhow, even if no clever salesman entices, then it becomes clear that that money would buy many more shoes than now, if only the selling-cost were omitted from the price. Of course, if the salesmen who sell shoes alone went out of existence, leaving the salesmen in all the other lines at work, then the shoe-factories would suffer. The Consumer's money would then be diverted away from shoes to some other com- 162 MODERN ECONOMIC TENDENCIES modify, even to the point of poorly shod feet as the price of needless purchases elsewhere. For clever salesmanship is a real hypnotic power. It is a common phenomenon for it to induce purchases which are not really desired by the Consumer. But it cannot possibly expand the aggregate volume of purchases, for that is determined not at all by psychic desire, whether natural or induced, but solely by aggregate pecuniary pur chasing -power. All the money available for spending will be spent anyhow, sales- men or no salesmen. Therefore if all salesmen were outlawed simultaneously, by a universal adoption of the factory-system, then interchange and consumption would be distributed among commodities very much as now, except that the volume in all lines would be very much greater than now. Ultimate versus Intermediate Consumption. The Ultimate Consumer, when he buys, usually buys only what he actually desires or really needs. The burden of conducting purchases of that sort is a necessary and productive task, in so far as it is not artificially exaggerated by the presence of ownership- in-industry, multiplying unnecessarily the number of retailers. But under the commercial system the bulk of all buying and selling is not of this sort. It is not done by Ultimate Consumers, but by manufacturers or re-sellers. It has nothing to do with the desires, personal needs nor Ultimate Consumption of the buyers. It is undertaken solely in order to reap a personal pecuniary profit. Purchases of commodities are made not to enjoy or consume them, but only to sell again. Purchases of securities are made solely for the purpose of drawing interest or dividends. The burden of conducting all these sales and purchases, which is a heavy one to society, is an unmitigated waste. It is irrelevant to reply to this that unless the Ultimate Consumer wishes an article it is worth nothing to the middle- man. If the movement of goods were stimulated and guided solely by the desires of the Ultimate Consumer, they would move from the original factory directly toward him, along the shortest possible path. But the facts are far from this. Goods now move toward their Ultimate Consumer not so directly as a sailing-ship tack- ing to windward approaches her port; and we all know how satisfactory that is to modern standards of speed and efficiency. THE MARKET-SYSTEM, OR COMMERCIALISM 163 Then, as a matter of fact, the intermediate commercial buyer needs have no appreciable regard for the question of ultimate consumption. The sole question for him is: "Can I find a man who believes more than I do that there will be an ultimate demand for these goods, or that they may be made to command a higher price than I believe? If so I can sell them to him at a proft." But if it then turns out that the second man was mistaken, it does not follow that he loses what the first man won, the Consumer paying only the natural price which would have been paid if neither of these men had entered the market. Instead, the second man says : "A man must live. If I make a mistake now and then I must still average a net profit." So he tucks upon whatever goods he succeeds in selling a profit sufficient to cover his losses upon those which he cannot sell, and ex- plains the whole as "the cost of handling the goods" forgetting that nobody ever asked him to handle the goods, that he has had to hustle in order to secure a chance to handle them, and that the Consumer, who pays all the bills, would be vastly better off if he ceased handling them altogether. As for the Consumer, he is helpless. Any refusal on his part to buy of any such an insane arrangement merely leaves him the alternative of buying from another equally bad. The Ultimate Consumer, in this game of commercial buying and selling without the natural cause, is like a base-runner caught between bases, with the basemen trading the ball back and forth over his head. They may make as many passes back and forth as they choose all to their pleasure and his ultimate discomfiture. For every profit on every transaction is charged up to the Ultimate Consumer. He must either pay or starve. The bulk of all commercial transactions, including not merely middle- men's speculations but all such variety of commercial and financial ventures as the starting of additional retail-stores, founding new advertising-mediums, launching new brands of old goods, with all the financial, legal and negotiative com- plications attendant thereon, are all conducted to-day not at all because the Ultimate Consumer who pays for them either desires or needs them, but solely for the sake of the profits incidental to charging up to, and collecting from, him all those 164 MODERN ECONOMIC TENDENCIES unwelcome costs, in the form of mysteriously rising retail- prices. Outline of the Market-system. The market-system thus com- prises all economic effort which is not productive in the sense of supporting the life of the Ultimate Consumer. It concerns all sales and purchases not needed by the Ultimate Consumer. It includes all diversion of energy into questions of ownership, price, markets, profits or opportunities for sale, or those neces- sitated by duplication of effort due to the present anarchic license of any man to enter any commercial field which may seem attractive to him, regardless of the interests of him who must pay all the costs thereof, the Ultimate Consumer. The sole exception to this definition, which blocks the way to making it sweepingly inclusive of all selling, is that effort which must inevitably be put forth, even under a nationally complete factory-system, by salaried salesmen each possessing a complete monopoly in his own line and district, in order to guide the Ultimate Consumer competently toward a wise choice amongst all the commodities produced in that line, all of which are presented for choice simultaneously and impartially. But this is a very small a barely perceptible fraction of modern selling-effort. For under even the most perfect system the Ultimate Con- sumer needs to be guided and informed. Under any imaginable system accumulations of goods must be maintained for his in- spection, or to tide over seasons of surplus or famine. These are natural, inevitable functions. Therefore, in so far as the retailers now actually perform these functions, as they would be performed by a national factory-system, just so far they do now form a part of our actual, if incomplete, factory-system. But on the other hand, to whatever degree and it is a major degree they now waste space, buildings, time and the energy of the public seeking commodities, by their maintenance of a myriad of trivial little stocks, each one incomplete and un- systematized with the others, or unwisely chosen as to locality, and duplicated endlessly; or wherever they entice customers through other than true or complete information, by adver- tising things already well known, or by stating things which they do not know to be true, or by emphasizing half-truths all for the sake of private profit, if public loss they belong to the THE MARKET-SYSTEM, OR COMMERCIALISM 165 destructive market-system. To that degree they arrest, deform, degrade, or destroy life, by increasing its cost and difficulty. The Ultimate Consumer the Sole Source of Economic Power. Because the Ultimate Consumer pays all the bills for wages, raw material, transportation, profits, selling-costs, rent, interest, profits, dividends, surplus, etc. he has full right to a choice instructed by the best grade of impartial information which modern science can accord him. He has a right to demand this to a degree of freedom and accuracy far exceeding his present difficulty in discerning what is best, amidst a frantic mob of competing owning-salesmen, each clamoring into his ear a lot of subsidized and misleading half-truths or downright falsehoods, or when forced to run from shop to shop, as now, before he can find that which one visit should have told him. There is no more sense or reason in our having to trot our feet off in trying to find the best bargain in dry-goods or machine-tools than there would be in postage-stamps, which are now sold (under the factory-system) of one quality and at one price from Eastport to Los Angeles. This right to an intelligently guided selection on the part of the Ultimate Consumer is a basic one. But it cannot be attained by demands addressed to the helpless tools of the present commercial system. It can be acquired only by the abolition of the present un-system, by denying to all non-con- sumers who seek to buy in order to re-sell (or in order to extort tribute in the form of rent or interest) the privilege of any ownership-in-industry whatever as is done in every factory in the land. Outline-definition of the Market-system. As features inci- dental to this undesirable non-consuming ownership, the defini- tion of the market-system must also include all speculative investment or storage for profits or dividends, all agencies, all drumming and advertising, most of all the time and nervous energy now spent in combatively determining wages or salaries, all time lost between jobs, and all financing and promoting. For every one of these losses consists in working hard (or worrying needlessly) to do something which either the Con- sumer, if relying upon the pure factory-system as his sole sup- port, would not need to have done; or which does not actually aid the factory-system in supporting his life, even when the Consumer may think that it does; or which would get itself 166 MODERN ECONOMIC TENDENCIES done better without any effort, if only the seekers after private profit at public loss would leave the situation alone. Most briefly, commercialism or the market-system consists in owning what one doesn't want, because someone else wants it. Contributory Commercialism. The market-system also in- cludes one branch of effort which will prove, as analysis pro- ceeds, to be perhaps the most important of all. This is the widespread diversion of what would otherwise have been pro- ductive labor, while still following the forms of what would otherwise have been a factory-system, into aid to some of the combative commercial activities listed above. Thus a shop of printers engaged in printing instructive, entertaining or inspiring books is a part of the national fac- tory-system. But that same lot of men and appliances, when diverted possibly within an hour to the printing of unneeded or misleading advertisements which soon reach the waste-basket, becomes thereby a part of the market-system. Similarly a lot of stenographers writing negotiative letters, or a labor-union in its hours of conference over wages, or upon strike, with many another instance of what is apparently a part of the productive system, must all come under the term market-system in its destructive sense. The fact that the workers in all these instances may draw their pay in the form of wages, or otherwise, has not the slight- est weight in determining their economic character. For it is not that which goeth into a workman, but that which cometh out, which determines his worth to society or to himself. The National Market-system. In the national factory-system the component elements were found to be either individuals or departments, or shops, or entire factories. Similarly in the national market-system, the component elements may be either individuals or entire organizations. In so far as factories actually interchange materials or productive services they to- gether constitute themselves a larger factory-system. But in so far as their selling-offices spend time and effort in negotia- tion preliminary to such interchange, enforced only by their disgregated ownership, or wherever they sell to outside parties in competition with each other, their negotiative forces thereby constitute a larger national or international market-system. Commercialism Always Antagonistic. One consideration differentiating the market-system from the factory- system is that THE MARKET-SYSTEM, OR COMMERCIALISM 167 the business of the former is always economic combat. The exertion is all directed toward counterbalancing and annulling an equal amount of exertion put forth by others. Work against such obstacles as that inevitably arouses in him who strives a sense of fault in the opposing human being. Failure begets hatred and leaves a corroding bitterness. Thus two farmers may haggle a week over the price of a cow, each telling all his neighbors what a hard-fisted old skin- flint the other is. Yet if neither of them owns the cow it and the two farms being the property of those who ultimately consume the potatoes, milk, and beef produced then the cow would be transferred from one farm to the other by an hour's labor, the price being settled on the books of the two farms by a mere clerk, after a few minutes' conference with the two farmers. For whether the price were too low or too high would then be of importance neither to the farmers, to the clerk nor to the Consumer-owners. Or again, imagine a man who wishes a dozen errands done, facing a dozen boys seeking a job. This man typifies the public of Ultimate Consumers. Suppose, in the first place, that he follows the plan of selecting one boy after another, assigning to each an errand. That is the factory-system in embryo. Human limitations aside, the selections will be made peaceably and efficiently, the man picking out each boy for the task assigned as wisely as his skill will permit. The Commercial System in Embryo. But suppose, in the second place, that the man alters his plan of procedure to the market-system. That is to say, he now scatters upon the ground a dozen tickets, each ticket a commission to run one errand. He then tells the boys to scramble for the tickets. This introduces the feature of combat over ownership of the jobs, as a prerequisite to productive work, where neither com- bat nor ownership is needed at all. What will be the result of the change in plan? In the second case will occur no peaceable, efficient co-opera- tion of the twelve boys in the performance of a dozen errands, as in the first instance. Instead will arise war. Now the boys will fight for the tickets, not because the boys are any more bellicose in nature than they were the moment before, nor because human nature is incurably prone to fight, but merely because society 168 MODERN ECONOMIC TENDENCIES has insanely arranged matters, in the second case or insanely omitted to make any arrangement whatever so that a fight is an unavoidable preliminary to doing any productive work! The blame for all war, whether commercial or martial, rests not upon him who fights, when the alternative to fighting has become more destructive to human life than the fight, but upon every obscure him who, through neglect, stupidity, indifference, cupidity or laziness, has allowed a planless situation to arise wherein life cannot continue without a fight. The Elements of Commercial Economics and Ethics. The second situation will develop several obvious faults which are so typical of the greater social faults which are now permeating our entire social organization that they are well worth study. These faults in embryo are these: (1) The tasks will no longer be distributed, even approxi- mately, to fit the individual power of the boys. It will be the best fighters, and not the best messengers, who get the jobs. (2) The tasks will no longer be distributed evenly. Some boys will get two or more tickets apiece; others will get none. Those securing more than one ticket will delay the performance of all errands except one, while that is being performed. Mean- time other boys who got no tickets will be standing idle. Congestion and delay upon the one hand; simultaneous lack of employment on the other ! Does it look so unlike our actual industrial situation, in the grasp of the market-system? (3) No errand can be performed until the fighting is done. The strength left for speed, and the nerve for nicety of judg- ment, are what is left after the exhaustion of combat. There- fore there will always result a deficit of both production and employment. Nor could this combat long remain child's play. Starvation awaits him who loses. (4) The worst nature of the boys, instead of the best, will ~be brought to the surface. Antagonism and bitterness wholly artificial and unnecessary will have been created. Those suc- ceeding will become snobbish. Those who fail will become re- vengeful. Ability given no outlet turns, to vindictiveness, for inhibition is to human nature what lightning is to milk. Human nature, under this mischievous system, will seem far worse than it really is. (5) The average cost of each errand will be much increased. THE MARKET-SYSTEM, OR COMMERCIALISM 169 In consequence the Ultimate Consumer can afford to distribute only a reduced number of tickets, as compared with what would have been possible under the factory-system. This artificial deficit in the normal volume of demand then intensifies the penalty for failure in the fight, and hence the venom of combat, and enlarges the proportion of those who must surely meet defeat and want. As our analysis develops this simple illustration into the dimensions of our national economic system it will become plain that this last factor the Consumer's decreasing purchasing- power is the controlling one in explaining the bulk of the growing bitterness pervading what we call the social problem, in its broadest and deepest aspect. Human Nature and the Social Problem. This illustration of the boys demoralized by a wrong system is a parallel with that of the modern factory when permeated with ownership-in-in- dustry, only more elementary. In each case there is no ques- tion of human nature. It is merely one of wisdom or folly in policy of organization, in the face of a human nature which has remained substantially the same since history began. Ask any superintendent of any actual messenger-boy service, or any other employer of factory-labor, if he thinks that the scramble-plan is better than the orderly one of assigning work without ownership therein and therefore without fight over that ownership and he will declare emphatically in favor of the non-owning plan. But ask that same man if he prefers this same non-owning plan when it is the Ultimate Consumer who does the hiring, through the retail-shop as agency, and when it is his own factory-organization whose work is hired thereby, and he will snort his indignant repudiation of the idea. In that case he prefers that the orders which keep his factory going shall be scrambled for in the dirt, by a lot of drummers or jobbers with the inevitable loss of many orders otherwise possible. For some reason or other he is mortally afraid of magnifying to a national scale the very policy which permeates his own entire factory, and on which he knows that its efficiency rests. This prejudice and fear prevail almost universally among businessmen. If it is not due to sheer greed, which is reckless of the country's welfare, it can be understood only as an in- tellectual cowardice which is none the less shameful because 170 MODERN ECONOMIC TENDENCIES manifested by men who would on no account incur the stigma of bodily cowardice. It is this moral and intellectual timidity on the part of our big men of affairs and our average modest citizen, and not some stupidity or greed on the part of "the other fellow/' which is the weak element in human nature which is involving us in all our present troubles. When our capitalist-employers preach what they everywhere practice our social turmoil will cease, and not before. Social Re-organization. At this point emphasis must be laid as heavily as space will permit upon the error of one superficial idea, which is met so constantly as to be discouraging beyond measure to anyone seeking a world more wisely organized than this. This false and superficial idea is that "society will be reformed when human nature is reformed/' But in these illustrations of the modern factory permeated with ownership-in-industry, or of the dozen messenger-boys similarly poisoned, there is no question of human nature what- ever! In each case the actors are just plain, human men or women, quite like the reader. In each case the human nature is the same under either system. Yet the results of the two systems are diametrically opposite, along both economic and moral lines. No conceivable excellence of human nature could prevent the manifestation, under the wrong system, of those gross evils which are inseparable there- from. These illustrations prove broadly one of the most basic prin- ciples of sociology, namely, that social phenomena do not de- pend upon human nature (except as to such basic traits as underlie all phenomena alike), but wholly upon our methods of organizing human nature. For our social phenomena re- peatedly turn inside out over night, so to speak, whereas human nature, if it changes at all, changes very, very slowly, as centuries pass. Thus, in our present problem, it is not the proposed ideal economic system of the future in this book nothing more ideal than the long familiar, well proven factory-system which will place upon human nature a stress beyond its powers of endurance. // is the present system which already does so. A large portion of all present immorality will prove, upon examination, to be due merely to the inability of perfectly good THE MARKET-SYSTEM, OR COMMERCIALISM 171 human nature to withstand the artificially exaggerated tempta- tions which are imposed, quite unnecessarily, by that foolish lack of all system which we call commercialism. 1 The Basic Economic Contrast Again. The inevitable evolu- tion of the pristine cottage-system, under the stimulus of in- vention, has therefore given to modern civilization, in its economic aspect, a two-faced form. On the one hand has arisen the factory-system, enormous in its bulk, comprising some nine- tenths of the active population; yet drawing this population usually from among the less able, brilliant and aggressive people although it also includes the underpaid intellectuals of college, laboratory and library. It creates from nature's rawest stores everything with which we support life and make it com- fortable. It brings all these things into the hands of those who ultimately consume and destroy them, in the development of an enlarged volume of new life and energy. On the other hand lies the market-system, also gigantic in its aggregate energy, but contrasted with the factory-system in its smaller population, in its brilliance of display, in its financial scales of magnitude, and in the peculiar sort of man- hood which it draws into its ranks not to be too quickly characterized by any one sweeping adjective, yet everywhere ex- hibiting a certain unity of character. Whether we regard the baron of finance, the traveling drummer, the department-store merchant, the corner-grocer or the itinerant pedlar, we find in each, mingled with the greatest variety of other attributes, two necessary instincts. One of these is the love of some un- certainty in life, if not of a sheer fight. The other is a keen sense of property. The typical producer, on the other hand, whether high or low in the social scale, is conspicuous for his lack of both of these. Whether he be an artisan at his bench, or a skilled surgeon, or a scientist, or an educator, he is everywhere alike in his love of peace and of work not necessarily in the sense of an unusual love for mere exertion, for many commercialists are also intensely active, but of work in the sense of producing something which can afterwards be viewed as an accomplished thing a work of art, a thing which betters the condition of the human race. This is the sense of craft. - This idea cannot be understood completely until the chapter upon Unemployment has been read. 172 MODERN ECONOMIC TENDENCIES With these creditable features of the factory-system ap- parently must be associated often others equally characteristic, but not equally delightful. These are intense monotony of task, longer hours than prevail in the market-system (except in retail trade), much lower average incomes approaching always the minimum wage upon which the particular grade of skill in question can maintain itself, from generation to generation and an incessant pressure toward the reduction of the courteous and esthetic, as well as the pecuniary, sides of life to their minimum. But these repellant features of factory-life in reality have nothing to do with the factory-system itself. They are imposed upon it only ~by the parasitical presence of the market-system. It is the latter alone which sucks out the life-blood from, and starves into discontent, the most just and perfect system of organizing labor and interchange ever yet devised the factory- system. Labor cannot now see that this is so. Nor can the rest of the world, apparently, see that until it sweepingly condemns all commercialism, as the only defect adequate in magnitude to explain the worldwide discontent with factory-conditions, it may never hope to prove to labor that the factory-system is indeed good. While unquestionably there has been an advance in the ad- ministration of our better factories during recent decades, in the direction of providing better light and air, and adding some slight suggestions of beauty, comfort, courtesy and recreation known in the vernacular as "welfare-work" yet these ad- vances are by no means universal. It has long been obvious that they are not competent to meet the growing discontent. To the masses of people working in the smaller or less success- ful factories, or in sweat-shops, or to the unskilled laborers who necessarily drift constantly from factory to factory, or from one construction-camp to another, or to that vast popula- tion of petty tradespeople immured in petty shops all of these buying their supplies through a market-system which every- where, as a matter of course, "charges all the traffic will bear" these benefits may never come. Through the leech-like activities of commercialism, life is inevitably being reduced automatically to the lowest level at which it can continue, without being snuffed out altogether THE MARKET-SYSTEM, OR COMMERCIALISM 173 and this is a very ugly level of life indeed. It is this which constitutes society's real problem. For the believer in the gradual reform of factory-conditions must never forget that it is not the factory-life of the factory- worker which needs amelioration, so much as it is his home- life. Yet this latter the welfare-worker cannot touch, with his hard, paternal wand. It must be left autonomous or else ruined. Moreover, the problem is far wider than either factory or home. It is the conditions which surround and feed (or starve) the worker's home, and not something within it, which must be reformed. Most of all, it is prices of commodities and regularity of employment which need reform. Even what little has been accomplished in the way of welfare- work has been enforced, rather than spontaneous, by the far more rapid advance in the standards of the market-system in luxury. The dazzling development of the natural habitat of the commercialist : the city-offices and lunch-clubs, the up-town apartments and hotels, the brilliant shops, theaters, social clubs, automobiles, etc., has presented a contrast with the habitat of the productive system the factory, warehouse and slum too painful to permit the latter to remain altogether stationary. Yet one can say truly that, while we have been developing our offices, shops, hotels, and theaters with every device known to technical science, we have left the homes of the workers, at their worst, unchanged. But this method of progress defeats its own end. If we are ever to find social happiness, peace and stability, it will never be on a plan wherein the rich advance by leaps and bounds, dragging after them the poor at a distance which is restrained from complete abandonment only by fear of outraging humanity to the point of explosive revolt. Discontent and social instability arise only from disparity and injustice. It is absurd and childish to point out that the average skilled workman enjoys to-day far more than he had fifty or an hundred years ago. The source of his, most natural discontent is that relatively, rather than absolutely, he has fallen behind. He has not progressed at anything like the rate that the negotiators have enjoyed. When the latter are now enjoying a brilliance and luxury of life some three, ten or a hundred 174 MODERN ECONOMIC TENDENCIES times that available a century ago whichever it may be what basis is it for content, or what sign of justice, that the artisan enjoys only some three, ten or an hundred per cent of advance ? For in the habitat of the negotiators appears increasingly every extreme of contrast with the characteristics of the factory. Order, system and discipline, except as they apply to underlings, are conspicuously absent. While often there prevails the intense energy and assiduity of the fighter, yet even there studiousness and asceticism are unknown. Instead appears the extreme of convenience, luxury, artistic beauty, mental superficiality, bril- liant display, subservience to every whim, sometimes even vulgar ostentation, and a continual demand for distraction from monotony or fatigue which borders as nearly as it dares upon the lazy and immoral. Here and there, it is unquestionable, one uncovers among the commercialists a minority of exceptions to these statements sporadic instances of real, wholesome, devoted, self-restrained virility and devotion to the world. But it is always in minority. It is not characteristic of the normal inducements of the system. Just as in those rare cases where one find beauty or idealism blossoming amidst the factory-system, these are instances of life persisting in spite of its environment, rather than of one in harmony with its surroundings. For the very soul of the market-system is ownership, and ownership means license. The man who does not place self- gratification first has handicapped himself against success in the market-system. Indeed, the man who does not own or control something, responsible only to his own ideas as to opportunity, private profit or public need, has no place in the market-world. The Commercial Tourney. The prime function of ownership- in-industry is to the modern businessman what horse and armor were to the medieval knight a means, pretext and license for free wandering, to be spiced with antagonism and mortal combat wherever might appear a chance of profit therein. Society, in discarding its "tin clothes," lost merely the insignia, and not the institution, of knight-errantry. The man who does not instinctively love a free fight has no place in commercialism. The basic idea of the market is a fight commercial nerve being the sort of courage, and finan- THE MARKET-SYSTEM, OR COMMERCIALISM 175 cial and office paraphernalia the sort of weapons, in use. The whole spirit of the market is win or lose, as one best may. All of the property visible there has been entered solely as counters recording victory or defeat, to suffer confiscation by combat according to set rules. To the larger operators money has long since lost its normal significance, either as dependent upon time-effort or as bearing upon personal comfort; but to the host of smaller commercialists loss is a tragedy. Yet the man who enters the market, and loses, receives every- where the same grade of help and sympathy accorded to a twelfth-century knight who came out of a joust with a broken head. In neither case is humanity lacking, expressed in a crude way. But neither then nor now has suspicion been aroused that personal outrage has been done, society demoralized by an exhibition of brute force where reason .should have prevailed instead, and all people impoverished, by an utter waste of the best nerve in the land. Nor has civilization yet advanced to where there is more than a glimmer of perception that law and public opinion should enter to stop the whole thing. Any such an idea is quite un- intelligible to the average commercialist, albeit he has always before his eyes the success of the factory-system, in which no combat is ever permitted. It is as incomprehensible to him as would have been to Eichard the Lion-hearted a land so gov- erned that no bloody jousts were ever allowed. We are as thoroughly steeped in our loyalty to our rough- and-tumble market-system as we are to our orderly factory- system, never dreaming that the two ideals and policies constitute hopelessly opposite, contrasted and incompatible extremes. Yet in both these systems the main duty to be accomplished is merely interchange. The main reason for collecting armies of workmen and dozens of departments into a factory, under a common superintendence and Central Office, is for the constant interchange between the workmen of partly finished tasks. // it were not for this the largest factory-per- sonnel in the land would be that group which perforce must work together on the one largest appliance. Likewise in the market-system, the prime reason for collecting tens of thousands of negotiators into a congested nest of sky- scrapers, or for the segregation of shops into groups in cities or villages, is apparently to facilitate this same basic need 176 MODERN ECONOMIC TENDENCIES of life: interchange. Although the negotiators in reality are not accomplishing interchange, but are braking it instead, yet they think that they are. They find intercourse personally profitable, however detrimental to the Consumer. So they gravi- tate into closer and closer congestion, dragging after them all their henchmen and trades-people, to the formation of cities the concentration of which is becoming the despair of modern social intelligence. Emulation and Competition. In each of these fields of in- terchange the factory or the market there is always at work, of course, that motive spirit which leads each human being to desire to outstrip his fellows. This spirit is, or may be, just as active within a factory owned by complete monopoly, where everyone is paid wages or salary, as between owner and owner. But in the a two -cases the effects upon society are exactly opposite. Hence are needed distinctive names for the same motive in the two situations. The spirit of rivalry at work within the factory, leading each worker to strive to produce more, will here be called emulation. In this sense, when justly rewarded, emulation is one of the greatest productive forces at the command of man. But when this same tendency is manifested in the combative market-system, in struggle over ownership or price, prompting each to fight harder and to destroy more of some other per- son's effort, it will be known here as commercial competition. In this sense competition may become, and now probably is, the greatest destructive force known to man, not even excepting war. For the average daily cost of the Great War, to either Or eat Britain or America, is not over one-third of America's daily cost of commercial competition, measured merely in dollars. In both cases the loss in life is worse than that in money. It is emulation, and not competition, which is the life of trade. Competition throttles it so fatally that competition always has to be replaced, ultimately, by consolidation. (As to this topic, treated in further detail, see the later chapter upon "Economic Equilibrium.") The greater the rewards for emulation in production become, the more intense will be that creative spirit. But the greater the prizes won by commercial combat or competition become, the less is left to form an incentive for emulation in production. As commercialism grows in brilliance of prosperity, activity ^ THE MARKET-SYSTEM, OR COMMERCIALISM 177 and luxury, the factory, as the seat of that emulative produc- tion which alone supplies all things consumed, and now in- creasingly taxed to support commercial militarism, must gradu- ally lose its natural reward, and hence its emulative zest, and must degenerate increasingly into a sodden atmosphere of sullen resignation to poverty, monotony and hopelessness, pierced here and there with flashes of intense bitterness, as black thunder-clouds are rent by lightning. It has been assumed all but universally, in past economic debate, that it is the factory-system which alone deserves our interest, because it alone feeds us and because labor's reward is thought to be determined there. This assumption has no- where been so effectively emphasized as by the worldwide propaganda of the socialist movement. But it is the office of this book to divert attention in the opposite direction, toward the market-system, because it is this which is starving us. It is because of the market-system's vital power over every phase of our coming destiny, both as to our physical famine and our political stability, that it deserves the closest attention and most accurate analysis of which the human mind is capable. CHAPTER VIII THE EFFICIENCY OF SOCIAL ORGANIZATION THE contrast between the two sorts of policy in industry which has formed the groundwork for all which has preceded forms the basic factor for measuring the efficiency or ineffi- ciency with which a given society has organized itself for its own support. The technical meaning of the word efficiency, it should be remembered, is the proportion of what-comes-out to what-has-been-put-in. Now it is a basic law of biological equilibrium that what each individual, whether brute or human, expects to get out of life is automatically balanced with its inherent ability to produce its own life-support. While individuals may depart slightly from this law in either direction, toward sloth on the one hand or over-ambition on the other, yet the general tendency is overwhelmingly toward the balance stated. Thus a clam, under normal environment, naturally expects to accomplish and receive what a clam naturally desires. With the horse, which is far more intelligent and sensitive than the clam, the same law holds true. With an imbecile human being the same holds true. For every grade of life, nervous system and ability, whether brute or human, educated or uneducated, this law holds true, provided the opportunity be normal. But with man, in modern complex society, the opportunity to produce, support life and be happy, and the temptation to be well disposed towards one's neighbors, depends largely, as we saw with the messenger-boys and to-day we might say overwhelmingly upon the relative perfection or efficiency of form of organization of whatever grades of individual ability happen to be available. Therefore the sole proper concern of the sociologist is the purity of the relationships formally in- stituted, whether by statute or by economic tradition and fact f between man and man. It is his business to relate man to man in such a manner that conflict will be avoided. 178 THE EFFICIENCY OF SOCIAL ORGANIZATION 179 Relationships versus Components. But this task of relating men properly does not depend in any way upon the quality or in- ternal characteristics of the things related. Indeed, inefficient men need to be related properly to each other, in order to avoid impact and friction, just as much, or even more, than efficient men do. That is to say, questions as to individual human efficiency may belong to the biologist, the physician, the surgeon, the psychologist, the educator or the religionist. They certainly do not belong to the sociologist. The skill of the latter is shown where his responsibility lies, namely, in the right or wrong form of organization of whatever personalities the skill of the biologist, the physician, the psychologist, the educator or the preacher may have made available for his organization. To-day, wherever we investigate, we find this principle cor- roborated. We find the inefficiency of result, and therefore the hope for improvement in the future, to lie far more in our faults of organization of society than in the faults lying within the human individual. But what we fail to grasp to-day is the fact that the study of organizational faults, on the one hand, and of individual faults, on the other, constitute entirely dis- tinct and contrasted professions. Thus in the study of the efficiency of a locomotive, for in- stance, we have two or more distinct professions involved in producing the result. These are (1) the metallurgist, who sup- plies the component steel, brass, etc., of which it is composed; and (2) the mechanical engineer, or designer, who says how these components shall be put together, as to proportions and relationships, in order to produce the best locomotive. But no engineer is ever so silly as to think that when we have pro- vided ourselves with a stock of good steel, brass, etc., we shall necessarily have a good locomotive, any more than piles of excellent stone, brick, timber, etc., insure the possession of a splendid, or even safe or satisfactory, building. The engineering profession, and the men-of-affairs whom they serve, have never been disposed to blur the clear distinc- tion between these two callings which we might call, for con- venience, the component and the constructive vocations re- spectively. They have always been able to discern the wide gap existing between questions of inherent quality of parts, on the one hand, and of relationships between parts, upon the 180 MODERN ECONOMIC TENDENCIES other. The two fields have always been considered distinct professions and given quite different educational approach. If a locomotive makes a poor record because of poor steel, weak brass or defective boiler-covering, it is never the designer who is blamed. The latter is at fault only if good steel, good brass, etc., have been so wrongly put together that impact and friction, or radiation, or incomplete combustion, etc., ensue in undue amount. Social Architecture. But, in our groping attempts at a social science, virtually all of the highest authorities confuse these basic issues. They do not know whether they are social designers or bio-psychological metallurgists. They are con- stantly trying to produce a better society by direct attack upon the individual. By some lucky hit-or-miss of cultivation they hope to evolve a superman, when all that is needed is a natural social organization in which normal men may develop normally. They are still hopelessly steeped in the primer-grade idea that what constitutes an excellent society is an aggregation of excellent individuals just as if baking a good cake consisted merely in securing good flour, eggs, etc. and that society can be made good and efficient only as one first makes its component individuals good and efficient. Are we never to have a real profession of social architects, but only skillful social brick- makers and stone-cutters, who blunder horribly when it comes to designing the structure of society? Yet the whole basis for modern thought which has been pro- vided by evolutionary science must brand any such an idea as this as obsolete and incompetent, and must start us at the other end of the line to make human relationships just and efficient first and then to rely upon their wholesome reaction upon the individual to develop whatever superman may be found to be natural. The evolutionary law which places en- vironment as the determinant of the individual applies to man as cogently as to any other form of life. With man, his most active environment is not topographical, but social. His social environment consists not so much of certain sorts of individuals as it does in the sort of acts toward him which are enforced upon the ordinary, garden-variety of human beings with whom he happens to be contiguous, by the social relationships embodied in constitution, statute or tradi- tion. THE EFFICIENCY OF SOCIAL ORGANIZATION 181 We cannot alter human nature appreciably, but these rela- tionships we can, and do, tear down and build up most rapidly. Every organizer or superintendent of labor knows these abstract facts intuitively. Every foreman knows well that the efficiency of a lot of workmen can be ruined by wrong handling, in the sense of disorganization, without their natures having under- gone any basic change whatever; and that good organization can double the output of some other bunch, without necessarily having converted any of its individuals into near-angels. It is incomprehensible how the orthodox professors of political economy, whose first responsibility is the efficiency of the nation's industrial system or our clear thought about it, at least can fail so utterly to base their science upon this familiar fact. It is puzzling to explain, on the other hand, why the businessmen, who base their every day's work upon this fact, seem to be unable to apply the idea to the nation as a whole. For, as society grows in population, and in those means for communication which weld into unity vast populations pre- viously discrete, this matter of mutual relationships grows tremendously in importance, while that of personalities wanes. Man finds himself to-day, in spite of widespread industry, patriotism, skill, Christian character and marvelous technical attainments, surprisingly unhappy. Yet he instinctively de- clines to believe that it is all his own fault. Many people find comfort in believing that it is all somebody else's fault; but most of us welcome a more Christian explanation than that. Bitter Social Philosophies. For herein lies the social poison which the seekers after a superman are distilling into society's veins. If all things must have their origin in the individual, then the only explanation of all our obvious ills is the personal fault of "some other fellow/' It is this philosophy which plays a large part in the recurrence of wars and revolutions. If it does not cause them, it sadly embitters them. It never seems to occur to anyone, and last of all to our professional sociologists, to explain all these irritating ills in terms of the real cause, namely, a wrong relationship between each man and his neighbor, while both man and neighbor re- main perfectly good men. For this relationship is a thing which can be remedied, whereas the reform of the individual remains, after four thousand years of endeavor at its solution, the one problem at which we have made no visible progress. We 182 MODERN ECONOMIC TENDENCIES shall have made a long stride toward permanent peace when we have realized that every quarrel between man and man is but the outward manifestation of a mere wrong relationship which both of them, with equal guilt and equal innocence, have allowed, by mere negligence, to creep upon them both unawares. Relationships versus Personalities. For relationships we can alter, but individuals we cannot. At least, the latest evidence of what nineteen centuries of this line of effort have accom- plished is certainly discouraging. Indeed, human attempts at the reform of one's neighbors have seldom netted any gain in happiness. They have usually produced negative results, de- veloping snobbery rather than Christian spirit in the actor, and begetting hatred rather than love in the object. Even attempted reform at one's self is usually futile, result- ing in self-conscious priggishness rather than exalted life. With our advance into the twentieth century we are supposed to have left that childish philosophy behind us. But reform of human relationships, whether with one's im- mediate neighbors or for society as a whole, is a field for al- truistic effort which never raises nettles with the wheat. Ee- form of our conscious relationships with those with whom we contact is the business of personal religion and ethics. Reform of our formally instituted relationships with the multimillions whom we never meet nor know personally, yet with whom we interact in the most powerful influences now affecting modern life, is the duty of the professional sociologist. For to-day, in the manifold trials of life, we are affected, as to personalities, only by those with whom we happen to come into actual contact; and these are relatively very few. But simultaneously we have become puppets actuated by huge forces developed and set free by hordes of distant, unknown human beings, each of them as well-meaning as ourselves, and as un- conscious of their influence over us as we are of our influence over them. Each of these innumerable unknown companions on the road through life acts only naturally, under the particular circum- stances of his individual life. He reacts to his environment of birth, breeding and surroundings exactly as we do to ours naturally and inevitably. Yet the result is toil and trouble for us both; but only because we have all been wrongly related, in a society which has been allowed to acquire population and THE EFFICIENCY OF SOCIAL ORGANIZATION 183 intricate appliances far more rapidly than it has perfected an organization adequate thereto. Social versus Individual Evolution. It is therefore the first duty of the student of economic conditions to trace accurately in history the evolution of industrial relationships, in their broadest sense, quite aside from, or even in direct contrast to, any growth in individual efficiency, whether through education or eugenics. Indeed, to anticipate the ultimate fruits of this investigation, it will actually be found that it is our very growth in individual efficiency and education, as evidenced in the rapid progress of material invention, which is involving us ever more inextricably in this toil and trouble, rather than serving for our relief therefrom. It does this by its multiplication of the mechanical intricacies of our social life, yet with no parallel, adequate development of our formal organization of society to correspond. War and Peace. Indeed, this has always been the function of eras of peace to develop, through the arts, an actual form of society which becomes more and more incompatible with the fixed form of government. Thus arises gradually a tide of social impact, friction and discontent. Then has always come, finally, a sudden regaining of equilibrium, in earthquake- fashion, through some war or revolution which accomplished instantly, so to speak, that reform of the formal relationships of society which should have been performed gradually by debate throughout the preceding decades. Virtually every advance in the institutional form of society has been accomplished by war' or revolution. Virtually none such of a major sort has been accomplished by the rational de- bate of times of peace. War and revolution, however revolting their cost, have been virtually our only educators in civil gov- ernment and social organization. Such has been the universal history of our cruder past. Whether such shall continue to be the history of our near future, which the reader is now engaged in making, is for him to decide. But, if he hopes to act effectively upon this suggestion, to forefend violence, he must do so with the energy and decision which is exercised in time of war. This social problem is no pink tea. If we wish to avoid violence we must accomplish peacefully what violence accomplishes. In pursuing our present investigation, therefore, our first 184 MODERN ECONOMIC TENDENCIES task is to eliminate all desire for data concerning the individual, when regarded as a cause. The acts of the individual are the result, and not the cause, of social phenomena. These social phenomena consist, instead, of a series of con- stantly changing institutional human relationships a series which unfolds itself according to natural laws which we are now engaged in identifying, quite independently of any slow development of the individual. This unfolding of history brings unheralded events crashing down upon us, as during the last few years, with a suddenness and unexpectedness which is baldly contrasted with the slow, well planned and diligently cultivated growth of human nature. The Basic Economic Contrast Again. In following this idea into economic fields, as our guide in our search for the welfare of the Ultimate Consumer, it is this contrast between that well tried human relationship called the factory-system, on the one hand, and that institution which is called here the market- system, or commercialism, on the other, which forms the prime indicator of social efficiency. This measure of social, or in- stitutional, as contrasted with personal, efficiency finds expres- sion in the proportion prevailing between "value" and "valua- tion," preliminary definition of which terms were given on page 44. These definitions may now be amplified one step further toward their exact determination in terms of dollars. Value and Natural Cost. It will be held here that the sole cost for a commodity to which the Consumer can naturally and justly be held is that involved in maintaining the factory-system requisite for producing that article and bringing it to him. This cost will be considered hereinafter to be the natural cost; and cost in this natural sense becomes synonymous with value and natural price. All costs in addition to this which may be incurred through the artificial antagonisms incidental to ownership-in-industry, where ownership is quite unnecessary, and which form a major factor in all present market-prices, will be held to be unnatural, unnecessary, oppressive and unjust. They should be made im- possible also a thing to be accomplished automatically as soon as ownership-in-industry is made illegal. In the published analyses of economic problems, whether in the form of treatises upon political economy or essays upon public versus private ownership, there appear the greatest THE EFFICIENCY OF SOCIAL ORGANIZATION 185 variety of definitions of value, and of methods of accounting. But for the purpose of a scientific analysis of the general economic situation there can be but one method of accounting, and that one based upon this fundamental contrast between the factory- and the market-systems. There can be but one definition of value, and that is the amount of energy going into or coming out of a thing at the point of Ultimate Consumption, with supply regarded as performed solely by the factory- system. For the time and place of Ultimate Consumption is the sole point in the economic system at which it is possible to equate money accurately with human energy. This is the only point at which money represents wholly the transformation of human energies into commodities, or of commodities into human energy, with none of it dissipated into economic heat in impact and friction over ownership. Whereas it has long been vaguely recognizable that money and human life were both forms of energy, and hence were transmutable to a degree, yet it has not been recognized that only at this point could the test of transmutation, under the cosmic principle of the conservation of energy, be applied. Valuation, on the other hand, is the price in money set upon this same commodity when delivered to its Ultimate Consumer through the market-system, with all the loss of efficiency due to commercial impact and friction added thereto. So long as any commercialism whatever exists that is to say, so long as any ownership is permitted in industry or interchange, any- where along the line just to that degree valuation must exceed value, when both are expressed in money. Valuation will exceed the natural price by the cost of the commercialism parasitical thereto. Efficiency of Economic Organization. On the average, valuation must bear the same proportion to value, in money, that the aggregate human energy of the entire industrial and com- mercial population I ears to that portion active in the productive factory-system alone. For society's aggregate industrial and commercial energy constitutes its current investment in the socio-economic machine or process. But it is the energy active in the national factory-system alone which is transmuted into what society gets out of its investment Life-support. There- fore the ratio of the latter to the former, following the universal 186 MODERN ECONOMIC TENDENCIES rule for computing efficiencies, must measure the efficiency of economic organization prevailing at the time. This proportion of useful result to investment of effort, it must be repeated and emphasized, depends not at all upon any question as to the efficiency of the individual members of so- ciety. All that interminable mystery has been eliminated by our basing our concept of efficiency upon the mere ratio of whatever aggregate may come out to whatever aggregate may have gone in. Thus, we might double or quintuple the average personal efficiency of the individuals concerned; yet, if we did nothing else, we should not have altered our social efficiency thereby in the least. We should be getting out from two to five times as much as before, it is true; but we should also be putting in from two to five times as much. And the incidental losses of energy in commercial combat would be two or five times what they were before. This proportion of true value, in the form of life-support for the Ultimate Consumer, which lies latent within the expanded valuation which the market-system places upon any commodity, has always been less than one hundred per cent. That is to say, there has always in the past been some economic combat going on, some dissipation of human energy in struggle over ownership. But it is only within recent decades, due partly to a political liberty new to the history of the world, and partly to an unprecedented rate of invention, that this economic dis- sipation of energy has assumed a dominant importance in social evolution never attained at any earlier period. But just as, in mechanics or physics, or chemistry, or elec- tricity, we can comprehend phenomena and derive exact, in- telligible laws only when our equations are based upon some ideal one-hundred-per-cent hypothesis, so in this present work, actual economic phenomena must be studied in terms of an ideally perfect organization of economic society. Only, in this case, all that is asked of the imagination, as its picture of the ideally perfect, is nothing more lovely nor unfamiliar than the homely factory-system but a factory-system extended to fill completely our social system that factory-system which has now for a generation or two comprised some nine-tenths of our active population, resulting in the most successful production of material wealth ever known to history. THE EFFICIENCY OF SOCIAL ORGANIZATION 187 We know no better economic system than the factory-system. The ideal one-hundred-per-cent held up in this work consists merely in a frankly complete adoption of what we now have already well tried and zealously approved by every capitalist, employer and man-of -affairs rather than any chimerical dream of either reforming the individual into some heroic superman nearer the angel, or of devising some new and wonderful con- formation of society, the value of which we cannot test until after we have committed ourselves wholly to it. In any such an ideal one-hundred-per-cent factory-system as this, values and valuations would be identical. Everyone would be organized upon the non-owning, salaried or wage-paid, monopoly-of-his-own-job principle of the factory. No energy would be wasted in determining ownerships where ownership is irrelevant and unnecessary. No two nor ten men would be trying to do one man's job. No twenty men would be trying to do what no one wants done. 1 Polling the Economic Community. In attempting to apply statistically to modern society this standard of comparison, the first task is to list accurately all human skill and effort, whether of muscle or brain, currently devoted to the placing in the hands of the Ultimate Consumer of all that which supports his life, or which he consumes in the belief that it supports life. The aggregate of all this human energy constitutes the national, productive factory-system. The aggregate of all this, in money, measures our current national income of value. It is, in aggregate, the minimum or natural cost toward which, as a goal, skill in national or- i Anyone who feels that this brief reference to the factory-system as the ideal, one-hundred-per-cent form of society is too vague can find a more developed picture in the later chapter upon Unemployment, Chapter XX. The distinction to be kept in mind in the meantime, in order to understand the author's position, is that, in the existing factory-system no one factory is self-supporting. It makes only one narrow line of commodities. Its members, in order to live, must ex- change what they produce, through the intricate channels of the open market outside, for what they need to consume. Thus their lives become dependent upon a system far different from the factory-system, and they uffer accordingly. But in Chapter XX is developed a picture of a single factory making everything, under one organization; in which case the members would buy that which they consume under the same system as that under which they now make what they (virtually) sell a situation far different from the present. 188 MODERN ECONOMIC TENDENCIES ganization may hope to reduce market-prices to the Ultimate Consumer. Next is to be measured statistically the skill and effort cur- rently devoted to economic combat over ownership, price, etc., or dissipated indirectly by such ownership, wherever ownership is sought for purposes other than Ultimate Consumption. The aggregate of all this constitutes the national, combative market- system or, more loosely, commercialism. Aggregate Economic Energies. The grand total of these two classifications or aggregates will be the total economic energy put forth by the nation, destined either to conservation or dis- sipation respectively. This grand total measures, for the nation, our total valuation, or retail market-price. Ratio of Valuation to Value. In average for all industries and commodities, the valuation or market-price to the Ultimate Consumer must bear the same proportion to the natural cost that the grand total of these two economic aggregates bears to the first alone. The Sheep and the Goats. Every person must classify, or his activities must be classified or his consumption must be classified, if he consumes in idleness between these two sorts of social economic life, factory-system production or combative commercialism. In many cases the life of an individual is so intimately divided between the two classes that consecutive hours, or even minutes, span the line between. But this fact must never be allowed to confuse us as to the diametrically opposite natures of the two sorts of economic energy. In the fine metabolism of nature the one produces social happiness, and the other unhappiness, as certainly and as accurately as, within the mysterious obscurities of our own bodies, each molecule of food produces life and poison death. In this statistical determination due consideration must be given, of course, to both the poll, or numbers involved, on the one hand, and to relative ability on the other. Proper estimate must be made of the relative weight of brains and brawn. All this will receive attention. The aggregates which we seek are those of human energies, regardless of whether muscular or intellectual. American Economic History. Speaking briefly in anticipa- tion of the further development of our analysis, the tracing of the relative growth of these two contrasted sorts of economic THE EFFICIENCY OF SOCIAL ORGANIZATION 189 energy through recent American history will show that, previous to about the middle of the nineteenth century, the western world had been so pre-occupied with, or exhausted by, political or military combat, or, in America, by struggle against the physical obstacles of a virgin continent, that economic combat, or commercialism, had had no appreciable opportunity to de- velop. But during the last century, and more particularly dur- ing its later decades, comparative political stability and military peace, with the completion of our exploration of the North American continent, have opened opportunity for a brilliant acceleration of invention, resultant in a rapid growth and un- precedented unification of vast populations. The concurrent reaction of this invention, upon the huge population for whose existence it is itself responsible, has re- sulted in a phenomenal growth of systematic (or anarchic) economic combat, or commercialism, so unprecedented as to warrant the characterization of the present era as distinctly the commercial one of all history. It is to trace more accurately this commercial development which is the first task in attempt- ing to understand American history. The chronological limits of this commercial era, it will be admitted, cannot be too rigidly defined. Its beginning, as was noted in Chapter I, really occurred in the eighteenth century, as the result of invention, forming the final cause of the eradica- tion of the last vestiges of the feudal system. Interrupted by the Napoleonic wars, it got a second start during the second quarter of the nineteenth century. Arrested momentarily again by the Prussian wars and our own Civil War of the eighteen- sixties, it rebounded into a marked acceleration throughout the period extending from 1865, say, into the present century. Its final acceleration (previously to the Great European War) was derived from the war between Spain and this country in 1898. Feeding upon the plethora of peace, stimulated by the filling of the American continent with people, and drunken with the absinthe of war-credits, human energy, barred outlet to other sorts of strenuousness, has turned feverishly to the development of commercialism. The modern phenomenon of free economic combat, with all its brilliant trappings and military enthusiasm, has leaped into prominence as a gayly colored but poisonous mushroom springs from rich mold after rain. 190 MODERN ECONOMIC TENDENCIES Commercialism, with its atmosphere of gigantic profits, im- perial luxury and arrogance of success, has proved extremely alluring. Hosts have dropped their productive tasks to hasten into its ranks. Even educated men, specially devoted to social studies, have been unable to perceive its hollow fraud. But a frank and scientific analysis of this mushroom-institution reveals no real nutriment and much virulent poison. As this growth has occurred increasingly, the modern social problem has arisen. With technical aids to production never so efficient in the past, society is yet daily becoming more dis- satisfied with what it has. With means for cheapening the production of commodities such as previous generations could never have imagined, costs and prices are everywhere rising. While the efficiency of the individual is everywhere being magni- fied by experts in education, the efficiency of economic society as a whole is everywhere obviously declining, through neglect of national economic organization. It is this last huge topic which constitutes the real task at hand, in this present historical study of American economic evolution. We shall study it as the most important efficiency involved in modern life. CHAPTER IX THE WEAPONS OF COMMERCIAL COMBAT THE task in hand, it has been explained, is the statistical tracing of the degree to which American institutional relation- ships have been guided into economic inefficiency by the gradual growth of the market-system or commercialism under the stimulus of invention, combined with unprecedented political liberty and topographical freedom. But this task cannot be taken up in detail until a better understanding has been had of the subdivisions of this intricate market or commercial system. This is best attained by a study of the several weapons utilized in commercial warfare, and of the methods of their use. In military combat the manner of campaign is most varied. In one place occurs the headlong charge, in another ambush, in another intrenchment, with counter-sapping, mining and avia- tion; in another persistent siege, or blockade of trade, or espionage, and so on. And in each sort of warfare a different weapon is used. There is no art of peace which is more varied in its accouterments than that of war. Nor is the destruction resultant from war only that inflicted directly upon one combatant by another. Much of it, and usually the most horrid part, falls upon non-combatants and is merely incidental to the main action. Sometimes it is in- tentional, but more often not; but in either case it is equally painful. Both of these statements are equally true of both political and commercial militarism. Indeed, the parallelism between the two will come out continually, the more one studies commercial- ism. In commercial combat the manner in which the fighter or he who profiteers from the fight of others puts the pressure upon the Ultimate Consumer, to force him to disgorge, is most varied. It is often indirect and often unintentional, so far as hitting the Ultimate Consumer is concerned; but it always hits him, nevertheless. 191 192 MODERN ECONOMIC TENDENCIES The instruments utilized in the extortion sweep through a like range of variety. But all of these instruments or methods may be segregated into a few broad classes, as follows : (1) Passive Control of Land, or Site; (2) Passive Control of Appliances, including Buildings, Tools, etc.; (3) Active Control of Appliances, Markets or Avenues of Interchange ; (4) Indirect Waste of Value Incidental to the Direct Combat this last being probably the largest of the list. In analyzing all of these sorts of commercial combat we shall take not the slightest heed of whether the combatants are in- spired by malice, or other immoral impulse, or not ; nor whether they are conscious of doing harm or not. Most of them are doubtless guided by a sincere belief in the righteousness of their acts. Only occasionally does sheer malice rear its head. But to whatever degree these things may or may not be true, we are concerned here not at all in motives, but only in the net economic results to the community as a whole. As a means to prosecuting the analysis these following definitions must be noted: (A) Productivity and Wages All moneys paid to any person for activity in any of the many varied departments of production of life-support, in the factory-system in its broadest sense, as defined above, are properly to be called wages. This idea of wages, it is to be noted, is quite different from the ordinary use of the term, which turns merely upon the fact of money paid for time-effort. But in this present analysis we are interested not at all in the particular form of the work- man's income, whether it be paid by the hour, day, week, month, year, piece or job, nor whether it comes in the form of com- missions, rebates, fees, contracts, etc., nor whether paid outright by an employer or deducted by the man himself (as the pro- prietor of the business) from gross receipts, nor whether it reaches him in a yellow envelope or a white one, nor whether in specie or by check. It is the character of the deed performed, and not of the pay received, which classifies economic energy. The sole determinant THE WEAPONS OF COMMERCIAL COMBAT 193 of true wages is that it shall be received for effort which really aids in the transformation or transportation of the raw material of the field, forest, mine or sea into the hands of its Ultimate Consumer, overcoming only natural and inevitable obstacles, under fully informed and unperturbed guidance by the Ultimate Consumer, expressing itself through the familiar, time-honored factory-system. This use of the word wages is of course different from the ordinary one, in its limits, although in many cases the thing usually called wages is actually true wages, as defined here. But, on the other hand, many payments now called wages cannot be rationally classed, we shall find, with true wages, because contrasted therewith in both origin and effect. More- over, there are many payments now current which no one now thinks of calling wages, yet which must surely be brought in under the term, because they are identical, in both origin and result, with those wages which most truly represent the idea intended by the term, namely : return by society in money-form, to the producer of life-support, of the value of what he pro- duces for society. Thus a retail shop-keeper, for instance, when he really per- forms a service for the Consumer, as is sometimes true, must have his income classed as wages, rather than profits, because it has been earned in supplying life-support to the Ultimate Con- sumer. The fact that he may derive it in the form of a margin between his buying and selling prices makes no difference to its effect upon the community. It is the effect of the effort, and not the form of the pay, which counts in classifying incomes. On the other hand, a printer of advertising-matter, or a ticket-seller, or a typist writing negotiative letters, or the usual book-keeper, must have his income and energy classed as com- mercial, rather than under wages, because it has been earned in aiding commercial combat. The fact that it may have been paid to him by an employer in the form of time-wages has nothing to do with its effect upon society. Real versus Apparent Demand. Incidentally to the deter- mination of what is wages and what is not, it must be noted that the Consumer, under the present system, apparently "de- mands," as he buys, a lot of things and services which are con- demned herein as of no use to him. But this he does, not because he really desires these things, nor because he is con- 194 MODERN ECONOMIC TENDENCIES scious of offering money for them, but because he is by no means fully informed as to how his money is spent for him by the dealer who handles it. Indeed, this destination of his money is carefully concealed, and this concealment is protected by law. Or, even if the Consumer suspects undesired and unauthor- ized uses of his money by the dealer who acts as his agent, he lacks all power to stop the procedure. For his freedom of choice in the open market, under "free" competition (of which he is so jealously proud), amounts only to a choice between several such dealers, all of whom are doing substantially the same thing. Each is virtually like all the rest in his charging the Consumer for a lot of expenses for commercial competition which the latter in no wise desires, and which do the Consumer no good, but rather harm, and which the Consumer has never authorized. The Consumer normally does not know what he is buying, nor how it was made or procured. Even those factories which are most open for inspection use all manner of materials re- garding the natural cost or the purity of which even the factories themselves are ignorant; or, if informed, they are as helpless for reform as is the Ultimate Consumer. Virtually all for which they can be held responsible is what happens on their own premises. Under commercial competition they either must buy cheap or else go out of the business. While a minority of factories may be able to evade this al- ternative, through the possession of unusual skill or energy, yet over the heads of the majority it has always held sway as immutably as the law of gravitation. The one formula which has never been of the slightest use in reforming anything is that calling upon the weaker members of the race to be as strong as the most successful. Civilization consists rather in protecting the weak, that they may grow in strength. But even where both Consumer and manufacturer feel assured of the purity of materials, the former may rest assured of a gross adulteration of price by the manufacturer, by his inclusion within it of various costs of commercial combat, both in buying materials and in selling the product. The factory may throw open to the public its work-rooms, but it never does its ledgers ! The Consumer knows with certainty only one thing about everything he buys, provided he inquires at all, and that is that all of his competing purveyors are charging him, over and above THE WEAPONS OF COMMERCIAL COMBAT 195 the natural cost of what he desires, the unnatural and unneces- sary costs of a battle between themselves. Political versus Economic Government. This sort of adul- teration of the dollar the political government is constitution- ally powerless to prevent. Indeed, there exists nowhere upon earth any government possessing the authority to prevent it. So far as the author is aware, no such form of government has ever been even suggested. This is the first definite item of fact, among many which may be urged later, in support of the statement already made that we are not governed, to-day, by our political government, but by our economic institutions and traditions. These institu- tions we may be able to alter, but not through the functions of our political government. (B) Commercialism and Diluits When one turns from productive wages to the contrasted moneys and energies of the commercial field, new terms become necessary. So undesirable is the coining of strange words that this entire section of the book was written several times over, using only the familiar word "profits" to designate these moneys. But the result was hopeless confusion. The word profits has now long been used in the commercial world so loosely that it has lost all accuracy of force or meaning. However carefully it might be re-defined in advance in this book, there would surely arise situations wherein the reader's previously fixed ideas as to profits would lead to misunderstanding. Moreover, the situation demands at least two new terms, to indicate two novel distinctions in economic argument. If the word profits were retained for one of these, the reader would inevitably attach to the new term used for the other a con- trast with what he had always had in mind as profits, whatever that might be. Therefore the only way to insure a distinct understanding of these new and more accurate ideas is to use two novel names for them. Although these two terms are to cover economic quantities which largely consist of the many different things which are commonly called profits, yet the aim is to distinguish from the common idea of profits. 196 MODERN ECONOMIC TENDENCIES DiluitS. For all the different sorts of income which are not wages as defined above, therefore, when considered in aggregate, will be used the word diluits. The word diluits is based upon the same Latin derivation as diluents, and is intended to convey the same significance, merely the termination being altered into similitude with profits. For it will be established later that all moneys and efforts here classified as diluits serve merely to dilute the pur- chasing-power of the Consumer's every dollar, wherever through- out the land it may be spent, by whatever sort of a spender, or for whatever sort of goods or services. This is the basic idea with which the reader is to step from our illustration of the factory imaginably permeated with own- ership-in-industry into the field of money as a measure of human energy. Under the broad heading of] diluits of commercialism come these following sub-classifications of income: ( 1 ) Rent. The money extracted from the Consumer through the control of Land or more properly, Site is Rent. The word rent is now commonly used to include income de- rived from the ownership of buildings, as well as land; but this is improper. Income from buildings should properly be called interest. This is so because buildings are a fruit of labor, whereas site is not. Income from ownership of the fruits of labor classifies as interest, in contradistinction with rent as income from the ownership of site. In its effect upon society in general, and upon the Ultimate Consumer in particular, this distinction between rent and in- terest possesses no weight whatever. The two are equally burdensome and equally unjust. But because the single-tax doctrines have given a prominence to this distinction which we feel it does not deserve, it is important to have it at least ac- curately defined in mind. (2) Interest and Dividends. The money extracted from the Ultimate Consumer through the control of artificial appliances, including buildings as well as tools, etc., will be called interest or dividends indiscriminately. In the commercial world there is a technical difference be- tween interest and dividends, but this is of no consequence in a scientific analysis made from the standpoint of the Consumer. Both interest and dividends are squeezed from the Consumer THE WEAPONS OF COMMERCIAL COMBAT 197 by a pressure of passive ownership of things made by man and needed in industry. They stand in contradistinction to rent, on the one hand, which is extracted by passive control of a site originally made valuable by God,, and enhanced by the efforts of society as a whole; and in further contradistinction, on the other hand, with value extracted from the Consumer by the active exertions of commercial combat a form of economic dissipation to receive a name below. The term dividends as used in the commercial world is broader than mere interest, for dividends are in actuality often paid from funds accumulated through rent, interest, profits and surplus together. But since dividends are justified in the eyes of the commercial world by their percentage-relation to capital invested, quite in parallel and in fluid equilibrium with interest, the term will be used here indiscriminately with interest. It will be noted that this classification ignores any idea that interest is paid by the borrower. This is intentional. The borrower is merely an agent of the Ultimate Consumer. He is an unauthorized agent, it is true ; but that makes him no less an agent. For the Ultimate Consumer is the only person who can, and the only one who actually does, pay all interest and dividends. The borrower is not possibly a source of economic energy, as is the Consumer. He might become one by turning Consumer, or he might become a source of biological energy by turning producer. But as a mere borrower he is neither. Therefore he cannot pay interest. Not paying, he has no rightful authority. (3) Entropits. The moneys extracted from the Ultimate Consumer by the Active Control of Appliances, Markets or Op- portunities for Interchange will be called entropits. That is to say, whereas the terms rent and interest cover destructive passivity in owner ship-in-industry, the term entropits covers destructive, dissipative activity in ownership-in-industry. This word entropits has been coined from the same Greek base as the word entropy, which was invented by Professor Clausius in 1865 to cover what proved later to be the dis- gregation of the molecule, in heat action, and the dissipation of the energy present, by such processes as friction, impact, con- duction or radiation. The terminal syllable has been altered into similitude with the word profit. 198 MODERN ECONOMIC TENDENCIES All of these processes are antagonistic and dissipative in their nature, in contradistinction to the conservative processes upon which efficiency in thermodynamic action (the production of power from heat) depends. They are all active in their nature. Therefore they correspond scientifically with the dissipation of energy, in the economic field, in commercial friction and im- pact over ownership-in-industry. The idea of entropits parallels roughly what is commonly known as gross profits. It excludes, however, those things com- monly classed as profits which have been shown above to be really wages, rent or interest. The distinguishing character- istic of entropits is that it covers only moneys received for activity concerned with price, ownership or opportunity for interchange , as distinguished on the one hand from wages received for activity in production, and on the other from in- terest derived from passivity in ownership-in-industry. As with the other sorts of income, the classification has nothing to do with the form of payment, nor with any distinct funds. A single check or pay-envelope may include portions of wages, rent, interest and entropits, intermingled together, with no book-keeper sufficiently skilled to tell one from the other. But in the fine metabolism of economic society the contrasted human energies represented by each of these are distinguished, as to result upon society, as unerringly as the walls of the stomach distinguish the molecules of food from those of poison, and both from inert foreign matter. (3a) Costs of Doing Business. The term entropits is a gross one, and includes the moneys paid, often in the form of wages, to hirelings who aid the commercialist in his combat, but who have no share in the risk or reward. Such moneys are com- monly called the costs of doing business although this last, as commonly used, normally includes rent and interest also. Here the term "cost of doing business" will be reserved, when accuracy is of importance, to mean only wages or salaries paid for active aid in commercial combat. After such costs have been deducted, entropits becomes our scientific parallel with what is commonly called net profits. All of these distinctions will become clear if it be kept in mind that we are no longer attempting to classify forms of income itself, which was the self-imposed task of the earlier THE WEAPONS OF COMMERCIAL COMBAT 199 economists, but forms of social function by which the income is acquired. The distinction between gross entropits and net profits is not an important one in effect, but merely for clarity of thought. Whether the moneys extracted from the Ultimate Consumer by commercial impact and friction be paid out as wages, to hire- lings whose productive abilities have been diverted to waste by the commercialist-employer, or remain in the latter's hands as net profits, is all one to society as a whole. In either case they constitute sheer waste, and serve only to dilute the pur- chasing-power of the Consumer's dollar. Indeed, some of the enterprises most burdensome to the Con- sumer make little or no net profits. This is true of all those businesses which, as reported by their owners, have all their profits eaten up in competition. Some of the current leaks of purchasing-power which are most burdensome to the poor, on the other hand, take the form of a distribution of wages to workers who are as poor and underpaid as are those whom their work impoverishes. Such workers, indeed, impoverish themselves. This is largely true of such wage-earners as stenographers, bookkeepers and office-cleaning women, for instance, who aid the commercial fighters. This distinction between net entropits and cost of doing business bears as heavily upon the issue raised by orthodox socialism as does that raised by the single-tax doctrines upon the distinction between rent and interest. The socialists lay all blame for poverty upon capitalism. Yet, as a matter of fact, a large and increasing portion of it rests upon wage-earners. To be sure, these wage-earners may be morally guiltless, be- cause helpless to alter the situation. But so also must the capitalists appear to be, the more carefully one examines the situation. This classification of commercial incomes and energies, being unfamiliar, needs further examination in detail. Rent. At the basis of every economic system lies the quest- tion of rent, the plan by which society distributes to its mem- bers various sites, of divers values, for their use and enjoyment. For before one may enter the questions which attach to the equities of other forms of wealth, sites, with their relative advantages and disadvantages, form the first threshold to pro- 200 MODERN ECONOMIC TENDENCIES ductive opportunity of any sort whatever. It is the obviousness of this fact which has led to the prominence, in all agitation for reform, of the land-question. It is this which explains the wide favor of the single-tax program. Now sites are unquestionably the creation of God, as to topography, and of society as to their environment. Therefore, as a matter of obvious equity, no one may lay claim to owner- ship of any site without both blasphemy against God and treason against society. For instance, the rental value which Manhattan Island pos- sessed in Henry Hudson's time was created by God, and so obviously belongs to society as a whole. That which it has acquired since then is due to the activities of society as a whole, and therefore belongs to society as a whole. The use of a site, as of a tool in a factory, must naturally be reserved to the individual, in order that productive enter- prise may proceed. But the current value thereof, as dis- tinguished from the user's wages, due to time-effort, he must render to society, as true, natural rent. What, from this point of view, is the natural, the ideal, the "hundred-per-cent" nature of rent? Further, have we gained or lost by our departure from it in our inheritance and main- tenance of the present system of private ownership in land? Since society as a whole has inherited the right to all natural advantage of every site, and has actually created every artificial advantage, all payments of rent must be made, in effect, to society as a whole. As to the amounts of such payments, they would naturally be fixed, under any system, as apparently they are now, by equilibrium between supply and demand, determined by auction from time to time. Under any just system simple precautions will be taken against undue hardship or injustice in evicting a holding tenant. But this once said, the land must always be held available for the needs of society's growth, and the rights of any tenant subservient to the interests of society as a whole. These payments of rent, made to and expended for society as a unit, would most naturally go toward public service or improvements. But however this might be in detail, in effect it must amount to a distribution of the whole to all citizens, each citizen receiving his share upon the basis of that equality THE WEAPONS OF COMMERCIAL COMBAT 201 before the state which has long been held and proven to be foundation of all our liberties. Thus the net effect of this natural or hundred-per-cent system of rent would be that each citizen would enjoy an equal income from rent. His outgo might be what he pleased, but his income would be fixed, so far as true rent is concerned., and equal to that of all his neighbors. Hence every citizen electing to enjoy a site above the average in productivity would pay more rent to the community than he received. He would thus pay net rent. But each person electing to enjoy a site of less than the average productivity, on the other hand, would pay less rent than he received. He would therefore enjoy, in effect, an income of net rent, received in some form of life-support or another, if not in money. Receipt and Payment of Rent. Now what, as a mere ques- tion of pecuniary gain rather than of equity, is the position of the average citizen, under our present system of rent, in contrast with this natural, hundred-per-cent system? Take for illustration the common case of a family in medium circum- stances which enjoys a moderate income of wages or salary, helped out by rent or interest or dividends from the ownership of a small property for the illustration applies equally to any of these three. There is no class of society which opposes so bitterly as this any plan for the abolition of rent, interest or dividends. It can see only that it loses something. The fact that it might gain far more than it loses never "gets through." Yet what is the actual, net fact? Such a family, each time it spends a dollar across the shop-counter, is paying rent, in- terest and dividends upon untold valuations and intricacies of site, building and appliance, in factory, warehouse, railway, etc. Indeed, a major fraction of the family's entire income must go to pay these tributes to commercial warfare, including profits and contributive costs, which do it no atom of good. Reserving figures for later use, it may be said that if all these useless features of commercial cost were cut out this family could buy and enjoy at least twice as much as now, on wages or salary alone, as compared with gross income, including rent received, now. But the advocate of commercialism never stops to think that far. 202 MODERN ECONOMIC TENDENCIES Inertia. The author knows of no school of social philosophy which urges that the present plan of private ownership of land-valuations offers any advantages over the natural one. It has been inherited without question from the past. It stays solely as the guest of mental and social inertia. The splendid gospel as to the nature of rent which was preached forty years ago by Henry George has received wide academic debate, it is true, and its sound core has furnished seed which has rooted deeply in American public opinion. An important proportion of all thinking people are single-taxers. But the movement still remains academic in form. Yet Henry George was deeply in error in ascribing all economic ills to the private ownership of land alone, and this error is now generally recognized in liberal circles. For own- ership in land is in no wise demarked from that of the other features needed for industry. Some of the heaviest and most unnatural burdens borne by the Consumer come from activities which make little or no use of land, and which would remain unaffected by any conceivable reform in rent. Capitalism can be transferred from ownership of land to other ownership-in- industry in perfect fluidity, without dulling in the least its effectiveness against the interests of the Ultimate Consumer. Land-titles. Historically the original titles to land, both here and in Europe, go back to claims resting upon pure combat, either military or commercial. The lands were not only won by combat, but they have been held ever since for that same purpose, in effect. To a degree, it is true, the titles to farm-lands in this country (if we overlook Indian rights) go back to squatter or home- stead rights. But the bulk of such rights were secured from the government for speculative rather than productive purposes. Much of this land has since been absorbed into towns and cities, and has undergone transfer after transfer, each adding its increment of valuation, each converting more completely the spirit of the title from productive to combative. So remote and obscure, indeed, is the nature of the origin of any title to land that any effort at justifying present incomes on the basis of ancient equities is not worthy of serious consideration. But whatever might be such embryonic equities of these titles, the growth of land-values since then is much like that of a picture, for instance, which the original painter may have sold THE WEAPONS OF COMMERCIAL COMBAT 203 for ten dollars, in order to keep his pot boiling, but which society ultimately appraises at ten thousand usually after the painter is dead. Society lauds the painter as a great artist, accrediting him with contribution to the highest advance of civilization. But it proves itself far from civilized, at the same time, by inconsistently and unjustly allowing the $9990 which he created to remain the lawful property of the various art- dealers who had happened to speculate upon the value of the painting since its creation. Society forgets that its delay, or stupidity, or grossness of taste, in appraising the picture can never affect the fact that, whatever may prove ultimately to be its value, that value was created by the painter. Society must consider itself the cus- todian of that value until it is paid. It owes it to the painter far more literally than it owes the rent on its art-museums. It is now an anarchist in fact, in its brutal lack of organized attitude toward the painter, far more than if it refused to pay its rent. It cannot pose as the patron of art in any effective degree until it first guarantees to the artist the recognized value of what he has produced. Now in the case of real estate it is society which is the creator, rather than any individual. In allowing private titles to land to continue, while society is daily investing its labor and brains in making those sites more valuable, it is defrauding itself as foolishly as if a poor painter should encourage the speculation in art which robs him of his proper pay. The curators of both our artistic creations and our land-values should be non-owning, salaried public agents, reserving in each case the increment of all ultimate appraisals to the original creator to the individual in the case of the painting, and to society as a whole in the case of the land. CHAPTER X INTEREST AND DIVIDENDS TURNING now to that particular weapon of commercial combat which is herein to be known as interest, but which in the commercial world often masquerades under the name of dividends, we encounter an institution which has risen to such transcendent importance in the economic history of America that it demands at least a special chapter of its own. There is no other topic of such supreme import to modern society as the nature of interest. There is no other one feature of the social organism which handles anything like the current volume of wealth as this, nor which guides toward happiness or unhappiness so many lives. There is no other one institution excepting possibly the twin brother of interest, commercial competition which forms such a menacing sword of Damocles as this, suspended as by a hair above our political government and our national destiny. Therefore no treatise on political economy may lay claim to authority which does not debate at the outset this question of the nature of interest, doing so incisively as to the interests of society as a whole. No public question can be approached intelligently without a full comprehension of its essentials. No theorizing of any sort is competent unless it recognizes interest and competition as together forming the two legs upon which stalks, just now, our entire commercial world-civilization to its fate. No apology is necessary, therefore, for detaining the -reader with a careful review of the nature of interest, before proceeding further with the historical outline of America's economic progress. Interest versus Dividends. For the present, the minor differ- ences between interest on bonds, commercial paper or personal loans, as contrasted with dividends on stock, will be overlooked. The same remark applies to some so-called profits, which include wrongly sums which are in reality interest. Whatever the 204 INTEREST AND DIVIDENDS 205 name, the essential character of interest is that it is money paid by the Ultimate Consumer (and not by the borrower) for the privilege of use of certain artificial appliances of indus- try, such as buildings, tools, railways, stores of material, etc., the legal ownership of which is vested in certain individuals. These payments are never, as things go now, made directly by the Ultimate Consumer, who alone pays all interest, to the owner of the appliances. The appliances are used by manu- facturers or middlemen or retailers who supply the Ultimate Consumer, and who act as his agent in paying the tax called interest to the owner. This tax is then charged up to the Consumer in the retail-price of the goods produced, and col- lected from him across the retail shop-counter. It is to be noted that in every such case the owner of the appliances not only makes no use of them himself, but that he has no interest nor pleasure in that ownership, except that of receiving the tax called interest or dividends. He invests in- differently in a South African diamond-mine, a Cuban cigar- factory or an American railway; in potatoes, gasoline or cos- metics. With him there is not the slightest pretense of any craftsman's interest, Consumer's desire, collector's taste nor any other human passion connected with the tangible property itself. None is expected. The sane investor asks himself only two questions concerning any proposed investment: (1) What interest will it pay? (2) What are the chances for getting my principal back again ? There is no aspect of human life so utterly bloodless as that of commercial investment. There has hardly been a writer, from Chaucer to Charles Dickens, who felt the human pulse and whose words have survived for that reason, who did not despise commercialism and interest from the bottom of his heart. It is true that there is a minority of investors, such as officials of corporations, who carry investment in the securities of their own corporation, in whose work they may be psychologically as well as financially interested. But this is merely because such securities fall better within their judgment as to worth than do strange ones. It is in just such cases, indeed, that the contrast between the psychological interest of the workman loving his work, and 206 MODERN ECONOMIC TENDENCIES the financial interest of the owner earing for nothing except revenue, becomes most impressive, when both are embodied within the same individual. For it is the former alone, which receives inadequate reward and enjoys virtually no outlet, which is of value to society. The latter, which is valueless or de- structive to society, is the only one amply rewarded by society. Expansion of Facilities. The community is constantly grow- ing in population, territory, invention, wealth, intricacy and standard of living. All of these sorts of expansion are con- tinually demanding a corresponding extension of material ap- pliances and facilities for industry. But at any point where the need for such further extension arises, the question always arises with it: How can the Consumers needing the extension secure the materials and labor requisite therefor ? In the factory-system the answer to this question is always simple. All that is needed is a requisition upon the stock-room. In the factory-system the maintenance of an accumulation of surplus materials is always a department as important as any other. These materials are held subject to requisition by the Central Office in behalf of any man who, as that Office decides, should use the materials for making some extension useful to the factory-community. So soon as separate owner- ship of the materials is eliminated the problem resolves itself into beautiful simplicity. But modern society does not know enough to maintain its own Stock Room and Central Office, nor to eliminate separate ownership-in-industry. So, when the Consumer wishes an ex- tension of facilities he is told to apply to the financier, who will loan him the paper equivalent of ownership of the needed materials, taxing him interest until the loan is repaid. As in- cidental props to this apparently simple plan has grown up that entire fabric of promoters, bankers, brokers, clerks, ex- changes, etc., known as the financial system. All this is inexcusably cumbrous and expensive, in comparison with the simpler one of the factory-system, which makes no paper loan and charges no interest, but advances the materials upon untaxed credit. Yet this simple statement of the financial method just given, so obviously inferior to the factory-system method of financing, is so much better than the reality in the commercial world that it is inadequate as more than a starter on our investigation. INTEREST AND DIVIDENDS 207 Initiative. For in the actual world the Ultimate Consumer, who pays all the bills and who is theoretically supposed to take the initiative in expressing desire for that for which he is to pay, is never permitted by the commercialists to enjoy that prerogative, of being the first to ask for the loan. Instead, it is the business of the financier, as a shrewd businessman, to foresee the need of the Consumer for the extension in question, and then to corral in advance the means for its gratification. The man who, witnessing a shipwreck off-shore, should pre- pare a stock of coffee and sandwiches against the drifting in of half-dead survivors, to whom they were to be sold at a dollar a plate, would be actuated by motives which, in their economic aspect, are identical with those of the shrewd financier who secures a franchise, or establishes a market, for facilities which he knows the community will soon have to have or die of congestion. Morally the two cases are different only because society is able to see all the factors in the case of the ship- wreck, but becomes confused by the intricacy of fact in the case of the franchise, charter or "vested interest." But in social effect the two cases are peas out of one pod. The pressure upon sheer life and death involved in the need of a great, congested city for transit-facilities, not to mention food, shelter, clothing and amusement the last being one of the real necessaries of life is no whit less tragic, however less obvious, than that of shipwrecked seamen. Yet society, in its blind loyalty to a commercial system which it never de- liberately adopted, and which it doesn't know why it owns, offers its richest premiums for the encouragement of just this spirit of exploiting the shipwrecked. And it cannot stop it until it prohibits all ownership-in-industry. It is admittedly true that the work of the financier or pro- moter requires foresight and energy. So does that of the life- saver on the beach, who does the exact opposite from exploiting the shipwrecked. But so also does piracy. So also does that of the discoverers in medical and surgical science, in astronomy, physics or chemistry, in legislation or jurisprudence. It might even be suggested that so also does that of the truly scientific sociologist. All of these most diverse and contrasted occupations require foresight, energy, skill, industry and force of character. But the energy or the like going into an enterprise is no measure 208 MODERN ECONOMIC TENDENCIES at all of its value to society. It is what comes out which de- termines that. Yet none of these later vocations in the list do v/e reward with huge, unaccounted ownerships, fluctuating hourly in Wall Street, exacting tribute from the Ultimate Consumers for life, and then inheritable for generation after generation. We do not need to do so. No department of life is making more rapid progress, or maintains its routine more efficiently, than these wholesome vocations paid only by salary or wages and often by not much of that. Commercialism, which alone is making greater apparent progress, is growing more rapidly only in an undesirable aspect. Even life-saving on the beach was never done efficiently until it was removed from the field of chance adventure for indeterminate profit, and was placed upon a salaried basis entrusted no longer either to the unre- liable impulses of altruism or to the back-acting inducements of commercialism, but organized simply as one department of our vast national factory-system. Tradition. Let us face this issue honestly. In the contrast between commercial and scientific rewards we are dealing with no basic, unalterable distinction whatever. All is arbitrary tradition. We might just as easily reward our promoters with salaries and our scientists with dividends, if we chose. The only difference would be that then we should lose a lot of our present commercial "initiative/' without which we should be far better off, and a lot of science without which we should be far worse off. All through the industrial world the situation is the same in essential, however differing in detail. The investments of the capitalists everywhere reveal themselves, upon examination, as mere forestallings of the public need, made deliberately as a hold-up and sanctioned only by custom. These investments are never requested by the public, but always by the investor. The truth of this does not depend upon the size of the enterprise. When a new grocery-store is to be installed, for instance, those who are to support it financially, the Ultimate Consumers, are never consulted first, any more than when it is a railway or an oil-refinery which is involved. The active, expensive scramble for railway and other franchises, in the earlier days when there were still franchises to be given away, stands in parallel with the present clamor INTEREST AND DIVIDENDS 209 in Wall Street and before our public commissions for continual expansion of the opportunities for investment in industrial enterprises, in the refunding of railway or other securities, or what not. In the general country, outside of the financial centers, the constant multiplication of small shops, new cor- porations, expanding valuations of dwellings, etc., performs the same function more diffused in form, but greater in aggregate volume. There is not a fact sticking out of the whole financial field which warrants the idea that investment is regarded by financiers as a burden. There is none so prominent as the fact that investment is everywhere regarded as an opportunity, everywhere eagerly even frantically sought. Commercial Propaganda. The doctrine common in the care- less philosophy of the street, and found even in the responsible lecture-halls of our universities, that he who pays interest ever begs the investor to invest, is -one impossible of momentary defense. This doctrine prevails only because it is to the interest of the commercial world not to have it attacked. Their instilla- tion of such doctrine into the people, through every channel influenced by wealth, is just as insincere in its origin or as unhappy in its self-delusion, if you prefer and in either case as deplorable in its effect as is that taught the German people by the Prussian military oligarchy. The capitalist, it is true, is constantly under importunity from the borrower or promoter to invest; but this is only because it is not the borrower nor the promoter who pays the interest. It is the Ultimate Consumer alone, for whom neither the borrower nor the promoter is acting as an authorized agent, who pays. Never would the borrower borrow, nor the pro- moter promote, if he did not expect the Ultimate Consumer to more than reimburse him for his interest-payments. Everyone possessing the leisure and education of a capitalist knows this. Risk in Commercialism. As to the speculative risk assumed by the investor or promoter, in thus anticipating the needs of the community, that belongs in the same class with the risk incurred by the speculator in art, or anything else, or the in- vestor in a ship to be used for privateering or piracy. No sane nor really civilized community would ever permit any individual to assume that risk. The risk taken by the commercialist is exactly that, for instance, of the privateer in national defense 210 MODERN ECONOMIC TENDENCIES against a foreign foe picturesque, extremely profitable (upon the average) to the privateer, and supposedly patriotic; but actually harmful and dangerous to society, and therefore dis- loyal in effect. When governments were so poorly organized that adequate navies were unknown, privateering was permitted as a neces- sity. In those days the ships of Drake and Hawkins, which have handed down to us our highest ideals of sailor-manhood, fought just as bravely, and perhaps more efficiently, than those of the royal navy of that day. But this was not because privateering is inherently more efficient than a navy, but be- cause then the navy was an undeveloped, unappreciated and neglected institution, the possibilities of which were quite mis- understood. So long as privateering was allowed at all, its glittering allurements were sure to deceive thus the public mind. But we are now far enough away from the blinding glare of such profits to realize that the navy was then poor not because it was royal, but because the stupidity of that day quite failed to comprehend the possibilities of a navy so well developed that no privateer could dream of rivaling it. For Drake and Hawkins, with their tubby little sailing-ships, represented al- most the highest possibilities of privateering, while the furthest fruits of the governmental organization of our defense by sea we have not yet attained in our most magnificent battleships. To modern notions of social development and national sta- bility, privateering, when not sheer piracy, was so impotent a reliance in the face of attack as to constitute treason in effect. The "Invincible" Spanish Armada, of the sixteenth century, threatened not only England's freedom to trade upon the high seas, but also the sole nucleus of political liberty then remain- ing upon the soil of Europe, in the English system of that day. The imbecility of government, such as that of Queen Elizabeth, which allowed it to enter the English Channel unhindered by any organized preparedness in London, and opposed only by the gallant privateers of various small channel-ports, is to-day inconceivable. It certainly amounted to treason to civilization. We now deem such imbecility characteristic of an age far more crude and stupid than our own shrewd times. Yet in our present stress of internal economic affairs we insist upon an exactly parallel reliance upon privateering for profit, as INTEREST AND DIVIDENDS 211 our sole defense against the menace of impending famine and high prices that menace which history has proven, time and again, to be far more portentous of national disaster and unspeakable human misery than has been any external attack by foreign foe. The crisis which resulted from this policy in 1588, when Elizabeth's throne trembled for days in hazardous balance, may make picturesque reading for future generations. But we who thrill so pleasantly over the spectacle of risk, heroism, noise and color now recognize the situation too plainly as a crazy hell of disorganization, irresponsibility and inefficiency to call it a real civilization. We now see plainly that the privateers should never for a moment have been permitted to assume the risk not the risk to themselves, ~but that to the nation and to civilization. Would to heaven that we had the same clarity of vision concerning our modern commercial privateers ! Initiative and Expansion in the Factory-system. For the natural answer to all this modern anarchy of commercial investment, as our reliance for securing extensions of facilities with its grave danger that, under it, we may not even be able to maintain our present rate of production is nothing more radical nor fanciful than the mere extension of the well tried factory-system, which has so long comprised over nine-tenths of the population, to include all the rest. Every factory main- tains a stock of surplus material. If the factory-system were co-extensive with the nation this stock would include all food, clothing and every conceivable line of factory-product, from stove-bolts to beans, and all would be publicly available for the making of extensions. All would be available without asking favor of a single capitalist, nor incurring a dollar of liability for future interest- payments. Whatever risk of loss might be involved in building extensions, the value of which only the future could reveal, it would fall, like the gains, upon the community as a whole. More than that, the whole of this loss would "be visible when the supplies were requisitioned. No future failure could add to them. No commercial margins would have to be added. No unpaid loans could arise in the future, demanding repay- ment out of other enterprises. No unpaid, unpayable debts would be handed down to posterity. There might be disap- pointment, but. there never could be unexpected loss. 212 MODERN ECONOMIC TENDENCIES Do you reply: "Such public opportunity would develop gigantic graft"? Kemember, then, that that is exactly what they said in Elizabeth's day concerning a royal navy and for the same reason. For then they did not need to predict graft. It was already there, upon a scale to shame modern pikers! The navy was horribly corrupt. But that fact had no bearing whatever upon any comparison between the navy, as a system, and privateering. We see 'now that it had none then. It has none to-day. Then the navy was corrupt because of the privateering. When privateers were permitted to make habitually such huge for- tunes, no one could afford to be a seaman without making money out of his calling. Although it took time to free the navy of corruption, the abolition of privateering was a necessary first step, not a final result. This fact the English chose to learn, in their dogged English way, through generations of hideously cruel history. We Americans pride ourselves upon being more facile in learning, without waiting for hard experience of our own to teach us. Actual Extensions of Facilities. For it must be remembered, as to the modern economic problem, that all extensions of facilities are now actually made in the face of two unalterable facts. These are that ( 1 ) The extensions are achieved, even now, under commercialism, not by any drafts against the future, so far as materials are concerned, but only by drafts upon our actual, existing accumulations of factory -surplus of material, wherever they may be or whoever may own them. No con- ceivable system of finance or credit can (immediately and of itself) possibly expand these material resources by a single brick or bolt although a faulty system may tie up and render useless many a brick and bolt already there. Our problem, whenever we may need an extension, is always merely to find access to the material now lying ready. (2) The second fact is that, whenever these same accumula- tions of material are wanted for an extension of the facilities of the same factory which produced them, no loan is executed, no securities are issued and no interest-tax is collected. All that is needed is a non-interest-bearing factory-requisition. Or, if it be true that the former cumbrous procedure is occasionally followed, it is not for the sake of procuring the INTEREST AND DIVIDENDS 213 materials, but for the privilege of collecting from the Ultimate Consumer the interest upon the indebtedness thus artificially created. 1 But normally no interest is ever charged by any de- partment or stock-room of any factory for the loan of supplies or services needed by some other department. The reason for this is simple. Any such a charge would come back immediately upon the factory as a whole, because it is a unit-organization of ownership. Any such charge would be absurd and useless. Whenever dividends or interest are collected it must, in order to have any point at all, be done across a gap in ownership. Dividends or interest are merely evidence of discontinuity of ownership, permitted unwisely in the face of a continuity of need. They are no evidence at all of service rendered. Capital versus Capitalism. This stock-room accumulation of materials and spare service which forms a part of every factory, and which in aggregate constitutes society's sole resource for material growth, is purely capital. It is the only thing which is capital. It is the only thing needed by any manufacturing community for the extension of its facilities in any direction whatever. Yet before this accumulation may become available for use there must be issued from the Central Office certain paper orders, called requisitions. These requisitions constitute the prototype, in the pure factory-system, of all that variety of papers which are called in the commercial world "interest- bearing securities/' "commercial paper," etc. They constitute the circulating-medium of the factory-system. They are the only natural credit-instruments and before this book is finished the instruments for the transmission of fluid credit will be seen to be the most important and vital of all factors for social metabolism and stability. All such paper requisitions, if they draw no interest, as in the actual factory, are mere representations of real capital for convenience of record. They themselves are worthless in nego- tiation. Their proper function fluidity of transmission of credit they perform perfectly. But that is all. They possess no inherent tendency to expand. They do not dominate nor perturb life in any way. They merely aid it. But if these scraps of paper draw interest, as is always true 1 Note the case of the Kansas City Union Depot, cited on page 279. 214 MODERN ECONOMIC TENDENCIES in the commercial world, then they become a very different matter indeed. Because they carry with them the special privilege of exacting the tribute called interest, they nov/ be- come actively negotiable. For the same reason they possess an irresistible tendency to expand in volume. For these reasons they now exercise an important a dominant influence upon the fluidity of our credit, the purchasing- power of our money, our hiring-power for labor, and many other things. Therefore they deserve a name to themselves. They have ceased merely to represent capital, as was the pure function of the factory-requisitions. They were never capital itself. Yet they have become our main reliance as a circulating-medium. Therefore they are now called capitalism. But capitalism, it must never be forgotten, is an institution distinct from and contrasted with true capital in every conceivable way. In our actual factory-system, as now directed by our ablest businessmen, these paper requisitions upon the nation's surplus stock of material and service never draw interest. This is because the sole object of their issue, under that system, is interchange and increase in production. But in the commercial world these papers always draw in- terest. This is because virtually the sole reason for their issue, under that system, is the extraction of interest from the Ultimate Consumer. It is true that ostensibly the issue of commercial paper is for the purpose of facilitating productive effort. To some slight degree, and so far as the real commercial purpose of the paper interest is not interfered with, they do facilitate productive activity. But the latter function is quite secondary to the former. Anyone who doubts it needs only to note that securities which fail to draw interest cannot be issued or cannot stay issued. It is one of the heaviest indictments against the commercial system that this is so that no enterprise may possibly be launched or continued, to-day, unless it is capable, in addition to paying all natural expenses and serving the community, of paying a substantial return upon its securities in interest or dividends. This situation has been explained at length in order to an- ticipate and negative the argument, so common on the street INTEREST AND DIVIDENDS 215 and in university-economics, that capitalism and interest are essential prerequisites to the expansion of facilities. This, indeed, his nothing to do with the matter, except as a plausible excuse for the enjoyment of unearned income. Not only do the capitalists themselves systematically ignore, in their rela- tions with the public, that system for extending facilities (without the burden of interest-payments) which they them- selves enforce within every factory which they control, but they expend money and effort freely in resisting strenuously every effort of the public to have the non-interest-burdened factory-system adopted, in substitution for the interest-laden commercial one. Theories of Interest. When one seeks an explanation of the nature of interest in the economic text-books one is always re- ferred back to the original history of the investment. In this policy we concur only that we shall try to get our history true to fact. In this reduction to origin all the current theories of interest (and there are several, none of them accepted as authoritative) may be reduced to two classes. One of these, which we shall call the Walker theory, although not confining ourselves to the language of Walker, is based upon the nature of the effort which produced the accumulation. The other, which may be called the Fisher theory, is based upon the time-factor involved in the method of use of the capitalism. Both theories start with the idea that capitalism begins in a surplus productive power on the part of a true producer, over his current needs for life-support ; which surplus power, coupled with frugality, enables the skilled, industrious and thrifty pro- ducer to accumulate a material surplus. This surplus he loans to the unthrifty producer, who can better afford to pay him interest than to forego the use of the capital. Both theories, too, are content to argue the equity of interest from the standpoint of borrower and lender alone. They quite overlook the vital concern which society, as a whole, must have in any contract between these two. Yet society is a third contracting-party in questions of investment, just as vitally interested as it is in contracts involving slavery, or as it is in the marriage-contract. The people who urge that borrowers and lenders have a right to do just as they please are placing themselves, however unconsciously, in exactly the same mental 216 MODERN ECONOMIC TENDENCIES and moral category with those who argue excuse for slavery, or prostitution, or unrecompensed free love, as things in which only the principals are concerned. The various theories of interest we shall examine first in their unofficial form, in which they float about the world of economic discussion. Later they will be chased down to the details of official language. Interest Warranted by Original Act. First comes the con- tention that the interest drawn by the capitalist is a right based upon his original industry and frugality, whereby wages were saved and accumulated until they gave him power over his fellowmen. But for each day's work done, or each job finished, in this original industry the embryo capitalist was paid in full, with wages which, however he may quarrel with them from the workman's point of view, he can never, as a capitalist, say were insufficient or inequitable. Therefore there is no basis whatever for any argument that, to reward thrift, their pur- chasing-power must in equity be eked out with interest- payments. Even from the viewpoint of the workman, if the wages were then regarded as insufficient, there was no contention on either side that the deficit would or should be made up later in the form of interest. They should have been made up in the form of wages, paid then instead of later. Yet, if it be true that the workman was fully paid in the first place, then no later demand for any further payment whatever, whether called interest or by any other name, can be based upon the origin of the wealth. Whatever may be the equity urged in support of the capitalist's receipt of interest, it must be based upon some act of his, truly in the interest of society, performed at a date subsequent to the acquisition of the wealth invested. As a matter of fact, this position is upheld by every fact con- cerning the commercial world; for the vast majority of all personal wealth now drawing interest, came into its owner's hands long since he ever performed any wage-earning labor. The fact is that every capitalist to-day, so far as he has any consistent economic views whatever, holds that the wages actually paid for the original work did fully imburse the work- man with the value of what he had produced. To take any INTEREST AND DIVIDENDS 217 other position would involve the capitalists of to-day in a pretty lien against their properties, from the claims of past labor for deficits in proper wages or for wages saved and lost in the attempt to make good the deficit by investment in the capital- istic system ! Not all the title-guarantee companies in America could make valid the title to any piece of commercial property against such a gigantic lien as that! If sustained, it would throw all the huge incomes of modern commercialism to the heirs of past workingmen, most of whom are still workingmen. The cogent points are that, however inequitable may have been the original wage, (a) it is not the slightest aid to justice to suggest present interest as a salve for past deficit in wages, because the workingman always loses at the interest-game. He remains a workingman chiefly because he does not know how to play it. (b) There is not the slightest evidence that the present in- stitution of interest or dividends guides its payments even approximately toward those who suffered from any insufficiency of original wage. (c) The task of identifying those who thus suffered in the past, that they may be reimbursed now in the form of in- terest-payments, is the most hopelessly impossible which the mind can conceive. If interest be really based upon the origin of wealth, then it is the most inequitable institution in the world, for it has wholly failed to keep record of those whom it owes. (d) There is not the slightest evidence that those who enjoy interest in quantity to-day were ever either markedly indus- trious (productively) or markedly saving in the past. Perhaps a few were so, but as a class the recipients of interest are not emphasized in that direction. (e) Present incomes in the form of interest, and present valuations of principal, are far too large to be explained by any connection with original savings from wages. If thrift in saving from wages had ever been the sole origin of interest- bearing wealth, we should never have had any modern social problem. For, following Professor Hayes, it may be pointed out that the one obvious feature of magnitude of modern incomes upon capital throws into absurdity most of the academic theories as to their equity or nature or origin. Thus, we are reputed to 218 MODERN ECONOMIC TENDENCIES possess at least one billionaire citizen. Millionaires are now so common as to be no longer worthy of notice. Yet what is involved in saving such fortunes from wages, or in exerting any degree of productivity and frugality such that its value to society should justify such fortunes? A man who actually earned, productively, $20,000 a year, and saved half of it, would certainly be a remarkable man. Yet in order to become a mere millionaire by that process would require a century of continuous effort! To accumulate a billion would require a thousand centuries! Yet the whole history of modern American commercialism is compassed within a century. The bulk of all our millionaires have been created within the last twenty years or so. Pre- liminary data go to show that a third of them have come into existence within the last year or so! For all these reasons any explanation of interest by reference to origin has become too great an absurdity for presentation to self-respecting intelligent people. Whatever the capitalist may have done to deserve interest, he must have done it since he acquired the wealth invested. Interest as a Motive Promoting Thrift. Next comes the argument that if interest were not paid upon savings, no sav- ings against old age would be made. It does seem as if this doctrine did not need serious refuta- tion, yet it does. It is met most frequently in the mouths of intelligent businessmen. Certainly, if it should become no longer possible to provide against old age by savings plus in- terest, there would be all the more anxiety to provide enough savings to do it by the principal alone. But more than that, if interest is to be accredited only by its excellence of provision against old age, then certainly, as a mere matter of policy, it defeats itself. For if there be any one particular in which the commercial system fails society in a way more obvious and tragic than elsewhere, it is in its utter failure to provide adequately against old age, in the great majority of industrious, frugal lives ! The prime characteristic of the modern commercial system, made up as it is of the policies of the jousting-lists, Donnybrook Fair, the privateers and simon-pure piracy, all developed by modern technique to a degree shaming any one of those good old sports, is that it INTEREST AND DIVIDENDS 219 makes uncertain the title and tenure of every piece of property in the land. The prime tragedy of life among the lowly, prevailing an hundred times to once where poverty in old age is the fruit of individual irresponsibility, is the familiar one of the family or person who has lived an unsullied life of toil, thrift and saving, only to find in the end that either no progress can be made against rising prices and the accidents of life, by saving; or else, having saved, to see the whole swept away by our commercial anarchy, just as old age needs it most; or else, barring both of these, to find prices rising against one more rapidly than savings can be accumulated, even with interest to help. Because the commercial system is not only a total failure in its methods of provision against old age, for all except a few, but is actually an obstacle to such provision, this country should long ago have adopted that general policy of insurance against old age by the government which prevails in most other progressive countries. It is just because we are more com- mercial, and therefore more inconsiderate of the money of the weak and the old, than any other land, that we should have done this first, rather than last. Our recent provision of a "postal" savings-bank is a late step in the right direction; but it does not go far enough. It still offers interest as an inducement to save. It still leaves untouched the huge interest-bearing "savings" of others, to raise prices against the poor. Whenever a true science of political economy may become accessible to the people, no one will ever expect to receive in the future, in return for present savings, more than one hundred cents on the dollar. For all will then realize clearly that to ask any increase, as in the form of interest, must take more out of one's credits, in the form of higher prices collected across the shop-counter, than can be received as interest. For, on the average, this increase in retail prices is always equal to the steadily rising volume of interest paid by the nation of Ultimate Consumers, plus a commercial margin to cover the cost of paying this interest to the Consumer, and then collecting it from him again across the shop-counter. Interest creates poverty, in the form of rising cost of living, rather than prevents it. 220 MODERN ECONOMIC TENDENCIES For all these reasons any reliance upon interest as an induce- ment to saving against old age is the most mistaken of all policies. It is as mistaken as the reliance upon advertising as an inducement to purchase. Just as one may rely best upon the natural, wholesome, unstimulated, unperturbed desire of the Ultimate Consumer to lead him to purchase life-support when he needs it, to the maximum volume pecuniarily possible, so may reliance best be placed upon the natural instinct to provide against old age. For in each case the instinct is a basic one a motive force bedded deep in the springs of life, rather than a superficial result needed to be created artificially. All that society needs is a rational means for carrying it out. All which any really honest person should want is the certainty of possessing in the future the dollar which is not spent now. To attempt more is to cheat oneself. This instinct to provide for future life characterizes all lower forms of life, as well as directs all human history. It drives the insect-world to its heroic strivings to store honey, to weave cocoons or to lay eggs the last-named task usually ending with the death of the parent. It guides the vegetable-world to ac- cumulate nutriment in seed or bulb or tuber. It leads the animals to starve and freeze themselves that their young may have a fair start in life. It lies back of every school, orphan- asylum and savings-bank. But all these latter would be far more effective than now, if only they were not throttled at every turn by the parasitical presence of commercialism and interest. Income and Outgo of Interest. Let us revert to the illus- tration of the family enjoying a modest income of both wages (or salary) and interest this time in figures. Take for in- stance the family normally spending twelve hundred dollars annually. In its every act of purchase of food, clothing, shelter, amusement or transportation it is constantly making interest- payments. These, with the incidental contributive costs due to commercialism, amount, if it spends all its income, to anywhere from four to seven hundred dollars annually.* But this is the usual interest upon a passive investment of about ten thousand dollars ! Therefore no -family of this grade is a winner from the institution of interest, even in the direct pecuniary sense, unless it owns interest-bearing securities aggre- * For more accurate figures as to this, see page 336. INTEREST AND DIVIDENDS 221 gating well above ten thousand dollars in market-valuation, the interest from which it does not spend! Since life loses from commercialism in many other ways than the directly pecuniary, in lack of security, spaciousness, refinement, etc., the real situation is even worse than this. Yet this degree of capitalism is expected to go with an income from wages or salary of only five to eight hundred dollars, helped out with from four to seven hundred dollars of interest, if it spends the latter or wages of twelve hundred dollars if it does not spend the interest! Of course, there are very few families among those pretending to rely upon productive wages for income who possess this degree of invested wealth. Yet with any less, they lose upon every cent of interest taken in. In other words, the capitalism owned by a family must be at least from twelve to twenty limes its annual wages or salary, depending upon the rate of interest which it succeeds in drawing without danger of losing its principal, before that family may even hope to come out even on the game of draw-interest-and- pay-it-back-across-shopcounter. In order to win at that game it must own far more capitalism than this. Rising Prices. But the above is stated merely in terms of the momentary balance between income and outgo. Yet the situation, when the fluctuation of prices is included in the argument, becomes far worse than this. Since capitalism is steadily and rapidly putting up prices, so that a dollar to-day buys far less than a decade, or even a year, ago, the wage-earner loses by depreciation of the purchasing-power of his money with time, before his interest-return comes in, as well as by momen- tary balance of his ledger. In actual fact, a family possessing only the proportion of capitalism to wages stated above will be slipping backwards, rather than holding its own, owing to the relatively more rapid progress of the big commercialists in accumulating capitalism! Just now the country is being canvassed for Liberty Loans, with strenuous appeal to invest, for the sake of the future, in bonds bearing four per cent. But money invested at this rate, even at compound interest, requires more than eighteen years to double itself. But, if prices more than double in eighteen years, as they are certainly doing now, it is actually more thrifty, under the efficient conditions imposed by the commercial 222 MODERN ECONOMIC TENDENCIES system, to spend the dollar now than it is to try to save it against the future ! For commercialism provides no way for saving it without interest-charges being incurred. It believes or avers that it believes that without the interest-charges there would be no inducement to save. Yet it is actually the interest-charges themselves which annul all inducement to save! They actually eat up the value of the principal, by reducing its purchasing- power. To-day any interest-rate as small as four, or even six, per cent is unquestionably a dead loss to the investor! Yet if he seeks a higher risk he invites the loss of his principal ! With any rates as small as these, or with proportionate sums of interest-earning principal to wages or salary as rmall as those stated above, each day sees a measurable loss. To whom- soever places reliance upon petty, passive commercialism as an aid to wages, ultimate poverty is inevitable. This is the real explanation of the present world-wide discontent, which is felt by a class of people far more sober, industrious, skillful and respectable than superficial public opinion takes into account. It is only the big, skillful commercialists, acquiring high rates upon large sums, through unusual combative powers and never losing their principal, or winning more often than they lose who come out ahead at the game of interest-drawing, even in the narrowest pecuniar/ sense. They win from the petty investors just as surely as the professional gambler wins from the transient player who drifts into his den. In the broader sense of general comfort, prosperity and security in life even the biggest capitalists lose at their own game. Interest not a Source of Value. It must already be becom- ing plain that interest, when viewed from the standpoint of society as a whole, consists merely in taking money out of one pocket and passing it (minus certain losses on the way) into another. Interest represents no natural process of increase in wealth. Money itself has no natural power of growth. The useful appliances which it represents inevitably suffer continual physical depreciation from the first instant of their creation. Surplus money or credit commands interest only because our surplus stock of materials cannot be made fluid for circulation from man to man, across the open gaps in ownership-in-industry now dividing man from man, without reliance upon this surplus money or credit for effecting transfer. It is only because the INTEREST AND DIVIDENDS 223 Ultimate Consumer is so involved in his blind faith in the policy of cultivating his income, rather than of conserving his outgo, that he is willing to pay tribute in the form of interest in order to effect a carry across these gaps. There is no desire to argue here that, to date, he has not been slightly better off, on the average, in paying this tribute rather than in foregoing all privilege of economic intercourse with his fellowmen a privilege now purchasable only by pay- ments of interest. But the fact is irrelevant. The gains have been due not to interest-payments, but to progress in the technical arts made by salaried or wage-paid men. The economic loss involved in thus deferring this privilege to demands for tribute in the form of interest is an exact parallel with our simultaneous loss of self-respect. Mankind has been either shamefully stupid or shamefully supine, that it has ever let itself get confronted with the alternative of either paying the tribute or going without the transfer. Indeed, in the chapter upon Credit many instances were given of how these ubiquitous gaps in ownership between commer- cialist and Consumer, which now everywhere fissure our economic system as crevasses traverse a glacier and which can be bridged for the life-support of the Ultimate Consumer only by the payment of tribute, in the form of interest, for access to somebody's private capitalism are obstacles which, rather than being natural and inevitable, are artificially and deliberately created by commercialism, and industriously widened from day to day, just in order to reap the tribute called interest which thereby becomes inevitable. Capitalism is exactly like a man who might dig a ditch across a road, then bridge the ditch, and then collect fancy tolls for the privilege of using the bridge posing, the while, as a benefactor in having built the bridge. If able commercialists wish to realize what is meant by this, let them cease their present efforts at organizing stockholders, to raise prices, and undertake the organization of the Ultimate Consumers to bring prices down. Depreciation. As stated above, all wealth suffers deprecia- tion from natural causes, from the first instant of its creation. At least, all material capital does so. Capitalism, however, does not; and in this contrast between capital and capitalism lies 224 MODERN ECONOMIC TENDENCIES one of the distinctions most pregnant with significance for the economic trend of the times. The very existence of an accumulation of material wealth is a burden to the community,, through its physical depreciation, unless its presence be justified by either (1) Its active use by labor in multiplying the rate or ease of current production, or (2) As an insurance against famine during adverse sea- sons, or (3) For extension of facilities. Even then a certain amount of labor must currently be set aside to make good its natural depreciation. Only when the usefulness of the accumulation exceeds this current depreciation is the existence of the capital profitable to the community, rather than a loss. Sometimes interest is explained as due the owner of capital in order to make good this depreciation. The answer to this is obvious. No real interest exists until after the current pay- ments made by the Ultimate Consumer to the capitalist have offset depreciation, and exceeded it. If interest were merely an offset to depreciation then the capitalists as a class would be no richer to-day than they were a century ago. The most patent facts of commercial history make it not worth while to pursue this line of inquiry. Water or Rust? Take for illustration a bond or stock-cer- tificate issued many years ago, ostensibly to cover the cost of certain appliances needed for extension of facilities. During the life of this paper these appliances have surely depreciated, by rot and wear or tear, to nothingness; or if not that, they have become obsolete and worthless by the progress of events. Yet neither the face-value nor the market-valuation of the paper in the commercial world has depreciated, for that reason, ly one penny. The valuation of the paper depends solely upon its ability to extract from the Ultimate Consumer by force the tribute called interest; and that is the same or greater to-day than when the paper was first issued. The Consumer is to-day paying interest upon billions of investments nominally representing appliances (so far as it is yet worth while to keep up the pretense of its representing anything) which long ago fell into rust and dust. INTEREST AND DIVIDENDS 225 Yet not only is it true that the demands for interest upon these securities have not abated one jot, but the principal of the debt fastened thereby upon society has not depreciated by a dollar. So far as the equities or practice of commercialism is concerned, a century hence will find our great-grandchildren still burdened with this same indebtedness to the capitalist as now, or even a greater one, for appliances bought before the Civil War, used up while Hayes was president, and rotted before this present century opened ! During this time the gradual physical depreciation of these appliances has actually been made good out of the payments made by the public for commodities and service ; for depreciation is a legitimate, natural charge against the Ultimate Consumer making use of appliances. Therefore all these interest-payments stand as additional to payments for depreciation. Yet they have not been credited to the Consumer on any other account. He still owes the full principal of the debt, and no capitalist will listen to any plan for letting him pay it. Commercial Authorities upon the Origin of Capitalism. For further light upon the nature of interest let us turn away from the loose talk of the man-in-the-street to some statements made by prominent commercialists themselves, under oath. Take for instance the testimony of the Illinois Central Railroad before the Interstate Commerce Commission in 1910 (Docu- ment 725, 61st Congress, Third Session). The road entered an exhibit showing that its actual cost to date, including better- ments and extensions, had been $277,000,000, with which it compared its then capitalization at $285,000,000 the figure on which it had requested permission to earn a "reasonable return/' whatever that may be. This cost had been determined by starting with the recorded "cost" of the road when first built, in 1856, of $19,000,000. We overlook, for the moment, many interesting questions as to just how this paper indebtedness arose, step by step, from the original figure for a few hundred miles of single track to nearly three hundred millions of dollars for a great system of nearly five thousand miles. We overlook the important, but futile, question whether even the original nineteen millions had not already been made much larger than was necessary, with the deliberate purpose of "earning" interest thereon for the 226 MODERN ECONOMIC TENDENCIES railroads, however they may have been copied elsewhere since then, were the pioneers in high finance. The sole point at present is that every foot of that original road of 1856 lias become at least once, and most of it twice, completely worn or rotted to nothingness; or become so obsolete as to be worthless! Yet not a dollar's worth of its capitalization has been canceled! This is so by the repeated testimony of the road's own officers, arguing the vast sums which have had to be expended for upkeep and betterment. They forget that the only conclusion enforced by these facts is that every penny of this original indebtedness of nineteen millions, and much of the additional $258,000,000, ought, in the most ordinary equity to the public, to have been canceled long ago by sinking-fund, and not re- funded, so that it no longer formed any part of the community's economic burden in 1910. Yet this case of the Illinois Central is in no wise an extreme or unusual one. It was not challenged by the Interstate Com- merce Commissioners as such. It merely illustrates well (by a case so favorable to the railroads as to be selected by themselves from among many, for representing them all before the Com- mission) the normal procedure of the financial world and the public's acceptance of it as "business." It might be said here that this and further quotations from testimony by the railroads are not adduced because the railroads are in any wise exceptional offenders, but merely because their public character forces into the limelight statements concerning them which bear upon the true nature of commercialism, from authorities high in that field, such as are not to be had in any other business. There is scarcely a corner-grocery in the land, not to mention the common run of corporations, which is not following exactly this same financial policy as the railroads; but their smaller size and greater number permit them to "get away with the goods/' where the railway-companies are caught and held up to public execration. But it is the prime object of this work, however it may be forced to cull from the railroads the facts which it condemns, to unmask this pose of innocence on the part of the multitude of petty commercial sinners, and to show that they are just as guilty in degree, and cumulatively far more so in volume, than are the railroads. All this bears directly upon the common allegation that in- INTEREST AND DIVIDENDS 227 terest is justified provided it be paid upon moneys which have been actually expended for appliances; or in other words that, provided the stock has not been "watered/' dividends upon it are equitable. Without stopping here to debate this question in full, it must be clear that if the existence of these appliances is what justifies interest, then their disappearance must remove that justification. However honest an investment may have been originally, twenty years later its physical embodiment is sure to be pure water or dust. As the appliances rot, wear out or become obsolete, the interest-payments upon them, in equity, should gradually cease. But this never occurs. The commercial world to-day cares not one hurrah, in reality, whether its interest-bearing paper represents actual appliances or not. The sole question attaching to it is : Can it be made to draw interest or pay dividends ? Interest as a Fruit of Unproductivity. Another contention in favor of the justice of interest to which preliminary attention may be given here and this is the only contention which appears to offer even a ghost of reasonableness is that interest is in- curred by reason of loans or requisitions made for the purpose of creating some extension of facilities which cannot be expected to be productive for some time in the future. It has already been pointed out, in effect, that the natural, or factory-system, method of making requisitions for the exten- sion of facilities, without asking interest thereon, depends not at all upon any idea that the new facilities must immediately become productive. The factory's stockroom stands there for the express purpose of tiding over this interregnum period until the new shall have become productive, be it short or long. But however this may be, certain it is that, in either equity or common sense, an interest-bearing debt which has been in- curred for the purpose of tiding over this unproductive period, with its interest explained as being due to this unproductivity, must cease to bear interest, and must cease to be a debt, as soon as the enterprise has become productive. In equity, the first destination of any profits must be to cancel all outstanding interest-bearing indebtedness. Any failure of those in control to provide for this enforces immediately the conclusion that the indebtedness was incurred, in actuality, not for the sake of the new facilities, nor the interest paid because those facilities were not immediately 228 MODERN ECONOMIC TENDENCIES productive which statements serve merely as an insincere excuse but solely for the sake of exacting continuous tribute, called interest. Now all of the broad, patent facts of the commercial world drive one irresistibly to the acceptance of this latter alternative. It is plainly not the new and unproductive enterprises which pay all, nor even any appreciable part, of the aggregate interest paid. The ~bulk of all interest-payments come from those enter- prises which are the most intensely productive, and which have been so for the longest time! There is not even a ghost of a pretense among the commercialists themselves, although there is among our university-puppets, that things are otherwise. It is everywhere obvious, to those having the slightest desire to observe the truth, that it is just those concerns which have unquestionably been most profitable for decades or generations, whose securities "earn" the highest rates of interest or dividends, which are constantly refunding those securities in largest volume, and whose capitalization is increasing most surely, rather than decreasing most rapidly, because of their high rates of produc- tivity. Indeed, new enterprises are habitually launched with the most emphatic promises that soon large profits will permit large payments of dividends! But, if all this be so, then dividends certainly cannot rest upon temporary unproductivity as their excuse. Opportunity for Investment. The unremitting pressure of the entire financial world, the publicly avowed demands of the railway-corporations before our Interstate Commerce Commis- sion, the ceaseless activity of every inventor having also the commercial instinct, the unquestioned methods of every broker, promoter or agent, and the continual intrusion of new business- enterprises into districts already fully served all these prominent and indubitable characteristics of the commercial world stand as evidence of its utter indifference to the interests of .the Ultimate Consumer, as its guiding force, and of its insatiable appetite for this tribute called interest or dividends an appetite which limits itself by no law nor reason whatever, except the sheer inability of the Ultimate Consumer to pay further tribute. These facts concerning commercialism all record a continuous, deliberate, energetic and reckless expansion, rather than any INTEREST AND DIVIDENDS 229 rational, judicious or wholesome retraction, of this volume of interest-bearing burden upon the Ultimate Consumer, to confine it to those enterprises and periods during which unproductivity is unavoidable. New securities are constantly being issued; but none, in effect, are ever retired. Those which mature are always refunded, either directly or indirectly, in ever greater and greater volume. In not one atom of all this is there solid basis for any sincere argument that the debt is created merely to tide over the un- productive period and hence is to be canceled forever out of the first earnings. Instead, the larger those earnings may be- come the higher is the rate of interest paid, or the greater is the expansion of the securities in volume. There has been from the start no other aim in mind than this! Indeed, the sole limitation upon the issue of ever larger volumes of such securities, for the sake of increasing the burden of tribute exacted from the Ultimate Consumer, is avowedly the sheer ability of the public to pay the interest or dividends thereon, in the form of prices collected across the retail-shop- counter. As soon as this ability has been demonstrated, in connection with any particular set of securities, these are said to have been "absorbed." If the public shows signs of inability to pay the tribute, then warning is recognized therein that the traffic (of issuing securities) has been "charged all it will bear." Water or Dust. Whether or not these securities may have been originally issued against any real expenditure for useful appliances which will all have become a matter of indifference twenty or thirty years from the date of issue their market-value has become, through the fact of