GIFT OF 
 
 THOMAS RUTI-rEP,FORD BACON 
 
Digitized by the Internet Archive 
 
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 IVIicrosoft Corporation 
 
 http://www.archive.org/details/economiesaccountOOhadlrich 
 
By ARTHUR TWINING HADLEY 
 
 Railroad Transportation, Its History and Its 
 
 Laws. 12°, pp. iv. + 269 . . . |i 50 
 
 " Prof. Hadley's treatise is no less timely than it is valuable. 
 . . Taken as a whole, the work is the result of an investiga- 
 tion no less wide than exhaustive, and one possible only to a 
 thoroughly equipped man, familiar with many modern languages," 
 — The Nation. 
 
 " Every page of the work bears witness to the thorough 
 knowledge of the writer on the subject, and to his equal ability 
 and practical sound sense in its discussion." — Literary World. 
 
 Economics. An Account of the Relations between 
 Private Welfare and Public Property. 8°, $2 50 
 
 G. P. PUTNAM'S SONS, new york and London 
 
ECONOMICS 
 
 AN ACCOUNT OF THE RELATIONS BETWEEN 
 PRIVATE PROPERTY AND PUBLIC WELFARE 
 
 BY 
 
 ARTHUR TWINING HADLEY 
 
 Economy in Yale University ; someti 
 te of Connecticut ; Author of " Rai: 
 portation, its History and its Laws ' 
 
 Professor of Political Economy in Yale University ; sometime Labor Commissioner 
 of the State of Connecticut ; Author of " Railroad Trans- 
 
 cJi) 
 
 G. P. PUTNAM'S SONS 
 
 NEW YORK LONDON 
 
 27 WEST TWENTY-THIRD STREET 24 BEDFORD STREET, STRAND 
 
 SCI^e ^ttitkerbocher '§its» 
 1896 
 
*e\ll 
 
 Copyright, 1896 
 
 BY 
 
 G. P. PUTNAM'S SONS 
 Entered at Stationers' Hall, London 
 
 Ube "Rnicfeerbocfeer press, tUw Iftocbcllc, "ft. l?* 
 
PREFACE. 
 
 This book^ is an attempt to apply t he met hods of 
 modern science to tEe^pratstemsof modern business. 
 
 Within the last thirty years there have been important 
 changes in economic theory. -Qne^^cJaaal. of investigators 
 has employed the principle of natural selection to explain 
 the development and present shape of industrial ideas and 
 institutions. Angthgr-Sjchaol has used some of the results 
 of recei}l.p.S3a^iological sty^ to account for the actions 
 of individual men in pursuing their own interests under 
 the ideas and mstitutions thus developed. Both these 
 things have combined to make the economic science of 
 the present day very different, in its methods of analysis 
 and powers of explanation, from that which formed the 
 basis of John Stuart Mill's Principles of Political Economy, 
 Meantime iieLWLpioblems have been developing in modern 
 business life ; most conspicuously, perhaps, in connection 
 with large investments of capital in factories and railroads. 
 The time which elapses between the rendering of labor 
 and the utilization of the products of labor is now so long 
 
 jk that the work of the_specul ator has far grea ter importance 
 y q[ than it did a generation ago. The size of the units of 
 
 iM" capital is so large that_ fr ee com^ pgtjtion often becomes an 
 impossibility, and theories of economics which are based 
 upon the existence of such competition prove blind guides 
 in dealing with modern price movements. We have to 
 study, far more closely than we once did, the effect of 
 combinations upon the interests of the consumers on the 
 one hand and the laborers on the other; to examine the 
 
 282069 
 
 / 
 
IV ECONOMICS, 
 
 results of meeting organizations of capital with organiza- 
 tions of labor, and of controlling them by special legisla- 
 tion or by direct government ownership. We have to 
 deal with socialism, not as the theory of a few visionaries 
 who try to destroy property rights, but as a series of 
 practical measures urged by a large and influential body 
 of men who are engaged in extending the functions of 
 government. 
 
 There is no general work in the English language which 
 deals at all comprehensively with these problems of modern 
 economics. As long as Marshall's book remains incom- 
 plete there is nothing which attempts to do for the readers 
 of to-day that which Mill did with such signal success for 
 those of half a century ago. The field thus left open I 
 have tried to cover to the best of my ability in the book 
 now offered to the public. It is written for students — that 
 is, for those readers who are willing to give the time and 
 trouble necessary for understanding subjects which are at 
 once important and perplexing. In a professional ex- 
 perience which has been about equally divided between 
 the editorial room and the lecture room, I have generally 
 found that, barring certain necessary differences in form 
 of presentation, what is good teaching in one place is 
 good in another. I have attempted to make the book 
 available for students in the broad sense of the term as 
 well as in the narrow sense ; for those who are engaged 
 in doing the world's work as well as for those who are 
 preparing themselves to do it. 
 
 I have put things as plainly as I could ; but there are 
 some parts of economics where no amount of effort by 
 an author will relieve the reader of the necessity of do- 
 ing independent thinking on his own account. There 
 are many problems of business life which are so compli- 
 cated in reality that it is unwise to treat them as if they 
 were simple. There is no foundation for the popular be- 
 lief that questions of money, of the tariff, or of the rela- 
 
PREFACE. V 
 
 tions between labor and capital, are easy to understand if 
 properly presented. The simplicity obtained by looking 
 at them from one side only is apt to be secured at the ex- 
 pense of thoroughness and too often of candor. 
 
 Dealing as the book does with matters of active contro- 
 versy, sometimes clouded by party loyalty or by personal 
 interests, I am far from expecting ^very o ne to agree with 
 its conclusions. But I trust that everyone will recognize 
 my intent to state both sides of disputed questions as 
 clearly as possible, and to treat the controversies as an 
 arbiter rather than as an advocate, even in those cases 
 where the arguments on one side have seemed decidedly 
 stronger than those on the other. 
 
 Where these controversies involve important differences 
 of legislative or commercial policy, the arguments have 
 been presented in the text of the book ; where they in- 
 volve differences of explanation or theory rather than of 
 practice, they have been outlined in the foot-notes. These 
 notes are not to be regarded as exhaustive discussions of 
 economic theory, but as summaries of opinion on contro- 
 verted points, which may serve to pave the way for 
 detailed study on the part of those who are interested 
 to pursue the subject farther than the limits of the pres- 
 ent book will allow. 
 
 Without going into the more complicated details of 
 modern mathematical economics, I have occasionally 
 employed diagrams in cases where they seemed neces- 
 sary for a thorough explanation of the subject. For 
 most people who are likely to use this book I am con- 
 fident that time spent in studying the diagrams will be 
 more than repaid. I have used one of Cournot's methods 
 of presentation, not because it is any better than those 
 employed by his successors, but because it is simpler. 
 
 The separation which is made in so many modern 
 books between economic theory and economic practice 
 seems to me a mistake. I have tried to keep theory and 
 
 / 
 
VI ECONOMICS, 
 
 application together ; and, just as far as possible, to make 
 the study of practical problems a means of developing 
 and explaining scientific theories. Where this method 
 can be employed it gives increased interest to the study 
 of economics; and, what is still more important, it guards 
 us in some measure against the danger of disproportion- 
 ate and one-sided deductions from certain parts of eco- 
 nomic science, to which the student is always liable if he 
 develops his theory first and makes its practical applica- 
 tions afterward. No writer on economics has had as wide 
 an influence as Adam Smith ; and while Smith's power 
 was in large measure due to those personal qualities in 
 which he stands pre-eminent, it was in perhaps equal 
 measure due to his habit of keeping theory and practice 
 closely combined. People studied his reasoning carefully 
 because it was applied to things which they really wanted 
 to understand, and was constantly supported by an appeal 
 to the observed facts of business life. 
 
 I am very far from trying to substitute economic his- 
 tory for economic theory. In a book like this, the ex- 
 planations are the important thing ; the presentation of 
 facts is not an end in itself, but a means of making the 
 explanation clear and comprehensive. The reader will be 
 disappointed if he expects to find a complete and well- 
 ordered history of the financial and industrial poHcy of 
 various nations. For such a history, he should look to 
 the various works that deal with the special departments 
 of finance, commerce, or industry. A work like this is 
 designed to enable him to make use of such books, not 
 to dispense with them. 
 
 In thus connecting theory and practice and giving due 
 prominence to the work of the speculator in modern in- 
 dustry, I have found myself obliged to abandon the time- 
 honored division of the science into the departments of 
 production, distribution, exchange, and consumption. 
 The subjects which are commonly treated under the 
 
PREFACE, VU 
 
 head of production are chiefly found in chapters ii, v, 
 and vi ; those"wliich are commonly treated under the 
 h^ad'of exchange will be found in chapters iii, iv, vii, and 
 viii ; while the last six chapters deal principally with 
 questions of distribution, and incidentally with those of 
 consumption. 
 
 My obligations to previous writers, in general and in 
 detail, are something which I cannot possibly express in 
 full. When a scientific principle is specially identified 
 with the name of some particular author, I have taken 
 pains to credit it to its proper source — especially in the 
 case of work which, from its newness or for any other 
 reason, has not become part of the general stock of 
 economic discussion. In other cases, I have limited my 
 citations to those books which are likely to prove most 
 accessible and useful to the reader who desires to pursue 
 special subjects farther than can be done within the 
 limits of a general text-book. The titles of such books 
 have been for the most part placed at the head of the 
 chapters bearing on the specific subjects with which they 
 deal ; thus forming a bibliography which, while very in- 
 complete, may yet prove serviceable to some readers. 
 Other things being equal, I have included works which 
 are written in English, rather than in foreign languages, 
 and have cited English translations rather than originals. 
 
 I am indebted for material aid to my colleagues Messrs. 
 Irving Fisher and J. C. Schwab ; and still more to my wife, 
 on whom I have depended both for criticism and for assist- 
 ance at every stage of the work. 
 
 Yale University, New Haven, 
 Maxch, 1896. 
 
CONTENTS. 
 
 CHAPTER I. 
 
 PAGE 
 
 Public and Private Wealth I 
 
 Preliminary Definitions — Development of Economic Science — 
 Individualism and Socialism — Standards of Public Good. 
 
 CHAPTER II. 
 Economic Responsibility . . . ... 26 
 
 Slavery — Property — Emancipation — The Persistence of Poverty 
 — The Malthusiah Theory — Poor Relief — Compulsory Insurance. 
 
 CHAPTER III. 
 
 Competition 6^ 
 
 Freedom of Exchange — Bargaining — Mercantile Competition — ^ 
 Market Price — Effects of Competition — Normal Price — Value — 
 Socialistic Theory of Value. 
 
 CHAPTER IV. 
 
 Speculation . . 97 
 
 Gambling — Insurance — Comm ercial Speculation — Legitimate 
 and Illegitimate Transactions — Industrial Speculation — Func- 
 tions of the Capitalist. 
 
 CHAPTER V. 
 
 Investment of Capital 121 
 
 The Wage System — Private Land Ownership — Patent Right — 
 Legalization of Interest — Usury Laws — Limited Liability. 
 
X ECONOMICS. 
 
 CHAPTER VI. 
 
 PAGE 
 
 Combination of Capital . . . . • 151. 
 
 Modern Tendencies toward Monopoly — Their Effect on Prices — 
 Limitation of Profits — Laws Fixing Rates — Problems of Rail^^S^^ 
 road Regulation — Enforcement of Responsibility. 
 
 CHAPTER Vn. 
 Money 180 
 
 Its Functions and Forms — Seigniorage — Depreciation — The 
 General Level of Prices — Conflicts between Debtor and Creditor 
 — Bimetallism in Theory and in History — Irredeemable Paper 
 Money. 
 
 CHAPTER VIII. 
 
 Credit 232 
 
 Checks and Clearings — Domestic and Foreign Exchange — In- 
 fluence of Deposit Accounts on Prices — Note Issue and its 
 Dangers — Attempts to Regulate Note Issue — The Government 
 as a Banker. 
 
 CHAPTER IX. 
 
 Profits 264 
 
 Competition ajacmg Investors — The Rate of Interest — Causes of 
 VariatTcm-^^conomic Rent — Net Profits and Losses — Commer- 
 cial Crises. 
 
 CHAPTER X. 
 
 Wages 301 
 
 Piece-Wage and Time-Wage — What Constitutes Demand for 
 Labor — The ,, Popular Theory — The Wage-Fund Theory — 
 The Residual The^y^^TTi'e"' Laborer as a Consumer — Wages 
 Depend on Maximum Economy oft^p n st t n r p^On — With Some 
 Men this is Obtained by Low Wages and Low Efficiency, with 
 Others by High Wages and High Efficiency. 
 
 CHAPTER XL 
 Machinery and Labor 336 
 
 Alleged Displacement and Degradation of Labor— Factory Acts 
 —Labor Organizations— Old aud New Methods — Compulsory 
 Arbitration — The Living Wage. 
 
CONTENTS, XI 
 
 CHAPTER XII. 
 
 PAGB 
 
 Cooperation 370 
 
 PrufiL-Sliaring — Producers' Co6peratioii:=rForms of Consumers* 
 Cooperation — Govefnm ent M anagement of Industrial Enter- 
 prises. 
 
 CHAPTER XIII. 
 
 Protective Legislatiofi 404 
 
 The Eight-Hour Movement — The Contract System — Prison 
 Labor — Foreign Immigration — Protective Tarififs — The Popular 
 Argument — The Development of Infant Industries — Political 
 and Military Questions Involved. 
 
 CHAPTER XIV. 
 Government Revenue 447 
 
 Its Different Forms — Principles of Taxation — Certainty the Pri- 
 mary Object — Incidence of Taxation — Direct and Indirect Taxes 
 — Property and Income Taxes — Progressive Taxation — The 
 Single Tax— Public Debts. 
 
ECONOMICS 
 
 AN ACCOUNT OF THE RELATIONS BETWEEN PRI- 
 VATE PROPERTY AND PUBLIC WELFARE. 
 
 CHAPTER I. 
 
 PUBLIC AND PRIVATE WEALTH. 
 
 Preliminary Definitions — History of Economic Science — Individualism and 
 Socialism — Standards of Public Good. 
 
 Luigi Cossa : "An Introduction to the Study of Political Economy"; 
 translated by L. Dyer. London, 1893. An admirable history and bibli- 
 ography. Its title is a little misleading, as the book is of more use to 
 advanced students than to beginners. 
 
 J. N. Keynes : " The Scope and Method of Political Economy." Lon- 
 don, 1891. 
 
 Among the many critical histories of socialism the most useful is perhaps 
 that of John Rae : 2d ed., London and New York, 1891. A good pres- 
 entation of the ideas and aims of moderate socialists is given in " Fabian 
 Essays in Socialism" ; edited by G. B. Shaw. London, 1890. New York, 
 1891, For a brief statement of extreme individualistic views see W. G. 
 Sumner: "What Social Classes Owe to Each Other" New York, 1883; 
 for a fuller development, W. Donisthorpe : " Individualism " London, 
 1889. 
 
 § I. In the Middle Ages questions of industrial policy- 
 were treated by most writers as incidental details in a sys- 
 tem of theology or of law. But in the sixteenth and seven- 
 teenth centuries people began to separate the study of 
 matters affecting a nation's commerce and finance from 
 the more general consideration of its politics or its morals, 
 
2 PUBLIC AND PRIVATE WEALTH, 
 
 and to develop an art of political economy which should 
 guide the statesman in his efforts to promote public wealthy 
 as the arts of personal and industrial economy guide the 
 individual in his pursuit of private wealth. In their at- 
 tempts to formulate the rules of this art, writers of the 
 eighteenth century discovered certain laws which are the 
 basis of the modern science of economics, 
 
 § 2. But what is public wealth ? 
 
 In the first place it is not the same thing as government 
 property. It is something far wider. The individual 
 citizens are a part of the nation just as much as the 
 government is ; their property, n/6 less than that of the 
 government, must be included/ in any rational, attempt 
 to estimate the industrial resources of the commun- 
 ity. Waterworks and railroads owned by private com- 
 panies are just as much part of the public wealth as are 
 municipal waterworks or national railroads. Whether 
 the public wealth is likely to be increased in any particu- 
 lar case as an indirect result of making more of it public 
 property, can only be decided by examining the circum- 
 stances of that case. It will depend upon how well such 
 property is managed. If the agents of the government 
 are disinterested and wise enough, the public property 
 will probably be made to render more service than pri- 
 vate property ; if they are not disinterested and wise, it 
 will probably be made to render less service. In the 
 latter case, the " nationalization " of a piece of property 
 will tend to diminish the public wealth instead of increas- 
 ing it. 
 
 § 3. Nor can we estimate the public wealth of a nation 
 by taking the sum of the property of its individual mem- 
 bers. Many things like pure air and abundant water sup- 
 ply, which form most valuable elements of public wealth, 
 are hardly counted as private property at all. A property- 
 right is a title to part of the public wealth ; but the 
 amount of these titles outstanding forms no indication 
 
f 
 
 L ' 
 
 '4 
 
 TI/B DISTINCTION ILLUSTRATED. 
 
 of the amount of enjoyment which the public can com- 
 mand. The exchange value of a property-right is con- 
 nected with its exclusiveness. It depends not so much' 
 upon the enjoyment which the property can be made to 
 afford as upon the completeness with which its owner can ; 
 monopolize that enjoyment for himself or his friends to 
 the exclusion of the general public. 
 
 The total value of these rights of exclusion does not 
 necessarily correspond in any way with the resources avail- 
 able for the public. It is quite misleading to measure a 
 nation's wealth by a census of the property of its mem- 
 bers. Property-rights may be created without increas- 
 ing public wealth or destroyed without diminishing it.* 
 Under the English system of enclosures, land which had 
 formerly been free to all the public was made the subject 
 of private ownership. By this practice there was a crea- 
 tion of property-rights without production of wealth. 
 The landlords now had something valuable which could 
 be bought or sold and which did not exist before ; but 
 the wealth of the community was in no wise increased. 
 There were no more means of enjoyment in existence 
 than there had been previously. On the other hand, the 
 abolition of slavery involves a diminution of private 
 property without a corresponding loss of public wealth. 
 It sweeps away an enormous mass of exchangeable wealth 
 of individuals. Systems of compensation to the owners 
 of such wealth, though they may shift the burden, can- 
 not annul the loss. Yet such a loss is simply a destruc- 
 tion of titles and transferable rights. It does not destroy 
 means of happiness. The wealth of the community, 
 judged by public standards, is as great after abolition as 
 it was before. 
 
 ' A curious instance where loss of private wealth went 
 
 hand in hand with gain in public wealth is furnished by 
 
 the history of the waterworks in the city of Venice. For- 
 
 ' But see § 12. 
 
4 PUBLIC AND PRIVATE WEALTH. 
 
 merly water was so scarce that it commanded a price^ 
 and a good well was a source of considerable private 
 wealth to its possessors. But when an abundant supply 
 of water was furnished at slight cost, the commercial 
 character of the water changed, and it could under all 
 ordinary circumstances be had for nothing. But the very 
 abundance of water, which makes it commercially worth 
 nothing, is an element of public wealth ; and the scarcity 
 which makes it a valuable article of property is a symptom 
 of public poverty. 
 
 The high price of real estate in New York City, which 
 forms an enormous item of private wealth, is partly con- 
 nected with causes that promote the public wealth and 
 partly with those that antagonize it. So far as it is due 
 to the excellence of the harbor and other things which 
 make New York an admirable trade centre, it connotes 
 a public good. So far as it is connected with the narrow- 
 ness of Manhattan Island and other things which limit 
 the number of people who can most conveniently avail 
 themselves of these privileges, it connotes a public evil. 
 
 § 4. Improvements in the arts have had a beneficial 
 effect on the public wealth of nations wholly out of pro- 
 portion to any gains which they have enabled individu- 
 als to appropriate for their own exclusive advantage. 
 This benefit cannot be measured in money. If an improve- 
 ment enables the same number of laborers to produce 
 twice the amount of useful products, it may happen that 
 the price of each product will fall one half. In this case 
 there is no apparent gain in private wealth ; but if the 
 article is a really useful one, there is a great gain in 
 public wealth and social Avell-being through its increased 
 abundance. 
 
 The true basis for an estimate of a nation's wealth is to 
 be found in the enjoyments of its members. The wealth 
 of a community does not depend on the money value of 
 its means for such enjoyment, nor even on their physical 
 
INCOME AND CAPITAL, 5 
 
 amount, but on their utilization. Public wealth is *' a flow 
 and not a fund " ; it is to be measured as income and not 
 as capital, 
 
 § 5. The distinction between capital and income as 
 modes of mcasurino ' resources is almost as important as 
 the distinction between public and private wealth, and is 
 quite as much neglected in current economic discussion. 
 
 If a man for a series of years earns $10,000 a year and 
 spends it all, he is always rich in one sense, and never in 
 another. He has much income and no capital — unless 
 we stretch the idea of capital wide enough to include the 
 skill which enables him to earn the large income. In like 
 manner a nation whose members habitually produce much 
 and consume much, will have large enjoyments and small 
 accumulations. Measured as income its public wealth 
 will be large ; measured as capital it will be small. 
 
 The distinction between capital and income is not due 
 to a difference in the things themselves, but to a differ- 
 ence in methods of measurement. The capital of an 
 individual or a community is an amount of wealth in 
 existence at a particular moment. The income of an 
 individual or a community is an amount of wealth ob- 
 tained during a specified period. Capital is being con- 
 stantly converted into income and income into capital. 
 But capital, under all times and conditions, is measured 
 as a quantity, while income is more properly measured as 
 a rate. Capital is a static conception, independent of 
 time ; income a dynamic conception involving the time 
 element. 
 
 We see this distinction illustrated in the balance 
 sheets of any large industrial enterprise. The capital 
 account of a railroad company gives the property which 
 it owns at a particular moment — road, equipment, land, 
 
 ^ For the development of this distinction, which involves a combination 
 of the ideas of Knies and Newcomb, I am much indebted to my colleague, 
 Dr. Irving Fisher. 
 
6 PUBLIC AND PRIVATE WEALTH, 
 
 buildings, stocks of other corporations, accounts payable, 
 materials and cash on hand. The income account gives 
 its earnings during the year preceding — from passengers, 
 freight, mail, express, and other sources. The two ac- 
 counts deal with the same road, but with a totally differ- 
 ent set of items ; and while the amount of the one has a 
 great influence on the other, there is no direct connection 
 between the two. 
 
 § 6. As a matter of pure mathematics, a quantity of 
 capital and a rate of income should be as incommensur- 
 able as a line and an angle. In practice, however, we 
 are constantly comparing the two. The rate of interest 
 furnishes a basis on which we compare and exchange 
 capital and income with one another. If we say that the 
 rate of interest is five per cent, we mean that we regard 
 an income of five dollars a year as equivalent to a capital 
 of a hundred dollars. The causes which determine this 
 basis of comparison are extremely complicated ; they are 
 treated at length in chapter ix. 
 
 § 7. Of the two methods of measuring wealth, the in- 
 come standard is of more primary importance ; that of 
 capital is secondary. Accumulations of capital have their 
 chief usefulness as means of producing income. For this 
 reason the term capital is confined in ordinary usage to 
 things which are valued in connection with productive 
 industry. As thus limited, the word capital, in its public 
 sense, means wealth used for producing more wealth. A 
 nation's capital consists mainly of food, necessary cloth- 
 ing and shelter, materials, machinery, means of transporta- 
 tion, and instruments of exchange. It is impossible to 
 say just which objects are capital and which are not. It 
 is very far from being possible to form an accurate money 
 valuation of the aniount of such capital. On the other 
 hand, private capital is property used for acquiring more 
 property. We can tell with substantial accuracy what 
 property each individual is using as capital, and can esti- 
 
DIFFERENT MEANINGS OF CAPITAL. y 
 
 mate its money value very closely. Just as the acquisi- 
 tion of property is usually attended with production of 
 wealth, so the investment of property as private capital 
 is usually attended with accumulation of public capital. 
 But there are cases where one takes place without the 
 other. The burglar's outfit or the roulette table of the 
 gamester is private capital — property used for acquiring 
 more property ; but it certainly is not wealth used for 
 producing more wealth. On the other hand, the pioneer 
 in science often adds greatly to the wealth of the country 
 by the use which he makes of existing wealth ; but the 
 cases are very rare where he increases his property in so 
 doing, or where the attempt to acquire property is a 
 dominant motive in directing his action. Public capital is 
 not the sum of the private capital of individuals, any more 
 than public wealth is the sum of individual property rights. 
 Public capital consists of useful things ; capital goods, as 
 Clark calls them. Private capital consists of titles and 
 rights to a part of those things.^ The increase or diminu- 
 tion of such titles is not synonymous with an increase or 
 diminution of the things themselves. 
 
 § 8. The relations between the different forms of wealth 
 may be summed up as follows : 
 
 ^ Some economists, who see that there is a distinction of this kind, fail to 
 recognize its true nature. Both Marx and Clark, for example, speak of 
 capital as a permanent thing, independent of the transmuted and changing 
 goods of which it is at each moment composed. But Clark regards this 
 thing as permanently productive and its increase as normal and natural ; 
 while Marx regards it as an unproductive dead-weight, whose increase is a 
 spoliation of the laborer. But what is this thing which is permanent while 
 the goods change ? It is nothing else than the titles to property in process 
 of industrial transmutation ; titles which carry with them the control and 
 direction of the process. Whether the existence of these titles increases the 
 production of the community depends on the wisdom with which the con- 
 trol is exercised. They are not necessarily productive as assumed by Clark ; 
 still less are they necessarily unproductive as held by Marx. They are more . 
 likely to be productive than not, because our industrial arrangements are 
 such that, if men fail to use their capital for things the community needs, they 
 lose money and are eliminated from control of the next period of production. 
 
-^ 
 
 8 PUBLIC AND PRIVATE WEALTH, 
 
 Wealth in the public sense consists of all means of en- 
 V joyment, whether they have a commercial value or not. 
 The use obtained from these things in a given period is 
 the public income for that period. The amount in exist- 
 ence at any given moment is the public capital at that 
 moment in the broadest sense of the word. But it is cus- 
 tomary to confine the term capital to wealth which is 
 actually used for producing more wealth. 
 
 Wealth in its private sense, better designated as prop- 
 erty, consists of rights to part of the public wealth. The 
 amount of such rights which accrues to any person in a 
 given period is his income for that period. The aggre- 
 gate amount which he has at any moment is his capital in 
 the broadest sense of the word. But here again it is cus- 
 tomary not to apply the term capital to a man's whole 
 property, but to confine it to that part which he uses as a 
 means of acquiring more property. 
 
 § 9. These distinctions are something which the student 
 of economics must master at the very outset. This is not 
 so easy as it appears. The political economists of the six- 
 teenth, seventeenth, and early part of the eighteenth cen- 
 turies habitually confused public and private wealth. The 
 theories of that time constitute what is known as the 
 'inercantile system of political economy, because they in- 
 volve the idea that a nation should strive to make money 
 in the same manner as an individual merchant. Just as a 
 prudent business man so manages his affairs as to produce 
 more than he consumes and make money by the excess 
 of his sales over his purchases, it was thought that a pru- 
 dent statesman should so manage the affairs of the nation 
 as to make it produce more than it consumes and export 
 more than it imports. It was considered by many that 
 this excess of exports over imports constituted an index 
 of national prosperity and the true measure of the in- 
 crease of national wealth. Just as the money which an 
 individual has made represents his power of industrial 
 
MERCANTILISTS AND PHYSIOCRATS. 9 
 
 control over other individuals, it was thought that the 
 money which a nation had thus saved represented its 
 power of control over other nations. In fact, no small 
 part of the commercial legislation of all countries has 
 been framed under the influence of these ideas. 
 
 § 10. The error of the mercantile system was pointed 
 out by a school of French economists known as physio- 
 crats, because they laid stress on the powers of nature as 
 the basis of national prosperity and public wealth. These 
 economists indicated that the true source of national 
 power lay, not in the supply of gold or silver, but in the 
 supply of food ; not in the power to command other na- 
 tions' labor, but in the power to develop its own labor. 
 A nation might be prosperous with very little money /^r 
 capita. This would simply result in a lower scale of 
 prices. But with little food per capita great misery and 
 industrial inefificiency must inevitably follow. Instead of 
 encouraging manufactures, as the mercantile school has 
 done, the physiocrats were led to undervalue them. No 
 manufacture, they said, could exist except on the basis of 
 a surplus of food produced by the agricultural laborers ; 
 and the real cost, not to say the real worth, of every 
 manufacture was measured by the amount of food con- 
 sumption which it represented. Food was therefore the 
 true measure of wealth, no less than the true source of 
 national prosperity. 
 
 § II. This was a great advance from the conception of 
 wealth embodied in the mercantile system. But the 
 physiocrats made a mistake in laying too much stress 
 on the quantity of food as a measure of public wealth 
 and too little on its utilization. The prosperity of a 
 nation depends far more upon the use made of its wealth 
 than upon the amount of such wealth in existence at 
 any time. The public income is not represented by an 
 amount of money, but by a series of purchases made 
 with that money ; not by an amount of unconsumed 
 
10 PUBLIC AND PRIVATE WEALTH, 
 
 food, but by a series of things made and used by those 
 who consume it. A nation which has a large amount of 
 capital and utilizes it badly may be far less prosperous 
 than one with a smaller capital which it transmutes more 
 rapidly. 
 
 The full importance of this process of transmutation 
 was first recognized by Adam Smith, whose Inquiry hito 
 the Nature and Causes of the Wealth of Nations, published 
 in 1776, is usually regarded as the starting-point of modern 
 political economy.^ He agreed with the physiocrats in 
 their strictures on the mercantile system, but his concep- 
 tion of public wealth was broader and truer than theirs. 
 He also showed, far more clearly thaYi any of his prede- 
 cessors, the relation between the pursuit of private wealth 
 and the utilization of public wealth. He proved that the 
 former was a most powerful agency for furthering the lat- 
 ter ; that the actions of men in their pursuit of money- 
 making were a means of serving others even when they 
 had no intention or consciousness of so doing. Modern 
 economists have followed in the lines laid down by Adam 
 Smith. Their inquiry into the causes of the wealth of 
 nations has connected itself with an inquiry into the 
 results of the property rights of individuals and the 
 motives connected with them. This twofold aspect of 
 the science is recognized in the definition given on the 
 title-page of the present work( — An Account of the Rela- 
 tions between Private Property and Public Welfare. 
 
 § 12. The perception of this relation between the ac- 
 quisition of property and the production of wealth has 
 had several important consequences. In the first place, it 
 has changed the attitude of the public mind toward trade. 
 In ancient times trade was regarded as a fight between 
 buyer and seller ; to-day it is looked at as a means of 
 
 ^ The best edition is that of J. E. Thorold Rogers, Oxford, 1880. W. 
 J. Ashley has published an excellent abridgment (New York and London, 
 1891), which presents the most important parts in very narrow compass. 
 
MODERN VIEWS OF MONEY-MAKING. II 
 
 mutual service. To the mediaeval economist the business 
 man was a licensed robber; to the modern economist he 
 is a public benefactor. Five hundred years ago it was 
 thought that a man could make money only by buy- 
 ing goods for less than they were worth, or by selling 
 them for more than they were worth ; that each business 
 transaction involved the temptation to cheat ; and that if 
 a man was successful in business it showed that that 
 temptation had been too much for him. To-day we 
 believe that money is made on a large scale by doing the 
 public a service. If a man's goods command a high price 
 we assume that he has met an actual need. If this price 
 furnishes him a large margin of profit, we believe that he 
 has so organized the labor under his control as to diminish 
 not only his own expenses but the actual labor cost of 
 producing the goods. So confident are we of the substan- 
 tial identity of interest between the business man and the 
 community as a whole, that we give our capitalists the 
 freest chance to direct the productive forces of society to 
 their own individual profit. Even the mistakes of private 
 enterprise may prove a means of progress to society, since 
 they show at comparatively small cost what is to be 
 avoided in the future.' 
 
 § 13. A second result is a change in the attitude of 
 economists toward state interference. When people 
 thought that every business man was trying to serve him- 
 self at the expense of the community, a large number of 
 restrictions of all kinds were brought into play. The 
 commercial legislation of past centuries was a mass of 
 such restrictions. Adam Smith and his successors showed 
 that the bulk of this legislation had a very different effect 
 from what was intended. Instead of preventing extortion, 
 it prevented mutual service. Instead of enabling the 
 nation as a whole to make money, it interfered with the 
 
 ^ Compare J. S. Mill, " On Liberty," London, 1839 ; John Morley, " On 
 Compromise," London, 1877. 
 
12 PUBLIC AND PRIVATE WEALTH, 
 
 development of its resources and the wise application of 
 its labor. To so great an extent were the economists 
 able to point out the evil results of mistaken legislation, 
 that in the popular mind the teaching of economics has 
 become synonymous with the effort to reduce the activity 
 of government to a minimum. The phrase Laissez faire^ 
 laissez passer (let things taken their own course), which 
 was the motto of the physiocrats, has taken an exagger- 
 ated hold on the public imagination, and has been regarded 
 as a fundamental axiom of economic science, when it is in 
 fact only a practical maxim of political wisdom, subject to 
 all the limitations which experience may afford. 
 
 § 14. A third result is to make people treat political econ- 
 omy as a science instead of an art. The earliest students of 
 the subject thought that political economy was the art of 
 managing the business affairs of a community in the same 
 way that domestic economy is the art of managing 
 the business affairs of a household. The modern econo- 
 mist rejects the idea of paternalism involved in this 
 conception. He sees that the attempts of government 
 authorities to manage the economy of a nation, however 
 well meant, are apt to defeat their own ends ; that the 
 growth of national wealth depends upon causes far deeper 
 and more powerful than those which the statesman or 
 legislator can control ; and that more is to be accomplished 
 by trying to observe and study these causes than by seek- 
 ing to repress their operation. In this modern view we 
 are able to develop a true science of political economy. 
 It is one which concerns itself primarily with explanations 
 rather than precepts. It bears the same relation to the 
 arts of statesmanship and legislation that the science of 
 physiology bears to the art of medicine, or the science of 
 mechanics to the art of engineering. It does not prescribe 
 to the statesman or legislator exactly what he shall do, as 
 the ancient art of political economy would have attempted ; 
 but it indicates limits which he cannot pass without 
 
ECONOMIC LA WS, 1 3 
 
 defeating his own ends. Economics does not say that all 
 men must be left free to make their own contracts, any 
 more than mechanics says that all buildings must be con- 
 structed on geometrical patterns. But each science sets 
 forth the conditions of stability and the laws of structural 
 strain, which the statesman or the builder disregards at 
 his own peril. 
 
 § 15. In the modern conception of economics the word 
 law is necessarily used in two quite distinct senses. In 
 the majority of cases the economist is primarily occupied 
 with establishing and investigating natural laws, or ob- 
 served sequences of cause and effect. In spite of indi- 
 vidual variations, it is now recognized that the average or 
 typical conduct of masses of men operates with a high 
 degree of regularity. The modern science of statistics is 
 based on the existence of such regularity, and concerns 
 itself exclusively with natural laws of this kind. But the 
 economist also includes in the scope of his investigations 
 X\\Q positive laws or commands relating to wealth, whether 
 moral or jural in their character ; the former deriving 
 their authority from the moral sentiments or religious 
 beliefs of the community, while the latter are promulgated 
 and enforced by the government. 
 
 § 16. With the growth of these modern ideas of sci- 
 entific method, the name economics, which is essentially 
 that of a science, is gradually being substituted for the 
 older term political economy, which was in some respects 
 more appjjcable to an art. ^^ - 
 
 § 17. It was not by mere chance that the Declaration 
 of Independence and the Wealth of Nations were pub- 
 lished at so nearly the same time. Each involved the 
 recognition of the same principle in different fields of 
 human activity. In jngdern politics we have seen that 
 society is better governed by allowing individuals, as far 
 as possible, to govern themselves, ^n modern economics 
 we have seen that society is made richer by allowing 
 
14 PUBLIC AND PRIVATE WEALTH, 
 
 individuals, as far as possible, freedom to get rich in their 
 own ways. Each of these principles has its limits ; but 
 each marks an immeasurable advance, in politics and in 
 economics, over the system of police government which 
 had preceded it. 
 
 This development of individualism in economics is part 
 of the general trend of modern thought and modern life. 
 A few centuries ago, the principle of individual freedom 
 was not recognized in law or in morals, any more than in 
 trade. It was then thought that liberty in trade meant 
 avarice, that liberty in politics meant violence, and that 
 liberty in morals meant blasphemous wickedness. But 
 as time went on, the modern world began to see that this 
 old view was a mistake. Human nature was better than 
 it had been thought. Man was not in a state of war with 
 his Creator and all his fellow-men, which it required the 
 combined power of the church and the police to repress. 
 When a community had achieved political freedom, its 
 members on the whole used that freedom to help one 
 another instead of to hurt one another. When it had 
 achieved moral freedom, it substituted an enlightened 
 and progressive morality for an antiquated and formal 
 one. When it had achieved industrial freedom, it sub- 
 stituted high efficiency of labor for low efficiency, and 
 large schemes of mutual service for small ones. Con- 
 stitutional liberty in politics, rational altruism in morals, 
 and modern business methods in production and dis- 
 tribution of wealth have been the outcome of the great 
 individualistic movement of the nineteenth century. The 
 individualist has taught people not to confound public 
 morality with a state church, public security with police 
 activity, or public wealth with government property. He 
 has taught men that, as society develops, the interests of 
 its members become more and more harmonious ; in 
 other words, that rational egoism and rational altruism 
 tend to coincide. In fact his chief danger lies in exag- 
 
INDIVIDUALISM AND SOCIALISM, 1 5 
 
 gerating the completeness of this coincidence in the 
 existing imperfect stage of human development, and in 
 believing that freedom will do everything for society, 
 economically and morally. He is prone to assume that 
 private property would necessarily be managed in the 
 public interest, and is in danger of treating the increase 
 of such property as a good in itself instead of a means to 
 the public good/ 
 
 § 18. These mistakes and exaggerations of individualism 
 have afforded a legitimate field for socialistic criticism. 
 A socialist, in the proper definition of the word, is a man 
 who distrusts these conclusions of the individualist and 
 who believes that the loss from the exercise of individual 
 freedom in most of the debatable cases outweighs the 
 gain.^/^Scientific socialists have done admirable work in 
 pointing out where the evils arising from individual free- 
 dom may exceed its advantages, and when society must 
 use its collective authority to produce the best economic 
 and moral results. Men of this type must recognize that 
 the point of issue between individualism and socialism is 
 not a question of ends, but of means. Both sides have 
 the same object at heart, namely, the general good of 
 society. One side believes that this good is best achieved 
 by individual freedom in a particular line of action ; the 
 other side believes that the dangers and evils with which 
 such freedom is attended outweigh its advantages. 
 
 § 19. Unfortunately the contest between individual- 
 ists and socialists has not been carried on in a spirit 
 which could lead to mutual understanding. The individ- 
 ualist is apt to regard the socialist as revolutionary, in 
 the face of the fact that in conservative countries like 
 England a great many of the ideas of socialism have been 
 carried out by constitutional methods and in the most 
 
 ^ An illustration of this danger is seen in the writings of the brilliant 
 French economist Bastiat, whose '* economic harmonies " are sometimes as 
 overstrained as the " economic antinomies " of socialists like Proudhon. 
 
 r 
 
1 6 PUBLIC AND PRIVATE WEALTH. 
 
 peaceable fashion. The socialist is apt to regard the in- 
 dividualist as hard-hearted and immoral, in the face of the 
 fact that the group of individualist thinkers at the close 
 of the last century, headed by Jeremy Bentham, did more 
 to promote practical morality and enlightened care for 
 the unfortunate than had been accomplished for centuries 
 previous. The socialist thinks that the individualist's 
 ideal of a good citizen is the "economic man," solely oc- 
 cupied with the pursuit of wealth, whom some economists 
 have used as a lay figure on which to exhibit their deduc- 
 tions. He charges the individualist with glorifying the 
 pursuit of wealth and making it the chief end of man. 
 This is exactly the reverse of the truth. The individual- 
 ist views the pursuit of private wealth, not as an end, but 
 as a means to the general well-being of society. He 
 shows that the effort to make money is a most powerful 
 incentive to work in the service of the community — in 
 fact the most powerful incentive the world has yet known ; 
 and that within certain limits the commercial success or 
 failure of an enterprise is dependent upon the question 
 whether the community needs it. To this extent he may 
 be said to glorify the pursuit of wealth, in showing that it 
 is a means of mutual service instead of mutual robbery, 
 an honorable ambition instead of a base one. But in thus 
 elevating it to its proper place in the social order, he also 
 reduces it to its proper place. By understanding the uses 
 of the commercial system, he is able the more effectively 
 to criticise its abuses. The day is past, if ever there 
 was one, Avhen indiscriminate condemnation of business 
 methods and business ambition can be effective. The 
 moralist who tries to show that money-getting is a mean 
 thing overshoots the mark. His own acts, in his daily 
 life, are usually enough to convict him of inconsistency. 
 The economist, on the other hand, in pointing out the 
 reasons why modern business methods are approved by 
 society, puts himself in a position to condemn those 
 
INTELLECT VERSUS EMOTION, 1/ 
 
 methods when they are carried to a point where they 
 cease to be of social service, and violate instead of fur- 
 thering the purposes which have justified their existence. 
 § 20. Individualism is not a creed or a platform, but 
 a way of looking at things ; and the same may be said of 
 socialism. The difference between individualists and 
 socialists is largely a matter of temperament. It comes 
 from a difference in constitution which leads the individu- 
 alist to calculate the large and remote consequences of 
 any measure and ignore the immediate details, while the 
 socialist feels the immediate details so strongly that he* 
 distrusts the somewhat abstract lines of thought which the 
 individualist is prone to follow. There is always some 
 danger that the individualist will undervalue the emo- 
 tional element in dealing with economic matters. Men 
 of the more purely intellectual type are liable to mistakes 
 of this sort. Reasoning about human conduct is full of 
 chances of error ; and if the outcome of such reasoning is 
 to leave a considerable number of human beings in hope- 
 less misery, the socialist is justified in demanding that 
 every premise and every inference in the chain of reason- 
 ing be tested, and every rational experiment be made to 
 see whether such a consequence is reallv inevitable. In- 
 stances have not been wanting where the conclusions of 
 the economists have proved wrong, and the emotions of 
 the critics have been warranted by the event. The fac- 
 tory legislation of England furnishes an historic example. 
 The economists, as a rule, condemned this legislation as 
 wrong in principle and likely to do harm ; but the results 
 showed that these economists had overlooked certain 
 factors of importance with regard to public health and 
 public morals which vitiated their conclusions and justi- 
 fied public opinion in disregarding them. 
 
 But while the men of emotion may sometimes be right 
 and the men of reason wrong, the chances in matters of 
 legislation are most decidedly the other way. It is safe 
 
1 8 PUBLIC AND PRIVATE WEALTH, 
 
 to say that the harm which has been done by laws based 
 on unemotional reasoning is but a drop in the bucket 
 compared with that which has been done by laws based 
 on unreasoning emotion. The tendency to overvalue 
 feeling as compared with reason is a far greater practi- 
 cal danger than the tendency to undervalue it. For 
 legislation is essentially a matter of remote consequences. 
 The man who tries to reason out these consequences will 
 occasionally make mistakes ; the man who refuses to reason 
 them out will habitually do so. S^The good which state 
 'interference does is often something visible and tangible. 
 The evil which it does is much more indirect, and can 
 only be appreciated by careful study. The man who has 
 his mind so fixed on some immediate object as to shut his 
 eyes to the results of such study, is almost certain to 
 advocate too much state action. He may succeed in 
 passing a few good laws, but he will be responsible for a 
 vastly larger number of bad ones.* 
 
 § 21. But how are we to determine what constitutes the 
 general good of society, or to decide, in doubtful cases, 
 whether a law is to be regarded as good or bad ? What is 
 to be our standard of public wealth ? Shall we judge it 
 by some preconceived ethical code ? This begs the whole 
 question, for every race and every generation has a dif- 
 ferent ethical code of its own ; and the very point we 
 have to decide is, which of these several standards is the 
 best. Or shall we judge a law by its effect on the happi- 
 ness of the human race as a whole ? The difficulty of 
 measuring happiness of groups of men renders this 
 standard wholly unpractical except in a very limited 
 range of cases. Or shall we try to discover in which 
 direction human evolution is tending, and call a thing 
 good or bad according as it perpetuates itself by conform- 
 ing to this tendency or destroys itself by resisting it ? 
 This is the standard which Hegel, Comte, and Darwin, 
 ^ Herbert Spencer, "The Man versus The State," 1884. 
 
THE STRUGGLE FOR EXISTENCE, 19 
 
 each in their several ways, have gradually taught the 
 modern world to apply and accept. 
 
 The modern observer sees in human history, no less 
 than in natural history, the record of a process of elimina- 
 tion and survival. He sees that laws and institutions no 
 less than genera and species are the result of natural 
 selection instead of being ordained by Providence for all 
 time. He sees that the explanation, not to say the justi- 
 fication, of national customs and feelings must be sought 
 in the historical reasons for their survival. The modern 
 world is coming to look at history as a record of a struggle 
 between different ideas and different institutions, whose 
 issue is chiefly decided by the^ moral qualities of the con- 
 testing races and has its chief importance in determining 
 the moral standards of those races in the immediate 
 future. 
 
 § 22. The struggle for existence among men is probably 
 quite as severe as that among the lower forms of organic 
 life. Among men as among animals or plants, we find a 
 number of young brought into being which is far in ex- 
 cess of the number that reaches maturity. We have a 
 constant process of elimination of the weak and selection 
 of the strong ; a process by whose workings we may ex- 
 plain the formation of different types of man, as we have 
 learned to explain the origin of species in plants or 
 animals. In some respects the application of the doctrine 
 of natural selection to human history is easier and clearer 
 than its application to biology. In biology, no satisfac- 
 tory explanation has been given of the preservation of ac- 
 quired characteristics. Whether we hold with Darwin that 
 they are transmitted by heredity, or with Weissmann that 
 they are not thus transmitted, our reasoning is in either 
 case beset with difificulties. But the student of human 
 history is troubled with no such dilemma. Imitation and 
 education will account for the perpetuation among the 
 children of the useful qualities which their fathers have 
 
20 PUBLIC AND PRIVATE WEALTH. 
 
 developed, and for the quick suppression of some qualities 
 which have proved disastrous, without the necessity of 
 calling in the aid of any doubtful theory of heredity. 
 
 § 23. But while the intensity of the struggle is the 
 same, the conditions under which it is waged are different 
 in certain important respects. In the first place, the 
 human struggle for existence is between groups more 
 than between individuals. In the second place, it is a 
 struggle for domination more than for annihilation, — a 
 struggle which has in it the possibility of losing part of its 
 character as a strife and giving place to an arrangement 
 for mutual service between those whose interests at first 
 seemed to conflict. Neither of these things is wholly 
 confined to the human race. All the higher animals 
 make some sort of arrangements for the protection of 
 their young until they reach years of maturity. They 
 have some measure of family life, in which one or both 
 parents will readily sacrifice themselves for the preserva- 
 tion of their offspring; so that the struggle is to a certain 
 extent for the preservation of families rather than of 
 individuals. In a great many cases larger groups of 
 animals band themselves together for mutual defence and 
 support, so that, within the limits of the group or herd, 
 cooperation takes the place of conflict. In a few cases, 
 especially among the higher forms of articulate life {e. g. 
 ants), we even find domination substituted for annihilation 
 as the result of the struggle between races. The race of 
 ants which has proved stronger in the fight no longer 
 regards the members of the weaker race as rivals to be 
 killed, but as helpers to be utilized in labor for which the 
 fighting race is unfitted. Under such circumstances we 
 find institutions and usages which are in many respects 
 strikingly like those of semi-civilized man. 
 
 § 24. What really distinguishes the evolution of human 
 habits and institutions from those of the beaver or the ant 
 is that their progress and differentiation are not accom- 
 
E VOL UTION IN HUM A N SOCIE TV, 21 
 
 panied by changes of corresponding importance in the 
 physical structure of the members of the race. The fight- 
 ing ant is of a different species from the working ant. All 
 its physical characteristics are different. They cannot 
 have a common offspring. But the fighting man and his 
 slaves belong to the same species. Their races can and do 
 mix. Their physical characteristics are strikingly alike. 
 The development of distinctive habits and usages among 
 the lower animals is coincident with, and probably in- 
 cidental to, obvious changes of physical structure. But in 
 man the variations of habit and usage are the conspicuous 
 phenomena, while the variations of physical structure are, 
 by comparison, neither permanent nor important. 
 Among the lower types of organic life, instances where 
 domination rather than annihilation is the outcome of the 
 struggle for existence are marked by sharp structural 
 distinctions between the groups involved ; distinctions 
 which are even more conspicuously marked in groups 
 which render mutual service without one-sided domina- 
 tion. In the lower forms of life this is almost confined to 
 organisms that stand wide apart — e.£^., flowers and insects. 
 But in the human race it is most fully developed among 
 those who stand nearest together in their plane of 
 civilization, and who in their physical characteristics 
 would seem to be designed for rivals rather than helpers. 
 § 25. There may have been a time at the beginning of 
 its existence when the human race lived in isolated fami- 
 lies ; when its organization was like that of the lion rather 
 than that of the wolf. The evidence on this subject is 
 quite untrustworthy. But the earliest and lowest races 
 of humanity about which we can safely generalize are 
 conspicuously gregarious. The horde is the unit, and not 
 the family. There seems to be no reason for modifying 
 the old word of Aristotle, that man is a political animal, 
 and that the man without a community is either less than 
 man or more. 
 
22 PUBLIC AND PRIVATE WEALTH, 
 
 When we have a struggle for existence between com- 
 munities, we no longer find the stronger individuals pre- 
 served at the expense of the weaker. It is the stronger 
 form of organization which survives ; or perhaps we can 
 better say that survival proves which of the forms of 
 organization is the stronger. We have a natural selection 
 of ethical types rather than physical ones. In fact the 
 very strength of the bonds which hold the organization 
 together may prevent the elimination of weaker individu- 
 als and pave the way for physical degeneration of the race 
 as a whole ; realizing Goethe's fear that the world would 
 turn into a vast hospital where the best energies of the 
 strong would be taxed to take care of the weak. 
 
 § 26. To avoid this danger, which becomes more immi- 
 nent as civilization advances, every_good organ izatioij, 
 provides^ fof ar-C€rtain-a4nauiit,^of.jtjruggle withinrthegroup 
 itself. Such a struggle between individuals is of im- 
 portance, in order to prevent the group type from becom- 
 ing so rigid, and its laws and customs so inflexible, as to 
 render it unable to adapt itself to changed conditions. 
 But these conflicts within the group are to be regarded 
 as means for preserving the whole group and making it 
 strong. Where an institution gives the best individuals 
 the chance to set the pace for the whole community and 
 force it up to their level, it affords to the race that 
 enjoys it an advantage in the struggle for existence ; 
 where it gives them the chance to exalt themselves by 
 pushing down their fellows, it has an opposite effect. The 
 individual conflict must be judged as good or bad accord- 
 ing to its bearings on the outcome of the race conflict. If 
 the individualist can show that freedom will really con- 
 tribute to the success of a nation or community in its 
 struggle for existence with rival nations or communities, 
 no one is likely to dispute the advantages of freedom. 
 If, however, the socialist can show that this freedom en- 
 riches a few in the nation at the expense of the many, 
 
ECONOMICS A ND E THICS. 2 3 
 
 and thus makes any increase in material wealth a source 
 of weakness rather than of strength, his criticism and de- 
 mand for change will be accepted. No economist of repu- 
 tation at the present day would attempt to ignore the 
 ethical aspects of an institution, as might have been done 
 fifty years ago. Instead of asserting the complete inde- 
 pendence of economics and ethics, the modern economist, 
 whether individualist or socialist, would insist on the close 
 connection between the two sciences. He would say that 
 nothing could be economically beneficial which was ethi- 
 cally bad, because such economic benefit could be only 
 transitory. He would insist with equal force that nothing 
 could be ethically good which was economically disastrous, 
 because in this case also destruction must ensue with 
 equal certainty. The economist must understand the 
 ethical bearings of the results which he discusses ; the 
 moralist must understand the economic consequences of 
 the action which he advocates. 
 
 § 27. Now that the world has come to recognize the 
 true position and importance of economic history, it is 
 useless to try to divide the economists of today into de- 
 ductive and historical schools^ according as they employ 
 one method or the other. Every good economist now 
 employs both methods by turns; being guided in his 
 choice by the character of the problem he is investigat- 
 ing. The old antithesis between deductive and historical 
 schools is giving place to a distinction between static 
 and dynamic problems. In a static problem we assume 
 that the character and institutions of a people remain 
 fixed while the relations between the individual members 
 change. In a dynamic problem we take account of the 
 progressive changes in national character which result 
 from the altered conditions of individuals. If the econo- 
 mist takes human nature and human society as he finds 
 them in the most civilized communities, with all their 
 habits and their motives, their institutions and their 
 
24 PUBLIC AND PRIVATE WEALTH. 
 
 theories, and on the basis of this assumption inquires 
 what will be the effect of any proposed line of action 
 upon the production and distribution of wealth, and the 
 general well-being of society, this is called the deductive 
 method of investigation. It deduces consequences from 
 a given set of social conditions ; it is the method chiefly 
 used in dealing with static problems. But the economist 
 may go one step farther back and inquire how these mo- 
 tives and institutions have arisen ; how far they are them- 
 selves capable of modification ; what causes at the present 
 day may be contributing to modify them. This is called 
 the historical method of inquiry, and is of special impor- 
 tance in the study of dynamic problems. 
 
 § 28. Most of the every-day work of economists involves 
 the deductive method rather than the historical. If we 
 ask why the price of wheat is falling ; or why wages are 
 high in a certain locality ; or what is the probable effect 
 of a proposed tax law upon production and prices ; or how 
 the various classes in the community are influenced by the 
 use of silver as money ; — we take human nature as we find 
 it, and consider how commercial motives operate in affect- 
 ing demand and supply in various lines of industry. But 
 in the more difficult questions which involve moral judg- 
 ment, the historical method must be combined with the 
 deductive. If we ask whether trades-unions are a good 
 thing or a bad thing, it is not enough to consider their 
 momentary effect on wages, prices, and demand for labor. 
 We must study this carefully; but we must also study 
 something more. We must look at the educational effect 
 of such organizations upon successive generations of 
 workmen and capitalists. Have they, in actual history, 
 been wisely or unwisely led ? Have they taught work- 
 men to do better work or worse work than was obtained 
 by free competition? Have they secured a more equita- 
 ble distribution of wealth among the members of the com- 
 munity ? Are they likely to mitigate or to intensify those 
 
HIS TO RICA L ME TIIOD OF INQ UIR Y. 2$ 
 
 conflicts between capital and labor which form such a 
 source of social weakness in the present economic system ? 
 All these questions must be answered, and the probable 
 gains and losses carefully balanced, before we are in a 
 position to pass judgment on the question in its most 
 fundamental aspect. In a broad problem of this kind, de- 
 ductive economics and deductive ethics are equally help- 
 less. The two sciences must be studied historically in 
 connection with one another. 
 
CHAPTER II. 
 
 ECONOMIC RESPONSIBILITY. 
 
 Slavery — Property — Emancipation — The Persistence of Poverty — The 
 Malthusian Theory — Poor Relief — Compulsory Insurance. 
 
 For a fuller account of the sociological basis of economics the reader is 
 referred to F. H. Giddings, *' Principles of Sociology," New York, 1896. 
 A. Wagner, " Grundlegung " (vol, i. of his " Lehrbuch der Politischen Oeko- 
 nomie "), 3d ed., Leipzig, 1893 ; and A. Loria, " Les Bases Economiques de 
 la Constitution Sociale," Paris, 1893, may be read with advantage. The lat- 
 ter deals with economic history from a distinctly socialistic standpoint. 
 
 J. Bonar : " Malthus and his Work," London, 1885. 
 
 H. Fawcett : " Pauperism," London, 1871. 
 
 G. Drage : " The Unemployed," London, 1894 ; " The Aged Poor," 
 London, 1895. 
 
 § 29. Primitive man seems to have lived in much the 
 same way as did the animals about him. He obtained 
 his food by hunting, by fishing, or by consuming such vege- 
 table products as lay ready to his hand ; in other words, 
 by the destruction of the lower forms of organic life. But 
 as civilization began to develop, he learned to utilize 
 animals and plants instead of destroying them. Instead 
 of kilHng all the animals which he captured in the chase, 
 he found that they could serve him more usefully by be- 
 ing domesticated. Some, like the dog or the horse, could 
 assist him in hunting and increase the certainty of spoils. 
 Some, like the goat or the cow, could give him a steady 
 supply of milk. Some, like the sheep, could be made to 
 multiply their numbers, and give an assured source of 
 
 26 
 
DESTRUCTION OR DOMINATION, 2/ 
 
 warmth in time of cold and a reserve of food when hunt- 
 ing or fishing proved unproductive. A Httle later he 
 learned to utilize plants as well as animals. Instead of 
 eating all the fruit which he found, semi-civilized man 
 saved a part for seed, and had more to eat during the 
 coming year. Instead of destroying the means of food 
 supply that nature furnished, he took care to replace them 
 in increasing numbers. Instead of seeking income only, 
 he began to accumulate capital.' 
 
 § 30. This change in his attitude toward the lower 
 forms of life paved the way for a change in his attitude 
 toward his fellow-men. When a tribe of men lived by 
 hunting, it looked upon the members of other tribes as 
 rivals, to be killed, if not eaten. So late as Roman times 
 a stranger \hostis) was synonymous with an enemy. 
 Where the available food supply was small, every addi- 
 tional mouth was a positive evil. As a consequence the 
 wars between different tribes were wars of extermination. 
 Prisoners could not be taken ; for the only way in which 
 they could support themselves was by hunting, and if 
 they were given weapons to hunt with, they might use 
 them to the destruction of their conquerors. In a state 
 of society like this female captives were occasionally 
 spared ; male captives almost never, unless for some very 
 exceptional reasons the conquerors were prepared to adopt 
 the captive as a member of their own tribe. 
 
 But when the domestication of animals and the cultiva- 
 tion of plants came into use, the case was altered. The 
 captives could be employed to perform labor which was 
 disagreeable to their conquerors. This labor required no 
 weapons and did not render the slaves dangerous ; though 
 we find some tribes where captives were habitually blinded 
 as a precaution against insurrection, as in Herodotus* 
 description of the Scythians. The more the arts ad- 
 vanced, the greater was the opportunity to utilize such 
 * In the public sense — not as yet in the private sense. 
 
28 ECONOMIC RESPONSIBILITY. 
 
 unwarlike labor and the larger was the proportion of 
 captives whose lives were spared. 
 
 Such was the origin of slavery. As compared with the 
 conditions that preceded it, it represented a positive 
 gain for humanity. From the standpoint of the captive, 
 it was better to be spared even for a life of hard labor 
 than to be put to death without mercy. From the stand- 
 point of the conqueror, it was an intellectual and moral 
 advance to forego the cruel delight of torturing enemies 
 for the sake of the future advantages to be obtained from 
 mastery over their persons and powers. From the stand- 
 point of the community as a whole, it was an immeasurable 
 gain to have labor exercised continuously for a remote 
 end, even though it was bestowed grudgingly and under 
 compulsion. 
 
 § 31. Those who look at the virtues of free communi- 
 ties, and the vices which develop in connection with the 
 system of slavery, are often tempted to regard its intro- 
 duction as a degradation of society. Even if they admit 
 that the new system enables a great many people to live 
 who would otherwise have been put to death, they think 
 that this is accompanied by a lowering of the average 
 moral standard of the community. There is much super- 
 ficial reason for this view. Where all men were free, and 
 all skilled in the use of arms, there was universal self- 
 reliance and self-respect. Where each man by the same 
 token was able to protect the honor of his daughter, sister, 
 or wife, there was frequently a high degree of respect for 
 women. But these merits were outweighed by an in- 
 security which rendered progress impossible. So much 
 of the strength of the community had to be spent in 
 fighting, that there was little opportunity for present 
 comfort and no chance to lay the foundation for future 
 improvement. The rose-colored view of the life of free 
 communities which people held a few years ago is no 
 longer universally accepted. Great as were the disadvan- 
 
SLAVE LABOR. 2g 
 
 tages attending it, there is reason to believe that the con- 
 dition of serfdom gave to the majority of the people who 
 lived under it a positive advance in present enjoyment 
 and in possibility of increased future enjoyment. The 
 mediaeval villein who had to give half his time to the ser- 
 vice of a feudal lord was better off, materially at any rate, 
 than a man who, though nominally free, had to spend half 
 of his working time in self-protection, and who even on 
 those terms could not protect his family from outrage, 
 nor the results of his labor from arson and pillage.' 
 
 § 32. But while slave labor marked an advance over the 
 conditions which had preceded it, it was far from being a 
 good sj^stem according to modern standards. It was 
 better than no labor at all. This was about all that could 
 be said in its favor. If people would not work except on 
 compulsion, it was a good thing for society to have that 
 compulsion exercised. But the result was at best un- 
 satisfactory. The slave tended to keep his product at a 
 minimum. He was compelled by the overseer to do a 
 certain amount ; he had no inducement to do more than 
 that amount. He had reason to believe that his master 
 would be forced by self-interest to allow the slave enough 
 to keep him alive ; he was still surer that the master would 
 not allow him more than this. Any extra exertion or care 
 redounded to the profit of the master, not of the slave. 
 The inevitable result was low efificiency and great waste. 
 The more complicated the work to be done, the less was 
 the chance of avoiding these evils. A slave-driver could 
 compel those who were subjected to his rule to perform a 
 certain amount of physical labor: but he could not com- 
 pel them to exercise intelligence or zeal. These were only 
 to be secured when the hope of reward came in to supple- 
 ment or take the place of the fear of punishment. When 
 
 ^ Modern historical criticism has cast doubt on the idea, so universally held 
 a short time ago, that the development of feudalism supplanted a system of 
 free and prosperous village communities. 
 
> 
 
 r 
 
 30 ECONOMIC RESPONSIBILITY, 
 
 the habit of labor and the capacity for labor were suffi- 
 ciently developed in a race of men, the institution of 
 property furnished a far more potent means of getting 
 work done for society than did the institution of slavery. 
 While it allowed the shiftless men to do a little less, it 
 encouraged the prudent and ambitious to do a great deal 
 more. 
 
 § 33. It must not be supposed that property rights 
 originated in considerations of this kind. Though the 
 institution of property is a most important motive to the 
 zealous and intelligent application of labor, it was not de- 
 vised for this purpose. The earliest property rights were 
 based on occupancy rather than on labor. They were a 
 recognition of the power of the strong man to retain what 
 he had seized, not of the right of the industrious man to 
 enjoy what he had produced. We may fairly grant the 
 claim of the socialist that capital originated in robbery. 
 In like manner, labor originated in slavery. Neither fact 
 has any appreciable bearing on present issues. Neither 
 fact tends in the least to prove either that the capitalist 
 is a thief or the laborer an inferior. 
 
 § 34. At first, property seemed indistinguishable from 
 possession. The so-called property-rights of uncivilized 
 tribes are for the most part customs regulating the claims 
 conferred by possession, rather than guarantees of per- 
 manent ownership. True property right is something 
 quite distinct from the fact of possession or from the 
 claims which such possession gives the occupant. It in- 
 volves a recognition on the part of the community that 
 some individual or group of individuals has permanent 
 authority over certain objects, whether he is actually 
 using them or not. In the hunting stage of society there 
 was very little property right, because most of the useful 
 objects took the form of food for immediate consumption 
 or clothing and weapons for continuous use. In any of 
 these cases the fact of possession was the important matter 
 
ORIGIN OF PROPERTY RIGHTS. 3 1 
 
 and established a right of use. A man was left in posses- 
 sion of the things which he himself made, used, and con- 
 sumed. But the same progress in the arts which gave 
 the chance for labor and paved the way for slavery, gave 
 rise to questions of ownership and to a more complex 
 system of property rights. Whenever there was an alter- 
 native between domination and destruction, as in taming 
 an animal instead of eating it, or in sparing a prisoner of 
 war instead of killing him, it was necessary to strengthen 
 the motives which should lead people to sacrifice obvious 
 present enjoyment for the sake of large future advantage 
 to the community. An animal was far more likely to be 
 domesticated if the man who had captured it was allowed 
 special and enduring rights to its use. The prisoner of 
 war was far more likely to be spared by his captor if that 
 captor was assured that the slave would be recognized as 
 belonging permanently to him rather than to the com- 
 munity as a whole. 
 
 § 35. Such ancient property rights are for the most part 
 not well earned, according to modern standards. They 
 are due to force more than to labor. The men who enjoyed 
 the most property were, as a rule, the successful fighters 
 rather than the industrious workers. But such a system 
 of property, in spite of its apparent violations of justice, 
 has served an important purpose. It marks the beginning 
 of a higher civilization. It enables the races that have 
 lived under it to reach a higher stage of material and 
 moral development than their rivals who have had no 
 such system. 
 
 In the first place, it tends to the preservation of useful 
 things. It causes domination to take the place of extinc- 
 tion as a habit in peace and a purpose in war.* It gives 
 the race a larger amount of accumulated wealth of every 
 sort ; and this wealth, though primarily enjoyed by a few 
 
 * Compare O. Effertz, " KatechismusderPolitischenOekonomik," Bonn, 
 1893. Lieferung III. 
 
32 ECONOMIC RESPONSIBILITY. 
 
 who have perhaps done least to merit it, nevertheless con- 
 tributes to the strength and security of the whole people 
 and their possibilities of enjoyment in the future. Insecu- 
 rity of tenure makes wealth likely to be destroyed. It 
 was noticed in the American Civil War that when a regi- 
 ment was ordered to leave a camping ground which it had 
 gradually made comfortable, a fire was almost certain to 
 arise which would consume all the non-portable improve- 
 ments. 
 
 § 36. In the second place, property right, even when 
 based upon force, creates a class of men more or less 
 removed from the immediate pressure of poverty. The 
 man who holds accumulated wealth can use it for the per- 
 manent advantage of himself and his children, and enable 
 them to develop physically and mentally in the face of 
 industrial vicissitudes which would otherwise bring the 
 whole community to the verge of starvation. Property 
 of this kind is accumulated not for the individual alone, 
 but for his family. Its development is associated with 
 the development of modern family life. It paves the way 
 for a progressive advance of the members of a family from 
 generation to generation. By exempting the children of 
 the fortunate few from the burdens of want which, if 
 equally shared, would drag the whole race down, it 
 allows them to advance and to pave the w^ay for a similar 
 advance on the part of others. The desire to make pro- 
 vision for one's children is not merely a potent motive for 
 the preservation of property, but a powerful means for 
 giving free room to the process of natural selection of the 
 types most fit for permanent strength and survival. 
 i § 37. In the third place, such accumulations of prop- 
 erty, combined as they are with family life and family 
 feeling, create a conservative class in the community 
 which stands on the side of law rather than of violence, of 
 construction rather than of destruction. If a strong man 
 has no property, he has everything to gain and nothing 
 
EXTENSION OF PROPERTY RIGHTS. 33 
 
 to lose by the constant prevalence of petty warfare. If, 
 however, he has useful rights which he wishes society to 
 recognize, and, above all, if he desires a permanent recog- 
 nition of those rights for his children as well as for him- 
 self, his powers are enlisted on the side of tranquillity and 
 permanence rather than on that of war and change. He 
 is interested in giving increased power to law and to the 
 sentiment of respect for law ; a process which, as it is car- 
 ried toward its completion, must work for the benefit of 
 the weak quite as much as for that of the strong. Even 
 if his property right was originally based upon acts of 
 violence, he is led to discourage the continuance of this 
 method of acquisition among his immediate neighbors, 
 and to make usage, rather than force, the basis on which 
 society is to recognize rights of possession. 
 
 § 38. If this point has been reached, and the strong 
 man appeals to customary rights among his neighbors, it 
 is but a short step to the recognition of such customary 
 rights among his slaves. Whether a nation takes this 
 step or not depends very largely upon its foreign relations. 
 If these are such that the supply of slaves from abroad 
 continues rapid and steady, the acknowledgment that 
 slaves have rights makes little progress. The old slaves 
 are worked to death, new ones take their place, and there 
 is no room for the creation of a traditional status which 
 slave laborers may inherit from generation to generation. 
 Even among the most civilized nations of antiquity the 
 progress of emancipation was slow as long as wars of con- 
 quest were matters of every-day occurrence. The Romans 
 created a system of property right which enabled them to 
 accumulate wealth, to develop an aristocratic class, and to 
 secure the highest degree of law and order within the 
 Roman dominions ; but it was a long time before the 
 slaves obtained much benefit from this process, because 
 slave labor from abroad was so readily obtained by con- 
 quest. In mediaeval Europe, on the other hand, while 
 
34 ECONOMIC RESPONSIBILITY, 
 
 there was much less accumulation of wealth and much 
 less respect for law, there was far more rapid recognition 
 of civil rights on the part of the laborers who were actu- 
 ally engaged in the production of wealth. It is true 
 that these rights were by no means accurately defined. 
 Serfs could be sold into foreign parts, and different mem- 
 bers of families separated from one another by such 
 sale, to a far greater degree than is generally supposed. ^ 
 But a custom grew up and grew stronger from generation 
 to generation, rendering such infringements of personal 
 liberty more and more rare as time went on. In mediaeval 
 serfdom, as we generally see it in western Europe from 
 the twelfth to the fifteenth century, the villein was bound 
 to labor for his lord a certain number of days, and on 
 other days was allowed to work for himself or for his own 
 community on certain lands set apart for that purpose. 
 He had thus attained, by custom rather than by law, a 
 certain measure of freedom and a status in the community 
 which placed his position far above that of the Roman 
 slave. 
 
 § 39. Where such customary rights have been once 
 established and no new sources of supply of slave labor 
 are opened, the necessity of stimulating production causes 
 the workmen to be given proprietary rights in the pro- 
 duct of their labor. This is at first most conspicuous in 
 manufacturing industries. A few skilled workmen collect 
 in a town where they can defend themselves against mili- 
 tary aggression, and then produce goods so far superior 
 in quantity and quality to the product of their enslaved 
 competitors that the feudal lord soon comes to purchase 
 goods from the town instead of relying on the few rude 
 articles which can be made on his own domain. The 
 towns thus become a centre of free trade and free labor. 
 
 § 40. The same course of events works itself out in 
 
 1 D'Avenel: " Histoire Economique de la Propriete," Paris, 1894, pp. 
 162/-. 
 
EMANCIPATION. 35 
 
 agriculture, though as a rule more gradually. The free- 
 man working for himself can produce so much more than 
 the serf that there is a chance for both parties, lord and 
 vassal, to gain by the process of emancipation. If the 
 amount which a man produces in a day when he works 
 for his landlord is worth a halfpenny, and the amount 
 which he produces when he works for himself is worth 
 one and a half pence, it is for the advantage of both the 
 landlord and the laborer to make a contract whereby the 
 laborer agrees to pay the landlord a penny in lieu of each 
 day's labor previously rendered. Such a contract is also 
 advantageous to the public wealth of the community as a 
 whole, by causing increased food supply and consequent 
 increase either of numbers or of strength. The more in- 
 teUigent and ambitious the laborer, the greater will be 
 the difference between his minimum product which he 
 creates as a serf and his maximum product which he can 
 create as a freeman ; the greater, therefore, will be the 
 possible advantages to all parties from emancipation. 
 Hence we find that the passage from slavery to freedom 
 came earliest and worked itself out most completely in 
 those countries where the general ability of the villein 
 class was greatest. In England, between the twelfth and 
 the fourteenth century, there was a rapid change in the 
 position of the cultivators of the soil, whereby money 
 rents of small amount were substituted for compulsory 
 labor.^ On the continent of Europe the change did not 
 take place so soon, nor was it so complete when it came. 
 Instead of agreeing to pay a certain amount of money, 
 as was generally the case in England, the continental 
 peasants usually contracted to pay a certain share of the 
 product to the owner of the soil. They thus gained a 
 part of the benefit of their industry and ambition, instead 
 of the whole. This system of share rents, whereby the 
 cultivator gives the proprietor a percentage of the pro- 
 
 * W. J. Ashley : " English Economic History," chap. i. 
 
36 , ECONOMIC RESPONSIBILITY. 
 
 duct, is known as the metayer system. Even this degree 
 of independence was not attained by most of the peas- 
 antry in central Europe until the close of the last century, 
 while in Russia the system of serfdom lasted with but 
 slight modifications until 1863. 
 
 § 41. It must not be supposed that this change from 
 slavery to free labor was voluntarily suggested, or even 
 readily accepted, by the feudal lords. It was forced upon 
 them by the conditions of the struggle for existence be- 
 tween different races and different members of the same 
 race. As Europe was constituted in the Middle Ages, 
 the land was by no means well utilized. Scarcely any 
 district produced anything like the amount of food and 
 other supplies which would have been possible under a 
 better system of government. As long as warfare was 
 carried on with rude appliances, this.lack of good agricul- 
 ture, however injurious to the comfort of the mass of the 
 people, did not seriously cripple the fighting power of the 
 privileged classes. But with the improvements in military 
 art, which rendered capital necessary for the successful 
 waging of war, it was impossible for a man to fight to ad- 
 vantage unless his vassals worked to advantage. Where 
 every man was ready to fight on short notice and armies 
 could be supported by plundering the peaceful inhabi- 
 tants of the country through which they travelled, whether 
 friend or foe, the necessity of large supplies was not 
 clearly manifest. But when war was waged on such a 
 scale that a campaign involved weeks of preparation and 
 days of occupancy of the same ground, victory was apt 
 to rest with the man who had the best commissary 
 service. Under these circumstances, the race that could 
 feed and clothe its army on the largest scale had an 
 enormous advantage in the conflict, and one which gener- 
 ally proved decisive. It was for this reason quite as much 
 as for any other that we find kings so often taking the 
 side of free labor. It was not because they loved serfs 
 
SUPERIORITY OF FREE LABOR. 37 
 
 and hated nobles, but because, warring on a large scale, 
 they were compelled to maintain large armies and to give 
 their acquiescence to the system by which such armies 
 could best be fed. 
 
 § 42. The force of these considerations is illustrated by 
 the history of emancipation in Russia and in the United 
 States. To the Russian government, the Crimean war 
 had proved that a country living under the old industrial 
 order, however large her population and her army, could 
 not even on her own ground cope successfully with coun- 
 tries which enjoyed modern industrial methods. Emanci- 
 pation thus became a military necessity. In the United 
 States this necessity was even more strikingly emphasized, 
 because the contending parties were of the same race and 
 on the same general level of civilization, differing only in 
 the fact that the North relied on free labor and the South 
 on slave labor. The contest was decided, not by the 
 direct result of military operations — for if we look at bat- 
 tles alone the victories of the South were more conspicu- 
 ous than those of the North — but by the fact that the 
 North was able to maintain her supplies of every neces- 
 sary article almost unimpaired by the stress of war, while 
 the South was brought low by continually increasing ex- 
 haustion. The war was not decided by disparity of num- 
 bers between the two sections ; for this disparity was 
 nearly counterbalanced by the advantage which the South 
 had in acting on the defensive. It was the disparity of 
 industrial systems which decided the issue of the contest. 
 
 § 43. It must not be assumed that emancipation is a 
 good thing for every man or for every race. Compulsory 
 labor is better than no labor at all. If people are not 
 ready to work for fear of starvation tomorrow, they must 
 be forced to work by physical compulsion today. If they 
 are not accessible to motives of ambition, there is danger 
 that the loss by the introduction of free labor will out- 
 weigh the gain. Where a body of serfs contributes in 
 
38 ECONOMIC RESPONSIBILITY, 
 
 large measure to the working out of its own emancipation, 
 there is not much danger of this result. The struggles 
 necessary to obtain freedom form the best preparation for 
 freedom and the best guarantee that it will be wisely 
 used. But where emancipation is imposed from above by 
 outside power, whether from motives of humanity or of 
 self-interest, there is great danger that, for the time being 
 at least, the losses will outweigh the gains. The emanci- 
 pation of the slaves in South American countries has not 
 always contributed to the commercial prosperity of the 
 countries which set them free or to their general standard 
 of morality and efficiency. Even in the United States it 
 seemed for many years questionable whether the good 
 resulting from the abolition of slavery would outweigh 
 the evil. A population which had never worked except 
 under immediate compulsion was suddenly given the 
 highest degree of freedom. To a considerable part of 
 the negro race this freedom meant liberty to desert their 
 families and to violate all contracts for continuous work. 
 For many years the free labor of the South was too 
 uncertain to be available for industries requiring unin- 
 terrupted toil. Iron manufactures failed in regions con- 
 spicuously well adapted for iron production, because no 
 laborers could be found to keep a furnace in blast if a 
 circus unexpectedly appeared in the next county. They 
 were ready to sacrifice all prospects of future employment 
 for the sake of the day's gratification. Of late this state 
 of things has changed for the better. The increasing de- 
 velopment of business ability among the leading men of 
 the South, coupled with the adaptability and docility of 
 most of the negroes, has at length enabled the country 
 to secure the advantages of free labor. In spite of many 
 perplexing problems connected with increase of negro 
 population, the worst difficulties of emancipation have 
 been evidently surmounted. 
 
 § 44. In Russia the result is not nearly so good. 
 
LOCALIZATION OF POVERTY, 39 
 
 Though the Russian peasant was a little more self-reliant 
 than the negro slave, he was by no means so adaptable to 
 new conditions. Nor were the Russian nobility fitted, 
 either by power or by inclination, to take the lead in 
 teaching the peasantry good business habits. Under 
 such circumstances, the condition of the Russian free 
 peasant today seems to be worse than that of the serf a 
 generation ago. He has diminished instead of increasing 
 his productiveness. He has fallen under the control of 
 the money-lender, who proves quite as hard a master as 
 the old noble. Not having been mentally qualified at the 
 start to avail himself of the advantages which emanci- 
 pation offered, he has gradually sunk into a position 
 where those advantages are out of his reach, no matter 
 how great the industry or the ambition which he might 
 show. People differ as to the remedy ; but there is a 
 general consensus of opinion among all who are versed in 
 Russian affairs that the state of things as it exists at pres- 
 ent is a most unsatisfactory one, and that emancipation 
 has failed to accomplish the good which was expected. 
 
 § 45. The gradual progress of emancipation widens 
 the circle of those who can free themselves from the im- 
 minent danger of poverty. Instead of being confined to 
 the military chieftain, a fair degree of comfort comes 
 within the reach of a large number of men of industry and 
 ability. Under the system of slavery, the worker had no 
 inducement to increase his output or to diminish his con- 
 sumption. Under the system of free labor, each increase 
 in the amount that he produces and each diminution in 
 the amount that he consumes goes to make up a fund 
 which will ensure him and his children against danger of 
 starvation. Under these circumstances there is a force 
 constantly at work to build up a race of industrious and 
 prudent men. Poverty is by no means abolished, but it 
 is localized. The ancient world was constantly in dread 
 of famines which swept away large sections of the com- 
 
40 ECONOMIC RESPONSIBILITY. 
 
 munity and diminished the strength of those that sur- 
 vived. Today we no longer regard such universal misery 
 as a probable incident of economic life. When there is 
 an approximation to such a condition, as in the potato 
 famine in Ireland in 1846, or in the occasional years of 
 great distress in the Russian Empire, it is due to excep- 
 tional causes which have prevented the laborer from 
 realizing the benefits of freedom. In the most advanced 
 communities, extreme poverty is very apt to be associated 
 with gambling, drinking, or general shiftlessness. The un- 
 fortunate but deserving poor, though still far too numer- 
 ous, are the exception rather than the rule. 
 
 § 46. While it is true that poverty persists in the 
 midst of advancing wealth, it is not true that it increases, 
 as so many people are led to suppose. Judged by the 
 best criteria which we can apply, poverty as a whole is 
 diminishing rather than increasing. Both the absolute 
 standard of comfort attained by the average laborer, and 
 the share of national income which goes to labor, seem 
 to be better now than in any period for which we have 
 adequate data for comparison. ^ Perhaps the chief reason 
 why the evils of poverty are so emphasized in modern 
 times is to be sought in the very progress which has local- 
 ized poverty. As long as danger of starvation was re- 
 garded as the common lot of mankind, from which only a 
 favored few were exempt, it seemed as idle to complain 
 of poverty as it was to complain of heat or cold. But 
 when most people were relieved from a pressure which 
 was formerly wellnigh universal, the lot of those who re- 
 mained under the yoke excited commiseration as some- 
 thing exceptional. As theories of political and social 
 
 ^ This subject is further developed in subsequent chapters. See also Rae : 
 " Contemporary Socialism," chapter on "Socialism and the Social Ques- 
 tion." Atkinson : " The Distribution of Products," Part i. Reasonings on 
 either side of this question based on uncritical use of census figures are quite 
 worthless. 
 
THE MALTHUSIAN THEORY. 4I 
 
 equality make progress, the industrial inequality between 
 richer and poorer members of a community is felt to be a 
 grievance. Even by some of those who grant that the sys- 
 tem of free labor has tended to diminish the number of 
 the poor, the fact that any people whatever remain poor 
 and out of work is made an indictment against it. It is 
 felt by many that our theories of political equality and 
 our sense of moral duty are violated if any man who is 
 willing to work cannot obtain the chance to exercise his 
 powers and obtain a living wage by so doing. Admitting, 
 as they must, that much of the poverty is due to causes 
 for which the poor themselves are to blame, they do not 
 feel that society has done its duty as long as any man 
 who is willing to work is deprived of the opportunity. 
 
 § 47. This view was subjected to sharp criticism by 
 Malthus at the close of the last century.^ He made a sys- 
 tematic attempt to prove that society could not under- 
 tgJs^ to provide work for all who might desire it, and that 
 poverty was a necessary incident of the struggle for ex- 
 istence rather than an indictment against modern society. 
 It is of the utmost importance to determine the truth or 
 ^ error of the Malthusian theory. According as we accept 
 or reject it we change our mental attitude toward a large 
 number of schemes of social reform. If poverty is inevi- 
 table and simply represents a sacrifice of individuals for 
 the sake of the progress of the race, we may and must 
 view with resignation a number of evils which can only be 
 made worse by attempting to eradicate them. If, on the 
 other hand, it is in large measure a preventable thing, then 
 the claims of our present civilization to favorable judg- 
 ment, in the matter of either material or moral prosperity, 
 can hardly stand for a moment. 
 
 § 48. The Malthusian theory, in brief, is that popula- 
 tion has a tendency to multiply faster than subsistence, 
 and that, under such circumstances, some people will neces- 
 
 ' "Essay on the Principle of Population," 1798. 
 
42 ECONOMIC RESPONSIBILITY, 
 
 sarily fail to have the food they need ; that poverty is 
 therefore inevitable unless the race as a whole adopts pre- 
 ventive means to restrict the increase of its numbers. In 
 the absence of such preventive checks to population, the 
 Malthusian holds that poverty is unavoidable, and that 
 the numbers of the race will be kept down by vice and 
 misery. 
 
 § 49. In order to understand the chain of proof by 
 which this theory is supported,* let us look at the rela- 
 tions between the birth and death rates and the prosperity 
 of the community as a whole. By the birth rate, as it is 
 ordinarily expressed in statistics, we mean the number of 
 births per thousand inhabitants per year. If in a city of 
 100,000 inhabitants the records show 300 births in a 
 month, we say that this represents a birth rate of 36, be- 
 cause the same number continued through the twelve 
 months would make 3,600 in a year for the whole city of 
 100,000, or 36 per thousand. The physiological possibili- 
 ties of the birth rate in the human race, when not restrained 
 by intellectual, social, or moral considerations, are thought 
 to be as high as 60 per thousand, though no statistics 
 show a birth rate as large as this over any considerable 
 extent of space or time. 
 
 The death rate is computed and expressed in the same 
 manner as the birth rate. For instance, if the number of 
 deaths in the same city during a month was 200, it repre- 
 sents a death rate of 24. 
 
 The lowness of the death rate is an index of social 
 prosperity. If the death rate is high it means that there 
 is a large amount of disease and waste and a short aver- 
 age duration of human life. If, on the other hand, the 
 death rate is low, it means that the average duration of 
 human life is long, disease relatively infrequent, and 
 
 ^ The line of argument which follows differs in some respects from that 
 adopted by Malthus. It represents the modem proof of the theory rather 
 than the one originally advanced. 
 
BIRTH RATE AND FOOD SUPPLY. 43 
 
 working power well utilized. A death rate of 20 per 
 thousand means an average duration of life of 50 years. 
 A death rate of 40 per thousand means an average dura- 
 tion of only 25 years, with all the misery which such a 
 state of things connotes. 
 
 § 50. The difference between the birth rate and the 
 death rate in any one year represents the rate of increase 
 of population for that year. If the birth rate is 45 per 
 thousand, and the death rate 25 per thousand, the in- 
 crease of population is 20 per thousand, or two per cent. 
 Such an increase in any given area means a corresponding 
 increase of the density of population. As long as this 
 increase is accompanied by corresponding improvements 
 in the arts of producing and utilizing food, it has no ad- 
 verse effect ; but when the increase of numbers is more 
 rapid than this, it involves difficulty in obtaining enough 
 for people to eat. For it is a fact thoroughly estab- 
 lished by observation, that in any given stage of the arts 
 there is a certain point beyond which increased applica- 
 tion of labor and capital does not obtain correspondingly 
 increased supplies of food from a given area. A territory 
 which can support one million men in comfort cannot 
 do the same for two million under the same conditions 
 of cultivation. Either the two million must work very 
 much harder to obtain their food supplies from the land, 
 or they must content themselves with less food per capita. 
 This great law of agricultural production is known as the 
 law of the diminishing return. Up to a certain point in- 
 creased amounts of labor and capital are accompanied by 
 more than proportionate increase in the product ; but 
 when this point is passed the additional returns diminish 
 rapidly and not infrequently cease altogether. In order 
 to live at all the laborers have to seek out new lands less 
 advantageous than the old, or to content themselves with 
 obtaining the necessary product from the old lands at an 
 economic disadvantagew 
 
44 ECONOMIC RESPONSIBILITY. 
 
 § 51. Whenever a country has become so crowded that 
 such a state of things as this is realized, the struggle for 
 domination between individuals gives place to a struggle 
 for extinction. Each man in striving to obtain enough to 
 keep himself alive leaves less than enough for some other 
 man. As society is at present organized this pressure 
 will be felt most severely by those who have large families 
 of children. The prudent man, who has not married until 
 assured of his ability to support a family, has placed 
 himself outside of the severest stress of this struggle. 
 But his less prudent competitor, who earns no more and 
 who has more mouths to feed, may find himself, and 
 often does find himself, through no fault of his own ex- 
 cept lack of foresight, in a position where he is unable 
 to keep his children alive. Not that in civilized com- 
 munities they often die of actual and direct starvation ; 
 but that the lack of the food best adapted to their wants 
 makes them succumb to disease where better-fed children 
 would survive. 
 
 § 52. Under favorable circumstances this scarcity of 
 food may be avoided by improvements in the arts, whether 
 of agriculture, of domestic economy, or of good govern- 
 ment. Whatever contributes to the better utilization of 
 the products of the land for human support increases the 
 number of people that can be maintained without the 
 danger of starvation. This result is produced by any im- 
 provement in agriculture which enables the land to fur- 
 nish larger crops ; or by better cooking, which enables 
 more nourishment to be obtained out of the same crop. 
 Improvements in clothing and shelter, which keep people 
 warm, may take the place of food which was once needed 
 to produce heat. Methods of government which cause a 
 larger part of the land to be utilized for the support of the 
 nation or diminish losses and waste from violence, may 
 serve to prevent the pressure of overcrowding. But the 
 physiological possibilities of the birth rate are so far in ex- 
 
EXCEPTIONAL CONDITIONS IN AMERICA. 45 
 
 cess of any death-rate which is consonant with social pros- 
 perity that the improvement in the art of food supply, 
 direct or indirect, will not generally keep pace with this 
 possible excess. Even if the pressure be momentarily 
 relieved, the reduction of the death rate, which is a con- 
 sequence of such relief and an index of prosperity, serves 
 to hasten the time when the increase of population reaches 
 the limit set by the possibilities of supporting it. 
 
 § 53. A fact like this may be obscured for a time in a 
 country like the United States, where settlers with a high 
 degree of civilization occupy land which is almost empty. 
 Before such a country has filled up to the level permitted 
 by modern civilization, increase of numbers will for a long 
 time mean increased economic advantage, and the law of 
 the diminishing return will drop out of sight. But the 
 United States is doing, in little more than a century, 
 what it has taken Europe several thousands of years to 
 do. It is passing from a density of population limited by 
 the arts of the hunting stage to one which is allowed by 
 the modern arts of scientific agriculture. Such a state 
 of things is necessarily exceptional, and must terminate 
 in a comparatively short time.^ 
 
 § 54. This pressure of population upon subsistence 
 serves in no slight degree as a stimulus to improvement 
 in the arts. It was this which forced hunting tribes to 
 practice the domestication of animals. It was this which 
 forced wandering pastoral tribes to settle down and apply 
 themselves to the less exciting and agreeable arts of 
 agriculture. It is this which has done much to accelerate 
 the change from the military organization of society to 
 the modern system of free labor. The attempt to provide 
 for all children that might be born would, in the opinion 
 
 ' The criticism of Henry George ("Progress and Poverty," book ii.), 
 which is perhaps to readers of the present generation the most familiar 
 argument against the Malthusian theory, overlooks this exceptional character 
 of American conditions. 
 
46 ECONOMIC RESPONSIBILITY. 
 
 of the Malthusian, not only prove futile from the difficulty 
 of finding food enough to go around, but it would also, 
 first, take away the stimulus under which progress had 
 been made ; second, put a stop to the natural selection of 
 the stronger individuals and families and reduce the race 
 to a dead level; third, impair the capital of the com- 
 munity through increased consumption and diminished 
 production so much that it could not maintain the stage of 
 civilization which it had reached, and that its progress must 
 give place to retrogression. The Malthusian therefore 
 argues that society cannot undertake to relieve its mem- 
 bers from the pressure and from the evils of poverty un- 
 less they will consent to adopt preventive checks to 
 population. They must be prepared so far to reduce 
 the birth rate that the excess of the actual birth rate 
 over the admissible death rate will not outstrip the annual 
 improvement in the arts of producing food. If we wish 
 to reduce the death rate to 25 in the thousand and the in- 
 crease in food supply from the area available is not likely 
 to average more than one per cent, annually, the birth 
 rate must be kept down to 35. The man who marries 
 recklessly, so as to make the consumption of his family 
 exceed its contribution to the annual product of the na- 
 tion, is, in the opinion of the Malthusian, assuming the 
 right to do something which must prove disastrous to the 
 race if adopted generally. Against the attempt to burden 
 society as a whole with the results of such imprudence 
 the Malthusian protests emphatically. If the relief of a cer- 
 tain section of the poorer classes results, not in the accumu- 
 lation of property by those classes, but in the multiplication 
 of the number of their children, society, by the re- 
 lief which it furnishes, simply transfers its food supplies 
 from the support of the children of the efficient and 
 prudent to the support of the children of the shiftless 
 and imprudent. Such a course must result in degen- 
 eration. It is a condition of social progress that so- 
 
ARGUMENTS AGAINST MALTHUS. 47 
 
 ciety must keep its increase of numbers within the limits 
 set^by improvement in the arts. In order to make such 
 a general restriction of numbers possible, the respon- 
 sibility for diminishing the numbers of his own family 
 must be brought home to every man ; and if this respon- 
 sibility is ignored, the blame for the condition of the family 
 must be imputed, not to society as a whole, but to the 
 man who has ignored a social necessity. 
 
 § 55. To this view the opponents of Malthus reply : 
 I. There is almost never, in civilized society, a present 
 or immediate pressure of population upon subsistence. 
 TJl£r£js_always food enough to go around, if it were only 
 better distributed. 2. If such a distribution were made, 
 there is no likelihood of a future pressure of population 
 upon subsistence, because increased comfort is accom- 
 panied by a lower birth rate instead of a higher one. 
 
 § 56. These critics overlook the fact that this surplus of 
 food in civilized countries is itself a consequence of that 
 family responsibility on which the Malthusian lays so 
 much stress. In uncivilized countries there is not ha- 
 bitually any such surplus. It is a matter of very great 
 doubt in each year whether there is going to be food 
 enough to go around. Famine and weakness, resulting 
 from too great numbers and too little food, constitute an 
 ever-present danger to an uncivilized or half civilized 
 tribe. The efforts to avoid this danger testify to its 
 existence and its importance. Not a few races have ha- 
 bitually resorted to infanticide as the only means of keep- 
 ing the numbers of the tribe within the power of the 
 land to support. Others, a step farther advanced, have 
 tried to solve the question of population by leaving the 
 matter to the women, — a system known as the matri- 
 archate. Each of these methods lessened the burden of 
 unproductive consumption, but neither of them fully met 
 the necessities of the case. While they checked consump- 
 tion and made accumulation possible, they did not provide 
 
48 ECONOMIC RESPONSIBILITY. 
 
 security for such accumulations of capital nor means of 
 natural selection of the strong ; still less did they afford 
 the stimulus to production which the combination of pri- 
 vate property and family life gives to the modern laborer 
 in all but the very lowest classes. 
 
 § 57. Nor have we any reason to believe that increased 
 comfort is necessarily accompanied by a lowering of the 
 birth rate. It is true that as society exists at present, 
 high comfort and low birth rate are commonly associated, 
 because comfort is made to depend upon prudence. Let 
 the comfort be made independent of prudence, as in the 
 case of the pauper or criminal, and the birth rate tends to 
 increase rather than diminish. It may not be exactly 
 true, as some Malthusians would have us believe, that the 
 low birth rate is the cause of the comfort, but it is much 
 farther from the truth to assert that the comfort is the 
 cause of the low birth rate. Both are the results of a 
 common cause — the exercise of prudence, which gives 
 high comfort and low birth rate to those who are capable 
 of practicing it, while those who are incapable of so doing 
 have at once a higher birth rate and a lower level of 
 comfort.^ 
 
 § 58. This line of thought enables us to explain satis- 
 factorily a phenomenon which has been misunderstood 
 by many of the opponents of Malthus, namely, that the 
 fear of starvation does not lower the birth rate so much 
 as the fear of losing social standing. In the light of what 
 has just been said, the reason for this is perfectly clear. It 
 is not that social ambition in itself constitutes a greater 
 preventive check to population than the need of sub- 
 sistence; but that the need of subsistence is felt by all 
 men alike, emotional as well as intellectual, while social 
 
 * No amount of facts such as are accumulated by writers like Nitti will 
 prove anything against the Malthusian theory. Statistics show that high 
 comfort and low birth rate go hand in hand. They are absolutely incapable 
 of showing which is cause and which is effect. 
 
ETHICAL SELECTION. 49 
 
 ambition stamps the man or the race that possesses it as 
 having reached the level of intellectual morality. Ethical 
 selection can therefore operate on the latter class as it 
 does not on the former. The intellectual man has possi- 
 bilities of self-restraint which the emotional man has not. 
 Give the intellectual man the chance to reap the benefit of 
 such self-restraint, and you will find reduced birth rate 
 and increased comfort going hand in hand. 
 
 There are some cases under the existing social order 
 where men who are capable of higher things multiply 
 recklessly through sheer hopelessness. With men like 
 this, a better distribution of the results of labor would 
 doubtless operate not only to increase their productive 
 efficiency but to contribute to their prudence in marrying, 
 and thus to diminish the birth rate. But this result would 
 be accomplished by assimilating the condition of these 
 men to the normal condition of property owners, and 
 would be dependent on the operation of those prudential 
 motives which the majority of the opponents of Malthus 
 habitually decry. 
 
 § 59. The more completely you give the prudent and 
 efficient man control of the results of his labor, the more 
 do you localize the pressure of population upon subsist- 
 ence, and confine the effects of this pressure to a few. 
 Under such circumstances there is habitually that surplus 
 of food on which the anti-Malthusian lays so much stress. 
 But give the children of the shiftless, by thoughtless char- 
 ity or various systems of poor relief, the right to eat the 
 substance of the efficient and prudent, and you will soon 
 lose both the capital and the morality under which that 
 capital has been created. 
 
 When the comfort of an individual is made dependent 
 upon his foresight and prudence, and when the comfort 
 of a group is made dependent on the existence of intellec- 
 tual as distinct from emotional morality, we shall find 
 prudent men and prudent races possessing high comfort 
 
50 ECONOMIC RESPONSIBILITY. 
 
 and low birth rates. The history of civilization is in large 
 measure a history of this development of prudence and 
 comfort. Possibly some nations are carrying this conscious 
 adaptation of means to ends a little too far for their own 
 good. The waste of nerve power connected with the ex- 
 ercise of conscious prudence is a real evil, and if carried to 
 an extreme may offset the gain attendant upon the pos- 
 session and accumulation of capital. The case of France 
 is an instance in point. The French people, as a rule, 
 logically accept the consequences of the Malthusian 
 theory. The birth rate is low, the national wealth high, 
 the increase of population almost nil. Some writers think 
 that this course of events has been attended with moral 
 and physical evils ; that less prudence and keener struggle 
 for existence would better serve to protect the race 
 against danger of degeneration. The same criticism has 
 been applied to the conditions prevailing in many parts 
 of the United States. 
 
 § 60. This is a fair point for socialistic criticism. But 
 with the average man, the dangers of this extreme are less 
 than those of the other. The evils of thinking too much, 
 and trusting Providence too little, seem small in com- 
 parison with those which arise from trusting Providence 
 for everything and not thinking at all. Doubtless Malthus 
 made a mistake in giving too much countenance to the 
 idea that restrictions upon population must be conscious. 
 But his socialist critics make a greater mistake in holding 
 that they are automatic. The truth would seem to be 
 that they are for the most part institutional. The modern 
 family and the modern law of capital have acted as a 
 powerful system of preventive checks to population. The 
 apparently automatic and often non-conscious operation 
 of these checks must not bUnd us to the historical power 
 which has established and perpetuated them. The as- 
 sumption made by so many of the socialistic critics of 
 the Malthusian theory, that the average character of a 
 
DELINQUENT AND DEPENDENT CLASSES, 5 1 
 
 people will remain unchanged when the economic institu- 
 tions under which this character has developed are radi- 
 cally modified or abolished, finds no warrant either in 
 ancient or in modern history. 
 
 § 61. It is urged by some of the socialists that the advo- 
 cates of the Malthusian theory make too much use of the 
 principle of natural selection, and ignore the equally im- 
 portant biological principle of functional adaptation. 
 They urge that natural selection has in large measure 
 done the work which was required of it in inculcating 
 prudence, and that, in order to regulate population prop- 
 erly, we have only to secure those favorable economic 
 conditions to which the race has proved its power to 
 adapt itself. But the history of the English poor-law 
 (§ ^5) seems to show that natural selection has not done its 
 work ; that such measure of functional adaptation as has 
 been already secured is extremely precarious, and that it 
 can only be maintained by continuing the stimulus under 
 which it has developed to its present degree of activity. 
 
 § 62. Although society insists as far as it can that each 
 man shall be responsible for himself and his family, it can- 
 not carry this principle out to its logical conclusion. We 
 cannot kill off the weak merely because they have been 
 unable to support themselves. Still less can we leave the 
 unfortunate to die as a result of their incapacity. The 
 ethical loss to the community which adopted such a course 
 would indefinitely outweigh any material or physical gain. 
 The dependent and the unfortunate must, under certain 
 conditions, be taken care of by society, even though the 
 process of natural selection is thereby hampered. 
 
 § 63. Besides these two classes there are two others 
 which habitually defy the principle that every man should 
 earn a living for himself and his children. These are the 
 criminal and the pauper. The case of the criminal, how- 
 ever hard we may find it to deal with him in practice, is 
 easily judged from the standpoint of economic theory. 
 
52 ECONOMIC RESPONSIBILITY, 
 
 His activity must be repressed and his power of perpetuat- 
 ing his race limited. The case of the pauper involves 
 more difificulty. He is not, like the criminal, actively 
 hostile to society. He claims charity on grounds which 
 are often plausible, and which on investigation may pos- 
 sibly turn out to be valid. We often do not know the 
 real reason why a pauper seeks charity. If it is because 
 he can work and will not, he approaches very near to the 
 condition of the criminal ; he is trying to get a living 
 out of society without rendering society an equivalent. 
 If he is willing and able to work but cannot find an op- 
 portunity, he is no longer a criminal but an unfortunate. 
 If he is mentally or physically unable to work, he is an 
 incapable. According as he belongs to one or the other 
 of these three classes he demands different treatment, 
 both for his own sake and for that of society. Yet it is 
 frequently a matter of the utmost practical difHculty to 
 see where he belongs. Perhaps he cannot tell himself. 
 He may belong to all three by turns, according to the 
 circumstances in which he is placed. 
 
 § 64. In the treatment of paupers there is a natural in- 
 clination, both on the part of individuals and of the 
 public, to take a charitable view of the matter and give 
 help in doubtful cases. People think that the harm from 
 denying charity to a deserving man so far outweighs that 
 which will result from giving charity to an undeserving 
 one that they give relief in a great many cases simply be- 
 cause they have no power to make investigations. There 
 is an evil involved in such free exercise of private charity 
 which people are slow to recognize, but which is all the 
 more dangerous on that account. If a man gives money 
 to a pauper he seems to be doing an unselfish act. He 
 parts with a certain amount of his own property and gives 
 it to some one else. But the economic result does not 
 stop here. The dollar which is given to an undeserving 
 beggar and is spent by him for his own purposes diverts 
 
INDISCRIMINATE CHARITY, 53 
 
 the product of the labor of the country from the hands of 
 the industrious to those of the idle. Th^ property which 
 the giver has placed at the beggar's disposal diverts wealth 
 from some other consumer. It enables the pauper to con- 
 sume unproductively what otherwise would probably have 
 gone to the support of a hardworking man. If the prac- 
 tice of indiscriminate giving becomes general it causes so 
 many beggars to lead lives of idleness that the production 
 of the country is greatly diminished and the industrious 
 find themselves compelled to maintain an idle population 
 out of a scant product. 
 
 § 65. The evils connected with private charity are 
 more conspicuous in the case of misdirected public char- 
 ity, because public charity is dispensed on a large scale 
 by officials who have the whole taxable property of the 
 community to draw upon. The operation of the English 
 poor-law in the early part of the present century fur- 
 nished a memorable instance of the troubles which may 
 arise from this source. 
 
 The history of poor-relief in England divides itself into 
 four periods. In the first period, lasting till i6cx), the 
 state confined its efforts to the suppression of pauperism, 
 leaving the care of the incapable and unfortunate to other 
 agencies. The Reformation made some of these agencies 
 inoperative ; and during the second period, inaugurated 
 by the Act of Elizabeth (i6oi)the parish authorities were 
 charged with the duty of relieving the destitute. Every 
 effort was made to prevent such relief from being abused. 
 The tendency of the poor to migrate to parishes where 
 they received the best treatment was met by the acts of 
 settlement, which were framed to prevent people with 
 precarious means of livelihood from changing their legal 
 residence. The laxity of certain justices who ordered 
 relief tij be granted on inadequate grounds, was met by 
 the imposition of the workhouse test (171 3). Parishes 
 were encouraged to build workhouses and to make resi- 
 
54 ECONOMIC RESPONSIBILITY, 
 
 dence in such workhouses a condition of relief. Pauper- 
 ism was made as unpleasant as possible in order to reduce 
 the burdens of the rate-payer. But in the latter part of 
 the eighteenth century a different spirit began to prevail. 
 The old practice was felt to be unnecessarily hard on the 
 poor. The use of the workhouse as a test was abolished. 
 It was made a place of support for the incapable. No one 
 was to be sent to a workhouse if he could maintain him- 
 self elsewhere. By ** Gilbert's Act " (1782) the guardians 
 of the poor were charged with the duty of helping them 
 thus to maintain themselves ; in other words, of finding 
 work for every one who applied for it. Until they succeeded 
 in finding work for him, the applicant was to be supported 
 in his own home at public expense. The effect of this 
 law on the prosperity of the English agricultural districts 
 was terrible. It relieved any man who chose to avail him- 
 self of its provisions from the responsibility of seeking 
 work. It gave the overseers more to do than they could 
 possibly accomplish. They could not find employment 
 for all who applied. They were compelled to support 
 these applicants and their families in reasonable comfort. 
 The burden of this support came indirectly on the indus- 
 trious laborers. The condition of the man who lived on 
 charity was in many districts made better than that of 
 the man who supported himself by honest labor. Con- 
 spicuously was this the case with persons who had large 
 families. The parish allowance for each child was so 
 great as to constitute a premium on the increase of num- 
 bers. In certain districts the operation of the law not 
 only crippled industry, but had most disastrous effects on 
 public morality ; practically abolishing female chastity 
 among those classes to whom the ample parish allowance 
 for the support of children constituted a temptation to 
 vice.' So great were these evils that in the year 1834 
 Parliament was compelled to reestablish the workhouse 
 
 ^ " Report of Poor-Law Commissioners, 1834." 
 
THE Vi^ORK TEST, 55 
 
 test. By this change the burden of pauperism, which 
 had increased with such rapidity that it threatened to 
 cripple English agricultural prosperity, was gradually 
 lightened ; but the southern and western counties of 
 England have not yet recovered, either materially or 
 morally, from the evils which were entailed upon them by 
 fifty years of liberal policy in the matter of poor-relief. 
 
 § 66, In the interest of those who are willing and able 
 to work it is absolutely indispensable to reduce the bur- 
 den of pauperism to a minimum. Any other policy not 
 only puts unnecessary taxes upon the industrious, but 
 tends to increase the number of paupers and diminish the 
 number of those who are charged with the labor of sup- 
 porting them. 
 
 The first step toward reducing pauperism is to separate 
 the wilful paupers from the incapable and unfortunate ap- 
 plicants for relief. By this policy we are able to refuse help 
 to the former class and limit greatly the number of those 
 who seek aid under the pretext of belonging to one of the 
 two latter. A part of the work of separation consists in 
 careful investigation of individual cases. This is our chief 
 means of distinguishing the incapable poor who cannot 
 work, from those who can. The separation of the unfor- 
 tunate from the pauper is more difficult. To secure this 
 end personal investigation on the part of organized chari- 
 ties or agents of the government must be supplemented 
 by the work test. If we insist that an able-bodied man 
 who applies for help must stand ready to do hard work of 
 some sort, and if we do not give too much help in com- 
 parison with the labor required, we avoid putting a pre- 
 mium on pauperism. We make it probable that a man 
 who applies for help under such conditions really deserves 
 it, and is not making the absence of work a convenient 
 pretext for living in idleness. * 
 
 * It is an open question whether the administration of relief, and especially 
 of emergency relief, should be in the hands of the same authority that im- 
 
56 ECONOMIC RESPONSIBILITY, 
 
 § 6j. The work test just described is primarily and 
 chiefly used as a means of determining the character of 
 the appHcants. If it can be so arranged that the product 
 of the labor which is thus tested is worth something to 
 the community, well and good ; but the attempt to make 
 the labor useful must not be allowed to interfere with its 
 character as a test. If this once happens, the efforts to 
 render the results of relief work valuable to society are 
 worse than useless. 
 
 § 68. These efforts take three forms: I. Public works 
 to utilize the power of those who are temporarily thrown 
 out of employment. 2. Labor colonies to give perman- 
 ent occupation to those who are in need of it. 3. Ad- 
 vances of money procured by the credit of the govern- 
 ment, and placed at the disposal of those who expect to 
 repay it by their work. None of these plans can be said 
 to have accomplished the object in view. 
 
 § 69. There is a specious argument in favor of public 
 works for the relief of those who are temporarily unem- 
 ployed. People say that such work would have to be 
 done, sooner or later, in any event ; that the unemployed 
 must be helped in some shape or other; that even if 
 those who are set to work upon these things do not earn 
 the full amount of their wages, the little they may accom-^ 
 plish is better than nothing, as otherwise they would have 
 to be wholly supported at public expense. They also 
 add that employment on useful work of this kind pre- 
 serves the self-respect of the laborer which the direct giv- 
 ing of charity tends to destroy. But this view of the 
 matter is a somewhat dangerous one. There is reason to 
 fear that public works arranged with this motive and ob- 
 ject in view do more harm than good. In the first place, 
 most public works cannot be constructed in the winter 
 
 poses the tests. If the detection of fraud becomes the chief function of any 
 organization, such a body is sometimes handicapped in its attempts to dis- 
 cover and relieve poverty that is not fraudulent. 
 
PUBLIC RELIEF WORKS, 5/ 
 
 season, when destituti9n is greatest and the need of tem- 
 porary relief most pressing. In the next place, the amount 
 accomplished by laborers who are set to do such work 
 without special training is greatly overestimated by those 
 who have not had experience. It seems a simple matter 
 to build a sewer, but it requires an amount of training for 
 which the man who is given such work as a temporary 
 means of relief has had neither the time nor the oppor- 
 tunity. In the third place, the seeming advantage from 
 the construction of these works causes too many opera- 
 tions of the kind to be undertaken, and diverts to these 
 operations a certain number of laborers who would grad- 
 ually have found profitable and useful employment in 
 lines for which they were more fitted. The net loss to 
 the tax-payers from this large amount of ill directed 
 labor is greater than that which would have resulted from 
 the bestowal of a smaller amount of direct charity to the 
 persons who, by investigation and by the work test, had 
 been found worthy to receive it. Finally, the preserva- 
 tion of self-respect to the laborer by this process is more 
 apparent than real. If it is known that public works are 
 being constructed for which laborers are employed on 
 something better than a commercial basis, the pressure for 
 these positions makes them an object of political wire- 
 pulling. It is a false notion of self-respect which leads 
 the man who can take money out of the public by chi- 
 canery to rate himself higher and be rated higher by so- 
 ciety than the one who truthfully confesses to himself and 
 others the real ground on which property is diverted to 
 his support. 
 
 Some of these objections apply with less force to works 
 of agriculture and land improvement, because the danger 
 of undue diversion of laborers into this line of industry is 
 slight. We are suffering from a drift of population into 
 mechanical industries. If we can keep some of this drift 
 back, and employ it in the production of food, we have a 
 
58 ECONOMIC RESPONSIBILITY, 
 
 twofold advantage. First, the product of agricultural 
 labor will keep the producers from starvation, whether 
 they can sell it or not. Second, the character of the work 
 is not such as to render it attractive to any but those who 
 really deserve relief. 
 
 § 70. Labor colonies and similar means of furnishing 
 permanent employment do not as a rule reach the class 
 for which they are intended. They do not teach men to 
 be self-supporting. They become " places of refuge for 
 those who have suffered moral as well as physical ship- 
 wreck " ; not for the industrially unfortunate, but for the 
 chronic or vicious poor. 
 
 Proposals for an advance of state credit to laborers who 
 could not find employment on advantageous terms were 
 most actively urged by Lassalle some forty years ago. He 
 would have allowed associations of laborers to pledge the 
 future product of their labor as security for such ad- 
 vances, so that the workmen would be relieved from their 
 present dependence on the capitalist, and be put in a 
 position to exercise their powers to the best advantage. 
 But no association of workmen is in a position to guaran- 
 tee the utility of its future product to society. The very 
 industry of its members might readily result in over- 
 production of things that were not wanted ; nor could the 
 agents of the government, on the basis of any statistics 
 yet devised, be trusted to guard against this danger. If 
 too many men made watches, the selling price of watches 
 would not cover the advances made by the government ; 
 and, what is more important, the utility of such watches 
 would not make good to society the waste of food and 
 other forms of public capital consumed by those engaged 
 in their production. 
 
 If such advances are confined to agricultural laborers, 
 the danger is, for the reasons already given, much less. 
 Several schemes have been proposed for this end. The 
 one most under discussion at present . is the allotment 
 
AID IN FINDING EMPLOYMENT, 59 
 
 system, which plays a somewhat important part in Eng- 
 lish social policy. Under this system the public authori- 
 ties buy land for the use of actual cultivators in small 
 plots, borrowing the money for that purpose at a low rate 
 of interest. It is confidently expected that the occupiers 
 can pay the government a sufficiently large sum to make 
 the experiment financially self-supporting, and that they 
 will thus be relieved without great public cost from most 
 of their present dependence on the fluctuations of trade. 
 This plan has much to recommend it ; but it has not 
 been tried long enough for decisive judgment as to its 
 success. 
 
 § 71. Less radical in their aims, but perhaps quite as 
 promising in their operation, are the attempts to help 
 people to find work for themselves instead of trying to 
 make it for them. In Germany, bureaus of information 
 have accomplished much in this way ; and the German 
 police system is so efficient that it has been found pos- 
 sible to provide food and lodging for those who were 
 actually in search of work without great danger that such 
 relief would* be misused. But in the absence of such 
 effective police control this system would certainly in- 
 crease the number of tramps who make the seeking of 
 work a pretext instead of an object of their journey, and 
 might readily result in a condition like that which pre- 
 vailed in the worst days of the English poor-law. 
 
 Systematic effort to give the unemployed a chance to 
 find work often sets in its true light a form of pauperism 
 which is widespread, and shifts the responsibility for many 
 cases of destitution from society as a whole to the indi- 
 vidual with whom it belongs. There is a large number 
 of people in times of commercial crisis who really want 
 work but who want it in cities, and who are absolutely 
 unwilling to engage in those lines of food production 
 which require them to live in the country. The number 
 of people who ask relief and are willing to take even light 
 
6o ECONOMIC RESPONSIBILITY, 
 
 farm-work as a means of earning it is exceedingly small. 
 They insist on their right to live, and in many instances 
 are prepared to maintain that right by a readiness to work 
 in certain trades in the city, but they absolutely refuse to 
 engage in the production of food, which alone can keep 
 the community alive. 
 
 § 72. Another means by which it is proposed to re- 
 duce the burdens of pauperism is compulsory insurance. 
 This can be utilized in some measure for the incapa- 
 ble as well as for the unfortunate, if they have been com- 
 pelled to contribute to the insurance funds before they 
 have become incapacitated for work. 
 
 The system of compulsory insurance has been more 
 completely carried out in the German Empire than any- 
 where else. Small contributions are levied from the 
 workmen or from their employers to create a fund for the 
 support of the workman and his family when he becomes 
 ill or superannuated. There are many reformers who are 
 anxious that other countries should follow the example 
 of Germany. But the experiment has not progressed far 
 enough to pass judgment on its success. In many respects 
 the gain to the public from a system of this kind is more 
 apparent than real. The payments to the insurance funds 
 must chiefly, if not wholly, come out of wages. Even 
 though they be nominally levied on the employer, he is 
 compelled by competition with other employers who are 
 not subject to this levy to reduce in corresponding degree 
 the wages which he pays. If the workman receives less 
 wages, he must either consume less or save less. So far 
 as he economizes on useless items of consumption the in- 
 surance fund thus created represents a positive gain to the 
 community, providing for the workman's support in the 
 future without causing any corresponding general loss or 
 burden in the present. But if he economizes on articles 
 that are necessary or useful to his well-being and that of 
 his family, he lessens his own labor power and that of his 
 
COMPULSORY INSURANCE, 6l 
 
 children and diminishes rather than increases the general 
 ability of the community for maintaining the necessary 
 burdens of poor-relief. If, finally, he makes these pay- 
 ments out of money that he otherwise would have saved, 
 he transfers the provision for his support from his own 
 shoulders to that of the public organization. He becomes 
 less self-supporting, and more dependent on society. 
 
 § 'Ji. The opposition of friendly societies to schemes 
 of government insurance is something quite rational. 
 These societies are in their nature agencies for the 
 promotion of voluntary saving as a means of mutual 
 insurance. If the government uses compulsory saving 
 as a means to the same end, it takes away the ground 
 for the existence of these societies and substitutes a 
 system which secures the same material results to the 
 workman but fails to secure the same educational and 
 moral ones. To those who regard these educational and 
 moral results as a chief advantage in voluntary saving, 
 the change to a compulsory system looks like a step 
 backward. 
 
 § 74. There is also a positive danger that the amount 
 of accident and sickness may increase under the opera- 
 tion of compulsory insurance. The accident insurance 
 law, in its early application to the German railroad ser- 
 vice, had a distinct effect of this kind. The number of 
 disabling accidents was increased. The individual, being 
 freed from responsibility for his own loss of time, put 
 himself in a position where more aggregate time was lost. 
 Whether this was due to increased carelessness or to slack- 
 ness in returning to work is a matter of comparatively 
 slight consequence. In either event, the diminution of 
 individual responsibility and assumption of such respon- 
 sibility by public organizations lessened the incentives 
 to continuous work and to the care which makes such 
 continuous work possible. In factory insurance this dif- 
 ficulty can perhaps be avoided by localizing its manage- 
 
62 ECONOMIC RESPONSIBILITY. 
 
 ment in such a way that the people who have to pay the 
 cost of unnecessary accidents can see them and guard 
 against their recurrence. Accident insurance works much 
 better in Germany, where it is locally administered, than in 
 Austria, where it is a national matter. 
 
 § 75. Finally, there is a danger that the apparent ad- 
 vantages of an insurance system of this kind may blind 
 public opinion to the more real advantages of better 
 forms of insurance. A certain section of the public is so 
 dazzled by the prospect of pensions that it overlooks the 
 true ground on which pensions are justified. It comes to 
 regard the pension as an end in itself rather than as a 
 means of relieving the general funds of the government 
 of a burden. Schemes are already proposed in England 
 for giving a pension to every one above a certain age, 
 independent of any contribution which he may have made. 
 People are impressed with the advantages of a pension 
 and with the difficulties of every special system of contri- 
 bution for securing it. They therefore propose to trans- 
 fer the burden of such payments to the general tax account. 
 They do not see that three quarters of the arguments for 
 pensions are based upon their usefulness in lightening the 
 claims upon this general account, and that a system which 
 increases these claims undermines the very grounds on 
 which it is advocated. It is sometimes argued that the 
 total amount of these claims is not really much increased 
 by the adoption of a liberal pension policy : because, pen- 
 sions or no pensions, society must in the last resort sup- 
 port the aged who have worked out their usefulness, and 
 no harm can be done by recognizing as a right on the 
 part of the individual what society already recognizes as 
 a duty. But this is an unsound position. There are cer- 
 tain things which society must do in justice to itself, which 
 it cannot safely allow individuals to demand in justice to 
 themselves. If you give every man a right to a pen- 
 sion when he is incapable of self-support, you tacitly ap- 
 
NECESSITY OF SELF-RELIANCE, 63 
 
 prove his failure to provide for himself and his children. 
 That the necessary degree of production and of economy 
 by the community as a whole would be maintained if such 
 a point of view were adopted, seems highly improbable. 
 We need measures which shall increase individual re- 
 sponsibility rather than diminish it ; measures which shall 
 give us more self-reliance and less reliance on society as a 
 whole. We cannot afford to countenance a system of 
 morals or law which justifies the individual in looking to 
 the community rather than to himself for support in age 
 or infirmity. 
 
CHAPTER III. 
 
 COMPETITION. 
 
 Freedom of Exchange — Bargaining — Mercantile Competition — Market Price 
 — Efifects of Competition — Normal Price — Value — Socialistic Theor}' of 
 Value. 
 
 J. E. Caimes : " Some Leading Principles of Political Economy, Newly 
 Expounded." London (and New York), 1874. 
 
 A. Marshall: " Principles of Economics." Vol. i. 3d ed. London and 
 New York, 1895. 
 
 W. S. Jevons : " Theory of Political Economy." 3d ed. London and 
 New York, 1888. 
 
 F. V. Wieser: "Natural Value." (Trans, by Malloch.) London and 
 New York, 1893. 
 
 § ^6, In mediaeval times separate families and com- 
 munities supplied their own needs to a degree which it 
 is now hardly possible to realize ; although the plantation 
 life in the Southern States a generation ago furnished in 
 some respects an approximation to the feudal type. In 
 such a condition of society the laborer has not, as a rule, 
 any large surplus above the bare necessaries of life. The 
 excess of his production over his consumption goes into 
 the hands of the lord of the manor or plantation. It is 
 the ruling class alone which has goods to exchange for 
 outside products. Within the plantation or manor every- 
 thing is done by the inhabitants for one another, under a 
 system of labor wholly or partly compulsory, and on 
 terms rigidly fixed by custom or by superior authority. 
 Each individual, from master to slave, finds his consump- 
 tion no less than his production closely restricted. A 
 man's labor and his enjoyments both form part of the 
 
 64 
 
THE BEGINNINGS OF TRADE, 65 
 
 status into which he was born and from which his most 
 strenuous exertions can hardly free him. He may be 
 bound by caste regulations as in India, by positive law 
 as was the case in many parts of Europe, or by the mere 
 force of custom, which often needs no formulated law to 
 give it effect. 
 
 In such stages of society trade plays a relatively unim- 
 portant part. The fundamental characteristic of the 
 manorial group in England in the thirteenth century, says 
 Ashley, was its self-sufficiency. The village included men 
 who carried on all the occupations and crafts necessary 
 for every-day life. There was little room for anything 
 like freedom of exchange. The few things that were 
 purchased were paid for at prices fixed by custom. The 
 value of an estate was measured by the physical resources 
 which its owner possessed. The difference between the 
 measurement of public and private wealth, noted in the 
 first chapter, had not yet come into play. 
 
 § 77. But when the nation became sufficiently ad- 
 vanced to carry on commerce a different state of things 
 developed. Its members produced more than they needed 
 for their own requirements and sold the surplus to others. 
 The country obtained much of what it used from the 
 towns. The people in the towns lived on food provided 
 by the country. Markets and fairs were held at stated 
 times, to which men of different occupations could resort 
 as a means of buying what they needed and selling what 
 they produced. In such a market, prices were never 
 wholly fixed by custom, but, in some measure at least, by 
 the relative number of buyers and sellers. The rate of 
 exchange was not based upon the number of days* labor 
 involved in the product, but upon the amount which the 
 consumers were ready to give in exchange for it. The 
 more remote the point of origin of the goods purchased, 
 the less dominant was the influence of custom in fixing 
 the price which should be charged. 
 
^6 COMPETITION. 
 
 § 78. As labor became freer and more diversified, peo- 
 ple produced more and more for one another and less 
 exclusively for themselves. The advantages of division 
 of labor made themselves felt. If a man attempted to 
 supply himself and his family with everything, he 
 was obliged to spend a great deal of time for a compara- 
 tively small product. The many occupations, which he 
 was forced to pursue by turns, prevented the attainment 
 of a high degree of dexterity in any one of them. The 
 waste of time in passing from one to another meant a 
 corresponding loss of efficiency. When regular means of 
 sale were assured, each man found it more profitable to 
 devote himself to some one thing in which he had special 
 advantages, and to exchange the surplus product which 
 he could not use for the goods which others were ready ta 
 offer. In this way it was possible for the community to- 
 combine the advantages of specialized production and of 
 diversified consumption. Each man could contribute the 
 largest share to the public wealth by confining his produc- 
 tion to one line. He could obtain the largest use and en- 
 joyment from the public wealth by spreading his consump- 
 tion over a great variety of lines. As hand labor was 
 gradually supplemented and rendered more efficient by 
 machinery the specialization of work became more and 
 more marked. In the industrial civilization of the present 
 day there are few who produce all that they need for their 
 own requirements. The most prosperous man is usually 
 one who consumes only a small portion of his own pro- 
 duct and has a large surplus to sell to others. 
 
 § 79. Freedom of production and of trade are accom- 
 panied by increased freedom in consumption. With the 
 adoption of a system which gives a great many individuals 
 property to exchange, there has been a gradual abandon- 
 ment of legal enactments which were intended to re- 
 strict exchange and Hmit expenditure. Sumptuary laws, 
 which prescribe the dress and food which individuals 
 
SUMP TUAJ^Y LAWS, 67 
 
 may use, have for the most part become a thing of the 
 past. We have ceased to pass statutes to prevent men 
 from ruining themselves in their own way, if they see fit 
 to do so. Only in those cases where the individual, by 
 exercising rights of trade, will injure others as well as 
 himself, do we continue to prohibit sales and purchases. 
 
 The clearest case for prohibiting such transactions is 
 connected with the abolition of slavery. Formerly a man 
 could buy and sell slaves, and in a great many communi- 
 ties he could sell himself or his children into slavery. 
 To-day it is recognized that such a transaction is a public 
 wrong, not a private one. The man who sells himself or 
 his children into slavery harms not only the parties im- 
 mediately interested, but the industrial future of the 
 nation as a whole. Such dealings are therefore abso- 
 lutely forbidden. But the corresponding evil and wrong 
 of prostitution is allowed to go on unheeded. It is only 
 where public sentiment is practically unanimous as to the 
 existence of a public necessity that prohibitory laws can 
 be enforced. The case of the liquor traffic furnishes a 
 marked illustration of this truth. No one denies that a 
 great deal of harm is done by the sale of intoxicating 
 drinks ; but in the majority of communities society finds 
 it extremely difficult to enforce any effective restrictions 
 upon such traffic. The doctrine of individual freedom 
 has made such progress that most communities tolerate 
 the exercise of such freedom in many transactions which 
 their moral sense distinctly condemns. 
 
 § 80. When we try to make positive laws as to what 
 people shall buy and sell, instead of negative ones as 
 to what they shall not buy or sell, we are confronted 
 with even greater obstacles. The enforcement of sanitary 
 regulations, however necessary for the public health, is 
 attended with extreme difficulty. There is a universal 
 consensus of opinion that tenement houses should con- 
 form to certain requirements with regard to light, air, and 
 
68 COMPETITION, 
 
 drainage, but the difficulty of giving effect to these re- 
 quirements is enormous. _If_the demand for bad tene- 
 ment houses is such that people find it profitable to build 
 them and to let them, it is nearly impossible to stop such 
 traffic. The erection of model dwellings enables that 
 class of the community which appreciates the advantage 
 of such improvements to enjoy them. But it does not 
 prevent the rest of the people from living as they did 
 before, nor does it stop the tenement-house owner from 
 making his profit out of public squalor. Even if some of 
 the worst tenements are condemned by the exercise of 
 municipal authority and better ones are built in their 
 places, the result is too often merely an overcrowding at 
 some other point. Public knowledge of the laws of health 
 and public responsibility as to the evils of overcrowding 
 are needed in order to give effect to any statute or ordi- 
 nance. 
 
 A striking instance of the difficulties connected with the 
 effort to avoid overcrowding was furnished by the experi- 
 ence of Miihlhausen. This city, which formed the centre 
 of the cotton industry of upper Alsace, was long noted 
 for the model dwellings in which its operatives lived. 
 But the direct personal and unofficial investigations of 
 Herkner disclosed the fact that these supposed advan- 
 tages were in large measure illusory, and that any slight 
 gain at some points was offset by increased pressure and 
 more shameless overcrowding at others. 
 
 § 8 1. A certain amount of positive legislation is al- 
 ways necessary for public health and public enlighten- 
 ment. We cannot allow the ignorant man to exercise 
 his freedom in cultivating bacteria or in leaving his chil- 
 dren without education. The one is dangerous to the 
 health of the whole community, the other to its future 
 intelligence and morals. In neither case will a let-alone 
 policy cure itself by the elimination of the unfit. Wise 
 and unwise together are bound to suffer in very consider- 
 
 I 
 
EFFECT OF CUSTOM ON EXPENDITURES. 69 
 
 able measure from the pestilence engendered by public 
 filth or the corruption attendant on public ignorance. In 
 cases where such positive legislation is found necessary, 
 it is generally best for the government to take the trans- 
 action wholly out of the realm of sale and purchase, and 
 to provide means by which sanitation and education can 
 be had at the expense of the tax-payers. Compulsory 
 education involves public schools ; compulsory drainage 
 involves public sewers ; compulsory vaccination involves 
 public medical service. Only in those cases where viola- 
 tions of the statute are done in public sight, under the 
 authority of parties who can be held responsible — as in 
 the case of unhealthful and dangerous appliances in fac- 
 tories — do we find important exceptions to this rule. 
 
 § 82. Although laws prescribing what a man may buy 
 or sell have fallen into disuse, it must not be supposed 
 that every man exercises his intelligence and pleasure to 
 buy what will give him the most happiness. People are 
 bound by custom where they have ceased to submit to 
 law. A large part of the expense of most people is regu- 
 lated, not by their own desires and demands, but by the 
 demands of the public sentiment of the community about 
 them. The standard of life of every family is fixed in 
 large measure by social conventions. Few are intelligent 
 enough to break away from those conventions, even where 
 they are manifestly foolish. Although we have made 
 much progress in the direction of economic freedom, it is 
 a mistake to assume that the authority of custom in these 
 matters is a thing of the past. With most men, custom 
 regulates their economic action more potently than any 
 calculation of utility which they are able to make. Nor 
 can we assume, as some writers are prone to do, that 
 such custom represents the average judgment of the com- 
 munity as to the things needed for the comfort and happi- 
 ness of its members. It represents an average absence of 
 judgment — a survival of habits which doubtless proved 
 
70 COMPETITION. 
 
 useful in times past, but which in many instances have 
 entirely outlived their usefulness. 
 
 The success of advertising shows how little intelligence 
 is habitually exercised in these matters. A man does not 
 generally use his nominal freedom to buy what he wants 
 until some one comes and tells him in stentorian tones 
 what he wants to buy. The authority of custom and 
 tradition can only be overcome by the authority of drums 
 and trumpets. It is a mistake to draw too fine-spun de- 
 duction as to the motives which guide buyers in their 
 choice, when three quarters of the buyers exercise no 
 choice at all. It is not merely that people want things 
 which hurt them, or which fail to do them the maximum 
 good — a point well developed in the writings of Patten — 
 but that they buy things without knowing whether they 
 want them or not, through sheer vis inertice. 
 
 § 83. Where consumption has become diversified and 
 the division of labor has estabhshed itself, the determina- 
 tion of the rate of exchange of goods between different 
 producers becomes a matter of cardinal importance. In 
 undeveloped societies a man's wealth is measured in the 
 physical things which he has at command. He is rich 
 or poor according to the extent of his lands, the number 
 of his dependents, the herds and the crops which he can 
 raise for their support. But when property has taken the 
 place of slavery as an economic force, and when people 
 have begun to exchange their property more or less freely 
 with one another, a man's personal wealth is estimated 
 in money. The goods which he makes are valued, not 
 as a source of enjoyment to the producer himself, but 
 as a means of commanding the goods and services of 
 others in the open market. The measure of his wealth is 
 found in the exchangeability of his product and its power 
 to command a price. 
 
 A price, in the broadest sense of the word, is the 
 quantity of one thing which is exchanged for another. 
 
BARTER. 71 
 
 § 84. Where two persons exchange their goods or 
 services, without the intervention of money, the transac- 
 tion is known as barter, I may barter a ton of coal for a 
 pair of shoes, or an hour's labor for a breakfast. Under a 
 system of barter, either man's contribution may be 
 regarded as the price of the other. We may consider the 
 breakfast as the price of the labor, or the labor as the 
 price of the breakfast. 
 
 Barter flourishes chiefly among uncivilized communities, 
 or those reduced to severe straits by the operation of a 
 destructive war ; though survivals of this method, as well 
 as of many other uncivilized ones, may be seen in the 
 dealings of children with one another. Barter is not 
 available in any complicated system of trade. If A makes 
 shoes and wants cloth, while B makes cloth and wants 
 shoes, the two can resort to barter ; but if B^ who makes 
 cloth, wants flour, while C makes flour and wants shoes, 
 the attempt to provide for the needs of all three men by 
 a system of barter becomes very perplexing. The diffi- 
 culty is met by a resort to money ; that is, to some 
 medium of exchange which A, By and 6^ are all ready to 
 accept. If A sells a pair of shoes to C for five dollars, he 
 does not need to inquire whether C makes cloth ; he can 
 take the five dollars and buy cloth of B. B can then take 
 the five dollars and buy flour of C, Through the inter- 
 vention of money each producer has sold his product to 
 the man who wanted it, and obtained what he wanted 
 from the man who produced it, in a way which would 
 have been almost impossible under a system of barter. 
 
 § 85. Just what constitutes money is a question which 
 can best be answered at a later stage of our inquiry. For 
 the present it is enough to say that it must be universally 
 ■acceptable throughout the community, so that it can be 
 used for the purchase of goods or services of every kind ; 
 and that it must be sufficiently homogeneous in character 
 for people to desire a given quantity of it, rather than a 
 
72 COMPETITION. 
 
 pa.rt[cu\ar />zece of it.^ Anything which possesses these two 
 characteristics may serve as money. The actual money 
 of any civilized nation usually consists of gold, silver, and 
 paper, accredited with the stamp of the government. The 
 international money of the world, acceptable by weight 
 without the stamp of any government, is gold. 
 
 Under the modern commercial system, prices are meas- 
 ured in money. A price, in the commercial sense of the 
 word, may be defined as the quantity of money for which 
 the right to an article or service is exchanged. The man 
 who furnishes the article or service is known as the seller ; 
 the man who furnishes the money is known as the buyer. 
 
 § 86. If the transaction is an isolated one, and not one 
 of a series of similar transactions, the price is usually 
 fixed by bargaining. Suppose A wishes to sell a house 
 unlike other houses in situation or construction, and B is 
 the only man who, for the moment at any rate, wishes to 
 buy it. It may happen that the maximum price which B 
 is willing to pay is less than the minimum which A is wil- 
 ling to accept. In that case there will be no sale. Or it 
 may happen that ^'s maximum exactly coincides with ^'s 
 minimum. In that case there will be a sale at exactly this 
 price. But it may also happen that ^'s maximum is some- 
 what higher than A'?> minimum ; and in view of this pos- 
 sibihty, A is unwilling to name the lowest price at which 
 he will sell until he sees whether ^ may not be induced to 
 pay more, while B is equally unwilling to name his highest 
 price until he sees whether A may be induced to sell for 
 less. So it will probably happen that A names a price 
 somewhat higher than the minimum which he would ac- 
 cept, and that B replies by offering a price somewhat less 
 
 ^ Whenever certain pieces of money, be they few or many, are decidedly 
 preferred to the general stock, they are rapidly withdrawn from circulation. 
 They may find their way into the collections of numismatists, into the strong 
 boxes of bankers, or even into the mints of foreign countries, according as 
 one cause or another has produced the preference in question. 
 
BARGAINING, 73 
 
 than the maximum which he is prepared to give. Thus 
 A might ask a nominal price of $15,000 when he would 
 be ready to take $12,000 rather than lose the chance of 
 selling the house ; while B might make a first offer of 
 $11,000, though he would be prepared to pay $13,000 
 rather than lose the chance of buying it. Successive offers 
 bring A and B nearer together, and finally the house is 
 sold at some price not less than $12,000 nor more than 
 $13,000; the exact figure depending on the relative skill 
 in bargaining shown by A and B. 
 
 % 87. But if there are other house owners in the same 
 situation as ^, or other buyers in the same situation as B^ 
 the matter assumes a different aspect. A is afraid to ask 
 an exorbitant price for fear B may go and buy of some 
 one else ; B is unwilling to begin with an unduly low 
 figure, for fear that A may break off negotiations with 
 him and deal with some other buyer. The moment 
 there are other sellers who can enter into competition 
 with A, or other buyers who can enter into competition 
 with By the chance for bargaining is greatly restricted, if 
 not altogether abolished. 
 
 Competition may be defined as the effort of rival sellers 
 to dispose of their goods and services, or of rival buyers 
 to secure the goods and services which they require ; an 
 effort limited by the desire of the seller to secure as high 
 a price as possible, and by the desire of the buyer to pay 
 as low a price as possible.^ Its existence shows that peo- 
 ple are guided in their dealings by individual self-interest. 
 Its action may be totally suspended by combination, 
 where sellers or buyers act in concert and not in rivalry. 
 An effective combination of sellers is known as a mo- 
 nopoly. It may also be greatly modified by custom or 
 by sentiment. Custom, with or without the authority of 
 law, often causes the seller to accept a price lower than 
 
 ^ It may be briefly but pertinently defined in the vernacular as the effort 
 not to get left. 
 
74 COMPETITION. 
 
 that which he could otherwise obtain. Sentiment, on the 
 part of an individual or of the public as a whole, occa- 
 sionally leads the buyer to pay a larger price for goods or 
 services than that which would be absolutely necessary for 
 securing them. 
 
 § 88. A place w here prices are determined by competi- 
 tion is known as a market. 1 da akes no difference whether 
 the goods are actually exposed for sale, as in the mediae- 
 val markets, or largely bought and sold on the basis of 
 warrants or telegraphic orders, as in the produce ex- 
 changes of to-day. The essential thing is that different 
 buyers and sellers shall know something about one an- 
 other's transactions, so that the individual buyer need not 
 pay more than the prevailing rate, nor the individual seller 
 be forced to sell for less than the prevailing rate. 
 
 There may be different markets for the same article in 
 the same place. The prices in the wholesale market are 
 determined by one set of conditions, and those in the 
 retail market by another. Though not wholly indepen- 
 dent, they can often move separately. 
 
 It is doubtful whether we should apply the term market 
 to places or groups of transactions where there is compe- 
 tition on one side only, and monopoly or combination 
 on the other ; where the buyers compete and the sellers 
 do not. 
 
 § 89. In any given market, the supply of an article, in 
 its technical sense, is the amount offered at a given price. 
 It tends to increase as the price increases. It must be 
 distinguished from the stock, which is an absolute amount 
 independent of price. 
 
 In any given markej: the deman d for aft artide is the 
 amount whfch will be taken at any given price.^ It tends 
 
 ^ There is another sense of the word demand, occasionally used by nearly 
 all the older economists, and emphasized by Caimes. In Cairnes' use of the 
 word, it means, not the quantity of a particular article demanded, but the 
 quantity of money, or other things representing general purchasing power. 
 
MARKET PRICE. 75 
 
 to diminish as t he price incre ases. It^jnustjbs_d.istin- 
 
 'guished from desTre, whi ch isa feelin^ ^ while deman4 is a 
 
 concrete quantity. Desire is the cause of dem a nd, b ut 
 
 the two terms are different in kincTand ca n never be u sed 
 interchangeably. 
 
 §^90. The marke t price of a n article, under the modern 
 commerciaFsyste m, is the pri ce at which the- demand- is 
 equal to" the supply ! Forjjf the supply at any given 
 price Is grea ter than the dema nd, the several sellers will 
 be driven to make special effor ts and concessions in order 
 to dispose of their goods ; while conversely, if the demand 
 at any given price is greater than the supply, the buyers 
 will be led to offer special inducements in order to get 
 the goods which they want. Suppose that cotton of a 
 certain grade is selling in the New York market at eight 
 cents a pound. If the amount of cotton brought to New 
 York from week to week to be sold is exactly equal to the 
 amount taken out of the New York market by the con- 
 sumers, the price is likely to remain at eight cents. But 
 if the amount brought is in excess of the amount taken 
 away, the sellers will see that the stocks are increasing, 
 ^and each will be afraid of being left with unsold cotton 
 on his hands which he may be unable to dispose of, 
 except at a great sacrifice. Competition among sellers 
 now becomes active. Each seller strives to get rid of his 
 cotton, — at eight cents if possible, but if that price cannot 
 be had, at seven and a half cents, or perhaps even at seven 
 cents, rather than be left with unsold and unsalable cotton. 
 As this process goes on, the lower prices induce the 
 buyers to take more cotton, and discourage the pro- 
 
 which buyers stand ready to give in exchange for it. The word is used by 
 the commercial world in both senses with about equal frequency. It makes 
 comparatively little difference which meaning we adopt, as long as we 
 adhere to the one selected. While Cairnes' definition is for some purposes 
 better than that given in the text, there are many other purposes for which 
 it is not so good. There appears to be no sufficient reason for departing 
 from the prevalent usage of modern economists. 
 
y6 COMPETITION. 
 
 ducers from sending so much to New York ; in other 
 words, they increase the demand and diminish the supply, 
 until a new point of equilibrium is established. How far 
 the actual price goes down depends for the moment 
 chiefly upon the amount of additional use of cotton which 
 is caused by a fall in price. If a difference of half a cent 
 a pound greatly stimulates the manufacture of cotton, 
 the price in the case supposed is not likely to fall below 
 seven and a half cents. If, on the other hand, the differ- 
 ence of half a cent has no great effect on consumption, 
 the price for the time being is likely to fall to seven cents 
 or even lower. 
 
 Now take the opposite case. Suppose that at eight 
 cents the demand is greater than the supply. We shall 
 have competition of buyers instead of sellers. There is 
 not going to be enough cotton for everybody at eight 
 cents. A cotton merchant or broker sees that the stock 
 of cotton is being gradually reduced. If this process 
 goes on, it means that there will be a scarcity in the im- 
 mediate future. He therefore refuses to part with his 
 cotton at eight cents, hoping to be able to command 
 higher prices a week hence. Others follow his example. 
 The buyers can no longer get the amount of cotton they 
 need for eight cents a pound. Some are unwiUing to give 
 more than eight cents and drop out of the market ; 
 others are prepared to pay eight and a half cents; still 
 others will go as high as nine cents rather than do with- 
 out the cotton. Whether the -actual price goes up to 
 eight and a half cents, or to nine cents, or even higher, 
 depends largely on the number of buyers who withdraw 
 from the market at successive changes in the price. If a 
 large proportion of the buyers will not pay more than 
 eight cents, the merchants can increase the price but 
 little. The man who holds his cotton at a price which 
 drives the buyers out of market cuts off his own head. 
 But if a large proportion of the buyers are prepared to 
 
THE DEMAND CURVE. 
 
 77 
 
 pay nine cents, the merchant will probably do well to 
 refuse to sell for less than this figure. If he is wise, he 
 will continue to hold back his cotton as long as the stock 
 in the market continues to diminish ; that is, as long as 
 the amount taken by consumers at existing prices exceeds 
 the amount sent to market by producers. When this 
 state of things is on the point of being reversed, he will 
 sell. No further rise in prices is probable. He is much 
 more likely to see a fall, and cannot afford in such an 
 event to be left with unsold goods on his hands. The 
 self-interest of each merchant leads him to refuse to sell 
 as long as the demand exceeds the supply, and to sell 
 when the two things become equal to one another. 
 
 30000 
 ZSOOO 
 
 FiQ. 1 
 
 \ 
 
 d, 
 
 riq. 2 
 
 J}' 
 
 P, Pz Ps 
 
 § 91. Beginning at the point O (Figure i), lay off in 
 the horizontal line OP a series of points whose distances 
 from O shall represent successive prices of cotton per 
 pound. From these successive points, representing 
 price, let vertical lines be raised representing quan- 
 tities of cotton which will be taken by the purchasers at 
 those prices in the course of a week. These quantities 
 tend to fall as the price rises. If the purchases at eight 
 cents are 40,000 bales per week, we may assume for the 
 sake of illustration that only 30,000 bales would be taken 
 at nine cents, and only 25,000 at ten cents ; but that a fall 
 in price to seven cents would call out a demand for 50,000 
 bales a week, and a fall to six cents a demand for 65,000 
 
78 COMPETITION. 
 
 bales. A fractional price, like seven and a half cents, 
 would call forth a demand intermediate between that at 
 eight cents and that at seven. If we establish a number 
 of points in this way and connect them by a line, we shall 
 have what is known as a demand curve, representing the 
 whole series of relations between price and quantity 
 demanded. 
 
 If, in Figure 2 DD' is the demand curve for a given 
 article in any given market, then at any assumed price 
 Opj^ the demand will be represented by the line p,d^\ 
 similarly at the prices Op^^ Op^^ the demand will be 
 represented respectively by the lines /^^,/y/^.' 
 
 § 92. The shape of the demand curve is different for 
 different commodities,'' and even for the same commodity 
 in different markets. But its for m is limited by one g en- 
 eral law ; the quantity HprnanHpf^ t^nd.s to increase as the 
 price diminishes, and to dimmish as the price increases. 
 ThIs^§^TSa^l3r established by observation of commercial 
 facts. It can also be proved theoretically, as a deduction 
 from observed principles of human nature. 
 
 It is a well known law of psychology that the same 
 stimulus, if repeated more and more rapidly, produces a 
 constantly diminishing sense of added pleasure or pain. 
 As an economic consequence of this, rapidly increasing 
 suppHes of the same class of goods do not proportionately 
 increase the happiness of their possessor, but are all the 
 time diminishing in their utility ' to him. The first slice of 
 
 ' In these figures the horizontal lines represent prices, and the vertical 
 lines quantities of the commodity. Horizontal lines must therefore be com- 
 pared with one another, and vertical lines with one another ; we must not 
 attempt to take the ratio between a horizontal and a vertical line, since the 
 two represent quantities of different kind, with different units of measurement. 
 
 * This point is further developed in chapter x. 
 
 ' Utility, as the word has been used by writers on economics, means the 
 power of satisfying a temporary desire rather than the power of doing a per- 
 manent good. In this sense, whiskey would be regarded as having a high 
 degree of utility to many to whom it is by no means beneficial in the long 
 run. 
 
y 
 
 MARGINAL UTILITY. 79 
 
 bread received in the course of a day has almost infinite 
 uj:ility as a means of preserving life. The second has 
 great utility as a means of avoiding hunger, but not so 
 great as the first ; the third makes less difference than the 
 second ; and when we come to the tenth, the added grati- 
 fication is perhaps hardly appreciable. So it is to a greater 
 or less degree with all other commodities. Additional 
 increments in quantity do not bring proportionate increase 
 of enjoyment or utility. The total utility of the larg er 
 amount is greater than that 'of the smaller^ but *s^^.jnar' 
 ginal ^ wXVii'Cy'or^dditions to the supply available ioi: jmy 
 individual keeps diminishing. 
 
 § 93. If there is only a small amount of a commodity 
 in the market the buyers are often extremely anxious to 
 add to their consumption, and are willing to pay high 
 prices. If the amount available becomes larger, and the 
 most urgent needs of the buyers have already been satisfied, 
 the holders must offer inducements to those whose need is 
 less urgent ; that is, they must lower prices to create a larger 
 demand. The demand for cotton at ten cents a pound 
 comes from those to whom the utility of adding to their 
 stocks of cotton is greater than the sacrifice involved in 
 earning ten cents, or in giving up something else which 
 the ten cents might purchase.' The demand for cotton 
 
 ' Also called final utility. 
 
 2 Desire alone cannot create demand. A man must have the means of 
 payment ; and these means usually come from the supply of goods or services 
 which he has previously sold. If producers and consumers come in personal 
 contact with one another each man's supply of commodities which he sells 
 becomes a demand for the commodities of others which he wants to buy. 
 He will sell his goods, and increase their supply, as long as the utility of what 
 he can buy at the market rates of exchange is greater than that which he 
 sacrifices in parting with his own products. This double aspect of his goods 
 as supply and demand forms the basis of the theory of reciprocal demand 
 which was developed by Cairnes in popular form and by Walras with scientific 
 accuracy. 
 
 But if an interval elapses between the time when a man makes prices for 
 the goods which he sells and spends the money thus obtained in the purchase 
 
8o COMPE TITION. 
 
 at nine cents comes from those to whom its utility is 
 greater than the sacrifice measured by nine cents. Eagh 
 reduction in price increases the amount of goods whose 
 utility to the buyers is greater than that which is measured 
 by the price charged ; that is, it increases the demand. 
 It may, however, happen that the stock of an extremely 
 useful article is so great that no reduction in price will 
 serve to create a commercial demand for the whole. 
 Water, except in cities, is an example of this. The total 
 utility of water is enormous ; but if there are already a 
 million gallons available, the marginal utility of an ad- 
 ditional gallon is so small that no one is likely to pay any- 
 thing for it, and there is no commercial demand in the 
 proper sense of the word. 
 
 This is, in substance, the theory of demand set forth by 
 Jevons, and carried out in detail by the Austrian school 
 of economists. It is of great importance as showing the 
 direct connection between utility and price under the 
 existing commercial system. It explains more clearly 
 than previous theories have done the psychological mo- 
 tives which determine the relations between price and de- 
 mand. Much of the work of this school, however, seems 
 to belong rather to the domain of psychology than of 
 economics, and to have a very remote application to the 
 practical problems of business and of legislation. 
 
 § 94. The demand for an article thus depends upon its 
 utility as estimated by the consumers, and can be increased 
 by lowering the price. To dispose of any given supply 
 the holders must make the price low enough to create a 
 corresponding demand. 
 
 In the case of perishable goods, the conditions deter- 
 
 of other goods, the theory of reciprocal demand ceases to work smoothly. 
 We can no longer say without much reserve that ' ' a market for products is 
 products in market." The intervention of the speculator and the varying 
 success with which he performs his work, make such a difference in the 
 rapidity of exchange that they cannot be ignored in the discussion of price 
 variations. 
 
THE SUPPLY CURVE, 
 
 8i 
 
 mining the supply are comparatively simple. The supply 
 of such goods is substantially the same as the stock 
 brought to market. If a thousand quarts of strawberries 
 come into the hands of the retailers of a certain city 
 to day and cannot be kept till to morrow, the price must 
 be made low enough to create a demand for the thousand 
 quarts, even though such a price be wholly unremunera- 
 tive. 
 
 90000 
 
 60000 
 ■*0000 
 
 Q 
 
 
 
 
 
 
 
 riq.3 
 
 \ 
 
 
 / 
 
 
 
 \ 
 
 \\ 
 
 1 
 
 \ 
 
 
 
 
 / 
 
 \ 
 
 
 JO 000 
 
 
 / 
 
 >» 
 
 / 
 
 T 
 
 Q 
 
 \. 'A 
 
 /S' 
 
 Fi<J. ^ 
 
 
 V 
 
 
 
 
 / 
 
 \ 
 
 d. 
 
 
 
 / 
 
 
 \ 
 
 
 / 
 
 i, 
 
 
 D' 
 
 P 
 
 t 2 i *■ S 6 7 
 
 P> P 
 
 But if an article be of a more permanent character and 
 less liable to deterioration, it will not be necessary to sell 
 the whole stock. If the price goes too low, the merchants 
 may hold back a part of the stock in the hope of realizing 
 higher prices in the future. At a price like ten cents the 
 merchants would try to sell every available pound of 
 cotton ; at nine cents they would not wish to leave them- 
 selves wholly bare, but would reserve a little for future 
 contingencies ; at eight cents they would reserve more ; 
 while at seven cents or six cents, increasingly large shares 
 of the product would be held back. If we assume the 
 stock of unsold cotton in New York to be 100,000 bales, 
 the supply might be o at five cents, 10,000 at six cents, 
 25,000 at seven cents, 40,000 at eight cents, 60,000 at nine 
 cents, and 90,000 at ten cents. On this basis we can con- 
 struct supply curves, similar to the demand curves in 
 Figures i and 2 ; and can then combine the two curves 
 into one figure as in Figure 3 or Figure 4. 
 
82 ' COMPETITION, 
 
 % 95. The market price of an article is determined by 
 /Ihe intersection of the supply and demand curves.' The 
 ' price for cotton in Figure 3 will be eight cents a pounds 
 at which price 40,000 bales will be offered and taken. Any 
 price lower than this will produce an excess of demand 
 over supply, and the competition of buyers will tend to 
 force prices upward ; any price higher than eight cents 
 will produce an excess of supply over demand, and the 
 competition of sellers will tend to force prices downward. 
 Had the price been seven cents we should have had 
 buyers for 50,000 bales and sellers for only 25,000 ; had 
 it been nine cents, we should have had sellers for 60,000 
 bales and buyers for only 30,000. But a price of eight 
 cents will just clear the market. There will be no one left 
 who wants to sell except at a higher figure, or to buy ex- 
 cept at a lower figure. In the general illustration (Fig. 4) 
 the price Op \^ determined by the intersection x of the 
 curves Z^Z?' and SS' . This is the point at which the quan- 
 tities demanded and supplied are equal, both being repre- 
 sented by the Ymepx. At any lower price, 0/>„ the demand^ 
 Pjdjt exceeds the supply, pjSj, and produces competition 
 of buyers ; at any higher price, (9/^, the supply, /^ s^^ ex- 
 ceeds the demand, pj djj and produces competition of 
 sellers. 
 
 In some markets, like the Berlin Stock Exchange, this 
 equalization of supply and demand, instead of being left 
 to individual intelligence in competition, is performed by 
 a committee, which, after revising all the bids and ofifer- 
 ings for the day, at their various prices, establishes a 
 settling price which will secure the maximum number of 
 transactions ; a price, that is to say, which leaves the 
 smallest difference between the amounts wanted by 
 buyers and offered by sellers. 
 
 § 96. A market price, as thus explained, is a price fixed 
 
 ^ The case of a perishable article may be represented by a horizontal sup- 
 ply curve, the supply being a fixed quantity whatever the price offered. 
 
ITS ADVANTAGES TO THE PUBLIC. 83 
 
 by the self-interest of buyers and sellers, each acting inde- 
 pendently — that is, with free competition on both sides. 
 The price thus fixed is generally an advantageous one for 
 society. This proposition may best be proved by con- 
 sidering the various causes which may defeat the action 
 of competition and observing the evils which result from 
 them. 
 
 The action of free competition may be defeated by 
 ignorance, by custom (either with or without the authority 
 of law to enforce it), and by combination. 
 
 The bad effects of ignorance hardly need proof. An 
 Ignorant buyer, unfamiliar with the market rate, is liable 
 to be charged a higher price on account of that un- 
 familiarity. This results in uncertainty with regard to 
 prices, and redounds chiefly to the advantage of the more 
 unscrupulous sellers, who will make money by deceiving 
 those who deal with them. A one-price system, which is 
 a most important element in commercial honesty, is 
 secured by intelligent competition and defeated by 
 ignorance. 
 
 The disadvantage of relying on custom or combination 
 as a means of fixing prices may easily be proved in 
 detail. 
 
 § 97. Suppose that, at the old price, the supply is less 
 than the demand, but that custom prevents the buyers 
 from competing with one another to force prices up. The 
 low price continues as long as the stock lasts. The buyers 
 get what there is at the old price, and use it freely. There 
 is no apparent motive for them to lessen their consump- 
 tion, nor is there any motive for producers to send a 
 larger supply to market. After a time the stock of goods 
 is used up, and we have distressing scarcity or famine. 
 The temporary gain which resulted from the low price is 
 more than offset by the suffering due to the total absence 
 of the commodity in question. But if the buyers are 
 allowed to compete and to force prices up at the very 
 
84 COMPETITION. 
 
 beginning of the scarcity, the advancing price at once 
 operates as a warning to use the article economically. 
 This of itself causes the stock to hold out longer. It will 
 also generally happen that the advancing prices lead the 
 producers to send more goods to the market where higher 
 prices prevail ; and that long before the advent of actual 
 famine new sources of supply are developed by which the 
 severest scarcity is avoided. If this result can be secured 
 by a moderate advance in price it is worth many times 
 what it costs. For it must be remembered that high 
 prices are not so much an evil in themselves, as an indica- 
 tion of an evil. If they exist in an open market, it shows 
 that certain needs of the community are inadequately 
 supplied. It often happens that the higher prices serve 
 as a natural cure for the underlying evil, and that the 
 effort to force those prices down by custom or law pre- 
 vents the evil from curing itself. If custom or law pre- 
 vents buyers from paying a competitive price, it soon 
 means that some buyers must go without things they 
 very much want. 
 
 Where for any reason competition cannot or will not 
 act, it is sometimes much better to fix prices by custom 
 or law than to leave them to the results of special bargain- 
 ing. Each city has its rates of carriage hire established 
 by public ordinance. The medical practitioners of any 
 given locality have their customary scale of charges, from 
 which professional etiquette forbids them to depart. In 
 the case of monopolies, complete or partial, like docks, 
 water-works, or railroads, the fees for their use are not in- 
 frequently fixed by legislative authority. But while a 
 system of established rates is better than one of special 
 bargains, it is worse than one of free competition because 
 it does not ensure an adaptation of the quantity of service 
 to the needs of the community. The effort to fix railroad 
 charges by law results in low rates for those who can get 
 the needed transportation facilities ; but it often curtails 
 
LOSSES FROM COMBINATION, 8$ 
 
 the construction of new roads and the development of 
 train service on old ones to such a degree that the loss to 
 those who cannot get their goods to market overbalances 
 the gain to those who can. 
 
 § 98. Suppose, on the other hand, that at the old price 
 the supply is in excess of the demand, but that the 
 sellers are enabled, either by custom or combination, to 
 avoid the effect of competition in forcing prices down. 
 The sellers get the old price for what is actually bought : 
 but the purchases continue smaller than the supplies, and 
 the visible stock increases up to the limit of the mer- 
 chants' carrying capacity. One of two things must happen. 
 Either a part of the accumulated goods will deteriorate, 
 and a useful article be wholly lost to the community ; or 
 there will come a time when there is such a glut in the 
 market that enormous stocks are sold at a sacrifice which 
 causes widespread commercial failure. The acts of the 
 French Copper Syndicate of 1888 furnish a good ex- 
 ample of this effect of non-competitive prices. This syn- 
 dicate succeeded in controlling so large a part of the 
 copper of the world that it could apparently fix its 
 charges to suit itself ; but the high prices interfered de- 
 cidedly with the use of copper, and although the increas- 
 ing stocks of metal could be carried without deterioration, 
 the financial burden ultimately became too great for the 
 largest business concerns to bear, and the accumulations 
 had to be sold at panic figures. 
 
 Receding prices are, as a rule, the effect of increased 
 supply. If they are allowed to work out their natural 
 results, they bring about increased use of the article, and 
 prevent the large supply from being wasted or allowed to 
 deteriorate ; while they also act as a warning to producers 
 not to increase the supplies of an article where low prices 
 prevail. They may seem like a temporary evil to mer- 
 chants and to producers ; but it has been proved over 
 and over again that the attempt to stave off this evil 
 
86 COMPETITION. 
 
 by interfering with the action of competition makes the 
 disaster worse in the end. 
 / §99. Not only does competition tend to utiHze the 
 / agg^'eg^t^ product of the community to advantage, as 
 / shown in the previous paragraphs; it also tends, on the 
 I whole, to make the prices of different articles proportion- 
 V ate to the expense of producing them. 
 
 Suppose that the market price of iron, as fixed by 
 supply and demand, is insufficient to cover the expense 
 of producing it. No investor seeking a business opening 
 is likely to go into the production of iron, nor will those 
 already engaged in the business increase their plant or 
 even renew it when it wears out. If at the same time 
 there is another article, for instance copper, whose market 
 price, as fixed by supply and demand, affords a large 
 excess over the expense of production, new investors 
 will seek to produce copper, while those already engaged 
 in the business will extend their plant and keep it up to 
 the highest standard of efficiency. We shall see a dimi- 
 nution of the output of iron and an increase of the out- 
 put of copper, by a process which, though not generally 
 involving actual transfer of capital from one industry to 
 another, amounts to the same thing in its effect on the 
 community. The permanent supply of iron being dimin- 
 ished, while the conditions of demand remain the same, 
 the producers will be able to charge a higher price and 
 yet dispose of the total product ; while, conversely, the 
 permanent supply of copper being increased, the produ- 
 cers will be forced to charge a lower price in order to call 
 forth a corresponding demand. This process will go on 
 until the profit in the production of copper is no greater 
 than that in the production of iron. 
 
 § 100. This adjustment actually takes place among the 
 industries of the country as a whole. There is a constant 
 supply of free capital and labor seeking investment in 
 localities and industries where the higher profits are to be 
 
NORMAL PRICE, 8/ 
 
 obtained, and not entering those where the profits are 
 lower. This process tends to force down the prices of 
 products in lines where they have been unfairly high, 
 and to maintain or increase them in those where they 
 have been disproportionately low. When this equalizing 
 process has taken place, the price is said to be normal. 
 A normal price is reached when the product has so 
 adjusted itself to the demands of consumers, that the 
 market price affords the current rate of profit to the 
 producer who enjoys no extraordinary advantage. We 
 may contrast market and normal price by saying that a 
 market price is one at which, for the moment, the supply 
 is equal to the demand ; while a normal price is one at 
 which, as long as the existing stage of the arts continues, 
 the production is likely to be equal to the consumption. 
 
 Under the modern industrial system there is first a 
 temporary adjustment of the demand to the supply by 
 the commercial competition of merchants, which lowers 
 (or in the converse case raises) the price to make it 
 correspond to the marginal utility. This temporary ad- 
 justment results in market price. Then there is a more 
 permanent, though less accurate and universal, adjust- 
 ment of the supply to the demand, by the industrial com- 
 petition of investors which lowers (or in the converse 
 case raises) the price (and the marginal utility) until it 
 becomes proportionate to expense of production. This 
 permanent adjustment, as far as it is carried out, results 
 in an approximation to normal price. 
 
 § 10 1. The adjustment of market price to normal price, 
 by changes in the direction of business activity, is a fact 
 of cardinal importance. But it should be understood, 
 from the very outset, that the process is a rough and not 
 an accurate one. The causes which prevent it from being 
 completely carried out may be grouped as follows : 
 
 (i) Some articles are absolutely fixed in quantity, 
 so that the price received has little or no effect on the 
 
88 COMPETITION, 
 
 supply. Historic autographs, old coins, or rare postage 
 stamps cannot be said to have any normal price, since 
 no amount of labor and capital can honestly duplicate 
 them. 
 
 (2) A larger number of articles and services are under 
 the control of monopolies which strive to limit the supply 
 in such a way as to maintain high profits. A railroad may 
 charge high rates for a long time without calling a com« 
 petitor into being ; for business which gives unusual profit 
 to one road may afford very inadequate remuneration to 
 more than one. As a rule, however, the effect of such 
 monopolies is only to retard and not to destroy the forces 
 of industrial competition which check exorbitant profits. 
 More will be said of this when we come to examine in 
 detail the results of modern industrial combination. 
 [ (3) A more universal difficulty in applying the theory 
 \ of normal price arises from the uncertainty attaching to 
 \ the phrase " expense of production " in any given line of 
 Business. This expense varies with different men, differ- 
 ent locations, and different processes. Are we to take the 
 average expense of production as the standard of normal 
 price, or the expense of the most skilful and well-situated 
 producer, or that of the least skilful and well-situated ? 
 This will depend upon the line of business. In agricul- 
 ture or mining, where the best lands can only meet a part 
 of the demand, the community must habitually pay a 
 price high enough to induce owners of other lands or 
 mines to enter the market ; a price which affords the 
 owners of the better lands or mines a surplus profit 
 known as rent. In manufacturing, on the other hand, 
 when the best plants can increase their output with little 
 restriction, so as to be able to supply the whole market, it 
 is often the better concerns that fix the price and the worse 
 ones have to get on as they can. In general, it involves 
 no great error to say that the normal price of any article 
 is measured by the expense of producing additional sup- 
 
 r 
 
UNCERTAINTIES IN ADJUSTMENT, 89 
 
 plies on the part of those who go into business without 
 either the advantage of old locations or the disadvantage 
 of old methods. 
 
 (4) Another case where the relation between cost and 
 price is obscured is seen in bye-products — incidental results 
 of industrial processes which have been established for 
 some other purpose. If a furnace is engaged in reducing 
 pyrites for the sake of the metal which it contains, its 
 owners find themselves left in possession of a quantity of 
 sulphur from which the metal has been separated. This 
 sulphur is" a bye-product, not a main object of the busi- 
 ness ; its owners are ready to sell it for what they can get 
 without attempting to figure the cost. In the manufac- 
 ture of illuminating gas, coke is an important bye-product. 
 If there is much demand for gas and little demand for 
 coke, the latter will be sold by the gas company for 
 almost anything it can get. If the demand for coke 
 becomes greater, it may come to be treated as a main 
 product of the business ; and the effort to determine the 
 normal price either of gas or of coke becomes a matter of 
 serious doubt.' When a large concern like a railroad per- 
 forms many kinds of service at the same time, it is often 
 quite impossible to say which of its services is to be con- 
 sidered as the main object of its existence, and which are 
 to be treated as bye-products. Under such circumstances 
 the determination of the expense and the normal price of 
 any individual piece of work becomes quite an arbitrary 
 matter. 
 
 (5) Another difficulty in applying the theory of normal 
 price arises from the fact that the process of investment 
 is so slow that new inventions may often create a new 
 normal price before the original adjustment is complete. 
 This is especially the case in industries involving large 
 capital. If a factory or a railroad charges too high a 
 price, it may be some years before a competitor is found 
 
 * Mill : '• Political Economy," Book iii., ch. xvi. 
 
90 
 
 COMPETITION, 
 
 to reduce it ; if, on the other hand, too many competitors 
 come in, it will be a number of years before they can drop 
 out again. Under these circumstances, the price may 
 easily remain for a long time either unfairly high or un- 
 fairly low, without effective remedy from free competition. 
 § I02. In spite of all these hindrances, the adjustment* 
 of market price to normal price, though a rough and slow 
 process, is a most important one ; and the efforts to ignore 
 it, whether on the part of combinations for keeping prices 
 too high or legislation for keeping them too low, have 
 generally resulted in signal failure. 
 
 § 103. Let Op (Fig. 5) represent the normal price of 
 an article, and px the quantity which will ordinarily be 
 produced and consumed at that price. Let Op^ repre- 
 sent the maximum price which any buyer is willing to 
 pay, so that above this price all permanent demand ceases. 
 Let Opi represent the minimum expense of production to 
 the most advantageously situated producer, so that below 
 this price all permanent supply ceases. The total demand 
 for the article will be made up by consumers to whom its 
 utility ranges from the price represented by Op^ down to 
 that represented by Op. The total supply of the article 
 is made up by producers to whom its cost ranges from 
 Opi up to Op. At the normal price the amounts of this 
 production and consumption will be equal. If the normal 
 price of wheat is seventy-five cents, it shows that the 
 
PRICE AND VALUE, 9 1 
 
 number of consumers to whom the utiHty of the wheat 
 is such that they can afford to give seventy-five cents or 
 more just takes up the supply which the producers can 
 afford to furnish at seventy-five cents or less. 
 
 Competition by making a one-price system enables the 
 consumers whose necessities are greatest to get the article 
 for less than they would be willing to pay in an emergency ; 
 it also enables the producers whose advantages are greatest 
 to charge more than they would be able to accept if hard 
 pushed. The gain to the consumers by this process is 
 represented by pxp^ ; the gain to the producers by pxpi. 
 The former corresponds in a very rough way to the excess 
 of utility over price ; the latter corresponds in an equally 
 rough way to the excess of price over cost.' 
 
 § 104. A price is a fact. A value is an estimate of what 
 a price ought to be. 
 
 The word value is used in a number of wholly different 
 meanings, but this idea of a permanent standard or cause 
 of price, as distinguished from a temporary or accidental 
 phenomenon, lies at the basis of them all. Sometimes 
 value is used in the sense of utility — for instance, when I 
 say that an article has a value to me out of all proportion 
 to the amount for which I could sell it." Sometimes it 
 
 ^ While these curves of normal supply and demand are useful for purposes 
 of illustration, they are often misleading, because they are based on assump- 
 tions rather than on observations. The use of the supply curve is specially 
 open to danger. There is a tendency to identify the area pxpi^ with eco- 
 nomic rent (ch. ix.). This is an error. Rent is the excess of price received 
 over the actual expense of the several producers. The 2s&2ipxPi^ represents 
 an excess of price received over the hypothetical expense which the better 
 producers would incur if the worse ones went out of business. The reduc- 
 tion of wages incident to the withdrawal of weaker competitors would make 
 the expense in the second case much lower than in the first. 
 
 In the more complicated cases under (2), (4), and (5) in § loi, a normal 
 supply curve can hardly be said to exist. 
 
 ' An estimate of this kind is sometimes called subjective value. But it is 
 better to use the term utility to avoid the confusion which would otherwise 
 arise. 
 
92 COMPE TI TION, 
 
 means purchasing power in the abstract, as distinct from 
 concrete measures of this power ; for instance, when 1 say 
 that an article has value, though I do not know just what 
 its price may be. Sometimes it means purchasing power 
 measured in commodities instead of in money. In coun- 
 tries with a paper currency there is frequent occasion for 
 using the word in this sense. If the currency is doubled 
 by act of the legislature, the prices of goods measured in 
 this currency will tend to double also ; but we are justi- 
 fied in saying that there is no increase of real value corre- 
 sponding to this change in nominal price. Sometimes the 
 term value means average probable price. If I say that 
 a certain railroad stock is selling below its true value, I 
 simply mean that in the long run it is, in my opinion, 
 likely to command a higher price than it does now. Finally 
 the word value often means 2l proper and legitimate price, 
 as distinct from an unfair or extortionate one. The last 
 is much the commonest and most important sense of the 
 word in commercial usage, and there seems to be no good 
 reason against our adopting it. In this sense, the sub- 
 stantive value corresponds exactly to the adjective worth. 
 If we say that a man is charging a higher price for an 
 article than it is worth, we mean that he is putting the 
 buyer at an unfair disadvantage. 
 
 The price of an article or service, in the ordinary com- 
 mercial sense, is the amount of money which is paid, 
 asked, or offered for it. The value of an article or service 
 is the amount of money which may properly be paid, 
 asked, or offered for it. A theory of price puts us in a 
 position to explain the transactions of commercial life. 
 A theory of value undertakes to pass judgment upon 
 their advisability or their morality. 
 
 § 105. Value being essentially an ethical term, we may 
 have as many different theories of value as there are differ- 
 ent views of business ethics. But these views fall under two 
 main heads : the commercial or competitive theory, which 
 
J 
 
 TWO THEORIES OF VALUE, 93 
 
 bases value upon what the buyer is willing and able to offer 
 for an article; and the socialistic theory, which bases it 
 upon what the article has cost the seller in the way of toil 
 and sacrifice. When we have grasped this ethical charaC!^ 
 ter of the controversy between the commercial and social- 
 istic theories, we seize more clearly upon the points which 
 are essential to the adjudication of that controversy. The 
 question between the two parties is not primarily one of 
 fact, but of advisability ; not what necessarily determines 
 value, but what kind of a price we shall stamp with our 
 approval by calling it a value. The commercial theory is 
 that the value of an article is the price which it would 
 command under a system of free and open competition, as 
 distinct from one which is the result of special bargaining 
 or fraudulent concealment.' In this sense, the market 
 price represents the temporary value of an article, and the 
 normal price represents its permanent value. The advo- 
 cates of the commercial theory hold that the competitive 
 system serves the economic interests of society so well, 
 that the first rule of business morals is to conform thereto ; 
 and that the demands of commercial justice are generally 
 satisfied by a schedule of. prices made under the influence 
 of fair and open competition, as allowed and encouraged 
 by the common law of England and America. 
 
 § 106. From this view of commercial justice the social- 
 istic theory dissents. The advocates of the socialistic 
 theory say that, whatever the effects of competition may 
 be upon society as a whole, its relative effects upon differ- 
 ent members of society are extremely unfair. Many of 
 those who do the most disagreeable work have the least 
 enjoyment to show for it. This the socialists hold to be 
 contrary to the principles of popular government, or of 
 enlightened government of any kind. In criticising the 
 results of free competition, they emphasize the fact that 
 J:he adjustment of price to expense of production is 
 
 ' The " Austrian " theory of value is nothing more than the commercial 
 theory carried out to its logical conclusion. 
 
94 COMPE TI TION, 
 
 _exi^remely imperfect ; and they add that the expense of 
 production, as measured in money, is a very different 
 thing from the cost of production, measured in the labors 
 and sacrifices of the producer. They think that the 
 increased extent of modern competition intensifies this 
 divergence between cost and expense, because it brings in 
 labor of different grades of efficiency to supply the same 
 market, and forces men to accept the same price under 
 increasingly different conditions of supply. -^^They hold 
 that the rendering of labor constitutes the only just 
 ground for charging prices and the only just basis for esti- 
 rnating values. This basis they believe to be habitually 
 ignored or defied in the processes of modern trade. They 
 think that trade involves an effort to buy goods for less 
 than their value and to sell them for more than their 
 value ; that the profits of traders and capitalists of every 
 kind represent money unfairly extorted from consumers 
 or withheld from producers ; and that society must employ 
 some organized means to prevent this extortion, and not 
 let the trader take advantage of his power to fix prices to 
 suit himself. 
 
 § 107. That there is an obvious inequality in the re- 
 turns under the existing commercial system of payment 
 may readily be granted. None but the blindest optimist 
 will deny that many of the men who do the most 
 disagreeable work have the least comfort to show for 
 it. The socialists are justified in asserting that there is 
 an inconsistency between our poHtical doctrine of equal 
 rights to the pursuit of happiness for everybody, and the 
 facts of the industrial world, as we see them about us. 
 But when they come to formulate a positive theory or 
 standard of value, they give us something which, if 
 carried into practice, would be inconsistent, to a far greater 
 degree than is the existing system, with the pohtical 
 doctrines of a free commonwealth and with the chances 
 of happiness for its citizens. 
 
THE SOCIALISTIC THEORY. 95 
 
 If we attempt to reward every one according to his 
 labor, we are at once brought face to face with the danger 
 that people will make the wrong things. Give free choice 
 of occupation under this system, and we should at once 
 have an overplus of painters and musicians, with a defi- 
 ciency of farmers and mechanics. It would be necessary 
 for the government authorities to regulate the number 
 who should engage in each occupation — a method which 
 would be subject to the gravest industrial and political 
 dangers. 
 
 The free choice of employment under the modern com- 
 petitive system, while it doubtless increases the inequali- 
 ties of return within the same trade, diminishes the 
 inequalities of return between different trades, and gives 
 able men in underpaid industries or localities a chance to 
 better their condition by a change. If the numbers em- 
 ployed in different trades were regulated by public 
 authority, the chances for such movement would be much 
 reduced. The possibilities which, under the commercial 
 system, are open to a man of real ability, even under 
 unfavorable circumstances, would under the socialistic 
 system be confined to those who could command excep- 
 tional political influence. 
 
 § 108. There is another even greater danger inherent 
 in the socialistic theory of value. It takes away the pre- \ 
 mium for efificiency. It makes a man's claims for reward ■ 
 depend not upon what he has done for others, but upon 
 how he has occupied himself. Time wasted counts for as 
 much as time spent. This is a difficulty which the leaders 
 of socialistic thought have in vain tried to meet. To say, 
 as Marx does, that value depends on the quantity of 
 socially necessary labor represented by an article, intro- 
 duces two conflicting standards. Social necessity is a 
 quality which varies in degree — a fact whose consequences 
 Marx fails to take into account. How shall we rate an 
 article which embodies a little labor with a great degree 
 
96 COMPE TI TION, 
 
 of social necessity, as compared with one which embodies 
 a great deal of labor with a less degree of social neces- 
 sity ? If we deem the producers of the former article 
 worthy of the higher award, we reintroduce the com- 
 mercial standard of value under a new guise. But if 
 we reward the producers of the article which represents 
 much labor and little social necessity, we take away all 
 inducement for the efHcient or wise application of labor 
 and capital. The commercial theory of value has the 
 inestimable advantage of giving a man a motive for effi- 
 cient work by the best methods. Success and power are 
 made dependent on doing as much as you can, with 
 the least possible waste. It is by this process that capital 
 is accumulated and fortunes made. The socialists are 
 wrong in regarding trade as robbery. Individual instances 
 there may be which lend color to this idea; but those 
 instances are far from being the rule. If a man obtains 
 a large income, in nine cases out of ten it is because 
 he furnishes something which society wants ; if this 
 income leaves him a large margin of profit, it is because he 
 has known how to economize social force in doing the 
 work. The theory of value and of commercial justice 
 which puts a premium on w^ork of this kind is far better 
 for the community than that which, in its pursuit of dis- 
 tributive equity, is ready to sacrifice collective efficiency 
 and economy. 
 
CHAPTER IV. 
 
 SPECULATION. 
 
 Gambling — Insurance — Commercial Speculation — Legitimate and Illegiti- 
 mate Transactions — Industrial Speculation — Functions of the Capitalist. 
 
 § 109. We have thus far studied some of the principles 
 which regulate compensation for goods and services. We 
 have now to deal with those which regulate compensation 
 for risk. f. 
 
 The first case to be considered is that of gambling, li A 
 agrees to pay -5 a dollar in the event that a coin, tossed into 
 the air, turns up heads, and B agrees to pay A the same 
 amount in the other event, we have a transaction which 
 gives each party an equitable compensation for the risk 
 involved. Yet the moral sense of the community disap- 
 proves of dealings of this kind, and the law does what it 
 can to discourage them. The courts will not enforce such 
 contracts, and the public authorities usually try to stop 
 people who make a living in this way. The 'more en- 
 lightened the community, the more decided is the moral 
 disapproval, and the more persistent are the attempts to 
 enforce legal prohibitions of lotteries, policy shops, and 
 book-making establishments. 
 
 § no. We saw in the last chapter that successive ex- 
 penditures on the part of any individual were accompanied 
 by diminishing additions to his enjoyment. The first 
 hundred dollars of a man's income represents a difference 
 between life and death. The second hundred is a matter 
 of less absolute necessity. The third represents an in- 
 
 97 
 
98 SPECULA TION. 
 
 crease of comfort which is still great, but not equally in-^ 
 dispensable. When it comes to the tenth hundred it is a 
 question of enhanced enjoyment ; at the twentieth, it per^ 
 haps becomes a matter of luxuries only. In general, we 
 have a diminishing scale of utility for each additional 
 hundred dollars as the income itself gets larger and 
 larger. 
 
 If a man with an income of $ICXX) a year bets $500 on 
 an event which is in equal degree likely to happen or not 
 to happen, and then wins, he finds himself with $1500 in- 
 stead of $1000. If he loses, he has $500 instead of $1000. 
 His loss of comfort and efficiency in the latter case far 
 outweighs his gain in the former. A risk which appears 
 equitable when measured in dollars and cents, is very in- 
 equitable when measured in the comforts which that man 
 can command for himself and his family. He is risking 
 the loss of a larger amount of comfort, for an even chance, 
 of gaining a smaller amount. 
 
 When a man stakes a large percentage of his income in 
 this way, it is easy to see that gaming is folly. The apoU 
 ogists for gambling say that they risk such small propor- 
 tions of their income, that the difference in utility between 
 equal money gains or losses is very slight, and that the 
 pleasure of the excitement in the hazard outweighs any^ 
 such trifling difference. This is in many instances true -; 
 but it is also true that in a large number of instances 
 people do not know when to stop ; that under the stress 
 of excitement they risk very considerable proportions of 
 their money (not to speak of cases where they risk other 
 people's money also) ; that the losses represent losses of 
 comfort and self-respect, while the gains are spent in 
 luxury or carousal. Under these circumstances, the pub- 
 lic is fully warranted in holding that gambling contracts 
 are against public policy. It is a public misfortune to 
 have people hazard their fortunes in this way ; and the 
 man who makes a living by persuading other men to take 
 
INSURANCE, 99 
 
 such risks on terms advantageous to himself, whether in 
 gaming, horse-racing, or lotteries, is worse than a parasite 
 on society. 
 
 § III. Let us now contrast the workings of insurance. 
 In this case also the contract is a wager. A house owner 
 pays an insurance company fifty dollars, in return for 
 which he is to receive five thousand dollars in case his 
 house burns down within a specified time ; just as he 
 might pay a bookmaker fifty dollars and receive five 
 thousand in case a specified horse wins a race. But the 
 motives and effects in the two cases are wholly different. 
 The man who wins in betting on horses secures an addi- 
 tion to his income which means increased luxury ; the 
 man who has insured a house that burns down prevents 
 the distress to his family consequent upon the loss of a 
 home.' In like manner, the man who has insured his life 
 makes small annual payments at a time when he can do so 
 without encroaching on the comfort of his family ; thereby 
 assuring to that family, in the event of his death, a pay- 
 ment of money at a time when the loss of the earning 
 power of its head might otherwise mean want and destitu- 
 tion. Insurance puts money where it is needed, instead 
 of putting it where it is not needed ; where it has the 
 highest utility to the individual and to society, instead of 
 the lowest ; where the possibility of securing it, instead 
 of being a means of demoralizing excitement, becomes a 
 source of security and of industrial efficiency. Hence the 
 insurance company in protecting the individual insurer 
 against losses to himself and his family from fire, accident, 
 or death, is rendering a public service ; and the profits of 
 such a company, unlike those of the bookmaker or the 
 
 * If a man insures a house in which he has no interest, or insures his own 
 house beyond its real value, the transaction comes very close to gambling 
 and is discountenanced both by the insurance companies and the law ; not 
 simply or primarily because it is a gambling transaction, but because it leads 
 to fraud and arson. 
 
lOO SPECULA TION. 
 
 lottery, are honestly earned by an actual contribution to 
 the public wealth. 
 
 §112. Commercial speculation is sometimes analogous 
 to insurance, and sometimes to gambling. In the former 
 case it is said to be legitimate, in the latter it is said 
 to be illegitimate. But the legitimate and illegitimate 
 transactions are so much alike in their form, and so inex- 
 tricably mingled in practice, that it is often extremely 
 hard to draw the line between them. 
 
 § 113. A large speculative element is involved in trade of 
 every kind. The trader seeks to buy articles at as low a 
 price as he can and to sell them at a higher price. He may 
 do this either by buying them in a market where they are 
 cheap and selling them in a market where they are dearer ; 
 or by buying them at a time when they are cheap and sell- 
 ing them at a time when they are dearer. The difference 
 between his buying and selling prices represents his profit 
 on the transaction. The uncertainty attaching to the 
 amount of such profit makes the operation a speculative 
 one. There is a serious risk of loss, which the trader 
 assumes for the sake of a possible gain. Unless we can 
 prove that the gains are honestly earned by some service 
 to society, we shall be forced to regard them as little 
 better than book-makers' profits. 
 
 Those who hold the socialistic theory of value regard 
 trade as a dangerous occupation, which affords almost 
 irresistible temptations to dishonesty. Believing, as they 
 do, that the value or just price of an article depends on 
 the labor embodied in it, they see in trade a constant 
 effort to buy articles for less than their value and to sell 
 them for more than their value ; an effort in which the 
 trader's superior shrewdness often enables him to cheat 
 both producer and consumer. In that form of trade where 
 articles are bought in one place and sold in another, they 
 admit that the trader may do a necessary work of distribu- 
 tion which increases the value or just price of the goods 
 
SERVICES RENDERED BY TRADE, 10 1 
 
 in question, so that a part of the profit of this form of 
 trade is legitimate. But in that form of trade where 
 articles are bought at one time and sold at another, they 
 deny that there is any service rendered which increases 
 the value of the goods, and they hold that all profit ob- 
 tained by this means is unjust and extortionate. In 
 mediaeval times, when the socialistic theory of value was 
 generally accepted, all trade was regarded with a suspicious 
 eye : and the attempt to buy an article when it was cheap, 
 with a view to selling it when it became dear, was visited 
 with the severest penalties. 
 
 § 1 14. But those who hold the commercial theory of 
 value believe that trade renders a service to society, inde- 
 pendent of the labor of distribution ; and that this service 
 is of essentially the same character, whether the sale be 
 made in a different market or in the same market. They 
 hold that the work of the trader, in acquiring goods when 
 they are cheap and parting with them when they are dear, 
 results in an increase of their utility to the public. If an 
 article is unusually cheap, it means that the supply is 
 unusually great and the utility of additions to the supply 
 less than it ordinarily is. If it is unusually dear, it means 
 that the supply is unusually small, and the utility of 
 additions to the supply greater than it ordinarily is. 
 If wheat stands at 50 cents a bushel, the need for addi- 
 tional wheat is small; if it stands at $1.00 a bushel, the 
 need for additional wheat is great. The man who with- 
 draws wheat from the market in the former case and is 
 thus enabled to add it to the supply in the latter, serves 
 the wants of society. Nor is it true, as might at first sight 
 appear, that he is enabled to appropriate to himself by 
 the higher price the whole benefit of the increased utility. 
 If any considerable quantity of wheat is bought by the 
 traders at the lower figure for future sale, it will increase 
 the demand and make the present price higher than 50 
 cents ; while the supply thus made available when wheat 
 
I02 
 
 SPECULA TION. 
 
 becomes scarce will prevent the future price from reach- 
 ing $i.oo. 
 
 § 115. Let DD' (Fig. 6.) be the demand curve for 
 
 zoooo 
 10000 
 
 liOOO 
 
 1*000 
 
 IZOOO 
 
 10000 
 
 Q ^ 
 
 
 
 \ 
 
 *•/« K 
 
 
 
 \ 
 
 "T^ 
 
 
 
 
 \ 
 
 
 
 
 
 
 \ 
 
 
 
 
 
 
 - 
 
 \ 
 
 
 
 T-t 
 
 t 70 i 1 ao M» 
 
 wheat in a certain market where 10,000 bushels a week 
 would be taken at a dollar a bushel, but where 20,000 
 bushels a week could not be disposed of except by redu- 
 cing the price to fifty cents. If a single trader stores away 
 a few bushels of wheat when it is plenty, and sells it when 
 it is scarce, he hardly affects the price to the producer or 
 the consumer, and can in that case realize nearly the 
 whole gain for himself. But his success will teach others 
 to follow his example. Now if he and other traders store 
 away 2,000 bushels a week in time of plenty, they so re- 
 duce the amount for immediate consumption that the 
 ruling price at that time is sixty cents instead of fifty ; 
 while by selling this same wheat in time of scarcity, they 
 increase the supply so that the ruling price only goes up 
 to about ninety cents. If the traders withdraw 4,000 
 bushels a week in times of plenty, and thus provide an 
 increased supply for times of scarcity, it is probable that 
 they will have to pay seventy cents for what they buy, 
 and only get eighty cents when they sell it — a difference 
 which may little more than pay them for the cost of 
 carrying the wheat. The more fully the traders seek to 
 take advantage of differences in price, the narrower is the 
 
THE PROFITS OF TRADE, 
 
 103 
 
 margin they can realize for themselves. In general, if a 
 supply Oq^ (Fig. 7) will only command a price Op^^ while 
 
 ^ 
 
 ritj.r 
 
 Pi Pi. Pi P*- Ps />* 
 
 a supply Oq6 will command a price Op6, it means that 
 the need of increased supplies in the latter case is greater 
 than in the former, and that any man supplying that need 
 renders society a corresponding service. If a trader with- 
 draws a small quantity ^^^ in time of plenty and sells it in 
 time of scarcity, the extremes of price variation are Op^ 
 and Opj^ and the trader is able to realize the difference/^/^. 
 But if the traders reserve a larger quantity ^^^ and corre- 
 spondingly increase the supply from Oq^ to Oq^ in time 
 of scarcity, the extremes of price will be Opj and Op^. 
 This leaves only a small margin pjp^ per bushel for the 
 traders (instead of /^/^, as in the former case), and leaves 
 a much larger part of the gain to s6ciety for the benefit 
 •of producers and consumers. Anything which tends to 
 prevent fluctuation in price renders a service in putting 
 goods where they are needed — a service which has an 
 effect on the public wealth far greater than can be 
 measured by any of its effects on the private wealth of 
 individuals. 
 
 § 1 16. If the traders can compare accurately the rela- 
 tions of supply and demand in different markets, they 
 will all try to put the supply where it is most needed, as 
 long as the difference in price is likely to cover the cost 
 
I04 SPECULATION, 
 
 of transfer. The profits from trade of this kind are small, 
 and relatively sure. But if no such accurate comparison 
 can be made, the trader's possible profits are much larger, 
 while the risks and uncertainties are at the same time 
 greater. The transaction in this case becomes a more 
 speculative one. 
 
 § 1 17. Down to the present century, a large part of the 
 speculative profits were made by taking advantage of dif- 
 ferences of price in different places — chiefly in connection 
 with foreign trade. The means of communication and 
 transport were so defective that there was often a great 
 scarcity of an article in one region and an abundance of 
 the same article in another. The shipowners who moved 
 the article from the latter place to the former had a chance 
 of enormous profits. But the business was also attended 
 with great risks. Transportation was far less safe, either 
 from the elements or from human violence, than it is to- 
 day. There was no telegraph, no good postal service, no 
 efficient protection from pirates by sea or highway rob- 
 bers by land. All these causes combined to render the 
 arrival of goods so uncertain that the very wages of the 
 seamen were made contingent upon the safe delivery of 
 the cargo, and the whole body of sailors thus became 
 participants in the speculation. 
 
 The nineteenth century has witnessed a change in these 
 respects. Improved means of communication have greatly 
 lessened the differences in price in different markets. It 
 is no longer possible to have a glut of wheat in Chicago 
 and a scarcity in Liverpool. The modern post-office and 
 the telegraph furnish prompt information of what is going 
 on all over the world, and enable merchants to know where 
 goods are most needed. The steamship and the railroad 
 furnish a quick and safe means of placing the goods where 
 they will meet such needs as may arise. The difference 
 of price of any staple article in two large wholesale 
 markets will not generally be much greater than the cost 
 
CONTRACTS FOR FUTURE DELIVERY, 1 05 
 
 of transportation from one to the other. So moderate 
 have the profits from this source become, that the busi- 
 ness of those who try to secure them is now known as 
 arbitrage rather than speculation. Only in the trade with 
 barbarous or half-civilized races does foreign commerce 
 retain its character as an extra-hazardous business. 
 
 § 118. The speculator of to-day makes his money 
 chiefly by taking advantage of differences of price 
 between different times, rather than between different 
 markets. It is not so much the difference in the 
 price of wheat in Chicago and in Liverpool which fur- 
 nishes the source of his profits, as the difference between 
 its price in Chicago this month and next month. If the 
 speculator foresees a rise, he buys wheat to-day with 
 the hope of selling at an advance. If he foresees a 
 fall, he contracts to make future deliveries at to-day's 
 prices, in the hope that he can secure the means of filling 
 those contracts at rates low enough to leave him a profit. 
 This is the type of transaction which forms the bulk of 
 the business on all the leading exchanges of the world. 
 
 § 119. When such speculation anticipates an actual 
 demand, it is of great service to the community, The 
 long time which elapses between production and consump- 
 tion, between contracts and their fulfilment, makes it 
 extremely important to have responsible men to antici- 
 pate the wants of the market and take the risks on their 
 own shoulders. If I wish to build a house, I ask a builder 
 to give me an estimate of the cost. He in turn goes to 
 dealers in lumber and other materials and asks them to 
 tell at what price they will deliver him the goods when he 
 wants them. In this way he knows approximately what 
 it will cost to build the house. The lumber dealer prob- 
 ably contracts to deliver lumber which is not now in his 
 possession. But if he understands his business he knows 
 more accurately than any one else what its future price is 
 likely to be. He habitually makes a profit by his superior 
 
I06 SPECULA TION, 
 
 knowledge ; but this profit is far less than the loss which 
 would be involved if every builder, at the time of making 
 a contract, had to buy all the lumber he was going to 
 want six months hence, leaving his capital (and the com- 
 munity's capital) unproductive for that length of time, 
 besides being subject to the dangers of loss by fire. 
 
 Nor does this case illustrate the full measure of service 
 which legitimate speculation is able to render the com- 
 munity. Suppose that the cotton crop of this year is an 
 unusually small one. The price will go up, the amount of 
 manufacture lessen. But the cotton brokers foresee that 
 next year's crop will be larger. They therefore contract 
 to make future deliveries at lower rates. The manufac- 
 turers do not need to buy raw material in advance of 
 their actual wants. They use up the whole old stock just 
 as the new crop comes in ; and the mercantile community 
 gradually accumulates other reserves from this large crop 
 which may become available for use in a year of scarcity. 
 The effect of such speculation is to equalize the supply 
 of cotton in different years, and to render its price 
 comparatively steady. More steady price makes larger 
 consumption and manufacture for consumption ; it there- 
 fore tends to increase the total quantity demanded and 
 to benefit producers also. If we compare the prices of 
 the present day with those prior to the development 
 of speculative activity, we find that the margin between 
 amounts paid to producers and those charged to consumers 
 is much narrower now than it was before. Part of this 
 difference is due to cheap transportation; but a part 
 is due to the action of speculators in minimizing the effect 
 of variations in production upon prices paid to the 
 producer. 
 
 § 1 20. This is the effect of legitimate speculation — antici- 
 pating movements of supply and demand and taking fair 
 risks. Unfortunately there is a mass of speculation which 
 is not legitimate — which is either pure gambling or some- 
 
MARGINS. 107 
 
 thing worse. If a man goes into the purchase of grain or 
 cotton, not because he foresees that it will be wanted, but 
 for the excitement of the wager, he is doing the same 
 kind of business as the man who bets on a horse-race 
 or on cards. The amount of these gambling transactions 
 veiled under the forms of commerce has become very 
 large. In many cases it has assumed the proportions of a 
 public evil. 
 
 The sales of certain commercial staples, such as wheat, 
 cotton, or petroleum, in the New York market are in 
 some years fifty times as great as the actual deliveries. 
 Of the transactions in stocks, perhaps an equally small 
 proportion represent purchases for investment. A large 
 part of such sales and purchases are made on margins ; 
 the buyer not paying or intending to pay the full amount, 
 but depositing with his broker a sufficient sum to secure 
 the latter from loss, and receiving or paying at the com- 
 pletion of the transaction an amount corresponding to the 
 change in price of the commodity purchased. The nar- 
 rower the margin, the greater is the chance of gain or loss 
 in proportion to the capital invested, and the higher are 
 the stakes to the gambler on either side. 
 
 Here, as elsewhere, high stakes constitute a temptation 
 to unfair play. If the outside public, as frequently hap- 
 pens, has bought securities or produce in the ill-grounded 
 hope of a rise in price, the professional operators will 
 speculate for a fall and try to ensure its advent by 
 spreading false reports of every kind. If, on the other 
 hand, a large number of operators have made contracts 
 to deliver securities or produce which they do not 
 possess, a few men with large capital will often try to lock 
 up the whole available supply of such commodities, and 
 compel those who have made the contracts to purchase 
 the means of filling them at an exorbitant figure. Such 
 an operation is known as a corner ; and its success is made 
 possible by the number of speculative contracts which 
 
I08 SPECULA TION. 
 
 must be filled within a limited period of time. The man 
 who thus attempts to manipulate the market, lowering 
 prices by false reports or raising them by factitious 
 scarcity, is doing the same kind of business as a man who 
 '* pulls " horses or stacks cards. In fact, he is doing 
 worse ; for the men who suffer from false running or 
 from card sharping are those who voluntarily go into the 
 business of betting ; while the knavish speculator may 
 hurt to some degree not only other speculators, but also 
 producers and consumers — the producers by his deceit, 
 the consumers by his combinations to raise prices. The 
 direct harm done to producers and consumers by these 
 means is very likely much less than is generally sup- 
 posed ; in the first place, because successful corners are 
 relatively few, and, in the second place, because the profits 
 of one group of speculators are for the most part made at 
 the expense of other groups. But the indirect harm to 
 business methods and business morals is incalculable. 
 
 § 121. So great has been the extent of this evil that 
 many have desired to see an entire prohibition of con- 
 tracts for future delivery of things which a man does not 
 possess at the time ; but this is obviously out of the 
 question. It would prevent operations like those of the 
 cotton broker or the lumber merchant, which economize 
 the capital of the community and have become a neces- 
 sary feature in modern business life. It would be at- 
 tended by great and disastrous irregularity in prices. 
 Any legislation of this kind, in order to be successful, 
 must be so contrived as to affect the gambling trans- 
 actions and leave the legitimate ones comparatively 
 untouched. 
 
 § 122. It is extremely difficult to make this distinction 
 by law. It cannot be based on the subject-matter of the 
 transaction. The illegitimate speculations deal with the 
 same articles as the legitimate ones. Sometimes when 
 public indignation has been roused by the operation of 
 
EFFECT OF RESTRICTIONS. IO9 
 
 brokers in certain lines there have been attempts made to 
 stop all transactions in those lines ; but they have usually- 
 proved disastrous. In the year 1864, the large issue of 
 paper currency had driven gold out of circulation and 
 caused it to be bought and sold as a commodity. Much 
 of it was in the hands of speculators. When its price 
 rose more than one hundred per cent, it was supposed 
 by the public that a part of this increase was due to the 
 operations of these speculators. All gold speculation was 
 therefore prohibited by statute. Under the excitement 
 of public opinion in time of war this statute was enforced 
 to a far greater degree than could have been done in 
 peace. The effect was precisely the opposite of what 
 had been anticipated. Every man who was engaged in 
 foreign trade had to provide security for being able to 
 make gold payments in the immediate future, if called 
 upon to do so. Being prevented from dealing with 
 speculators, he now had to accumulate a reserve of his 
 own. This caused an increased demand for gold at a 
 time when it was unusually difficult to maintain an 
 adequate supply. Under two weeks' operation of the 
 act, the price of a hundred gold dollars rose from about 
 two hundred paper dollars to very nearly three hundred. 
 So obvious was its evil effect that it was hurriedly re- 
 pealed as a means of preventing further commercial dis- 
 asters. Again, in the early part of 1866 there was a rise 
 in the price of gold, which was attributed by public 
 opinion to the speculators. Their machinations were 
 defeated, not by legislation, but by the issue to the 
 market of a part of the gold lying in the Treasury of the 
 United States. For the moment the price of gold fell, 
 and people rejoiced that the plans of the speculators had 
 been defeated. But a short time later, when the war 
 between Prussia and Austria caused a demand for gold in 
 Europe, there were large exports of the metal, and its 
 price rose by natural causes. The United States was 
 
I lO SPECULA TION. 
 
 obliged to buy back, at a decided loss, a part of the gold 
 which the Treasury had so unwisely issued. It turned out 
 in the end that the operations of the speculators in an- 
 ticipating the wants of the future would have prevented a 
 loss to the country, and that the attempt of the Treasury 
 to defeat those operations was attended with expense 
 both to the government and to the mercantile com- 
 munity. 
 
 § 123. Nor can the distinction be based on the form of 
 the transaction. In England the law attempts to enforce 
 a requirement of actual delivery. But in the majority of 
 speculative commodities delivery is made, not by turning 
 over the product itself, but by a warehouse receipt. The 
 physical delivery of a thousand bales of cotton every time 
 the right to that cotton changed hands would involve an 
 absurd waste of power. A warrant is all which can be 
 delivered. But a warrant for delivery can be passed as 
 many times as the exigencies of the law require. In- 
 stances are on record where such warrants have changed 
 hands fifty times before reaching the actual consumer. 
 The spirit of the law requiring delivery can thus be 
 evaded. It is almost as easy to evade laws which pro- 
 hibit the settlement of transactions by the payment of 
 margins — transactions where there is no deliver)' of 
 goods, but a payment of money from one party to the 
 other, based on a change in value of the goods. Where it 
 can be proved that this was the original intent of the 
 transaction it is easy to stamp it as gambling ; but a very 
 slight change in form is sufficient to enable such opera- 
 tions to be continued under a nominal compliance with 
 the letter of the law and in open opposition to its spirit. 
 
 § 124. The difference between legitimate speculation 
 and gambling lies neither in the subject-matter nor in the 
 form of the transaction, but in its intent and purpose. 
 Legitimate speculation involves anticipation of the needs 
 of the market and a power to assume risks in making con- 
 
LEGITIMATE METHODS, III 
 
 tracts to meet these needs. A failure to fulfil either of 
 these requirements makes the operation an undesirable 
 one for the public to tolerate. If a man, instead of 
 anticipating the needs of the market, attempts to manipu- 
 late that market by combinations and corners, any gain 
 that he makes is usually at the expense of the public. A 
 stricter enforcement of laws with regard to conspiracy, 
 and, what is more to the purpose, a better understanding 
 by the business community of the distinction between 
 what is good and bad public policy in this matter, would 
 do a great deal to remedy some of the worst evils with 
 which speculation is att^ded. Of even more importance 
 is the requirement that a speculator should actually take 
 the risks which he pretends to take. He should speculate 
 with his own capital, and not with other people's. If a 
 man speculates with his own capital the transaction is apt 
 to be a legitimate one ; if he speculates with the capital 
 of the community it is almost always pure gamblings 
 whether he intends it to be so or not. In the first place, a 
 requirement that a man should speculate with his own 
 capital makes him more cautious. He is not likely to 
 take risks unless there is a reasonable chance of winning. 
 Moreover, the man who has the capital is likely to be a 
 fairly good judge of such risks. If he has saved it by his 
 own exertions it shows that he possesses industry and 
 prudence. If he has inherited it, there is some probability 
 that he has inherited these same qualities, and an even 
 higher probability that he has had the advantages of a 
 commercial education. If in spite of these advantages he 
 makes mistakes and fails to provide the public with what 
 it actually needs, he is unable to repeat his experiments. 
 His bad judgment has eliminated him from the ranks of 
 speculators, while his successful rival, by the very fact of 
 his success, is able to repeat his operations on a larger 
 scale in the immediate future. As long as the require- 
 ment that a man should speculate with his own capital is 
 
1 1 2 SPECULA TION. 
 
 rigidly enforced, there is a progressive elimination of the 
 unfit and selection of the competent. The longer this 
 process goes on the greater is the probability that the 
 wants of the market will be anticipated and that the work 
 of speculation will prove one of equaHzation : putting pro- 
 ducts where they are needed, increasing their utility to 
 the community, and insuring it against fluctuations in 
 their supply. 
 
 § 125. But if a man can speculate on borrowed capital 
 and have the credit of the community placed at his dis- 
 posal for this purpose, the result is likely to be quite 
 different. The chance of using other people's money 
 puts a premium on reckless gambling operations. It 
 allows the speculator to take indefinite chances in risking 
 what does not belong to him, with the assurance of 
 increasing his own power and influence if such gambling 
 is successful and losing nothing if it fails. We expose 
 ourselves to this danger by loose systems of credit, by 
 loose bankruptcy laws, and above all, by loose commercial 
 ethics, under which the public opinion of the business 
 community not only tolerates but admires success in 
 operations of this kind. Instead of treating speculation 
 on borrowed capital as a fraud on the community and 
 denouncing it as such, we offer mild criticism in case of 
 failure and unqualified admiration in case of success. 
 There is no more serious danger to the present commer- 
 cial system than that which arises from the easy-going 
 tolerance of abuses like this. As long as this state of 
 mind continues no law to check the abuses of speculation 
 can be made effective. With a reform in public senti- 
 ment, little or no law would be needed. 
 
 § 126. It is not only in commercial matters, but also in 
 industrial ones that the speculator exercises a dominant 
 influence. He controls production as well as trade. 
 What the merchant does when he buys products in the 
 hope of selling them at an advanced price, the manufac- 
 
INDUSTRIAL RISKS. II3 
 
 turer is doing when he buys labor in the hope of selling the 
 results of that labor at a profit. The whole wage system 
 is one under which the employers of the country part 
 with property rights tq-day in the hope of securing larger 
 property rights in the future. Part of their prosperity 
 arises from skill in organizing labor ; part, and usually a 
 larger part, arises from skill in foreseeing the wants of the 
 market. The success or failure of a man engaged in 
 manufacturing, in transportation, or in agriculture depends 
 more upon his skill as a prophet than upon his industry 
 as a producer. When Henry George says, " It is never 
 as an employer of labor that any producer needs capital. 
 When he does need capital it is because he is not only an 
 employer of labor, but a merchant or speculator in or an 
 accumulator of the products of labor," he has described a 
 salient feature of the modern industrial system. But 
 when he goes on to assume that this state of things is an 
 unnecessary and arbitrary one, he fails to take the facts 
 of industrial history into account. We have put the em- 
 ployment of labor into the hands of those who are able 
 and ready to speculate in the products of labor, because 
 this method has on the whole proved the best for the 
 community. The industrial development of the last three 
 or four hundred years, rightly interpreted, is an account 
 of the reasons which have led society to put the control 
 of its industry into the hands of a body of speculative 
 investors. 
 
 § 127. All productive industry involves a certain amount 
 of risk. Whenever time elapses between the application 
 of labor and the completion of the product of labor in a 
 form available for actual enjoyment, there is an advance 
 of capital to the producers for the sake of a remote and 
 generally somewhat unknown result. In the building of 
 a factory or a railroad a great deal of food is consumed. 
 Whether the product of the labor thus applied will be as 
 useful to the community as the food which was consumed 
 
1 14 SPECULA TION, 
 
 by those who have produced it, is always somewhat un- 
 certain. The more remote the result, the greater is the 
 uncertainty. George's own chosen illustration refutes his 
 assumption that labor necessarily replaces the capital 
 which it consumes. " Here is a blacksmith at his forge 
 making picks ; clearly he is making capital — adding picks 
 to his employer's capital, before he draws money from it 
 in wages. Here is a machinist or boiler-maker working 
 on the keel-plates of a Great Eastern. Is he not also just 
 as clearly creating value — making capital ? " No. The 
 men who worked on the keel-plates of the Great Eastern 
 were clearly not creating value. The Great Eastern was 
 an ill-designed boat that never rendered the services ex- 
 pected. It was a case of misdirected labor. Had the 
 machinists and boiler-makers who worked on the Great 
 Eastern been compelled to content themselves with the 
 price which the result of their labor ultimately com- 
 manded, they would have starved before it was half done. 
 In the simple processes like those of the blacksmith the 
 result is so near at hand and the needs of the consumers 
 so well known, that the chance of conspicuous failure to 
 replace the public capital consumed is very small indeed ; 
 in processes like those of steamship or railroad building 
 the danger is indefinitely larger. The more remote the 
 consumers in time or place, the greater is the uncertainty 
 and the more speculative the whole transaction. 
 
 § 128. Especially prominent does this uncertainty be- 
 come in the application of any new process or the de- 
 velopment of any new locality. Under old conditions, 
 experience has proved what products are wanted and how 
 labor can be economically applied ; but every new inven- 
 tion or new settlement involves a multitude of new and 
 unknown conditions. Scientific experts cannot predict 
 the success or failure of a commercial enterprise ; it re- 
 quires the test of actual experience. Every business man 
 will tell you of many projects that look well on paper 
 
INDUSTRIAL PROGRESS, II5 
 
 but fail to work in practice. A large proportion of the 
 capital embarked in such enterprises is lost. A large pro- 
 portion of the food consumed by the laborers engaged in 
 such undertakings is virtually wasted. 
 
 § 129. Are we then to forego all chance of such prog- 
 ress ? No. The gain to the community as a whole, from 
 one successful experiment, may outweigh the loss from 
 ten unsuccessful ones. The conservative nation that 
 never changes its methods avoids a great many losses, 
 but it fails to make the conspicuous gains which consti- 
 tute modern industrial civilization. The problem of in- 
 dustrial growth can be solved only by encouraging enough 
 experiments to secure progress without encouraging so 
 many as to destroy the whole accumulated capital of the 
 community. We have tried to accomplish the former 
 object by giving individual possessors of capital the chance 
 of realizing large profits in case of success ; and to protect 
 ourselves against the latter danger by insisting, at least in 
 theory, that a man shall make these experiments at his 
 own expense. If everybody were free to undertake them, 
 whether he had proved his fitness by accumulating private 
 capital or not, the food supply of the community would 
 probably soon run short. If nobody were allowed to 
 make them until the whole community was ready to vote 
 for their adoption, they would be indefinitely delayed. 
 By leaving it to the option of the individual property 
 holder to undertake them or not as he pleases, society 
 secures most of the gain and avoids most of the loss. It 
 allows him to waste part of the capital of the community 
 in unsuccessful experiments, believing that his example 
 will be a warning to prevent others from following in his 
 track, and that the immediate loss to the community may 
 become a means of future gain. It guarantees him the 
 good results from the successful experiments, trusting 
 that competition will subsequently prevent his profits 
 from being too large. 
 
1 1 6 SPECULA TION. 
 
 § 130. Where this view prevails, a new motive is given 
 for the acquisition of property. It is no longer desired 
 simply as a means of enjoyment, but as a means of con- 
 trolling the industrial actions of other men. The pursuit 
 of wealth beyond a man's present necessities is no longer 
 a matter of avarice but of ambition. Such wealth gives 
 its owner a power in no wise inferior to that of the success- 
 ful general or politician. 
 
 § 131. The introduction of this new motive for amassing 
 wealth produces the following effects : 
 
 1. A great increase of accumulations. Under the stimu- 
 lus of ambition many men are led to increase their produc- 
 tion and diminish their consumption far more than any 
 intelligent consideration of their own comfort would 
 dictate. In this way we have a great increase in the 
 amount of public wealth available for enterprises whose 
 return is remote and involves long waiting. The rights to 
 such wealth may not always remain in the hands of those 
 who have done the most work or practised the most ab- 
 stinence ; but it remains none the less true that private 
 motives for work and abstinence are the most effective 
 means of accumulating public capital. 
 
 2. A process of natural selection of men who have 
 ability to manage capital. If the property owner has 
 shown foresight in investment he reaps a rich reward 
 for his services in rendering a new process or locality 
 available for supplying the wants of the community. If 
 he has been over-sanguine, he loses his own capital 
 and that of those who have trusted him, and becomes 
 once more dependent on his labor. Under this system 
 we have not simply a selection of the strong and an 
 elimination of the weak, nor a selection of the indus- 
 trious and an elimination of the lazy ; but a selection of 
 the prudent and intellectual with an elimination of the 
 reckless or emotional. The moral character of the em- 
 ployers thus developed presents a mixture of good and 
 
NARROWED MARGIN OF PROFIT. WJ 
 
 bad qualities. The control is placed in the hands of men 
 who are enterprising and efficient, but often narrow and 
 unscrupulous. They possess sagacity which enables them 
 to deal with the market ; they often fail to possess that 
 broader sagacity which would enable them to deal equally 
 well with those in their employ. The danger of this 
 deficiency is greatly intensified by the possibility of specu- 
 lating with borrowed capital, and gaining control of in- 
 dustrial enterprise by transactions which are virtually 
 gambling. 
 
 3. An increased intensity of competition among those 
 who handle the large accumulations of capital. This is 
 contrary to the popular view. It is commonly assumed 
 that the more competitors you have, the greater will be 
 the intensity of competition. But in actual experience 
 there is no competition in the world so intense as that 
 which prevails between two highly organized bodies 
 that stand opposed to one another. In the old days of 
 small concerns there was much more slackness of manage- 
 ment, and much larger profit per unit of product, than 
 we find to-day. It is proverbial that the largest houses 
 can make the closest calculations in selling goods at a 
 slight margin above expense ; and competition is generally 
 strong enough to force them to make these calculations 
 closer than would have been deemed possible a half- 
 century ago — in other words, to keep down profits. 
 
 § 132. In comparing our large factories of to-day with 
 the smaller ones of two generations past, we find, on the 
 whole, that the ratio of wage payments to interest and 
 dividends is larger now than it was then. The margin of 
 profit has been narrowing more conspicuously than the 
 piece-price for labor has been diminishing. The large 
 capital and its earnings make a greater impression on. 
 the public mind than did the numerous small capitals of 
 independent producers ; but it is not probable that the 
 aggi'ega-te valuation or remuneration of the capital of to- 
 
Il8 SPECULATION. 
 
 day has increased proportionately with the increase of 
 demand for labor. We are not warranted in assuming, as 
 so many of the socialists do, that profits are growing 
 enormously and are to be regarded as sums withheld 
 from labor. They are in most cases not disproportionate 
 to the chances of loss. A very slight change in efficiency 
 of management may readily convert the capitalist's sur- 
 plus into a deficit. The charge made by the capitalist 
 classes, for their services in industrial speculation, cannot 
 be regarded as immoderate, if the work is well done. 
 
 § 133. But how far is this condition fulfilled? Does 
 the existing system secure progress and avoid loss ? To 
 the first half of this question we may unhesitatingly give 
 an affirmative answer. Whatever else the speculative sys- 
 tem may do or fail to do, it gives us industrial progress. 
 It was for this reason that it displaced the traditional 
 methods of agriculture and manufactures which had pre- 
 ceded it. The feudal system and the gild system were 
 both too conservative ; the system of private capital 
 proved its superiority in being progressive. Nor has this 
 merit outworn itself with age. The superior flexibility of 
 the speculative system makes itself conspicuous not only 
 in contrast with feudal industry, but also with modern 
 state-owned industry. Though half the railroads and 
 nine-tenths of the telegraphs of the world are in govern- 
 ment hands, all the large improvements of method in 
 these lines have been made under private enterprise. 
 
 The work of avoiding losses has not been so well done. 
 It is the theory of the modern system that the accumu- 
 lated capital of speculators should act as an insurance fund 
 to secure a steady supply of products and an unimpaired 
 reserve of national resources. This general reserve is 
 fairly well maintained ; but it is not always well utilized. 
 The supply of capital is steadier and surer than the em- 
 ployment of labor. Mistakes and wrongs of large specu- 
 lators frequently result in commercial crises from which 
 
FINANCIAL LEADERSHIP, 1 19 
 
 the whole community suffers. The occurrence of these 
 crises constitutes the severest possible indictment against 
 the modern speculative methods. 
 
 § 134. It will not do for capitalists to try to minimize 
 this indictment, or to evade the responsibility for the evils 
 attendant upon industrial depressions. Society gives its 
 great financiers a trust compared with which all other 
 trusts sink into insignificance. It gives them the power 
 of directing the labor and capital of the country. If they 
 can do this well, they will deserve the power and retain 
 the trust. But in order that it shall be well done, the 
 control must be in competent hands. 
 
 To secure this result, the process of natural selection of 
 employers must be what it purports to be — a survival of 
 those who have proved their power to serve the public 
 and an elimination of those who have failed to do so. 
 The contest for commercial supremacy must be settled 
 by success in organizing production and foreseeing con- 
 sumption, not by success in gambling. If the industrial 
 and financial struggle actually brings the best men for- 
 ward, they show their ability in such a manner that we 
 have little to fear from socialism. If a man's personal 
 advantage is identified with the success of his business ; 
 if his position in the financial world is dependent on his 
 competence in the industrial world ; if, in short, he ar- 
 ranges to stand or fall with the success or failure of his 
 management, then we have a process of natural selection 
 under which men who serve the public inevitably come 
 to the front, while their less competent rivals are pushed 
 into the background. If, on the other hand, the question 
 of control is settled by gambling instead of by legitimate 
 business transactions, if the possession of financial au- 
 thority is made to depend on success in stock operations, 
 rather than on success in organizing producers and meet- 
 ing the wants of consumers, then we have a process of 
 selection by which the wrong leaders come to the front 
 
120 SPECULA TION. 
 
 driving out competitors who might serve the public better, 
 though they have not known how to serve themselves quite 
 so well. When the wrong men are brought forward, the 
 speculative system is in real danger, because it does not 
 do what the public has a right to demand of it. 
 
 § 135- We cannot rely upon legislation to protect us 
 from this danger, because, as we have already seen, 
 gambling transactions and legitimate transactions are 
 indistinguishable in form. We must look to the public 
 sentiment of the business community ; we must see that 
 it recognizes the difference between legitimate and illegiti- 
 mate speculation, and condemns the latter as a breach of 
 trust. Such it is under existing conditions. The man 
 who gambles away his money is not simply parting with 
 his own enjoyment, but with his control of the industrial 
 forces of the community. It is not like selling his labor : 
 it is like selling his vote. 
 
 If business men are not to be controlled by commercial 
 ethics — ethics fitting the economic conditions of today, 
 rather than those of five centuries ago, — they must expect 
 to be controlled by something else. If they will not 
 accept the full measure of responsibility which goes with 
 their industrial power, they must expect to be deprived 
 of responsibility and power together, by a popular move- 
 ment in the direction of socialism. Such a movement is 
 being aided and countenanced by every financier whose 
 interests in the stock market lead him to forget the inter- 
 ests of his properties, by every lawyer who teaches his 
 clients to evade the responsibilities attaching to wealth, 
 by every man who in the excitement of speculation loses 
 sight of those responsibilities — by every one, in short, who 
 forgets that under the existing system the possession of 
 money involves a public trust, with whose fulfilment or 
 non-fulfilment that system must stand or fall. 
 
CHAPTER V. 
 
 INVESTMENT OF CAPITAL. 
 
 The Wage System — Private Land Ownership — Patent Right — The 
 Payment of Interest — Limited Liability. 
 
 W. J. Ashley : " English Economic History." London and New York, 
 1891, 1893. 
 
 K. Marx : " Das Kapital." This book (which has been translated by 
 S. Moore and E. Aveling), in the closing sections of the first volume, gives 
 the socialistic view of the events and processes described in this chapter. 
 
 § 136. It is characteristic of the modern industrial sys- 
 tem that a laborer who owns no capital, though nominally- 
 free to do what he pleases, must actually find some prop- 
 erty owner who will give him enough to keep him alive 
 during the period which must elapse between the render- 
 ing of the labor and the sale of the finished product. 
 Under such circumstances, the laborer almost inevitably 
 submits to the direction of the property owner in deciding 
 how his labor shall be applied. Laborers without capital 
 must necessarily work on this basis ; even those who have 
 small amounts of capital habitually do so. Such advances 
 of capital are known as wages. Many writers of good stand- 
 ing give broader definitions than this, but in the actual 
 usage of ordinary life wages designate the sums paid by 
 property owners, or their representatives, to laborers for 
 work done under the direction of the property owners.' 
 
 ^ If the degree of education required is such that the laborer must be in 
 large measure self-directing, these payments are known as salaries or fees ; 
 the former term being applied to payments for continuous employment, the 
 latter to payments for irregular or varying employment. Salaries correspond 
 to time wages (ch. x.), fees to piece wages. 
 
 121 
 
122 INVESTMENT OF CAPITAL, 
 
 % 137. Whatever be the details of the contract by which 
 wages are determined, the employer must be in a position 
 to guarantee the fulfilment of his part of the agreement 
 and to relieve the workman of any risk which may arise 
 from failure to sell the product of his work at the expected 
 profit. This is essential to the idea of wages, and to the 
 principles on which modern industrial society is organized. 
 This is the reason why the employer must be a property 
 owner, or must at any rate act as the agent or representa- 
 tive of property owners. If he is not in this position, he 
 cannot guarantee the payment of the wages he has agreed 
 to give. The certainty that wages shall be paid is so im- 
 portant to society that the Jaw_ strains every point to 
 secure this en^. The employer should pay his hands in 
 money, or in checks which are as good as money, not in 
 orders upon stores or other forms of " truck." In many 
 states he is compelled to make his payments as often as 
 once a week. The workman not infrequently enjoys a 
 *'' mechanic's lien " upon the results of his work ; for 
 instance, if ^builder for any reason cannot pay his jour- 
 neymen the wages agreed upon, the journeymen can 
 attach the building upon which they havebeeh employed, 
 and compel its owner to pay the wages due them. On 
 the other hand the wages themselves are in many states 
 exempt from attachment ; that is to say, if the laborer 
 owes money to an outside party, that party cannot have 
 recourse to the employer, and divert from the workmen 
 wages earned but not yet paid. The wage contract, in 
 such states, must be fulfilled with the workman directly, 
 and not with the workman's creditor. Wherever society 
 tolerates any failure on the part of the employer to meet 
 such contracts fully and directly, it indicates a low stage 
 of industrial development.* 
 
 ^ An exception to the stringency of this requirement is found in the law 
 concerning seamen's wages. In times past the shipowner has not generally 
 "been held liable for such wages unless the voyage was successfully completed. 
 This was because marine enterprise was attended with such risks from ship- 
 wreck or piracy that an effective guarantee was impossible. In recent years, 
 
COST OF PRODUCTION, 1 23 
 
 § 1 38. The great bulk of the wage payments in any com- 
 munity is made by those who expect to sell the result of 
 the labor to others instead of enjoying it themselves. Such 
 a payment is a speculative investment of capital. Look- 
 ing at the transaction from the private standpoint the 
 property owner transfers a certain amount of money to 
 the laborer, in the hope of obtaining a larger amount of 
 money in the future by the sale of the product of that 
 labor. Looking at the transaction from the public stand- 
 point, the laborer is enabled to consume a certain part of 
 the public wealth, in the expectation that the products of 
 his labor will more than replace the amount thus con- 
 sumed. He receives as income the right to enjoy a part 
 of the capital already existing' ; his employer hopes and 
 believes that any destruction of public capital will be 
 made good, and is prepared to bear the loss, in his own 
 property, in case this expectation is not fulfilled. 
 
 § 139. The amount of capital thus sacrificed in the 
 hope of its replacement and increase is known as cost of 
 production. In its private sense, the cost of an article to 
 any individual speculator is the amount of capital which 
 he has advanced to secure it. This may have been paid 
 either to the laborers in the form of wages, or to other 
 speculators as a means of controlling the results of past 
 labor. Private cost is better designated as expense.' In 
 its public sense the cost of an article to the community is 
 
 as the industry has developed and become more secure by better navigation 
 and by the development of marine insurance, there has been an increasing 
 tendency to treat seamen's wages just like other wages ; that is, to guarantee 
 their payment even in the event of shipwreck. 
 
 ^ The money which he receives is known as nominal wages ; the enjoy- 
 ment which he can command is called real wages. (See ch. x.) 
 
 ' Some writers prefer to measure cost in terms of pain (total and margi- 
 nal "disutility") rather than in terms of waste. The practical difference 
 resulting from the use of the two methods is not very great, for an increase 
 or diminution of pain is usually accompanied by a corresponding increase or 
 diminution in waste ; but waste is a better standard, because it is a more 
 measurable thing than pain, and because the reduction of waste furnishes a 
 more tangible goal of public policv than the reduction of pain. 
 
124 INVESTMENT OF CAPITAL, 
 
 the amount of public capital which has been consumed 
 or rendered unavailable in connection with the production 
 of that article. 
 
 The excess of return above cost is known as profit. 
 The profit of an individual is the difference between 
 money advanced in production and money received from 
 the sale of the product. The profit of a community is 
 the difference between old products consumed and new 
 ones produced. Individual profit is tolerably easy to 
 measure ; the profit of a community, extremely diffi- 
 cult.' 
 
 Under the modern wage system society gives the em- 
 ployer the right to realize individual profit from the sale 
 of the products of labor in the belief that his effort to do 
 this will conduce to public profit. 
 
 § 140. Profits are neither more nor less than the excess 
 of the selling price of the products of industry above the 
 amount advanced as wages. It is true that some of the 
 investments of an individual capitalist are not made in 
 the form of wages, but in payments for materials and 
 machinery which other capitalists have made ready for 
 use. But if we look at the relation between capitalists 
 as a class and laborers as a class, we shall find that the 
 capitaHsts as a body advance wages, and appropriate the 
 difference between the price paid to the laborers and that 
 received from the consumers. The expectation of this 
 difference or profit gives them a motive to utiHze their 
 capital, and to make it more available as a means of 
 public income. 
 
 1 While the effort of the speculator to reduce his expense and increase 
 his profit tends on the whole to reduce public cost and increase public profit, 
 it must not be assumed that expense corresponds at all accurately to cost, or 
 private profit to public profit ; any more than the selling prices of articles 
 correspond to their total utility. The producer's surplus described in chap- 
 ter ix. represents in large measure an excess of expense above cost ; an 
 amount transferred from the capitalists to the laborers in excess of the 
 necessary consumption of the latter. 
 
FIXED CAPITAL, 12$ 
 
 If the process of production is a brief one, this motive 
 is enough to make people invest their capital. If a man 
 has more property than he needs for immediate use, he 
 is glad to apply it in such a way as to give him control 
 of the labor of others. If the chance of gain is greater 
 than the chance of loss most men would rather invest 
 their capital than store it up. There is good ground for 
 such expectation of gain from investment of capital when 
 an intelligent man takes control of a process whose dura- 
 tion is short. Any skill that he may show redounds to 
 his own advantage. But in a long process of production 
 the case is different. The instant it has proved a success, 
 other competitors come into the field and reduce profits 
 by their competition. The pioneer in any industrial 
 method which involves remote returns, takes all the 
 chances of failure, and may receive but a small part of 
 the rewards of success. Naturally there is great reluc- 
 tance to take the initiative on terms like this. It is not 
 enough to give the speculator direction of his labor and 
 the right to dispose of his products, in order to induce 
 him to invest his capital for such remote objects. He 
 must receive a guarantee of permanent profit in case of 
 success, sufficient to make him hazard the risk of perma- 
 nent loss in case of failure, 
 
 § 141. Capital thus invested for the sake of a remote 
 return, whether in the form of agricultural improvements, 
 buildings, or machinery, is said to h^ fixed. It can rarely 
 be withdrawn from its original use and applied in any 
 other place or for any other purpose, without great loss 
 to the owner and to the public. But in spite of this 
 danger of loss the economy to the public, attendant upon 
 the use of fixed capital, is very great, and constantly in- 
 creases as population becomes denser. 
 
 The first farms cultivated are not as a rule the best 
 ones, but those which require the least original outlay. 
 The first industries practised are those which require the 
 
126 INVESTMENT OF CAPITAL. 
 
 fewest tools. The first roads are made with the least 
 possible amount of surfacing and drainage. The mini- 
 mum of fixed capital is used in every instance because of 
 the small market and the need of immediate returns. 
 But as the community grows it adopts a different system. 
 It resorts to farms which are less accessible, and to 
 methods of cultivation which are less obvious, but which, 
 when once brought into use, are more productive. It 
 applies processes of manufacture whose dominant prin- 
 ciple is not to reduce the outlay, but to increase the out- 
 put. It adopts means of transportation which cost much 
 more to establish, but much less to use. The permanent 
 investment of fixed capital keeps growing larger ; the 
 current expenses per unit of product grow correspond- 
 ingly smaller. 
 
 The original outlay connected with an old-fashioned 
 shoemaker's establishment was very small. A few 
 benches and tools were sufficient means for conducting 
 the business. But the labor of sewing each pair of shoes 
 was very large. When hand work gave place to factory 
 work, it necessitated an original investment of many 
 thousands of dollars ; but when a factory was once estab- 
 lished, the direct expense of making each pair of shoes 
 was very small. The larger the market for shoes, the 
 greater was the comparative economy of factory labor. 
 The cost of an old-fashioned country road is next to 
 nothing; the cost of carriage upon such a road may 
 amount to a dollar a ton a mile. Substitute a modern 
 macadamized road, and you increase the original cost, 
 but diminish the cost of carriage. Spend $30,000 a mile 
 on a railroad, and the direct cost of carrying freight will be 
 less than a cent for each ton carried. Increase the in- 
 vestment in the railroad by reducing grades and making 
 more solid structures, and you will treble the possible 
 train loads, with a corresponding diminution in cost per 
 ton. 
 
MODERN LAND TENURE, 12/ 
 
 To realize this economy a large market is necessary. 
 If there are only a hundred people to wear the shoes or 
 to use the road, old-fashioned methods are more eco- 
 nomical than modern ones. But with increase of popula- 
 tion we find the opportunity for increasing use of fixed 
 capital and the necessity for such economic institutions 
 as shall encourage its investment. 
 
 § 142. The first and in some respects the most im- 
 portant of these institutions was private property in land. 
 
 The feudal land tenure, whose development was de- 
 scribed in chapter ii., was based upon force. The 
 dependants of the mediaeval lord paid him rent, either in 
 labor or in money, as a price for the security of posses- 
 sion which he could give them. These feudal burdens 
 were far more analogous to modern taxes than to modern 
 ground-rents. They represent a price paid to the sover- 
 eign for his protection, rather than an economic equiva- 
 lent paid to the property owner for the productive 
 capability of the land. But when this security was once 
 so thoroughly established that the strong arm of a mili- 
 tary chieftain was no longer needed to protect his vassals, 
 tenure of land gradually passed out of the hands of sol- 
 diers and into the hands of capitalists. It was found 
 more profitable by the tenant to cultivate improved land 
 which produced a great deal, and pay a substantial rent 
 for it, than to get a bare living from unimproved and 
 unproductive land, even though the rental of such land 
 was merely nominal. This change was not only better 
 for the tenant but better for the community. If a new 
 system of cultivation enabled more food to be raised 
 from a given area with the same amount of labor, it was 
 of great advantage to the community to have that system 
 adopted. When processes of agriculture were discovered 
 which promised an increased permanent productiveness 
 of the land, it became necessary to guarantee to men who 
 had the capital for applying these processes a sufficiently 
 
128 INVESTMENT OF CAPITAL. 
 
 long and complete tenure to give them the motive to 
 make the experiment. No one would be willing to incur 
 the outlay involved in draining or in artificial fertilizing 
 unless he was guaranteed the occupancy of the land thus 
 improved for a sufficiently long time to make the change 
 remunerative to him, as well as to the community in 
 general. For no new process is an assured success 
 until it has been actually tried. Successful investment 
 of capital in the improvement of real estate has been a 
 means of making large fortunes ; but these fortunes were 
 not certainties from the outset. If they had been, the 
 community could and would have made the improve- 
 ments from the public funds at public expense. The 
 profits of the successful, in land speculation and land im- 
 provement, have been offset by the losses of the unsuc- 
 cessful. The monopoly of an advantageous location or 
 of a fertile piece of ground which the real-estate owner 
 enjoys is a premium which has been offered to him be- 
 cause of the skill of capitalists in developing land at the 
 points and in the ways where such development was 
 needed. 
 
 In view of the public necessity for improvement of real 
 estate the laws which prohibited the alienation of land 
 from the families of the nobles were gradually modified ; 
 and the farms passed from the hands of soldiers who 
 only knew how to spend money into the hands of prop- 
 erty owners who understood how to invest it. 
 
 § 143. This change in the system of tenure was by no 
 means confined to agricultural lands. The same course 
 of development is seen in mining. Mining law has its 
 hunting stage, where a man wanders up and down the bed 
 of a creek in the hope of finding nuggets of gold. It has 
 its pastoral stage, where the miner has his movable prop- 
 erty, perhaps a mule and a wheelbarrow, and uses them as 
 best he can in collecting natural deposits. In this state of 
 society rights to the instruments of production are clearly 
 
MINING CLAIMS, 129 
 
 recognized, and the stealing of a mule is punished with 
 the utmost severity. But rights to real estate are as yet 
 chaotic. A man must be prepared to defend them by his 
 own arm. The wanderer has a claim to the bed of a stream 
 only as long as he is actually in possession and can main- 
 tain his right for himself. But as population becomes 
 more dense and these superficial sources of supply are 
 exhausted, a new system of mining property becomes 
 recognized in usage and in law, whereby the man who , 
 invests capital in a location obtains permanent rights to 
 this location. Whether he makes his arrangements for 
 washing down large alluvial deposits far away from an 
 ■existing stream, or for tunnelling into the quartz rock for 
 the sake of the veins of metal which it contains, the real 
 estate which he has developed becomes his own. This 
 permanent right of property, with the attendant monop- 
 oly which it gives, is an absolute necessity if the com- 
 munity wishes a man to invest large capital in mining ; 
 for the whole investment may prove a failure, and no man 
 is willing to take the chance of failure unless assured of 
 special and permanent advantages in case of success. 
 If the community has reached a point where it needs to 
 have much capital used in mining, it must give the capi- 
 talist rights of control and chances of possible gain, to off- 
 set the great chances of total loss. 
 
 § 144. The conditions under which private ownership 
 of land has developed are strikingly illustrated by a com- 
 paratively new form of landed property, — submarine rights 
 to oyster-beds. Of all waters in the United States, those 
 of the Chesapeake are perhaps best fitted for the produc- 
 tion of oysters. But the system of tenure recognized by 
 the state of Maryland was not well adapted to their 
 development. Certain ill-defined parts of the Chesapeake 
 and other oyster grounds were set apart for dredging, cer- 
 tain other parts for " tonging." There was also aright given 
 to individuals to take up five acres of oyster land under 
 
I30 INVESTMENT OF CAPITAL, 
 
 water. But this right or license was revocable at the pleas- 
 ure of the state, so that the licensee had not the assur- 
 ance of permanent holding which would make far-sighted 
 policy in the use of these oyster-beds profitable or even safe. 
 The oyster law of Maryland was almost exactly analogous 
 to the land law of the mediaeval village community, with 
 its ill-defined common, its ill-defined forest land, and its 
 extremely precarious rights of use of individual strips of 
 the soil. The result was the same in either case. Proper 
 utilization of the land was impossible. The Maryland 
 oyster-beds were so rapidly exhausted as to threaten the 
 extinction of the industry in spite of all natural advan- 
 tages for its prosecution. Meanwhile there was a great 
 increase in the production of oysters in the waters con- 
 trolled by some other states, where rights of permanent 
 tenure were allowed that were closely analogous to ordi- 
 nary property in land. The oyster-beds thus held formed 
 a large source of income to their owners, but it was not 
 an income amassed at the expense of the state. The 
 oyster growers of Long Island Sound have paid in taxes 
 an amount far exceeding the total rental value of the 
 oyster-beds which the state of Maryland leased for short 
 terms under licenses revocable at will. 
 
 § 145. The good effects of the system of private land 
 tenure are most conspicuously seen when the owner and 
 the occupier of the land are one and the same person. 
 Under these conditions, land ownership serves at once as. 
 a motive to zeal in labor and to hberality in investment. 
 Where one man owns the land and another occupies it, 
 the right of the owner to the benefit of all improvements 
 not infrequently acts as a discouragement to the occupier 
 and prevents him from laboring with the zeal or the skill 
 which he would otherwise use. The loss in efficiency of 
 labor under such circumstances may be greater than the 
 public gain from the capital invested. Large tenant 
 farms are sometimes less well developed than the peasant 
 
ABSENTEE OWNERSHIP, I3I 
 
 properties on the continent of Europe, — in spite of the 
 disadvantages, inseparable from small husbandry and scant 
 capital, under which the latter suffer. Systems which 
 recognize the right of the tenant to compensation for 
 improvements, or which guarantee him fixity of tenure at 
 a stated rent, have often proved salutary. They help the 
 public by encouraging the tenant more than they hurt it by 
 discouraging the owner — unless the owner was far-sighted 
 enough to give the tenant these privileges without com- 
 pulsion. Even so crude a device as the metayer system 
 (§ 40) often works better, on account of the permanence 
 of tenure which it gives the occupier, than a system of 
 tenancy at will under a capitalist landlord. 
 
 If for any reason the landlords do not properly develop 
 the real estate which they own, and try to get money 
 out of the land without putting money into it, the 
 system of private ownership proves itself a thoroughly 
 bad one. The land tenure of a body of foreign conquer- 
 ors represents a drain on the community rather than an 
 addition to its resources. The case of Ireland is an 
 instance in point. The right to receive rent from Irish 
 land has habitually served, not as a motive to improve the 
 land, but as a means to degrade the laborer. When this 
 result takes place to a marked degree, modern society 
 often so far modifies the principle of private property in 
 land as to introduce/^^^/^W^/ rents instead of competitive 
 ones ; substituting public arbitration between landlord 
 and tenant for a system of competition which is so short- 
 sighted or imperfect as not to subserve the public needs.* 
 
 § 146. When the habit of land speculation becomes 
 
 * Another conspicuous case where private land ownership fails to serve 
 the public interests is connected with the destruction of forests. In this 
 case the governments have tried to remedy the evil by encouraging the right 
 use of the land rather than by prohibiting its wrong use. The point in- 
 volved in public or quasi-public forestry is treated in the chapter on co- 
 operation. 
 
132 INVESTMENT OF CAPITAL, 
 
 prevalent, there is always danger that the system of pri- 
 vate land ownership will be made a means of hurting the 
 public instead of helping it. 
 
 It will not do to go to the extreme of condemning all 
 land speculation as hurtful. A man who sees that a large 
 business block will be wanted in a certain spot at the end 
 of ten years may serve the public by keeping the lot un- 
 occupied during that time. For the gain which the owner 
 and the public would reap from the use of inferior build- 
 ings during those ten years would not compensate the loss 
 which would be involved in tearing them down before 
 they had paid for themselves, or in waiting until they had 
 paid for themselves before erecting the new block. In 
 such a case a land speculator will contribute to the best 
 utilization of the public wealth by a far-sighted calcula- 
 tion of the time when investments of capital will be most 
 profitable. But it is needless to add that a great deal of 
 land speculation is of a totally different character from 
 this, and is a mere effort to get money out of the land 
 without putting money into it. Such irresponsible specu- 
 lation is greatly increased by the mistaken practice of 
 assessors in rating unimproved land at relatively low 
 figures on account of its lack of productivity and conse- 
 quent inability to bear high taxes. No man should be 
 encouraged to keep land out of use by a remission of 
 burdecis which necessarily puts heavier taxes on those who 
 have put adjoining land into use. He is holding his 
 property in a shape where it does the public no present 
 good in the hope that the work done by others will make 
 this a profitable policy in the long run. He may be' right ; 
 but for the present he is causing public inconvenience, 
 and cannot complain if he is taxed on the basis of his own 
 estimate of the value of the land rather than on that of its 
 immediate productiveness. If he cannot pay taxes he 
 can sell it to some one else. Great as are the mistakes of 
 the single-tax agitators it is to be hoped that they may 
 
PATENTS, 133 
 
 have a salutary effect in leading assessors to put heavier 
 burdens on ground values and lighter ones on improve- 
 ments. For after all that can be said in behalf of land 
 speculation, it remains practically true that the men who 
 have done conspicuous public service with their land are 
 as a class those who have been prompt rather than tardy 
 in its development. 
 
 § 147. While agriculture was helped by giving the capi- 
 talists ownership of the land, the development of manufac- 
 tures was stimulated by grants of monopoly. At first 
 these grants were made quite recklessly. In the early his- 
 tory of England we find frequent records of permanent 
 privileges assured to an individual citizen in consideration 
 of his services in introducing some new industry. Such 
 a system afforded grave opportunities for abuse. Privi- 
 leges were often granted to court favorites as a reward of 
 personal or political services. The introduction of a new 
 manufacture was made a pretext for oppressive taxation 
 of the people who had to use its products. Special grants 
 of this kind, however plausibly worded, were generally 
 unpopular, and formed a frequent source of public com- 
 plaint against the sovereigns of mediaeval Europe. 
 
 § 148. In modern times the grant of monopoly privi- 
 leges is hedged about with precautions against such abuse. 
 The system of patents confers^a monopoly on the man 
 who introduces a new invention. But the government 
 takes pains to insist that such an invention shall be really 
 new, and the monopoly granted is only a temporary one. 
 A patent system, if properly guarded, seems to be thor- 
 oughly justified by its results. In the absence of such 
 protection few new inventions would be developed. The 
 risk attending the introduction of a new process is always 
 great. Even when it works thoroughly well in the labora- 
 tary or model room, it may not work well in public. The 
 man who first develops a new invention loses his whole 
 capital if it fails. If he is immediately exposed to free 
 
134 INVESTMENT OF CAPITAL. 
 
 competition in case of success, he can enjoy exceptional 
 profits for a short time only. The risk of loss, under such 
 circumstances, outweighs the possibility of gain. No man, 
 as has already been said, will take the lead in a hazardous 
 experiment when those who follow him have practically 
 equal chance of gain and almost no chance of loss. The 
 patent, by making the gain a permanent one, makes it safe 
 for a capitalist to develop a new process. This is the real 
 justification of the system. The American theory that the 
 patent is a reward for invention, and the English theory 
 that it is a reward for disclosure of the invention to the 
 public, both fail to touch the true grounds on which 
 patent right has grown up. It has established itself, not 
 primarily as a stimulus for invention or for disclosure, but 
 for utilization and development of new methods requiring 
 the investment of capital and the guarantees which shall 
 make such investment possible. 
 
 The monopoly of the patentee is in one respect much 
 more complete than that of the landowner. The ex- 
 clusive right to use a certain process may shut out all 
 competition ; while the exclusive right to use a certain 
 piece of land rarely prevents other landowners from com- 
 peting with the most favored individual. It puts them at 
 a slight disadvantage, but not often at a prohibitory one. 
 The monopoly conferred. by a valuable patent while it 
 lasts is thus much more absolute. To offset this, it is 
 limited in duration. After a comparatively short term of 
 years the patent expires, leaving its owner no advantage 
 except what he has derived from possessing an established 
 business; while the land monopoly may continue to give 
 an increasing advantage for an indefinite length of time. 
 
 § 149. The monopoly conferred by copyright is closely 
 analogous, both in its form and in its justification, to that 
 of patent right. It is of comparatively little importance 
 for the community to decide whether an idea is or is not 
 a fit subject of property ; but it is of great importance to 
 
TARIFFS AND SUBSIDIES, I35 
 
 have the law in such a shape that a publisher can safely 
 risk his capital in making that idea accessible to the read- 
 ing public. A new book may prove a failure, just as 
 much as a new process. For the sake of profits possible 
 under a copyright law, the publisher can afford to take 
 the risks of failure which he cannot do in the absence of 
 such protection. 
 
 § 150. Another form of monopoly, less complete than 
 those just described, is exemplified by protective tariffs 
 and navigation acts. The benefit of such monopoly is 
 not given to one individual to the exclusion of other 
 individuals, but to the home producers to the exclusion of 
 foreign competitors. The underlying motive for such 
 protective legislation, when framed with a public purpose 
 in view, has been like that of private land ownership or 
 patent' right ; to give the home country the benefits 
 accruing from investment of capital under its own imme- 
 diate control. The case of a protective tariff differs from 
 that of a patent in that the private risks in case of failure 
 and the public gains in case of success attendant upon 
 the transplantation of a process which is already in use 
 elsewhere are far less than those which attend the develop- 
 ment of one which has been as yet totally untried.^ 
 
 § 151. Where for any reason grants of monopoly have 
 been impossible, or inadequate to secure their purpose, 
 governments have often resorted to subsidies ; as in 
 bounties for the production of sugar, municipal subscrip- 
 tion to railroad securities, or, most frequent of all, pay- 
 ments to shipbuilders and shipowners.' How far such 
 
 ^ The arguments concerning the protective tariff system are so compli- 
 cated and depend so much upon the theory of wages that their discussion 
 must be reserved for a later chapter. 
 
 ^ Exemption from taxes, such as is frequently granted by our western cities 
 for the purpose of attracting manufacturing capital, is to all intents and pur- 
 poses a subsidy. The same thing of course can be said of the grants of 
 public lands which have been used by the United States to encourge trans- 
 portation enterprises. From a very early period we have had important 
 
136 INVESTMENT OF CAPITAL. 
 
 subsidies are justified is a question which must be reserved 
 for further discussion in connection with matters of inter- 
 national policy. 
 
 When debts were chiefly created for the sake of per- 
 sonal expenditure, the taking of interest or usury was 
 deservedly condemned. The men who borrowed money 
 and spent it did not, as a rule, increase their productive 
 capacity. They relieved a present need ; but they gener- 
 ally did nothing but put off a day of reckoning and make 
 it heavier when it actually did come. In cases like this, 
 it was fair enough to say that money did not produce 
 money and to condemn interest on this ground. Mediae- 
 val loans were generally unproductive loans. The lender 
 did no service to society which would entitle him to claim 
 encouragement. So far as the prohibition of interest 
 prevented borrowing for personal expenditure, it was a 
 good thing. 
 
 But when a considerable part of the loans were made 
 for productive purposes, the case was altered ; and it was 
 not long before the law and public sentiment were altered 
 correspondingly. We have not space to follow out in 
 detail the various subtleties by which this change was justi- 
 fied to the legal mind.* The traditional excuse for interest, 
 as a penalty for delay in payment,** was made to cover 
 
 gifts to encourage the building of roads and canals. In the years from 1850 
 to 1856 more than 25,000,000 acres of land in various states were given to 
 railroads. During the war and the period immediately following it terri- 
 torial lands were given away on a yet larger scale, the grants in aid of Pacific 
 roads alone amounting to over 150,000,000 acres. The result of these gifts 
 has been far from proving an unmixed good. They stimulated unsound 
 railroad schemes and caused railroad building to be misdirected. Provisions 
 intended to protect the interests of the government were disregarded. Set- 
 tlers were induced to move too far west, to points where they were at the 
 mercy of railroad agents. In many instances the only gainers were land 
 speculators and financiers of the worst sort. 
 
 ^ The reader is referred to Ashley, " English Economic History," vol. i., 
 ch. iii. ; vol. ii,, ch. vi. 
 
 ' Hence the derivation of the word interest — i.e., a difference made by 
 time. 
 
HISTORIC FORMS OF INTEREST, 1 37 
 
 cases where the delay was purely nominal. The theory 
 of compensation for loss {damnum emergens) was stretched 
 to cover cases where the only loss was loss of oppor- 
 tunity for profit {lucrum cessans). Of yet, wider import- 
 ance was the recognition of the right of one associate in 
 an enterprise to insure a fixed return to another instead 
 of a variable one. This contract of assurance {contractus 
 trinus) really stands at the foundation of the modern 
 interest system. The lender of capital is an investor who 
 commutes his chance of a large profit for the assurance 
 of a smaller one. Society allows this commutation, be- 
 cause it is a public advantage to have the capital of these 
 investors used in enterprises which they cannot them- 
 selves supervise, and whose risks they must therefore 
 leave to others. The justice of interest is not based 
 primarily on equities between borrower and lender, but 
 on the public advantage of encouraging guaranteed in- 
 vestments.^ 
 
 § 153. The use of capital as a means of ensuring its 
 owners a fixed return derived additional recognition and 
 sanction from another quarter as the purchase of rent 
 charges became more frequent. Whenever a piece of 
 property was economically productive, its selling price 
 was pretty sure to bear a fixed relation to its rental. 
 
 ^ Most of the popular justifications of interest try to reach their end by 
 too short a route. Bastiat uses the illustration of a man who has made a 
 plane which so increases the efficiency of labor that some one who wants to 
 borrow it will promise to give back, at the end of the year, not only a new 
 plane to replace the old one which has worn out, but a plank in addition. 
 George criticises this as inconclusive, since the only way in which the owner 
 of the plane could have obtained a plank was by working with it ; but says 
 that if one person lends another a calf, the productive powers of nature 
 will put him in a position to return a cow at the end of the year [without 
 working : a curious conception of farm life], and that this justifies interest, 
 because capital gives control of the productive forces of nature. In point 
 of fact there is no essential difference between the two cases. We allow in- 
 terest because it is for the advantage of the community to encourage a man 
 to save capital which will support people in making more planes than he 
 himself can use, or in bringing up more animals than he himself can watch. 
 
138 INVESTMENT OF CAPITAL. 
 
 What this relation was depended partly on the number 
 of persons who needed ready money and were prepared 
 to sell future income for that purpose, and partly on the 
 security felt by the buyers that their tenure and income 
 would be undisturbed. The ratio of the selling price to 
 the income is known as the rate of capitalizatiofi. Where 
 there was a well-defined rate of capitalization it amounted 
 to almost the same thing as an interest rate to the in- 
 vestor. Instead of loaning money at five per cent he could 
 buy a piece of rented land at twenty times the annual 
 rental. Even where the fee of the land was not actually 
 sold, it often happened that fictitious rent charges were 
 created and the right to receive these charges forever was 
 sold for a lump sum ; which amounted virtually to an 
 interminable loan at interest secured by the productivity 
 of the land. The German word for interest (Zms) is 
 derived from the census or rent charge thus capitalized. 
 
 § 154. When interest was once recognized as a legiti- 
 mate thing, the authorities were not slow to profit by it ; 
 sometimes in questionable ways. Governments were en- 
 abled, by the promise of interest, to obtain in the form of 
 voluntary contributions sums which they could not have 
 secured by taxation without danger of revolt. Privileged 
 classes or individuals were allowed to establish pawn- 
 brokers* shops and other doubtful agencies as a means of 
 making profits by loaning money. All these things, in 
 spite of the evils connected with them, taught the states- 
 men and the public the usefulness of a fund of capital 
 and the power of a small fixed return to lead people to 
 save and invest such capital. The modern savings bank, 
 which offers depositors a low rate of interest and then 
 invests the money thus obtained in channels which the 
 depositors could not have used by themselves, either 
 because their individual savings were too small or their 
 business experience inadequate, is an example of what 
 can be done in this way. The life insurance company, 
 
USURY LAWS. 139 
 
 when properly managed, is an almost equally effective — 
 indeed, in some respects a more effective — means to the 
 same end/ Both these institutions give a stimulus to save 
 and avoid the necessity of hoarding. They thus cause 
 the public capital to be increased and to be effectively 
 utilized. 
 
 § 155. It is one thing to recognize the usefulness of the 
 system of interest ; it is quite another thing to leave bor- 
 rowers and lenders at liberty to fix the rate of interest by 
 mutual agreement. To a large section of the public it 
 seems as if the lender had every advantage over the 
 borrower in settling the terms of such a transaction, and 
 were likely to make an unfair use of this advantage. He 
 has capital and can wait, while the borrower cannot ; he 
 has intelligence to see what other people are doing, while 
 the borrower's vision is often much more restricted. 
 Under the influence of these ideas nearly every nation 
 has passed usury laws, fixing a legal rate of interest, 
 stigmatizing any charge above that rate as usury, declar- 
 ing contracts at higher rates void, and often visiting the 
 lender with the severest penalties. 
 
 Where a large part of the borrowers are so ignorant that 
 there is no effective competition among capitalists, and 
 no market rate of interest, such prohibitions appear to be 
 justified ; especially if the legal rate is placed high enough 
 
 ^ The life insurance company has the advantage over a savings bank in 
 knowing when it will receive payments and (by the law of averages) when it 
 must make them. It can thus keep smaller reserves and utilize more fully 
 the capital entrusted to its charge. It also makes its payments at the time 
 when the need for them is supposed to be greatest. It is further claimed, 
 as a public advantage, that it compels a certain amount of saving on the 
 part of the policy holders every year. But this is quite as likely to prove a 
 burden as an advantage. While such compulsion is of use to the improvi- 
 dent, it may prove a severe load to the unfortunate, enhancing instead of 
 lightening the weight of his misfortune. To such a man, and indeed to 
 the provident investor as a rule, the elasticity of his relations with a savings 
 bank, where he deposits money when he can and withdraws it when he must, 
 is an inestimable advantage. 
 
I40 INVESTMENT OF CAPITAL, 
 
 to cover the risks on all ordinary loans.' A usury law of 
 this character may prevent cases of shameless extortion, 
 where the creditor so presumes on the debtor's ignorance 
 as to charge rates far above those which ordinarily pre- 
 vail. Among non-commercial peoples there is serious 
 danger of just this thing. The Russian peasantry is now 
 suffering severely from loans unintelligently contracted, 
 whose charges have become a burden too heavy to be 
 borne. Anything which can prevent the imposition of 
 such burdens is likely to be good for the community. A 
 law fixing a maximum rate of interest which can be col- 
 lected from such borrowers may cause temporary hard- 
 ship by making some men unable to borrow ; but even 
 this is much better than an assumption of obligations 
 which purchases temporary relief at the expense of future 
 independence. 
 
 § 156. In commercial communities the case is quite dif- 
 ferent. Where each borrower knows to some extent what 
 the others are doing, the competition of different lenders 
 produces a market rate which is fair to both sides. Even 
 if the borrower in a particular case be weak and the 
 lender strong, the latter cannot charge a high rate of 
 interest, because other lenders stand ready to underbid 
 him. The rate of interest for any given class of risks 
 will fall until the supply and demand of capital become 
 equal. If the attempt is made to reduce the market rate 
 still further by usury laws, the effect is analogous to that 
 of laws regulating price (§ 97) ; but there are complica- 
 tions, due to the ease with which usury laws can be 
 evaded, which make the attempt to reduce interest by 
 statute even more conspicuously futile than the attempt 
 to reduce prices. 
 
 ^ The German usury law names no specific maximum rate, but leaves it to 
 the judicial authorities to determine whether, in view of the special circum- 
 stances of each case, the lender has taken advantage of the borrower's ignor- 
 ance or distress to charge more than a fair amount. This seems a wise 
 method of procedure. 
 
EVASION OF USURY LAWS, I4I 
 
 If the legal rate of interest is made lower than the com- 
 petitive rate which equalizes supply and demand, and if 
 the law is obeyed, the demand for loans will tend to 
 increase in consequence of the lowness of the rate, and 
 the supply of capital to loan will tend to diminish. There 
 will then be an excess of demand over supply. A part of 
 those who want loans will get them at low rates ; a part 
 will not get them at all. 
 
 If we could be sure that the people who did not get the 
 loans were the ones who did not need them, and that 
 their willingness to pay higher rates was the result of self- 
 destroying recklessness, we might be well content with 
 the effects of a usury law. But this is not ordinarily the 
 case. In an intelligent community the men who are will- 
 ing to pay high rates are quite generally the ones who can 
 make productive use of capital. So far as they are pre- 
 vented from borrowing, the active use of capital is 
 lessened, and the industrial progress of the locality hin- 
 dered. If a state makes a law fixing interest at six per 
 cent when a number of men are willing to pay eight, it 
 simply means that. those men, if they obey the law, 
 cannot get the capital they want. 
 
 § 157. In point of fact, they do not obey the law. If a 
 borrower is really desirous to get a loan and cannot have 
 it at low rates, there are many indirect ways of making 
 the interest charge higher than appears on the face of the 
 contract. -On an ordinary industrial loan, the borrower 
 may pay a large commission to the man who negotiates 
 it, part of which can go to the lender ; or he may tacitly 
 content himself with the receipt of a sum smaller than 
 the nominal amount of the loan. If a note is given for 
 $1,000, payable at the end of five years, bearing six per 
 cent interest per annum, and the borrower tacitly accepts 
 a payment of $950 instead of $1,000 as a consideration 
 for this note, the actual rate paid is about seven per 
 cent annually instead of six. On short-time loans from 
 
142 INVESTMENT OF CAPITAL. 
 
 banks, the means of evasion are yet more numerous and 
 more difficult to detect. The bank may insist on the 
 maintenance of a large deposit account in its hands, 
 which virtually reduces the sum lent ; or it may make a 
 fictitious charge for collection of the note at maturity, 
 which, on a short-time loan, adds a great deal to the rate 
 of interest. If a bank discounts a sixty day note at six 
 per cent, the total interest charge is one per cent; if to 
 this figure it adds one quarter of one per cent for col- 
 lection, it greatly increases the interest rate without 
 directly conflicting with the letter of the usury law. 
 
 If intelligent borrowers want loans and can get them by 
 using these means, they will use them. The borrower 
 runs little or no risk in these operations ; it is not against 
 him that the provisions of the law are directed, and he 
 does not regard himself as a lawbreaker. The case of the 
 lenders is different. They run a slight risk ; and even if 
 the act cannot be brought home to them, they know that 
 they are breaking the law. Some are deterred from these 
 transactions by their risk ; more, by their crookedness and 
 virtual illegality. Thus while the dqpiand for such loans 
 is not much checked, their supply, even at the old com- 
 petitive rate, is considerably diminished. Therefore, 
 while the more scrupulous lenders are kept out of the 
 market by a usury law, the less scrupulous ones are able 
 to take advantage of the reduced competition to charge a 
 higher rate of interest, which serves as a more or less ade- 
 quate compensation for the risk to their pockets and 
 the strain on their consciences. Meantime the borrowers 
 are suffering both from the scrupulousness of the honest, 
 who refuse them capital, and from the unscrupulousness 
 of the dishonest, who charge them extra high rates ; and 
 even if some borrowers get their loans a little cheaper 
 from the operation of the law, the gain at this point is 
 dearly purchased by the loss at others. 
 
 § 1 58. While the system of interest on loans has won its 
 
SECURITY FOR DEBTS. 1 43 
 
 way to recognition, imprisonment for debt and other 
 personal means of enforcing payment have been gradu- 
 ally falling into disuse. Increased control over the terms 
 of the loan has gone hand in hand with diminished 
 power over the person of the debtor. Both of these 
 changes arise from the same cause. Each is a virtual 
 recognition of the fact that a loan is justified by the pro- 
 ductiveness of the thing for which it is used, rather than 
 by the wants of th.^ person by whom it is borrowed. Once 
 having grasped this fact, we can draw two conclusions 
 from it. (i) If a loan will result in a really productive 
 thing, we should give the borrower every chance to 
 attract capital for its creation. (2) If a loan will not 
 result in a really productive thing, we should give the 
 lender no inducement to advance the money except the 
 motive of personal kindness, and no right to impose 
 future burdens on the debtor which will belie or conflict 
 with the motive of kindness. Both of these results are in 
 large measure accomplished by making the creditor look 
 to the investment rather than to the borrower for his 
 security. We have abolished imprisonment for debt, not 
 so much on account of the hardship to the debtor, who 
 may be a very worthless person, as on account of the dis- 
 advantage to society in having money lent on personal 
 security. It is not that we love the debtor more, but the 
 creditor less. It is for like reasons that civilized commu- 
 nities have so frequently abolished or mitigated laws con- 
 cerning attachment of wages. If a store has given a 
 workman credit, it seems at first sight fair that the owner 
 of the store should have a legal claim on the workman's 
 wages when they become due. Yet the evils connected 
 with store credit are so considerable, and the unwisdom 
 of encouraging workmen to get into debt is so manifest, 
 that society discountenances the creation of such debts by 
 removing or restricting the facilities for their collection. 
 § 159. Another phase of the limitation of personal lia- 
 
144 INVESTMENT OF CAPITAL. 
 
 bility, and one which has stimulated productive specula- 
 tion in the very highest degree, is exemplified by the 
 position of the shareholders in a modern industrial corpo- 
 ration or joint stock company. The old theory was that 
 if a man went into business of any kind he should be 
 held personally responsible for all debts incurred in con- 
 nection with it. In case of an individual who has mat- 
 ters under his immediate control this is perfectly right. 
 In the case of a partnership it may work injustice, when 
 one man is held responsible for debts incurred by the 
 unwisdom or wrong doing of his partner; but as long 
 as the number of partners is small, each can be presumed 
 to know if the other is doing wrong and can be held 
 accountable for any failure to protect himself and the 
 public. But as a concern becomes larger and larger, it 
 grows more difficult for a number of individual owners to 
 see how it is managed. If a hundred men unite their 
 capital in an industry they must necessarily put the con- 
 trol in the hands of a board of directors, and can only 
 know by occasional reports how their business is con- 
 ducted. Under these circumstances it is manifestly 
 unjust to hold them all responsible to the extent of 
 their whole private fortunes for mismanagement on the 
 part of a director. The investors know less about the 
 actions of the director than do those who have commercial 
 dealings with him. Under such circumstances it is quite 
 fair to transfer a part of the responsibility for loss from 
 the shoulders of the investor to those of the outside 
 public. It is not only equitable, it is necessary. With- 
 out such limitation of responsibility it is practically im- 
 possible to get the necessary capital subscribed for 
 undertakings where the investors cannot exercise per- 
 sonal supervision. One of the earliest attempts to meet 
 this need was by the partnership in covimenda, where a 
 comparatively small number of persons assumed the 
 active management and the responsibilities of the enter- 
 
LIMITED LIABILITY, I45 
 
 prise, while others simply furnished capital for the sake 
 of a share in the profits. A better form is the modern 
 joint stock company, in which all shareholders stand on a 
 common basis of limited liabiHty, and choose a few repre- 
 sentatives to exercise active supervision of the business. 
 The system of limited liability distinguishes such a cor- 
 poration from a partnership. If a man puts a thousand 
 dollars into a partnership, and the firm contracts debts in 
 excess of its resources, he may be called upon to pay 
 many thousands more to satisfy the claims of creditors. 
 But if he puts his thousand dollars into railroad stock, he 
 is quit of all further responsibility. His liability is limited 
 to the amount of his original investment. If the company 
 is well managed he will get his dividends. If it is badly 
 managed he will probably lose his money. But his loss 
 will be confined to the amount of his stock subscription. 
 If the liabilities of the company exceed its resources, that 
 is the affair of the creditors. They can take possession of 
 the concern and run it to suit themselves ; but they have 
 no further claims against the individual stockholders. 
 What is true of railroad stock is generally true of manu- 
 facturing stock, and partially true of the stock of banks 
 and of trading corporations. The liability of the indi- 
 vidual shareholders is in each case accurately defined 
 by statute. 
 
 § 160. It was with much reluctance that the system of 
 limited liability was admitted as an integral part of cor- 
 poration law. It seemed like an attempt of the investors 
 to secure large profits from an enterprise without assum- 
 ing corresponding liabilities. But the experience of coun- 
 tries like Great Britain or states like Massachusetts, which 
 strove to restrict the introduction of limited liability, 
 proved that this conservatism was either unwise or un- 
 just : unwise, so far as it prevented investments of capital 
 on a scale which the community required in order to 
 utilize modern improvements in the arts ; unjust, because 
 
146 INVESTMENT OF CAPITAL. 
 
 in the dealings of large concerns the creditors were in a 
 better position to prevent the creation of bad debts than 
 were the individual shareholders. The experiences in the 
 City of Glasgow Bank failure in 1878, which reduced to 
 penury a number of small investors who had no possible 
 control over the affairs of the bank or moral responsibility 
 for its management, were sufficient to prove to the most 
 conservative how ill adapted was the old system to the 
 conditions of modern investment. 
 
 As the need of permanent improvements gave shape to 
 the system of land tenure, so the need of concentration 
 of capital gave shape to corporation law. When a hun- 
 dred men putting their capital together could do much 
 more for society than if they kept it separate, it was 
 necessary to devise some system which should make it 
 easy and safe for them to unite. The modern corpora- 
 tion, combining as it does the principles of perpetual suc- 
 cession, representative government, and limited liability, 
 has met the industrial needs of the case. The feature 
 of perpetual succession prevents any loss of continuity in 
 operation when one of the shareholders dies or transfers 
 his interest. The feature of representative government 
 allows the different shareholders to choose a board of 
 directors small enough in number to secure efficiency of 
 control and operation. The feature of limited liability,. 
 whereby each shareholder is responsible for the debts 
 of the concern only to the extent of his original hold- 
 ing, protects him from losses due to the misconduct 
 of other shareholders, which the large size of the corpo- 
 rate body makes him unable to control. The union of all 
 these features allows the public to secure the economy 
 resulting from large accumulations of capital limited 
 neither by the lifetime of a few individuals nor by the 
 extent of their private fortunes. 
 
 § 161. These institutions and the motives connected 
 with them have served their purpose so fully that in 
 
OVERPRODUCTION OF MACHINERY. 1 47 
 
 modern times we are quite as apt to find an excess in the 
 saving and investment of capital as to find a deficiency. 
 
 In the beginnings of civilization scarcity of capital is a 
 most serious and imminent economic danger. Under such 
 conditions anything which will lead people to save and use 
 their savings productively is good for society. But in more 
 modern times, there is a temptation to invest capital in 
 machinery to such a degree as to reduce the demand for 
 the products of machinery. If one man tries to save, and 
 convert his capital into permanent investments, he can do 
 so ; but if every one tries to save, a great many people will 
 fail to realize their expected profit because of an over-pro- 
 duction of machinery. It is in this way, rather than by a 
 fall in the rate of interest, that the effect of over-accumu- 
 lation of capital shows itself most conspicuously. This 
 mistaken investment proves a loss to society as well as to 
 the individuals immediately concerned. In a given stage 
 of the arts, and with given habits of consumption, a certain 
 amount of machinery can be advantageously utilized ; a 
 larger amount than this is a waste. We have for generations 
 been cultivating motives which should make individuals 
 reduce their consumption and increase their investment 
 until we could obtain the required amount ; and we have 
 apparently overdone the matter. It is certain that the 
 increased utilization of existing capital which follows any 
 stimulus to consumption is apt to bQ more conducive to 
 general prosperity, than a corresponding increase in the 
 amount of investment without such stimulus. A super- 
 ficial observation of this fact leads many people to adopt 
 means of stimulating consumption which are transient in 
 their nature, and which provoke a reaction which makes 
 matters worse in the end than they were at the beginning 
 Currency inflation may serve as a type of such means. 
 The danger of measures like this is greatly increased if 
 the economist shuts his eyes to the small fraction of truth 
 hidden amid larger fractions of error in the arguments of 
 
148 INVESTMENT OF CAPITAL, 
 
 their advocates. The modern civilized world is in per- 
 petual danger of under-consumption. Too many of its 
 members use their supplies of products, not to purchase 
 the consumable products of others, but to duplicate ma- 
 chinery and other permanent investments. Under the 
 operation of the credit system the danger in the process 
 remains unseen, until masses of such machinery come into 
 use ; then its comparative worthlessness becomes ap- 
 parent. The men who own it find themselves poor 
 instead of rich. The laborers who have been trained 
 to produce it are thrown out of employment, and the 
 community is plunged into a commercial crisis (ch. ix). 
 
 § 162. The historical study of the origin and develop- 
 ment of capital in its various forms may guard us against 
 several rather prevalent fallacies. 
 
 In the first place we must beware of treating rights to 
 land, or to the management of corporate property, as 
 " absolute " or '* natural " ones. This danger is not so 
 great now as it was a century ago, for political science 
 makes far less of natural rights than it once did. But 
 enough of the old view remains * to make it worth while 
 to emphasize the fact that the various institutions under 
 which capital is invested have been sanctioned by society 
 
 ^ A curious aftermath of the old theories of natural right is seen in some 
 of the modern theories of natural value. Labor, land, and capital are re- 
 garded as co-operating in production, and an attempt is made to deter- 
 mine the natural share of the product which each factor obtains by free 
 competition, under the assumption of a certain normal degree of intelligence 
 in the investment of capital and development of land. But this is a thing 
 which we cannot assume ; and it is precisely becatise we cannot assume it, 
 that the various institutions described in the foregoing chapter are tolerated. 
 Interest and rent and the different forms of monopoly gain have grown up as 
 means of enabling the community to make progress by the elimination of 
 investors of lower degrees of intelligence and the substitution of better ones. 
 The habits of mind which determine the relative value of present and future 
 goods are so bound up with these institutions and these differences of intelli- 
 gence, that reasonings based upon the continuance of present methods of 
 valuation apart from existing institutions and their historical causes, seem at 
 once hazardous and unprofitable. 
 
EXPROPRIA TION, 1 49 
 
 for the sake of their effect on the public well-being ; and 
 that they derive their efficacy from this sanction. When 
 they stand in the way of progress, society does not hesi- 
 tate to modify or limit them. The power of expropria- 
 tion, based on the right of ** eminent domain " inherent 
 in the people, furnishes a conspicuous instance of such 
 limitation. If a man uses his land tenure to stand in the 
 way of public improvement, the government arranges a 
 process by which his land can be taken from him, whether 
 he will or no ; saying that the community has rights to 
 such property which, in case of necessity, override the 
 individual will. In like manner, if a corporation uses its 
 authority to harm the community which depends on its 
 services, the government brings its " reserved police 
 power " into play to check such abuses of authority. It 
 is perfectly clear that in case of public necessity private 
 property may be taken by the state, always providing 
 that '* due process of law " is used and compensation 
 given to the owners. 
 
 § 163. A little study of this idea of compensation will 
 show us how much less absolute (if such a phrase may 
 be permitted) are the rights of capital than the more gen- 
 eral right of property. Any considerable impairment of 
 the right of property would involve a change in the whole 
 industrial system, and even in the moral system on which 
 society is organized. Property-right is the chief modern 
 motive to labor, to care, and to avoidance of waste and 
 destruction. Rights of capital, however important or 
 beneficial in their effects, are much narrower in their 
 scope. They affect the methods of management of in- 
 dustry, rather than the motives on which all industry is 
 based. They can be seriously modified without changing 
 the general substructure of society. There can be no 
 reasonable doubt that they will be thus modified as better 
 methods are found to take their place. 
 
 § 164. But it is a much more serious error to go to 
 
150 INVESTMENT OF CAPITAL. 
 
 the other extreme, and assume that they can be modified 
 at will by the action of organized force. The fact that 
 the present organization of capital is the result of histori- 
 cal development, and that present forms have survived 
 while others failed, is the strongest proof of their vitality. 
 George's argument that collective property in land is per- 
 fectly practicable because so many races have tried it and 
 given it up, is but the reductio ad absurdum of many 
 attacks on the present industrial system. While it is un- 
 doubtedly true that the various rights of the capitalist 
 depend upon the existence of a civilized society which 
 maintains them, it seems equally true that the existence 
 of a civilized society in the stress of the struggle for exist- 
 ence among different members of the human race depends, 
 for the present at any rate, upon maintaining the rights 
 of the capitalist. 
 
CHAPTER VI. 
 
 COMBINATION OF CAPITAL. 
 
 Modem Tendencies toward Monopoly — Their Effect on Prices — Limitation 
 of Profits — Laws Fixing Rates — Enforcement of Responsibility. 
 
 T. H. Farrer : " The State in its Relation to Trade." London, 1883. 
 
 The general subject of monopoly is not adequately dealt with in economic 
 literature — especially in book form. On railroads and railroad charges, 
 mention may be made of C. F. Adams, " Railroads, their Origin and 
 Problems," New York, 1878; A. T. Hadley, "Railroad Transportation, 
 its History and its Laws," New York, 1885; W. D. Dabney, "The 
 Public Regulation of Railways," New York, 1889 ; W. M. Acworth, "The 
 Railways and the Traders," London, 1891 ; and, above all, of G. Cohn, 
 *' Untersuchungen tiber die Englische Eisenbahnpolitik," Leipzig, 1874, 
 1875, 1883. The third volume of Cohn gives the best general investigation 
 of the principles regulating monopoly price. Compare also the fifth book 
 of A. Marshall, "Principles of Economics," 3d ed., London, 1895. 
 
 For further references on closely allied subjects see chapter xi. 
 
 § 165. The investment of fixed capital described in the 
 preceding chapter has wrought much more radical changes 
 in manufactures and transportation than in agriculture. 
 
 There are several reasons for this difference. In the 
 first place, the productiveness of factories has increased 
 faster than that of farms. No means has been found for 
 indefinitely enlarging the amount of food which can be 
 obtained from a given area. We can perhaps double it or 
 treble it ; but no investment of capital, wise or unwise, is 
 likely to increase it a hundred-fold. Therefore no one 
 farm, however large, is likely to supply more than a very 
 small fraction of the world's consumption. Until there 
 is some radical change in the art of food production, we 
 
 151 
 
152 COMBINATION OF CAPITAL, 
 
 shall continue to have competition between different 
 producers. Nor has the investment of fixed capital in 
 agriculture gone so far that its interest and maintenance 
 constitute the chief elements in the cost of food pro- 
 ducts. They form an important, but not a dominant 
 factor. Under these circumstances, the theory of normal 
 price, though hindered in its operation, is by no means 
 rendered inapplicable. There is a slight delay in the 
 adjustment between price and cost ; there is a certain 
 margin between the price which will induce new com- 
 petitors to enter the field, and that which will drive out 
 the old ones. But, in the majority of cases, we can still 
 rely on competition to protect the consumers and do no 
 gross injustice to the producers. 
 
 § 166. In manufactures the case is different. The units 
 of capital are much larger. Each producer can extend 
 his output with a gain rather than a loss in economy. If 
 he can increase his sales, there will be only a slight in- 
 crease — perhaps none at all: — in the expense for wages 
 and materials, and a decided decrease in the share of the 
 charges on fixed capital which each unit of product must 
 pay. There is no fixed standard of cost which we can 
 treat as the normal price ; for the cost per unit of product 
 depends on the quantity sold, falling as sales increase. 
 
 The price which will induce new competitors to enter 
 the field is also much higher than that which will lead 
 old ones to withdraw. No concern will quit competition 
 as long as it can pay an appreciable part of its interest 
 charges. It is better to lose part of your interest on 
 every piece of goods you sell, than to lose the whole of 
 it on every piece you do not sell. As long as the price 
 received more than covers the expense for wages and mate- 
 rials each of the old factories will continue to compete. 
 Even if it changes ownership by foreclosure it will remain 
 in operation. But, on the other hand, no new competitor 
 will be called into being unless the price is high enough 
 
CONDITIONS WHICH PROMOTE IT, 1 53 
 
 to afford a liberal profit, after paying interest, mainte- 
 nance, and other charges on fixed capital invested under 
 modern methods. Thus prices, instead of constantly 
 tending to gravitate toward an equitable figure, oscillate 
 between two extremes. The rate of production, at figures 
 which give a fair profit, is usually either much larger than 
 the rate of consumption, or much smaller. In the former 
 case, prices are unremunerative and unjust to the pro- 
 ducer; in the latter case, they are oppressive to the con- 
 sumer. The average price resulting from such fluctuations 
 may perhaps be a fair one ; but the wide changes of price 
 are disastrous to all parties concerned. 
 
 § 167. The failure of competition to secure fair or 
 stable rates gives additional force to the pressure toward 
 combination which always exists among certain classes of 
 business men. 
 
 Many writers on combination treat it as a new thing, 
 peculiar to the present stage of commercial and industrial 
 development. This is a mistake. Efforts at trade com- 
 bination have always been made, and have not infre- 
 quently been successful. The more we study the past 
 history of any line of business, the more we are impressed 
 with the extent of such efforts at combination. The dis- 
 tinctive feature of the present age lies in the existence of 
 certain added causes peculiar to this stage of commercial 
 development, which work in favor of those who advocate 
 combination, and make it harder for independent competi- 
 tors to resist it, or for the law to prohibit it on grounds 
 of public policy. 
 
 § 168. The economy, to the public as well as to the indi- 
 vidual, of concentrating capital as much as possible, always 
 furnishes a pretext, and sometimes a real reason, for sub- 
 stituting combination for competition. In some cases the 
 industrial units which are necessary for proper utilization 
 of labor have become so large as to produce actual mo- 
 nopoly. This is especially true of distributive services, 
 
154 COMBINATION OF CAPITAL, 
 
 like water, gas, telegraphs, or railroads. The attempt to 
 have two independent agencies perform any of these 
 services for a single community is apt to result in loss to 
 the producer and inconvenience to the consumer. So 
 much of the expense of delivery of water or gas is con- 
 nected with the laying of mains, that a system which dupli- 
 cates these mains is a public burden. So much of the 
 advantage of the telephone service to each subscriber lies 
 in the power of reaching all the other subscribers, that 
 the existence of two competing exchanges in the same 
 city destroys the usefulness of both. In railroad trans- 
 portation a single organized company can put lines just 
 where they are needed, and run trains at the time when 
 the public wants them. If the same service is performed 
 by two companies, there will be unnecessary duplication 
 of lines in some places, and failure to build needful ones 
 in others ; while the train times and train connections will 
 be arranged, not with regard to the maximum convenience 
 of the public, but with a view to increase the business of 
 one competitor at the expense of the other. Even in cases 
 where the necessity for concentrated management is not 
 quite so marked as in those just described, the competi- 
 tion of different concerns always involves a loss, from the 
 need of maintaining too many selling agencies, the ex- 
 pense of unnecessary advertising, and the lack of proper 
 utilization of fixed capital.* 
 
 ^ The increasing profit when we enlarge the output of a factory is often 
 contrasted with the diminishing profit when we attempt to do the same thing 
 on a farm ; and some writers say that industries with large fixed capital are 
 subject to a "law of increasing return" which contrasts with the law of 
 diminishing return that prevails in agriculture. This statement hardly goes 
 to the root of the matter. The distinction is not so much between kinds of 
 industry as between kinds of capital. With a given amount of fixed capital, 
 whether invested in agriculture or in manufactures, any increase of output 
 diminishes the charges on such capital per unit of product. The current 
 expenses per unit of product do not thus tend to diminish as the output in- 
 creases ; in fact, when a certain relation has been established between out- 
 
AGREEMENT TO MAINTAIN RATES, 1 55 
 
 § 169. The simplest form of combination is an agree- 
 ment to maintain rates, where the several competitors 
 promise not to reduce their prices below a scale fixed by 
 common consent, with a view to giving producers a fair 
 profit. But such an arrangement rarely proves effective. 
 Each company is at the mercy of its agents. They will 
 try to steal business from rival concerns by cutting rates. 
 If they are allowed a commission on sales, they will divide 
 it with the buyer ; if they are not allowed such a commis- 
 sion, they will find a hundred different ways, less obvious 
 but hardly less effective, of rendering a rate agreement 
 nugatory. It is so profitable for one concern to steal busi- 
 ness from another, and so disastrous to its rival to lose 
 the business, that the latter will always suspect the former 
 of bad faith when any irregularities of its agents are dis- 
 covered or surmised. A contest will be inaugurated which 
 tends to drive prices far below the normal rate ; usually 
 to the advantage of those who least need and least deserve 
 such reductions. The honest and straightforward business 
 man is content with the one-price system. He is not seek- 
 ing to gain an unfair advantage over his neighbor, but to 
 be treated squarely. Fluctuating and uncertain rates are 
 not what he desires, for he knows that his less scrupulous 
 rival will be the first to gain the benefit of such changes. 
 It is better for A to be paying 30 cents and be sure that 
 
 put and fixed capital, the current expenses per unit of product increase very 
 rapidly. Whether, with an increase of output, the gain from fuller use of 
 fixed capital offsets the loss from increased current expenses, depends partly 
 on the amount of the fixed capital, but chiefly on the degree to which it was 
 previously utilized. If it was not fully utilized we shall see the phenomena 
 of increasing return ; if it was already fully utilized, we shall see those of 
 diminishing return. The apparent contrast between agriculture and manu- 
 facturing in this respect is chiefly due to the fact that population habitually 
 approaches a limit set by the arts of food production, so that its agricultural 
 improvements are always employed nearly to the limit of profitable output ; 
 while in manufactures there is no such increase of demand, and fixed capital 
 is often quite inadequately employed. 
 
156 COMBINATION OF CAPITAL, 
 
 his competitor B is also paying 30 cents, than for A to 
 pay 25 cents when B pays 20. Wars of rates, though 
 they produce very low prices, generally work to the dis- 
 advantage of the honest purchasing public and to the 
 advantage of the shrewder speculators. 
 
 § 170. A single instance will serve to illustrate the diffi- 
 culty of maintaining rates by agreement. Twenty-five 
 years ago a fair rate for cattle from Chicago to New York 
 was about $110 a carload. If the large shippers of cattle 
 wished to break this rate, they would drive all their steers 
 to one of the competing lines and would spread a rumor 
 in the commercial columns of the newspapers that this 
 line was not maintaining rates. This rumor, combined 
 with the fact that the line in question was getting all the 
 shipments, would make the other lines think there was 
 foul play, and lead them to order a reduction in rates to 
 meet the supposed cut. As soon as any such reduction 
 was announced the shippers would all divert their cattle 
 to the lines that had made it. The road that was carry- 
 ing everything yesterday received nothing to-day ; and 
 indignant at the bad faith on the part of its rivals it would 
 meet their reduction by a yet larger reduction. To this 
 process there was no limit as long as the price paid for the 
 carriage of cattle more than covered the expenses of load- 
 ing and hauling. Under the excitement of the contest the 
 railroad agents sometimes went even lower than this, and 
 carried cattle at an actual loss in order to prevent rivals 
 from making a profit. 
 
 § 171. When competing concerns are thus at the mercy 
 of their agents or of outsiders, a resort to closer forms of 
 combination is inevitable. If it proves that an agreement 
 to maintain rates is not enough, they will arrange a pool 
 or division of traffic. Pools take three distinct forms. 
 Sometimes rival concerns divide the field ; as when com- 
 peting gas companies agree to serve different streets in the 
 same city, or when competing railroads agree not to build 
 
DIVISION OF TRAFFIC, 1 5/ 
 
 branch lines into one another's territory. Sometimes 
 they divide the traffic itself. If three railroads find that 
 each has done an approximately equal amount of busi- 
 ness during the year preceding, they may arrange to divide 
 the competitive business equally, and let each company 
 take one-third. If more than one-third of the shippers 
 desire to use one of the three lines during the coming 
 month, that line agrees to turn over a part of its business 
 to one of its rivals. If the different railroads are not of 
 equal importance, the traffic can be divided on the basis 
 of the percentages actually carried during the previous 
 period of competition. Sometimes the railroad which is 
 less favorably situated has to make concessions in rates in 
 order to secure any traffic at all. In this case it is allowed 
 to charge a lower price than its rivals, and receives a per- 
 centage of traffic at this lower rate. Such a concession is 
 called a differential rate in favor of the weaker line, and is 
 used as a means of inducing it not to enter into cutthroat 
 competition. Sometimes, instead of dividing the traffic, 
 the competing concerns may divide the earnings from that 
 traffic, having a common accounting office and perhaps a 
 system of joint agencies connected with it. 
 
 These divisions of traffic or earnings are far harder to 
 arrange than agreements as to rates, but, when once 
 established, they are much more effective. For when 
 such a division exists, any irregularities of the agents in 
 the matter of rates hurt the company which they repre- 
 sent far more than its rivals. This arrangement, there- 
 fore, substitutes mutual confidence for mutual suspicion. 
 
 § 172. Pools have not been regarded with favor by the 
 law.' In the United States they are treated as contracts 
 
 ^ In England the legal decisions are much more favorable to pools than in 
 the United States ; while in most parts of Continental Europe they are ac- 
 cepted as matters of course ; the governments themselves entering into pool- 
 ing contracts with private companies with which they find themselves 
 brought into competition in the management of state railroads or other 
 industrial enterprises. 
 
158 COMBINATION OF CAPITAL, 
 
 in restraint of trade, and therefore void as a gambling con- 
 tract would be void. The courts say that they are against 
 public policy and will not aid in their enforcement. 
 
 In certain kinds of business, notably railroad transpor- 
 tation, such pools or combinations are treated as misde- 
 meanors, and attempts are made to punish their promoters 
 by fine or imprisonment. But these efforts to do away 
 with pools have conspicuously failed of their object- 
 There are many ways of evading them. A joint account- 
 ing office may take the form of a clearing house estab- 
 lished for the convenience of the public, and yet may 
 serve all the purposes of a pool. If competing companies 
 are forbidden to divide traffic by contract, they may 
 secure a permanent understanding by putting a majority 
 of their stock into the hands of a common board of trus- 
 tees. Such an arrangement is known as a trust. The 
 stockholders, in thus putting their securities in trust, part 
 with the voting power, — that is to say, the power of 
 directing the policy of the concern, — retaining the right 
 to receive whatever may be earned on their stock, while 
 it is held in trust by a board that secures harmony of 
 management between the different companies engaged. 
 If trusts are prohibited, it is always possible to resort to 
 actual consolidation ; the only serious difficulty being 
 that a large consolidated company is liable to be taxed 
 on the whole of its capital stock in a number of different 
 states. It was this difficulty which the trust agreement 
 was primarily designed to evade. As tax legislation be- 
 comes more systematic, the trouble from this source 
 becomes less, and the possibility of consolidation is 
 decidedly increased. 
 
 § 173. The attempt to prohibit combination has proved 
 futile, and has simply driven the competing concerns into 
 closer consolidation. Had it been successful, it must 
 either have retarded the development of modern business 
 and the utilization of modern methods requiring concen- 
 
MISTAKES OF COMMERCIAL POLICY, 1 59 
 
 trated management of capital, or it must have subjected 
 all of our large industries to constant fluctuations in their 
 scale of prices, which would have been hardly less disas- 
 trous to the consumer than to the investor. 
 
 But the advantages of industrial combination, when it 
 comes to include all competitors, are frequently balanced 
 by the evils of commercial combination. The economy 
 connected with the use of concentrated capital is in some 
 measure offset by the loss of that stimulus which compe- 
 tition alone seems able to give ; and the resulting 
 monopoly makes it uncertain whether the consumers 
 will get the benefit of the economy which is actually ob- 
 tained. 
 
 § 174. If a monopoly is managed by inexperienced 
 hands the effort to put prices up is usually more notice- 
 able than the effort to put expenses down. It seems so 
 easy to make a profit at the expense of society, that man- 
 agers are apt to neglect the more laborious method of 
 making a profit by service to society. When business 
 men have been all their lives accustomed to face imme- 
 diate competition, they think that the combination of all 
 competitors removes the only effective restriction upon 
 charges. But this is a short-sighted view of the matter 
 which has wrecked most of the enterprises run on such a 
 basis, and has made the average trade combination a 
 means of hindering rather that helping its members. 
 
 If the managers of a combination make it their chief 
 concern to suppress competition rather than to realize 
 economies in production, their policy toward trade 
 rivals results in violation of commercial morality, if 
 not of commercial law. Not content with obtaining 
 unfair advantages in the way of discriminating rates 
 for transportation of its goods, the combination tries 
 to exclude its rivals from their accustomed markets by 
 methods of boycotting and intimidation, which, when 
 they are used by trades-unions, provoke fierce denuncia- 
 
l6o COMBINATION OF CAPITAL, 
 
 tion from the same men who have been ready to practise 
 them for their own advantage/ 
 
 Even among those combinations which, Hke the Stand- 
 ard Oil Company, have reaHzed economies and reduced 
 rates for their product, this unscrupulous policy toward 
 competitors has been carried to such an extent as to 
 create a just prejudice against them ; a prejudice which is 
 enough to explain, and in one sense to justify, the ten- 
 dency on the part of the public to ignore or depreciate 
 the industrial services which they have actually rendered. 
 
 § 175. There is one case, and one only, where a 
 monopoly has almost unlimited power to make high 
 charges. If a number of contracts must be fulfilled 
 within a specified time, a combination which controls the 
 matter which is made the subject of these contracts can 
 fix prices to suit itself, limited only by the danger of 
 driving the contracting parties into bankruptcy." 
 
 If operators have sold for future delivery stock which 
 they did not own, or have contracted to deliver wheat 
 during a certain month without assuring themselves of 
 their sources of supply, the owners of the stock or of the 
 wheat can, by a sufficiently extensive combination, force 
 the operators to pay what price they please. Such a 
 combination is known as a corner. Its managers have 
 a great advantage in not being compelled to control the 
 supply for more than a limited period, and of being 
 assured of a fixed demand during that time. But the 
 number of " successful corners is less than is commonly 
 supposed. Though the apparent profits of such an oper- 
 ation are often large, the expenses of securing control of 
 the whole supply, and the difficulty of selling it to advan- 
 
 ^ It is interesting to see how combinations of capital and combinations of 
 labor are subject to the same possibilities of abuse or mismanagement ; and 
 how the same violation of commercial right looks excusable to the party 
 benefited, but monstrous to the party injured. 
 
 * Or by special rules of particular exchanges framed to avoid such a 
 result. 
 
/REASONS FOR REDUCING RATES, l6l 
 
 tage upon the expiration of the corner, make the real 
 gains less than the apparent ones. . 
 
 § 176. If the article is to be sold to consumers instead 
 of to speculators who have made fixed contracts, the 
 chance for financial success by a policy of exorbitant 
 prices is very small indeed. We have seen in chapter iii 
 that the demand for an article falls as the price rises. In 
 the case of almost everything except necessary food sup- 
 plies, this fall in demand is very rapid, so that the gross 
 receipts of the sellers under a high charge are less than 
 those which they obtain with the lower scale of prices. 
 Under these circumstances the maximum gross income is 
 obtained by making rates low enough to develop a good 
 volume of traffic, instead of by raising them so high as to 
 reduce that traffic to a small amount. If a concern uses 
 a. large amount of fixed capital, it will rarely happen that 
 the most money can be made by a policy of high charges 
 with small volume of business. Experience has shown 
 that the opposite method is the one which has proved 
 permanently profitable, even to the concerns whose mo- 
 nopoly seemed most assured. It pays in the long run 
 to bring rates down very near to the limits of actual cost, 
 if such reductions are followed by a large development 
 of traffic. 
 
 § 177. Where a monopoly is of such precarious charac- 
 ter that it may be subjected to direct competition at 
 almost any moment, this truth is sufficiently obvious. If 
 a concern in this situation attempts to do a small busi- 
 ness at high rates and make large temporary profits by 
 such a policy, new capital will come into the business in 
 the hope of securing the good-will and custom of the 
 community by lower rates. High charges invite dupli- 
 cation of plant in all cases where such duplication is pos- 
 sible. If, on the other hand, the original concern adopts 
 a policy of doing a large business at low rates, the 
 promoters of a rival enterprise will soon see that they 
 
l62 COMBINATION OF CAPITAL. 
 
 cannot hope either to do the business cheaper, or to make 
 a satisfactory profit on that moderate fraction of the 
 existing business which it is possible for a new competitor 
 to secure without special concessions in rates. 
 
 § 178. Even where a monopoly does not fear direct 
 competition, there are many cases where it is subjected 
 to similar restraints in an indirect manner. If there 
 is but one railroad in a certain section of country, and 
 this has a monopoly of available routes for reaching the 
 market which the producers of the district naturally seek,, 
 the shippers are apparently at the mercy of that company 
 and its agents. But if there is another railroad line 
 which supplies the same market with goods from another 
 section, it is all but inevitable that the competition of the 
 two districts with one another should regulate the price 
 which the railroads can charge.* We cannot have two- 
 different prices for similar goods in the same market. If 
 the supply and demand of wheat at Liverpool fixes the 
 price of wheat in the Liverpool market at a certain rate 
 per bushel, the railroad and steamship lines in every 
 direction must make their charges such that the wheat 
 producers, in the sections which they can serve, can ship 
 their supplies at a profit. Some of the transportation- 
 agents may disregard this necessity for a year or two, but 
 not permanently. The penalty for such disregard is the 
 destruction of the traffic on which the transportation 
 route makes its living. The railroads of the United States,, 
 of Russia, and of British India feel one another's com- 
 petition in determining the prices which they can charge 
 on their international traffic. 
 
 § 179. There are a few cases where the monopoly of 
 the sources of supply is so complete that even this possi- 
 
 ' When permanent monopoly rights are guaranteed by law in all the 
 competing districts, as on French railroads, we are apt to find a system of 
 high charges which no nominal powers of public supervision prove adequate 
 to control. 
 
LARGE CONSUMPTION INDISPENSABLE. 1 63 
 
 bility of indirect competition is absent. A private com- 
 pany may thus control all the available water within 
 reach of a large city. A great industrial combination like 
 the Standard Oil Company may become the sole means 
 of supplying certain grades of oil to the United States, 
 or even to the world. Here it might seem as though the 
 power to make high charges were absolutely unlimited. 
 Yet, even in these cases, the self-interest of the producers 
 dictates the adoption of a relatively low scale of prices. 
 Such monopolies can, as a rule, only be secured by very 
 large investments of capital. Adequate profit on these 
 investments involves correspondingly large public con- 
 sumption. A man whose facilities are so rude that he 
 makes only a few articles in the course of a year and sup- 
 plies but a small part of the public demand, is interested 
 in having the price of those articles as high as possible. 
 But the man who makes a great many articles in the 
 course of a year and meets a large part of the public de- 
 mand IS primarily interested, not in getting a maximum 
 price for a few things, but in getting the public to take a 
 great many things. Among those trusts and other com- 
 binations that have had apparently a complete monopoly, 
 a large number have made conspicuous failures, simply 
 because they thought of high prices rather than large 
 sales, and did not see that such a policy was suicidal. 
 
 § 180. Perhaps the most striking illustration of this 
 truth is furnished by the history of the French copper 
 syndicate of 1888. By a series of brilliant financial opera- 
 tions, this syndicate obtained control of the copper pro- 
 duct of all the best mines of the world. It attempted to 
 raise the price of copper from nine cents a pound to six- 
 teen cents. Everything was apparently favorable to the 
 success of these operations. Copper was a necessity for 
 use in the arts ; the sources of supply where copper could 
 be produced cheaply were few in number, and the syndi- 
 cate had exclusive contracts with them all. The demand 
 
164 COMBINATION OF CAPITAL, 
 
 for copper was constantly tending to increase, owing to 
 the new uses of electricity. The syndicate itself had very 
 large capital, and was supported by many of the strongest 
 financial houses of Europe. Yet with all these things in 
 its favor it failed disastrously, because the consumption of 
 copper at the advanced prices shrunk to such a degree 
 that all the calculations of the syndicate were deranged 
 and its financial resources put to a strain which they 
 could not stand. Even the strongest of monopolies must 
 make its price low enough to cause the public to buy 
 its goods or services to a sufficient extent to utilize its 
 capital, and this price will usually be found to be nearly 
 the same as that which would have been fixed by free 
 co'mpetition. 
 
 § 181. If a large industrial combination uses the advan- 
 tages given by concentration of capital to render labor 
 more efficient and obtain a good profit at low rates, it 
 has excellent chances of success. But if it makes such 
 economy of labor a pretext instead of an object, and uses 
 its monopoly to put prices up, the danger of failure is 
 wholly disproportionate to the chances of success. Such 
 a policy may succeed for a few years, but sooner or later 
 it seems bound to ruin those who adopt it. 
 
 Can we trust the managers of our large industrial enter- 
 prises to see this for themselves ? Can we treat their 
 mistakes as a self-correcting evil, and wait quietly for the 
 time when they shall learn that their own permanent in- 
 terests are best served by doing good public service ? To 
 this question it is impossible to return a general answer. 
 Our decision in any particular case will depend partly 
 upon the character of the business involved, partly upon 
 the inteUigence of those who manage it, and most of all, 
 perhaps, on our own habits of mind. 
 
 § 182. If we are in the habit of looking at direct con- 
 sequences, and disregarding indirect ones, we shall see 
 grounds for active public interference in almost all cases 
 
DIFFERENT VIEWS OF STATE CONTROL, 1 65 
 
 of industrial combination. The managers of a monopoly 
 have it in their power to do a great deal of harm before 
 they begin to feel the loss to themselves which arises 
 from the adoption of a short-sighted policy. Even if the 
 trouble corrects itself in the long run, a great many legiti- 
 mate interests are sacrificed in the process. A railroad 
 ultimately finds it suicidal to kill the local shippers who 
 are its best permanent customers ; but it is small comfort 
 to the shippers to know that their deaths are to be slowly 
 avenged by the operation of economic laws. The ship- 
 pers demand some immediate control over the railroad 
 agent ; something which will prevent the evil in the 
 beginning, instead of simply sufficing to prevent its in- 
 definite repetition. They will be prone to adopt the 
 socialistic solution of the problem, and insist that the 
 government should own the railroad, as the surest means 
 of avoiding such abuses. 
 
 But the man who is in the habit of looking at indirect 
 consequences will see that the undiscriminating attempt 
 to prevent evil often results in preventing an even greater 
 amount of good. He will be prone to take the individu- 
 alistic view of the matter. He will be disinclined, except 
 as a last resort, to put the business into the hands of a 
 government whose agents are almost always chosen on 
 other grounds than those of industrial efficiency, and 
 whose methods are much less flexible than those of a pri- 
 vate corporation. He will be indisposed to see stringent 
 regulations put in force until he is convinced that milder 
 remedies are inadequate to protect the interests of the 
 public as a whole. 
 
 § 183. The industrial and political conditions which de- 
 termine whether the conduct of a business may advan- 
 tageously be entrusted to the government instead of 
 being delegated to the property owners, are discussed at 
 length in chapter xii. We have here to consider the 
 merits of various methods of regulation of such indus- 
 
1 66 COMBINATION OF CAPITAL. 
 
 tries, where government ownership proves undesirable 
 or impracticable. These may be grouped under three 
 heads : 
 
 1. Limitation of profits. 
 
 2. Fixing of rates by public authority. 
 
 3. Enforcement of far-sighted methods of management. 
 § 184. The first of these methods looks much better 
 
 than it really is. It is a favorite remedy with people who 
 have had no practical experience of its working. They 
 say that it is very unjust for a monopoly to obtain a 
 much higher dividend than would be possible under free 
 competition ; and they think that if we Hmit the dividend 
 we shall remove the motive for extortion. In practice 
 the matter does not work in this way. Laws limiting 
 profits, if obeyed, tend to keep rates high instead of low ; 
 if evaded, they substitute a crooked method of distribution 
 for a straight one. 
 
 If a company is selling gas at $1.50 a thousand feet, 
 it indicates that this is the price which furnishes the 
 maximum profit. A higher rate would lessen this profit 
 by limiting consumption ; a lower rate would lessen it by 
 making the margin above expenses too narrow. If the 
 cost of making the gas is $1.00 a thousand feet, and the 
 consumption will be 10,000,000 at $1.75, 20,000,000 at 
 $1.50, and 30,000,000 at $1.25, the profit at $1.75 would 
 be $75,000, at $1.50 it would be $100,000, and at $1.25 
 it would be $75,000. If the company were forbidden 
 to divide $100,000, the price would be quite as likely 
 to be kept up at $1.75 as to be reduced to $1.25. In 
 fact, the higher figure would be very much the more 
 probable one ; first, because it is on the whole easier 
 for the officials of a company to handle a small business 
 on a liberal margin of profit than a large business on a 
 close one ; and second, because the actual rates charged 
 almost always represent the result of a process of reduc- 
 tion which has been going on for years, for the very 
 
FUTILITY OF LIMITING PROFITS, 1 67 
 
 purpose of obtaining a maximum profit. If our large 
 corporations were trying to raise their charges, limitation 
 of profits might readily remove the temptation to such a 
 policy. But this is not what they are habitually doing. 
 They are lowering their charges for the sake of possible 
 profits. Take away the chance for increased profit and 
 we destroy the motive for reductions in charge. We in- 
 vite corporations to pursue a conservative policy when a 
 progressive one means better public service at cheaper 
 rates. 
 
 Lord Farrer, whose long experience as secretary of the 
 Board of Trade gave him unique opportunities for observ- 
 ing the effects of various methods of regulation practised 
 in England, says that limitation of profits does not cause 
 reduction in rates; and that in trying to apply this prin- 
 ciple Parliament has gone on a wrong tack and involved 
 the country in a *^ maze of absurdities." 
 
 § 185. Besides hindering reductions of rates, limitation 
 of profits also prevents the increased investment of capital 
 which is the best guarantee of efficient public service. If it 
 is impossible for a concern to make more than an ordinary 
 rate of profit, there is no adequate motive offered to the 
 investor to develop new facilities and introduce new 
 methods. These experiments may turn out badly and 
 involve loss. If the company is to be deprived of the 
 special profit in case they turn out well, the motive for 
 their introduction is taken away, and the public fails to 
 secure the service which it might otherwise enjoy. 
 
 § 186. If laws limiting profits are evaded instead of 
 being obeyed, the effects, though different in kind, are 
 •equally undesirable. It is easy to reduce profits by ex- 
 travagance in management, or by giving officials large 
 salaries. This does no good to the consumer, and posi- 
 tive harm to the investor. Such laws may also be evaded 
 by inflating the company's capital account : a practice 
 known as stock-watering. If a corporation is allowed to 
 
1 68 COMBINATION OF CAPITAL. 
 
 divide all the money that it makes, there is no temptation 
 to honest managers to create a fictitious capital account. 
 But if the dividends are arbitrarily limited to eight per 
 cent when the company is really earning twelve, the 
 directors are tempted to pretend that there has been an 
 investment of capital one and one half times as great as 
 has actually been expended. On the basis of this sup- 
 posed investment they issue a stock dividend of fifty per 
 cent. This is in common language, "water." It does not 
 represent money actually paid in. By dividing eight per 
 cent on the watered stock, they can put the real earnings 
 of the company into the hands of the investors without 
 direct conflict with the law, and sometimes without public 
 knowledge of the actual nature of the transaction. 
 
 The worst of the matter is that when the practice of 
 stock-watering once becomes tolerated, it is indefinitely 
 abused by those who are in a position to do so. If com- 
 panies begin to issue fictitious capital, there is no limit to 
 such issues. A false capital account gives opportunity 
 for every kind of stock-speculation and for all sorts of 
 illegitimate methods of control by financial operators. 
 Many attempts have been made to prohibit stock-water- 
 ing; but as long as limitation of profits is attempted, 
 there are enough honest men who are interested in the 
 more defensible forms of stock-watering to render it 
 almost impossible to detect and punish the indefensible 
 ones. The evil from this source alone far outweighs any 
 good that has ever been obtained by trying to limit divi- 
 dends. * 
 
 § 187. By limiting rates instead of profits we have a 
 somewhat more effective means of control. It has the 
 
 ^ Some charters, especially in England, try to combine limitation of profits 
 with limitation of rates by providing that whenever the profit exceeds a 
 specified percentage, the charges for services shall be correspondingly re- 
 duced. Others (like those of the French railroads) provide that all dividends 
 above a certain figure shall be shared with the government. Neither of 
 these systems has won its way into general recognition. 
 
DIFFICULTY IN ESTIMATING COST 1 69 
 
 merit of aiming at the right target, whether it hits it or 
 not. Its chief difficulties are connected with the com- 
 plexity of the conditions affecting modern traffic. It is 
 seldom possible to say what any specific piece of work really 
 costs a large concern. The cost depends upon the amount 
 of work done. The larger the investment of capital, the 
 more complete is this dependence of cost upon quantity. 
 Under the old system of hand labor it was possible to 
 know with approximate accuracy the cost of a single pair 
 of boots. It could be estimated by finding the commer- 
 cial price of the material, and the time involved in sewing 
 the boots. But under the modern system, when the boots 
 are produced in a large factory, it is impossible to tell how 
 much they cost, unless we know how many pairs the owners 
 of that factory sell in the course of a year. If the annual 
 charges of the factory for interest and maintenance are 
 $10,000 a year, and 10,000 pairs of boots are manufac- 
 tured in that time, every pair costs $1 over and above the 
 price of the labor and materials involved. But if only 
 5,000 pairs of boots are made, the proper charge under 
 this head is $2 a pair ; while if 20,000 pairs are made, the 
 charge may be reduced to 50 cents a pair. In fact, the 
 chief means which a manufacturer possesses for reducing 
 cost is to increase the number of his sales so as to make 
 it possible to lower this item of expense. This is the 
 really critical element in price determination in all cases 
 where large amounts of capital are involved ; and it is 
 precisely this which public authorities are unable to de- 
 termine in advance, because it is essentially speculative 
 in its character. Of course, the business men themselves 
 have the same difficulty ; but they are experimenting with 
 their own capital, at their own risk, and in lines where 
 they have the maximum technical knowledge ; while the 
 government authorities, dealing with the capital of others 
 and the results of others* experience, find themselves 
 sorely perplexed. 
 
170 COMBINATION OF CAPITAL. 
 
 § 188. Among industrial monopolies, the case where 
 these difficulties are least is probably that of water com- 
 panies. The capital invested is known with a fair degree 
 of accuracy. If the engineering work has been properly 
 performed at the outset, it is comparatively easy to decide 
 on the amount of annual repairs required. The water 
 consumption can be predicted on the basis of population 
 served. In the case of gas works the matter is rather 
 more complicated. Fluctuations in the cost and quality 
 of coal make a great difference in profits. New processes 
 may be invented which will either increase possible econ- 
 omy, or render a part of the old investment valueless. 
 Other methods of lighting may conceivably be introduced, 
 which will so far lessen the demand for gas as to deprive 
 the shareholders of a large part of the permanent value 
 of their property. In order to know the real profit we 
 must deduct from the apparent profit a considerable sum 
 to allow for the depreciation of the fixed capital ; a sum 
 which in cases like this is not calculable with certainty. 
 Under such circumstances the whole business becomes 
 more speculative, and the possibility of prescribing fair 
 rates less satisfactory. 
 
 § 189. These difficulties are yet more conspicuous in 
 the matter of electric lighting, and in fact in all the com- 
 mercial applications of electricity. With the possible ex- 
 ception of the telegraph, there is no electrical industry in 
 which we have even an approximate means of estimating 
 the real profits from year to year. We have not had long 
 enough experience to know what is a proper allowance to 
 be made for depreciation. In some cases — notably that 
 of the telephone — we do not as yet know the proper basis 
 for the arrangement of charges. Shall telephone charges 
 be based on the message, as in long-distance business, or 
 on the instrument, as in the ordinary local business? The 
 former is the more logical basis, but it involves decided 
 difficulties. The public, in local telephone exchanges, 
 
APPORTIONMENT OF EXPENSES, 171 
 
 distinctly prefers the latter method. But if a company 
 charges by the instrument and not by the message, we are 
 brought face to face with the remarkable fact that the ex- 
 penses per unit increase with an increase in the volume of 
 business done. In a town with only 100 telephones in 
 operation, the expense to the company per instrument and 
 the rate which can be profitably charged is far less than 
 in a city with 1000 instruments. In the one case^ it need 
 only be prepared to make ninety-nine connections for each 
 subscriber ; in the other, it must arrange for nine hundred 
 and ninety-nine. This will serve to illustrate the highly 
 experimental character of the problem of rate-making in 
 the newer forms of industry. It is difficult enough for 
 the investors to find agents who can be trusted to experi- 
 ment with property under these conditions. Still more 
 diffcult is it to find public officials who can be trusted to 
 experiment with other people's property. 
 
 § 190. It is in transportation service that the regulation 
 of charges is most perplexing, because transportation 
 agencies do a great many different kinds of work, and no 
 rule has been found to decide how much of the expense 
 of maintenance and interest may justly be charged to one 
 kind rather than to another (§101). A railroad carries both 
 freight and passengers. How are we to decide how large 
 a part of the expense of maintaining the road in efficient 
 condition shall be charged to passengers, and how much 
 to freight ? If we attempt to apportion these charges on 
 the basis of the number of trains of each class, we seem at 
 first sight to obtain a fair basis of distribution. But if we 
 make passenger rates high enough to pay their share of 
 the general expenses of the road on this basis, it may 
 happen that a great deal of passenger traffic will be lost. 
 In that case such an adjustment of charges, however great 
 the apparent equity, will hurt the road, the travellers who 
 live on its line, and even the shippers of freight them- 
 selves ; for if passenger rates kill passenger traffic, trans- 
 
1/2 COMBINATION OF CAPITAL. 
 
 portation can only be had when the shippers of freight are 
 prepared to bear the whole expense of maintaining the 
 line instead of a part only. There is the same difficulty 
 in making the further apportionment of charges between 
 short-distance and long-distance traffic of the same kind, 
 or between different consignments of freight that have the 
 same weight but different commercial value.' 
 
 § 191. A private company solves the problem of appor- 
 tionment by charging what the traffic will bear. If the 
 maximum revenue can be obtained by fixing a high rate 
 on cloth and a low rate on coal, the company adopts 
 this policy. It argues, with much justice, that its own 
 interests in this matter are substantially identical with 
 those of the public. If cloth gives the maximum revenue 
 at high rates, it shows that such rates do not burden the 
 traffic. If coal gives the largest net revenue under a 
 schedule which allows the company very little profit per 
 ton, but very large tonnage, it shows that a low coal rate 
 is needed in order to meet the public requirements. 
 Rates are based on value of service not only in the tariffs 
 of well managed private companies but in all effective 
 schemes of public regulation. A turnpike company has 
 been allowed to charge a pleasure wagon more than a 
 freight wagon, not because the former involves greater 
 cost of maintenance to the turnpike company, but because 
 it could be compelled to pay more without destroying 
 travel. But a public official has not at command the 
 
 1 The proposal to solve this difficulty by leaving different carriers free to 
 run their trains over the track of any railroad company, if they v^^ill pay 
 tolls to cover the interest and maintenance of the capital invested in the 
 roadbed, ignores the chief difficulty of the case. The perplexing problems 
 about regulation of rates would be felt in the apportionment of tolls. The 
 assumption that the matter of tolls for the use of the track will be simple 
 and can be easily dealt with, if separated from loading and movement ex- 
 penses, is quite unwarranted. It is just because of the difficulty connected 
 with compensation for interest and maintenance of permanent way that a 
 railroad problem exists at all. 
 
REGULATION OF RATES. 1 73 
 
 means which a railroad agent can use in order to decide 
 what the traffic will really bear. The agent can try ex- 
 periments and see whether the column of business grows 
 enough to justify reductions of rates. The legislature Or 
 commission can only guess at such a result in advance, 
 without the chance of feeling its way by experiment/ 
 
 § 192. Of the means of transportation now controlled 
 by private companies, street railroads offer the fewest 
 difficulties to the legislator. Their rates of fare are 
 almost always regulated either by custom or by law. 
 This can usually be done without much injustice. If 
 rates are fixed so low as to be unprofitable, the company 
 can crowd its cars a little more. By putting enough 
 persons on a car at almost any rate, however low, it is pos- 
 sible to meet the running expenses of that car, and the 
 fixed charges attaching to the track as a whole are com- 
 paratively slight, because the city, in the great majority 
 of instances, has given the right of way for nothing. 
 Even in cable, electric, or elevated railroads, the condi- 
 tions of traffic are far simpler than in a steam rail- 
 road built for general purposes ; the chief difficulty 
 of fixing rates in all these cases being connected with 
 
 ' The price charged by a railroad for any service really consists of two 
 parts — a fee and a tax. The former covers the direct or immediate expense 
 of doing the particular service in question — expenses of billing, loading, 
 hauling, etc. The latter contributes to the general expenses attaching to 
 the road itself as a mass of fixed capital — interest, maintenance, and other 
 costs which are not greatly affected by additions to the volume of business 
 done. The railroad agent endeavors to make the aggregate amount of these 
 contributions to the general expenses as large as possible ; for any excess of 
 this total above such expenses constitutes the net profit of the road. If a 
 reduction in rates increases gross earnings faster than it increases expenses, 
 it shows that the old tax was too high, and was defeating its own purpose by 
 destroying traffic. The most profitable rate on any class of goods is the one 
 where the product obtained by multiplying the amount of traffic secured into 
 the profit per unit of traffic — /. e., the excess of price received above direct 
 expense — is a maximum. The same rule which applies to railroad rates of 
 course holds good of any other concern which has a monopoly of any species 
 of traffic. 
 
174 COMBINATION OF CAPITAL, 
 
 the uncertainty attaching to the depreciation account. 
 (§^i88.) 
 
 § 193. In the case of steam railroads, the theoretical 
 difficulties attaching to a just apportionment of rates are 
 almost insuperable. If a government commission wishes 
 to prescribe a schedule of rates, it must find what system 
 of charge is adapted on other roads similarly situated, 
 and whether those charges pay or do not pay a fair profit 
 on the investment. But no two roads are just alike, and 
 any commission is liable to make its schedule too high or 
 too low, according to its personal bias. In countries like 
 England, where the railroads are owned at home, and 
 where their promoters have great influence with the legis- 
 lature, such maxima are placed so high as to be inopera- 
 tive. Where, on the contrary, a large part of the railroad 
 stock is owned at a distance from the road itself, the 
 legislature is tempted to fix the maximum rates too low 
 and to leave the owners no opportunity for profitable 
 work. The evil resulting from the latter alternative is 
 worse than from the former. It was seen in the opera- 
 tion of the Potter law in Wisconsin in 1874, where the 
 maxima were placed at a figure that prevented the roads 
 from earning interest or even maintenance. They were 
 compelled to contract their service to such a degree that 
 the development of the state was checked, and after two 
 years' trial the very men who had been most anxious to 
 pass the law were equally pressing in favor of its repeal. 
 While few instances of railroad legislation have had as 
 bad an effect as this, the temptation to exercise a short- 
 sighted policy is always present when the legislature feels 
 the urgent pressure of shippers for a reduction in rates 
 and does not feel the claims of absentee owners for a fair 
 return on their property. 
 
 § 194. Where state ownership is impracticable, and 
 private enterprise short-sighted and extortionate, laws 
 fixing rates may be the best available resource for the 
 
WHAT THE TRAFFIC WILL BEAR. 1 75 
 
 protection of the public ; but their operation is in almost 
 all cases rather unsatisfactory. They subject the com- 
 munity to the evils resulting from inequality of supply 
 and demand, as described in chapter iii ; and the burden 
 consequent upon these evils is apt to outweigh the good 
 actually accomplished by the statute. 
 
 § 195. Less ambitious in their aims, but more successful 
 in their practical results, have been the attempts to secure 
 fair rates by insisting on far-sighted management in the 
 affairs of monopolies. 
 
 It cannot be too often repeated that it is not so much 
 the character of a particular industry which creates an 
 apparent conflict of interests between the investors and 
 the public, as the want of foresight in the management of 
 that industry. The principle of charging what the traffic 
 will bear, adopted by our large corporations, is a good 
 one ; it is only when it is made a pretext for charging 
 what the traffic will not bear, that it gives rise to abuses. 
 It depends largely upon the intelligence of the manage- 
 ment whether it is used as a principle or abused as a 
 pretence ; and intelligence in management is often a 
 matter of slow growth. In the Middle Ages people 
 thought it necessary to regulate by public authority the 
 rates that bakers might charge for their services in making 
 bread. They said that in the absence of such regulation 
 the public baker had the rest of the community at his 
 mercy. He could take advantage of the necessities of 
 his customers to exact starvation prices. We have passed 
 beyond this industrial stage. Our business men can look 
 a week or a month ahead ; the baker can see that other 
 bakers will take away his business unless he is guided by 
 considerations of public policy. But we have not learned 
 to look ten or twenty years ahead. The managers of our 
 largest enterprises still invite competition by high rates 
 instead of forestalling it by low ones, and still handicap 
 their best customers by discrimination instead of develop- 
 
1/6 COMBINATION OF CAPITAL, 
 
 ing their trade by equality of charges. The newer the 
 industry, the greater is the danger of unnecessary conflicts 
 between producers and consumers, and the need of apply- 
 ing every agency to quicken public intelligence. 
 
 § 196. The power of the government may be so exer- 
 cised as either to hasten or to retard this educational 
 process. Attempts to prescribe rates have a tendency to 
 retard it ; and this is probably the severest positive evil 
 connected with them. If, as so often happens, the results 
 of such attempts prove unsatisfactory, the managers will 
 impute all their own shortcomings to the existence of a 
 control which hampers them, and will not take to heart 
 the lessons which they might otherwise learn from mis- 
 takes. 
 
 On the other hand, the educational process may be 
 stimulated by measures which secure greater publicity 
 in the affairs of monopolies. Much of the apparent con- 
 flict of interest between producers and consumers is due 
 to misunderstanding on the part of each side as to the 
 real needs of the other. This misunderstanding can be 
 lessened, if not wholly avoided, by clear judicial opinions. 
 A great deal of the influence exercised by English and 
 American courts has been due to the fact that they placed 
 economic principles before both sides in a non-partisan 
 version and in an absolutely clear light. There is some 
 danger that the bench will lose this influence, partly be- 
 cause of the increasing complication of modern industry, 
 which renders it difTficult for a lawyer to understand the 
 indire-ct economic effects of his decisions ; partly on ac- 
 count of a somewhat dangerous doctrine of sovereignty, 
 which is leading our courts to lay too much stress on pre- 
 cedent and statute and too little on the common sense of 
 the people. The authority of the court depends, not on 
 the acts of the legislature, not even on uninterrupted tra- 
 dition, but on the fact that it knows more than the parties 
 between whom it is deciding and can see the consequences 
 
ADVISORY COMMISSIONS, 1 77 
 
 of different lines of action more clearly, as well as more 
 impartially, than they can. 
 
 § 197. To meet the deficiency of technical knowledge, 
 recourse is often had to special commissions of experts 
 for impartial investigation of disputes. The Massachu- 
 setts Railroad Commission is perhaps the best known 
 example of this kind. In the days of its most successful 
 operation it had practically no power except the power 
 to report ; but its reports showed such a clear under- 
 standing of the points at issue that they were accepted as 
 authority by impartial men on both sides. The Inter- 
 state Commerce Commission was in some respects mod- 
 elled upon the Massachusetts commission, and such success 
 as it has enjoyed has been based on its power of applying 
 sound economic principles to difficult cases. It is true, 
 though it sounds paradoxical, that the power of these 
 commissions is lessened by increasing their powers. 
 They are engaged in building up new laws, new tradi- 
 tions, and new methods of business where it is absolutely 
 essential that their reasoning should command the assent 
 of clear-headed men on both sides. When they cease to 
 rely on their reason and fall back on authority, they lose 
 the educational power which is the source of their domi- 
 nant influence. 
 
 Another useful form of advisory commission is com- 
 posed of local business men, or representatives of commer- 
 cial and industrial organizations, who can give advice as 
 to the probable effect of changes in rates. Without such 
 advice a railroad agent (or a tariff committee composed 
 exclusively of railroad men) is in danger of making reduc- 
 tions, not where they are most needed, but where they 
 are most clamorously called for. The system of local 
 advisory boards has been most consistently appHed in the 
 German Empire ; and, though a little slow in its operation, 
 seems to have much to recommend it. 
 
 § 198. The legislation which is most serviceable in giving 
 
178 COMBINATION OF CAPITAL, 
 
 force to the decisions of such commissions and advisory 
 boards is that which prescribes publicity of rates. The 
 most serious evils in connection with arbitrary manage- 
 ment of monopolies have taken the form, not of attempts 
 to oppress the public as a whole, but of attempts to make 
 differences between different sections of the public and 
 to charge the poor man more than the rich man. When 
 these differences are brought prominently before the 
 public eye, they often stop of themselves ; and the courts 
 find comparatively little difficulty in dealing with those 
 which persist. It may at times seem necessary to sup- 
 plement these provisions with special statutes to secure 
 equality, such as the " long and short haul " clause of the 
 Interstate Commerce Act, which prohibits railroad com- 
 panies from charging local business a higher aggregate 
 rate than through business of the same sort ; but the 
 good done by such acts is usually much less than their 
 promoters have anticipated. Effective control must be 
 sought in the application of general legal principles, rather 
 than in special statutes. 
 
 § 199. Another means of securing far-sighted manage- 
 ment is the enforcement of directors' responsibility. If 
 those who are engaged in the actual management are 
 striving to make the largest immediate income out of a 
 concern, they will pursue an extremely short-sighted 
 policy, destructive alike to customers and to investors. 
 If, on the other hand, their interests are identified with 
 the permanent profits of the company instead of the 
 temporary ones, they will be almost certain to do well 
 by the public. Anything which so increases the borrow- 
 ing power of corporations or diminishes the liabilities of 
 directors as to make it possible for them to speculate with 
 other people's money, causes short-sighted and unintelli- 
 gent use of monopoly powers. Whatever makes the 
 director responsible to the investor, tends to make the 
 whole corporation serve the public better in the long run. 
 
DIRECTORS' RESPONSIBILITY, 1 79 
 
 § 200. If the managers of an enterprise are allowed to 
 use other people's money while they risk comparatively 
 little of their own, a number of serious evils will inevitably 
 follow. They will persuade the public to engage in 
 enterprises which are doomed to failure in advance, in 
 the hope that they may themselves make a temporary 
 profit out of their management, either in the form of 
 large salaries or of lucrative personal contracts. Or 
 they may so manipulate the finances of the companies 
 which they control, as to make a personal profit out of 
 fluctuations in the value of their securities. These possi- 
 bilities form a temptation to waste the investors' private 
 capital and, what is far worse, to misuse an appreciable 
 part of the public capital. The former causes loss to the 
 individual investors directly concerned ; the latter affects 
 the whole community, consumers as well as investors, by 
 preventing the national resources from being properly 
 utilized. This danger is most inadequately met in the 
 United States. There are few localities where either law 
 or public sentiment does much to check it. In this 
 respect America is far behind other countries. In most 
 parts of Europe, these evils are avoided or mitigated by 
 holding the promoters of new concerns responsible for the 
 correctness of their indications, and by making it a crime 
 for them to divert the money of investors to their own 
 uses by lucrative private contracts. In England these 
 laws are backed by a public sentiment which looks on 
 the position of a director or an official of a corporation 
 as one of trust, and which unsparingly condemns every 
 attempt to use such a place for personal aggrandizement 
 at the expense of the investor. But in the United 
 States the legal responsibility is inadequate, and the 
 public sentiment even more so. Perhaps the most seri- 
 ous among all the evils under which American business 
 suffers is the lack of clear understanding as to directors' 
 responsibility. 
 
CHAPTER VII. 
 
 MONEY. 
 
 Its Functions and Forms — Seigniorage — Depreciation — The General Level 
 of Prices — Conflicts between Debtor and Creditor — Bimetallism in 
 Theory and in History — Irredeemable Paper Money. 
 
 Of the abundant literature on this subject, perhaps the best short work 
 for general use is W. S. Jevons : " Money and the Mechanism of Exchange." 
 4th ed. London and New York, 1878. This may be supplemented by 
 H. "White : " Money and Banking," Boston, 1895. 
 
 The general theory of money and credit is admirably developed in the 
 third book of John Stuart Mill's " Political Economy." 
 
 J. L. Laughlin, " History of Bimetallism in the United States," New 
 York, 1886, deals with the subject of silver coinage from the monometallist 
 standpoint. The best presentation of the bimetallist argument is perhaps 
 given in J. S. Nicholson : "A Treatise on Money and Essays on Monetary 
 Problems. 2d ed. London, 1893. 
 
 The annual reports of the U. S. Treasury Department furnish much 
 statistical matter which is of great value. 
 
 § 201. Nearly all business contracts and agreements 
 — sales, leases, wages, loans, insurance, etc. — call for pay- 
 ments of money from at least one party. Money is best 
 defined as a thing which, by common consent of the 
 business community, is used as a basis of commercial 
 obligations. Whatever may be chosen for this purpose, 
 becomes, by the very fact of being thus used, a convenient 
 standard for measuring private wealth — a value denomi- 
 nator, as it is sometimes called — by means of which the 
 power and advantage attaching to the ownership of differ- 
 ent kinds of saleable property can be compared. 
 
 § 202. There are two quite distinct purposes for which 
 
 180 
 
RESERVE AND CIRCULATION, l8l 
 
 supplies of money are needed by the business community 
 and its individual members. 
 
 (i) A certain amount of capital must be held in this 
 form as a cash reserve to secure solvency. 
 
 (2) A large amount of income may be received in this 
 form as a convenient meditim of exchange. 
 
 The latter function seems at first sight much more 
 important than the former. The volume of transactions 
 settled by payments of money as a medium of exchange 
 in the course of a year is far greater than the whole 
 amount of cash reserve in existence at any one time. In 
 spite of this disparity, the function of money as capital is 
 of more fundamental consequence. If we have a proper 
 cash reserve of money, we can use other things as media 
 of exchange. We can make our payments by bank 
 checks or other instruments of credit. If we have not an 
 adequate reserve of capital in the form of money, no 
 credit or banking system, however well devised, will act 
 as a substitute. The individual or the community that 
 wishes to do a successful business must keep an adequate 
 stock of cash — not necessarily as a means of payment, 
 but as a guarantee of solvency. The ease with which 
 other means of exchange can be substituted for money, 
 does not prove that money is unnecessary ; it proves that 
 its function as a means of exchange is not the sole or 
 even the principal object for which it is needed. 
 
 § 203. It sometimes happens that there are two differ- 
 ent standards of contract in common use at the same 
 time. In that case we really have two independent forms 
 of money in the same community. It may be that one 
 article is used for the settlement of debts and other long 
 time contracts because of the stability in the conditions 
 which affect its supply and demand, while another is used 
 for sales and wages because of its superior convenience as 
 a means of exchange. This state of things has been ex- 
 emplified in English history in cases where rents were 
 
1 82 MONEY, 
 
 calculated in wheat' or in days' labor, while payments 
 were made in coin. The standards which served as units 
 for hiring land, were absolutely unavailable as a means of 
 exchange in ordinary life. 
 
 A basis of contracts which does not serve as a medium 
 of exchange is known as 7itoney of account. 
 
 § 204. The concurrent use of different kinds of money 
 for different purposes may result from the attempt of the 
 government to force the nation to use money of a kind 
 which some of its members dislike or distrust. This state 
 of things has seemed imminent in the United States, when 
 the agitation for free silver coinage has been most active. 
 A large number of the more permanent contracts have 
 been made payable specifically in gold. If silver became 
 the medium of exchange and unit of reckoning for ordi- 
 nary transactions, we should see the concurrent use of 
 two different kinds of money side by side. Such a state 
 of things is extremely undesirable. It is of great impor- 
 tance to the commercial world that the money which a 
 man receives for the goods which he sells should be avail- 
 able for the settlement of debts ; and conversely that the 
 money which the creditor receives from those who are 
 indebted to him should be serviceable for the purchase of 
 current supplies,' 
 
 * Adam Smith has discussed the advantages and disadvantages of " corn 
 rents." In the long run, wheat is probably a more equitable standard of 
 payment than either gold or silver, because the number of people tends to 
 adjust itself to the food supply, so that there will be a rough correspondence 
 between the value of a bushel of wheat and that of a day's labor. But from 
 year to year wheat fluctuates more than gold or silver, because of variations 
 in its production, and still more because of the absence of an accumulated 
 stock large enough to reduce the effect of these variations to a minimum. 
 In ordinary contracts the danger from momentary fluctuations outweighs the 
 gain from permanent steadiness, because sudden changes involve worse vio- 
 lations of commercial equity than slow ones. 
 
 ^ Menger has observed that the essential characteristic of money is its 
 saleableness. If the same thing serves at once as a medium of exchange 
 and a basis of contracts, it combines present and permanent saleableness in 
 the highest degree. 
 
COMMODITIES USED AS MONEY. 1 83 
 
 § 205. Any commodity can serve as money where the 
 public accepts it without question as a unit of reckoning 
 and a means of settlement of debts. To this end it is 
 only necessary that it should be universally desired, so 
 that no man need fear having it left on his hands ; and 
 that it should be homogeneous, so that people demand a 
 certain quantity of it rather than a specified piece of it. 
 Articles of the most diverse sort, like the salt of Abyssinia, 
 the tobacco cakes of the Virginia colonists, or the shells 
 which formed the wampum of the North American In- 
 dians, have been used as money by communities in differ- 
 ent stages of civilization. Among pastoral peoples cattle 
 serve as a unit of reckoning, and not infrequently as a 
 medium of exchange. The Latin name for money, 
 fecunia, is derived from pecus, a flock ; and it is probable 
 that the English word " fee " is connected etymologically 
 with the German Vieh, cattle. 
 
 § 206. Metals have some advantages over all other com- 
 modities for use as money. In the first place, they are 
 more permanent. They are not liable to destruction by 
 lire nor to quick consumption in emergencies. There is 
 thus a large permanent stock of metal carried over from 
 year to year, which makes the available supply less de- 
 pendent upon fluctuations in current production. The 
 world's stock of gold coin and bars probably amounts to 
 nearly four thousand million dollars — many times the 
 annual production or consumption. Under such circum- 
 stances, the amount produced in any one year might be 
 greatly increased or diminished without causing more than 
 a slight effect on the total volume in use. If this state 
 of things continued for a series of years, we should have 
 a gradual expansion or contraction of the world's gold 
 currency ; but the large permanent stock would make the 
 percentage of annual increase or diminution so small as 
 to allow contracts to adjust themselves to the change in 
 conditions. 
 
1 84 MONEY, 
 
 The metals are also, as a rule, more homogeneous than 
 any other commodities in use, and offer great mechanical 
 advantages as means of exchange. They can be cut into 
 pieces of whatever size is wanted, and these pieces can 
 pass from hand to hand; being accepted either by ac- 
 count or by weight, as the importance of the transaction 
 demands. 
 
 § 207. The choice of a metal for use as money has de- 
 pended mainly on its cost of production. If the cost 
 was too low as compared with the purchases of daily 
 life, the pieces of money became so large as to be 
 inconvenient to handle. If the cost was too high as com- 
 pared with that of articles to be exchanged, the pieces of 
 money became so small as to be incapable of the neces- 
 sary subdivision without great danger of loss. As the 
 knowledge of mining and metallurgy has increased there 
 is a tendency to substitute more costly metals for less 
 costly ones, on the basis of convenience alone. Iron, which 
 was in occasional use in ancient times for coins of low 
 value, has been displaced by copper and nickel. Copper, 
 which was first used for transactions of considerable mo- 
 ment (the Roman as being originally a pound of copper), 
 has been gradually relegated to a position of trifling im- 
 portance. Silver, which was formerly' a medium of ex- 
 change for very large transactions, has now on the whole 
 given place to gold for these purposes. 
 
 On the other hand, a metal may be too rare to com- 
 mand universal acceptability. The experiments of Rus- 
 sia in coining platinum did not prove a success. Even 
 gold has a relatively low value among less civilized 
 nations, which have but slight experience of large trans- 
 actions. There was a time when an ounce of gold in 
 Europe would purchase thirteen or fourteen ounces of 
 silver, but could be bought for three or four ounces of 
 silver in the far East. 
 
 § 208. . When the government or some accredited agent 
 
COINAGE, 185 
 
 of the government places a stamp upon a piece of metal 
 certifying its weight and fineness, the process is known as 
 coinage. When the genuineness of a coin is undoubted, 
 it has a great advantage over uncoined metal as a medium 
 of exchange. People will then accept it by tale or count 
 instead of by weight. Such acceptance furnishes a temp- 
 tation to the counterfeiter, who attempts to place a stamp 
 like that of the government on baser metal or on a piece 
 of inferior size, and to the clipper or sweater, who at- 
 tempts to abstract part of the metal from the coin by 
 processes which will not so greatly change its appearance 
 as to prevent its acceptance in ordinary transactions. To 
 m^et the danger of counterfeiting there has been a con- 
 stant improvement in the art of coinage. The oldest 
 coins have a stamp on but one side. A little later the 
 stamp was put on both sides, so that the thickness of the 
 metal could not be reduced without defacing the stamp 
 itself. To prevent clipping, the edges were milled by 
 mechanical devices. To defeat the art of the sweater, 
 provision was made for the retirement and recoinage of 
 pieces that began to show the effects of natural wear; 
 thus rendering artificially worn coin an object of public 
 distrust. 
 
 § 209. Where a system of coinage has become estab- 
 lished it is customary for the government to declare its 
 coins legal tender for all debts. A seller, laborer or cred- 
 itor, if he has agreed to receive a certain amount of 
 money in settlement of what is due him, is obliged to 
 accept such coins as money. They are a " legal tender," 
 which he has no right to refuse unless his contract has 
 been made in terms of some commodity other than 
 money. Where the coin is really acceptable, and the 
 function of government is only that of certification, the 
 legal tender feature simply gives effect to the public will, 
 and prevents annoyance and uncertainty. Where for any 
 reason the money is not thus universally acceptable, and 
 
1 86 MONEY, 
 
 the government attempts to create by legislation a de- 
 mand and a purchasing power which does not otherwise 
 exist, the opportunity to declare a coin legal tender is apt 
 to be abused. Such abuse is most common and flagrant 
 in communities which are about three-fourths civilized. 
 Before they have reached this stage, people make con- 
 tracts payable by weight, because they have not yet 
 learned the uses of coinage ; after they have passed this 
 stage, they have recourse to the same means, because 
 they have learned the abuses of coinage and the methods 
 of protecting themselves against them. The authority of 
 the government in making money acceptable seems quite 
 unlimited as long as it is used to give expression to the 
 will of the property-holders ; but when once it attempts 
 to act independently of that will, it is found to be very 
 shadowy. 
 
 § 2IO. When the government agrees to put its stamp of 
 weight and fineness, and thus bestow the legal tender 
 character, on any piece of metal of the required size and 
 quality, we are said to have free coinage of that metal. 
 This does not mean that it is done for nothing, but that it 
 is done for every one who desires it, and at a price not 
 disproportionate to the actual cost of the operation. The 
 work of coinage involves certain expenses to the govern- 
 ment for assaying and minting, amounting in the case of 
 modern standard coin to about one-fifth of one per cent. 
 If a private person brings gold to the mint to have its 
 weight and fineness certified, most governments retain an 
 amount of metal sufficient to defray this expense. A 
 few nations, like England, have made no such deduction, 
 believing that it is an advantage to the country to allow 
 people to convert their gold into coin with the utmost 
 freedom, and that the government for the sake of this 
 public advantage can well bear the small loss which is 
 involved. The balance of opinion is on the whole against 
 this view. Countries like the United States or France 
 
SEIGNIORAGE, 1 8/ 
 
 which make a small charge for coinage, in order to cover 
 the expense of the process, have habitually performed the 
 work better than those which have done it for nothing. 
 The advantage to the public in the superior execution of 
 the coinage has been of more consequence than the slight 
 gain in the elasticity of the currency which the English 
 business world may have enjoyed. 
 
 §211. In some cases the government retains, for the 
 profit of the exchequer, an amount larger than the actual 
 cost of coinage. A charge of this kind is known as 
 seigniorage} The word is derived from the fact that 
 rights of coinage in mediaeval times were often made a 
 most valuable prerogative of the " seignior " or feudal 
 lord. 
 
 Almost every civilized nation deducts a considerable 
 seigniorage from its smaller coins ; that is, it puts less 
 metal into these coins than they can purchase in the open 
 market. The object of this practice is to prevent them 
 from being melted down for use in the arts or for export. 
 A certain amount of small currency is always needed as a 
 medium of exchange. If any of it is withdrawn for use in 
 the arts the remainder becomes inadequate for monetary 
 transactions, which causes great inconvenience, if not 
 hardship. Now if the metal in a half dollar is worth less 
 than half as much as the amount of metal in a dollar, 
 people will choose the large coin to melt down, and the 
 small coin will remain in circulation. When the frac- 
 tional currency is made of a different material from the 
 larger currency, this principle is equally applicable. If a 
 hundred cents contained a dollar's worth of nickel and 
 other metals combined with it, not only would the cents 
 be of inconvenient bulk, but we should be in constant 
 danger of having them withdrawn from circulation and 
 
 * The name '* seigniorage " is sometimes, though less properly, applied to 
 the small charge described in the previous paragraph. This is better desig- 
 nated by the French term brassage. 
 
1 88 MONEY. 
 
 melted if the price of nickel went up while that of gold 
 remained stationary. In order to maintain this currency 
 in daily use at a value higher than that of the bullion 
 which it contains, the government limits the quantity of 
 such issues to the actual wants of the people. Two half 
 dollars are worth as much as one dollar, because half 
 dollars are needed for current purposes of exchange. As 
 a rule, governments do not give this fractional currency 
 the attribute of legal tender, except in small amounts. 
 Limited issues of small currency containing less than its 
 market value of metal are known as subsidiary coin. 
 
 Where a seigniorage is abstracted not only from the 
 subsidiary coin, but from the legal tender money, the pro- 
 cess is known as debasement. 
 
 § 212. If a relatively small amount of debased currency 
 is issued, its chief effect is to drive a nearly corresponding 
 amount of better money out of circulation. 
 
 If the people of a country have been in the habit of 
 using a thousand million dollars of standard weight, it 
 shows that this amount is needed as a reserve for carry- 
 ing on the business of the country at the old price level. 
 The loss of productive power due to any attempt to trans- 
 act business with a smaller cash capital is greater than 
 the gain from the use of a little more metal in the arts, or 
 from the purchase of foreign products with that metal. 
 But if the government adds one hundred million light- 
 weight dollars to the money of the country, this equilib- 
 rium will be destroyed. The increase in the number of 
 dollars in the country will tend to make each dollar worth 
 less, and given sums of money will purchase fewer goods. 
 Under these circumstances, some dollars will be melted 
 down for use in the arts, and some will be exported to 
 buy foreign products, until the supply of dollars is reduced 
 to approximately its old amount. 
 
 The dollars chosen for melting or for export will be the 
 ones which contain the largest weight of metal. For if 
 
GRESHAM'S LAW, 1 89 
 
 two coins are equal in debt-paying power, but unequal in 
 utility in other respects, a nian will reserve the worse coin 
 for paying his debts, and use the better coin for purposes 
 where its advantage is felt. This tendency of bad money 
 to drive out good money was noted by so ancient an 
 observer as Aristophanes. It was brought prominently 
 to the notice of the English-speaking world by Sir 
 Thomas Gresham, Chancellor of the Exchequer under 
 Elizabeth, and is commonly referred to as Gresham s 
 Law. 
 
 § 213. When the amount of debased currency has be- 
 come so great as to afford the necessary reserve for all 
 transactions in which the government can compel the 
 creditor to accept this form of payment,* the limit of dis- 
 placement is reached. For when all the current circula- 
 tion of the country is debased, there is none left which can 
 be advantageously used in the arts or for export. Any 
 further issue will produce a redundant stock of money, 
 and a fall in the value of each piece of money, which 
 
 ' As the amount of debased money grows larger, its sphere of usefulness 
 grows smaller. Importers and others engaged in foreign trade have to pro- 
 vide themselves with a certain amount of cash reserve which derives its value 
 from something more wide-reaching in its effects than a legal tender act. 
 Farsighted capitalists, who fear the future fiscal policy of the government, 
 insert stipulations in their loans or in their leases, requiring payment of dues 
 in some specific commodity rather than in the general currency of the country. 
 Even as a medium of exchange in domestic transactions, the debased money 
 may be discredited by the action of the people. D'Avenel has collected 
 some curious facts which show that the arbitrary changes in coinage made 
 by the French crown were to a large extent rendered inoperative in this way. 
 The same result was seen in California, during the Civil War, when the 
 public was able to nullify the legal tender act and prevent the use of paper 
 currency as money throughout the state. A man might pay one debt in 
 paper, but he was thereby cut off from the chance of doing a credit business 
 afterward. In the rest of the country paper money was available for general 
 business purposes, but a certain amount of gold had to be retained by those 
 engaged in the foreign trade, for the adjustment of their purchases abroad 
 and for payments of any customs duties to the United States at home. The 
 interest payments of the United States Government on the great bulk of its 
 loans also involved the use of gold coin, and correspondingly restricted the 
 
190 MONEY, 
 
 manifests itself in the form of rising prices. If the govern- 
 ment persists in putting debased coin into circulation, 
 this increase in the amount of currency and diminution in 
 its value can go on until the purchasing power of the coin 
 falls so low as to allow it to be melted down or exported 
 in spite of the seigniorage. 
 
 Such an increase in debased currency beyond the dis- 
 placement limit, is known as inflation ; the resulting loss 
 in purchasing power is known as depreciation. 
 
 Debasement usually results in depreciation, because the 
 fiscal motive to expand the amount of a debased cur- 
 rency is very great. If the government abstracts a cer- 
 tain amount of bullion and coins the remainder, the bullion 
 as bullion is relatively useless. The temptation to coin 
 the seigniorage as a means of paying current expenses, or 
 of meeting some unexpected emergency, is enormous. 
 This motive, seconded as it habitually is by the interest, 
 real or supposed, which many voters have in seeing an 
 increased abundance of money, has proved well-nigh irre- 
 
 field of circulation of paper. In later years, in connection with the agitation 
 for silver coinage, the number of obligations which specifically promised 
 payment in gold was gradually increased. It is obvious that if the United 
 States should change from a gold to a silver standard, a large part of the 
 transactions of the country must still be fulfilled in gold, unless the courts 
 should legalize a direct violation of specific promises. 
 
 The parity of gold and silver dollars is to-day jeopardized, not because the 
 supply of silver money has become nearly equal to the total demand of the 
 United States for currency, but because it has become nearly equal to that 
 part of the currency demand over which the legal tender act exercises effec- 
 tive control. There is no reason to apprehend that the country will lose all 
 its gold. But there is a great deal of apprehension that people will cease to 
 treat gold and silver dollars as equivalent. To keep them at equal value the 
 government has been compelled not only to stop the coinage of silver dollars, 
 but to pay gold on demand for any of its coin obligations. The equivalence 
 between the two forms of currency is thus made dependent, not on the large 
 stock of gold in the country, but on the small stock of gold in the treasury ; 
 not on the solvency of the United States as a nation, but on the sufficiency 
 of the current receipts of the United States Government — a far more preca- 
 rious matter. 
 
REDEEMABLE PAPER, I9I 
 
 sistible. The world's monetary history shows that very 
 few governments have been able to resist the temptation 
 which the existence of a seigniorage involves. 
 
 § 214. Paper money is a convenient substitute for gold 
 or silver on account of its lack of weight, and has there- 
 fore come into increasing use as transactions have grown 
 larger. It has three forms, governed by different laws and 
 to be judged on wholly different principles. 
 
 1. Coin or bullion certificates. These certificates simply 
 state than an amount of coin or bullion corresponding to 
 the face of the note has been deposited with the govern- 
 ment and is held as a fund to redeem that note, not to be 
 used for any other purpose whatsoever. The amount of 
 coin or bullion thus specially reserved always corresponds 
 exactly to the amount of coin certificates. These, there- 
 fore, have exactly the same purchasing power as the coin 
 or metal for which they call. They are more convenient 
 to handle than metal and do not involve any danger 
 except that of absolutely reckless dishonesty and viola- 
 tion of pledges on the part of the government ; a vio- 
 lation which is not likely to occur with deposits thus 
 specifically appropriated. The gold and silver certificates 
 in the United States, and (to all intents and purposes) 
 the notes of the Bank of England (see chapter viii), are 
 of this description. 
 
 2. Redeemable paper. Like the coin certificate, this is 
 a promise on the part of the government to pay coin ; but, 
 unlike the coin certificate, it is secured only by the general 
 solvency of the treasury department, and not by a specific 
 deposit, dollar for dollar. Experience proves that this is 
 not nearly so safe a reliance as that on which the coin cer- 
 tificate is based. The government, in issuing notes which 
 are secured by the general assets of the treasury, is really 
 doing a banking business, whose safety depends upon the 
 degree in which the administration and the legislature 
 understand the methods of banking. At the very best, 
 
192 MONEY, 
 
 there is danger that the assets on which the government 
 relies for the payment of such notes will fail in an emer- 
 gency. The treasury department is not well constituted 
 for doing a general banking business. The assets of the 
 government are, for the most part, permanent investments 
 of a kind which it is not easy to sell at short notice. When 
 a fiscal emergency arises the dangerous power, possessed 
 by the legislature, of declaring such notes a legal tender 
 even if they are not redeemed, is a constant menace to 
 financial stability. 
 
 3. Irredeemable paper. This is neither more nor less 
 than money on which the government has charged a 
 seigniorage of approximately one hundred per cent. It 
 is subject in an exaggerated degree to all the dangers 
 arising from debased coin. If a coin is debased twenty 
 per cent there is a limit to the issue of such coins by the 
 government. When that issue has gone so far that prices 
 have risen twenty-five per cent,^ the profit to the govern- 
 ment on further issue stops, and the danger from this 
 source reaches its natural limit. But in the case of irre- 
 deemable paper such issues may go on indefinitely, until 
 legal tender provisions are nullified by the refusal of the 
 people to accept the discredited paper. 
 
 § 215. Besides these various forms of government pa- 
 per, the banks of most countries issue notes which are 
 intended to circulate from hand to hand. Except in 
 those comparatively rare instances where bank-notes are 
 made a legal tender, they do not properly come within 
 the definition of money. They are only promises to pay 
 money, which are made by responsible corporations. 
 But the note of a bank is apt to be quite as good as 
 that of the government which charters the bank ; and 
 we find both kinds of paper in circulation side by side. 
 
 The sum total of instruments of circulation which pass 
 
 * If the value of $1 falls to $0.80, things which formerly sold for $1 will 
 now sell for about $1.25. 
 
THE GENERAL PRICE LEVEL, 1 93 
 
 from hand to hand — coin, government notes, and bank- 
 notes — is known as the currency. 
 
 Of equal importance as means of exchange are certain 
 instruments, like bank checks, which do not circulate 
 from hand to hand, but which are cancelled when they 
 have served to settle one transaction, or at most a short 
 series of transactions. The conditions which govern the 
 use of these instruments as substitutes for money are 
 described in the next chapter. 
 
 § 216. The value of money is measured by the quantity 
 of other things which a unit of money will purchase. It 
 varies inversely as the general level of prices. If general 
 prices are high, a given amount of products or services 
 will cost a great many dollars. This of course means 
 that a given number of dollars will buy comparatively 
 few products or services. The purchasing power or value 
 of money is therefore low when the price level is high, 
 and vice versa. 
 
 If the prices of different commodities rose or fell simul- 
 taneously, it would be easy to ascertain the amount of 
 change in the general price level and in the value of 
 money. But the price of each article is subject to inde- 
 pendent variations of its own. Some articles rise while 
 others fall. Under these circumstances the problem of 
 determining the general price level becomes an extremely 
 difficult one. Several different methods have been pro- 
 posed for its solution. Under the method first used, 
 which has the advantage of simplicity, we take the re- 
 corded prices of a number of articles in a market where 
 statistics have been accurately kept for a series of years. 
 We select some one year for a basis of comparison, and call 
 the price of each article in that year 100. We then compare 
 the price of each article in the next year with its price in 
 the year which we have chosen for our basis of compari- 
 son, and take the average of the percentages thus ob- 
 tained to constitute what is known as the index number 
 13 
 
194 MONEY, 
 
 for the year in question. For instance, if we choose i860 
 as our base, and are considering four articles whose prices 
 in 1861 were respectively 98 per cent, loi per cent, 104 
 per cent, and 109 per cent of those in i860, the average 
 recorded price of these four articles in 1861 would be 103 
 per cent of the average for i860. If the level of prices in 
 i860 were represented by the index number 100, that in 
 1861 would be represented by the index number 103. 
 
 The results obtained by this method are somewhat 
 arbitrary, because they depend upon the articles selected 
 for observation. This diflBculty may be partly met by 
 dealing with as wide a range of articles as possible.^ But 
 even when we apply it with the utmost completeness this 
 method is defective, in that it fails to take account of 
 differences in importance between different commodities. 
 It is unfair to let a rise in the price of pepper offset a cor- 
 responding fall in the price of wheat, because the total 
 expenditure for the one is so much less than for the other. 
 To avoid this difficulty Palgrave has urged the use of a 
 weighted average of prices where each article is given an 
 importance proportionate to the quantity marketed, as 
 recorded in trade statistics. Falkner, working for the 
 United States Senate Committee on Wages and Prices,, 
 has adopted a modification of Palgrave's method, in 
 which he assigns commodities their relative importance 
 not on the basis of total amounts sold in wholesale mar- 
 kets but on the basis of quantities used by the typical 
 workingman's family." In point of fact, the results 
 obtained by an unprejudiced application of the three 
 methods are substantially alike. They all indicate that 
 gold prices in different countries rose from 1850 to 1873, 
 
 * The tables of the Economist and of Soetbeer are perhaps the best and 
 most widely known. 
 
 ^ The method of the United States Senate Committee is open to criticism 
 from the fact that it applies wholesale prices to quantities which are pur- 
 chased at retail. 
 
INDEX NUMBERS, I95 
 
 and have fallen since that time ; so that the index numbers 
 which represent the general price level in 1890 stand 
 not far from the level of 1850. Since the crisis of 1893 
 there has been a further fall, so that the general price 
 level of 1895 is exceptionally low. 
 
 § 217. If we regard our index numbers not as records 
 of wholesale prices but as indications of the enjoyment 
 obtained in spending money or the sacrifice involved in 
 earning it, all the methods which have been employed 
 make the figures for recent years lower than they ought 
 to be. 
 
 1. They deal with payments for products and not for 
 services. The former have fallen in price, owing to labor- 
 saving improvements ; the latter have risen quite as often 
 as they have fallen. A budget of family expenses should 
 include house rent and services as well as supplies, in 
 order to indicate the actual expense of living. 
 
 2. They deal with wholesale prices instead of retail 
 ones. The work of the retailer is one of those services 
 which have been least affected by modern improvements ; 
 and therefore retail prices have fallen relatively less than 
 wholesale prices. 
 
 3. As a rule, the index numbers are based on prices in 
 the wholesale markets nearest the point of consumption. 
 If a producer is obtaining the same price for an article in 
 1895 that he did in 1875, while the cost of railroad and 
 steamship transportation has fallen, the recorded price of 
 the article falls. This tends to reduce the index number 
 correspondingly, and to show an apparent loss to the pro- 
 ducer where there is no real loss to any one except the 
 transportation companies. 
 
 All these causes combine to make the gain to the con- 
 sumer and the loss to the producer from the observed 
 fall in prices much less than a superficial view of the index 
 numbers would lead us to infer. 
 
 §218. The problem of explaining variations in general 
 
196 MONEY. 
 
 prices is even more complex than the problem of deter- 
 mining the amount of those variations. 
 
 If the total amount of business transactions in the 
 United States is $100,000,000,000 in 1895 and $110,000,- 
 000,000 in 1896, this change indicates, from the standpoint 
 of the sellers, either an increase in the extent of the trans- 
 actions themselves or in the general price level on which 
 those transactions are conducted. From the standpoint 
 of the buyers it indicates an increase either in the number 
 of dollars in use or in their rapidity of circulation — in the 
 amount of exchange work which a dollar can perform in 
 the course of a year. The $110,000,000,000 paid by the 
 buyers may be regarded as the product of the amount of 
 money in the country multiplied by its average rapidity of 
 circulation. If there are 1,000,000,000 dollars in use, a 
 volume of business of $1 10,000,000,000 indicates that each 
 dollar on an average changes hands 1 10 times in the course 
 of the year. The $1 10,000,000,000 received by the sellers 
 may in like manner be treated as the product of the 
 physical volume of business multiplied by the general 
 price level. If the price level of 1896 is to that of 1895 as 
 102 : 100, and the volume of business has increased from 
 $100,000,000,000 to $110,000,000,000, it indicates that the 
 transactions of 1896 at the prices of 1895 would have 
 amounted to very nearly 108,000,000,000 ; in other words 
 that about eight per cent of the increase in the monetary 
 transactions is due to changes in the amount of transfers 
 of goods and securities rather than to changes in the scale 
 of prices paid. 
 
 Let the amount of money in the country be represented 
 by J/ and its rapidity of circulation by R. Let the price 
 level of 1896 be represented by P (that of 1895 being 
 treated as unity). Let the transactions of 1896, estimated 
 at the prices of 1895, be represented by T. Then RxM 
 will represent the total of prices paid by buyers and PX T 
 the total of prices received by sellers. The two products 
 
CIRCULATION AND PRICES, 197 
 
 obviously represent opposite aspects of exactly the same 
 series of transactions ; so that as a matter of necessity, 
 
 RXM=PXT 
 
 If we can treat the rapidity of .circulation and the extent 
 of business transactions as constant,* the quantity of money 
 and the general level of prices will be proportionate to one 
 another, 
 
 § 219. This proposition simply states a fact. It does 
 not show the method by which this fact is brought about, 
 nor does it indicate which of the things under discussion 
 is cause and which is effect. When the amount of money 
 is regulated by the discretion of the government, as in the 
 case of irredeemable paper, the changes in quantity of 
 money are the cause, and the variations in price level are 
 the effect. Whatever may be the quantity issued, the 
 prices will tend to adjust themselves to it with great 
 rapidity. If the government inflates the currency ten per 
 cent it is forced to make most of its purchases with that 
 money at a ten per cent advance because active business 
 men know enough of commercial history to be sure that 
 an increase in the number of dollars means a proportionate 
 fall in the purchasing power of each dollar. Among per- 
 sons of less commercial intelligence, prices will not adjust 
 themselves to the new conditions quite so rapidly, and 
 there will be a time when their more astute neighbors 
 make a profit by paying them in an inflated currency at 
 the old scale of prices. But this state of things is quite 
 transient, and the general price level soon adjusts itself 
 to the volume of government paper in circulation. 
 
 When the amount of money is regulated by the dis- 
 cretion of individuals, under a system of free coinage, the 
 case is more complicated. Changes in the quantity of 
 money under this system are at once a cause and an effect 
 
 * Or as rising and falling together. The study of the conditions which 
 afifect rapidity of circulation must be reserved for the next chapter. 
 
198 MONEY. 
 
 of changes in general price level. If we have to choose 
 between the two ways of looking at the matter there is in 
 the majority of cases less error in treating them as an 
 effect than as a cause. The amount of production and 
 coinage of gold is so far afjected by changes in the general 
 price level that it tends to adapt the supply of money to 
 the demand and mitigates changes in general prices far 
 oftener than it causes them. 
 
 § 220. Under a free coinage system, the amount of 
 money is not fixed by action of the government, but is 
 allowed to adjust itself to the wants of trade. If the 
 marginal utility (§ 92) of an ounce of gold in the arts is 
 less than the marginal utility of the products for which it 
 can be exchanged when used as money, there will be a 
 tendency to withdraw gold from the arts and convert it 
 into money. If the utility of gold in the arts is greater 
 than the utility of the things which it will purchase when 
 used as money, the process is reversed ; coin is melted 
 down, and used in gold manufactures. Equilibrium is 
 reached when the marginal utility of an ounce of gold 
 employed in the arts is equal to the marginal utility of 
 the things which that ounce will buy if it is converted 
 into money. 
 
 This is sometimes treated as a solution of the problem 
 of the value of money. It is far from being a full one. 
 It indicates certain conditions which prevail when the 
 adjustment between quantity and price is complete; but 
 it does not adequately describe or explain the processes 
 by which this adjustment is brought about. 
 
 § 221. The average amount of gold coin held in a coun- 
 try as a reserve during the year will be the sum of the 
 average reserves held by individual citizens or corpora- 
 tions. If a nation uses no banking system, each indi- 
 vidual must hold a relatively great reserve of coin.* If it 
 
 ' Equal to his average payments per day multiplied by the average time 
 that elapses between his receipts and payments— ;/>//<j a slight margin for 
 contingencies. 
 
CASH RESERVES AS CAPITAL, I99 
 
 uses bank checks as means of making large payments, 
 the individual can avail himself of a bank account instead 
 of a cash reserve for such payments, and the amount 
 of coin which the nation needs as a reserve to secure 
 prompt settlement of these transactions will be greatly 
 reduced (§ 269). If the nation uses bank notes as well as 
 bank checks, thus making small payments as well as large 
 ones on the basis of bank credit, the reserve necessary 
 to secure the smaller transactions can be similarly re- 
 duced (§ 275). But whether the amount needed be larger 
 or smaller, whether it be held directly in the cash drawer 
 or indirectly in the bank, a certain amount of capital must 
 be kept in the form of money. If an individual tries to 
 reduce his cash capital to a figure lower than this, the 
 loss from doing business with inadequate money is 
 greater than the gain from having more capital to put 
 into machinery or other things which are more obviously 
 productive than money. If a man invests $10,000 in 
 machinery, and keeps a cash reserve of $2000, it is be- 
 cause the loss of profit from reducing his cash reserve to 
 $1000 more than balances the gain in profit which would 
 result from increasing his investment in machinery to 
 $11,000. For the sake of the profit to be derived from 
 holding a money reserve, he causes gold to be treated as 
 productive capital instead of being used in the arts ; just 
 as he withdraws a certain amount of iron or copper from 
 uses which give immediate enjoyment, to those which 
 promise future profit.^ The fact that the gold appro- 
 
 ' The great apparent difference between permanent investments of gold 
 in money and permanent investments of iron in machines, or copper in wires, 
 is due to two facts, i. The investments of gold as capital can be converted 
 back into means of direct enjoyment with little or no loss, while those of 
 iron or copper cannot. 2. The laws governing the utility of the total in- 
 vestment of gold are much more uniform than those which govern the utility 
 of the total investment of iron or copper. But after making allowance for 
 both these differences, the process of using gold as money is far more 
 closely analogous to that of using other commodities as productive capital 
 than most writers have assumed. 
 
200 MONE Y, 
 
 priated as capital consists of individual pieces which cir- 
 culate from hand to hand, obscures the relation between 
 investments in money and investments in machinery, but 
 does not essentially alter it. 
 
 The nation's demand for money, measured as capital — 
 and this is our only practicable way of measuring the 
 quantities of money — is the sum of the cash reserves 
 which the individual members of the nation deem neces- 
 sary for their maximum profit. The higher the general 
 price level, the greater will be the amount of money 
 which it is necessary to hold as a reserve ; for with a high 
 price level a given amount of money will settle a smaller 
 number of transactions. 
 
 § 222. If there is a temporary deficiency of the money 
 reserve, those who have not provided themselves with 
 adequate means of making payments will try to make 
 use of the gold of individuals or nations who have pro- 
 vided themselves with a slight margin above their im- 
 mediate wants. This they will do by offers of more than 
 the usual rate of interest on short time loans. If this 
 high rate of interest on short time loans lasts so long as 
 to neutralize the profit obtained from holding capital in 
 other forms, people will try to sell their goods and securi- 
 ties in order to get gold. This will diminish the price of 
 goods and increase the purchasing power of gold. This 
 change will usually cause some gold to be imported from 
 other countries, and some to be withdrawn from the arts 
 for conversion into coin. Under a free coinage system 
 this process will continue until the stock of gold available 
 for use in the arts has become so reduced and the stock 
 of coin so increased that the marginal utility of an ounce of 
 gold used in the arts is as large as the marginal utility of 
 the things which an ounce of coined gold will purchase. 
 
 The converse case of excess in money reserve shows 
 corresponding effects. If it is temporary, the rate of 
 commercial interest on short time loans falls lower than 
 
SUPPLY AND DEMAND 20I 
 
 that on industrial investments. If it is local, it operates 
 to send gold coin away from the place where it is redun- 
 dant, for the sake of obtaining higher prices somewhere 
 else. If it becomes universal, it causes gold coin to be 
 melted down for use in the arts, until the diminishing 
 utility of an ounce of gold bullion and the increasing 
 utility of the things purchased by an ounce of gold coin 
 reach a common level. 
 
 § 223. The supply and demand of gold money are in 
 equilibrium when the amount of gold which the indi- 
 vidual members of the commercial world find it profitable 
 to hold in the form of productive capital — i. e. money — 
 at a given price level, leaves the remaining supply of 
 gold, available for the consumers, of such a size that the 
 marginal utility of an ounce of gold used in the arts is 
 exactly equal to the marginal utility of the goods which 
 it will purchase at current prices when used as money. 
 
 § 224. This conception of marginal utility in its relation 
 to money requires further illustration. 
 
 If no gold were used as money, the relative prices of 
 gold and wheat would be determined by the enjoyment 
 attending their use and the cost involved in their produc- 
 tion. Some of the supplies of gold could be produced at 
 a cost of I bushel of wheat per ounce of gold, some would 
 cost I.I, some 1.2, some 1.3, some 1.4, some 1.5 bushels. 
 On the other hand, there would be different degrees of 
 utility or enjoyment furnished by different parts of the 
 gold which might be purchased in the market. Some of 
 the gold would give its possessors an enjoyment for which 
 they would be willing to sacrifice 1.5 bushels of wheat, or 
 more ; for increased quantities they would be willing to 
 give but 1.4 bushels, 1.3, 1.2, i.i, or I bushel only. At a 
 ratio of one ounce of gold to 1.5 bushels of wheat, the 
 supply of gold would probably be greater than the de- 
 mand ; at one ounce to i bushel of wheat, it would be less 
 than the demand. If the demand and supply are equal at 
 
202 MONE V. 
 
 a ratio of one ounce to 1.3 bushels, it means that the 
 number of people who make a gain in utility by exchang- 
 ing wheat for gold at this ratio have a supply of wheat 
 corresponding exactly to the demand of those who make 
 a gain by selling gold for wheat on these terms. When 
 this condition is fulfilled, the market price will be 1.3 
 bushels. If this is the normal price (§ 100) as well as the 
 market price, i.e., if the' rates of supply and demand are 
 permanently equal at this ratio, it indicates that the cost 
 of producing the last ounces of gold is 1.3 of the cost of 
 producing the last bushels of wheat supplied to such a 
 market. P'or if the cost of producing an ounce of gold 
 were greater than that of 1.3 bushels of wheat, some of the 
 producers would gradually cease to mine gold and devote 
 their capital to wheat raising ; and conversely, if the cost 
 of producing one ounce of gold were less than that of pro- 
 ducing 1.3 bushels of wheat which are exchanged for it, 
 some of the producers would cease to grow wheat and 
 gradually devote their capital to gold mining. 
 
 § 225. Now suppose that to the uses of gold in the arts 
 is added a new use as capital. A part of the gold which 
 was formerly used for ornament or manufacture will now 
 be used for monetary purposes. The part which is given up 
 to these new purposes will be that for which the purchasers 
 were formerly willing to give the lowest rate ; in the case 
 supposed, 1.3 bushels of wheat. When this part has been 
 coined, none of the users of gold will part with his stock 
 at less than the rate of 1.4 bushels of wheat to the ounce ; 
 nor will he convert it into money unless the scale of prices 
 is such that the coin made from an ounce of his gold will 
 buy 1.4 bushels of wheat. A new equilibrium is estab- 
 lished, not between the demands of those who offer 
 gold in exchange for wheat and those who offer wheat 
 in exchange for gold, but between those who use gold for 
 enjoyment and those who use it as capital. The purchas- 
 ing power of an ounce of gold will go up to the point where 
 
RATE OF PRODUCTION. 
 
 203 
 
 its marginal utility as gold bullion to the consumers is equal 
 to the marginal utility of any of the various articles which 
 the money coined from such bullion would purchase. 
 
 § 226. In this example we have supposed the rate of 
 production of gold to remain unchanged. In point of 
 fact, it would almost certainly increase. As a result of 
 the withdrawal of gold from use in the arts, it would ex- 
 change at the rate of 1.4 bushels of wheat for an ounce, 
 instead of 1.3, and there would be a similar alteration 
 in its ratio of exchange for all other commodities. But 
 this change of ratio would soon increase the production of 
 gold. For there would be some persons who could more 
 profitably grow wheat than mine gold if the ratio of ex- 
 change were an ounce to 1.3 bushels, but who could more 
 profitably mine gold than grow wheat if the ratio were 
 one ounce to 1.4 bushels. And a number of other men, 
 engaged in the production of other commodities besides 
 wheat, would find themselves similarly situated. There 
 would thus be a diversion of capital from agriculture and 
 manufactures to gold mining, and an increased supply of 
 gold which would prevent the change in the relative 
 prices of gold and wheat from being so great as it other- 
 wise would be. In the case supposed, it might readily 
 happen that the production would increase until one ounce 
 of gold exchanged for 1.35 bushels of wheat. 
 
 P, Pi Pa /V 
 
 In Figure 8, let Opjy Op^y Op^, Op^ represent prices of 
 gold expressed in wheat, i. e.j the number of bushels of 
 
204 MONE V, 
 
 wheat for which an ounce of gold will exchange ; and 
 let /fj^ry p^^y p£^, p^q^ represent the quantity annually- 
 used in the arts at these ratios. Let q,m,, q^m^, q^m^^ 
 q^m^ represent the part of the annual product which will 
 be needed for use as money at successive prices.* Finally, 
 let the cost of mining be such that, at the successive 
 prices, the quantities normally produced will be repre- 
 sented by p,s,, p^s^y pjSjy p^^. Then if the gold is used 
 in the arts alone, the normal price will be fixed by the 
 intersection of the curves s^s^ and q^q^ ; but if to this 
 there be superadded a use as money, we shall have a new 
 point of intersection with the supply curve at a higher 
 price and larger quantity. The difference in marginal 
 cost of production (at the limit to which it is profitable 
 to extend mining operations) will be represented by 
 p2p3\ the total quantity produced will increase from 
 p^s to p^^. Of this increased product there will be 
 withdrawn from use as money an amount s^^ ; leaving 
 the amount used in the arts/^^^. 
 
 § 227. In point of fact, the scarcity of gold, so severely 
 felt in recent years, is adjusting itself by an increase 
 in supply. The gold production of the world, which for 
 a number of years (1875-1885) did not vary much from 
 five million ounces, had risen in the year 189 1 to six 
 million, and in the year 1893 to more than seven million. 
 As long as the men who wanted to invest in mines 
 thought that the users of money could be compelled to 
 take the metal that the producers desired to offer, there 
 was a tendency to mine silver rather than gold ; but when 
 it became evident that mining was to stand on the same 
 footing as other industries, and that the producers must 
 consult the consumers' convenience in order to dispose of 
 
 ' This may take the form of a negative quantity ; that is, the need for 
 gold in the arts may rise so high that some will be taken from the stock of 
 money left over from past years. In this case the direction of many of the 
 changes described in this paragraph is reversed. 
 
NORMAL VALUE OF BULLION. 205 
 
 their product, the public soon began to get what it wanted 
 in surprisingly large amounts. If this process continues 
 the present very low price level can be only temporary. 
 
 § 228. In the case of gold bullion or any other form of 
 money of which increasing supplies can be obtained only 
 at increased cost, we thus have a double equilibrium : 
 
 1. Between the marginal utility of the bullion to the 
 man who can just afford to use it in the arts, and the 
 marginal utility of the amount of commodities purchased 
 by a coin of corresponding weight. 
 
 2. Between the cost of production of such bullion and 
 the cost of the production of the articles for which the 
 corresponding amount of coined money is exchanged. 
 
 If the utility of the bullion is temporarily greater than 
 the utility of the articles for which it is exchanged, coin 
 will be melted down and converted into bullion. If it is 
 temporarily less than that of the articles for which it is 
 exchanged, bullion will be taken to the mint for conver- 
 sion into coin. If for a series of years the utility of the 
 bullion is greater than that of the articles for which the 
 corresponding weight of coin can be exchanged, capital 
 will be diverted from the production of those articles 
 and used in mining gold. In the converse case, capital 
 will be withdrawn from gold mining and devoted to other 
 industrial purposes. 
 
 This adjustment, which is simply an application of the 
 general laws of normal price (§ 100) to the special case of 
 gold, furnishes a guarantee against sudden changes of 
 ratio between gold and other commodities. If the gen- 
 eral level of prices goes up so that fewer commodities can 
 be bought for a given weight of gold, the resulting con- 
 version of coin into bullion will diminish the quantity of 
 money and will put prices down. If, on the other hand, 
 the general level of prices goes down, and more com- 
 modities can be bought for a given weight of gold, the 
 resulting conversion of bullion into coin will increase 
 
2o6 MONE V, 
 
 the quantity of money and tend to put prices up. If 
 either of these processes continues for any considerable 
 length of time, until the reserve stocks of coin have been 
 melted into bullion or until the reserve stocks of bullion 
 have been converted into coin, the effect of cost of pro- 
 duction will begin to come into play. If prices continue 
 high, so that a given amount of gold exchanges for a 
 small quantity of other useful things, people will abandon 
 gold mining and produce more of those other things. If, 
 on the other hand, prices remain low, so that a small 
 quantity of gold purchases a large number of useful 
 things, people will increase their production of gold and 
 divert capital from the production of other things for that 
 purpose. These movements will make the change in the 
 relative value of gold and of the articles which gold pur- 
 chases a slow one, and will give time for contracts to be 
 adjusted to any slow changes which may take place. 
 
 That which holds true of gold in this respect holds 
 true of silver or copper or any other relatively indestruc- 
 tible commodity which is subject to the law of diminish- 
 ing return and has been continuously used as money under 
 a free coinage system. 
 
 § 229. In spite of these adjustments, there is always 
 considerable fluctuation in the purchasing power of coin. 
 Enlarged volume of business, or new uses for the metal 
 in the arts, may increase the demand for the metal and 
 make its value go up ; improved methods of doing busi- 
 ness on credit (chapter viii) or new developments in mining 
 will tend to increase the available supply of the metal and 
 make its value go down. In the former case we shall 
 see a fall in the general price level; in the latter case, 
 a rise. 
 
 Such fluctuations in value alter the relative positions 
 of debtors and creditors. If prices rise, a man who has a 
 debt to pay can accomplish his object with less labor ; 
 while the man who receives the payment cannot purchase 
 
THE TABULAR STANDARD. 20/ 
 
 SO many things with the money which he has received. 
 If prices fall, both of these results are reversed. In the 
 former case, injustice may be done to the creditor ; in 
 the latter case, to the debtor. 
 
 § 230. Some writers propose to obviate this injustice 
 by a plan known as the tabular standard. They would 
 have contracts payable in coin, as they now are ; but the 
 amount of such coin for which the creditor might call 
 would under this plan depend upon the price level at the 
 time when the payments became due. When the index 
 number rose (/". e. when the purchasing power of money 
 fell) the amount paid should be larger ; in the reverse 
 case, it should be smaller. It is argued that in this case 
 all the demands of equity would be fulfilled ; and that 
 we could use our present money as a medium of ex- 
 change without subjecting ourselves to its disadvantages 
 as a basis of contracts. 
 
 The execution of this plan would involve considerable 
 machinery. In the first place we should have to obtain 
 common consent as to the table of commodities which 
 would form the basis of the standard ; and in the next 
 place we should have to find an authority that could be 
 trusted to apply it with intelligence and fairness in order 
 to say just what had been the change in purchasing 
 power on the basis of this table. This is extremely diffi- 
 cult to do. The only group of officials which has the 
 technical knowledge necessary for dealing with the prob- 
 lem is connected with the treasury department. But 
 the treasury department is itself habitually a very large 
 debtor, and its awards would, justly or unjustly, be made 
 the objects of suspicion and criticism. In emergencies it 
 would be difficult to trust to their impartiality. Under 
 these circumstances, the uncertainty attaching to the 
 tabular standard makes its practical usefulness seem 
 doubtful. 
 
 § 231. If the tabular standard is considered to be im- 
 
208 MONE Y. 
 
 practicable, there is often an apparent conflict of interest 
 between debtors and creditors in the choice of a metal to 
 be used for coinage. The creditors believe it to be for 
 their advantage to insist on payment in the dearer metal. 
 The debtors believe that it is for their interest to compel 
 the creditor to accept payment in the cheaper metal at a 
 ratio fixed by the authority of law ; and they claim that 
 the interest of the community in these matters coincides 
 with that of the debtor classes. 
 
 § 232. A policy which by allowing free coinage of more 
 than one metal gives the debtor the chance of using the 
 cheaper metal, and which at the same time undertakes to 
 protect the creditor by keeping both metals in concur- 
 rent or at any rate in alternating use, is known as 
 bimetallism. 
 
 Some of the agitation in favor of bimetallism is the re- 
 sult of the efforts of silver mine owners who seek a 
 market for their product on more favorable terms than 
 they can command at present ; and some is connected 
 with an unintelligent demand for increase in quantity of 
 money irrespective of its quality. But there are several 
 serious arguments for the attempt to maintain the two 
 metals in concurrent circulation which must be carefully 
 examined in detail.^ 
 
 § 233. It is urged in favor of such a policy, that it dimin- 
 ishes the chance of fluctuations in the value of money. 
 Its advocates say that if the commercial world uses but 
 one metal as money, anything which greatly affects the 
 
 ^ The reader who wishes to pursue the subject of bimetallism more fully 
 than it is treated in the general references given at the beginning of the 
 chapter will find a mine of information in the report of the ' ' Gold and 
 Silver Commission" of 1888 (Royal Commission appointed to inquire into 
 Changes in the Relative Value of the Precious Metals 1887-88) with accom- 
 panying documents. 
 
 The popular discussions of the silver question from each side contain so 
 many overstatements and even mistakes of fact that they are generally of 
 little use. 
 
ARGUMENTS FOR BIMETALLISM, 209 
 
 production of that metal will cause a large proportionate 
 increase in the volume of coin and a corresponding rise in 
 prices ; and that conversely, if its use in the arts is 
 increased without a change in the conditions of produc- 
 tion, there will be a very decided scarcity and a corre- 
 sponding fall in prices. If, on the other hand, two 
 metals are simultaneously used as money, a change in the 
 production or use of one metal alone will make less pro- 
 portionate difference. At the time of the California gold 
 discoveries there was a large stock of coin added to the 
 currency of the world, and an appreciable rise in prices. 
 How much greater would this increase have been had the 
 new supplies of money been added, not to an existing stock 
 of gold and silver coin, but to the relatively small stock of 
 gold alone ? The comparatively slight effect of the gold 
 discoveries in California and Australia is cited by the 
 advocates of bimetallism as an instance of the salutary 
 action of their principle. Only in the rather improbable 
 contingency of a simultaneous change in the conditions of 
 production and use of the two metals should we have a 
 disturbance comparable in magnitude with that to which 
 a monometallic world is daily subject.^ 
 
 § 234. The bimetallists further emphasize their position 
 by pointing out the evils which have arisen since the aban- 
 donment of the policy of bimetallism by several of the 
 leading nations of the world, in the years immediately suc- 
 ceeding 1870. They say that the attempt to use only a 
 
 ^ A few years ago when the world was pretty equally divided into gold and 
 silver using countries, a nation which maintained both metals in concurrent 
 circulation gave its business men the advantage of whatever stability in 
 value is due to bimetallism, in a very tangible form. Being able to export 
 and import currency freely to or from all parts of the world with which it 
 had dealings, such a country not only protected itself against fluctuations in 
 price, but protected those of its members who were engaged in foreign 
 trade from the more obvious danger of fluctuations in exchange (chapter viii). 
 But so few countries now have free coinage of silver that this argument for 
 bimetallism has lost much of its force. 
 
2IO MONEY, 
 
 single metal has caused an actual contraction of the cur- 
 rency; that the use of gold in the arts is so great that 
 the additions to the world's stock of coin are inadequate 
 to maintain the old price level and properly meet the 
 wants of existing business. They attribute the series of 
 severe industrial depressions during the last twenty-five 
 years to a decline in prices directly consequent upon the 
 abandonment of bimetallism. They show that many of 
 the staple commodities have fallen in price concurrently 
 with the fall in silver. They claim that the gold currency, 
 which is now the only available basis of contracts, has 
 appreciated ; that each unit of money will purchase more 
 commodities ; and conversely, that an increased amount 
 of commodities is required in order to fulfil an agreement 
 which has been made in terms of money. A contract 
 which calls for the payment of a hundred dollars or a 
 hundred pounds sterling in return for past services, puts 
 the man who pays the money in a worse position, and 
 the man who receives it in a better position, than was 
 contemplated at the time those services were rendered. 
 Every man who borrowed money with the expectation 
 of producing commodities as a means of paying his debts 
 finds himself in worse financial circumstances than he had 
 any reason to expect. The result has been a loss to the 
 debtor and a gain to the creditor, a loss to the active busi- 
 ness man and a gain to the one who sits quietly at home 
 and receives interest. The bimetallists urge that this loss 
 is at once unjust and destructive ; unjust as between man 
 and man, destructive to the active prosecution of business 
 enterprise throughout the community. 
 
 § 235. They also urge — and this is in some respects 
 their strongest argument — that a slowly depreciating cur- 
 rency is better than a slowly appreciating one. We have 
 seen how, in the present tendency toward under-consump- 
 tion, the contraction of expenditure for the sake of 
 profits which are expected but not always realized forms 
 
FALL IN PRICES NOT UNIVERSAL. 211 
 
 a source of danger to the community ; and how, for the 
 moment at any rate, an inflation of the currency may con- 
 tribute to the better utilization of national capital by 
 increasing national consumption. The bimetallist claims 
 that a slowly depreciating currency maintains this health- 
 ful process without the reaction which follows reckless in- 
 flation ; and that an appreciating currency, such as gold 
 appears to be, intensifies all the evils incident to the 
 modern passion for over-investment.* 
 
 § 236. To these charges the monometallist replies, in 
 the first place, by denying most of the allegations of the 
 bimetallist concerning the amount of appreciation of gold. 
 He can show that the fall in prices chiefly affects those 
 articles where new processes have economized the labor 
 of production and distribution. He can point out many 
 commodities which have fallen but little and a number 
 that have actually risen. The articles which have most 
 conspicuously fallen in price belong to two classes: (i) 
 
 ' Besides these arguments there are two sentiments working in favor of 
 bimetallism, which it will not do to leave unnoticed. One is the feeling 
 that the debtor is more deserving of sympathy and assistance than the cred- 
 itor. The creditor is pictured as a rich financier living on the income which 
 he draws from the struggling debtor. In point of fact, the financiers are 
 apt to be debtors quite as much as creditors. They hold relatively large 
 quantities of stock, as compared with bonds ; their advocacy of the gold 
 standard arises from the fact that it enables them to borrow money at lower 
 rates of interest and in larger quantities. The chief creditor classes of the 
 community are the people who live upon past savings — not usually in very 
 large amounts, — the holders of life insurance, and above all the receivers of 
 salaries and wages. To deem the debtors worthy of encouragement at the 
 expense of these classes is to put a premium on economic recklessness. 
 
 The other sentiment is connected with the feeling that silver mining is an 
 industry which has not been very profitable and that it ought to be helped. 
 The claim is gravely made that 371 grains of silver really costs as much as 23. 2 
 grains of gold and that therefore we ought to pay as much for it. But if 
 consumers do not want an article, the high cost is a reason against stimu- 
 lating its production, and the theory that a man may use the power of the 
 government to compel people to buy a thing they do not want at the price 
 which it has cost him, is socialism of the extremest type. 
 
212 MONEY, 
 
 Products like steel or sugar, in whose preparation there 
 have been marked improvements during the period in 
 question, enabling a given number of producers to in- 
 crease their output and compelling as well as justifying a 
 fall in price. (2) Products like wheat, whose improved 
 transportation facilities have greatly widened the area 
 from which trade centres could draw their supplies, and 
 have increased the intensity of competition between 
 different producers. Where one or the other of these 
 causes has not been conspicuously present, prices have 
 been quite as apt to rise as to fall. We see this exempli- 
 fied in goods which are mostly consumed at home, like 
 eggs ; in goods in which there is little international com- 
 petition, like corn ; and even in goods which form the 
 subject of international trade, like india-rubber, in case 
 there have been no new sources of supply or methods of 
 economizing labor. 
 
 § 237. He can also show that the recent years of falling 
 prices were preceded by a corresponding period of rising 
 prices, and can claim that the injustice to debtor classes for 
 twenty years succeeding 1873 was but an offset to a cor- 
 responding injustice to creditors before that time. In 
 point of fact, the amount of such injustice either way is 
 very much less than would appear from looking at the 
 figures of the prices alone. For in times of advancing 
 prices a part of the loss to the creditor was offset by 
 an increase in the interest rate. As prices rose, interest 
 rose. Most of the contracts for the payment of interest 
 were terminable at short enough periods for the creditor 
 to indemnify himself by increased interest charges for any 
 probable depreciation of his principal. Conversely, when 
 prices began to fall, interest fell also. The burden upon 
 the debtor due to the realization of lower prices for his 
 product was in very considerable measure offset by the 
 possibility of borrowing capital at lower interest rates. 
 
 § 238. The monometallist further claims that even if the 
 
EQUITY OF BIMETALLISM QUESTIONED, 213 
 
 prices of many important staples have moved concurrently 
 with that of silver, the price of labor has maintained 
 a more nearly constant ratio to that of gold. He urges 
 that the demands of justice are better satisfied if the dis- 
 charge of a debt requires a fixed amount of labor than if it 
 requires a fixed amount of commodities. The question 
 of equity in his mind resolves itself into this : Must a 
 man do more work to pay a debt than he would have had 
 to do at the time when that debt was contracted ? If 
 this is the case, there is a hardship to the debtor ; if this 
 is not the case, he suffers no hardship. The debtor was 
 not borrowing a certain amount of comfort from the 
 creditor. He was borrowing a certain amount of control 
 of labor. Of that labor and its products he has had the 
 use during the period stipulated. Even if he is compelled 
 to sell the commodities which are the results of that labor 
 at lower rates than he expected, because of the increased 
 efficiency in production which the rest of the producing 
 world enjoys in common with him, this was a risk which 
 he might have foreseen and expected when he contracted 
 the debt. The over-production of goods at unremunera- 
 tive prices was the very thing which he as a business man 
 should have taken care to avoid. That he failed to fore- 
 see it and to avoid it indicates, not a defect in the mone- 
 tary system, but an over-sanguine temperament on the 
 part of the individual speculator or group of speculators. 
 § 239. The monometallist rejects the theory that two 
 metals will necessarily be more stable than one. All 
 depends upon the metal in question. There is at most a 
 slight a priori probability in favor of the concurrent use 
 of two metals if it can be proved practicable. But the 
 gold monometallist urges that any argument based upon 
 this a priori probability is completely overthrown by the 
 facts concerning silver mining in recent years. Even 
 admitting what may be plausibly claimed as to the 
 appreciation of gold, the monometallist urges that this is 
 
214 MONEY, 
 
 far less conspicuous than the depreciation of silver. The 
 marginal cost of gold has gone up a little : that of silver 
 has gone down a great deal. The attempt to maintain 
 bimetallism would have resulted in a rapidly depreciating 
 standard with all the evils of over-speculation incident 
 thereto ; and this would have been a far worse state than 
 that in which the commercial world at present finds itself. 
 
 § 240. He denies that the evil secondary results which 
 follow quick inflation are avoided by a slow and continu- 
 ous process of depreciation. They do not come so soon ; 
 but in his opinion they come just as surely. For while 
 prices are gradually advancing, the more reckless specula- 
 tors come into control of business by offering high rates 
 of interest which they cannot pay unless the deprecia- 
 tion of the currency is still further continued. There is 
 then sure to be a gradual over-production of machinery 
 under circumstances which make its permanent useful- 
 ness out of the question. Such a condition was reached, 
 the whole world over, in 1873, when the depreciation of 
 gold reached its extreme. The monometallist claims 
 that the severity of the depression that followed was 
 not so much a direct result of contraction, as an in- 
 evitable secondary effect of the expansion which had 
 preceded ; one which the demonetization of silver may 
 at most have intensified, but for which it cannot be held 
 responsible as the cause. 
 
 § 241. But the monometallist has a stronger argument 
 than any of these. He claims that the maintenance of 
 bimetallism is impracticable under any of the plans pro- 
 posed by its advocates, and extremely doubtful under any 
 plan whatsoever ; so much so that the uncertainty attach- 
 ing to the future of a bimetallic currency would make it 
 an extremely bad one to adopt. 
 
 We may make three distinct suppositions as to the con- 
 ditions under which bimetallism is attempted : 
 
 I. When the ratio chosen for the coinage of two metals 
 
COINAGE AND MARKET RATIOS, 21$ 
 
 is exactly the market ratio of the price of the two metals 
 at the time. If an ounce of gold sells at the same rate as 
 a pound of silver, the nation which coins each of these 
 two metals, putting sixteen times as many grains of silver 
 into the silver dollar as it puts grains of gold into the gold 
 dollar, will probably have a considerable amount of both 
 metals brought to its mint. But it is improbable that this 
 exact ratio of bullion value, independent of the operation 
 of coinage laws, will be maintained for a long time ; since 
 anything which affects the conditions of production or 
 consumption of either metal is liable in some degree to 
 disturb it. 
 
 2. If the ratio adopted is near the market ratio of the 
 bullion price of the two metals, though not absolutely 
 coincident with it, their concurrent circulation may still 
 be maintained. If, apart from any attempt at bimetallism 
 an ounce of gold would exchange for \6\ ounces of silver 
 instead of i6, it might readily happen that the opening 
 of the mints of a large nation or group of nations to the 
 free coinage of silver at a ratio of i to i6 would so 
 change the conditions of demand and supply of the two 
 metals as to make their bullion value conform to the 
 coinage ratio. For if twenty million dollars of silver 
 were coined yearly under the operations of such an act, 
 twenty million dollars' worth of gold which would other- 
 wise have been needed for coinage would be set free for 
 use in the arts. To call forth a demand for this addi- 
 tional twenty million dollars of gold buillion, some people 
 must be induced to use it under the new conditions who 
 would not have done so under the old ; a result which can 
 only be accomplished by a slight fall in the ratio at which 
 it is exchanged for other commodities. On the other 
 hand, the increased monetary demand for silver would at 
 first cause withdrawals of silver from use in the arts. This 
 would mean that those who now wanted the silver would 
 have to pay a little higher price to get it. This price 
 
2l6 MONEY, 
 
 would stimulate an increased production, but additions to 
 the product being subject to the law of the diminishing- 
 return could only be obtained at an expenditure of a 
 little more labor per unit of product. If the labor, and 
 other elements of expense, needed for the units of added 
 product were appreciably greater than that by which the 
 old demand for silver had been suppHed, this disadvan- 
 tage would soon put a stop to increased production from 
 the mines, and the price of silver would be permanently 
 raised by the additional demand for coinage purposes. 
 Meantime, the increased suppHes of gold set free for use 
 would have made gold mining less profitable, would have 
 thrown some gold mines out of use, and would have left 
 in operation only those where the cost per unit of pro- 
 duct was less. Under those circumstances we should 
 have a new ratio between silver and gold, where more 
 silver was demanded and produced at slightly higher 
 marginal cost, where less gold was demanded and pro- 
 duced at slightly lower marginal cost, and where the final 
 ratio of such cost would be i6 to i instead of i6|- to i. 
 
 The effective operation of this process depends upon 
 the power of the nations which adopt bimetallism to take 
 a sufficient quantity of silver, year after year, to raise 
 the marginal cost of production without driving gold 
 wholly out of use as money. If the annual demand of 
 such nations for currency is small, or if the amount of 
 additional silver which can be produced at a slight ad- 
 vance in price is large, the experiment fails. The greater 
 the quantity of silver which the nations that strive to 
 maintain bimetallism can absorb annually, the better are 
 the prospects of success. The greater the amount which 
 miners stand ready to produce at a moderate advance in 
 price, the larger are the chances of failure. 
 
 The power of legislation to influence the demand for 
 the precious metals is on the whole surprisingly small. 
 People will demand a metal for coinage whose bulk makes 
 
OBSTACLES TO BIMETALLISM, 21/ 
 
 it convenient to handle. If their transactions are small 
 they may use copper as a standard. As they buy and sell 
 more they will use silver. When their business is very 
 large, they will prefer gold. Consequently the relative 
 value of the cheaper metals tends to fall as the amount 
 of coin in use becomes larger.* In eastern countries the 
 ratio of value of gold to silver has been as low as four to 
 one. In Europe in the middle ages it was in the neigh- 
 borhood of twelve to one. For the greater part of the 
 nineteenth century it was fifteen and a half to one. With 
 the development of new mines and new processes since 
 1870 it has risen as high as thirty-two to one. This 
 change of ratio has been accentuated by the action of a 
 number of governments in abandoning the attempt to 
 keep gold and silver in concurrent circulation. But there 
 is no proof — in fact, there is a decided absence of prob- 
 ability — that the various governments could have suc- 
 ceeded in maintaining the old ratio if they had tried to 
 do so.^ 
 
 3. Where the ratio chosen for coinage is far from the 
 market ratio of the bullion the failure of any attempt to 
 maintain bimetallism is certain. The difference between 
 this case and the preceding one may be made clear by a 
 
 ^ If two metals are in concurrent use, an increase in the supply of the 
 dearer metal, by increasing the amount of coin, lessens the monetary utility 
 of the cheaper metal, and makes but a slight change in the ratio of value — 
 witness the trifling effect of the periods of large gold discovery. On the 
 other hand, an increase in the supply of the cheaper metal increases the 
 monetary utility of the dearer metal and makes a great change in the ratio — 
 witness the great effect of the silver discoveries in the seventeenth century, 
 when there was no legislative discrimination against that metal. An 
 increased supply of gold means diminished demand for silver, and a 
 parallel movement of value of the two metals. An increased supply of 
 silver means increased demand for gold, and a divergent movement of value 
 of the two metals. 
 
 ^ The quantity of silver coined in some of the recent years has been 
 greater than at any previous time in the world's history, but has not sufficed 
 to create a demand for the product of the mines at anything like the old 
 prices. 
 
2l8 MONEY, 
 
 concrete illustration. If it takes 1 5 J- days' labor to pro- 
 duce a pound of silver and \6\ days' labor to produce 
 an ounce of gold, a country which has several hundred 
 millions of gold and proceeds to make purchases of silver 
 at 16 to I can so increase the quantity of silver demanded 
 and diminish the quantity of gold demanded, that the 
 marginal cost of the pound of silver and the ounce of 
 gold will soon become equal ; but if it takes 12 days' labor 
 to produce a pound of silver and 20 days' labor to pro- 
 duce an ounce of gold, no amount of regulation is likely 
 to make the 12 days' labor command a price equal to that 
 of the 20 days' labor. The most that can be expected is 
 that a supplementary demand for the products of the 12 
 days' labor should increase their selling price to a point 
 represented by 13 or possibly 14 days' labor, and that a 
 reduction of demand for the products of the 20 days' 
 labor should lower their selling price to a point repre- 
 sented by 19 or 18 days' labor. But we should still be 
 far from reaching an equaHty of value or concurrent use 
 of the two metals as coin at the ratio of 16 to i. Even if 
 the whole world should adopt a ratio of 16 to i under 
 those conditions of production, the chance of a successful 
 issue of such a policy would be extremely problematical. 
 It is more than likely that the whole gold product of the 
 world could be used in the arts, leaving silver alone to per- 
 form the functions of money, without so far lowering the 
 demand for gold and increasing that for silver as to make 
 their price ratio as low as 16 to I. 
 
 § 242. When the coinage ratio for one or more coun- 
 tries is fixed so far from the commercial ratio as to pre- 
 vent the use of more than one metal, we have nominal 
 and not real bimetallism. Gresham's Law comes into 
 operation. The less valuable metal is brought to the 
 mint to be coined and used in paying debts ; the more 
 valuable one is exported or used in the arts for the sake 
 of its bullion value. 
 
BIMETALLISM IN FRANCE. 219 
 
 § 243. The most important case where free coinage of 
 two metals was successfully maintained was in France 
 in the first half of the present century. The conditions 
 were favorable for such an experiment. Production of 
 both gold and silver was slow and equable. There was no 
 likelihood of sudden changes, either in demand or in sup- 
 ply. The French financiers saw that the normal commer- 
 cial ratio of the two metals under the conditions of use 
 then existing was such that 15^ ounces of silver exchanged 
 for one ounce of gold. In 1803 this was adopted as the 
 ratio at which the French mint would coin either metal.^ 
 For nearly fifty years this policy was successfully main- 
 tained. If for a time the price of silver rose, gold 
 was taken to the French mint ; if the price of gold rose, 
 silver was taken to the French mint. The causes for 
 such fluctuations were so slight that a moderate amount 
 of coinage of one or the other metal was sufficient to 
 exercise a very decided compensating action. But in 
 1850, when the California gold discoveries came into 
 effect, there was a distinct fall in the price of gold, due to 
 its increased production. Silver ceased to be coined by the 
 French mint, not on account of any change in the law, 
 but from a change in the commercial conditions. In 
 order to preserve its stock of fractional silver unim- 
 paired, (§ 211), the French Government had to reduce the 
 amount of metal in its smaller coins, which it did by in- 
 creasing the proportion of alloy, the weight of the coins 
 remaining the same. At about this time (1865) Belgium, 
 Switzerland, and Italy, whose coinage systems resembled 
 that of France, joined with her in forming the Latin Union, 
 which has been cited as a most conspicuous example of 
 successful bimetallism. As a matter of fact, the success of 
 the bimetallic experiment was ended before the Latin 
 Union was formed. The bimetallism of the Latin Union 
 
 * This was only the re-adoption of a ratio which had been established 
 in 1785. 
 
220 MONE V, 
 
 was nominal, and not actual. The great bulk of the free 
 coinage under the Latin Union has consisted of gold ; 
 the silver coined under its auspices has almost all been 
 subsidiary. 
 
 Had the cheapness of gold continued, it is highly prob- 
 able that the nominal bimetallism of the Latin Union 
 might have been indefinitely maintained ; but as the 
 Californian and Australian gold fields became somewhat 
 exhausted and new sources of supply of silver came into 
 play, the relative price of gold rose, and that of silver fell 
 correspondingly. People began to take silver to the 
 mints instead of gold. This change was not regarded 
 with the equanimity with which the authorities had 
 seen the substitution of gold for silver. It was in fact a 
 change from a metal which was convenient for use in large 
 transactions to one which was extremely inconvenient. 
 Just as France in 1864 had taken measures to preserve 
 her silver for use in small transactions, she now took 
 pains to preserve her gold for use in large transactions, 
 not of course by diminishing the number of grammes of 
 gold in a twenty-franc piece, but by limiting the amount 
 of silver which she was prepared to coin. The example 
 of France was followed with more or less hesitation by 
 other states in the Latin Union, and in 1876 the prin- 
 ciple of bimetallism was abandoned in. name as it had 
 been twenty years earlier in fact. 
 
 § 244. The other great series of experiments in bimetal- 
 lism was made in the United States. By the coinage act 
 of 1792 the United States offered to coin both silver and 
 gold. Our financiers were, however, less successful in 
 their judgment of the probable commercial value of the 
 two metals than the French authorities, and fixed the ratio 
 at 15 to I, making the dollars contain either 371.25 grains 
 of pure silver or 24.75 grains of pure gold. But 24I- grains 
 of gold bullion was worth more in the world's markets 
 than 371 grains of silver bullion. Where the two things 
 
BIMETALLISM IN AMERICA, 221 
 
 had the same debt-paying power, it was advantageous to 
 use the 371 grains of silver for paying debts and to sell 
 the gold for export or for use in the arts. We had practi- 
 cally nothing but silver in use as coin. This state of 
 things continued until 1834, when the desirability of 
 using gold for large transactions was felt, and the coin- 
 age law was so amended as to make the ratio 16 to i in- 
 stead of 1 5 to I, by changing the weight of gold in a dollar 
 from 24f grains to 23^2^. This overdid the matter. While 
 24f grains of gold had been worth more than 371 grains of 
 silver, ^^-^-^ grains of gold was worth less than 371 grains 
 of silver. It was far preferable to take gold to be coined 
 and sell the silver either for use in the arts or for export. 
 This took place to such a degree that in order to preserve 
 its subsidiary currency the United States was compelled 
 to do what France did some years later. It reduced the 
 amount of silver in its fractional coins in order to pre- 
 vent export, and maintained their value by limiting their 
 issue. From 1853 to 1873 we had nominal bimetallism, 
 but in fact the silver was so over-valued that few silver 
 dollars were coined, and practically none went into actual 
 circulation in the United States. 
 
 § 245. In 1873 the free coinage of silver was abolished. 
 This action seemed to have little importance at the time, 
 particularly as the United States was using neither silver 
 nor gold dollars, but paper ones ; these being worth much 
 less than coined dollars of either kind. But in the years 
 immediately following, the increased production of silver 
 made the price of silver bullion fall until 371 grains 
 of silver were cheaper than a paper dollar. Under such 
 circumstances there was a loud demand for the reenact- 
 ment of the law permitting people to take their silver to 
 the mint and have it coined. This demand was urged 
 both by the silver producers, who wished a market for 
 their product, and by the debtors, who wished an inflation 
 of the currency. They were not strong enough to put 
 
222 MONE V. 
 
 their wishes into effect, but succeeded (1878) in securing the 
 passage of a measure known as the Bland Act, by which 
 the United States purchased and coined two miUion dol- 
 lars' worth of silver per month, the seigniorage on the 
 transaction accruing to the advantage of the government. 
 There was a discretionary power given to the Secretary 
 of the Treasury to purchase twice this amount, but it was 
 never exercised. 
 
 The Bland Act disappointed the expectations both of 
 its advocates and of its opponents. It did not create a 
 sufficient demand for silver to keep the price from fall- 
 ing, as its advocates had hoped. On the other hand, 
 it did not prevent the use of gold currency, as its 
 opponents had feared. The United States was in a 
 strong financial position, both as a people and as a gov- 
 ernment. It demanded, for use in its expanding trade, 
 an increase in currency of more than two million or even 
 three million dollars a month, so that it was able to absorb 
 into its circulation the whole amount of silver coined 
 under the Bland Act, without in the least crowding gold 
 out of use. The government also had so large a surplus 
 that it was able to make the necessary purchases without 
 impairment of its gold reserves. 
 
 § 246. Twelve years later the silver men were strong 
 enough to secure the passage of a more sweeping act than 
 the Bland law. This was known as the Sherman Act of 
 1890. It provided for the purchase of four and one- 
 half million ounces of silver a month, by an issue of 
 treasury notes equal in amount to the bullion value of 
 the silver thus purchased. It was hoped by the friends 
 of the measure that the increased amount of silver pur- 
 chased would send the price of the product up, and that 
 notes based on the bullion value of the silver at the time 
 of the purchase would be secured by a reserve sufficient 
 to protect the government against loss and the currency 
 against depreciation. Had silver not fallen in price these 
 
PURCHASES OF SILVER, 223 
 
 expectations would perhaps have been fulfilled. But the 
 actual working of the measure was far from being satis- 
 factory to any one. A temporary rise in the price of sil- 
 ver brought new mines into use and caused a speculative 
 over-production of silver, which made the price fall lower 
 than it had ever done before. When the Sherman Act 
 was passed the selling price of an ounce of silver was -^ 
 of that of an ounce of gold. Three years later it had 
 fallen to ■^. Meantime, the additional purchases were a 
 burden both to the country and to the government. The 
 country had been able to absorb two million dollars' worth 
 of silver coin monthly without crowding out gold. It was 
 not able to absorb a much larger amount, especially under 
 the adverse financial conditions that followed. Nor were 
 the revenues of the government adequate to make the pur- 
 chases out of surplus income. Extravagant appropriations 
 had so completely destroyed the disposable funds that the 
 payments under the Sherman Act were accompanied by a 
 reduction of the gold reserves in the treasury. In 1893 the 
 supply of silver currency in the country had nearly reached 
 the limit of the demand for such currency ; partly because 
 of the increase in the supply itself, partly because the peo- 
 ple began to distrust it to such a degree that they were 
 making gold contracts and using gold reserves for many of 
 the needs of commercial life. Nor was the government 
 in §1 position to maintain, by force of the treasury reserve, 
 an equilibrium which had become so precarious. Relief 
 was barely obtained by the repeal of the Sherman Act 
 and a return to gold monometallism. 
 
 The experience under the Sherman Act is extremely 
 valuable as showing how little is the chance of increasing 
 the market price of silver by its forced use as currency. 
 During recent years the world's coinage of silver has been 
 large, but the increased production has been so great 
 as to outrun the monetary demand. The Sherman Act 
 proved beyond a doubt that the United States would be 
 
224 MONEY. 
 
 wholly unable to maintain bimetallism at i6 to i, or any 
 ratio approximating to this figure.' 
 
 § 247. Those who see the impracticability of bimetallism 
 at a fixed ratio, on account of uncertainty in the volume 
 of silver production, but who at the same time deplore 
 the contraction of the currency which they believe to be 
 incident to the adoption of gold monometallism, have 
 several plans to propose : 
 
 1. Free coinage at shifting ratios, to be determined 
 from time to time as the conditions of the market may 
 change. 
 
 The practical difficulties connected with the execution 
 of this plan are very great. It would make a complicated 
 currency system instead of a simple one, and would offer 
 government authorities a constant temptation to meddle 
 with the currency to their own advantage and to the dis- 
 advantage of others. If an attempt were made to regu- 
 late these matters by international agreement, the friction 
 attendant upon the operation of such agreements would 
 inevitably be very great. 
 
 2. Large coinage of silver by a number of nations to 
 supplement any deficiency in the gold supply, the issue 
 of such silver being limited by statute to an amount 
 which would not drive gold wholly out of circulation. 
 
 This was practically the position of the United States 
 from 1878 to 1893. Every nation does this to some 
 extent by the use of subsidiary silver. The attempt 
 to carry out the policy on a larger scale, as a means of 
 keeping the volume of the world's currency large, subjects 
 the nations that undertake it to dangers like those suffered 
 by the United States under the Sherman Act. A com- 
 mercial crisis may make an amount of silver coin which 
 it is easy for a nation to carry during one year exceed- 
 
 ' Besides the references at the beginning of the chapter, see F. W. Taus- 
 sig's excellent little book on " The Silver Situation in the United States," 
 New York, 1893. 
 
S YMME TALLISM, 2 2 5 
 
 ingly difficult to carry during the next. This liability is 
 intensified by the creation of a number of contracts in 
 which the commercial world nullifies the action of the 
 government and uses the metal it wants, independently 
 of legal tender clauses. 
 
 3. Symmetallism^ under which the unit of currency 
 would consist not of a certain weight of either metal, but 
 of a certain weight of both metals combined. Instead of 
 saying that a dollar should consist of 23.2 grains of gold 
 4)r 371.25 grains of silver, we might say that it should 
 ■consist of 1 1.6 grains of gold and 185.625 grains of silver. 
 Of course the ratio of weight and valuation of the two 
 metals might be wholly different from what it is in this 
 illustration without altering the principle. 
 
 The advocates of this system, which has been indepen- 
 dently suggested from several quarters, urge that it offers 
 all the advantages of bimetallism while reducing its dan- 
 gers to a minimum. The reply of the gold monometallist 
 is that these advantages of bimetallism are not so great as 
 to warrant us in exposing ourselves to even a fraction of its 
 dangers ; that the artificial character of the system opens 
 the door for abuse of government powers ; and that unless 
 it were adopted by concurrent action of all the commercial 
 nations of the world, it would give rise to fluctuations in 
 exchange and complications in the fulfilment of inter- 
 national contracts which would more than neutralize any 
 benefits which we might expect from it. 
 
 4. Free coinage of silver at the old ratio of 16 to I, or 
 even 15 J to i, regardless of what becomes of gold. 
 
 This is the policy urged by those who see the evils of con- 
 tracted currency so clearly that they have no vision left for 
 the much worse evils which would follow the adoption of 
 some other plans. They attempt to correct a compara- 
 tively shght ill by an indefinitely worse one. 
 
 § 248. If free silver coinage were adopted we should find 
 ourselves using a currency different from that of the other 
 
226 MONE V, 
 
 nations with which we deal. The currency of the United 
 States would be exposed to the full stress of any future 
 changes in the conditions of silver production. If its sup- 
 plies were stopped, we alone should have to bear the con- 
 traction ; if its supplies were increased the whole inflation 
 would come upon our markets.^ As matters stand at 
 present, an increase of a supply of gold in one country 
 causes a momentarily higher price level in that country, 
 but this high price level makes it a good market to sell 
 in and a bad market to buy in. People bring goods from 
 abroad and take away gold. Prices adjust themselves 
 nearly to their normal level. If the world's increase in 
 gold coin has been so large that the whole effect cannot 
 be neutralized in this way, the change, such as it is, is 
 shared by the different trading countries alike, and does 
 not affect their commercial relations one with another, 
 either in the matter of imports and exports or in the more 
 important matter of interest payments. But if we used 
 a different currency from that which was accepted by the 
 nations of Europe, we could not dispose of a surplus ex- 
 cept with great delay and inconvenience and after fluc- 
 tuations in prices almost if not quite as great as those 
 to which we were liable in our time of irredeemable 
 paper money. 
 
 § 249. Moreover, such a currency would not be univer- 
 sally acceptable even in our own country ; and the con- 
 traction of credit which would result from its use would 
 outweigh any apparent gain from increase in the cur- 
 rency. No man can be compelled to lend against his will ; 
 and if he is liable to be paid in unacceptable coin, he will 
 either refuse to lend or charge a high rate of interest. 
 Those who lay most stress on the injustice of the de- 
 monetization of silver overlook the fact that the saving on 
 interest payments to the borrowers of this country since 
 
 ^ We should have nominal help from a few silver-using countries, but their 
 demand for additional currency is so small as to be scarcely worth counting. 
 
CHANGE OF STANDARDS, 22/ 
 
 1873 has done much to counterbalance their loss on the 
 appreciation of the principal. The borrowers have taken 
 with one hand and given with the other; the low bor- 
 rowing rate has been dependent on the acceptability of 
 the terms of the loan. 
 
 §250. In. the third place, the change would create a 
 sudden alteration of the relative positions of debtor and 
 creditor which would involve a disastrous violation of 
 equity and give the future credit of the country a blow 
 from which it would require years to recover. Its adop- 
 tion would at once scale down all debts to much less than 
 their present value. Our experience under the Sherman 
 Act shows that free coinage on the part of the United 
 States, or any single nation, could hardly be expected to 
 raise the cost of a silver dollar to a point much higher 
 than two-thirds of the cost of the present gold dollar. 
 The resulting depreciation of the dollar would from its 
 suddenness be infinitely worse than any gradual appre- 
 ciation which has taken place during the last twenty 
 years. 
 
 It is not a question whether it would have been more 
 equitable to have had continuous free coinage of silver 
 and let people adjust their contracts and interest rates 
 accordingly, but whether we can properly scale down to 
 a silver basis contracts which were made under the ex- 
 pectation that. the country would be on a gold basis. 
 Such a change once made would create a liability of 
 similar changes in the future, and would make the nego- 
 tiation of loans or of long-time contracts enormously 
 difficult. Any apparent gain to the debtors would be 
 much more than offset by the difficulty of borrowing 
 capital in the future ; a difficulty which could be avoided 
 only by abandoning the use of a discredited currency and 
 employing some other standard than the legal tender 
 fixed by statute. 
 
 § 251. Even greater dangers than those connected with 
 
228 MONEY, 
 
 the free coinage of silver are involved in the proposal that 
 the government should undertake to furnish the people 
 the quantity of money that may be needed by the issue 
 of paper which is a legal tender. Some of the plans for 
 this purpose arrange for the assumption of banking func- 
 tions by the government ; these are discussed in the next 
 chapter. Others contemplate the direct issue of legal 
 tender notes without the pretense of a banking reserve. 
 Under each and every plan the existence of a currency 
 whose volume and purchasing power are regulated by 
 the discretion of the government exposes the people to 
 the most serious dangers. 
 
 Three motives combine to cause unwise and spasmodic 
 inflation of paper money of this kind : 
 
 1. A fiscal motive which leads governments to issue 
 such money as a means of paying expenses without taxa- 
 tion. 
 
 2. A constant pressure from the debtor classes, which 
 form a large and frequently a most influential element in 
 the body politic, for an increased volume of legal tender 
 money. 
 
 3. A general popularity of such issues among those who 
 look only at surface efTects, and who observe a certain 
 temporary prosperity to which they give rise, without 
 foreseeing the inevitable reaction, or tracing it back to 
 its proper cause when it finally comes. 
 
 § 252. Whatever momentary ease may be derived from 
 inflation proves to be dearly purchased. If a government 
 resorts to this method as a ready means of settHng cur- 
 rent accounts, all persons who have dealings with the 
 government will make charges for future supplies at 
 prices high enough to cover the risk ; or they may go so 
 far as to insist on payment in coin, which can only be 
 obtained by borrowing at a rate of interest much higher 
 than would have prevailed in the absence of inflation. 
 The history of the United States in the Civil War shows 
 
INFLATION AND LOANS, 229 
 
 how great was the real increase of debt due to the use of 
 paper money. Such instances might be indefinitely mul- 
 tiplied. Events take the same course in the transactions 
 of private debtors. To many of these debtors inflation 
 may give momentary ease. If a man has commodities to 
 sell and debts to pay, anything which increases the price 
 of his goods makes it possible for him to pay a larger 
 amount of debts with a given amount of products. But 
 if he has no such products to sell, he is neither better nor 
 worse off than he was before ; and if he wishes to con- 
 tract new debts he suffers exceedingly from the change. 
 
 §253. The reason for this is not always apparent to a 
 superficial observer. He thinks that he wants to borrow 
 money, and that therefore if there is more money he will 
 find it easier to get. In point of fact, he does not want 
 to borrow money, but capital.^ If he has land to improve, 
 he wishes to invest a certain amount of capital in its de- 
 velopment. If he has a factory to build, he wishes to buy 
 bricks and mortar and machinery and put them into use. 
 If the currency is inflated and the number of dollars in- 
 creased, he will have to borrow more dollars in order to 
 obtain the same amount of capital. If the currency of the 
 country has increased fifty per cent, and the general level 
 of prices has correspondingly risen, making it easier for 
 the old debtors to pay their debts, the borrower who 
 needs $1000 on the old basis will now have to borrow 
 $1500. The demand for money will thus keep pace with 
 the artificial increase of the supply. Meantime, the risk 
 attendant upon lending money will have become very 
 great, since a government which has once begun to in- 
 flate the currency will be liable to do it again. Some 
 men will be unwilling to lend money at all and will insist 
 on using it themselves ; others will demand additional 
 
 ^ There is an exception in a panic or other similar emergency where people 
 are seeking means of payment rather than means of investment. In such 
 cases, issues of money may, for the moment, prevent interest from rising. 
 
230 MONEY. 
 
 rates of interest as a means of insurance against possible 
 loss from further depreciation of the currency. The tim- 
 idity of those capitalists who are afraid to invest at all 
 will enable those who actually do invest to demand and 
 receive these high rates of interest. Instead of lightening 
 the future burdens of the debtor classes, it will tend to 
 increase them ; for capitalists, if they lend at all in a 
 country with " political money," will almost certainly 
 over-insure themselves by demanding exorbitant interest 
 rates. No usury law can stop this process without still 
 further lessening the amount of capital available for 
 borrowers, thereby hindering the development of the 
 country in question. 
 
 § 254. Meantime, any general stimulus to business, 
 which shows itself as an immediate result of inflation, is 
 rapidly exhausted. During the period when prices are 
 rising, there is often great business activity, and products 
 change hands rapidly. Everybody can make so much 
 money by his sales that he does not enquire too closely 
 into the purchasing power of the money thus received. 
 Consequently the products on hand are quickly disposed 
 of, and labor is actively employed to make new ones. The 
 public enjoyment is large in proportion to the public 
 capital because people spend freely and content them- 
 selves with a small real profit under the guise of a large 
 apparent one. But when prices have ceased to rise, the 
 illusory character of these profits makes itself felt. Peo- 
 ple find that their investments are not worth what was 
 supposed. A reaction sets in which diminishes the utili- 
 zation of the national capital even more conspicuously 
 than the inflation increased it. An attempt may be 
 made to stave off this reaction by further issues of cur- 
 rency ; but there soon comes a time when these issues 
 are discredited and when the reaction becomes more 
 severe from the efforts which have been made to post- 
 pone it. The stimulus of inflation is like that of alcohol 
 
INFLATION AND WAGES. 23 1 
 
 or opium ; the ensuing depression can be temporarily 
 averted by increasing the dose, but at the expense of 
 making the final collapse more ruinous. 
 
 § 255. Under these circumstances, the proportion of 
 legitimate transactions is diminished, and the amount of 
 speculative or gambling transactions largely increased. 
 Business becomes less of a certainty and more of a game. 
 The whole country becomes poorer under conditions 
 which prevent conservative borrowing and safe invest- 
 ment. Perhaps the greatest sufferers of all are the work- 
 ing classes. They accept gladly an increase in money 
 wages, not noticing that the purchasing power of that 
 money has decreased faster than its nominal amount has 
 increased. An examination of statistics during the Civil 
 War shows that under inconvertible paper currency, 
 though the nominal wages of the workmen increased con- 
 siderably, the amount they could purchase with a day's 
 wages was decidedly reduced. And if the speculative ac- 
 tivity under these circumstances sometimes causes the 
 working force of the community to be more fully em- 
 ployed than it was before, it is followed by a reaction 
 and a period of unemployment whose burdens more than 
 counterbalance the transient gain. 
 
 Of all the scientific students of currency questions, 
 there is no one who emphasizes the needs of the debtor 
 classes as vigorously as General Walker; and Walker 
 does not hesitate to say that the man who, having refer- 
 ence exclusively to economic interests, advocates the scal- 
 ing down of debts for the sake of encouraging trade and 
 production, shows himself so ignorant of history as to be 
 a wholly unfit adviser as to the present and the future. 
 
CHAPTER VIII. 
 
 CREDIT. 
 
 Checks and Clearings — Domestic and Foreign Exchange — Influence of 
 Deposit Accounts on Prices — Note Issue and its Dangers — Attempts to 
 Regulate Note Issue — The Government as a Banker. 
 
 C. F. Dunbar: "Chapters on the History and Theory of Banking." 
 New York, 1892. 
 
 W. Bagehot : "Lombard Street, a Description of the Money Market.'* 
 7th ed., London, 1878. 
 
 G. J. Goschen : " The Theory of the Foreign Exchanges." 14th ed., 
 London, 1890. 
 
 Those who wish to study the subject more thoroughly should acquaint 
 themselves with the writings of Ricardo and with those of H. D. Macleod. 
 Still more detailed are the six volumes of Tooke and Newmarch : " A His- 
 tory of Prices and of the State of the Circulation, 1792-1856." London, 
 1838-57. 
 
 § 256. The money which an individual uses in his 
 business, though a necessary part of his capital, often 
 seems like an unproductive one. If he can employ credit 
 instead of cash as a means of making his payments, he 
 has a correspondingly larger amount to spend in machin- 
 ery and other permanent investments whose direct pro- 
 ductive power is more obvious than that of money. What 
 is true of an individual is at least equally true of a com- 
 munity. If capital is scarce, the community makes every 
 effort to use credit instead of money, so as to avoid the 
 necessity of employing any part of its capital for conduct- 
 ing exchanges. If the property of a certain town amounts 
 to $100,000 -and $20,000 of this must be used as a cash re- 
 
 232 
 
REDUCTION OF CASH RESERVES. 233 
 
 serve in order to transact the business of the place securely, 
 the inhabitants often try to avoid the use of the $20,000 
 in every way possible, so as to have the whole $100,000 
 to spend for things directly serviceable in production and 
 consumption, instead of $80,000 only. In other words, 
 they try to get along with just as little actual money as 
 possible. 
 
 § 257. It is sometimes thought that this is a sign of 
 advancing civilization. We are told that people first pass 
 through a regime of barter, where goods are exchanged 
 for goods ; then follows the use of money as a means of 
 transfer; and this in turn, in the highest stages of indus- 
 trial evolution, gives place to credit. This last statement 
 is hardly warranted by the facts. The tendency of recent 
 times seems to be pretty clearly in the direction of an in- 
 creased use of cash in mercantile transactions. It is in 
 semi-civilized countries like Turkey that we see the fullest 
 operation of the credit system. It is doubtless true that 
 highly organized communities do some things on credit 
 which less advanced communities cannot do at all. But 
 when such operations have once become established, the 
 tendency is toward an increasing use of cash in their con- 
 summation ; a practice Which saves time, saves waste, and 
 saves middlemen's profits. Experience shows that the 
 apparent advantages from the use of credit are often out- 
 weighed by less obvious but more real advantages from 
 not using it. 
 
 § 258. The pressure to use little money and much 
 credit makes itself felt in two distinct cases : 
 
 I. In very poor communities, where the obvious needs 
 for consumption are great, money in the cash drawer 
 seems an unnecessary luxury. People are apt to spend 
 all they have, and trust to getting more when more is 
 needed. In this way they overreach themselves. They 
 leave too little for effective use as a medium of exchange. 
 By spending every cent they possess, they hamper 
 
234 CREDIT, 
 
 production and exchange by constantly keeping their 
 cash reserves at too low a figure ; somewhat as the 
 improvident operative, who spends every dollar before 
 he has earned it, keeps himself constantly in the power 
 of credit stores which charge him an unfairly high rate for 
 his accommodation. In a community of this kind we 
 find an inadequate supply of money, a very low level of 
 prices for cash, a much higher level of credit prices, and a 
 commercial system so uncertain and cumbersome as to 
 prevent people from serving one another most effec- 
 tively and from selling their products in outside markets 
 at the best advantage. 
 
 2. Another cause of scant money supply is exemplified 
 in communities of active producers. Such people spend 
 their money, not for immediate personal consumption, 
 but for various forms of capital which will tend to in- 
 crease their wealth in the future. It is not because 
 they are poor that they keep themselves scantily supplied 
 with money, but because they hope to be rich by means 
 of its investment. Where farms, railroads, factories, and 
 other forms of productive enterprise seem to insure their 
 owners a return of ten per cent, the temptation to use 
 too much money in purchasing means of production and 
 leave too little to serve as a medium of exchange is at 
 times quite overwhelming. In such communities there 
 is always an active attempt to develop a credit system 
 which shall serve the place of money. 
 
 § 259. The simplest means of accomplishing this result 
 is the use of account books and offsets. If A purchases 
 stoves of B^ and B purchases coal of A, each transaction 
 creates a debt. If ^'s purchases in the course of a year 
 amount to $100 and j5's purchases to $90, the debt can be 
 settled by the payment of $10, and the use of money 
 thus greatly lessened. But such a process is only avail- 
 able where two people are dealing with one another. If 
 A sells to B, B to C, and C \,o A, a. comparison of the 
 
BANK CHECKS, 235 
 
 books and a system of offsets connected with it would in- 
 volve so much time and uncertainty that it would proba- 
 bly be easier to pay in cash. 
 
 § 260. The system of bank credits has been utilized 
 to ipeet this difficulty. Suppose that A, By and C all have 
 deposits in the same bank. A owes B $100, B owes C 
 $90, C owes A $80. Instead of paying one another the 
 money, each gives his creditor an order or draft on the 
 bank for the amount of the debt. Such an order is known 
 as a check. When B receives ^'s check he takes it to the 
 bank ; and instead of collecting the money he has the 
 sum credited to his account. Against this credit of $icx) 
 we have to offset a debit of $90, which B has drawn from 
 his account to pay C, leaving him $10 better off than he 
 was before. C in like manner has a credit of $90 and a 
 debit of $80 ; while A has a credit of $80 against a debit 
 of $ICK), representing a net reduction of $20 in the value 
 of his deposits. All of these transactions can be settled 
 or " cleared " if the bank collects $20 from A and pays 
 $10 each to B and C. Transactions to the amount of 
 $270 would thus be effected by the use of $20 actual cash. 
 In many instances, even this small amount can be reduced. 
 B and C will leave their money on deposit instead of 
 calling for the cash from the bank ; while A will make 
 good his deficit, not by an actual deposit of cash, but by 
 an excess of credits over drafts in the immediate future. 
 A balance against him to-day will be offset by a similar 
 balance in his favor to-morrow. The necessity for actual 
 payments of cash to or from the bank will be diminished, 
 if the accounts of different depositors are left to run from 
 month to month. 
 
 § 261. If ^, ^, and C deal with different banks, the same 
 process of settling debts without the use of money is 
 effected through the agency of a clearing house. If A 
 has a deposit in the First National Bank, while B has a 
 deposit in the Second National Bank of the same place, 
 
236 CREDIT, 
 
 A pays B by giving him an order on the First National 
 Bank, but B does not take it to that bank for collection ; he 
 takes it to his own bank, and transfers to that bank by 
 endorsement his title to the check, the bank meantime 
 crediting him with a corresponding sum on his deposit 
 account. This check, which was formerly an order from 
 A to the First National Bank to pay $100 to B, is by this 
 endorsement made an order to the First National Bank to 
 pay $100 to the Second National Bank. In the course 
 of the day each bank thus accumulates a large number of 
 orders in its favor against other banks in the same place* 
 These orders or credits are all sent to a clearing house, 
 which does for the different banks the same work that 
 the bank did for its individual customers in the case pre- 
 viously supposed. Any bank' that has an excess of 
 orders in its favor over the orders presented against it 
 is credited with the surplus ; while any bank that has a 
 balance in the other direction is debited with the defi- 
 ciency. By paying these small differences to the clear- 
 ing house the banks can settle their obligations to one 
 another with very little use of actual cash. If the 
 accounts, instead of being settled every day, are allowed 
 to go on for a week or month, the proportion of cash 
 payments to checks cleared becomes exceedingly small. 
 
 § 262. For the successful operation of this system it is 
 not necessary that the different banks should all be situ- 
 ated in the same place. Every large city acts as a clear- 
 ing centre for the country banks in the districts around it. 
 New York, in like manner, acts as a clearing centre for the 
 whole of the United States, and London for the whole of 
 England. If Xin Albany wishes to pay a debt of $100 
 to Fin St. Paul, he sends a check on his own bank in 
 Albany. This check is an order to the Albany Bank to 
 pay $100 to F. F takes it to his bank in St. Paul, en- 
 dorses it payable to the order of that bank, and receives 
 the corresponding sum to the credit of his deposit account. 
 
THE CLEARING-HOUSE SYSTEM. 237 
 
 The St. Paul bank sends it for collection to a bank in 
 New York with which it maintains a deposit, endorsing it 
 to the order of the New York bank, and is credited with 
 a corresponding sum on its deposit account in New York 
 City. The New York bank sends it to the clearing house 
 for collection from some other New York bank which acts 
 as agent for the Albany bank on which the check is 
 drawn, and with which the Albany bank is presumed to 
 have a deposit account. In the New York clearing house 
 it now appears in the form of an obligation from one New 
 York bank to another. It is credited by the New York 
 clearing house to the agent or depositary of the St. Paul 
 bank, and debited to the agent or depositary of the Al- 
 bany bank. The New York bank which is thus debited 
 with the check deducts it from the deposit account of 
 the bank in Albany ; which, in its turn, on receipt of the 
 check, deducts it from the account of its customer who 
 originally signed it. In the New York clearing house, 
 meantime, this check has gone in with a mass of other 
 checks drawn in all parts of the country, and sent to 
 all parts of the country, which in time reach New York 
 in the form of claims of one New York bank on another. 
 These claims are thus settled by the payment, to or from 
 the New York clearing house, of insignificantly small sums 
 of money representing the difference between the credits 
 and debits of individual banks. 
 
 § 263. It is assumed in describing this transaction that 
 the right to receive a given sum of money commands the 
 same price, whether the payment be made in St. Paul, in 
 New York, or in Albany. This assumption is not always 
 fulfilled. If a great many people want money in the 
 West, while comparatively few want it in the East, there 
 will be an excess of checks calling for payments in one 
 direction, and a deficiency in the other. Some money 
 will have to be shipped westward ; and rights to receive 
 money in St. Paul will be worth more than rights to cor- 
 
238 CREDIT, 
 
 responding sums in New York or Albany, by a difference 
 which may equal the cost of such shipment. These 
 differences show themselves in the quotations for *' do- 
 mestic exchange." The bank which makes a payment in 
 St. Paul, where money is scarce, and receives a claim on 
 New York, where money is plenty, must either deduct 
 this difference or pocket the loss. If it is dealing with a 
 regular depositor it will probably do the latter. A loss 
 at one season is likely to be made up by a corresponding 
 gain at another ; and in any event the amount of such 
 loss in domestic exchange is small as compared with the 
 profit which the bank can make from a steady deposit 
 account. 
 
 § 264. In foreign exchange the case is different. The 
 cost of shipment is greater, giving a wider margin of profit 
 and loss ; and the remittances are managed by houses 
 which make them a direct source of income, instead of 
 doing the work for nothing as a means of attracting 
 deposit accounts. 
 
 The bullion value of a pound sterling is $4.86f ; but 
 the right to receive a pound sterling in London cannot 
 always be bought or sold for that sum in New York. 
 This will happen only when the payments which Ameri- 
 cans wish to make in London are approximately equal in 
 amount to those which Englishmen wish to make in New 
 York. In that case the foreign exchange houses which 
 have branches in both cities will sell drafts in each place 
 payable by their branch in the other; and the money 
 received from the sale of the drafts in one direction will 
 furnish the sums needed for paying those in the other 
 direction as fast as they are presented. The competition 
 of different houses with one another will prevent them 
 from doing much more than this ; the profits of such 
 remittances are made on a very narrow margin. 
 
 § 265. If there are more payments to be made in 
 London than in New York, the London houses will find 
 
FOREIGN EXCHANGE, 239 
 
 that they are called on for much money, and will find it 
 hard to sell drafts on New York with which to obtain the 
 means of payment. Their cash reserves diminish just 
 when they need them most. On the other hand, the 
 New York houses find everybody desirous to buy drafts, 
 which may prove a source of embarrassment at the Lon- 
 don end of the transaction. They therefore raise the 
 price of such drafts to $4.89 or thereabouts. It cannot 
 go much higher than this, because two cents and a half 
 covers the various items in the cost of shipping the gold — 
 freight, insurance, etc., — and a man desiring to pay a debt 
 in London will therefore ship the specie rather than pay 
 a rate much above $4.89. 
 
 If, on the other hand, there are more payments to be 
 made in New York than in London, the New York houses 
 are anxious to sell as many drafts as possible ; for they can 
 thus obtain the means of fulfilling commercial engage- 
 ments which their London houses can make with profit. 
 To save the necessity of actual shipment of gold from 
 London to New York, the New York houses will sell 
 drafts as low as $4.83 ; the difference between this and 
 $4.86f representing the expense for freight, insurance, and 
 loss of interest which they would incur by shipping the 
 money. Exchange cannot go lower than this, for any 
 further reduction would make it cheaper for the banking 
 houses to meet their obligations by importing specie. 
 
 § 266. The limits of variation in foreign exchange are 
 largely affected by the rate of discount (interest on short- 
 time commercial loans) * in the two countries. If the rate 
 in New York is higher than in London, there will be a 
 tendency to keep gold in New York for the sake of profit- 
 
 ^ If the interest on industrial investments (as distinct from commercial 
 loans) is enough higher in New York than in London to overcome the disin- 
 clination of English capital to emigrate, we shall see a movement of goods 
 from England to America which is paid for by securities — commercial bills in 
 one direction being balanced by financial transactions which offset them. 
 
240 CREDIT, 
 
 able investment in short-time or demand loans instead of 
 shipping it to London. Such a difference of interest rate 
 will retard the movement of gold from New York to 
 London when exchange is high, and accelerate the move- 
 ment from London to New York when exchange is low. 
 When a movement of gold from London seems imminent, 
 an increase of the Bank of England rate of discount is 
 sometimes made for the purpose of checking the antici- 
 pated outflow, and is usually successful in accompHshing 
 its end. 
 
 § 26^. Besides selling drafts, the houses engaged in the 
 business also buy exchange, advancing money in New 
 York on bills that are to fall due in London sixty days 
 hence, and vice versa^ at a discount corresponding to the 
 period which must elapse before collection. Besides the 
 profit due to this discount, the foreign exchange houses 
 may reap an advantage from foresight in predicting 
 movements in exchange. For it may happen that the 
 abundance of bills on London in New York to-day which 
 causes them to be sold at a low rate will be followed by 
 a reverse condition two months hence. In that case the 
 collection of the sixty-day bill in London will give the 
 banking house the money at just the right time and place, 
 and put its resources where they are needed. Such anti- 
 cipations of future wants, when correctly made, lessen the 
 necessity for gold shipments and result in public conven- 
 ience as well as in private profit. For, unless a country is 
 a large producer of gold, an outflow of the metal at one 
 season is very apt to be balanced by an inflow at another. 
 The withdrawal of a large supply of money would tend to 
 make prices lower than they were the year before. This 
 would make the country a good market to sell in and a 
 bad market to buy in. It would increase the exports and 
 diminish the imports far more effectively than any tariff 
 ever devised. People would take away goods and leave 
 gold in their place until the old price level was reached. 
 
ARBITRAGE, 24I 
 
 If a foreign exchange house can foresee this prospective 
 return of the metal and content itself with sending rights 
 to money by mail instead of shipping the metal itself, it 
 can save the public the loss involved in the double move- 
 ment of money back and forth. 
 
 § 268. It is not necess'ary that we should receive the 
 money back from the same country to which we send it. 
 If we ship gold to England and England ships it to Brazil, 
 Brazil may ship it back to the United States. And simi- 
 larly, if we remain indebted to England and England re- 
 mains indebted to Brazil on the current exchange account, 
 the whole affair will settle itself without movement of 
 money if Brazil becomes indebted to the United States. 
 The competition of arbitrage brokers (§ 117) with one 
 another enables the most roundabout transactions to be 
 adjusted (usually through the medium of London as a 
 clearing house) at a very small margin of expense, and 
 with comparatively little shipment of specie. 
 
 § 269. The credit system as thus developed affords two 
 quite distinct advantages to the public. In the first place 
 it furnishes a convenient method of payment, which 
 avoids the risk attendant on remittances of specie or 
 even of government notes. In the second place it saves 
 the wear and tear incident to the use of metallic money ; 
 and more important still, it saves the interest on the capi- 
 tal which would be represented by a large mass of unnec- 
 essary coin. It is also attended with profit to the bankers, 
 independent of the commissions which they may charge 
 on exchange. A bank knows that all the people who 
 have the right to draw checks upon it will not do so 
 in a single day, and that even if checks are drawn by 
 a great many of them, others will make deposits which 
 will balance the losses. If every bank had to keep a reserve 
 of coin equal to the total amount of checks that might 
 be drawn upon it, the check and clearing-house system 
 
 would save the public the trouble of handling money, 
 
 16 
 
242 CREDIT, 
 
 but would not save interest on idle capital or give any 
 profit to the bank. But no bank finds it necessary to 
 keep a reserve of one hundred per cent of all its liabili- 
 ties. Experience proves that a bank which keeps a cash 
 reserve equal to one-third, or even to one-fourth of its 
 deposits, is prepared for all contingencies that are likely 
 to arise.' 
 
 § 270. The proper amount of this reserve will vary 
 according to the circumstances of the bank. A savings 
 bank (§ 1 54) can work with a very small amount of cash. 
 It does not encourage its depositors to draw drafts upon 
 it and use them as means of remittance. In fact, most 
 savings banks expressly reserve the right to refuse pay- 
 ment of such drafts for a considerable length of time. 
 The savings bank is essentially a means of investment 
 rather than of convenience in payment or economy of 
 currency. It attracts funds from depositors by the offer 
 of interest. It invests a large proportion of those funds 
 in long-time loans, chiefly on real estate, and it keeps on 
 hand only a sufficient amount of cash or easily collectible 
 assets to meet a few drafts from those persons who wish 
 to reduce their deposit accounts. But a commercial bank 
 of the modern type encourages its depositors to draw 
 checks upon it, and gives them every conceivable facility 
 for using such checks as a means of remittance of money. 
 It must therefore hold a larger reserve of cash to meet 
 such drafts ; and its investments, instead of being of a 
 permanent character like those of a savings bank, are put 
 into assets that will mature quickly, so that in case of any 
 sudden call on its funds in excess of the ordinary cash 
 reserve it can at once secure the means to meet all de- 
 mands. There is no standard proportion between reserves 
 
 ' The theory of modem banking was apparently first formulated by 
 Alexander Hamilton. It is most fully developed in the works of H. 
 D. MacLeod, especially his " Theory and Practice of Banking," London, 
 1856. 
 
DEPOSITS AND DISCOUNTS. 243 
 
 and liabilities. Everything depends on the situation of 
 the bank and the kind of business that it is doing. City- 
 banks, as a rule, need a larger reserve than country banks. 
 Account is taken of this difference in the United States 
 National Banking Law, which requires the banks of the 
 larger cities to keep a reserve of twenty-five per cent on 
 all liabilities, while those in the rest of the country are 
 only required to keep one of fifteen per cent. In places 
 where a large reserve is kept, the banks as a rule do not 
 pay interest on deposits. They cannot afford to do it. 
 Besides, the very existence of a large reserve shows 
 that they are constantly called upon to furnish facilities 
 to their depositors in the payment of debts by check. 
 This consideration is sufficient to attract depositors with- 
 out the offer of interest. The country banks, on the other 
 hand, and the loan and trust companies — which are some- 
 thing intermediate between true banks and savings banks * 
 — frequently offer a small rate of interest on deposits of 
 any considerable amount and duration. 
 
 § 271. In any good banking system, most of the de- 
 posits used as a means of payment by check are founded 
 on the transactions which create the necessity for such 
 payment ; so that the credit given is made proportionate 
 to the occasion for its use. A bank invests its capital to 
 a very great extent in commercial paper. If a retailer 
 wishes to deal in stoves and has not at the moment the 
 money with which to buy those stoves from the manu- 
 facturer, he can pay for them by accepting a bill due at 
 ninety days from the date of the purchase. The manu- 
 facturer takes the bill to the bank, where he endorses it — 
 that is to say, guarantees that he will make it good to 
 
 ^ In the original conception, a trust company should not receive deposits 
 subject to check, but should chiefly occupy itself with handling trust funds, 
 in which case it can make long-time investments like those of a savings 
 bank ; but most of the large American companies of this kind hold deposits 
 subject to check, discount a considerable amount of commercial paper, and 
 perform all the important functions of a bank except that of note issue. 
 
244 CREDIT. 
 
 the bank if the dealer does not — and then has it dis- 
 counted. ' In this transaction the bank credits him with 
 the face value of the bill less ninety days' interest. If 
 the discount rate is six per cent and the bill is accepted 
 for $ 1,000, the bank deducts three months' interest at six 
 per cent, $15, and credits the manufacturer with $985. 
 Theoretically, the manufacturer can have this money 
 given to him in cash at once ; but if he did this without 
 some exceptional reason the bank would not be likely to 
 discount bills for him in the future. He leaves it on de- 
 posit, drawing checks against his account as he has need of 
 funds. The bank is reasonably sure that the total amount 
 of checks drawn in a single day will form but a small 
 fraction of its whole deposits. It therefore keeps but 
 $200 of the $985 as reserve, and can use the balance as a 
 means of discounting other bills. In due time the manu- 
 facturer's account is exhausted ; but at the end of three 
 months when the bill matures, the bank will receive 
 $1,000. This gives the bank a profit on the transaction 
 which compensates it for the trouble and risk involved, 
 and for the loss of interest on the comparatively small 
 reserve which it has been compelled to maintain. 
 
 § 272. Accepted bills are not the only kind of security 
 on which a bank makes advances ; but it is desirable that 
 the bulk of the paper discounted should be of this nature, 
 if not of this form. It should represent a need of money 
 for current transactions on which the profit is to be real- 
 ized in a comparatively short space of time. Whenever 
 there is a pretense of this without the reality there is a 
 decided danger to the bank. When parties are found to 
 be drawing what is known as accommodation paper, — 
 
 ^ This process is sometimes accomplished through the agency of a bill 
 broker, who borrows a large part of his capital from the banks and buys 
 bills created by transactions which he watches more closely than the board 
 of bank directors finds it possible to do. By charging his customers a 
 slightly higher rate of discount than the bank charges him, he can make a 
 small margin of profit on such operations. 
 
AN ELASTIC CURRENCY, 245 
 
 accepted bills on the basis of fictitious transactions instead 
 of actual ones, — well managed banks generally refuse to 
 have further dealings with them. 
 
 § 273. The public service rendered by the banking sys- 
 tem bears some analogy to that of the ordinary commer- 
 cial speculator. The speculator sells products which he 
 does not now have, on the carefully considered expecta- 
 tion of obtaining them in the future. He thus enables 
 the existing stock of such products in the community 
 to be more effectively utilized (§ 1 19). In like manner 
 the banker agrees to deliver more money than he has in 
 hand, with the expectation of obtaining such money to 
 advantage when he needs it. He thus allows the stock 
 of money in the community to be more fully utilized, and 
 makes it unnecessary to carry so large an idle reserve. 
 The bank also performs a work of insurance, though of 
 somewhat different character from that done by the spe- 
 culator. It may be said to insure credit. If it discounts 
 a three months' note and allows the maker to draw checks 
 upon the sum with which it credits him, it protects the 
 public, which accepts such checks, from the risk of sub- 
 sequent insolvency on the part of the maker. It is 
 because this insurance is effective that the public will 
 accept checks where it will not accept promissory notes. 
 
 The use of bank deposits as means of current payment 
 gives elasticity to the currency. To see what this means, 
 let us consider the case of a nation doing its business 
 without bank checks. If progress in the arts, or immi- 
 gration, or an unusually good harvest creates a necessity 
 for an increased number of transactions, a scarcity of specie 
 will probably ensue. A larger volume of business cannot 
 readily be done with the old amount of money, unless 
 means are devised to make it circulate more rapidly. In 
 default of such means prices will fall ; and although this 
 fall in prices wdll probably work its own cure by bringing 
 in specie from other communities (§ 222), the process 
 
246 CREDIT, 
 
 will be attended with some hardship. But if these addi- 
 tional transactions furnish a basis for the discount of bills 
 and increase of bank deposits, they can be settled by 
 drawing checks with comparatively little use of money. 
 The price level will thus remain stable, the need for 
 additional gold will be reduced to a minimum, and the 
 industrial growth of the community can go on unhindered. 
 § 274. In looking at the advantages of this method of 
 payment, we must not lose sight of its dangers. The dis- 
 counts of the banks may not merely keep pace with the 
 growth of business, but exceed it. Credit may be .em- 
 ployed, not as a supplement to money, but as a substitute 
 for it.^ If it becomes easy to obtain the accommodation 
 
 * The view here advanced is intermediate between those of Walker and 
 of Mill. Walker holds that checks have very little efifect on the general 
 price level ; Mill thinks that they have substantially the same effect as 
 money and exactly the same effect as bank notes. 
 
 Walker's position is as follows : The general level of prices is determined 
 by the supply and demand of the medium of exchange — either coin or notes 
 which circulate from hand to hand. On the price level thus created, there 
 are a number of credit payments which cancel obligations without the use 
 of money ; but the credit instruments used for this purpose originate in the 
 transactions to be settled,, and disappear when the business which occasions 
 their use is finished. Therefore checks are supplementary instruments of 
 trade, which do not affect the money supply or demand and can have no in- 
 fluence on prices. (Walker counts bank notes as actual money.) 
 
 Walker seems to overlook the fact that there are a great many transac- 
 tions for which money or checks can be used indiscriminately ; transactions 
 which people will settle by coin if they cannot use bank credit, but which 
 will be paid by checks when public confidence is good and bank accommo- 
 dation ample. The use of credit for this purpose has the effect of dimin- 
 ishing the demand for money. 
 
 Mill apparently goes too far in the other direction. Instead of treating 
 checks as a partial substitute for money, he reasons as though they were a 
 universal substitute. Because an individual can use cash or credit indis- 
 criminately, he argues that a nation can do the same. This inference is 
 not fairly warranted. The individual can convert his credit into cash, with 
 little or no loss, because commercial credit is backed by a considerable cash 
 reserve in the banks, and no single depositor or noteholder has large enough 
 credits to reduce that cash reserve very seriously by his personal demands 
 upon it. He can therefore treat cash and credit as equivalent. But if too 
 
DANGERS FROM ELASTICITY. 247 
 
 at the banks, a large number of transactions will be made 
 on credit. The checks which result from the creation of 
 such bank credit furnish a medium of exchange almost as 
 efficient as money. The over-abundance of a medium of 
 exchange in this form will make.it easier to get money 
 than it was before. This will tend to raise prices. Where 
 this process is once begun it goes on by its own momen- 
 tum. When stoves are worth $10 apiece, a bill for one 
 hundred stoves can be made the basis of a bank credit 
 of only $1,000. But if the use of bank credit raises the 
 general price level, stoves may soon be sold for $12 in- 
 stead of $10; in which case the next lot of stoves will be 
 made the basis for a credit of $1,200 instead of $1,000. 
 This concurrent increase of credits and prices may con- 
 tinue until the liabilities of the banks become dispropor- 
 tionate to their reserves. When the public perceives this 
 there is a sudden shock to confidence and a withdrawal 
 of accommodation which causes far greater distress than 
 would have resulted had the facilities of payment by credit 
 been less elastic at the outset. 
 
 § 275. This danger is very much greater when bank 
 credit takes the form of notes instead of checks. 
 
 We have thus far assumed that when a bank discounts 
 a bill it gives as consideration a credit or deposit account 
 against which checks can be drawn. The bank may, how- 
 ever, with equal advantage to itself, pay out over its 
 counter a corresponding amount of notes. In these notes 
 the bank agrees to pay to the bearer on demand a sum 
 of money corresponding to the face value of the note. 
 From the standpoint of the bank, a note is exactly like a 
 
 many individuals try to do this at the same time, the conversion is often at- 
 tended with difficulty and loss. The domain within which the two things 
 can be used interchangeably is after all a rather narrow one ; and an en- 
 largement of this domain can be effected only by a rather slow change of 
 commercial habits. Therefore, while bank credits have the same kind of 
 effect on prices as do additional issues of money, it will hardly do to assert 
 that they have the same effect. 
 
248 CREDIT. 
 
 deposit account. $985 of notes imposes on thebank pre- 
 cisely the same obligation as $985 of deposits ; namely, 
 the obligation to pay that amount of coin whenever the 
 evidence of the right to receive it is presented. But 
 upon the public the note may have a very different effect 
 from the deposit account. Credit given in the form of a 
 deposit account is exhausted in a short time, because the 
 checks drawn against it soon come back to a bank for 
 redemption. But credit in the form of notes may remain 
 outstanding for an indefinite period. These notes may 
 change hands a thousand times before returning to the 
 bank. Where a check settles a single transaction, a bank 
 note of the same value may settle a very large number. 
 There are also practical limitations to the undue expan- 
 sion of credit in the form of deposits which are by no 
 means equally effective in case of notes. If a bank is 
 tempted to increase its deposit accounts more than the 
 business of the community warrants, and tries proportion- 
 ately to augment its coin reserve, this process soon finds a. 
 natural limit from the difficulty of getting coin. The peo- 
 ple themselves, outside of the banks, need to use a certain 
 amount of coin. If the banks try to encroach on this 
 amount for their own purposes, a stringency makes itself 
 felt. But if the banks are increasing their note issues 
 instead of their deposit accounts the people will use these 
 notes as a reserve in their pocket-books and let the banks 
 withdraw coin from actual circulation without observation 
 on the part of the public. All of these things make bank 
 notes a more dangerous medium of inflation than bank 
 checks, even if a proper reserve is maintained. This 
 danger is greatly enhanced by the probability, almost 
 amounting to a certainty, that in the absence of special 
 legislation the proper reserve will not be maintained. In 
 a new country, where money is wanted, the issuing of 
 notes is regarded as a patriotic function, which promotes 
 the growth of the region and renders it independent of 
 
REACTION FROM OVERCONFIDENCE, 249 
 
 the money lenders of older communities. The presenta- 
 tion of bank notes for redemption; which would compel 
 the banks to keep a proper reserve, is condemned by an 
 unwise public sentiment as tending to injure the growth 
 of local trade. The bank ofificials are thus actively en- 
 couraged to do business with an inadequate supply of 
 cash. The worst abuses of the bank note system have 
 been made with the connivance, if not with the active 
 participation, of the communities in which they were 
 carried out. 
 
 § 2^6. If prices begin to increase, from any cause what- 
 soever, this increase furnishes a ground for an enlarged 
 issue of notes on the same physical volume of business. 
 This goes on until prices and currency both become so 
 inflated that people see the danger, and suddenly refuse 
 to accept the notes as the equivalent of money. If the 
 note issue is very large in proportion to the coin avail- 
 able, such a change of sentiment may come at almost 
 any moment. A bank failure is sure to precipitate it ; a 
 large commercial failure not infrequently has the same 
 result. When prices have risen on the basis of an arti- 
 ficially increased amount of the medium of exchange, a 
 great many people make contracts which can only be ful- 
 filled, and plans which can only be successfully carried 
 out, on the assumption of continued public confidence — 
 not to say over-confidence. Under such circumstances, 
 the whole industrial community lives in daily peril from 
 every kind of event which can shake this confidence. 
 Even a slight shock to credit may result in a severe com- 
 mercial crisis, with a long list of failures, and a long 
 period of industrial prostration. 
 
 § 277. Of course, bank note inflation does not always 
 lead to such serious disaster. It may be stopped before 
 the crisis is reached. If it is purely local in its extent, it 
 is almost certain to work its own cure. If the banks of a 
 single locality put out an unusually large number of notes 
 
250 CREDIT, 
 
 in proportion to the wants of trade, coin is driven to 
 other locaHties so rapidly that people take warning at 
 once. Even if a whole country is flooded with increased 
 bank note issues, the automatic movement of money to 
 other countries, described in the last chapter, may give 
 the alarm in time to prevent more serious evils. But 
 where there is no such outlet, and where, as not infre- 
 quently happens, the whole world is more or less involved 
 in simultaneous inflation, there is no marked change in 
 the movement of coin from one country to another, and 
 no warning is given until it is too late to profit by it. 
 We find that the great commercial crises of the present 
 century have been preceded by periods of inflation which 
 have simultaneously involved a large part of the civilized 
 world. 
 
 § 278. No method of organization of the banking system 
 has been devised which will avoid these evils. Local 
 banks and centralized banks have alike been subject to 
 them. It is urged by the advocates of local banks that 
 they will know what are the needs of their customers ; that 
 they will issue just enough currency to meet these needs; 
 that this currency will only circulate in a region for which 
 it is specially destined ; and that when money becomes 
 redundant in that region, the evil will work its own cure. 
 This argument depends for its force upon the assumption 
 that the local banks of different regions will choose dif- 
 ferent times for increasing their issues. As a matter of 
 fact, there is every probability that they will do it at the 
 same time in a large number of regions. Under such 
 circumstances each community will be able to float an 
 increasing volume of money as long as confidence con- 
 tinues. The local character of the currency may prove 
 an actual disadvantage in more ways than one. As it 
 does not go far from home, it will circulate altogether 
 too freely among people who have a patriotic pride in not 
 presenting it for redemption. In the old days of state 
 
CONTROL OF NOTE ISSUE, 2$ I 
 
 bank issues, the customer who tested the solvency of a 
 bank by presenting its notes for redemption was looked 
 upon in the light of a public enemy. If he wanted coin 
 for foreign travel or any purpose for which the local bank 
 issues were unavailable, he was obliged to explain his 
 reasons in order not to become an object of suspicion. 
 These disadvantages, combined with those which arise 
 from the absence of any power of control on the part of 
 the central government, usually outweigh the merits 
 claimed for local banks of issue. 
 
 § 279. Centralized control of banking and bank note 
 issues has worked somewhat better ; yet it has by no 
 means avoided the evils and dangers which have been 
 described. The United States banks of 1791 and 18 16 
 had a checkered career, and did much to heighten specu- 
 lative activity at the very times when restriction of such 
 activity was most needed. Even the Bank of England 
 has more than once been open to a similar criticism. 
 Experience proves that the mere existence of centralized 
 organization is not enough to prevent abuse unless strict 
 legislative limits are placed on the issue of bank notes. 
 
 § 280. The actual choice between local and centralized 
 banking has usually been determined by political consid- 
 erations rather than by economic ones. When a govern- 
 ment has needed the help of a strong banking house, in 
 order to borrow money or perform other necessary finan- 
 cial operations, it has given special privileges to any bank 
 or group of banks that would help it in this matter, and 
 has correspondingly restricted all bankers outside of such 
 an association. When, however, the immediate financial 
 need is over and the local demands for increased banking 
 privileges prove strong, the government has usually been 
 unable to resist the pressure of such local demands, and 
 has annulled or modified the exclusive privileges given in 
 times of financial stress. Only after long experience of 
 the evils of both systems have nations learned to develop 
 
252 CREDIT. 
 
 well defined lines of legislative policy whieh are guided 
 by far-sighted commercial intelligence rather than by the 
 pressure of political influence. 
 
 § 281. The Bank of England was established in 1694. 
 It grew out of the necessity of the English government 
 for a loan of ;^ 1, 200,000. In 1708 it was given an impor- 
 tant monopoly by an act prohibiting companies of more 
 than six persons, with the exception of the Bank of Eng- 
 land, from issuing notes or bills of credit. This restriction, 
 however, did not extend to Scotland or Ireland. In the 
 latter country especially, bank note issues of large amount 
 were put forth by irresponsible parties. Nor did the 
 restriction of 1708 suffice to prevent the issue of notes by 
 country banks in England. At the close of the last cen- 
 tury, the English bank note currency was so inflated that 
 a crisis took place in 1792 and 1793, and a suspension of 
 specie payments in 1797 which lasted for twenty-four 
 years. In spite of the experience of this period, the 
 directors of the Bank of England made no efficient 
 attempts to check the speculation of the years 1824 
 and 1825. In September of the latter year there was 
 a severe commercial crisis, which at one time threatened 
 to reduce the country to a state of barter. Amid the 
 efforts to prevent the recurrence of such evils there was a 
 temporary movement in favor of decentralized banking ; 
 but it accomplished very little. No radical reform was 
 effected until Sir Robert Peel's Act of 1844. By this 
 Act discretionary power over the issues of paper money 
 was taken out of the hands of English bank author- 
 ities. The country banks were absolutely forbidden to 
 increase the small circulation which they had outstand- 
 ing at the time of the passage of the Act. The Bank 
 of England was allowed to issue ;^ 14,000,000 (afterwards 
 increased to ;^ 16,000,000 to take the place of circulation 
 surrendered by some of the country banks), on the basis 
 of securities, chiefly British Public Funds, which it held 
 
BANK NOTES IN ENGLAND. 253 
 
 in its coffers. Every note beyond this was to be based on 
 an equal amount of coin or bullion placed in the hands of 
 the bank. If the Bank of England has ;^28,ooo,ooo of 
 notes outstanding, it indicates that there are ;£" 12,000,000 
 of coin or bullion on deposit in the bank. It is not 
 allowed to vary its note issue on the basis of the wants of 
 trade, real or supposed. Changes in the amount of notes 
 outstanding are based on equivalent changes in the 
 amount of coin deposited. To all intents and purposes 
 the Bank of England notes are of the nature of gold cer- 
 tificates (§ 214). The Act of 1844 makes the volume of 
 currency in Great Britain depend on movements of coin 
 or bullion, and not on the discretion of bank authorities 
 in issuing notes. 
 
 This Act was vehemently criticised at the time of its 
 passage. Its opponents urged that a currency which was 
 secured by proper banking reserves ^ would be equally 
 convertible with that contemplated by Peel's Act and 
 much more elastic. This criticism found considerable 
 confirmation in England's experience during the crises 
 of 1847, 1857, and 1866. On two of these occasions the 
 restriction on the note issues of the Bank of England was 
 suspended by authority of Parliament, and a discretionary 
 power was given which it had been the purpose of the 
 Act of. 1844 to take away. In the third, measures were 
 taken by bank authorities which were based on the prob- 
 ability of such parliamentary action. In all these cases 
 the bank issued notes more freely than was consistent 
 with the operation of the Act of 1844, thereby relieving 
 commercial stringency and preventing great public cal- 
 amities. Yet this fact, as we shall presently see, does 
 not prove that the Act was useless or undesirable. 
 
 § 282. In Scotland there was no such monopoly of note 
 
 ^ Notes thus protected are said to be secured on the " banking principle," 
 while notes which can only be issued on an actual deposit of coin are pro- 
 tected by what is known as the " currency principle." 
 
254 CREDIT, 
 
 issue. Banks were allowed discretion to advance notes to 
 individual borrowers. The convertibility of the note and 
 the solvency of the bank were thought sufficient safe- 
 guards to prevent the danger of over-issue. The system 
 seems to haye worked well ; but the Act of 1844 was ap- 
 plied to Scotland as well as to England and took away 
 the rights of the banks to make uncovered issues beyond 
 the amount then outstanding. The principle of the old 
 Scotch system is carried out in Canada at the present 
 day. The Canadian banks are allowed to issue notes up 
 to the limit of their capital. Every facility is afforded 
 the note holder to present his notes for redemption ; and 
 it is believed that this facility of redemption furnishes an 
 adequate safeguard against inflation. 
 
 § 283. The Bank of France was established at the 
 beginning of this century. Down to 1848 it shared the 
 right of note issue with certain departmental banks. By 
 laws passed in that year these banks were consolidated 
 with the Bank of France, which has since had a monopoly 
 of the note issues in that country ; a power which it has 
 on the whole exercised with great wisdom. During much 
 of its history there has been no statutory limit to its note 
 issue ; the existing limit is about $800,000,000.* 
 
 § 284. Prior to the consolidation of the German Empire, 
 the banks of that country were necessarily local, and their 
 issues could circulate in comparatively small districts 
 only. The establishment of an imperial bank in 1875 was 
 dictated by considerations of national policy. The local 
 bank note issues were not stopped, but are subjected to 
 strict control, and the imperial bank has charge of nearly 
 two-thirds of the note circulation of the empire. One- 
 third of the note issue must be protected by a coin re- 
 serve. If the difference between the issue and the reserve 
 exceeds $70,000,000,'' an annual tax of five per cent is 
 levied upon the excess. More reliance seems to be placed 
 
 ^ 4,000,000,000 francs. ' 296,000,000 marks. 
 
BANK NOTES IN AMERICA, 255 
 
 on general supervision of the management of the affairs 
 of the bank, and less on specific restrictions affecting the 
 reserve or the note issue, than is the case in England 
 or the United States. 
 
 § 285. The first United States bank was established in 
 1 79 1, chiefly for the purpose of assisting the government 
 in its financial operations. Its charter expired in 181 1 ; 
 but in 1 8 16 a second bank was organized on a similar plan 
 and with the same general objects. The formation of 
 the United States bank simply established an accredited 
 fiscal agent of the government ; it did not prevent note 
 issues by state banks. These issues were large in amount 
 and badly secured. The charter of the second United 
 States bank, owing to the opposition of President Jackson, 
 expired in 1836, but it continued business under the laws 
 of the State of Pennsylvania, and took an unenviable part 
 in the speculations which led to the commercial crisis 
 immediately following. No United States bank was 
 afterward established ; but the issue of state bank notes, 
 usually with inadequate supervision, continued until the 
 Civil War. 
 
 § 286. The first improvement in the state bank system 
 originated in Massachusetts, where a number of banks 
 established a common agency for the redemption of 
 notes, with a view to the prevention of irresponsible 
 issues. A further reform was made in New York in 1838, 
 by a law which compelled the banks to hold United States 
 or state securities, or real-estate mortgages, of an amount 
 equal to the value of the notes issued, and to deposit 
 them with the State Treasurer as a pledge for the ultimate 
 redemption of those notes.' As long as the securities 
 
 ^ This feature of the New York law, which also lies at the basis of the 
 National Bank law, is known as the the "safety- fund system." The 
 plan of redemption used in Massachusetts is commonly designated as the 
 " Suffolk system" from the name of the bank which acted as a general 
 redemption agency. 
 
256 CREDIT, 
 
 thus deposited were worth what they purported to be, the 
 ultimate soundness of the notes was secured. 
 
 § 287. In the years 1863 and 1864, under stress of the 
 Civil War, it became desirable to place large government 
 loans upon the market. With this end in view, special 
 facilities for note issue under national authority were 
 offered to banks that would subscribe to United States 
 bonds; and in 1865 all note issues under any other 
 authority were virtually prohibited by a tax of ten per 
 cent on the use of State bank notes. To avoid the 
 imposition of this tax upon their note issues, banks 
 were compelled to surrender their state charters and ac- 
 cept in their place charters under the National Bank Act 
 of 1864. Under this Act they were to invest one-third 
 of their capital in United States bonds, to be deposited 
 in the Treasury. Besides receiving interest on these bonds 
 as it became due, they were given the right to issue notes 
 to the amount of 90 per cent of the face value of the bonds 
 — unless the bonds should depreciate, in which case the 
 amount of notes was to be correspondingly reduced. 
 Provision was also made for the redemption of national 
 bank notes by the agents of the government, in conform- 
 ity with the Massachusetts system already described. 
 
 This plan made it certain that the national bank notes 
 would be fully as good as the United States bonds on 
 which they were based. Inasmuch as these bonds have 
 always commanded a premium, there has never been any 
 doubt as to the soundness of the currency issued under 
 this system. With regard to its volume there have been 
 many complaints. For some years the banks were anx- 
 ious to increase their circulation, and a limitation on the 
 total amount which they were allowed to keep outstand- 
 ing was considered a hardship. After 1880, on the other 
 hand, the price of the United States bonds became so 
 high as to render the maintenance of the circulation un- 
 profitable, and a large amount was surrendered, reducing 
 
AN EMERGENCY RESERVE, 2$/ 
 
 the total volume of the bank note issues to a figure less 
 than half of that which the law would have allowed.' 
 
 § 288. It is urged, both against the English and Ameri- 
 can systems, that they are based on no philosophical or 
 economic principle. Each of them limits the issue of 
 bank notes by a somewhat arbitrary line. Instead of 
 furnishing an elastic currency that will expand or con- 
 tract with the demands of business, they furnish a highly 
 inelastic one. In England there is no available means of 
 increasing the circulation except by suspending the Act 
 of 1844. It has been pointedly said that the English 
 Bank Act is of use only when it is rendered inoperative. 
 What is done in England by suspension of the Bank 
 Act is done in America by the issue of clearing house 
 loan certificates ' in virtual disregard of the National 
 Banking Law. Each of these things represents a breach 
 of the statutory principle, justified only by a public 
 emergency. 
 
 § 289. Yet the necessity of thus suspending limitations 
 in an emergency does not prove that the limitations 
 themselves are unwise. The most important function of 
 bank note issues, in a country which enjoys the benefits 
 of the check and clearing house system, is to provide a re- 
 serve for emergencies. If we limit note issues in ordinary 
 times we have a reserve power upon which we can fall back 
 in extraordinary times. The objection to unlimited bank 
 note issues is that they leave us no such reserve to fall back 
 
 ' The effect of this reduction was to leave room for other forms of cur- 
 rency to take the place of bank note issues thus withdrawn from cir- 
 culation. 
 
 2 In times of great stringency the New York Clearing House Association 
 has allowed its members to deposit securities with its loan committee and 
 receive in return " Clearing House Loan Certificates" for 75 percent, of their 
 par value. These certificates are accepted in lieu of cash in payment of 
 balances at, the Clearing House, and set a corresponding amount of actual 
 cash free for general business purposes. In the crisis of 1893 other clearing 
 houses resorted to this measure. The whole subject is admirably handled 
 by Horace White, Money and Bankings pp. 244-248. 
 
258 CREDIT, 
 
 Upon. If the currency is made thoroughly elastic in years 
 of confidence, there is no power of stretching it further in 
 days of doubt. If the check system alone has been over- 
 strained, a bank that has the power to issue additional 
 notes can ease public confidence. But if the public de- 
 mand for the use of notes as well as checks has been 
 supplied to the utmost, we have no further reserve at our 
 disposal. For this reason an unphilosophical limit to note 
 issues is far better than no limit at all. People may com-^ 
 plain that the currency does not adapt itself to the need 
 of a certain place or a certain time ; but on ordinary 
 occasions this defect may be made up by an extension of 
 the use of checks. At such times the receiver of a check 
 can readily satisfy himself whether the man who makes 
 payments in this form is financially solvent or not. If he 
 is in danger of failure, there will be special reasons which 
 make such danger imminent, and against whose operation 
 the commercial community can protect itself. But in 
 extraordinary times of stringency, any man is liable to 
 fail ; no man can be sure that his checks will be received. 
 It is in such emergencies that notes must be substituted 
 for checks in order to prevent an unlimited stringency 
 and a disastrous panic. On these occasions additional 
 issues of bank notes are not merely a public conven^ 
 ience, but a public necessity. The advantages of 
 having such a reserve power at command during one 
 month out of every fifty far outweighs the very slight 
 disadvantage of being unable to substitute notes for 
 checks during the other forty-nine. To prevent the re- 
 currence of experiences like those of 1825 in England 
 or 1857 in the United States, the important thing is to 
 have a limit on note issue, even if it be an arbitrary one, 
 and to have it low enough. Whether it should be as 
 stringently drawn as in England, where to all intfents and 
 purposes a bank note is simply a certificate of deposit of 
 gold, or whether we should allow the somewhat wider lib- 
 
GOVERNMENT NOTES, 259 
 
 erty in use in the United States, is open to question. 
 Probably it does not make so much difference with busi- 
 ness as might appear pn the surface. England has fewer 
 bank notes, but this does not cause a less proportion of 
 her business to be done on credit. Checks are substituted 
 for notes, and the proportion of transactions settled by 
 handling of actual coin or coin certificates is even smaller 
 in England that in the United States. Paradoxical as it 
 may appear, the all-important thing is that the bank note 
 currency should not meet the wants of business in ordi- 
 nary times ; that it should not be sufificiently elastic at 
 such times as to be unable to take additional strain in 
 times of emergency.' 
 
 § 290. If, as experience shows, the right of note issue is 
 a dangerous power to place in private hands, some people 
 think that the best way to avoid this danger is by having 
 the government take that power, instead of trying to re- 
 trict somebody else in its exercise. 
 
 Those who urge this view of the matter say that the 
 government by making its own note issues would com- 
 bine protection to the people with profit to the treasury. 
 A bank, by keeping a reserve of thirty per cent of its 
 outstanding notes, earns interest on the other seventy 
 per cent without furnishing any corresponding amount of 
 capital. Why should not the government avail itself of 
 this chance of getting something for nothing ? A fortiori, 
 if the bank has been allowed to secure its note issues by 
 the purchase and deposit of government bonds and thus 
 
 ' Political reasons may sometimes make it wise to allow freer issues of bank 
 notes than can be defended on strictly economic grounds. The advantages of 
 bank issues over government issues are so great that it may become advisable 
 to increase the volume of the former as a means of forestalling a demand for 
 the latter. In these circumstances there is much to be said in favor of any 
 well-considered plan by which the banks can issue, under public supervision, 
 notes based on securities of unquestioned value ; paying a tax on their circu- 
 lation sufficient to furnish a fund which will protect the community against 
 loss to the note-holders from the mismanagement of any individual bank. 
 
26o CREDIT, 
 
 earn double interest on the securities and on the notes 
 outstanding, why should not the government appropriate 
 this profit to itself instead of giving such a premium to 
 the banks ? 
 
 § 291. To these points it may be answered, first, that 
 much of the profit to the banks from such transactions is 
 apparent rather than real. The best proof of this is 
 found in the fact that so many of the national banks of 
 the United States have surrendered their circulation, 
 finding that they could employ their capital more profit- 
 ably in discount and deposit business than in the pur- 
 chase of government securities and the issue of notes. 
 The expense of the operations connected with the busi- 
 ness of note issue is apt to eat up the alleged double 
 profits. In the second place, if the government should 
 take this business out of the hands of the banks, the 
 apparent profit that it would derive from such transac- 
 tions would be outweighed by certain indirect losses. 
 The existence of a large body of outstanding notes, 
 guaranteed by the government and secured only by a 
 fractional reserve, involves a loss to the credit of the 
 government and an increase in the rate of interest which 
 it must pay on all other parts of its national debt. If 
 the government took two hundred million dollars of cir- 
 culation out of the hands of the national banks and held 
 a reserve of sixty million to protect it, it would earn 
 interest at (say) five per cent on one hundred and forty 
 million dollars, or seven million a year. If, however, as 
 a result, of this operation, the rate of interest on the 
 national debt in general were one per cent, higher than 
 would otherwise be the case (and this is not an improb- 
 able supposition), there would be a loss of one per cent 
 on a thousand million dollars. This loss of ten million 
 would outweigh the gain of seven million connected with 
 the assumption of the banking business by the govern- 
 ment, and leave a deficit of three million. The exceed- 
 
DANGERS IN GOVERNMENT NOTES, 26 1 
 
 ingly low rate of interest on the loans to the English 
 government is largely connected with the fact that that 
 government does not guarantee any paper currency on 
 the banking principle, directly or indirectly. England's 
 gain from this source almost certainly outweighs any 
 loss of possible interest which might be earned by float- 
 ing the currency on a fractional reserve. If this is true 
 at ordinary times, it is most conspicuously true in emer- 
 gencies. When the revenues of the government are 
 deficient in amount, the existence of a circulation guar- 
 anteed by the treasury and protected only by a frac- 
 tional reserve constitutes a public danger. This is the 
 time when people will want coin instead of notes, and it 
 is just the time when the government cannot give them 
 the coin in exchange for the notes without resorting to 
 a loan on more or less unfavorable terms. If the gov- 
 ernment finds itself face to face with a war instead of a 
 commercial crisis, these difficulties are multiplied. Every 
 dollar of notes over and above the stock of coin or bullion 
 available for their redemption is under such circumstances 
 a source of weakness to the government when it most 
 needs strengthening. If it has an accumulated supply of 
 cash assets, it can tide over the initial stages of the war, 
 until advantageous arrangements have been made for 
 placing loans and obtaining other means of meeting the 
 extraordinary expenses. But if instead of such a reserve 
 there is an absolute deficiency and an excess of liabilities 
 over assets, the finances are embarrassed from the very 
 outset, and the war burdens indefinitely increased. 
 
 § 292. Side by side with the fiscal reasons why the 
 government should not attempt to carry on the work 
 of bank note issue for itself, there are equally important 
 commercial ones. The treasury department is not well 
 situated for doing a banking business. It has no means 
 of getting currency into circulation where it is wanted, or 
 of retiring it when it is no longer wanted. A bank every 
 
262 CREDIT. 
 
 day handles commercial bills and other evidences of the 
 need of money. Its assets are of such a kind that they 
 can be used either for putting currency into circulation or 
 withdrawing it from circulation. The assets of the gov- 
 ernment are of a totally different character. They furnish 
 no indication 'of the volume of currency needed. If the 
 government attempts to issue notes on the basis of its own 
 property or the property of the country, quick inflation 
 is the result. The limit of power of the treasury to 
 maintain specie payment for such notes is soon reached. 
 When the government comes to that limit, the tempta- 
 tion to suspend specie payments and declare the notes 
 legal tender is enormous. If this is once done there is 
 no limit to the issue of more notes, but a very speedy 
 restriction of their commercial utility. The assignats of 
 the French revolutionary government were avowedly 
 secured by the value of confiscated lands which it held. 
 But this set no limit to their inflation. To avoid over- 
 issues of notes, they must be based, not on some form of 
 property whose value is measured in money, but on some- 
 thing which can be used as money itself and which will 
 at once be taken out of the hands of the government 
 when people begin to distrust the value of government 
 promises. 
 
 § 293. Proposals are occasionally made that the United 
 States government should issue notes on the basis of pro- 
 ducts entrusted to its hands ; the notes to be retired as 
 soon as the products are withdrawn, and the proportion 
 of such notes to the value of the product deposited to be 
 kept low enough to ensure the government against loss 
 and stimulate the owner to dispose of his goods as soon 
 as he conveniently can. The Farmers* Alliance lays great 
 stress on a project of this kind. Such a plan, if carefully 
 carried out, would do very little good or harm. But the 
 chance of its being carefully carried out is not one in a 
 thousand. The motive which lies back of its advocacy is 
 
FALSE EXPECTATIONS OF HELP, 26^ 
 
 the desire to raise prices, coupled with the belief that 
 prices are being unduly depressed by combinations of 
 capitalists who hold money back. It is not the tem- 
 porary difficulty of getting money, but the permanent 
 difficulty of getting more money than consumers are 
 willing to pay, which constitutes the chief cause of 
 demand for government intervention. If safe action on 
 the part of the government does not make the currency 
 larger than it is with safe action on the part of the banks, 
 the whole reason for the scheme will fall to the ground. 
 In itself, it would be neither good nor bad. But it 
 would involve the existence of a system of governmental 
 machinery which with slight changes in the law could be 
 made to inflate the currency under the guise of pro- 
 moting credit ; and this would be a perpetual menace 
 to the commercial stability of a country which adopted it. 
 
CHAPTER IX. 
 
 PROFITS. 
 
 Competition almong Investors — The Rate of Interest — Causes of Variation 
 — Economic Rent — Net Profits and Losses — Commercial Crises. 
 
 E. V. Boehm-Bawerk : " Capital and Interest," " The Positive Theory of 
 Capital." (Innsbruck, 1884, 1889.) Translated by W. Smart. London, 
 1890, 1 891. 
 
 § 294. If only one capitalist is engaged in the produc- 
 tion of an article, any labor-saving improvement which he 
 may apply will give him an obvious advantage. He will 
 sell his product at a high rate, and pay for his labor at a 
 low rate. The difference between the two, which consti- 
 tutes his gross profit, may be very large. 
 
 But the amount of this profit invites other competitors 
 to enter the field. They will increase the supply of the 
 product, and thereby drive prices down ; they will increase 
 the demand for labor, and thus tend to force wages up. 
 This process will continue as long as the excess of price 
 above wages furnishes a sufficient motive to attract capi-' 
 tal ; in other words, as long as the market price is above 
 the normal price. 
 
 § 295. Let Oa represent the minimum price' which any 
 
 ^ This figure differs from those in chapters iii and iv, in having the axes 
 reversed, so that horizontal lines represent quantities and vertical lines repre- 
 sent prices. This has been done because it is customary in mathematical 
 diagrams to represent causes by horizontal lines and effects by vertical ones. 
 In chapter iii we treated price variations as the causes and showed their 
 effects on quantities produced and consumed. Here we treat the quantities 
 produced and consumed as the causes which determine the price that can be 
 charged. Hence the reversal of axes. 
 
 264 
 
COMPETITION AMONG SPECULATORS. 
 
 265 
 
 laborer is willing to accept for his services in producing an 
 article, and Ob the maximum price which any consumer is 
 willing to pay for this article. If only one such thing is pro- 
 
 duced the capitalist will make a very large profit — no less 
 than the whole difference between the minimum cost Oa 
 and the maximum price Ob, But, with industrial as with 
 commercial speculation, the success of one operation paves 
 the way for others (§115); and as these operations become 
 more numerous, the margin of profit becomes narrower. 
 If aa! represents the supply curve of labor (§ 94), so that 
 any desired quantity of labor Oq can only be obtained at a 
 price qy^ and bb' represents the demand curve for the 
 products of this labor, so that the results of Oq can only 
 be sold at the price qx^ it is obvious that the margin yx 
 becomes narrower as the quantity of production increases. 
 When the amount of productive labor reaches Or^ the 
 selling price of the product only equals the amount of 
 wages paid, and there is no possible inducement for capi- 
 talists to extend their operations. In fact, they will not 
 wish to go as far as this point ; for at Or they simply 
 recover what they advance, with no compensation for the 
 risks which are always involved. To assume these risks, 
 they must have some adequate motive. They will not 
 care to employ labor unless they expect it to yield them 
 a margin of profit xy after replacing the capital advanced. 
 If this margin attracts possessors of capital enough to em- 
 
266 PROFITS. 
 
 ploy an amount of labor Oq at a price qy, the product will 
 be furnished to the consumers at a price qx. The com- 
 petition of different sellers will create a market price for 
 products which will render it unnecessary for any buyer 
 to pay more than qx ; the competition of different em- 
 ployers will create, though in less perfect fashion/ a market 
 rate of wages, which will render it unnecessary for any 
 laborer to accept less than qy. 
 
 Under these circumstances we have 
 
 (i) The area Oqya representing the amount which dif- 
 ferent laborers would be prepared to accept. 
 
 (2) The area Oqyw representing the amount which com- 
 petition enables them to get. 
 
 (3) The area Oqxb representing the amount which dif- 
 ferent consumers would be prepared to pay. 
 
 (4) The area Oqxp which competition allows them to pay. 
 
 The difference pxb between what consumers are pre- 
 pared to pay and what they actually do pay may be 
 treated without great error as illustrating the consumers' 
 gain or surplus from the process of production." The dif- 
 ference ayw between what laborers are prepared to receive 
 and what they actually do receive, may in like manner be 
 treated as the laborers' gain or surplus. The area wxyp 
 represents the total profit of the capitalists who have 
 brought the operation to a successful conclusion. The 
 ratio of xy (profit) to yq (capital advanced) " is the per- 
 centage of profit on the transaction. If the time which 
 elapses between the rendering of labor and the sale of 
 the product is one year, this percentage represents the 
 
 ^ This incompleteness of competition for labor is due chiefly to the fact 
 that different producers apply their labor under very different conditions. 
 For purposes of illustration, we have for the moment ignored these dif- 
 ferences. 
 
 * These illustrations find their chief practical use when we study the inci- 
 dence of taxation (chapter xiv). 
 
 ^ Note that the amount advanced by capitalists as a class is neither more 
 nor less than the sum of wage-payments (§ 139). 
 
DIFFERENT ELEMENTS IN PROFIT, 26y 
 
 rate of profit, as it is ordinarily expressed. If the time be 
 longer or shorter than one year, the ratio must be corre- 
 spondingly reduced or increased to bring it down or up 
 to the year's time unit as a basis of measurement. 
 
 § 296. It rarely happens that the case is so simple as 
 this illustration assumes. Different units of product do 
 not as a rule involve the same amounts of labor. In some 
 cases the amount paid in wages is far less than the selling 
 price; in others, the margin is very narrow. Part of 
 these differences may be explained by the difference in 
 time which elaoses between the application of labor and 
 the sale of the product. If one capitalist waits twice as 
 long as another and by so doing obtains double the 
 amount of profit, the rate of profit of the two men is 
 approximately the same. But after making all proper 
 allowances for differences in time, there remain other dif- 
 ferences, due to superior foresight in investment or skill 
 in management, which make the profits on capital, in its 
 different applications, take a very wide range. Instead of 
 a fixed rate of profit, as the result of competition, we find 
 an extremely variable one. 
 
 § 297. Wherever the system of interest prevails, it is 
 customary to explain these differences by analyzing profits 
 into several parts, each governed by laws of its own. If 
 the prevailing rate of interest on good security in a 
 certain market is five per cent, and a concern with an 
 invested capital of a hundred thousand dollars shows a 
 gross profit of eight thousand dollars in the course of a 
 year, we consider five thousand dollars as' interest on 
 the capital invested, and the other three thousand as sur- 
 plus gain. If this surplus is due to excellence of location 
 we call it economic rent ; if it is due to superiority of 
 management we call it net profit. We thus separate the 
 gross profits into three elements : 
 
 (i) A payment for capital Vnov^n as interest, 
 
 (2) A payment for location known as rent. 
 
268 PROFITS, 
 
 (3) A payment for skill known as net profit. 
 
 These distinctions are clear and important ; but there 
 has been a tendency among students of economics to 
 exaggerate their importance and their clearness. In 
 dealing with these various elements of profit we have to 
 guard ourselves against several prevalent fallacies with 
 regard to interest. 
 
 § 298. We must note, in the first place, that interest is 
 not a " natural " return for capital independent of skill. 
 The power of capital to yield interest is dependent upon 
 the skill with which it is managed. A borrower offers 
 interest because he thinks that he has the ability to earn 
 it. The rate which capital commands will depend pri- 
 marily upon the borrowers estimates of their skill in this 
 respect, rather than upon any natural or inherent quali- 
 ties in the capital itself. Of course there is a certain con- 
 formity between the borrowers' estimates for the future 
 and the actual experience of the past ; but this is by no 
 means so close as some writers seem to assume. 
 
 § 299. In the next place, we must beware of confound- 
 ing the causes which have established the system of inter- 
 est with those that determine the rate of interest. It is 
 partly with the object of avoiding this confusion that the 
 writer has chosen to explain the development of the sys- 
 tem in one chapter (§§ 132-157) and to discuss the deter- 
 mination of the rate in another. The system of interest 
 was approved by jurists, because the accumulation and use 
 of capital was advantageous to society as a whole, and in- 
 creased the -public wealth (§ 3). With this end in view, 
 society was willing to offer rewards to those who would ab- 
 stain from destroying wealth and would use it productively. 
 But it is an unwarranted statement that the amount of the 
 reward corresponds or ought to correspond to the sacrifice 
 involved in the abstinence or to the increased utility of the 
 product. The idea that the increase oi public wealth will 
 enable anybody to pay interest is justly characterized by 
 
WHO PA YS INTEREST, 269 
 
 Boehm-Bawerk as a " naive " theory. This naive theory 
 furnishes us a true explanation of the cause of the system 
 of interest ; but it does not touch the questions involved 
 in the determination of the rate. Society is anxious to 
 have a great deal of capital invested for the sake of the 
 resulting gain to the public wealth. It does not under- 
 take to pay a corresponding price, or in fact any specified 
 price whatever, for the capital used for this purpose. It 
 leaves to the skill of the investors the problem of deter- 
 mining what rate they shall pay for the use of one 
 another's capital. 
 
 § 300. For we must constantly note that interest is not 
 paid by society to the capitalists, but by one group of capi- 
 talists to another. It is not paid for capital, but for the 
 control of capital. The rate depends upon the relative 
 number of capitalists who desire such control and of those 
 who are willing to part with it for a fixed consideration 
 guaranteed by some other capitalist. 
 
 In any large industrial enterprise there are usually two 
 classes of investors, represented by the stockholders and 
 bondholders of a railroad. The former class is willing to 
 take large risks for the chance of contingent profits. The 
 latter class wants security of return and is quite willing 
 to abandon possible chances of large gain. The modern 
 system of interest is nothing more than the recognition of 
 these two classes of investors and their mutual relations ; 
 the rate of interest is the outcome of a bargain between 
 them. Interest results from a contract between two capi- 
 talists uniting in a common enterprise. It is a sum paid 
 by one investor to another investor — out of capital, if 
 necessity shall require. If the borrower has not capital 
 enough to cover such contingent necessity, what is called 
 interest really is compensation for risk, and is apt to be 
 made far too small in comparison with the chances of 
 loss on the principal. 
 
 Interest, from the standpoint of the borrower, is the 
 
270 PROFITS, 
 
 price paid for the control of industry. Capital gives its 
 possessors the right to direct the productive forces of 
 society if they will take the speculative risks connected 
 with the uncertainty as to the value of the product. When 
 some of those who unite in an investment are anxious to 
 do this and others are not, the former stand ready to offer 
 the latter a price for such rights of control. Interest from 
 the standpoint of the lender is the price for which he is 
 ready to forego the chances of control which, under the 
 present social system, the ownership of unconsumed 
 wealth gives him. It represents commuted profits. 
 
 § 301. The rate of interest, in its industrial aspect, is 
 neither more nor less than a competitive rate of commuta- 
 tion. It is fixed like any other competitive price, by the 
 self-interest of individuals, in such a way that the demand 
 for loans becomes equal to the supply. 
 
 Nearly all loans are made with the immediate or ulti- 
 mate purpose of investing the borrowed capital in such a 
 way as to enable the borrower to secure a profit — as in 
 undertaking a business enterprise — or to avoid an expense 
 — as in becoming the owner of a home which will save 
 the necessity of paying rent.^ The demand for produc- 
 
 ' There are three other less important sources of demand for loans which 
 require mention at this point : 
 
 (i) A few people desire loans for the pleasure of consumption rather than 
 for their utility in production. They will borrow money to-day which it 
 may be ten times harder to repay to-morrow, because abstinence to-day 
 seems to their imprudent minds a far more serious matter than abstinence to- 
 morrow. The demand for accommodation of this kind is so unintelligent 
 that its amount is but slightly affected by the rate charged. 
 
 (2) A somewhat larger number of people desire loans as a means of meet- 
 ing contracts which they have previously made, and which they cannot 
 otherwise fulfil without selling some of their property at a sacrifice. These 
 loans are sought for the purpose of avoiding a loss rather than of making a 
 profit — if the two things can be said to be distinguishable. They have 
 special importance in times of monetary stringency. The demand for such 
 loans is more affected by changes in the rate of interest than that for con- 
 sumption loans, but less so than that for industrial loans. 
 
 (3) Nations make loans for war purposes, in order to maintain an army at 
 the expense of future taxpayers instead of present ones (chapter xiv.) 
 
THE DEMAND FOR LOANS. 27 1 
 
 tive loans of this kind depends almost entirely upon 
 the rate charged. If a man has intimate knowledge of 
 the details of a business, he knows when to borrow and 
 when to contract his borrowings. His demand for loans 
 arises from the fact that he expects a profit from the con- 
 trol of the capital. As long as this expected profit is 
 greater than the prevailing rate of interest, he will be a 
 borrower rather than a lender. If he thinks that the 
 profit from an enterprise will be seven per cent, and he 
 can borrow additional capital at five per cent, he will be 
 glad to do so. Of course he knows that he may fail to 
 make more than four per cent, in which case his borrow- 
 ing will prove to have involved a loss ; but he also knows 
 that there is a chance of making ten per cent, in which 
 case there is an exceptional gain. If he has confidence 
 in his estimate of seven per cent as the probable rate of 
 profit on a series of transactions, he will not hesitate to 
 borrow at five per cent, or even at six ; believing that the 
 losses on some transactions will be more than balanced 
 by the extra gains in others. 
 
 As the rate of interest becomes higher the number of 
 men who are ready to borrow grows less. If in the case 
 just assumed the rate of interest had been seven per 
 cent instead of five, the man who expected the profit 
 to be seven per cent would have no inducement to 
 borrow ; and if the rate rose to eight per cent he would 
 become a lender instead of a borrower. He would find it 
 to his advantage to commute his profits, instead of taking 
 his chances ; to accept guarantees instead of giving them. 
 A considerable part of the supply of loanable capital 
 comes from business men who are so conservative in their 
 estimates of probable profit that they content themselves 
 with the certainty of a moderate rate which their more 
 sanguine competitors deem inadequate. We may say, in 
 a rough way, that the rate of interest in any business 
 tends to a point where the demand for capital on the part 
 of those who think their profit will exceed that rate 
 
272 PROFITS, 
 
 equals the supply furnished by those who think that it 
 will not/ 
 
 § 302. In point of fact, the rate is a little lower than 
 this. The borrower has a certain amount of trouble in 
 the management of capital, from which the lender is at 
 least partly free ; and this freedom from trouble makes 
 the lender willing to commute at a slightly lower rate 
 than he would otherwise accept, and enables the borrower 
 to get the benefit of this margin. Moreover there is a 
 large class of lenders to whom a sure return is a matter 
 of positive advantage independent of the rate charged. 
 There are a great many people to whom the certainty of 
 five per cent is worth more than an uncertain profit which 
 will probably be higher but which may turn out to be 
 much lower. The positive value of this insurance is such 
 as to make the supply of capital equal the demand at a 
 rate lower than would otherwise be fair or probable. For 
 the offer of a fixed interest rate attracts capital from 
 many investors with whom insurance is a dominant motive 
 instead of an incidental one. These people do not ask 
 what is the average probable profit in any line, but what 
 they can be sure of getting on their loans. They are not 
 prepared to make active investments in industrial enter- 
 prises if they can possibly help it. They simply stand 
 ready to put their capital at the disposal of the borrower 
 who will offer them the best terms consistent with full 
 security. Banks, and particularly savings banks, belong 
 to this class ; so in great measure do life insurance com- 
 panies ; and so do most of the people who have retired 
 from active business and are living on money which they 
 have saved. 
 
 * Some of the receivers of interest, where the contract is what it pretends 
 to be, obtain a surplus from the transaction analogous to that of the con- 
 sumers or laborers (§ 295). They would be willing to lend capital at much 
 lower rates than they actually receive ; but the large demands of the loan 
 market, and the unwillingness of other possessors of capital to lend it at 
 low rates, enable them to get a larger return than they would otherwise exact. 
 
THE SUPPLY OF LOANS. * 2/3 
 
 § 303. We thus have two distinct sources of supply of 
 loanable capital. A part comes from business men who 
 might be borrowers instead of lenders, and who take the 
 latter position only when the interest rate seems too high 
 in proportion to the risk. The amount of capital available 
 from this source is directly dependent on the price offered. 
 Another part comes from people who could not take an 
 active share in the management of industry ; people who 
 lend money as a means of insuring themselves an income 
 and who accept the best terms which they can get. The 
 amount of such capital does not vary with the rate offered 
 — at least not to anything like the degree which is often 
 assumed. Observation does not show that a high rate of 
 interest has very much effect on saving. Some of the 
 motives to save are even stronger when the rate is low 
 than when it is high. If a man wishes to provide himself 
 with an income of $1,000 per year for his own support 
 and that of his family when he becomes unable to work, 
 it is enough for him to save $20,000 if he can get five per 
 cent interest ; but if he can only get four per cent he 
 must save $25,000 in order to secure the required result. 
 It may safely be said of the general fund of savings, that 
 the rate of interest adjusts itself to the amount, rather 
 than the amount to the rate. 
 
 § 304. The thing which is offered by the borrowers in 
 exchange for loanable capital, and which equalizes the 
 supply and demand of such capital, is a rate of income 
 (§ 5). The interest transaction is an exchange of in- 
 come for capital. The rate of interest is the amount of 
 income per year which the owner of capital deems an 
 adequate consideration to induce him to part with the 
 capital. Wealth measured in one way is exchanged for 
 wealth measured in another. If interest stands at five 
 per cent it means that in the judgment of the mercan- 
 tile community, five dollars a year is worth a hundred 
 
 dollars out and out. This judgment or market valuation 
 
 18 
 
274 PROFITS. 
 
 implies that the amounts of capital which people are will- 
 ing to convert into income at that rate correspond to the 
 amounts of income which people are willing to convert 
 into capital/ If the rate of interest is less than five per 
 cent, there will be more people who offer income for 
 the sake of capital, i. e.^ in common parlance, more bor- 
 rowers than lenders. If the rate is more than five per 
 cent there will be an excess of people who offer capital 
 for the sake of income, i. e., more lenders than borrowers. 
 § 305. The general fund of loanable capital owned by- 
 people who desire neither risk nor control tends to 
 equalize interest rates in different lines. There are a 
 number of people who invest part of their money in 
 railroad bonds, and part in real estate mortgages. If 
 railroad interest rates fall, while farm rates remain un- 
 
 ' The valuation which constitutes the basis of the interest rate may be ex- 
 pressed either in the form of a relation between capital and income, as in 
 the text, or in the form of a relation between present and future goods, as is 
 done by Boehm-Bawerk. It makes little difference whether we say that one 
 hundred dollars of capital commands an income of five dollars a year, or that 
 one hundred and five dollars due a year hence is worth one hundred dollars 
 to-day. The former statement regards the transaction as an investment, the 
 latter as a discount. The distinction between them is one of form, not of 
 substance. 
 
 There is a different view of the cause of interest which is held by so many 
 able writers of the Austrian school (Menger, Wieser, Clark), that it demands 
 careful notice. According to this view, the price paid for an article, which 
 represents its marginal utility to the consumer, is distributed among 
 laborers and capitalists on the basis of the marginal utility of the labor and 
 capital which have contributed to its production. If the utility of capital, 
 as represented by its efficiency in producing the article, is higher than the 
 interest charged for its use, more capital will be employed, and longer time 
 allowed to elapse between the rendering of labor and the realization of the 
 product. If the utility of labor in producing additional supplies of the 
 article is greater than the wages charged, additional labor will be em- 
 ployed. These writers conceive of capital and labor as administered in 
 successive doses. As the amount increases, the marginal utility of the doses 
 will diminish. Competition will compel all capitalists to accept rates of 
 interest, and all laborers to accept rates of wages, based upon the produc- 
 tivity of the last dose, which gives an "imputed" value to the whole 
 
ADJUSTMENT OF INTEREST RA TES, 2y^ 
 
 changed, some of these people will direct their new- 
 investments to farms instead of railroads ; increasing the 
 supply of farm loans and diminishing that of railroad 
 loans. If this process were completely carried out, we 
 should have an equalization of the rates of interest in 
 different lines, and the establishment of one general rate 
 of interest for capital as a whole. 
 
 § 306. This equalizing process is never fully accom- 
 plished, partly for lack of time, but chiefly for lack of 
 knowledge on the part of investors. It takes months, 
 and generally years, for property owners as a body to 
 find out where profits really are highest and transfer 
 their investments of capital in amounts sufificient to reduce 
 the rate of profit in those lines to the general level. 
 When the public has found out where the opportunity* 
 
 suppfy both of capital and of labor. This process adjusts the demand and 
 price of labor and capital in such a way that the marginal utility of a dollar 
 spent for waiting (interest) is equal to the marginal utility of a dollar spent 
 for labor (wages). 
 
 The obvious difficulty in this theory lies in the fact that these adjustments 
 are apt to be disturbed by the mistakes of speculators (§ 324, note). But 
 there is a more fundamental objection to the whole analysis from the fact 
 that it involves reasoning in a circle. If at the beginning of a productive 
 process we decide upon using an increment of capital instead of an incre- 
 ment of labor, it necessarily means that we wait longer for our product. 
 We cannot therefore tell when the marginal productivity of labor and capital 
 is equal unless we know the relative value of products at two different 
 periods ; i. e., the rate of interest. If we do not stand at the beginning of a 
 period of production, but decide to avail ourselves of the results of past labor 
 instead of the services of present labor — which is the case contemplated in the 
 more popular expositions of the theory of imputation — we do not touch the 
 question of interest at all. We pay a price for the results of past labor 
 directly to the owners of the property, instead of giving money to our 
 laborers to buy those results for themselves. A manufacturer uses his capi- 
 tal to buy coal, which represents the results of past labor ; he pays wages 
 which enable his employees to buy flour which also represents the results of 
 past labor. There is no more waiting in the one case than in the other. 
 
 It may be added that if we look at the matter from any but the narrowest 
 point of view, all "doses" of capital are administered in the form of 
 wages. 
 
2/6 PROFITS. 
 
 for large rates of interest has really lain, the conditions 
 of business which gave that opportunity have generally 
 passed away. Instead of bringing down an unduly high 
 rate of interest, the luckless investors will find themselves 
 competing in an over-filled industry, where the chance 
 of profit hardly covers the risk to any of the parties 
 concerned. 
 
 Even without such over-competition, the uninstructed 
 capitalists who seek high rates of interest are apt to go 
 into the wrong places. They go where interest is appar- 
 ently highest, rather than where it is really highest. 
 They do not distinguish between high rates which offer 
 real chances of profit on good security, and those which 
 conceal a large danger of loss. Nor is this at all surpris- 
 ^ ing. In every commercial and industrial loan the element 
 of risk is present to a greater or less degree. It requires 
 special knowledge of the conditions of any particular 
 business to know whether that business gives special 
 safety or special hazard. Where the rate of interest on 
 what appears to be good security is a little higher than 
 that which prevails in other lines or other localities, we gen- 
 erally find that there are some hidden chances of loss which 
 account for the difference. It is these chances of loss 
 which prevent the capitalists who have direct knowledge 
 of the business from extending their investments on terms 
 which are apparently so favorable. If, under these con- 
 ditions, the uninstructed capitalist, who has not this 
 special knowledge, rushes in to take advantage of the 
 high rate, he is apt to lose a considerable proportion of 
 the principal which he has risked. Any movement of 
 capital to these lines results in lowering the rate of in- 
 terest where the margin of risk is high, and where the 
 true interest or guaranteed profit, over and above such 
 special risks, was perhaps unduly low from the beginning. 
 
 If a man possesses unusual sources of knowledge, he 
 can with a fair degree of safety undertake to secure rates 
 
MONEY SUPPLY AND INTEREST. 2// 
 
 of interest higher than those quoted in the open market. 
 But in the absence of such special knowledge the chances 
 are that the equalizing process will work in the wrong 
 directions instead of in the right ones, and that the in- 
 vestor who tries to get the benefit of large returns of 
 interest will find this benefit more than counterbalanced 
 by losses on his principal. 
 
 § 307. Making proper allowance for the slowness or 
 imperfection of these adjustments, we may fairly say that 
 there is a general rate of interest at which the demand 
 for capital equals the supply. 
 
 This general rate of interest may be influenced in three 
 ways : by changes in the supply of money, in the supply 
 of products, and in the degree of commercial security. 
 The effects of the two first are trifling in importance as 
 compared with the last. 
 
 § 308. We have already seen (§ 253) the fatuity of most of 
 the attempts to lower the rate of interest by increasing the 
 supply of money. Changes in the volume of the currency 
 are quickly followed by corresponding changes in price. 
 The man who desires to use a certain amount of food or 
 machinery and to control a certain amount of labor must 
 borrow a proportionally larger sum of money in order to 
 get the products and services required. The demand for 
 capital increases side by side with the supply ; and the 
 uncertainty which loose currency legislation creates with 
 regard to the future, actually tends to force the rate of 
 interest upward. 
 
 The one exception to this rule which is important 
 enough to deserve notice arises when issues of money are 
 made in such a form as to relieve a temporary stringency 
 in the money market. In such a case the public is seek- 
 ing for means of payment rather than for means of in- 
 vestment, and an unexpected supply of such means of 
 payment may break what is virtually a corner (§ 175) in 
 the stock of available money. But even in this case it is 
 
278 PROFITS, 
 
 necessary that the inflated supply of money be quickly 
 retired, in order to prevent the subsequent rise in interest 
 due to the speculation and insecurity which such excess 
 of currency engenders. 
 
 § 309. The idea that the rate of interest can be lowered 
 by increasing the supply of products involves less practi- 
 cal danger, because it is very hard for any mischief-maker 
 to put it into effect ; but as a theoretical fallacy it is even 
 more subtle and dangerous than the one just exposed. 
 When the student of economics has mastered the idea 
 that interest is paid for capital and not for money, he 
 infers that an increase in the supply of capital will result 
 in diminishing the rate paid for the use of such capital. 
 So it undoubtedly will. If there are twice as many 
 machines in existence, the rental value of each machine 
 will fall. But the rate of interest will not necessarily be 
 affected thereby. The price of each machine will fall 
 nearly as fast, and may fall quite as fast, as its rental 
 value. Interest on a machine is expressed by the ratio 
 between the rental and the price. The rate of interest 
 will therefore suffer little or no change from an increased 
 supply of machinery. A large part of the causes which 
 are used to explain when interest will be low really show 
 when machinery will be cheap, and nothing more. 
 
 § 310. The case is a little less clear when we come to in- 
 vestigate the effect of an increased supply of food instead 
 of an increased supply of machines. An increase of food 
 enables the community to wait a longer time for the vari- 
 ous products of its labor, and to get the benefit of improve- 
 ments which involve this long period of waiting. It is 
 argued by some writers that a fall in the rate of interest 
 necessarily follows such a lengthening of time in produc- 
 tion. But it is doubtful whether this result takes place 
 in practice. An increase in food supply is so apt to lead 
 to increased consumption on the part of the laborers that 
 the surplus will be utilized in a far different way from that 
 
FOOD SUPPLY AND INTEREST. 279 
 
 contemplated by this theory — not by a lengthening of 
 production time, but by a shortening of consumption time. 
 Under these circumstances it seems a mistake to deduce 
 what the rate of interest will be if the habits of the 
 laboring class remain unchanged, when in fact the habits 
 of the laboring classes adjust themselves to the increased 
 supply of products faster than the rate of interest does.* 
 
 The chief practical effect of abundance of capital upon 
 the rate of interest is a psychological one. If goods are 
 scarce in proportion to people's bodily necessities, the 
 public often sets a high value on present consumption 
 and makes relatively little account of the future. An 
 increasing abundance of consumable products, by dimin- 
 ishing the pressure of immediate necessity, gives larger 
 room for intelligent classification of risks and for accept- 
 ing future enjoyments instead of present ones, on terms 
 more nearly commensurate to the actual risk which arises 
 from deferring the enjoyment in question. 
 
 § 31 1. The prevailing rate of interest is far more affected 
 by the degree of security than by the volume of money or 
 of products. While people may not always judge accu- 
 rately of the security in any particular case, there is no 
 doubt that interest in general is low where property is 
 safe and high where property is uncertain, apart from the 
 conditions which prevail in any particular business. This 
 
 ' A scarcity of food lessens the profitable use of machinery, but not 
 through the agency of the rate of interest. If there is only food enough to 
 last a year, and a capitalist diverts laborers from the production of food and 
 other articles of immediate use to employments whose return is more remote, 
 lie finds at the end of a year that the supply of food and other consumable 
 products is scanty. The men who have produced food find their private 
 income increased by this scarcity ; those who have invested capital in 
 machines find their possible profits diminished because of the increased 
 expense of maintenance of themselves and their laborers during the period 
 of waiting. 
 
 Scarcity of food and high rates of interest both have the same effect in 
 restricting the use of machinery ; but this does not prove that scarcity of 
 food in itself causes a high rate of interest. 
 
28o PROFITS. 
 
 is partly because personal security promotes accumulation 
 of products (chapter ii), but chiefly because an assured 
 future enjoyment is far more valuable than a doubtful 
 one. 
 
 The best guarantee of security is given by the personal 
 character of the capitalists in a nation ; but the clearest 
 evidence of such security is generally to be found in con- 
 servative government. If law is so administered as to 
 make property rights precarious, the value of a future 
 return will necessarily be low. If it is so administered as 
 to make them stable, the value of future goods will more 
 nearly correspond to that of present ones. .In the former 
 case the rate of interest will be high ; in the latter case it 
 will be low.^ 
 
 § 312. It must not be supposed that a low rate of in-^ 
 
 ^ Security affects the rate of interest in two ways, which must be carefully 
 distinguished from one another. 
 
 The conscious attempt to provide against particular risks causes differences 
 in the nominal rate of interest. In uncivilized countries a large part of the 
 interest payments are of this kind. The bottomry loan in old times often 
 called for twenty per cent interest because of the chance that the ships 
 which furnished the security would be wrecked. But as civilization ad- 
 vances these risks come to be separated in the mind of the investors from a 
 residual sum which they can obtain on what they consider absolutely good 
 security. This rate is not looked at by the individual as a payment for 
 risk. Yet its height is probably in large measure a result of past experience 
 as to losses ; and this experience is a most potent factor in determin- 
 ing the relative value which people place upon present and future goods 
 even when they suppose those future goods to be certain. If investors have 
 been free from unforeseen losses in the immediate past, there is at once a 
 greater quantity of old capital in the hands of people who are ready to offer 
 its control to others, and a greater habitual readiness to accept promises of 
 moderate income rates as an adequate consideration for such control. If on 
 the other hand people have suffered considerable losses of property which 
 they have entrusted to others, there is at once a smaller supply of capital in 
 the hands of people who are ready to part with its control, and a hesitation 
 to accept promises of moderate income as an adequate consideration for 
 such control, even when there appears to be no tangible risk in the particu- 
 lar case involved. Thus the relative valuation placed upon present capital 
 and future income is unconsciously influenced by the past experience of the 
 community. 
 
DIFFERENCES IN RISK, 28 1 
 
 terest, due to increased security, represents an unmixed 
 good for society. Risk is an incident of progress. As 
 long as the human mind is not endowed with prophetic 
 foresight, great security may be obtainable only at the 
 price of general stagnation. So far as insecurity results 
 from activity in industrial enterprise on the part of the 
 capitalists of a nation, rather than from lax enforcement of 
 the laws protecting vested rights, it is a good thing. If 
 a low rate of interest means that people do not tamper with 
 laws it is good ; if it means that they do not experiment 
 with business methods it is bad. In the latter case any 
 saving which results from a low rate of interest is from the 
 public standpoint more than nullified by the failure to 
 utilize new processes and new ideas as fast as they are 
 developed. 
 
 §313. The tendency of profits and interest to fall as 
 a nation advances has been much overestimated. The 
 high rate of profit in new countries is apparent rather than 
 real. A new country offers more fields of exceptional 
 profit than an old one, but it also involves more dangers 
 of exceptional losses. The statistics of railroads in differ- 
 ent parts of the United States, show that the ratio of in- 
 come to the total capital invested is much higher in the 
 older parts of the country, and lower in those which 
 are more newly settled. Part of this difference is doubt- 
 less due to the fictitious capitalization of railroads in the 
 West, where the real percentage of profit to capital inves- 
 ted is greater than the apparent percentage. Yet after 
 making all due allowance under this head there remains a 
 balance in favor of investments in the East. This balance 
 of profit is made yet more conspicuous if we take into 
 account the generally appreciating value of railroad secu- 
 rities in New England or the Middle States, and contrast 
 it with the great depreciation which has affected so many 
 companies in the South and West. If, instead of confin- 
 ing our investigation to one country, we compare the rail- 
 
282 PROFITS, 
 
 roads of Europe with those of the United States, we shall 
 find that the European lines, which at first promised less 
 apparent profit, have on the average proved more remun- 
 erative to the investors than have those of the United 
 States. 
 
 The popular misunderstanding about profits in new 
 countries is due to two causes. In the first place, the 
 expectation of profit on the part of men who venture 
 their capital in a new country is generally exaggerated. 
 Public opinion is influenced by the glowing reports of 
 profits that are going to be realized, and does not stop to 
 inquire how far these expectations are warranted by actual 
 facts. In the second place, the public sees the instances 
 of exceptional profit, which stand out clearly because of 
 their success, and does not see those failures which have 
 sunk out of sight because they were unsuccessful. 
 
 § 314. While profits do not perhaps decline as a nation 
 advances, but simply become surer and less speculative, 
 the rate of interest undoubtedly tends to fall; but this fall 
 is not so marked as most people suppose. Many cases 
 of high nominal interest in a new country result from con- 
 tracts that are more or less fraudulent in their character. 
 In an undeveloped region there are always a number of 
 speculators who borrow money without giving adequate 
 security, obtaining such money by the promise of a rate 
 of interest which leads investors to close their eyes to the 
 defective character of the security offered. It is common 
 to speak of the high rates of interest received in such 
 cases as constituting insurance against risk. But the 
 amounts thus received in the form of interest represent so 
 small a fraction of the losses on the principal that the term 
 insurance is an arrant misnomer. Such contracts never- 
 theless give rise to an impression that the actual market 
 rate on good security is higher than is really the case. 
 
 At a time when interest rates in one of our leading 
 northwestern states were quoted in the eastern market at 
 
NEW AND OLD COMMUNITIES. 283 
 
 seven per cent on first-class security, the writer took pains 
 to inquire of conservative local bankers what were the 
 actual rates which persons in that section who had money 
 to lend felt that they could command. He found that 
 such loans ran at six per cent and less. The differ- 
 ence of one per cent was offered the eastern investor as 
 an insurance against risk. How miserably inadequate it 
 was for the purpose was seen in the collapse two or 
 three years later of the security for a large number of 
 these seven per cent loans. 
 
 § 315. After making proper allowance for these causes 
 which affect the apparent or nominal rate of interest in a 
 new country, there still remains a slight difference in the 
 real rate. This may be explained as follows : 
 
 1. In most new communities there is an insecurity of 
 tenure and a chance for adverse legislation regulating 
 conditions of payment, which make future rights less 
 valuable than they are in more conservative countries, 
 where the probability of change is less. 
 
 2. The high rate of apparent or false interest just de- 
 scribed attracts into illegitimate investments a certain part 
 of the supply of the capital which would otherwise be 
 used in legitimate ones and prevents the rate of true 
 interest from being lowered to the point which it should 
 normally reach. The point of equilibrium of the supply 
 and demand of capital is forced upward by the action of 
 speculators who are not really in a position to offer inter- 
 est, but who are enabled by the blindness of certain 
 sections of the investing public to compete in the market 
 for industrial loans. 
 
 3. In a new country a larger proportion of people are 
 anxious to manage their own business, instead of leaving 
 it to others. If a given amount of capital is in the field 
 seeking profits, the height of the interest rate will depend 
 upon the relative numbers of those who desire control and 
 of those who are willing to abandon such control for the 
 
284 PROFITS, 
 
 sake of a fixed return. Where nearly everybody wishes 
 to conduct his own business, the interest rate will almost 
 necessarily be higher than where most people are willing 
 to leave the conduct of business in the hands of others. 
 In the early history of New England, rates of interest 
 were higher than they are now, not because property was 
 less secure nor because capital was scarce, but because 
 almost every man stood ready to manage his own capital, 
 and required considerable inducements in order to be will- 
 ing to entrust it to others. 
 
 § 316. The process which tends to equalize the rates of 
 interest in different lines, operates also, but in a less 
 -degree, to equalize the rates of profit. 
 
 If interest goes down while profit remains station- 
 ary, there is a margin of advantage to the borrowers, 
 which makes each of them anxious to use more capital in 
 his business. So far as they do this, they will increase the 
 supply of products, which necessarily puts prices down, 
 and will increase the demand for labor, which tends to 
 force wages up. This process will go on until the rate of 
 profit adjusts itself to the rate of interest; that is, until 
 the difference between the two is only sufficient to pay 
 the employer a fair compensation for his time and trouble 
 — such as he could earn if working for another instead of 
 for himself. 
 
 § 317. But there are certain causes which make this 
 adjustment very incomplete. They have already been 
 mentioned in some detail in connection with normal price 
 (§ loi.) Looking at the matter from the standpoint of 
 the producer instead of the consumer, we may divide 
 them into two groups : 
 
 1. Where all the business men in an industry combine 
 to prevent the increase of investment and production. 
 
 2. Where they act independently and compete with one 
 another, but where some have advantages, either of method 
 or location, which others do not possess. 
 
DIFFERENTIAL GAINS. 285 
 
 Both of these are commonly called cases of monopoly ; 
 but the term applies much more properly to the first 
 class than to the second. The superiority which one 
 man has over his competitor when the two are actually 
 engaged in bidding against one another for the public 
 favor may better be called a differential advantage than a 
 monopoly. 
 
 § 318. The exceptional profits of a true monopoly are 
 generally transient in their character. If they are due to 
 a patent, which is the commonest case, they end with the 
 expiration of the patent right ; frequently even earlier 
 than this, on account of the invention of a rival process. 
 If they are due to closeness of organization or any of the 
 other causes described at length in chapter vi, they may 
 last longer ; yet even in these cases they are apt to be re- 
 duced either by legislation, by fear of new competition, or 
 even by the pressure of public opinion. The number of 
 monopolies which might have made exorbitant profits for 
 a term of years looks very large ; the number that have 
 actually done so is surprisingly small. 
 
 §319. Differential gains are quite another matter. They 
 generally result from causes precisely opposite to those 
 which produce true monopolies. A true monopoly tends 
 to arise when a large concern can increase its output with- 
 out corresponding increase in expense, so that it can sup- 
 ply the whole public and drive smaller or weaker concerns 
 out of the market. This case is often exemplified when a 
 large factory competes with a number of smaller ones. 
 But when a large farm competes with a number of smaller 
 ones, the case is quite different. The large farmer prob- 
 ably has certain advantages due to the scale on which he 
 conducts his operations. But the amount of product on 
 which he can realize this economy is limited in quantity. 
 A double application of labor and capital will not double 
 his output. He cannot drive his smaller competitors out 
 of business, because the attempt to supply a large part of 
 
286 PROFITS. 
 
 the market from one farm will result in loss instead of 
 gain. Such an industry is said to be subject to the law 
 of the diminishing return. The two chief causes of dimin- 
 ishing returns are the limited fertility or capacity of land, 
 and the limited power of human brains. No land can 
 produce unlimited quantities of product ; no brain can 
 direct unlimited numbers of men. If the demand for the 
 products of any industry is too large to be met by a 
 single organized source of supply, however great its nat- 
 ural advantages, we shall be likely to see a system of 
 differential gains, due to the independent competition of 
 men who make goods for the same market at different 
 expense. 
 
 § 320. Where these differential gains are due to personal 
 ability, they are almost always transient in their charac- 
 ter, and are known as net profits. Where they are due to 
 advantages of location, they are apt to be more permanent, 
 and are then known as economic rent. We may define rent 
 in its technical or economic sense, as 2.vvy permanent excess 
 of the rate of profit over the rate of interest.' Economic 
 rent is chiefly due to foresight in investment ; net profit, to 
 skill in management." But the work of separating the 
 
 ^ Some writers attempt to explain all profits, including interest itself, as 
 arising from differential gain. In this view, which has been most ably pre- 
 sented by Ricca-Salerno, interest represents an advantage enjoyed by the 
 owners of commodities which have become ready at so early a period that 
 they can apply labor under more favorable conditions of time than some of 
 their competitors can command ; in precisely the same way that rent repre- 
 sents a power of applying labor under exceptionally favorable conditions of 
 place. If we could ignore the functions and the mistakes of the speculator 
 (§ 324, note) this would apparently be a sound position. But as matters 
 ^stand there is a radical difference between rent, which is a varying actual 
 advantage possessed by the owners of real estate, and interest, which repre- 
 sents 2^fixedx2Xt, of commutation oi possible but uncertain advantage. 
 
 '^ We can in many cases distinguish profits from rent by finding what the 
 plant will sell for. Excess of selling price over cost is capitalized rent. 
 Excess of actual return from the property over interest on its price represents 
 profit. Thus if $25,000 represents <he amount of capital which has been 
 used in improving a piece of real estate, $30,000 its price in the market. 
 
ECONOMIC RENT, 28/ 
 
 two, even in theory, is very difficult, because we can never 
 tell which differential advantages are permanent and which 
 are transient. 
 
 § 321. The *' economic " or " Ricardian ' " sense of the 
 word rent must not be confounded with its ordinary com- 
 mercial sense. Commercial rent represents a price paid 
 for the use of land a7id improvements. A large part of it 
 is interest rather than rent. If we deduct the interest on 
 improvements from the commercial rent, the remainder 
 is economic rent. This is sometimes known as ground 
 rent ; and, if contracts for the rent of land were renewed 
 every year, ground rent and economic rent would be sub- 
 stantially the same. But since in practice ground rent is 
 habitually fixed for a very long term of years, the actual 
 divergence between the ground rent paid and the eco- 
 nomic rent computed on a theoretical basis is apt to be 
 very large. 
 
 It is in some respects unfortunate that the term ** rent *' 
 should have been chosen to designate these permanent 
 differential gains. Investigators are apt to identify them 
 much more closely with actual rents than the facts of the 
 case warrant. Thus Shearman, in a recent book on 
 *' Natural Taxation," treats the total rent of agricultural 
 lands in England as if it were ''economic " rent; whereas, 
 in fact, the amount of capital which the landlords have 
 invested in English farms is enormous. If interest on the 
 capital thus invested for agricultural improvements had 
 been deducted, as it ought to be, the conclusions which 
 Shearman draws from his figures would have been entirely 
 reversed. 
 
 and $2,000 a year its gross profit to the owner, the current rate of interest 
 being five per cent, we shall have this $2,000 made up of 
 $1,250 economic interest 
 250 " rent 
 
 500 " profit. 
 
 * The theory of differential gain was first clearly formulated by David 
 Ricardo in his Principles of Political Economy and Taxation. 
 
288 PROFITS, 
 
 § 322. Economic rent and net profit are like the pro- 
 ducers' and consumers* surplus described at the beginning 
 of the chapter in being differential gains — gains which are 
 due to a difference between the conditions of the stronger 
 and the weaker competitors. They are unlike them, first, 
 in being habitually measured in money and therefore 
 more observable ; second, in being offset by differential 
 losses which, in some instances, more than neutralize the 
 gains. The number of investments of fixed capital that 
 have more than paid interest is perhaps balanced by the 
 number of those that have failed to pay interest. While 
 there are many farms that are worth more than the capital 
 invested in them, there are also many which are worth less. 
 In times of advancing prices the gains are more con- 
 spicuous than the losses. In times of commercial depres- 
 sion the case is reversed. 
 
 The existence and persistence of this negative rent 
 (and of the corresponding losses or negative profits in 
 manufacturing industry) go far to furnish the justification 
 for the present industrial system. If it were true, as 
 George alleges, that rent is simply an unearned increment, 
 an appropriation of a part of the public product, then 
 there would be neither wisdom nor equity in leaving land 
 under private ownership. If it were true, as Marx claims, 
 that profits represent a similar unearned increment, the 
 same conclusion would follow with regard to capital. But 
 in point of fact, both rent and profits are of the nature of 
 compensation for risk. The amount received may be 
 greater than the amount lost, or it may be less. This will 
 depend largely upon the temperament of the capitalists 
 as a body. But of the fact of such losses there can be no 
 question whatever. 
 
 § 323. Many of the writers who treat of the relation 
 between business risk and business profit make the mis- 
 take of assuming that profits are an amount paid to the 
 individual capitalist to cover his risk of loss. Far from 
 
MISTAKES OF SPECULATORS. 289 
 
 it. They are paid to capitalists as a class for protecting 
 the public against its risk of loss. They are charges 
 which the capitalists make, not for insuring themselves, 
 but for insuring society against the losses incident to 
 industrial experiment and industrial progress. 
 
 § 324. The prevailing theory of economic rent ignores 
 the extent of these losses. It assumes that future prices 
 can be foreseen with a considerable degree of accu- 
 racy. It assumes that the marginal laborer and the mar- 
 ginal unit of capital do in fact contribute to the product 
 an amount equal to the valuation which is placed on their 
 services. But this is notoriously untrue. The marginal 
 laborer is often employed at a rate of wages which ex- 
 ceeds the total amount that the consumer ever pays for 
 the product of his labor. The marginal unit of capital 
 receives a return in the form of interest which is often 
 decidedly in excess of the advantage which the speculator 
 derives from its use. If the product of such labor and 
 capital were immediately available for consumption such 
 mistakes would not be made ; but as matters stand at 
 present they are always being made on a small scale, and 
 often on a large one. These mistakes are likely to con- 
 tinue as long as we have industrial progress. Society at- 
 tempts to reduce them to a minimum by a system which 
 is intended to place the control of industry in the hands 
 of those who have proved their foresight, and to elimi- 
 nate those who have made the mistakes. But in spite of 
 this process of natural selection, which makes the judg- 
 ment of speculators as a class better than that of the 
 average man, the number of serious errors is very great 
 indeed.* 
 
 ^ The various doctrines which base the rates of wages and interest upon 
 the actual contributions of marginal laborers and capitalists to the product 
 of industry habitually ignore the effect of these mistakes. To justify their 
 method of reasoning, the advocates of these doctrines would be compelled 
 to prove either (i) that the actual value of the product of labor and capital 
 does in fact conform to the expectations of the speculators ; or (2) that an 
 19 
 
290 PROFITS, 
 
 § 325. Ricardo of course knew about these mistakes; 
 but he assumed that they could be quickly rectified — that 
 no man would stay long in a business which was unprofi- 
 table. He thought that if wages in any particular line 
 were momentarily raised too high and prices depressed 
 too low, a speedy withdrawal of capital would almost cer- 
 tainly follow. Two things led him into this mistake. In 
 the first place, the industries of Ricardo's time were for the 
 most part conducted on a much smaller scale than they are 
 to-day. A number of independent producers supplied the 
 market. The most that the community had to fear under 
 such circumstances was a slight excess or slight deficiency 
 of the supply of products ; and as independent producers 
 were constantly entering or leaving business such an excess 
 speedily cured itself. In the second place, Ricardo was 
 a banker and dealt with those forms of capital which 
 could be most quickly transferred from less profitable 
 to more profitable lines. Although Ricardo combined 
 the experience of a landlord with that of a banker his 
 theory of rent represents essentially a banker's view of 
 farming, which, like a farmer's view of banking, takes 
 much more account of the profits than of the losses. 
 
 under-estimate of the advantage of using a process which promises remote re- 
 turns is just as probable as an over-estimate, so that the mistakes of specula- 
 tors may be treated as balancing one another ; or (3) that such mistakes as 
 are made will serve to teach their lesson in so short a time that no change in 
 the habits of society will intervene to prevent them from correcting them- 
 selves. 
 
 Of these alternatives (i) is obviously untrue ; (2) is so far dependent upon 
 national character that it is inadmissible as a general assumption ; while (3) 
 is, to say the least, open to very grave doubts which the exponents of the 
 theory of marginal contributions have made no adequate attempt to remove. 
 For instance : if wages in a particular trade are made higher than the actual 
 outcome of industrial processes ultimately warrants, the habits of living of 
 the laborers may change before the mistake is discovered and render an 
 adjustment to the old basis out of the question. The mistakes of speculators 
 render the problem a dynamic one (§ 27) so frequently as to justify us in 
 challenging the claims of a statical solution to be considered as any solution 
 at all. 
 
LOSSES ON FIXED CAPITAL. 29 1 
 
 He assumes that there may be a permanent profit due to 
 monopoly of location, while any permanent loss will be 
 avoided by withdrawal of capital. But modern capital is 
 not ordinarily invested in such forms that it can be readily 
 withdrawn or transferred from an unprofitable use. In 
 a large and increasing part of our investments capital is 
 irvGYOCdhly Jixed {% 141). Labor has been applied in such 
 a shape that its ultimate product cannot be obtained for 
 a long term of years. If such labor has proved especially 
 advantageous to society, land laws and patent laws confer 
 special advantages on the investor. But if for any reason 
 it has proved unremunerative, withdrawal is impossible 
 without great sacrifice. The positive rent which Ricardo 
 saw, and the positive profits of which his successors have 
 made so much, are counterbalanced by losses both on 
 real estate and on personal property which are perhaps 
 greater than the aggregate amount of differential gains 
 made by the more successful investors. 
 
 § 326. Several circumstances may give rise to such loss. 
 The most important are : I. Technical failure, where an 
 investment of capital does not produce the physical result 
 that was expected. 2. Industrial progress, where an in- 
 vestment of capital works well for a time, but must give 
 place to a better one before the accumulated profits have 
 paid for its original cost. 3. Over-competition, where a 
 useful method is applied by so many independent invest- 
 ors as to make the price of its products disproportionately 
 low. 4. Contraction of credit, which reduces the general 
 level of prices, and thus makes the investment unre- 
 munerative to the man who has made it, even though it 
 be otherwise perfectly adapted to the needs of society. 
 
 § 327. Of these causes of loss, technical failure, though 
 often the most conspicuous, is probably the least impor- 
 tant. The evils resulting from this source are so obvious 
 that they serve as a warning for other investors, and to 
 make the repetition of the same mistake improbable. 
 
292 PROFITS. 
 
 § 328. The losses from industrial progress are less obvi- 
 ous but more widespread. The discovery of a new pro- 
 cess may render a mass of old investments useless. The 
 invention of the power loom represented a great loss to 
 the owners of capital invested in hand looms. The inven- 
 tion of the railroad quickly rendered canal property unre- 
 munerative. Few, even among the more conservative 
 investors, make proper allowances for the danger connected 
 with the invention of new processes. The owner of a fac- 
 tory, in estimating his profits, is often content to deduct 
 the depreciation due to the wear and tear of machinery ; 
 and if he makes a further deduction as the patent rights 
 which have given him an advantage over his competitors 
 draw to a close, he deems that he is pursuing a conserva- 
 tive policy. A board of railroad directors is satisfied with 
 insisting that a certain sum shall be set apart from current 
 receipts to keep the track and equipment at a high stand- 
 ard of efficiency. But there is a probable source of dan- 
 ger which is not adequately met by depreciation accounts 
 in a factory or by maintenance accounts in a railroad. 
 Even when these deductions are made on a liberal basis 
 they do not provide a reserve fund to insure the investor 
 against the chance of total loss in case other competitors 
 bring into use new methods. This loss is not of a kind 
 which can readily be estimated in accounting or be de- 
 ducted from the sum available for dividends, but it repre- 
 sents a great reduction in the profits earned by owners of 
 fixed capital as a class. 
 
 § 329. Nor are landowners exempt from these dangers. 
 Much of Henry George's reasoning is based upon the 
 assumption that land speculators make many profits and 
 few losses. He has probably over-estimated the former, 
 and has quite certainly under-estimated the latter. The 
 amount of capital which has been sunk in developing 
 real estate that proves unprofitable is something for 
 which it is impossible to obtain accurate statistics ; but a 
 
LOSSES ON REAL ESTATE, 293 
 
 close observation of real estate values will indicate that 
 it is very great. The New England farm represents a 
 large amount of capital which was rendered jjnremuiierfi- 
 tive_ by the competition of farms elsewhere.* A change 
 in the current of population has often destroyed all profits 
 from real estate in which much capital has been irrevo- 
 cably fixed. The development of new means of transpor- 
 tation by which wheat could be shipped from a distance 
 has played havoc with the farm values of England and of 
 the American seaboard. It is not true, as Ricardo as- 
 sumes, that the normal price of wheat just remunerates 
 the last producer, and that any farmer for whom it fails 
 to be remunerative can speedily withdraw from the mar- 
 ket. In order to compete in the production of wheat 
 large investments of capital are necessary. To bring 
 producers into the market the price must be high enough 
 to cover their expenses, including interest on fixed capi- 
 tal, or at least to make investors think that it will do 
 so. But when once they have entered into competi- 
 tion they cannot withdraw without a very considerable 
 loss of fixed capital. If the price per bushel of wheat 
 for a group of producers is fifty cents over and above 
 interest, or eighty cents including interest, they will 
 not go into the business unless they expect to get 
 eighty cents ; but once in, they will not go out until the 
 price nears fifty cents. This difference between eighty 
 cents and fifty cents leaves room for a large margin of 
 loss. If the price falls to the lower figure the same differ- 
 ences continue to exist which the Ricardian theory re- 
 quires ; but they are differences of disadvantage rather 
 than differences of advantage. Moreover, as shown by 
 Carey, there are changes of method in agriculture as well 
 
 ^ The beginnings of this process were clearly noted by Carey, whose ob- 
 jections to the Ricardian theory of rent deserve more consideration than 
 they have received. Carey's ideas have been further developed by Patten, in 
 his '* Premises of Political Economy," Philadelphia, 1886. 
 
294 PROFITS. 
 
 as in other lines of industry. The first settlers occupy 
 the lands which are most accessible and easily brought 
 into use. Subsequent settlers take those which require 
 more capital for their development, and as transportation 
 becomes cheaper choose lands which are more remote but 
 also more fertile. The large production of these new 
 competitors often forces down the price of products below 
 the amount which it costs to obtain them on the older 
 farms, and renders the capital invested in these farms 
 unprofitable to its owners. 
 
 § 330. Even if a process continues to be successful for 
 a long term of years, each capitalist is constantly in dan- 
 ger from over-competition .on the part of other capitalists. 
 It is impossible for different investors to know accurately 
 what other investors are doing. If prices are high in a 
 particular line of industry a number of capitalists will 
 simultaneously arrange to take advantage of those prices 
 and to secure a share of the exceptional profits which 
 have prevailed. When a great many people try to do 
 this prices will fall and all investments in that line, old 
 as well as new, may be rendered unprofitable. This state 
 of things is known as over-production. The use of the 
 term over-production does not mean that more goods 
 are produced than the community can consume, but more 
 than the community can pay for at prices which cover 
 the expense to the producers. The larger the fixed 
 capital involved in an industry, the greater is the danger 
 of such over-production. We see this danger illustrated in 
 the history of iron and steel, of shipping, of railroads, and 
 in most of the distinctively modern forms of manufac- 
 turing enterprise. We find alternations between periods 
 of inadequate supply, where products are scarce and 
 profits large, and periods of over-supply, where products 
 are so abundant as to be sold at a sacrifice, and profits are 
 not only destroyed but converted into losses. The fac- 
 tory and the railroad put their goods or services on the 
 
OVER-PRODUCTION, 295' 
 
 market at prices which fail to pay interest or even main- 
 tenance. The owners have invested their capital in a 
 form which they cannot readily change. If they abandon 
 the field to other competitors it may prove a total loss. 
 It is better to lose a dollar on every ton of traffic shipped 
 than to lose two dollars on every ton of traffic sacrificed. 
 The only limit to this process of cut-throat competition is 
 found either in the absolute exhaustion of some of the 
 competitors, or in the growth of population to a point 
 where the demand at remunerative prices is equal to the 
 normal productive capacity of the whole body of com- 
 peting investments. 
 
 § 331. Over-production is liable to take place in any line 
 of industry involving large fixed capital. Occasionally 
 it will occur in one line only, without involving oth- 
 ers ; in which case it is more properly discribed as dis- 
 proportionate production. The depression in American 
 railroads in 1888, while other lines of industry were gen- 
 erally prosperous, furnished an instance of this kind. But 
 it will commonly happen that the phenomena of over- 
 production are not due so much to excess of supply in 
 one line as to contraction of demand in a number of lines 
 simultaneously. Such a contraction is the central fact in 
 any commercial crisis. These crises have occurred with 
 tolerable regularity ever since the introduction of applied 
 steam power. They have usually come once in ten or 
 eleven years, — a fact which led some observers to connect 
 them with sun spots which have a period of the same 
 length. But no one could say just why the sun spots 
 produced the crises, and this theory has been generally 
 set aside for lack of proof. The accepted view of the 
 phenomena of commercial crises makes them the result of 
 contractions in credit of the kind described in chapter viii. 
 
 § 332. The aggregate volume of pecuniary transactions 
 which can be performed in the course of a year with a 
 given reserve of money depends upon the efficiency of 
 
296 PROFITS, 
 
 the credit system ; that is, in general, upon the freedom 
 with which banks are able and willing to insure the pay- 
 ment of money in the future by people who have not the 
 money in hand at present. If for any reason the banks 
 are compelled, or think themselves compelled, to reduce 
 the accommodation of this kind which they give the mer- 
 cantile community, the men who wish to deliver money 
 cannot pay so much, and of course men who wish to re- 
 ceive money cannot obtain so much. The decrease in the 
 effective circulation of money causes a decrease of the 
 volume of business. Either the physical amount of the 
 transactions must be lessened or the average level of 
 prices must fall. Each of these things causes commercial 
 disaster. A fall in price prevents a great many people 
 from fulfilling their contracts. A fall in the number of 
 transactions prevents some of them from getting what 
 they need as consumers and from selling their surplus as 
 producers. We have a congestion in all the channels of 
 trade. We find all the phenomena of over-production in 
 a great number of different lines, not because the invest- 
 ments in those lines have been disproportionate to one 
 another, but because the contraction of credit makes the 
 general production of the community disproportionate to 
 the means of getting it into the right hands.* 
 
 This is, in brief, the description of a modern commercial 
 crisis. With varying details but with the same general 
 features, it has been illustrated in 1825, 1837, 1847, 1^57^ 
 1873, 1884, and 1893. As exchange and transportation 
 have developed, crises have become more and more uni- 
 versal in their pressure. As matters stand today, there is 
 scarcely an industrial nation which stands apart from their 
 evil influence. A paralysis of credit and trade in one 
 country commonly makes itself felt in the others. 
 
 ' Newcomb has an interesting analysis of these events, showing how a 
 contraction in the ' ' monetary circulation " of means of payment produces 
 a corresponding effect on the " industrial circulation " of goods and services 
 which consumers are anxious to receive and producers to render. 
 
COMMERCIAL CRISES, 29/ 
 
 § 333* l'^^ order of events in such a crisis is generally 
 this : 
 
 (i) A shock to public confidence in a period of liberal, 
 not to say inflated, credit, creates a demand for ready 
 money. No one is sure that his neighbor will remain 
 solvent. Each man is therefore anxious to secure him- 
 self against future loss. Every borrower seeks means of 
 paying his obligations and increases the demand for 
 money ; almost every capitalist tries to enlarge his cash 
 reserves and thus lessens the available supply. 
 
 (2) This increase of demand and diminution of supply 
 at first puts up the interest rate on short-time loans. 
 Money is needed to tide over the immediate exigency, 
 and every one is willing to pay large prices in order to 
 obtain it. But this is only a temporary measure. Under 
 the stress of need for securing money, people who have 
 engagements to meet sell their goods at a sacrifice in 
 order to obtain it. An unusually large supply of products 
 and securities is thrown upon the market just at the time 
 when many property owners feel themselves least able to 
 invest, and when some consumers are restricting their 
 purchases instead of expanding them. The temporary 
 increase in the interest rate gives place to a more lasting 
 fall in prices. 
 
 (3) Such a fall in prices lowers profits. A large num- 
 ber of people have made engagements with their creditors 
 and with their employees based on the supposition that 
 prices will continue at the old level. If there has been 
 a period of inflation, the prevailing rate of wages and of 
 interest have both been driven up to a high figure on 
 account of the large profits realized by active speculators. 
 A fall in price renders it impossible to pay interest out of 
 current earnings. Readjustments and foreclosures follow 
 one another in rapid succession. In cases where the 
 lenders of money have obtained proper security the con- 
 tracts are maintained at the expense of the principal of 
 
298 PROFITS, 
 
 the borrowers. If a railroad bond is really secured by 
 stock behind it, the loss falls on the stockholders, and 
 the bondholders, ultimately at any rate, receive all that 
 the interest contract called for. But if, as frequently 
 happens, the security has been a delusive one, the lend- 
 ers are compelled to assent to a reduction of the interest 
 which they believed to be safely guaranteed. 
 
 (4) When the interest contracts have been in large 
 measure readjusted, the chief effect on wages begins to 
 make itself felt. It might be supposed, on general 
 grounds, that a fall in price would affect the laborer 
 sooner than the investor, because wage contracts are 
 made for short periods and are liable to readjustment at 
 any moment, while interest contracts are made for a long 
 term of years. But in the early stages of a commercial 
 crisis the capitalist is not in a position to dictate terms to 
 his laborers. He must make goods and sell goods at any 
 price, in order to keep his head above water. As long as 
 it lasts, the cut-throat competition which lowers profits 
 prevents the demand for labor from being very rapidly 
 lessened. It is when readjustments of interest have been 
 made that the laborers' condition becomes worst. After 
 foreclosure sales have been completed and capital is re- 
 organized on a new basis, no capitalist is necessarily com- 
 pelled to work at a loss, and some probably go out of 
 work altogether. Under these circumstances the demand 
 for labor becomes appreciably less than it was, and the 
 price offered falls rapidly. The first moderate changes 
 are as a rule accepted by the laborers as inevitable, but 
 as reductions become more sweeping they are resisted, 
 particularly because house rents and consumers' prices, 
 owing to the inertia of retail trade, do not fall nearly as 
 fast as producers' prices. The workman sees his wages 
 reduced because his employer cannot sell goods at the old 
 figure, while the price that he pays for his supplies remains 
 nearly the same. He thinks that something is wrong, 
 
 I 
 
READJUSTMENT OF VALUES. 299 
 
 and strikes. This usually indicates the beginning of the 
 end of a commercial crisis. It has become a proverb 
 in the financial world that railroad strikes give no help to 
 those who are trying to depress the price of securities. 
 On the contrary^ in spite of the losses attending such 
 conflicts, it has been found in 1877, 1885, and 1894 that 
 the price of securities in general began to go up at the 
 very time when matters seemed to be at their worst. 
 There are two reasons for this. First, strikes cut down 
 production in any given line to such an extent as to en- 
 able competing producers to dispose of their products or 
 services more readily. Second, strikes indicate that wage 
 contracts, as well as interest contracts, have been read- 
 justed to the price conditions which prevail, and that 
 matters have therefore reached a point where speculators 
 can make arrangements for the future with the assurance 
 that, the marginal price charged by labor and capital for 
 their services does not exceed the market price which the 
 consumers are likely to pay for the results of such service. 
 
 § 334. Until this process is substantially complete, 
 actual prices do not correspond to the assumptions of 
 the marginal theory of value. The price which con- 
 sumers are ready to pay for the products of industry is 
 less than the marginal expense of those products — in- 
 cluding in this expense, as we properly must, a return on 
 capital invested. Some men, in trying to cover the cost, 
 fail to sell their products ; others, in trying to sell their 
 products, fail to cover the cost. So far as producers are 
 able to fulfil their contracts as to interest and wages — 
 and in the theory both of economics and of law they 
 should do so completely — the loss falls on rent and 
 profits and may convert the expected surplus from these 
 sources into a deficit of large amount. 
 
 § 335. The distributive process, whose workings have 
 been described in this chapter, may be summed up as 
 follows : 
 
300 PROFITS, 
 
 The competition of capitalists with one another leads 
 them to advance to the laborers a sum equal to the ex- 
 pected price of the product, less a compensation for wait- 
 ing and the risks attendant upon it, sufficient to induce 
 the proprietors to hazard the required amount of capital. 
 The advances constitute wages ; the excess of the product 
 above such advances constitutes profits. 
 
 By a somewhat similar process the competition of the 
 more active capitalists with one another leads them to 
 guarantee to' those who will lend them capital a fixed rate 
 of income for the use of such capital. This income, guar- 
 anteed but not advanced, is known as interest ; the re- 
 maining profit is known either as net profit for skill in 
 management, or economic rent for foresight in invest- 
 ment. The separation of interest from net profit or rent 
 results in a separation of the reward for waiting from the 
 rewards for risk and foresight. 
 
 Wages are, in all ordinary cases, guaranteed and ad- 
 vanced by capitalists as a body. Interest is guaranteed, 
 but not advanced, by one group of capitalists to another. 
 The justice of the charge made for such guarantees and 
 advances is to be defended, not because the enjoyment of 
 interest corresponds to the sacrifice of waiting or because 
 the amount of profit corresponds to the risk of loss, but 
 because society finds itself best served by the system of 
 guarantees and advances which the institutions of wages 
 and interest serve to encourage. 
 
CHAPTER X. 
 
 WAGES. 
 
 Piece- Wage and Time-Wage — What Constitutes Demand for Labor — The 
 Popular Theory — The Wage-Fund Theory — The Residual Theory — 
 The Laborer as a Consumer — Wages Depend on Maximum Economy 
 of Consumption — With Some Men this is Obtained by Low Wages and 
 Low Efficiency, with Others by High Wages and High Efficiency. 
 
 F. A. Walker : ** The Wages Question : a Treatise on Wages and the 
 Wages Class." New York, 1876. 
 
 F. W. Taussig: "Wages and Capital: an Examination of the Wages- 
 Fund Theory." New York, 1896. 
 
 § 336. Wages, under the modern competitive system, \ 
 are the discounted product of industry. They are what 
 capitalists are ready to advance on the expectation of a 
 future return. The competition of different employers ' 
 with one another, where it is at all active, prevents them 
 from making their rate of discount arbitrary in amount. 
 
 The expected value of the product, less the discount, 
 gives the labor cost per unit of product, or piece wage. 
 The piece wage received by any workman multiplied by 
 the number of pieces which he makes in a day, consti- 
 tutes his day's earnings or nominal wage. The amount 
 of comforts which he can buy with the money received as 
 nominal wages represent his real wage. If -^ is getting 
 ^2.50 a day while B is getting only $2.00, his nominal 
 wages are one fourth higher; but if he has to make his 
 purchases in a market where the general level of prices is 
 fifty per cent higher than those paid by B, his real wages 
 are one sixth lower than ^'s. For the $2.00 which B 
 
 301 
 
302 WAGES. 
 
 receives will buy as much as A could obtain with $3.00, 
 and decidedly more than he obtains with $2.50. 
 
 Strictly speaking, both nominal and real wages should 
 be estimated by the year (or even by the lifetime), rather 
 than by the day, in order to show anything about the 
 financial or economic condition of the laborer; because 
 the regularity and duration of employment is so much 
 less in some trades than in others that the same receipts 
 per working day mean very different things in the long 
 run. In practice, however, it is usual to quote nominal 
 wages by the day, and then make corrections for irregu- 
 larity of employment, limited duration of labor power, 
 and other factors of this sort which affect our inferences 
 from the apparent height of the wage figures. 
 
 § 337- The cost of labor to the employer is naturally 
 measured by the piece ; the return for labor to the work- 
 man is naturally measured by the day or year. This 
 does not mean that the employer will always wish to pay 
 his laborers by the piece, or that the laborers will always 
 prefer to be paid by the day. The choice between the 
 two systems will depend chiefly upon the line of employ- 
 ment. Time wages prevail in agriculture, in trades, in 
 personal service, and in the higher grades of mechanical 
 work; piece wages, in mechanical work of ordinary 
 grades. 
 
 Under the system of time wages the workman has no 
 immediate or obvious incentive to increase his output. 
 A large part of the time and strength of the foreman is 
 occupied in keeping the men under his charge up to a 
 proper standard of efficiency. To avoid this difficulty, 
 the introduction of piece wages is the most obvious ex- 
 pedient. Under this system the workman is paid, not on 
 the basis of time occupied, but on the basis of work done ; 
 not by the hour or the day, but by the yard, the pound, 
 or some other unit of measure. If one operative turns 
 out twice as many goods as another, he receives twice as 
 
PIECE-WORK AND TIME-WORK, 303 
 
 much pay. He thus has an incentive to work rapidly. 
 In fact, the danger is that he may work too rapidly for 
 his own good or for that of his work. Under the piece- 
 work system there is little need of insisting on quantity, 
 but much need of insisting on quality. Where the latter 
 object can readily be secured by a simple process of in- 
 spection, the employer always prefers to pay by the piece ; 
 where this is impossible, he has to pay by time. In tex- 
 tile weaving, where the grades of goods are simple and 
 definite, it is easy for an inspector to say whether a cer- 
 tain piece of cloth should be passed or rejected. Weav- 
 ing is therefore done by the piece ; the inspector looks 
 out for the quality and the operative for the quantity. 
 But in the work of a machinist, where it is impossible to 
 inspect the results quickly and surely, the workman must 
 be given every incentive to do his work well rather than 
 to do it hurriedly. He is therefore paid by the day ; he 
 looks out for the quality of his work and the foreman for 
 its quantity. 
 
 § 338. Differences in the rate of wages among produ- 
 cers of marketable goods are due far more to variations 
 in efificiency than to variations in piece wages. If we 
 arrange laborers of different countries in the order of 
 their earning power, we shall find a corresponding differ- 
 ence in their efficiency. America stands highest, and 
 England next, followed by other countries of western 
 Europe ; the efficiency of the laborer of eastern Europe 
 is much lower, and that of India lowest of all.^ 
 
 Nor is this at all surprising. Where different laborers 
 compete in producing the same article for the same mar- 
 ket, there are many things which tend to make the wage 
 payments per unit of product substantially the same for 
 
 ^ F. A. Walker, " Political Economy," p. 56. For fuller details, excel- 
 lently presented by the same author, see "The Wages Question," ch. iii. 
 Similiar conclusions are reached by Brassey, Schoenhof, and Schulze- 
 Gaevernitz. 
 
304 WAGES. 
 
 all the competitors. If the piece wage for one group of 
 employers differs greatly from that for another, competi- 
 tion tends either (i) to force the price of the product so 
 low as to drive the high cost labor out of business ; or (2) 
 if the amount of low cost labor is inadequate to do this, 
 the persistent high price produces an extra profit to the 
 employers of low cost labor, which other capitalists are 
 anxious to share ; and the competition of new capital, 
 bidding for the services of a restricted supply of low 
 cost labor, forces up the rate of piece wages which the 
 laborers can demand. For instance, if one group of 
 laborers makes a yard of cloth for ten cents, and another 
 group charges fifteen cents for the same service, it gen- 
 erally happens either that the employers of the former 
 group flood the market with products at fourteen cents 
 and drive the latter group out of business, or else that all 
 sell their products at a price above fifteen cents, and that 
 competition between different capitalists for the services 
 of the low cost labor forces its price up to a level which 
 leaves only the ordinary rate of profit. In the former 
 case the general wage-level would go down to ten cents ; in 
 the latter case it would go up to fifteen cents ; in either 
 alternative we should see an equalization of piece wages 
 among such laborers as continued to compete. 
 
 § 339. There are only two considerable exceptions to the 
 rule here laid down, (i) When different competitors use 
 different methods of production, interest may take a larger 
 share of the product in the one case than in the other, and 
 equal prices of products, fixed by competition, may leave 
 unequal remainders for labor. (2) When the operation of 
 low cost labor is restricted to land of exceptional advan- 
 tage, or otherwise limited by monopoly, there may not 
 be enough competition of capital to give the low cost 
 laborer the advantage of his superior economy. But the 
 importance of these exceptions, especially the former, 
 is much overestimated. One of the facts which most 
 
PAYMENT FOR SERVICES, 305 
 
 strongly impresses the student of industrial statistics is 
 the comparatively small range of variation in piece prices 
 for competing goods, even where the conditions of pro- 
 duction are wholly dissimilar. 
 
 § 340. On the other hand, the labor cost of services^ as 
 distinct from goods, shows a very wide range of variation. 
 This is because a community must have a certain number 
 of people engaged in personal and professional service, 
 and must pay them wages corresponding to what their 
 efficiency would secure if they were engaged in the produc- 
 tion of goods for market. The greater the productiveness 
 of industrial labor in any community, the higher will be 
 the cost of those services in which the laborer has no in- 
 dustrial advantage over those who perform similar services 
 elsewhere. The price of personal and professional service 
 in America is high because the people who render it 
 could niake large products by going into industrial em- 
 ployments.^ To induce them to enter the former field, 
 they must be paid at a rate based upon their probable 
 efficiency in the latter. 
 
 § 341. In occupations requiring no special skill, if the 
 rate of wages as fixed by the discounted value of the pro- 
 duct is insufficient to keep the laborer alive, the number 
 of laborers will be rapidly reduced. This will diminish 
 the supply of products in any industry where it occurs, 
 and will increase their price. This process will go on in 
 manufacturing industries until the discounted price of the 
 product rises high enough to enable the laborer to buy the 
 necessary amount of food ; it will go on in agricultural 
 industries until cultivation is restricted to more advan- 
 tageous lands or systems of tillage, so that the per capita 
 product is large enough to maintain the workmen in 
 
 ^ For the same reason we are apt to have a relatively wide margin between 
 wholesale and retail prices ; because the American retailer charges more per 
 day for his services than the foreign retailer, without always being able to 
 handle a correspondingly larger amount of products in the course of a day. 
 
306 WAGES, 
 
 undiminished numbers. Conversely, if the rate of wages 
 is more than sufficient to keep the laborer alive, there is a 
 similar tendency (though not so universally operative) to 
 increase numbers and reduce the price of the product, 
 until the limit of subsistence is reached. 
 
 In occupations of higher grade, there is a similar mini- 
 mum of wages fixed by the cost of educating and maintain- 
 ing a laborer in the manner necessary to their successful 
 prosecution. If the remuneration of high-grade labor 
 falls, below the cost of educating and supporting it, the 
 number of laborers must necessarily diminish and the price 
 of products will tend to rise. If, on the other hand, the 
 remuneration is in excess of the cost of education and 
 maintenance, there is a tendency towards increase of 
 number of laborers and fall in price of products. 
 
 § 342. It might seem at first sight as though we had 
 solved the problem of wages by thus indicating the con- 
 ditions under which the supply and demand of labor of 
 any grade are in equilibrium. But when we look closely 
 at the relations between supply and demand for labor in 
 any particular trade, we are confronted with a new diffi- 
 culty. The demand for labor is measured by the piece ; 
 the supply of labor is measured by the day. No equa- 
 tion between the two is possible until we know the num- 
 ber of pieces produced in a day ; and this is often 
 precisely what is hardest to determine. A community 
 stands ready to employ laborers in producing 10,000 
 yards of cloth at ten cents per yard, 11,000 at nine cents, 
 12,500 at eight cents, 15,000 at seven cents, etc. Whether 
 the 10,000 yards of cloth be made by 1,000 men earning 
 $1.00 per day or 500 men earning $2.00 per day is gener- 
 ally a matter of indifference to the buyers. On the other 
 hand we find 1,000 men ready to v/ork in cloth factories 
 at $2.00 a day, 900 at $1.75, 800 at $1.50, 700 at $1.25, 
 600 at $1.00, etc. Whether they make the $2.00 by pro- 
 ducing 20 yards at ten cents, or by the use of improved 
 
THE MEDIAEVAL SYSTEM, 307 
 
 machinery which will enable them to produce 25 yards at 
 eight cents, is in the majority of cases a secondary matter 
 to the wage-earners. Instead of one solution which equa- 
 lizes supply and demand we have an indefinite number 
 of possible solutions based on the varying rate of speed of 
 different laborers. 
 
 § 343. When there is little competition of capitalists, 
 there is a tendency to accept the solution which gives the 
 laborer just enough to keep him alive, and to get what 
 service can be obtained from a body of workers of low 
 efficiency. In cases of this kind the position of the com- 
 mon laborer is very like that of a slave, and the only 
 escape from this lot is by combinations of labor strong 
 enough for physical as well as industrial defense. Under 
 this system, which was substantially that of mediaeval 
 society, we find : 
 
 (i) A large body of peasants, producing food for the 
 whole community, and receiving enough of the bare 
 necessaries of life to keep them in condition to work. 
 The only thing that can raise their condition is a plague 
 or other destructive agency which so reduces their num- 
 bers as to give a scarcity value to their services, lasting 
 long enough to establish a customary rate of wages higher 
 than that which they had previously received — a state of 
 things exemplified in England from the thirteenth to the 
 fifteenth century. 
 
 (2) A body of craftsmen, whose numbers are determined 
 chiefly by the demand of the rich for their products, who 
 receive enough to pay the expenses incident to their edu- 
 cation and the maintenance of their station in life, and 
 who are sufficiently organized to resist any attempt to re- 
 duce their wages below this figure. 
 
 (3) The privileged classes, controlling at once the prop- 
 erty and the political power of the nation, who use the 
 surplus food produced by the peasants, not as a means of 
 giving employment to labor, but as a means of supporting 
 
308 WAGES. 
 
 in idleness a number of persons corresponding to the 
 amount of available food. 
 
 § 344. It is the theory of most socialists that this state 
 of things continues to the present day ; that the unor- 
 ganized laborer receives starvation wages ; that the organ- 
 ized laborer is able to insist on something more by virtue 
 of combination ; but that the property owners or capital- 
 ists are the residual claimants of an enormous surplus. 
 The use of this surplus as capital, the socialists regard as 
 an attempt on the part of the property owners to pur- 
 chase more labor at starvation rates and appropriate a 
 new surplus to themselves. In other words, they think 
 that the modern industrial system really applies mediaeval 
 methods of distribution to the increased number of peo- 
 ple which the use of modern methods of production has 
 enabled the land to support/ They believe that any in- 
 crease in the efficiency of labor helps the employers and 
 not the employed. A single laborer may raise his earnings 
 by increasing his speed ; but he thereby increases the sup- 
 ply of labor, reducing the piece price for his fellows and 
 for himself. The socialists (and many observers who are 
 not socialists) think that if one group of persons has ready 
 money, or things which can be converted into ready money, 
 while another group has labor to sell for this money, an 
 increase of the efficiency of labor will put the latter group 
 at a disadvantage in all its bargains. As the labor makes 
 more products the price of products will be cheapened. 
 The capitalists, or people who own the money, will be in a 
 position to get more products for the same expenditure. 
 If they increase their consumption in proportion to the 
 increase of efficiency of labor, they will enjoy more goods 
 and leave the laborers neither better nor worse off than 
 they were before. If on the other hand they do not thus 
 increase their consumption, some of the laborers will be 
 thrown out of employment and left to starve. 
 
 The large body of people who take this view of the 
 
THE POPULAR THEORY, 309 
 
 matter — often without really formulating it in detail — re- 
 gard the luxury of the rich as being on the whole a means 
 of preventing harm to the poor. They regard free ex- 
 penditure of the capitalists' money as a gain to the laborers, 
 and its saving as a loss. Industry on the part of the 
 wealthy sometimes seems to them a greater vice than idle- 
 ness ; for by the exerciseof industry the rich man appears 
 to take the bread out of the poor man's mouth and to de- 
 prive some laborer of the chance for a living in order to 
 add a few dollars to an already overgrown fortune ; while 
 if he lives in idleness and buys the labor of others, they 
 think that he at least transfers some part of his wealth to 
 those who need it more than he does. They often look 
 with complacency on the actual destruction of wealth as 
 a blessing in disguise. The broken window pane or burnt 
 house becomes in their eyes a source of new employment 
 to labor, transferring money from the pockets of the men 
 who own property to those of the men who are dependent 
 on their work for support. Not a few of them advocate 
 inflation of the currency, by every conceivable means 
 whether practicable or not, in the belief that whatever 
 increases the supply of money increases the demand for 
 labor and the advantage of the laboring classes. 
 
 § 345. This view of the matter is justly criticised as a 
 superficial one. It looks at temporary effects on nominal 
 wages, and disregards permanent effects on real wages. 
 A fire may increase wage-payments in certain trades in a 
 particular locality ; but there are two indirect consequences 
 ,of the fire which generally make the apparent advantage 
 to laborers worse than illusory. In the first place, the 
 money used to rebuild the burnt house is almost always 
 diverted from some other line of expenditure, so that the 
 gain to one group of workmen is offset by a loss to other 
 groups. In the second place, this utilization of labor to 
 replace commodities which have been destroyed, instead 
 of producing new ones, means that the community in the 
 
3IO WAGES. 
 
 end has fewer comforts and enjoyments than it could 
 otherwise have commanded. This scarcity shows itself 
 in advanced prices. For a considerable time after a fire, 
 house rents will be higher than they were before ; so that 
 the same amount of nominal wages means less available 
 comfort and enjoyment. The laborers are producing for 
 one another as well as for the capitalist. They are spend- 
 ing money for one another's products ; as consumers they 
 profit by an increase in the product, or suffer by its dimin- 
 ution. The destruction of property by the fire does not 
 represent something taken from the capitalist and given 
 to the laborer. It represents a loss of comfort in the com- 
 munity from which, as a rule, no class can wholly exempt 
 itself. 
 
 Nor does the money which the rich man saves repre- 
 sent something taken from the laborers and accruing to 
 the capitalists as a class. The man who saves money and 
 invests it is simply spending it in a far-sighted way, and 
 paying laborers for services which meet the future wants 
 of many men instead of the present luxuries of one 
 man. 
 
 The man who spends money in employing laborers on 
 things that are really useless, causes food to be consumed 
 by a group of workers who leave nothing permanent to 
 show for it, and lessens the amount of useful things which 
 the community can enjoy in the immediate future. He 
 usually does more harm than the man who saves money 
 and hoards it ; for while hoarding chiefly affects nominal 
 wages, unwise expenditure affects real wages. The harm 
 done by the miser is a negative one — he fails to make use 
 of the opportunities which have been given him. The 
 harm done by the spendthrift, though not equally obvious 
 to the popular vision, is a positive one — he actually leaves 
 fewer products for other people to enjoy. 
 
 If we look at real wages instead of nominal ones, at 
 things instead of money, we shall see that it is not the 
 
THE WAGE-FUND THEORY, 311 
 
 wealth that the capitaHst consumes which really goes to 
 the laborers, but the wealth that he does not consume/ 
 
 § 346. By those who have grasped this fact it is uni- 
 versally held that increased production due to efficiency 
 of labor accrues very largely to the laborers themselves. 
 
 During the early part of the present century the great 
 body of economists believed that this process was effected 
 through the agency of what they called a wage-fund. 
 This fund consisted of that part of the past product of 
 the community which was not consumed, but set aside 
 by the capitalists to assist future production. In the 
 very act of directing productive industry, this product 
 was transferred from the capitalists to the laborers in the 
 form of a wage-payment. The total quantity of the 
 unconsumed product thus used as capital represented the 
 aggregate real wages of the community. It was this capi- 
 tal and not the desires or wants of the consumers which 
 fixed the amount received by the laborers as wages. De- 
 sires and wants of consumers might determine the direc- 
 tion in which labor was applied ; they did not determine 
 the quantity of its aggregate remuneration, except so far- 
 as they might cause labor to be misapplied and prevent 
 the future capital of the community from becoming as 
 great as it otherwise might be. If a man employed laborers 
 in trimming a lawn instead of cultivating a wheat field, he 
 did not thereby either increase or diminish this year's 
 wages; these were determined by last year's product. 
 But he diminished the amount of next year's real wages, 
 because he caused less wheat to be produced, and thereby 
 
 ' This is what is really meant by the somewhat infelicitous phrase, used by 
 many economists, that a demand for commodities is not a demand for labor. 
 The demand for labor, using the word demand in its older sense of '* aggre- 
 gate price offered," rather than " quantity demanded," [(§ 89, note)] is not to 
 be increased by increasing the price which consumers are compelled to pay 
 for commodities, but by increasing the capital available for the maintenance 
 of labor. The personal consumption of the property owners is no measure 
 of the amount of comforts which will go to the support of the laborers. 
 
312 WAGES. 
 
 lessened the amount available for the support of next 
 year's labor. That industry was limited by capital and 
 not by consumers' wants, constituted the cardinal point in 
 the wage-fund theory. Whatever tended to increase or 
 diminish public capital, tended tc increase or diminish 
 the fund from which real wages were paid, and by which 
 they were measured. This fund could be increased by 
 efficiency on the part of the laborers, or by saving on the 
 part of the property owners. It could be diminished by 
 destruction of property, by idleness, or by useless luxury. 
 If the laborers, by combination or by favorable circum- 
 stances of any kind, got an unduly large share of the 
 national income in one period of production, they so 
 lessened the rate of profit that the inducement to save 
 was diminished ; and this tended to diminish capital and 
 wages for the years following. If, on the other hand, they 
 were deprived of a part of their share during one year,, 
 profits were so increased that there would be a greater 
 stimulus to save ; the wage-fund for the following years 
 would thus be enlarged, and the loss to the laborers 
 would prove only temporary. 
 
 To find the average rate of wages in any community^ 
 according to this theory, it was only necessary to divide 
 its total wage-fund by the number of the laboring popula- 
 tion. The general rate of wages as thus established could 
 not be effectively raised except by an increase of the wage- 
 fund, or a diminution of numbers. The free capital or 
 wage-fund constituted the source of the demand for labor ; 
 the laboring population represented the supply ; the aver- 
 age rate of wages was fixed by the ratio between the two.' 
 
 § 347. The wage-fund theory, at any rate in the form 
 in which it is presented by its more uncompromising 
 advocates, involves several unwarranted assumptions. 
 
 * It was one of those cases where the supply of labor was synonymous with 
 the stock, because the laborer without capital could not wait, but must sell 
 his services at once. Compare § 94. 
 
THE WAGE-FUND THEORY CRITICISED, 313 
 
 If we accept MacCulloch's definition of capital as com- 
 prising all those portions of the products of industry that 
 may be directly employed either to support human exer- 
 tion or to facilitate production, we shall find that the 
 amount of real wages falls very far short of what the 
 theory requires. Not all the things that may be em- 
 ployed for this purpose, are thus employed. A part is 
 spent in charity. A part gets into the hands of criminal 
 or semi-criminal classes, who convert it to their own uses 
 without giving society any return. A part is destroyed 
 by time and natural decay without reaching the consumer 
 at all. 
 
 Nor does the amount actually used as capital bear any 
 fixed proportion to the total product which might possibly 
 be thus used. The proportion wasted is by no means con- 
 stant. It varies from place to place and from year to 
 year. The ability of a community to pay high wages 
 seems to depend more upon the avoidance of waste than 
 upon the increase of accumulations. Laborers are better 
 off where there is a small surplus effectively utilized, than 
 where there is a large surplus ineffectively utilized. As 
 Newcomb well expresses it, wages are a flow and not a 
 fund. They are a quota of the national income rather 
 than of the national capital. 
 
 § 349. Contrast the conditions affecting wages in old 
 and new countries. The old countries have large amounts 
 of capital ; not only large in the aggregate, but large in 
 proportion to the number of laborers. New countries, 
 settled by men of the same race, have relatively small 
 amounts of capital. According to the wage-fund theory 
 wages should be high in the old country and low in the 
 new. But the facts are just the reverse. It is the new 
 country, with small capital, that has the high wages. Nor 
 can this difference be explained, as Cairnes ingeniously 
 undertakes to explain it, by saying that the capital of the 
 old country is invested in machinery, and that the supply 
 
314 WAGES. 
 
 of products constituting the wage-fund available for the 
 use of its laborers is therefore small. Making all due 
 allowance for the large amount of wealth represented by 
 machinery, it still remains true that the supply of unused 
 and disposable products in an old country is much larger 
 in proportion to its population than is the case in a newer 
 one. The reason for the difference in wages must be 
 sought chiefly in the fact of the superior utilization of its 
 small stock of capital by the new country, where business 
 is active and idlers are few. 
 
 We find the same point illustrated by the conditions 
 which prevail at the close of a war. At such a time the 
 supply of unconsumed products is apt to be small ; but 
 if the war has not lasted long enough to destroy the spirit 
 of business enterprise, nor been so disastrous as to paralyze 
 ambition, wages will generally be high. The effort to 
 regain lost ground, and the impossibility of supporting 
 idlers, cause all the available resources to be used in such 
 a way as to counterbalance the evil to the laboring classes 
 which would otherwise result from the diminished amount 
 of capital. 
 
 This point is even more conspicuously illustrated in the 
 course of a commercial crisis. At the beginning of such a 
 crisis there is a large stock of unsold commodities await- 
 ing consumption. Statistics of the different trades will 
 show the presence of all the conditions which, according 
 to the wage-fund theory, should promise prosperity to 
 the workmen and continuance of high real wages. Yet 
 somehow the very amount of these commodities seems to 
 form an obstacle to their utilization. People are so afraid 
 to continue their production when there are too many un- 
 sold products on hand, that the demand for labor is less- 
 ened and wages fall. A few years later, when the stocks 
 of goods have wasted away and the surplus on hand is 
 small, a revival of business, stimulated by the very small- 
 ness of visible stocks of goods, results in giving the laborer 
 
INDUSTRY AND CAPITAL, 315 
 
 large employment and a large share in the product. Under 
 such circumstances it may happen that his wages are not 
 limited by the amount of goods left over from past periods 
 of production. If he receives large money payments, and 
 does not spend all of the money thus obtained until the 
 next period of production has become so far advanced 
 that the goods produced during that period are placed at 
 his disposal, he can actually obtain his real wages, not out 
 of past accumulations, but out of current products. 
 
 § 350. These illustrations are enough to show that there 
 is a fallacy in the idea that industry is limited by capital. 
 In one sense of the word *' limited," this proposition is 
 measurably true ; for the amount which goes to the sup- 
 port of the laborers cannot, except under rare conditions, 
 exceed the unconsumed surplus from previous periods of 
 production. But as the word is commonly understood, 
 it means something more than this. If we say that one 
 thing is limited by another we imply, not only that the 
 first cannot exceed the second, but that it habitually 
 comes up to the bounds set by the second. If we say 
 that the chance of aerial navigation is limited by the 
 height of the atmosphere, we do not mean that a balloon 
 could not go higher than the atmosphere does, which is un- 
 doubtedly true ; but that it can go as high as the atmos- 
 phere does, which is undoubtedly false. If we say that 
 wages are limited by capital, we are naturally understood 
 as meaning that wages go as high as the amount of 
 accumulations will permit ; and in modern industrial 
 society this proposition is not borne out by the facts.* 
 
 ^ The wage-fund theory seems to involve a certain confusion betw^een 
 capital as a mode of measurement of wealth (§ 5), and capital as a mode of 
 use of wealth (§§ 7, 138). If we look at MacCulloch's view that the wealth 
 of the community measured as capital furnishes an indication of the amount 
 which will be paid in wages, we are justified in saying that the proposition 
 is important but untrue. If we look at Ricardo's view, that it is the amount 
 of wealth used as capital which furnishes the indication of the amount of 
 wages, we have a proposition which is true, but relatively unimportant. The 
 
3l6 WAGES. 
 
 § 351. According to the theory which is held by most 
 modern economists, wages are kept up, not by the exist- 
 ence of a fund of pubHc capital which must necessarily go 
 to the laborer, but by the competition of a number of 
 individual capitalists, which reduces profits to a minimum 
 and compels them to give the laborer as large a share of 
 his product as is consistent with the continuance of indus- 
 trial enterprise. The advocates of this theory claim that 
 there is such activity in the accumulation of capital that 
 competition secures to the laborer the chief benefit of 
 modern improvements, and forces the capitalist to con- 
 tent himself with a small fraction of the gain instead of 
 the lion's share. 
 
 The piece-price which the employer can afford to pay in 
 the long run, is the price of the product less the interest 
 on the capital involved in its production ; and in the long 
 run he is also compelled to pay as much as this. For if 
 the price of the product more than pays wages and in- 
 terest, new competition sets in which drives prices down 
 and wages up ; and if, on the other hand, the price of the 
 product less than pays wages and interest, the invested 
 
 error of the advocates of the wage-fund theory consists in the assumption 
 that the logic of Ricardo can be applied to the concept of MacCulloch. 
 They see that the payment of wages represents an investment of capital ; 
 they proceed to assume that the amount of such investment will bear a de- 
 terminate proportion to the total amount of unconsumed surplus which is 
 physically capable of investment. But the two things are totally different ; 
 nor does the amount of the one bear any fixed ratio to that of the other. 
 
 When John Stuart Mill defined capital as including whatever things are 
 destined to supply productive labor with the various means needed for the 
 process of production, and thus remitted to the mind of the employer the 
 determination of the amount of the wage-fund, he had implicitly aban- 
 doned the views of his immediate predecessors. But at the time when he 
 wrote his ** Principles of Political Economy," he was far from perceiving the 
 real bearing of this change on the doctrine of wages. It was not until 
 Longe and Thornton, and afterwards Walker, showed how conspicuously 
 the wage-fund theory failed to explain the facts of industry, that proper im- 
 portance was given to the anticipated value of a futwe product in deter- 
 mining the share of the past product of industry which goes to the laborers. 
 
THE RESIDUAL THEORY, 317 
 
 capital is allowed to wear out without being replaced 
 until prices are driven up and wages down. Neither of 
 these processes is under modern conditions a quick one, 
 but both are sure to come about in course of time. It 
 is from observation of these facts that Walker has de- 
 duced his theory that wages are the residual share of 
 the product of industry. If we look at any one establish- 
 ment, for a short period, this statement seems palpably 
 untrue ; for the employer pays a stipulated sum in the 
 form of wages, and takes whatever may be left. But if 
 we look at the industry as a whole, and at the course of 
 events in the long run, we find much to confirm General 
 Walker's view. 
 
 § 352. The residual theory has a great advantage over 
 its two predecessors, in explaining accurately the facts of 
 modern business. It shows, as the popular theory cannot, 
 why wages are high where labor is efficient. It explains, 
 as the wage-fund theory fails to do, why wages are high 
 when unconsumed products are scarce. It makes wages 
 depend on a flow of capital instead of a fund. But it is 
 not quite free from unwarranted assumptions. In laying 
 stress on the competition of capitalists with one another, 
 it seems to lose sight of the corresponding competition 
 among laborers. Increase of numbers is tending to drive 
 wages down in the same way that increase of capital is 
 tending to drive profits down. To be sure, the cases are 
 not quite parallel ; for a reduction in the rate of profit 
 means increased demand for labor, while a reduction in 
 the rate of wages means diminished demand for capital.' 
 
 ^ If the rate of profit falls, the laborer gets more nearly the whole amount 
 of the product. But if the rate of wages falls we have a corresponding fall 
 in prices and little change in the relative shares of labor and capital. 
 
 It is a common but erroneous assumption that if general wages are reduced 
 profits will rise. A fall in real wages, the methods of industry remaining 
 unchanged, means that less capital need be advanced in productive industry. 
 Now this lessened demand for capital would certainly not raise the rate of 
 profit — if anything it would probably lower it. If the amount of invested 
 
3l8 WAGES. 
 
 But this only amounts to saying that while part of the 
 gain from low profits goes to the laborer, all of the gain 
 from low wages goes to the consumer. It is the con- 
 sumer who is the residual claimant in the results of 
 modern industrial improvements. Inactive competition 
 on the part of any large group of producers may delay 
 this result ' ; it cannot essentially alter it. No one group 
 of producers can be marked as a residual claimant under 
 the modern process of industrial competition. Most of 
 the gain from any improvement in production ultimately 
 goes to the consumer, whoever he may be, by enabling 
 him to get his products cheaper. 
 
 § 353. Here we find a grain of truth in the much 
 despised popular theory. It is the possessors of ready 
 money that derive the chief advantage from improved 
 efficiency of labor. The error of the popular view of 
 wages is not in its assumption that increased efficiency 
 gives its main benefit to the buyers of products, but in 
 the assumption that those buyers are necessarily the rich, 
 the holders of accumulated wealth. A man's power of 
 consumption is measured by the income he receives rather 
 than by the capital which he owns. If his labor affords 
 him an income of one thousand dollars a year and he 
 spends it all, he never obtains any accumulated wealth, 
 but he obtains an enormous advantage from the large 
 amount of comforts which modern industrial processes 
 have placed at his disposal. The gain from an improve- 
 
 capital is diminished and the rate of profit not increased, the aggregate of 
 profit falls with a fall in wages, and the whole gain goes to the consumer. 
 
 Of course, if an individual employer can reduce wages, he thereby 
 increases his profits ; and an observation of this fact has doubtless been the. 
 source of the mistaken belief that what can happen in each particular case 
 can happen in all simultaneously. 
 
 ^ Cases of this kind have given rise to an opinion, frequently expressed, 
 that the benefit of improvements goes to the owners of the productive agent 
 which increases most slowly^ be it land, labor, or capital. This seems to be 
 a much more sweeping generalization than is warranted either by the facts 
 or the theoretical proofs which have been adduced to support it. 
 
LABORERS AS CONSUMERS, 319 
 
 ment goes chiefly to those who consume the products 
 cheapened by such an improvement ; and these may be 
 either laborers or capitaHsts. The study of distribution 
 of wealth between different classes resolves itself into a 
 study of the consumption of wealth by different classes. 
 If an improvement in production is of such a character as 
 to cheapen goods used by capitalists, and not to afTect 
 those used by laborers, the popular theory of wages is the 
 true one. The gain in such a case goes entirely to the 
 rich. If, on the other hand, the improvement is such as 
 to cheapen products used by the laborer, and not by the 
 capitalist, the gain goes entirely to the laborer, and the 
 wage-fund theory is the more correct one. The popular 
 theory tacitly assumes that every improvement is of the 
 former class. In point of fact, modern improvements 
 belong chiefly to the latter. 
 
 § 354. Let us look at this matter in detail. Suppose 
 that it were thus possible to divide goods into two classes ; 
 one used by the rich, the other by the poor. An improve- 
 ment in the production of goods consumed by the rich 
 would cheapen the price of such goods and enable the 
 rich to get more for their money. This would be the 
 only effect. It would not increase the amount of real 
 capital available for the support of labor, except in a very 
 slight degree, by an indirect process of redistribution of 
 producers in different employments. The surplus avail- 
 able for laborers would probably remain unchanged. The 
 activity of capital in giving employment to labor would 
 find itself restricted within narrow limits. 
 
 Suppose, on the other hand, that the increase is con- 
 fined to things which laborers use. Under such a con- 
 dition the rich would find themselves practically compelled 
 to reinvest the whole surplus. They would have no 
 use for the increased production. They would be forced 
 to convert it into capital. The benefit of the surplus 
 would accrue to the laborers in the form of a direct and 
 
320 WAGES, 
 
 immediate increase of real wages. Barring losses from 
 waste, and from the consumption of this increased pro- 
 duct by idlers instead of laborers, the wage-fund theory 
 in a case like this would be substantially the true 
 one. 
 
 What we actually see is something intermediate between 
 these two cases, but nearer the second than the first. Im- 
 proved methods have not cheapened the products which 
 are used by the rich exclusively. Champagne and yachts 
 and race horses are as costly as ever. They cheapen pro- 
 ducts which are used by poor as well as rich. Nearly all 
 the large improvements in modern industry have de- 
 pended for their success upon the creation of a wide 
 market (§ 179), appealing not only to those who have 
 accumulated large fortunes, but to those who live more 
 or less prosperously on the results of their labor. Under 
 these circumstances we find an active competition, both 
 for the services of the laborer as a producer and for the 
 money of the laborer as a consumer ; especially the latter. 
 The laborer is the residual claimant in modern industry, 
 not solely nor chiefly on account of his profit in the in- 
 crease of production, but on account of his profit in the 
 increase of consumption. 
 
 § 355. If the effect of increased efficiency in produc- 
 tion is to enlarge the amount of products available to 
 the laborer as a consumer, the question at once arises, 
 what he will do with the surplus. Four possibilities are 
 open to any group of laborers : 
 
 1. They may increase their numbers, making the aver- 
 age size of their families larger. 
 
 2. They may shorten their hours of labor. 
 
 3. They may enlarge their consumption of the products 
 of other laborers. 
 
 4. They may save money ; that is, they may waive the 
 enjoyment of a part of their income and put it at the 
 disposal of other members of the community, for the 
 
ALTERNATIVES OPEN TO LABOR. 32 1 
 
 sake of a future return which they anticipate from such 
 present abstinence. 
 
 The choice between these alternatives depends largely 
 upon the character of the laborer himself. 
 
 If he is influenced by the force of custom, and is not in 
 the habit of reasoning at all, he will unconsciously choose 
 the first alternative, supporting an increased family in the 
 old standard of comfort and bringing up a number of 
 children who in the next generation will increase the in- 
 tensity of competition of laborers with one another. 
 
 If he pursues short-sighted lines of reasoning, he will 
 take advantage of the improvement to lessen his hours of 
 labor, being able to obtain the old amount of comfort with 
 less expenditure of effort. Whether this change is a gain 
 or a loss to the community will depend largely on the way 
 in which he uses his leisure. If the time is spent in loaf- 
 ing, with its habitual concomitants, it will be a loss ; if it 
 is spent in rational enjoyment, it will pave the way for the 
 third alternative of diversified consumption, and will be 
 a means of real gain to the individual and progress to the 
 •community as a whole. 
 
 If he is in the habit of far-sighted reasoning, he will 
 choose either the third or the fourth alternative. Redu- 
 cing his labor very little, and making up by increased 
 speed for any slight reduction in hours, the far-sighted man 
 Avill take the fullest advantage of his gain as a consumer 
 and will utilize the change to secure more enjoyment, 
 either present or future, rather than to do less work. 
 He will not increase his family or diminish his output, 
 but will increase his comfort for the present and his pro- 
 vision for the future. 
 
 § 356. These differences may be illustrated mathemati- 
 cally as follows : 
 
 On the line OX (Y\^. 10) lay off equal parts represent- 
 ing units of time of labor — say hours of work per day. 
 At each of these points draw a line parallel to OY, repre- 
 
322 
 
 WAGES. 
 
 senting the intensity of enjoyment derived from the 
 results of the labor of that hour ; or, what is substan- 
 
 tially the same thing, the sacrifice which would be involved 
 in going without them. As the number of hours increases, 
 the intensity of enjoyment tends to diminish. The first 
 hours represent the difference between death and life, 
 and their product may be said to have infinite * utility. 
 Longer hours mean an increase in the total comfort 
 available ; but this increment becomes less marked as 
 the working day grows longer. If we connect the ex- 
 tremes of these lines measuring satisfaction, we obtain 
 a curve whose height at any point represents the de- 
 gree of enjoyment secured by the last unit of labor time, 
 while the total area between the curve and the two axes 
 represents the total enjoyment which the individual ob- 
 tains by his work. 
 
 If we represent the pain of successive hours of labor in 
 like manner, by lines drawn downward from OXy we can 
 construct a similar curve, below the axis, representing the 
 
 ^ Patten uses the term ** absolute" instead of "infinite," which is per- 
 fectly proper ; but he measures it by zero instead of infinity, which hardly 
 seems right. For the thing which is barely distinguishable from a necessity 
 involves a very great sacrifice, when people are forced to give it up, not a 
 very small one, and thus approximates to infinity instead of to zero. 
 
BALANCE OF PLEASURE AND PAIN, 323 
 
 sacrifices, direct and indirect * which the laborer undergoes. 
 These sacrifices during the early hours will be compara- 
 tively slight ; there may even be, as Jevons suggests, a 
 balance of pleasure in working rather than in not working, 
 in which case the curve of labor will rise above the axis. 
 But, as the hours increase, the pain and sacrifice also in- 
 crease. The laborer who exercises free judgment will go 
 on working until the (diminishing) increment of satisfac- 
 tion from the product just balances the increasing pain 
 and sacrifice from the labor. At that point he will stop. 
 In the illustration given, this condition of things comes 
 into play at the end of the ninth hour. Everything 
 before that gives a balance of satisfaction over pain and 
 sacrifice. Everything after that gives a balance in the 
 other direction. 
 
 § 357. What will be the effect on this balance, if the 
 laborer, either through his own increase of efficiency or 
 through the cheapening of the products of others, is able 
 to get more products and services for a given duration of 
 labor ? Will the enlarged quantity of possible return for 
 the tenth hour's work serve as a stimulus to make him in- 
 crease his time ? Or will the larger product which he has 
 obtained from earlier hours so appease the intensity of his 
 desires that he will stop at the eighth or seventh hour ? 
 Which will prove the stronger force, the increase of the 
 amount to be obtained, which makes additional labor seem 
 more remunerative, or the increased amount of comfort 
 already in his possession, which makes it seem less so ? 
 
 The answer to this question will depend largely upon 
 the kind of use which he makes of his wages. Assume 
 that a laborer spends part of his earnings for food, part 
 for comforts, part for luxuries, and part for social advance- 
 
 * Direct sacrifice means pain ; indirect means loss of pleasure. Patten 
 has developed some of the bearings of the difference between the two in 
 an interesting manner ; but in our elementary treatment of the subject it 
 seems hardly worth while to distinguish them. 
 
324 WAGES, 
 
 ment. While Weber's law, that increased consumption 
 is attended with diminished satisfaction (§ 92), perhaps 
 applies in some measure to all of these things, the rapid- 
 ity of the diminution is very different in the four cases. 
 It is most marked in connection with food. Hunger is 
 the most exacting of wants; but when hunger is satisfied, 
 the enjoyment connected with additional expenditures for 
 eating rapidly diminishes, and the point of satiety may 
 soon be reached. In the case of comforts like clothing, 
 fuel, or shelter, the first want is not so imperative as that 
 of hunger ; but the utility of added supplies of these things 
 does not diminish so rapidly as in the case of food. 
 While two suits of clothes do not represent twice as much 
 utility to the wearer as one suit of clothes, the gain in 
 enjoyment from their possession is relatively greater than 
 that which results from eating double the accustomed 
 number of meals. In the case of luxuries the first neces- 
 sity is much less than that for food or clothing ; but when 
 people have once begun to spend money on luxuries they 
 can go on for a long time before they find themselves 
 even approximately satiated. Expenditures for social 
 advancement are not a necessity at all, but they are 
 accompanied with almost undiminished enjoyment as 
 their amount increases. 
 
 § 358. Suppose that a laborer under old conditions, 
 working nine hours a day, spends the product of five 
 hours' labor on food, that of three hours' labor on com- 
 forts, and that of one hour's labor on luxuries ; and that 
 by some industrial change his purchasing power in all 
 these lines is doubled. What will happen? He will 
 quite certainly reduce the time devoted to the produc- 
 tion of means of purchasing food. He can get more food 
 by three hours' labor than he previously got by five ; and 
 this so far satisfies his hunger that the promise of in- 
 creased supplies from the fourth and fifth hour does not 
 constitute a motive to work for that purpose. The time 
 
ENGEVS LAW, 325 
 
 devoted to the acquisition of comforts is not so certain to 
 diminish. Not improbably it will remain nearly station- 
 ary. If he continues to work three hours for fuel, cloth- 
 ing, and house-rent, it will show that as the amount of 
 these things has doubled, the intensity of enjoyment from 
 additional supplies has halved — a probable enough result. 
 The labor-time devoted to securing luxuries is likely to 
 increase, because the increased amount of commodities 
 which he can buy gives a large enjoyment with which the 
 possession of other luxuries hardly interferes. What is 
 true of luxuries is even more conspicuously true of means 
 of social advancement. The more of these a man can get 
 for any given time of labor, the more will he try to secure 
 them independently of the amount he already possesses. 
 We are thus likely to see a redistribution of hours some- 
 what as follows : 
 
 Old Conditions. New Conditions. 
 
 Food 5 3 
 
 Comforts 3 3 
 
 Luxuries i 2 
 
 Ambitions o i 
 
 § 359. This is not mere theory. It is verified by two 
 independent lines of observation : 
 
 1. The Prussian statistician. Dr. Engel, has developed 
 the fact that the greater the wages a group of laborers re- 
 ceives, the smaller will be the percentage of those wages 
 which is spent for food. This generalization, known as 
 Engel's Law, has been confirmed by investigations in a 
 great many different countries, and has been supplemented 
 by observation as to other groups of expenditure corre- 
 sponding to the view just stated. 
 
 2. It has also been noted that an increase in the volume 
 of food products, while population remains unchanged, 
 produces a fall in price more than corresponding to the 
 increase of supply, so that the aggregate payment for such 
 products by the consumers tends to diminish. This in- 
 
326 WAGES. 
 
 dicates that consumers, when they can get a larger amount 
 of food for the same amount of labor, tend to reduce the 
 hours devoted to the work of securing food supplies. On 
 the other hand, in most manufactured articles, which 
 are matters of comfort or luxury, an increase in quantity 
 produced is accompanied by a fall in price less than cor- 
 responding to the increase in supply, so that the aggre- 
 gate payment for such products by the consumer tends to 
 increase. This shows that consumers, when they are en- 
 abled to get a larger amount of manufactured products 
 for the same amount of labor, so increase their consump- 
 tion as to devote more labor instead of less to procuring 
 things of this kind. 
 
 This result is even more conspicuously seen when we 
 come to luxuries like travel. A moderate reduction in 
 price has been sufficient to cause a great increase in the 
 use of transportation agencies, and to make the total 
 amount paid for their services much larger than it was a 
 few years ago. When the invention of the railroad en- 
 abled one man to do work which formerly required a 
 hundred or a thousand hands, it was supposed that the 
 demand for labor in moving goods and passengers would 
 be greatly diminished. But the railroad system employs 
 far more laborers in proportion to the population than 
 were employed on roads in the old days ; and this proves 
 that the people as a whole spends a larger part of its 
 income for transportation at low rates than it ever did at 
 high rates.* 
 
 ' These conditions are illustrated in the differing forms of the demand 
 curve (§ 91) for different articles. In the case of necessities, or things 
 which are regarded as necessities, a change in price is accompanied by less 
 than the proportionate change in quantity consumed. The demand curve 
 in these cases approaches more nearly to a horizontal line. Especially is 
 this true of an article like tobacco, so distinct from others in its character 
 that nothing else can be substituted for it. On the other hand, with things 
 which are not popularly regarded as necessities, a change in price is accom- 
 panied by a more than proportionate change in quantity demanded, and 
 
REDUCTION OF HOURS, 327 
 
 § 360. We have thus far assumed the hours of labor to 
 remain unchanged while the use made of the earnings of 
 those hours was redistributed. But it will generally hap- 
 pen that any increase of real wages, like that which has 
 been described, is attended with sojne reduction in the 
 hours of labor. 
 
 There are two different causes, operating on different 
 classes of laborers, which combine to produce this effect. 
 The low-grade laborer who cares much for food and drink 
 and comparatively little for other things, when he finds 
 himself able to get his accustomed living in fewer hours 
 is strongly tempted to reduce his working time ; or if he 
 continues to work as many hours as before, he reduces 
 speed in such a way as to have virtually the same effect 
 on the industrial community. Until his consumption has 
 become diversified and his ambition . developed, the mo- 
 tives for reducing his labor are stronger than those for 
 increasing his earnings. On the other hand, the high- 
 grade laborer, though anxious to increase his consump- 
 tion, finds that time is necessary for the enjoyment of the 
 new opportunities of diversified consumption which pro- 
 gress has placed within his reach. The long hours of 
 labor interfere with the enjoyment of the results of that 
 labor. He sets a limit to his working day, not so much 
 on account of the direct pain of labor as on account of the 
 indirect sacrifices connected with its long continuance. 
 He may try to combine both the means and the oppor- 
 tunity for enjoyment by reducing hours and increasing his 
 speed — in which case the reduction of the working day is 
 more apparent than real. 
 
 § 361. But will not the progress of those who wish to 
 shorten their hours or increase their enjoyments be de- 
 
 the demand curve approaches more nearly to the vertical line. At high 
 prices the demand will be trifling ; at low prices it will be many times 
 greater. Commodities of this kind are said to be sensitive ; those of the 
 former class are said to be insensitive. 
 
328 WAGES, 
 
 feated by the less intelligent laborers, who go on irration- 
 ally increasing their numbers ? Will not the whole vantage 
 ground be lost in the next generation, when a larger popu- 
 lation is competing for a hmited supply of food products 
 and disregarding opportunities for diversified enjoyment? 
 Is not the gain to the laboring classes in its nature a tem- 
 porary one, Avhich will be destroyed by increase of num- 
 bers on the part of the less intelligent members of the 
 class? In some lines of production it will. In these lines 
 the competitive system results in having our work done by 
 a large number of low-grade laborers, instead of by a rela- 
 tively small number of high-grade laborers. The ready- 
 made clothing trade in our cities furnishes perhaps the 
 most conspicuous instance. It is served by people who 
 are underpaid, underfed, and undersupplied with every- 
 thing which contributes to civilized life. The effort to 
 realize economy of production has in such cases led to the 
 employment of cheap labor in the bad sense — of labor 
 which is cheap because it does little, and which receives 
 correspondingly little. 
 
 § 362. But while low grade labor is the cheapest labor 
 in some employments, it is not cheap in others. To en- 
 able a man to do hard work he must be reasonably well 
 fed. The economy of increased power overbalances any 
 apparent loss from increased consumption. Even where 
 work requires physical strength only, the man who re- 
 ceives low wages per day is so much less efficient that 
 his labor may be very costly per unit of product. In em- 
 ployments which require mental ability as well as physical 
 strength, the inadequacy of the so-called cheap labor, and 
 its real dearness when measured on the basis of work 
 done, becomes even more conspicuously apparent. The 
 brain worker, to do his work properly, must have not 
 merely the necessary amount of food and shelter and 
 fuel, but the necessary amount of comfort and travel and 
 
ECONOMY OF CONSUMPTION, 329 
 
 education to keep the brain in working order.* A surgeon 
 or a lawyer who earns only one dollar a day is a very bad 
 man to employ. The cheap laborer cannot compete with 
 the dear laborer in lines requiring special strength or 
 special skill. 
 
 § 363. Different men require different feeding ; differ- 
 ent trades require different men. If we go into a machine 
 shop where many steam-engines are built, we find some 
 large ones and some small ones. The small ones burn 
 httle fuel, but they also furnish very little power. The 
 large ones burn ten or one hundred times the amount 
 of fuel, and require correspondingly greater care and ex- 
 penditure in every direction ; but the difference in work 
 done by large engines is such that, in those lines where 
 they can be used, the apparent waste represents a true 
 economy. So it is in the diversified industries of modern 
 life. There are some men whose maximum efficiency per 
 unit of food is obtained with small consumption and 
 small output. These go into the lines requiring neither 
 exceptional strength nor exceptional skill, and remain 
 poor because the best commercial economy in such lines 
 is obtained by a combination of low output and low 
 consumption. There are others who require for their 
 maximum efficiency a greater amount of food and a con- 
 siderable diversity of enjoyment. These go into lines 
 where the maximum efficiency is obtained by moderate 
 but not immoderate consumption. Finally, we have a 
 smaller number of men in yet higher walks of industry, 
 whose economy is like that of the engines of the Lucania ; 
 whose power can be obtained only by an enormous con- 
 sumption of the products of others, past and present, but 
 
 ^ A large manufacturing concern, within the author's knowledge, offered 
 to defray half the expenses of a visit to the Chicago Exposition for any of 
 its foremen who would make the trip, believing that the increased value of 
 their services to the concern would make the investment a paying one. 
 
330 WAGES, 
 
 is, if properly directed, capable of rendering services more 
 than proportionate to this consumption. 
 
 § 364. It is in this differentiation of employment that 
 we are to seek the cause of poverty. People will have 
 small earnings per day if they are so constituted that 
 their maximum service in the community is obtained 
 under conditions analogous to those of the small steam- 
 engine. The multiplication of numbers which is charac- 
 teristic of laborers of this grade drives the price of their 
 services so low that it becomes impossible for men with a 
 higher standard of living to compete with them in doing 
 work which requires no special qualifications, either physi- 
 cal or mental. The high-grade man who competes with 
 an increasing number of low-grade men finds himself 
 forced to the alternative of rising or dying. The compe- 
 tition of those who multiply their numbers instead of 
 shortening their hours or diversifying their consumption, 
 drives the higher class of laborers out of some things and 
 up into others. The men thus driven out cannot always 
 maintain themselves in any higher grade of employment, 
 and from this fact there results a great deal of hardship 
 to those upon whom the changed conditions come when 
 they are advanced in years ; but, on the whole, a sur- 
 prisingly large number of the workmen who appear to 
 suffer most from the competition of cheap labor are 
 forced upward in spite of themselves, — forced to do a 
 higher grade of work and to become richer and stronger 
 than they could have hoped to be under the old condi- 
 tions. The day-laborers in the United States have always 
 feared and tried to obstruct the immigration of men whose 
 habits of living were lower than their own, and whose in- 
 flux would apparently take the bread out of the mouths 
 of those who had previously done the cheapest grades of 
 work. But there can be no doubt that the successive 
 waves of immigration have improved rather than debased 
 the condition of those with whom they came into compe- 
 
INDUSTRIAL GROUPS. 33I 
 
 tition. The Irishman in 1830 forced the American up; 
 the Italian and the Canadian have forced the Irishman 
 up. The cheapening of the lowest grade of product, 
 while it has operated as a disadvantage to those who 
 compete in producing it, has served as an advantage to 
 every consumer, and has made all those in the higher 
 industrial groups better off from being relieved from the 
 necessity of doing the work which could more economi- 
 cally be done by cheap labor and poor men. 
 
 Each group of laborers contributes to the supply of 
 one particular kind of goods or services, and to the de- 
 mand for goods and services of many other kinds. Every 
 laborer who adds himself to one of these groups increases 
 the supply and lowers the price in the line which he 
 chooses. The greater the number of men in a group, the 
 smaller will be the price of their services, and the larger 
 the amounts which they have to pay for services rendered 
 by men in other groups. An addition to the numbers of 
 any given group makes life harder for those within its 
 pale and easier for those without it. 
 
 § 365. Many men find themselves bound to a certain 
 group by a custom or habit which they cannot override, 
 or by special tastes which are the result of such habit. 
 Others are free to choose their line of work as they please. 
 With some reservations, they will choose the line where 
 they think they can make the most money per year. A 
 man of given physical and mental traits will try to adopt 
 the business where those traits are most efficient — where 
 the value due to their possession outweighs the cost of 
 their maintenance. But if too many men go into the 
 same group, some must go to the wall. If a profession is 
 overcrowded, this fact reduces the amount which its mem- 
 bers can earn, until there comes a time when some are 
 forced into other trades where there is no such over- 
 crowding. The differences of wages in different employ- 
 ments are not due to differences in the pleasure or pain 
 
332 WAGES, 
 
 in the work, except so far as this pleasure or pain in- 
 creases or diminishes the number of those who enter the 
 field. They are due to the reciprocal demand of different 
 groups for one another's products or services/ The rela- 
 tive prices paid for the products of different groups must 
 be such as to secure a grade of workers within each group 
 which can give the required product at the minimum of 
 waste to society. 
 
 §366. While the characteristics of each individual are 
 the chief factor in determining to which of these groups 
 he shall belong, there are always some producers who 
 stand on the verge between a lower and a higher group, 
 and who are drafted to the one or the other by slight 
 changes in the public demand. If the majority of men 
 and women throughout the community are intelligent in 
 their consumption, spending a relatively small proportion 
 of their money for the bare necessaries of life and a large 
 proportion for comforts and enjoyments, of higher *as 
 well as lower grades, we can have a large number of pro- 
 ducers engaged in furnishing these enjoyments without 
 driving their remuneration below the necessary minimum. 
 In this way the education of the community in diversified 
 consumption becomes of the highest importance to all 
 classes in society. The qualities of an individual man 
 will determine to a great extent whether he is to be rich 
 or poor ; but the general standard of consumption of the 
 
 ^ Down to the time of Mill it was generally said that the price of articles 
 tended to conform to their labor cost. Mill showed that in international 
 trade this process was reversed ; that the remuneration of the producers of 
 goods for the export trade of different nations was determined by their 
 "reciprocal demand "for one another's products. Cairnes extended this 
 theory of reciprocal demand to explain the relative remuneration of men of 
 different social antecedents — " non-competing groups." About 1870 Wal- 
 ras, Jevons, and Menger, working almost simultaneously and quite inde- 
 pendently, showed that what Mill had treated as an exception was really a 
 rule. "I hold labor to be essentially variable," says Jevons, "so that its 
 value must be determined by the value of the produce, not the value of the 
 produce by that of the labor." 
 
EFFECTS OF LUXURY, 333 
 
 community will be the dominant factor in determining 
 how large a proportion of the community shall be rich or 
 poor. If the bulk of the people live on the minimum of 
 cheap food, multiply or at any rate maintain their numbers 
 as long as such cheap food is forthcoming, and spend com- 
 paratively little for comforts and luxuries, we shall find that 
 most of the labor of such a community is employed in ob- 
 taining subsistence for the masses. Under such circum- 
 stances the proportion of low grade labor will probably be 
 very great. If, however, a large part of the community 
 has been educated to demand something besides cheap 
 food and to exercise self-restraint in the multiplication of 
 numbers until it is possible to provide a high standard of 
 comfort, we shall have a relatively smaller demand for 
 food and a relatively larger demand for those comforts 
 and luxuries which are the product of higher intelligence 
 and require a higher rate of pay in order to enable the 
 producer to furnish them to advantage. In this way, any 
 increase in intelligence of consumption on the part of the 
 masses increases the average rate of real wages, by making 
 it possible for a larger proportion of the producers to live 
 in employments where the conditions of economical pro- 
 duction are favorable to comfort, education, and wealth, 
 rather than to poverty and numerical increase. 
 
 § 367. This must not be understood as involving indis- 
 criminate commendation of luxury. If luxury lays many 
 men and many things under contribution for the enjoy- 
 ment of one man only, it is bad for the community. If it 
 leads one man to monopolize the product of a larger 
 amount of land than is necessary for his own support, it 
 prevents others from getting food. If it causes an un- 
 necessary amount of labor to be spent for one man's 
 enjoyment, it prevents the labor from furnishing means 
 of enjoyment to many others. If, as frequently happens, 
 the product of this labor harms the efficiency of the man 
 who enjoys it, it involves an additional source of weak- 
 
334 WAGES, 
 
 ness to the community. We have seen the fallacy of 
 the attempt to excuse such luxury on the pretext that it 
 gives employment to labor. But in their well-grounded 
 protest against selfish excesses of luxury, and against the 
 excuses made to palliate them, some economists have 
 gone too far in discountenancing all unnecessary expendi- 
 ture for personal comfort. " The Puritans objected to 
 bear-baiting, not because it gave pain to the bear, but be- 
 cause it gave pleasure to the spectators." This judgment 
 is as unwarranted as the other. The intellectual progress 
 connected with using things that are not necessary is quite 
 as important to the community as the industrial progress 
 connected with producing things that are. The distinc- 
 tion between productive and unproductive consumption is 
 often drawn in such a way as to emphasize purely mate- 
 rial advances and ignore other things which are quite 
 as essential. The lack of intelligent enjoyment, in the 
 Anglo-Saxon race at any rate, involves more pressing 
 danger than the lack of readiness to save capital. If a 
 man spends his money for luxuries which do no harm, 
 and whose production does not involve a waste of land or 
 labor disproportionate to the enjoyment which they fur- 
 nish to him and to others, he is presumably helping rather 
 than hindering the progress of the community at large. 
 
 § 368. There are many schemes of social reform, whose 
 promoters expect to lessen poverty by increasing the 
 laborers' intelligence in production, but whose actual 
 promise of good to society is far more dependent upon 
 their influence on intelligence in consumption. Popular 
 education may serve as a type. This has some effect in 
 making a laborer more skilful and in enabling him to con- 
 tribute a larger share to the public income. But it does 
 not directly promote the man's earning power to a degree 
 commensurate with the time spent by the schoolboy or 
 the money spent by the taxpayer. The more advanced 
 the education, the greater is the force of this complaint. 
 
DEMAND FOR HIGH-GRADE LABOR, 335 
 
 A high school course is most useful to those who reach 
 the higher walks of life ; but all men cannot reach these 
 walks without overcrowding them : and in the lower 
 spheres of industry it often seems to do the recipient 
 little good. The greatest gain from public education lies 
 in the fact that a people which grows up with wide views 
 of life, develops wider demands for consumption. Instead 
 of a large population chiefly engaged in supplying itself 
 with a bare living, we have a somewhat smaller total 
 population, demanding and receiving more complex ser- 
 vices which their education has led them to regard as 
 indispensable, and in whose purveyance the high grade 
 laborer has an advantage over his low grade competitor. 
 Somewhat the same thing can be said of the grounds for 
 regulating the liquor traffic. The waste of productive 
 power due to indulgence in drink is only a part, and per- 
 haps not the largest part, of the evils chargeable to drunk- 
 enness. Where the passion for excess in drink stands in 
 the way of intelligent enjoyment, it promotes poverty, 
 not only by making the drinking men poor producers, 
 but by making the pubHc a poor consumer. 
 
CHAPTER XI. 
 
 MACHINERY AND LABOR. 
 
 Alleged Displacement and Degradation of Labor — Factory Acts — Labor 
 Organizations — Old and New Methods — Compulsory Arbitration — 
 The Living Wage. 
 
 W. S. Jevons , " The State in Relation to Labor." London, 1882. 
 
 J. A. Hobson : " The Evolution of Modern Capitalism." London, 1894. 
 
 G^ V. Schulze-Gaevernitz: " Der Grossbetrieb." Leipzig, 1892. 
 
 The older motives and ideas of English Trades-Unions are vi^ell presented 
 by G. Howell, " Conflicts of Capital and Labor," 2d ed. London, 1890. 
 The views of the new unionism are given by Sidney and Beatrice Webb, 
 '* History of Trade Unionism," London, 1894. There is no correspond- 
 ingly complete history of American labor movements ; perhaps the most 
 available is R. T. Ely, *' The Labor Movement in America," New York, 
 1886. 
 
 § 369. We have thus far assumed that improvements 
 in the efficiency of labor were not accompanied by any 
 radical alteration in the industrial system ; that the con- 
 ditions of employment remained substantially the same, 
 while the power of the individual workman was increased. 
 But in point of fact, the greater part of the increase in 
 the efficiency of modern labor has been connected with 
 the use of modern machinery and improved productive 
 methods which are under the control of the employer and 
 not of the laborer. Some people who admit that the 
 laborer gains by the increase of his own powers are dis- 
 posed to doubt whether a similar gain is possible for the 
 laborer when the means of increased production are held 
 in the hands of the capitalist. Especially doubtful does 
 
 336 
 
THE FACTORY SYSTEM, 337 
 
 the case seem in those large industries where combination 
 has made the greatest progress, and where the protection 
 which the workman receives from the competition of 
 different capitaHsts is apparently reduced to a minimum. 
 § 370. There are three evils which the opponents of 
 private capital charge against machinery, as now managed 
 and operated : 
 
 1. That it displaces a large amount of human labor, 
 thus taking income away from employees and giving it to 
 employers. 
 
 2. That when it does not actually drive human labor 
 out of use, it employs it in circumstances unfavorable to 
 efficiency, health, and morals. 
 
 3. That under the best conditions it deprives the work- 
 man of independence, making him a specialized machine 
 instead of a broad-minded man. 
 
 § 371. The first charge, in its wider shape, is obviously 
 belied by the facts. Machinery has not displaced labor. 
 On the contrary, there has been a most conspicuous in- 
 crease of employment in those lines where improvements 
 in machinery have been greatest. The number of persons 
 engaged in manufacturing and transportation to-day bears 
 a far larger proportion to those engaged in agriculture 
 than was the case two or three generations ago. The 
 urban population makes more use of machinery than the 
 rural population ; and it is a conspicuous fact that our 
 cities have grown faster than the country as a whole. 
 Whatever else machinery may have done, it certainly has 
 not kept labor out of mechanical industries. 
 
 Nowhere have modern methods been more strikingly 
 exemplified than in tmnsportation industries. By the use 
 of the railroad a single man is enabled to do work which 
 formerly would have been hardly within the capacity of a 
 thousand men. On this very account the introduction of 
 railroads was regarded with distrust by large classes of the 
 community. It was thought that teamsters, hostlers, and 
 
338 MACHINERY AND LABOR. 
 
 innkeepers would be thrown out of employment, and that 
 there would be no work left for them to do. But it has 
 turned out that the development of the railroad has 
 given additional work to the very classes which it was 
 expected to antagonize. While the efficiency of human 
 labor in transportation has increased a thousand-fold, the 
 volume of goods and passengers transported has increased 
 much more than this. The services of collection and 
 delivery of freight at stations now employ as many men 
 and horses as were engaged in the whole movement of 
 freight a century ago. The entertainment of modern 
 travellers affords occupation to a larger number of inn- 
 keepers than were supported by the few passengers who 
 ventured to take long journeys in ancient times. The 
 cheapening of transportation attendant upon the use of 
 improved appliances has called forth a development of 
 travel and of freight shipment more than proportionate 
 to the increased efficiency of service. The aggregate 
 demand for labor in these lines has become greater instead 
 of less. 
 
 Nor is this experience with railroad travel an isolated 
 or accidental one. It is characteristic of the effects of 
 modern mechanical processes, wherever they have been 
 applied on a large scale. The work of machinery is 
 generally of such a kind that it can be made profitable 
 only by extensive public use. If a community can buy 
 but ten pairs of shoes in a year, it will be more economi- 
 cal to have shoes made by hand, no matter what machinery 
 may be invented. In order to obtain the advantage of 
 the best modern processes of manufacture, we must make 
 a hundred thousand pairs a year. The economy of the 
 introduction of a machine consists, not in making the old 
 product at less expense and with less labor, but in making 
 a much larger product with the same labor. What is 
 called labor-saving machinery is in fact not labor-saving, 
 but product-making. It can only become profitable by 
 
INSTANCES OF INCREASED WAGES, 339 
 
 meeting the wants of the community as a whole, and not 
 those of a few rich men. 
 
 § 372. Some detailed results of improvement in ma- 
 chinery from 1840 to 1883 are well illustrated by figures 
 which Atkinson has collected from cotton mills. For 
 purposes of comparison he chose two mills which had 
 been in operation throughout this period, which em- 
 ployed substantially the same number of operatives in 
 1883 that they did in 1840, and which had not changed 
 the valuation of their capital. During the period in ques- 
 tion, the output of these mills had almost exactly trebled. 
 This increase had made it necessary to reduce the price 
 charged for the services in manufacturing (i. e., the margin 
 between selling price and cost of material) from about 
 three cents per yard in 1840 to about one cent and a half 
 in 1883. The wages paid had fallen from 1.82 cents per 
 yard in 1840 to 1.08 cents in 1883 ; but the profits had 
 fallen from 1.18 cents in 1840 to 0.43 cents in 1883. The 
 share of the laborers in the total product had risen from 
 less than 61 per cent in the former case to more than 68 
 per cent in the latter, in the face of a decided reduction 
 in the hours of labor, and an even more decided increase 
 in the number of looms and spindles per operative. The 
 actual profits on the total capital had remained about the 
 same, but the wages per operative per year had increased 
 64 per cent. Other instances like this, which have been 
 collected from different lines of business, seem to indicate 
 that under the modern industrial system there is a ten- 
 dency toward increase of wages and relative diminution 
 of profits. 
 
 To this optimistic view, that machinery benefits the 
 laborer rather than the employer, there are certain objec- 
 tions which must be carefully examined. 
 
 § 373- "^^^ increase of large fortunes on the part of the 
 owners of capital while so many of their operatives have 
 accumulated little or nothing is held by many to prove 
 
340 MACHINERY AND LABOR. 
 
 that the capitalists have been the chief gainers in modern 
 industrial progress. The growing contrast between wealth 
 and poverty seems to indicate that the rich are growing 
 richer and the poor poorer. In a new community, few 
 are very rich, but few are in danger of starvation. As the 
 community becomes older, the disparity between the 
 richest and the poorest becomes greater with each suc- 
 ceeding year. This fact of itself is thought sufficient to 
 prove that progress increases the advantages of capital as 
 compared with those of labor. 
 
 This reasoning is inconclusive. Differences of accumu- 
 lated wealth of different members of the community prove 
 nothing as to ratios of income of different classes. 
 
 The disparity in the accumulations of different men is 
 likely to become more marked as the amount of wealth in 
 any community grows larger. There is always a number 
 of people who stand at the zero point in the matter of 
 accumulation. Some men gamble and get rid of their 
 property at once ; some men drink and get rid of it 
 almost as speedily. Some without either gambling or 
 drinking are so shiftless that they refuse to work as long 
 as they have a dollar in their pockets. Some, again, are 
 unfortunate, through no fault of their own, and fall into 
 the fate of the shiftless unless relieved by charity. If 
 property were evenly divided to-day, there would soon be 
 some men who had none and others who had a great deal. 
 The successful gambler and the saloon keeper will benefit 
 by the losses of their victims ; the industrious or fortunate 
 man will find himself gradually drawing ahead of the shift- 
 less or unfortunate. The more capital there is in the com- 
 munity the greater these differences are sure to become. 
 With the increasing wealth of modern nations there has 
 inevitably been an increasing disparity between the accu- 
 mulations of those who have most and of those who have 
 least. 
 
 But this does not always represent a difference in in- 
 
ACCUMULATIONS AND INCOME, 341 
 
 come. The income of the man who has saved nothing 
 may be larger than that of the man who has saved a hun- 
 dred or a thousand dollars a year. Nor does it represent 
 a difference in enjoyment. The enjoyment of different 
 classes and different individuals in the community is 
 measured by their expenditure, not by their accumula- 
 tions. The most careful calculations show, that side by 
 side with the increase of accumulations, and partly as its 
 direct consequence, the proportion of enjoyment which 
 goes to labor is becoming larger, and the proportion which 
 accrues to capital relatively smaller. Just as increased 
 numbers of laborers mean increased competition for em- 
 ployment, forcing the position of the laboring classes 
 downward, so increased accumulations of capital mean 
 increased competition for the services of the laborers, forc- 
 ing the relative income of the capitalists downward and 
 that of the laborers upward. It is in large measure be- 
 cause of the enormous investments of capital and the 
 resulting keenness of competition among employers, that 
 the proportion of the public income going to the laborers 
 has steadily increased.* 
 
 * Several attempts have been made to measure the relative shares of the 
 annual product received by capitalists and laborers at different times. Rae 
 has made an estimate for England on the basis of figures furnished by 
 Gregory King for 168S and by Dudley Baxter for 1867. Using the term 
 " working class " somewhat narrowly, so as to exclude those receiving salaries 
 or fees, he calculates that in 1688 74 per cent of the population belonged to 
 the working class, and earned collectively 26 per cent of the entire income 
 of the country ; while in 1867 somewhat less than 80 per cent belonged to the 
 working class and earned collectively 40 per cent of the income of the com- 
 munity. Atkinson has made a similar estimate for the United States in 1880 
 in which he has included with the working class the salary-receivers as well 
 as the wage-receivers. Taking his figures from the United States census of 
 1880, he estimates the value of the commercial product of the country at 
 $10,000,000,000, while the amount paid in wages and salaries of every kind 
 was $9,000,000,000. As 1880 was very nearly a normal year, not conspicu- 
 ously marked by either inflation or depression, and as the census of 1880 was 
 better managed than any other in the history of the United States, he be- 
 lieves that this represented very nearly the ratio of wages to profits. The 
 
342 MACHINERY AND LABOR, 
 
 § 374. It is urged as proof of the diminishing share of 
 labor in the industrial product, that modern methods 
 cause more time to elapse between the rendering of labor 
 and the receipt of the product ; that while the rate of 
 profit has doubtless fallen, this fall is not proportionate to 
 the increase in the average duration of the process ; and 
 that the ratio of total profits to total wages must there- 
 fore have increased. 
 
 To this view it may be answered, first, that the rate of 
 profit (as distinct from the rate of interest) has fallen most 
 conspicuously in large industries with much fixed capital. 
 Goods are produced and sold on far narrower margins. A 
 few large employers can make more accurate calculations 
 of cost than a number of small ones ; and the very scale 
 on which the work is done, while it often seems to pre- 
 clude competition, really gives publicity to the facts with 
 regard to production and sale in a way to ensure more 
 fully both to laborers and consumers the benefit of the 
 one-price system. It may be added in the second place, 
 that instances of mistaken investment in machinery which 
 gives no profit at all, tend to reduce the gains of the capi- 
 talist classes to a far greater degree than any one would 
 assume who did not make the calculation in detail. 
 
 § 375. Another objection to the view that the benefit 
 of machinery has gone chiefly to the laboring classes is 
 based on the fact that the hours of labor have not been 
 reduced in proportion to the increased efficiency which 
 
 small proportion of profits under this estimate has excited general surprise, 
 and Hawley, in his criticism of Atkinson's methods, points out that the total 
 current product of the year 1880 should include the value of services ren- 
 dered, as well as goods consumed. Adding $2,000,000,000 on this ground, 
 Hawley makes the total sum to be divided between labor and capital $12,- 
 000,000,000, and the proportion of wages to profits 3 to i instead of 9 to i, — 
 a much more plausible result. But all estimates of this kind, however care- 
 fully made, are beset with difficulties, both theoretical and practical. For 
 the product which is distributed between laborers and capitalists is to be 
 measured as income, not as capital ; it is a flow, and not a fund ; and this 
 fact enormously enhances the difficulties of observing and measuring it. 
 
MARX'S ARGUMENT, 343 
 
 the new mechanical methods have given. Marx and his 
 followers make a great deal of this argument. They say- 
 that the inventions and appliances of the nineteenth cen- 
 tury have increased the power of labor in every line, and 
 that its average productiveness to-day can hardly be less 
 than three times what it was in 1800. Therefore, if the 
 laborer at the beginning of the present century worked 
 twelve hours a day to obtain a bare living, he ought now 
 to be able to secure the same result in four hours. If, in 
 spite of improvements, he continues to work ten or eleven 
 hours for starvation wages, it shows that the result of six 
 or seven hours' time has been quietly appropriated by the 
 capitalist. 
 
 The answer to this argument has been indicated in a 
 previous chapter. When a larger amount of products is 
 placed at the disposal of the community, different classes 
 of laborers utilize that increase in three or four distinct 
 ways. Some employ it in shortening their hours of labor, 
 some in extending their consumption of comforts and 
 luxuries or their control of industrial enterprises. Progress 
 has been made in all these directions. Some laborers 
 have become capitalists. Many more have increased their 
 •consumption of comforts and luxuries. The hours of 
 labor have been considerably shortened. But a large 
 class of laborers has been content to increase its numbers, 
 and has fallen into those lines of industry where the maxi- 
 mum economy is obtained by employing a large number 
 of people for a small daily wage. The effect of machinery 
 on the laboring classes as a whole is not to be judged by 
 its effect on those sections of the laboring class which, 
 -either by fault or misfortune, have placed themselves in 
 the position to obtain a minimum benefit, either as pro- 
 ducers or as consumers. 
 
 § 376. Another argument of those who beheve that 
 machinery has hurt the laborer is based on the facts 
 observed in every commercial crisis. The most con- 
 
344 MACHINERY AND LABOR, 
 
 spicuous, if not the most serious, distress connected with 
 hard times is found in those lines where there has been 
 great dupHcation of machinery ; Hnes where the machines 
 and the laborers together are far more than able to supply 
 the popular demand for products and services at rates 
 which will keep the workman and his family alive. This 
 criticism is not to be set aside like the two already noticed. 
 The suffering from this source is terribly severe. The 
 best that can be said is, that the evil is due, not so much 
 to the introduction of machinery as to variations in the 
 rate of its introduction, and that it is one which, after a 
 comparatively short period, works its own cure. 
 
 § 377. Let us examine the nature of the process by 
 which machinery leads to over-production and throws 
 men out of employment. 
 
 While a new machine is in process of construction, there 
 is a large temporary demand for labor in making it. The 
 capitalist is spending money which he hopes gradually to 
 recoup by the sale of the products or services of this ma- 
 chine. Until it is finished it causes an increased demand 
 for labor in the coal and iron trades, which are chiefly^ 
 concerned with the production of machinery ; after it is 
 finished, it creates a permanently increased supply of 
 consumable products or services in its own particular line 
 of work. The capitalist expects that a moderate reduc- 
 tion in the price of those products will cause an increase 
 in their consumption sufficient to enable him to sell 
 them. 
 
 If as a result of a commercial panic there is a sudden 
 cessation of investment in new machinery, we have a 
 stoppage of demand for labor in the coal and iron trades, 
 while the supply of consumable products of machinery 
 remains unimpaired. The loss of employment in the 
 trades concerned with the production of machinery oper- 
 ates to check consumption, since these laborers — no small 
 percentage of the whole people — find themselves without 
 
IRREGULARITY OF EMPLOYMENT, 345 
 
 money to spend. The manufacturers are left with a large 
 surplus of unsalable products on their hands. In order to 
 avoid an accumulation of unsold stock they are obliged 
 to limit the output of their mills, and thus the reduction 
 of employment extends far beyond the sphere of the 
 trades that were first affected and causes great suffering 
 to laborers in almost every line of industry. 
 
 § 378. This suffering constitutes perhaps the most seri- 
 ous ground for the indictments of the socialists against 
 the capitalistic system of production. It is not, however, 
 chargeable to machinery ; nor even to the private owner- 
 ship of machinery, for we find similar irregularities of 
 employment in industrial enterprises managed by govern- 
 ment. It is due to variations in the rate at which 
 machinery is introduced ; variations stimulated some- 
 times by inflation in the currency, sometimes by unwise 
 tariff legislation, sometimes by the abuse of commercial 
 credit and the reaction which inevitably follows it. Nor is 
 the position of the laborers permanently depressed by these 
 misfortunes. The chief ultimate loss falls on the capitalists. 
 Fixed capital is almost always permanently reduced in 
 value by the readjustments of a commercial crisis, while 
 wages return to their old figure in the next recurring 
 period of prosperity. 
 
 § 379. The second great charge made (§ 370) against the 
 factory system is that it displaces a higher grade of labor by 
 a lower grade ; sometimes substituting the work of women 
 and children for that of men ; sometimes substituting work 
 under conditions physically or morally unhealthful, for 
 work under healthful conditions; sometimes substituting 
 specialized and mechanical work for diversified occupation 
 which contributes to general intelligence. 
 
 § 380. In point of fact, the introduction of machinery has 
 not been attended with an increase in the proportion of 
 labor done by women and children, but with a diminution. 
 If we wish to find the place where the largest amount of 
 
346 MACHINERY AND LABOR, 
 
 work is done by the weaker members of society, we must 
 look to the peoples whose civilization is least advanced. 
 A much larger proportion of industrial work is done by 
 women in the unprogressive parts of Europe, where mod- 
 ern machinery is little known, than in those which have 
 felt the fullest effects of economic progress. As we ex- 
 amine the changes in the United States from one decade 
 to another, we find that successive censuses show an in- 
 creasing proportion of men engaged in manufactures, a 
 nearly stationary proportion of women, and an actually 
 decreasing proportion of children. While there is proba- 
 bly much more employment of women and children in 
 factories than is desirable for the best interests of the com- 
 munity, the facts which we have at command indicate 
 that we are better off in this respect to-day than we have 
 been in previous generations. 
 
 § 381. Those who hold the opposite view and think 
 that the use of machinery increases the proportion of 
 women's and children's labor, rely on two arguments to 
 prove their position. In the first place, they say that the 
 introduction of machinery dispenses with the necessity of 
 physical strength, and enables the weaker members of the 
 community to do many things which formerly required 
 the direct attention of the stronger. This is true as far 
 as it goes, but it is inconclusive. Machinery in its com- 
 plicated forms may lessen the demand for physical 
 strength, but it greatly increases the demand for responsi- 
 bility in handling it. The races which are successful in 
 dealing with machinery are those which have the mental 
 and moral qualities that enable them to operate it with- 
 out destruction. A lessened demand for strength which 
 might increase the use of child labor is counterbalanced 
 by an increasing demand for continuity of attention and 
 intelligent care which makes such labor inapplicable. 
 
 § 382. Another argument of those who believe that the 
 factory system has increased the employment of women 
 
UNHEALTHFUL EMPLOYMENT. 347 
 
 is founded on the high rate of infant mortality which pre- 
 vails in large cities. It is said that this points clearly to 
 the employment of married women in factories when they 
 should be attending to their children at home. This in- 
 ference is not fairly warranted. The conditions of city 
 life are so far adverse to the health of little children that 
 we may expect to see a high infant death-rate in cities, 
 whether the mother stays at home or goes out to work. 
 In England, where the vital statistics are far more accu- 
 rately kept than in this country, the largest percentage of 
 infant mortality is seen in Liverpool, which among all the 
 leading English cities is probably least devoted to manu- 
 facturing. So far as the factory system has caused peo- 
 ple to crowd in cities it may be held responsible for the 
 increase of infant mortality ; but it is through the lack of 
 air and sunlight that this effect seems to be produced, 
 rather than through the employment of married women 
 in factories. 
 
 § 383. The charge that factory labor is physically un- 
 healthful is so vague as to be difficult to discuss. Some 
 factory employments are of course injurious to health ; so 
 are some home employments. If we wish to see labor in its 
 most abject circumstances we must look, not to the large 
 factory, but to those survivals of the earlier domestic sys- 
 tem of industry which are exemplified in the tenement- 
 house districts of New York or the East End of London. 
 ■ 
 
 The crowding in factories with insufficient air space or 
 bad ventilation is sometimes a great evil ; but the air 
 space and ventilation of factories are as a rule indefinitely 
 better than the air space and ventilation to which the 
 operatives are elsewhere accustomed. " The trouble," 
 says Colonel Wright in his monograph on the factory 
 system of the United States, " is not in the air space of 
 the factories but in that of the homes. The air of a cot- 
 ton factory is better than that of a lecture room." The 
 statistics of mortality in the various occupations are not 
 
348 MACHINERY AND LABOR, 
 
 at all decisive as to the healthfulness or unhealthfulness 
 of factory life. According to Colonel Wright's observa- 
 tion, they " prove the one or the other conclusion, as the 
 motive of the person using the statistics may indicate." 
 
 § 384. Nor are the moral results of the factory system 
 as bad as those of the domestic system which it super- 
 seded. The intemperance of manufacturing towns seems 
 to be a result of town life rather than of manufacturing. 
 It has been proved in France ,that drunkenness among 
 factory operatives is less than among laborers of other 
 kinds ; and it is believed by Colonel Wright that the same 
 thing can be said of the United States. It is still clearer 
 that the factory system does not promote prostitution. 
 The small number of prostitutes coming from the ranks 
 of factory operatives is most conspicuous in every inves- 
 tigation of the subject. 
 
 § 385. " The great evils which became apparent during 
 the early days of the factory system were simply the results 
 of bringing together the labor which had become pauper- 
 ized under the domestic system and in agricultural dis- 
 tricts. The f?ictory brought these evils to light ; and the 
 employment of women and children became an offence in 
 the eyes of the public, not because it was severer than 
 under the old system, but because under the new the 
 evils of such employment could be seen." When these 
 things were brought to the notice of the public, measures 
 were at once taken to remedy them, not as a rule by the 
 workmen themselves but by sections of the public which 
 now became cognizant for the first time of wrongs which 
 had existed for centuries. The larger the factory, the 
 more visible are the evils and the more effectively does it 
 become possible to control them, either by law or by public 
 opinion. The factory system has not created the abuses 
 which are charged against it ; it has created the oppor- 
 tunity of holding employers responsible for their preven- 
 tion. This opportunity has been most effectively utilized 
 
FACTORY ACTS, 349 
 
 in England, the birthplace of modern manufacturing; 
 while of all the United States, Massachusetts, which was 
 the first to establish factories, has done the most to 
 regulate their methods and to improve the condition of 
 their operatives. 
 
 § 386. Much has already been accomplished in these 
 lines. The labor of very young children has been pro- 
 hibited, and that of older ones restricted in such a way as 
 to enable them to attend school. Female labor has been 
 subjected to regulations which are at once effective and 
 salutary. Even for adult men, the hours of employment 
 have been decidedly reduced, to some degree by law and 
 much more by public sentiment. Half a century ago, 
 thirteen hours was not an uncommon working day for a 
 factory operative. Now, eleven represents a maximum in 
 progressive communities, while the average working time 
 in such places is under rather than over ten hours.* 
 
 An equally important branch of factory legislation 
 deals with unhealthful methods of conducting business. 
 It would be tedious to enumerate provisions made in the 
 statutes of different states and countries, with regard to 
 ventilation, protection from fire, and provision against 
 various forms of accident to which those who use machin- 
 ery are liable. Apart from any system of statutory enact- 
 ments, much has been done by the enlightened self-interest 
 of the factory owners. Manufacturers' mutual insurance 
 companies (§ 431) have sought to reduce losses by avoid- 
 ing all preventable causes of fire, and have succeeded to 
 an astonishing degree. Associations for boiler inspection 
 are able to use a vigilance which in most districts far sur- 
 passes that which can be expected from the public officials, 
 and have prevented much loss of life to the workmen, as 
 well as loss of property to the employer. 
 
 ^ A fuller discussion of laws regulating the hours of labor, not as means 
 to public health, but as efforts to reduce the labor supply and create em- 
 ployment for those now out of work, will be found in ch. xiii. 
 
350 MACHINERY AND LABOR. 
 
 § 387. Meantime there has been a great change in the 
 views which prevail with regard to employers' liability in 
 the matter of accidents. The common-law doctrine on 
 this subject was exceedingly unfavorable to the workman. 
 It generally made him responsible for injuries which he 
 suffered in the exercise of his trade. It was held that in 
 accepting the employment he took the risks incident to 
 it. A special hardship in this matter arose from the pro- 
 vision that a workman could get no compensation for 
 harm sustained through the negligence of a fellow work- 
 man. The old doctrine appears to have assumed that the 
 employee, and not the employer, was in a position to tell 
 what was going on ; that the way to prevent carelessness 
 was to hold the workman responsible for the results of 
 such carelessness on the part of himself or his fellows. 
 In the modern factory a policy of this kind does not put 
 the responsibility where it belongs. In a very large class 
 of accidents arising from defects of ways, works, or ma- 
 chinery, the employer is usually in a better position than 
 the workman to know what is wrong and to take effective 
 measures to prevent accidents. Even in those cases where 
 injuries are caused by the negligence of a fellow workman, 
 the organization of modern industry gives the employer 
 power to prevent such casualties more effectively than 
 the employee. There is a strong tendency to place in- 
 creased responsibility on the owner of the works both for 
 defects of his buildings or machinery and for negligence 
 of his subordinates ; a tendency which has found most 
 marked expression in the Employer's Liability Law of 
 Great Britain. 
 
 § 388. The charge that the factory system tends to de- 
 prive the laborer of independence, and reduce him to the 
 position of a machine, is not so easily set aside. The sub- 
 stitution of mechanical for intelligent labor is often a very 
 serious evil in modern manufacturing. Not only are indi- 
 vidual forms of acquired skill, like that of the hand-loom 
 
THE MODERN LABORER, 35 I 
 
 weavers at the beginning of this century, made useless by 
 the introduction of new machinery, but large classes of 
 men who were most useful citizens in the past are being 
 driven out of existence by the stress of modern competi- 
 tion. The increasing efficiency connected with the division 
 and organization of labor has crowded out those men who 
 exercised a diversified Industry. It is not merely the 
 jack-of-all-trades, but the master of one trade, that finds 
 it difficult to compete with the employees who subdivide 
 his trade into a hundred different parts. The village black- 
 smith finds his occupation gone when so large a part of 
 his product can be made by machinery at one-tenth of 
 the old cost. We have secured diversification of con- 
 sumption through the cheapening of products, but it has 
 been obtained at the sacrifice of diversified industrial 
 activity on the part of the men who make those products. 
 It is undeniable that labor is becoming more and more 
 specialized, and that many of the occupations of the 
 modern laborer have a narrowing effect upon those who 
 practise them. 
 
 § 389. Nevertheless we may safely deny that this change 
 is causing an intellectual decline among the masses. The 
 gain in opportqriities for travel and for varied enjoyment 
 has outweighed the loss in opportunity for changes of 
 occupation. We may regret the disappearance of certain 
 attractive qualities, as the frontiersman gives place to the 
 farmer, the farmer to the craftsman, the craftsman to the 
 modern workman. There is a progressive loss of inde- 
 pendence and self-sufficiency, and sometimes of self- 
 reliance. Yet, on the whole, we find that advancing 
 civilization brings gains which more than make up for the 
 losses. The agricultural people has more to make life 
 worth living than the tribe of hunters. The craftsmen 
 dwelling in cities have more variety than the purely 
 agricultural peoples. The change from handicraft to 
 manufacture, in spite of its attendant dangers, yields the 
 
352 MACHINERY AND LABOR, 
 
 public a gain, not only in material wealth, but in breadth 
 and variety of civilization. 
 
 § 390. This improvement in the material and intellectual 
 condition of the laborers has not made the movements 
 toward combination of labor any less active. In fact, it 
 has probably tended to stimulate them. Just because the 
 laborer has so many advantages as a consumer, he is 
 often led to feel more keenly his lack of independence as 
 a producer. Increased comfort is attended with increased 
 ambition. Even if combinations of capital give relatively 
 good wages, combinations of labor may seem necessary to 
 insure the laborers against the loss of all industrial and 
 social power. 
 
 § 391. There was probably a slender historical connec- 
 tion between the remnants of the old trade gilds and the 
 first trades-unions of modern times.' But the tie was an 
 accidental and unimportant one. The modern organiza- 
 tions differ in principle from their mediaeval predecessors. 
 The gilds were really organizations of capital quite as 
 much as of labor. They controlled what little machinery 
 was used in the manufacturing processes of early days. 
 They broke down not so much because other laborers 
 competed with them, as because other capitalists had 
 better methods by which they were prepared to serve the 
 community cheaper. The modern union is distinctively 
 a combination of labor and not of capital. It is an out- 
 growth of the factory system ; an effort to meet concen- 
 tration of power on the part of employers by similar 
 concentration on the part of the employed. 
 
 § 392. At the beginning of the present century the law 
 and the public sentiment among the property-owning 
 classes were both unfavorable to the organization of 
 labor. This was conspicuously the case in England. To 
 say that laborers were not allowed to combine in defence 
 of their rights is to put the matter altogether too mildly. 
 
 ^ Brentano's evidence on this point seems conclusive. 
 
TRADES-UNIONS, 353 
 
 The slightest attempt at concurrent action to increase the 
 price of their services was visited by the severest penalties. 
 As late as 1834, six Dorchester laborers were sent as con- 
 victs to Botany Bay for the mere act of forming a labor 
 organization which had not even asked for an advance of 
 wages. But with the growth of democratic spirit and 
 democratic power, a more liberal policy began to prevail.* 
 Not the least important among the series of English fac- 
 tory acts were those which gave increasing recognition of 
 the right of laborers to combine. 
 
 § 393. The change in public sentiment toward trades- 
 unions has not quite kept pace with the changes in the 
 law. In the minds of a large section of the public, labor 
 unions are chiefly associated with strikes. It is believed 
 by many who ought to know better, that such organiza- 
 tions exist for the purpose of striking, and that if the 
 •organizations were suppressed, industrial peace would be 
 secured. 
 
 The first of these ideas is a distorted one ; the second 
 is wholly unfounded. Even in their severest days, com- 
 bination laws did not prevent strikes. Where a number 
 of operatives are bound together by a common feeling 
 they will take united action for what they deem to be 
 their rights, even if they have had no chance for previous 
 agreement or discussion. The attempt to prevent such 
 previous discussion tends to make the strike more violent 
 by putting it wholly under the control of feeling and 
 giving no place for reason among those who take part in 
 it. Under such circumstances we shall have recklessness 
 and terrorism, if not actual bloodshed or arson. Where 
 all organization of labor is placed under the ban of the 
 law, such unions as continue to exist in defiance of the 
 law are forced to develop their worst sides. The recog- 
 
 1 A similar change which took place in the United States was much less 
 conspicuous, because combination laws in America had never been admin- 
 istered in as severe a spirit as that which prevailed on the other side of the 
 Atlantic. 
 23 
 
354 MACHINERY AND LABOR. 
 
 nition of the right of labor to combine has made a 
 decided change for the better in trades-union policy. 
 It has substituted open methods of warfare for secret 
 ones. It has allowed the more cool-headed workman to 
 take a prominent part in guiding his fellow-laborers in 
 their conflicts with capital. It has tended to make strikes 
 more rational, and therefore more dangerous to those who 
 resist them. 
 
 § 394. A union whose primary object is conflict rarely 
 has funds enough- to carry its conflicts to a successful 
 issue.^ The stronger and better unions are organized for 
 purposes of insurance and other forms of mutual benefit 
 no less than for conflict. They are responsible bodies^ 
 prepared to make contracts with capital as well as to 
 fight against it. It is the possession of this permanent 
 organization and the control of the funds connected with 
 it which make these unions such dangerous enemies in 
 time of war. But this same permanence of organization 
 renders them less ready to engage in conflicts without 
 carefully computing the chance of bringing those conflicts 
 to a successful issue. They have acquired a store of past 
 experience both in victory and in defeat. They have in 
 many instances become holders of considerable property 
 of their own. They show the conservative spirit, not to 
 say the exclusivencss, to which the possession of expe-^ 
 rience and the ownership of property so often give rise. 
 It is a constant complaint of the more radical agitators ia 
 England that the older trades-unionists have no sympathy 
 with labor as a whole, but are interested only in the pros- 
 perity of a small body of laborers. The same charge is 
 made in the United States against the conduct of some 
 of the organizations which represent skilled labor only. 
 Many of the workmen who are most in need of help 
 find as little sympathy from a high grade union as from a 
 
 • The apparent, exceptions in recent English experience have hardly- 
 lasted long enough to be quoted in disproof of this statement. 
 
THE NEW UNIONISM, 355 
 
 landowner or a capitalist. Under such circumstances, a 
 ** new unionism " has grown up, which seeks to advance 
 the cause of all laborers, instead of that of the favored 
 few. In England this movement numbers among its 
 adherents nearly all of the most distinguished among the 
 younger members of the labor party. In the United 
 States, the ideas underlying this movement were set forth 
 by the Knights of Labor, an organization which in the 
 years 1885 and 1886 grew to almost unprecedented 
 magnitude. The Knights of Labor were not organized 
 according to trade, — though it might readily happen that 
 all the members of one local assembly might be working 
 in the same trade, — but according to locahty. They were 
 not occupied with advancing the interests of a particular 
 class of laborers, except so far as the interest of that class 
 was thought to be a part of the common interest of labor 
 against capital. On the continent of Europe, where labor 
 unions have been from the first largely under the dominion 
 of socialistic ideas, the revolt against the exclusiveness of 
 the older unions finds even more unquestioning sympathy 
 than in England or America.* 
 
 ^ The labor movements on the continent of Europe are political rather 
 than economic in their character. Their leaders are far more occupied with 
 the overthrow of oligarchic institutions than with the improvement of indus- 
 trial conditions. The " social democrat" is a democrat first and a socialist 
 afterward. Much of the odium and misunderstanding attaching to the name 
 *' socialist " is due to the fact that it has in practice been appropriated by- 
 revolutionists of every shade of economic belief. Working side by side and 
 under a common banner, we find (i) true socialists, whose programme con- 
 templates an increase of the powers of the general government ; (2) com- 
 munists, who wish the local governments to do nearly everything, reducing 
 to a minimum the powers both of the general government and the indi- 
 vidual ; (3) anarchists, who distrust all governments, local as well as 
 national, and wish their powers reduced to a minimum ; (4) nihilists, whose 
 objections to the existing governments are so great that they do not think it 
 worth while to delay over the discussion of a constructive programme in 
 times when destructive work is all-important. 
 
 So loosely has the word socialism been used, that non-revolutionary 
 socialists deem it necessary to distinguish themselves by such terms as "col- 
 lectivists," "nationalists," or " socialists of the [professorial] chair." 
 
356 MACHINERY AND LABOR, 
 
 § 395- With the leaders of the new unionism, insurance 
 and benefit systems count for little or nothing. They are 
 quite ready to support strikes ; they are even more ready 
 to engage in political agitation. They believe with a 
 great deal of reason that they are stronger politically 
 than they are industrially. They rely less on the power 
 of the individual strikers to enforce their demands, and 
 more on the collective power to influence public senti- 
 ment and legislation which is possessed by laborers as a 
 class. They think that the growth of the democratic 
 spirit in politics and industry has left the older trades- 
 union leaders far behind the times. They would transfer 
 the field of conflict from the place where capital is 
 strongest to the place where numbers are strongest ; from 
 the factory to the polling place, from the counting room 
 to the council chamber. 
 
 § 396. One of the most important objects which the 
 new unionism proposes to attain is the enforcement of 
 compulsory arbitration in lieu of protracted strikes. 
 
 In spite of the frequency with which they are inaugu- 
 rated, strikes are not a particularly successful means of 
 giving force to the demands of organized labor. The 
 capitalist is usually so situated that he can await the issue 
 of a conflict with less suffering, if not less actual loss, than 
 the labor union which seeks to fight him. He can main- 
 tain his family in comfort from the savings of past years, 
 while the funds of the laborers that oppose him are gradu- 
 ally exhausted by a protracted struggle. He can keep 
 large masses of machinery idle through the exercise of 
 his own individual will, while workmen are drifting in 
 from other districts to take the place of the strikers. The 
 attempt to prevent such laborers from accepting employ- 
 ment is beset with difficulty. The penalty of social ostra- 
 cism, which is the most powerful one that strikers have at 
 their command, may suffice to control the supply of home 
 labor, but it does not stop the importation of laborers from 
 
POSITION TAKEN BY LABOR LEADERS. 357 
 
 other places. The attempt to intimidate the new men 
 puts those who practise it outside of the pale of the law 
 and alienates public sympathy from the side of the 
 strikers. In exceptional cases, where the wages pre- 
 viously paid have been flagrantly inadequate, the compe- 
 tition of other capitalists may compel an employer to yield 
 to the demands of the strikers in order to prevent large 
 profits from going into other hands ; but, except in these 
 instances, the labor leaders are in the position of men who 
 are attempting to corner the labor market with inade- 
 quate capital. Such a policy is doomed to failure in the 
 long run. 
 
 If, however, the employer can be prevented from pro- 
 tracting the dispute, the position of the strikers is different. 
 They have only to hold together for a short time in order 
 to be assured of success. They are placed on the kind 
 of vantage ground enjoyed by the man who makes a 
 corner in wheat when a large number of people have 
 contracts which they must fulfil within a limited period 
 (§ 175)- This is the most potent motive with those who 
 demand compulsory arbitration. 
 
 § 397. They support this demand with strong argu- 
 ments. They urge that the capitalist who builds a rail- 
 road must undertake to serve the public continuously. 
 The more complete the monopoly, the greater is the pub- 
 lic necessity for uninterrupted service. This public need 
 is paramount to all other considerations. The capitalist 
 should not be allowed to withhold the necessary service 
 from the pubHc, merely because he cannot agree with his 
 workmen as to the terms of payment. If a railroad com- 
 pany professes itself unable on this account to deliver 
 goods or to run trains, it should be compelled to do so by 
 public authority. If it pleads inability to secure labor at 
 fair rates, courts of arbitration should be established to 
 decide what rates are fair 
 
 § 398. To this argument there is an equally strong 
 
358 MACHINERY AND LABOR. 
 
 reply. If capital is to be compelled to maintain continu- 
 ous service on terms like these, it will be difficult to find 
 investors who are ready to put their money into business 
 enterprises which are subject to this liability. Such an 
 arrangement as the one proposed, while apparently fair 
 to both laborers and capitalists, is really quite one-sided. 
 It could be enforced against the employer but not 
 against the employee. Laborers cannot be compelled to 
 work on the basis of an arbitrator's award. They have 
 not, as a rule, property enough to be held to such an 
 agreement by the threat of pecuniary damages. No one 
 would put them in prison if they refused to accept the 
 rates offered. Even if they could be thus compelled to 
 work against their own will, the service rendered under 
 such terms would resemble slave labor, and might become 
 dangerous alike to the property of the employer and to 
 the safety of the public. 
 
 If capitalists are afraid to invest their money in new 
 enterprises, both laborers and consumers suffer ; the con- 
 sumer for lack of new sources of supply, the laborer for 
 lack of new fields of employment. The loss to the 
 laborer from this cause more than neutralizes any good 
 which he may have obtained from the temporary enforce- 
 ment of his demands by a board of arbitrators. This is 
 illustrated by the history of the years 1885 and 1886, 
 when the industries of the United States were virtually 
 under a regime of compulsory arbitration. The Knights 
 of Labor were able so effectually to boycott the goods of 
 obnoxious manufacturers that employers were forced to 
 submit to their demands in this matter or suffer financial 
 ruin. A boycott was a far more formidable weapon than 
 a strike. It precipitated a contest at a point where the 
 laborers enjoyed the advantage which is possessed by the 
 holder of ready money as compared with the man who 
 offers specific goods or services for sale. The holder of 
 money can find new places to buy what he wants far more 
 
COMPULSORY ARBITRATION. 359 
 
 quickly than the man who has either labor or goods to 
 sell can find new purchasers to take them. In a strike 
 the employer had the money and the laborers the com- 
 modity. In a boycott the positions were reversed. By 
 refusing to buy his goods, the laborers attacked the em- 
 ployer at his weakest point. If he remained unmoved by 
 their refusal to purchase, the Knights of Labor could go 
 to the dealers who handled those goods and threaten 
 them with a boycott unless they supplied themselves from 
 other makers. These dealers were often indisposed to 
 defy such a threat for the sake of another man's quarrel. 
 Cut off from his markets, the employer was compelled to 
 submit the disputed matters to arbitration. Yet the re- 
 sult was by no means advantageous to laborers as a class. 
 The hands of the capitalists were so tied that productive 
 industry suffered severely. Compulsory arbitration cre- 
 ated more troubles than it settled. After a comparatively 
 short experience, not only courts and capitalists, but 
 laborers of the better class, united in condemning the 
 boycott and the system of arbitration enforced by its use. 
 It may be objected that the system of arbitration as 
 administered by the Knights of Labor was a one-sided 
 one, and that no conclusion can properly be drawn from 
 such an instance as to the effect of equitable arbitration 
 under public authority. But reasons have been already 
 given to show that arbitration under public authority is 
 likely to be one-sided. It is sought by the laborers and 
 not by the capitalists. It deals with conditions which are 
 as yet unknown and cannot be predicted with assurance 
 by any board of arbitrators. If the decision of such a 
 board is unfavorable to the workmen, they have it in 
 their power to nullify it. If it is unfavorable to the capi- 
 talist, he must nevertheless accept it. While public arbi- 
 tration may be so organized as to avoid intentional 
 unfairness, it can hardly fail to be one-sided in its effects, 
 because we can enforce it against one party and not 
 against the other. 
 
360 MACHINERY AND LABOR, 
 
 % 399- We are placed in an awkward dilemma. If we 
 do not admit the principle of compulsory arbitration we 
 are liable to interruptions of public service at points 
 where its continuous maintenance is essential to the com- 
 fort and prosperity of the community. If, on the other 
 hand, we adopt compulsory arbitration as a principle, we 
 are liable to an interruption of the investment of capital 
 where it is essential to social and industrial progress. The 
 public is the sufferer in any event. We cannot assume^ 
 as was done two or three generations ago, that a conflict 
 between labor and capital is one which the parties imme- 
 diately interested may be left to settle for themselves. 
 When there were a idozen independent capitalists and a 
 hundred or a thousand independent laborers, a dispute 
 between an employer and those who worked for him was a 
 matter of very little public account. But where the com- 
 bination of capitalists and laborers has become so com- 
 plete that a single strike may interrupt the transportation 
 service of a whole district and threaten large communities 
 with famine and suffering, the case is wholly altered. We 
 are, as Jevons says, working on the assumption that indi- 
 viduals will act as individuals, when in point of fact the 
 exigencies of modern industry compel them to act in 
 masses. 
 
 § 400. There are some who advocate government own- 
 ership of all monopolies as the only way out of this 
 dilemma. But this remedy (aside from the other dangers 
 connected with its adoption, which will be discussed in 
 the next chapter) is by no means certain to meet the 
 exigencies of the case. If a government avoids labor 
 troubles by yielding to the demands of the organization 
 in every instance, the want of discipline resulting from 
 this practice will be serious if not destructive. We shall 
 live under the rule, not of the people, but of a small sec- 
 tion of organized labor. If, on the other hand, govern- 
 ment resists the demands of the organization, it will have 
 
LESSONS DERIVED FROM STRIKES, 36 1 
 
 no means for maintaining its ground which will prove 
 much more effective than those which capitalists now 
 possess. The superior respect of the workman for a gov- 
 ernment agency might count for something ; but our 
 experience with railroads which are operated by the 
 United States Courts under receiverships, shows that 
 government authority is not enough to prevent strikes in 
 cases of serious wage disputes. 
 
 § 401. Fortunately, the practical chance of escape from 
 our dilemma is rather better than the theoretical one. 
 Every strike teaches either workmen or capitalists some 
 useful lessons for the future. There is a process of 
 natural selection, under which leadership, both in organi- 
 zations of labor and organizations of capital, must come 
 more and more into the hands of men who are competent 
 to exercise it. The time is past when the noisiest orator 
 can control the labor organization or when the closest- 
 fisted miser can succeed in the management of capital. 
 So far as the managers on either side become in the true 
 sense leaders of men, there is a chance for reducing labor 
 disputes to a minimum. This may be a slow and unsatis- 
 factory remedy for present troubles ; but it is the only 
 one which appears to promise much hope of permanent 
 success. 
 
 § 402. Government agencies for arbitration can be ar- 
 ranged either to help or hinder this consummation. If 
 they are so organized as to seem to give the laborer rights 
 which cannot be put in force without public disaster, they 
 will simply retard progress in these matters by invit- 
 ing the repetition of experiments which are foredoomed 
 to failure. If, on the other hand, they attempt to avoid 
 trouble by giving opportunities for mutual understanding 
 between employer and employed, and aim at preventing 
 disputes rather than settling them, they strengthen the 
 hands of those who are really competent to lead the 
 forces on either side. The history of boards of arbitra- 
 
362 MACHINERY AND LABOR. 
 
 tion, both in Europe and America, shows how little can 
 be accomplished by the exercise of political authority 
 after a fight has once begun. The work of courts of con- 
 ciliation, on the other hand, shows how much can be done 
 to prevent misunderstandings which lead to disputes, if 
 they are taken in hand before matters have reached the 
 stage of open hostility. The French Conseils de Prud' 
 homines have perhaps furnished the best though by no 
 means the only examples of what can be done by courts 
 of industrial conciliation. 
 
 A very considerable proportion of the disputes between 
 labor and capital may be characterized as wholly unneces- 
 sary. They are the outcome, not of direct quarrels, but 
 of misunderstandings. The employer wants to do one 
 thing, the laborers think he wants something else ; they 
 object to the latter, and he believes that they are taking 
 exception to the former. Or it may happen that the men 
 protest against a reduction in wages without knowing 
 what the conditions of trade really warrant ; the employer 
 insists on the reduction without giving facts to sustain his 
 position ; the workmen strike in the belief that he is wil- 
 fully refusing to give the wages they demand, when the 
 truth is that he is prevented by sheer inability. After 
 the strike is once inaugurated, it is often too late for fur- 
 ther explanations. But a board of conciliation, whether 
 organized by the government or by the voluntary action 
 of employers and employed, can render the greatest 
 service, in enabling each side to get a clear understanding 
 of the other's position before matters have gone so far as 
 to render cool action on the basis of such an under- 
 standing impossible. 
 
 §403. If, before any dispute arises, both parties can 
 settle upon a satisfactory scheme for the determination of 
 wages, and make a long-time contract on this basis, it pre- 
 cludes much of the danger of labor troubles. The system 
 which has seemed best adapted to this end is known as 
 
THE SLIDING SCALE, 363 
 
 the sliding scale. By this method the workman's earnings, 
 instead of being made proportionate to the product, as in 
 ordinary piece-work, are made to depend somewhat upon 
 its selHng price ; the rate of pay increasing as the price of 
 the product increases, and vice versa. It has been ex- 
 tensively applied in mining, and to a less degree in some 
 other lines of industry. Where the conditions will admit 
 of its use, it has a decided influence in preventing labor 
 troubles, by settling in advance the share in which the 
 laborer and capitalist shall divide the advantages of a 
 rising market or the burdens of a falling one ; nor is it, 
 under favorable conditions, so complicated as to give rise 
 to misunderstanding and suspicion/ 
 
 § 404. From the employer's standpoint no exception 
 can be taken to the principle of the sliding scale. It 
 undertakes to do for non-competitive labor what economic 
 forces do for competitive labor — to give the workman the 
 total value of what he makes, less a deduction for the 
 necessary profits of capital. But from the workman's 
 standpoint there is always a possible objection which may 
 prove very serious. What if the price of the product, less 
 the necessary deductions, fails to give him the income he 
 needs in order to keep himself and his family alive? 
 Looking at the matter from this side he proposes another 
 standard as a basis of just remuneration — the standard of 
 the living wage. According to this view, labor should be 
 paid enough to maintain it at a good grade of efficiency ; 
 the amount necessary for this purpose being determined 
 by the habits of life of the workers themselves.' 
 
 ^ If we go one step farther, and give the workman, in addition to his 
 wages, an interest in the net profits of the business, we have a case of profit 
 sharing. The operation of this systeni is described in the next chapter. 
 
 ^ The principle of the living wage was applied in England in past centuries 
 by action of the magistrates, who from year to year fixed wages as low as 
 they dared. Even this minimum is thought by Webb to have been in some 
 degree a protection to the laborer. 
 
 The present bearings of the agitation for a living wage are well treated by 
 W. Smart, "Studies in Economics," London, 1895. 
 
364 MACHINERY AND LABOR. 
 
 § 405. The question, which is often asked and seldom 
 answered, whether labor should be treated as a mere com- 
 modity, is simply a rhetorical method of bringing forward 
 the issue between the principles involved in the " sliding 
 scale " and the " living wage '* as bases of determination 
 of just payment. 
 
 If the price of labor is determined by competition, labor 
 is treated as a commodity ; if it is determined by the 
 needs of the man himself, labor is not treated as a com- 
 modity. If arbitrators act on the principle of the sliding 
 scale, they commit themselves to the former view ; if they 
 apply the principle of the living wage, they adopt the lat- 
 ter. In the one case, they allow every laborer to get what 
 he can ; in the other, they forbid the laborer to take less 
 than a specified sum, even though the refusal should force 
 him to starve or at any rate to become dependent on pub- 
 lic support. Either alternative involves widespread hard- 
 ship, which every serious student of the problem finds it 
 hard to contemplate. Any one who has looked at the 
 matter in all its difficulty is warranted in protesting 
 against the uncritical use of phrases concerning the treat- 
 ment of labor as a commodity, which have the effect of 
 prejudging the whole case by placing a rhetorical em- 
 phasis on the evils of one alternative in such a way as to 
 preclude dispassionate consideration of the relative merits 
 of both. 
 
 § 406. There is no doubt about the possibility of apply- 
 ing the principle of the living wage if the public is pre- 
 pared to take the consequences. If those who do not 
 earn a living wage are left to starve,' those who are 
 
 ' This danger is strikingly exemplified if we examine the effect of profes- 
 sional etiquette upon the employment of men who are just making their start 
 in life. Every profession has its customary scale of charges based in large 
 measure upon the supposed cost of education and maintenance of men who 
 can keep a high standard of professional attainment. The man who is begin- 
 ning life is not allowed to underbid his established competitor. Without 
 discussing the pros and cons of rigid adherence to such an established scale 
 
THE LIVING WAGE, 365 
 
 more efficient can get what they demand. But this is 
 hardly what is proposed by the advocates of the system. 
 They do not believe that the consistent adoption of their 
 principle would result in any considerable amount of star- 
 vation. Some of them think that the gain to society in 
 the avoidance of disease and vagrancy, of prostitution and 
 crime, which would result from paying better minimum 
 wages, would more than compensate any deficiency in the 
 value of the product of those whose wages were raised. 
 This would be hard to prove ; and it is difficult to see 
 what practical measures could be devised for testing its 
 truth, short of absolute socialism. Others, probably more 
 numerous, think that if the producers only stand together 
 they can dictate prices for the whole amount now con- 
 sumed and get higher pay by simply demanding it. But 
 in point of fact, if the producer dictates the price, the con- 
 sumer responds by varying the amount which he pur- 
 chases. If every laborer makes his product worth a living 
 wage by rendering society what it regards as an equiva- 
 lent for the food, clothing, fuel, shelter, and other things 
 represented by that wage, he can get it. If he attempts 
 to insist on the wage while not rendering the equivalent — 
 or, what amounts to the same thing, rendering that which 
 he deems an equivalent but which the consumer does not 
 — no amount of combination will enable him to enforce 
 his demands. He may refuse to work for less ; he cannot 
 insist on being employed at a price which he deems fair, 
 if the consumer views the matter otherwise. 
 
 If the men who demand a ''living wage " are prepared 
 to increase their working efficiency as a means of making 
 
 of charges, it is enough for the present purpose to point to the hardships 
 which it inflicts upon many who are striving to maintain a foothold in medi- 
 cine, in law, or in art. Not being free to sell his work for what the public 
 will pay, the young professional man in the majority of cases finds his first 
 years marked by a record of working-time unemployed except so far as he 
 may use it for his own study, and of wants unsatisfied except so far as he can 
 meet them from the previous accumulations of himself or of his friends. 
 
366 MACHINERY AND LABOR, 
 
 good their claim, their demand is effective in securing its 
 object and salutary in its influence upon industrial life. 
 But to believe that the wages can be paid without the 
 work, or even that the increased efficiency of work neces- 
 sarily results from improvement in wages, seems a danger- 
 ous fallacy. 
 
 § 407. The majority of trades-union leaders appear to 
 underrate the closeness of the competition of capital and 
 the narrowness of the margin of profit. They do not 
 realize how closely actual piece wages have been forced 
 up to the limit which prices will allow. They believe that 
 more is to be expected from combination of labor than 
 from competition of capital. They sometimes support 
 their position by the claim that machinery has destroyed 
 competition between capitalists and allows them to pay 
 unfairly low wages. We have seen in a former chapter 
 (§§ 176-180) how often similar statements made concern- 
 ing the effect of machinery upon consumers have proved 
 to be exaggerated. Even where the individual consumer 
 is not well protected, the general rate which the capitalist 
 can charge is limited by causes less obvious than imme- 
 diate competition, but hardly less effective. The same 
 thing holds true in regard to labor. A time might con- 
 ceivably come when capitalists would be closely enough 
 united to offer labor less than the value of its products, 
 employ a few laborers at that rate, leave the rest to 
 starve, and appropriate the large margin of profit to 
 themselves ; but this state of things is very far from being 
 realized at present.' 
 
 § 408. Under these circumstances the substitution of a 
 bargain between united labor and capital, for the inde- 
 
 * The common assertion that competition is more intense as the number of 
 competitors becomes greater, seems to be a loose inference from the fact that 
 prices are apt to be higher as the demand for an article becomes greater. It 
 is easy to see that these two things really have nothing to do with one 
 another. As a rule, the closest competition is that which prevails between 
 two well matched rivals. 
 
LABOR MONOPOLIES. 367 
 
 pendent competition of laborers and capitalists with one 
 another, could hardly prove a gain to the laborer. In 
 a bargain, the capitalist's superior strength and intelli- 
 gence must tell against the laborer. In competition, the 
 laborer has the advantage of the strength and intelligence 
 of different capitalists to secure him a market rate of 
 wages. In trying to substitute the former system for the 
 latter, the workman foregoes the advantage which he 
 receives from the strength of the capitalists in a competi- 
 tion, and submits to the disadvantage which this strength 
 imposes upon him in a contest of wits or endurance. 
 
 § 409. He finds himself at an equally serious disad- 
 vantage in attempting to set a monopoly price on labor, 
 and to reduce the supply as a means of maintaining the 
 price thus fixed. We have seen how universal is the fail- 
 ure of combinations of capitalists when they attempt to 
 carry out this policy. Where the capitalists fail, Avith 
 every advantage in their favor, it is hardly to be expected 
 that the labor organizations should succeed. The gilds 
 were unable to maintain a labor monopoly ; and the gilds 
 had many circumstances on their side which modern 
 labor organizations have not. To begin with, they did 
 not pretend to care for the interests of labor in general ; 
 they were occupied with securing special advantages for 
 their own labor. Moreover they had the full support of 
 the ruling powers. Their interests were in many respects 
 identical with those of the landowners, who possessed 
 dominant political authority. The landowners wanted 
 agricultural wages low ; the gilds wanted municipal wages 
 high. Both objects could be accomplished by a policy 
 which kept large numbers of laborers in the country and 
 prevented them from flocking to the towns. Accordingly 
 we find that gilds and landowners worked in harmony in 
 most measures of industrial legislation. Almost all chance 
 of bettering his condition was cut off from the agricultural 
 laborer by acts of settlement, which prevented his moving 
 
368 MACHINERY AND LABOR, 
 
 from one parish to another unless he could give the 
 authorities in his new home satisfactory assurance that 
 he would not become a burden on the rate payers. The 
 consequence was that an over-supplied labor market in 
 one district could not find relief by migration to another 
 and possibly more favorable farming region. Change of 
 occupation was yet more effectively cut off from the 
 farmer's son by restrictions on the right to exercise a trade. 
 Under the pretext of compelling a workman to learn a 
 trade thoroughly, the statutes of apprenticeship were 
 often used to prevent most applicants from entering it at 
 all and to force those who did enter to become rigidly 
 bound down to antiquated methods. All these measures 
 helped the leaders of the gild to limit the labor supply in 
 their several trades. But no monopoly, however fortified 
 by traditional rights and political alliances, could prosper 
 by refusing to do public service ; and as soon as Europe 
 became peaceful enough to admit of investments of capi- 
 tal, the industrial power passed from gilds who were 
 trying to restrict production, to capitalists who were 
 ready to increase it. 
 
 § 410. The political position of the modern labor or- 
 ganization is so much less strong than that of the gild, 
 that its mistakes are not likely to be so wide-reaching in 
 their consequences. But the same tendencies which made 
 the gilds a burden on society show themselves in the 
 management of trades-unions ; and this is the chief reason 
 why thoughtful men look on these organizations with so 
 much distrust. It is not because they promote strikes, 
 but because they discourage industrial efificiency. This 
 is not true of all unions, but it is unfortunately true of a 
 very large number. They seek their interest, not in 
 doing as much as possible, but in doing as little as pos- 
 sible. Instead of trying to make their members useful to 
 capitalists and consumers alike, they undertake to drive a 
 bargain with the capitalist, and they thereby antagonize 
 
DANGERS OF SLOW WORK, 369 
 
 the interests of the consumer. While they honestly 
 attempt to promote good work, they are yet more occu- 
 pied with promoting slow work. Such a policy not only 
 gives society short service, but handicaps the strong men 
 who would otherwise take the lead in industrial progress. 
 Until the representatives of organized labor recognize 
 the evils involved in this course, the dangers involved in 
 labor organizations are likely to outweigh their possi- 
 bilities of good. 
 
CHAPTER XII. 
 
 COOPERATION. 
 
 Profit-Sharing — Producers' Cooperation — Forms of Consumers' CoSperation 
 — Government Management of Industrial Enterprises. 
 
 D. F. Schloss : "Methods of Industrial Remuneration." London and 
 New York, 1892. 
 
 N. P. Gilman : " Profit-Sharing between Employer and Employee.'^ 
 Boston, 1889. 
 
 G. J. Holyoake : " The History of Cooperation in England." London, 
 1875, 1879. 
 
 [Johns Hopkins University] " History of Cooperation in the United 
 States." Baltimore, 18S8. 
 
 § 411. The relation between labor and capital is most 
 satisfactory when there is no sharp separation into classes ; 
 where many of the capitalists have risen from the ranks 
 of labor, and many of the laborers themselves hope to 
 become capitalists. Under such circumstances we have 
 every stimulus for efficient production, and little or no 
 opportunity for misunderstandings and conflicts. It is 
 this state of things, quite as much as the abundance of 
 free land, which gives the inhabitants of a new country 
 their economic advantages. 
 
 §412. Unfortunately, this condition is far from being 
 realized in Europe in the nineteenth century ; and America, 
 though better off than Europe, is making progress in the 
 wrong direction. The business men in the present genera- 
 tion have in large part risen from the ranks of labor to 
 their existing position of leadership ; but whether the same 
 
 370 
 
SEPARATION OF LABOR AND CAPITAL, 371 
 
 thing can be predicted for the next generation is very 
 doubtful. Certain it is that the prospect of becoming 
 capitalists does not act as so powerful a motive on the 
 laborers of to-day as it did on those of a generation ago. 
 The opportunities to save are as great or greater ; but the 
 amount which has to be saved before a man can hope to 
 become his own employer, has increased enormously. 
 When a man who had accumulated a thousand dollars 
 could set up in business for himself, the prospect of inde- 
 pendence appealed to him most powerfully ; when he can 
 do nothing but lend it to some richer man, the incentives 
 and ambitions connected with saving are far weaker — too 
 weak, in many cases, to lead the man to save at all, ex- 
 cept through the medium of a friendly society or trades- 
 union. We thus have a separation of the community 
 into more and more rigidly defined groups, different in 
 industrial condition, distinct in ideals, and oftentimes 
 antagonistic in their ambitions and sympathies. This 
 separation of laborers and capitalists into distinct classes 
 involves serious dangers to society as a whole. 
 
 1. It increases the liability of industrial. conflicts, pro- 
 ducing strikes and lockouts, which throw laborers out of 
 employment and machinery out of productive use. The 
 harm done by these conflicts is by no means confined to 
 the individual contestants, but may occasion misfortune 
 to the whole body of consumers. 
 
 2. It neutralizes a large part of the advantages of the 
 institution of private property. If a laborer does not ex- 
 pect to accumulate money and become a property owner, 
 he loses an incentive to hard and efficient work which 
 makes his service most valuable to society. 
 
 3. It involves a contradiction between our political 
 theories and the facts of industrial life. A republican 
 government is organized on the assumption that all men 
 are free and equal. If the political power is thus equally 
 distributed while the industrial power is in the hands of a 
 
372 COOPERA TION. 
 
 few, it creates danger of class struggles and class legisla- 
 tion which menace both our political and our industrial 
 order. 
 
 § 413. Some look for the solution of these difficulties 
 in a paternal policy on the part of employers toward those 
 whom they employ. It is said, with a fair measure of 
 truth, that much of the existing industrial friction arises 
 from the fact that men are treated as machines. The 
 employer tries to make as good a bargain with his work- 
 men as he can, and does nothing more than this. It is 
 urged that manufacturers should make provision for the 
 well-being of their operatives by public improvements, by 
 the erection of sanitary dwellings, by the establishment of 
 insurance funds, and by a number of other agencies which 
 shall bind the interests of labor and capital together. 
 Much good can undoubtedly be done in this way. We 
 see this exemplified in an institution like the familistere 
 at Guise or in some of the factory towns of the United 
 States where the capitalists have taken a living interest in 
 the welfare of their employees. But the remedy is by no 
 means a sure one. The modern workman is apt to chafe 
 under the feeling that his insurance funds are in the hands 
 of his employer. Nor does he always like to live in houses 
 owned by the corporation for which he works, even when 
 such houses are well built and rented at a fair price. 
 There is a feeling of dependence which often proves irk- 
 some, and may give rise to serious misunderstanding. 
 Events like the Pullman strike of 1894 show the dangers 
 to which a system of this kind is liable. And even when 
 these experiments are thoroughly successful, they only 
 touch the surface of the difficulty. They meet the first 
 of the evils enumerated, but not the second and the third. 
 They diminish the possibility of open warfare between 
 laborer and employer ; but they do not, to any conspicu- 
 ous degree, arouse the ambition of the laborer or avoid 
 the conflict between industrial facts and political theories. 
 
PROFIT-SHARING, 373 
 
 Indeed, the system of paternal care and provision, unless 
 administered with the utmost wisdom, leads to flagrant 
 violations of the modern doctrine of social equality. 
 
 §414. Another way of meeting these dangers is by 
 encouraging workmen to become owners of stock in the 
 companies for which they work. Many employers give 
 their hands every facility for thus becoming stockholders, 
 on terms more favorable than those which are open to the 
 general public. Such employers believe, and with a great 
 deal of reason, that the gain to the company in assuring 
 itself of the devotion of its men, is one which will more 
 than balance an apparent loss of money on the sale of the 
 stock. But a measure of this kind, though good as far as 
 it goes, is somewhat limited in its application. It is a 
 difficult one to put in practice where the concern is so 
 large that the employer does not come into direct contact 
 with his hands ; for in the absence of such contact, the 
 privilege of buying stock at less than market rates is 
 almost certain to be abused. It is thus inapplicable in 
 just those cases where a remedy for labor troubles is most 
 needed. Nor does it, in any real sense, make the work- 
 man his own employer. It gives him a fractional share in 
 electing the people who say how he is to be employed — a 
 very different thing, both in theory and in fact, and one 
 which is far from putting the laborer in a position of 
 independence. 
 
 § 415. A third remedy, which has a little wider applica- 
 tion, is found in profit-sharing. Under this system the 
 workman, in addition to his regular wages, receives a 
 dividend from the net profits of the business in which he 
 is employed. This stimulates him to make the interests 
 of the employer his own, and gives him, in some measure 
 at any rate, the ambitions and motives of a property 
 owner. This plan was brought prominently into notice 
 by the success of Leclaire, a Parisian house decorator, 
 who adopted it in 1842 and placed it on a permanently 
 
374 coOpera tion, 
 
 efficient basis, making his own fortune, as well as that of 
 many of his workmen, by its results. Profit-sharing has 
 been carried on with a fair measure of success by many 
 other houses in France, particularly since 1870, as well as 
 in Switzerland and in Germany. In England and in the 
 United States the results have not been so good. Though 
 we find some isolated instances of successful profit-sharing, 
 the system has not proved its power to stand a severe 
 strain or to prevent the occurrence of destructive strikes. 
 § 416. The most noted experiment in profit-sharing in 
 England was that of the Briggs collieries, near Leeds. Its 
 apparent success was so great that Jevons at one time pro- 
 nounced it a decisive proof of the ability of the system of 
 profit-sharing to accomplish what its advocates claimed. 
 But in 1875, under the stress of hard times, the whole 
 scheme was wrecked. As long as trade was prosperous 
 and wages were advancing, all went well. But when 
 trade conditions changed, the men struck against reduc- 
 tions in wages. The wage dispute was referred to arbitra- 
 tion, and the arbitrator decided in favor of the employers. 
 But the experiment in profit-sharing was at an end. The 
 bulk of the shareholders objected to the continuance of a 
 system under which they shared profits with their work- 
 men, but which did not make those workmen any more 
 ready to share losses or prevent them from resorting to 
 the old method of warfare between capital and labor, 
 which it was confidently hoped that industrial partnership 
 had forever banished. Various explanations have been 
 given of the failure of this experiment. It is said that 
 while the Briggs family were heartily and loyally in favor 
 of the system of profit-sharing, the outside stockholders, 
 who owned a majority of the capital of the concern, were 
 not. It is also stated that serious mistakes of policy were 
 made during the years of great industrial prosperity, by 
 which the success of the enterprise was unnecessarily 
 endangered. Even granting the truth of all this, it is 
 
DIFFICULTIES OF PROFIT-SHARING. 375 
 
 clear that the system did not do what was expected of 
 it. It did not prevent a strike on the first occasion when 
 its usefulness was put to any serious test. The claim 
 that the experiment would have been continued if the 
 bulk of the shareholders had been sympathetically in- 
 terested in its success, is a virtual admission that it did 
 not succeed when judged on business principles alone. 
 The fact is that the workmen did not heartily care for it. 
 They were glad to see it in operation when it increased 
 their wages ; but the past experience and future anticipa- 
 tion of its benefits did not enlist them in its support 
 strongly enough to prevent a strike when there appeared 
 to be a prospect of present gain by the employment of 
 that means. A similar comment may be made on the 
 failure of an almost equally noted American experiment 
 — that of Brewster & Co., in carriage manufacturing. For 
 two or three years the employees enjoyed the increase of 
 wages which the system afforded them, but they could not 
 resist the pressure which their fellow workmen brought 
 to bear upon them to enter upon an ill-advised and unjus- 
 tified conflict with their employers. 
 
 § 417. There has been a sufficient number of success- 
 ful experiments in profit-sharing to turn the hopes of 
 many economic reformers in this direction. But it must 
 be confessed that it has accomplished far less than its 
 advocates have prophesied, and perhaps less than the 
 majority of unprejudiced critics were disposed to antici- 
 pate. There are reasons which do not appear on the 
 surface, which too often make the expected benefits prove 
 illusory. 
 
 If it were true, as many people suppose, that ordinary 
 business offered a large surplus of profit, which would 
 give room for the distribution of a handsome addition to 
 the workman's wages without involving the employer in 
 bankruptcy, there would be a better chance to apply the 
 system of profit-sharing as a panacea for labor troubles. 
 
ZJ^ COOPERATION, 
 
 But we have seen that this is far from being the case. 
 The competition of capitahsts with one another has in 
 the majority of cases cut down profits to so low a figure 
 as to leave little if any room to increase wages at the ex- 
 pense of the employer. If the laborer is to receive a bonus 
 in addition to his wages, one of two things must happen. 
 Either his efficiency, care, and steadiness must be so in- 
 creased as to create the additional profit from which this 
 bonus is paid ; or he must be prepared to accept a lower 
 minimum wage to compensate for his chance of a higher 
 maximum, and leave the average where it now is. 
 
 § 418. The advocates of profit-sharing generally accept 
 the former alternative. They believe that the laborer, in 
 a profit-sharing industry, will do more work, exercise more 
 care, and abstain more surely from labor disputes than he 
 would under the traditional wage system ; and that in this 
 way he will create the profit to be divided. The facts 
 hardly warrant this belief, especially in the case of the 
 American workman. In the list of profit-sharing indus- 
 tries, one of the most conspicuous features is the large pro- 
 portion of them which report no profit to divide.^ Nor is 
 this to be wondered at. In the complicated industry of 
 modern times, the connection between the individual effort 
 of a single workman and the general profit of the business 
 as a whole is too remote to act as a very powerful stimulus. 
 If all the operatives simultaneously can be nerved to a 
 higher degree of effort or of care, the results will unques- 
 
 ^ It should also be remembered that these lists, from the very nature of 
 the case, make the percentage of successes appear too large. The records 
 of failure are never as well preserved as those of success. The successful 
 experiments of the last ten years can be tabulated with tolerable complete- 
 ness. They are known, and their promoters are anxious to have them known. 
 The failures are far harder to discover and tabulate. They are forgotten, 
 and their promoters are anxious to have them forgotten. It is very difficult 
 to hear about experiments which were quietly abandoned five or ten years 
 ago, unless there were some unusual conditions in their history which placed 
 their failure on record at the time. 
 
WHEN PROFIT-SHARING CAN SUCCEED, 377 
 
 tionably be gratifying. But if many of them are already 
 working up to the limit of their powers either in the mat- 
 ter of output or of economyj^ there is no chance for such 
 general improvement. The gain from the increased effi- 
 ciency of any individual will be distributed among those 
 who have done comparatively little to deserve it. The 
 smallness of the quotient and the inequity of distribution 
 both interfere with the attainment of good results from 
 the system. They may do even worse than this. If a 
 man has worked much harder than before and received 
 little or no increase of pay, he is sometimes in danger of 
 suspecting the good faith of his employer. Even if he 
 has access to the employer's books, he has not the knowl- 
 edge of bookkeeping which would enable him to test the 
 conclusiveness of what they show. Where there are no 
 profits to divide, the system of profit-sharing may breed 
 those very misunderstandings between capital and labor 
 which it is designed to prevent. 
 
 § 419. Where the laborers under the old wage system 
 are not working up to a high standard of efficiency, there 
 is more chance for the success of profit-sharing. This 
 seems to be the reason why it works better on the Conti- 
 nent than in England, and better in England than in 
 America. There is a greater chance for increase in the 
 general output in those countries where the men have 
 habitually been working far below their physical capacity ; 
 and profit-sharing, like anything else which contributes to 
 such an increase, is a first-rate thing for the workmen. 
 
 § 420. Profit-sharing without such probable increase of 
 output must be unqualifiedly condemned. It makes the 
 workman a sharer in gains and losses which are essentially 
 speculative in their character. For it must be remembered 
 that only a part, and not the larger part, of the variations in 
 profit is due to variations in cost of production. Most of 
 these variations are due to changes in the selling price of 
 the product — a thing over which the workman has no con- 
 
378 CObPERA TION. 
 
 trol whatever. To make his wages depend on net profits, 
 under these circumstances, is to force him to participate 
 in the speculations of his employer — a result neither 
 equitable as between individuals nor desirable for society 
 as a whole/ 
 
 §421. To avoid this difficulty, the attempt is some- 
 times made to determine how much of the gain in a 
 business is due to the work of the operatives, and how 
 much to the speculative power of the capitahsts and their 
 representatives ; crediting the operatives with the profit 
 under the former head, and not making them liable to the 
 contingencies which affect the latter. Sometimes this is 
 accomplished by premiums on coal economy, such as are 
 offered by certain railroad companies ; sometimes by a 
 carefully arranged computation of expenses, under which 
 a bonus can be added to the regular wages of the opera- 
 tives in case the normal standard of cost is diminished. 
 The chief difficulty of these computations is found in 
 their complexity. It is hard to ascertain which items of 
 expense should be charged to the labor cost of a product ; 
 it is perhaps equally hard to persuade the laborers that 
 the employer is accurately following out the apportion- 
 ment on which he has agreed. 
 
 ^ "It is quite possible that the workman who, in the hope of earning 
 * bonus to labor,* has done work 10 per cent in excess of the normal standard, 
 may, even under a liberal scheme of profit-sharing, find that, instead of 
 receiving an addition to his normal wages of, say 5 per cent, the bad manage- 
 ment of his employer has reduced his bonus to so low a level that he has 
 to be content with a supplement equivalent to only 2 per cent on his wages, 
 or that no bonus whatever is available. If I am to do 10 per cent more and 
 better work than I did last year, why not offer me a 10 per cent increase in 
 my wages, subject only to its being shown that my work exhibits a 10 per 
 cent improvement? Why tempt a working-man to gamble by staking 
 part of the reward of his labor upon the financial results of a business over 
 the conduct of whose financial operations he is not allowed to possess any 
 control, and would, perhaps, seldom be competent, even if he were allowed, 
 to exercise any useful control?" (Schloss, "Methods of Industrial 
 Remuneration," pp. 189, 190.) 
 
ASSOCIATIONS OF PRODUCERS, 379 
 
 § 422. A more radical reform in the condition of the 
 employees is contemplated by the advocates of co- 
 operation. 
 
 Cooperation is often confounded with profit-sharing; 
 but the two things are radically distinct in their nature. 
 Profit-sharing is a change in the method of payment, 
 which is intended to induce the workman to identify his 
 own interests with those of his employer, but which 
 leaves the direction and management of the industry 
 unaltered. Cooperation, on the other hand, involves a 
 change of management. A cooperative enterprise is con- 
 trolled, not by the representatives of the investor, but by 
 the representatives either of the laborers or of the con- 
 sumers. In the former case it is known as productive co- 
 operation ; in the latter, as distributive or consumptive 
 cooperation. 
 
 § 423. The history of productive cooperation goes back 
 to a very early period. The mediaeval gilds were co- 
 operative enterprises. They were managed, not by cap- 
 italist employers, but by associations of workmen who 
 contributed from their own funds whatever capital was 
 required for the conduct of the industry. But their con- 
 servatism of method led to their displacement by capital- 
 istic industry ; and it is not until about the middle of the 
 present century that we find widespread attempts to re- 
 establish the system of cooperative association. Many 
 cooperative societies were established in France in con- 
 nection with the revolution of 1848. Unfortunately, 
 these enterprises were directed by popular enthusiasm 
 rather than by careful business calculation. A few, 
 notably among masons and piano makers, were successful. 
 The majority were total failures. Those which survived 
 have as a rule abandoned the cooperative form and have 
 become joint stock companies owned by workmen. More 
 recent French cooperative movements, though often dis- 
 cussed in economic literature, do not appear to possess 
 
38o COOPER A TION, 
 
 great industrial importance. A number of English ex- 
 periments in cooperative production were made in cotton 
 manufacturing between 1850 and i860. But the difficul- 
 ties consequent upon the American civil war ruined most 
 of these enterprises, nor have they subsequently been 
 revived on any large scale. Of American attempts in pro- 
 ductive cooperation the most conspicuous instance has 
 been furnished by the coopers of Minneapolis. A num- 
 ber of journeymen organized a shop of their own in 1868, 
 which has extended its work from year to year and has 
 found many imitators. Its methods have been admirable, 
 its credit high, and it has had the effect of developing 
 business capacity in men who were not aware that they 
 possessed it. There have been also instances of success- 
 ful organizations of this sort among wood-workers in St. 
 Louis and among boot and shoe companies in Massa- 
 chusetts. But the whole number is small in proportion 
 to the amount that has been said about them. 
 
 § 424. It is always doubtful whether the operatives will 
 choose as good a manager as the stockholders of a cor- 
 poration, or whether the manager whom they choose can 
 enforce good discipline among those on whom he depends 
 for his place. It is often hard for workmen to realize the 
 value of the services of a responsible and efficient man- 
 ager. They are not willing to pay him a high salary ; 
 and this false economy too often wastes more money than 
 it saves. The lines of business in which productive co- 
 operation is most successful are those of comparatively 
 simple character, where industry counts for most and 
 management for least ; where the connection between the 
 efficiency of the labor and its result is most obvious, and 
 where the necessity for organizing power and speculative 
 foresight are reduced to a minimum. In such industries 
 the superior ambition of a workman who feels that he is 
 his own employer may stimulate him to an increased 
 amount of work and increased care in the use of materi- 
 
LASSALLE'S PLAN, 38 1 
 
 als, which will outweigh any lack of speculative skill. 
 This is conspicuously the case in the countries of Conti- 
 nental Europe, where the ordinary standard of work is so 
 low as to leave great room for gain in those directions. 
 The more completely the workman is in the habit of 
 utilizing his powers under the old system, the less chance 
 is there for gain under the new. For this reason the 
 United States furnishes, in some respects,'the least prom- 
 ising field for enterprise of this kind. 
 
 § 425. It is believed by many socialists that the chief 
 present hindrance to productive cooperation is the diffi- 
 culty which workmen meet in their efforts to obtain 
 capital. An association of laborers cannot work to the 
 best advantage unless it controls modern machinery ; and 
 modern machinery costs a great deal of money. Ferdi- 
 nand Lassalle proposed that the government should meet 
 this difficulty by advancing capital to associations of 
 workmen, who would guarantee to make good its value 
 at the close of the period of production. In this way he 
 thought that the present monopoly of capitalists in the 
 control of industry would be abolished. A man who had 
 no capital, but was willing to work, would be put on an 
 equality with one who had inherited capital from his 
 father or saved it from his business. But the history of 
 productive cooperation gives us little encouragement to 
 expect much good from a project of this kind. 
 
 In speculative investments of capital it is quite impossi- 
 ble for any association, of laborers or of any other men, to 
 guarantee that the value of their product to society will 
 equal the value of the goods consumed by the laborers in 
 the course of its production. As business is carried on 
 to-day the losses from unsuccessful investments are very 
 frequent indeed. They would inevitably be even more 
 frequent if these investments, instead of being made by 
 capitalists at their own risk, were made by laborers at the 
 public risk. There is every reason to believe that the 
 
382 COOP ERA TION, 
 
 waste of public capital under Lassalle's system would 
 many times outweigh any public gain from increased 
 freedom and energy on the part of the laborers. 
 
 Where the return on an investment is reasonably sure, 
 it is quite easy to find the money to set an enterprise in 
 motion without government aid. It is not scarcity of capi- 
 tal, so much as scarcity of business ability, which makes 
 productive cooperation so difficult at the present day. 
 So disinterested an observer as Schloss regards the ideal 
 of a self-governing workshop as " a curious mixture of 
 unsound economics and ill-directed philanthropy," and he 
 asserts that the measure of the success which the coopera- 
 tive movement has attained and of the improvement 
 which it has effected in the position of the working classes 
 has been in proportion to their abandonment of the ideals 
 and methods of producers' cooperation for those of con- 
 sumers' cooperation. 
 
 § 426. The latter system has certain theoretical advan- 
 tages which the former does not enjoy. When consumers 
 are managing a business they have it in their power to 
 avoid many difficulties to which the capitalist employer is 
 subject. Consumers can impose upon themselves a set of 
 rules which they would not tolerate if imposed from out- 
 side. By obedience to these rules they can secure great 
 gain in economy of production, without diminishing the 
 utility of the goods and services received. By their ex- 
 perience in adopting and enforcing these rules they can 
 educate themselves to a far higher degree of economic 
 forethought than they would otherwise be likely to pos- 
 sess, and can obtain a decided increase of comfort, both 
 for themselves and for the community as a whole. 
 
 The three most important forms of consumers' coopera- 
 tion are cooperative purchase, cooperative insurance, and 
 cooperative banking. 
 
 § 427. Cooperative purchasing agencies, through which 
 the buyer gives orders for what he wants instead of wait- 
 
ENGLISH COOPERATIVE STORES. 383 
 
 ingfor the seller to come and show him a variety of goods, 
 have proved of the highest value. This has been con- 
 spicuously the case in country districts, where buyers are 
 scattered, stocks of goods inaccessible, and travelling 
 agents more or less irresponsible in their acts because of 
 the absence of competition. The Patrons of Husbandry 
 have secured much advantage for their members and for 
 the public by a system of cooperative purchase, and the 
 same thing may be said with even more emphasis of the 
 agricultural syndicates in France, Germany, and other parts 
 of Europe. 
 
 § 428. Where the cooperators have stores as well as 
 purchasing agencies — in other words, where they aim to 
 keep a stock of goods on hand to supply current demands 
 — any success which they may achieve is more conspicu- 
 ous, but the danger of failure is at the same time indefi- 
 nitely multiplied. One of the earliest and most successful 
 of the cooperative stores was started at Rochdale, in 
 England, in 1844, by the modest attempt of a number of 
 workmen to buy a few ordinary supplies for their own use. 
 The economy which resulted from this undertaking was 
 so great that their example was rapidly followed in other 
 English towns. At the present day the cooperative 
 societies of this kind in the United Kingdom have a 
 membership of about a million, a capital amounting to 
 about ten million pounds sterling, and annual sales of 
 three times that amount. ^ 
 
 The great gain in economy realized by the English co- 
 operative stores was due to their adoption of a system of 
 cash payments. The retail business of the United King- 
 dom had been burdened with the practice of giving long 
 credits, many of which offered no prospect of collection. 
 The cost of this method of doing business ultimately fell 
 on the solvent consumers, who had to pay for the insol- 
 vent as well as for themselves. This credit system also 
 interfered with competition, because many customers be- 
 
384 COOPER A TION, 
 
 came bound to a particular store at which they kept their 
 account, and were not readily able to go elsewhere. A 
 cooperative society avoided all loss from bad debts by 
 insisting on cash payments, and was thus able to give its 
 members a reduction from the current retail prices which 
 covered both the loss from bad debts and the gain which 
 the storekeepers had been accustomed to exact on the 
 basis of their partial immunity from competition. In the 
 United States, where retail credits were less abused than 
 in England, and where competition had probably been 
 more universal, there was less chance of economy from 
 this source, and the success of cooperative stores was 
 therefore much less conspicuous. Though the Patrons of 
 Husbandry have established large numbers of successful 
 purchasing agencies, their losses from cooperative stores 
 have been very serious. Even more noticeable was the 
 failure of an organization known as the Sovereigns of 
 Industry, estabhshed in New England in 1874 with the 
 avowed purpose of maintaining cooperative stores. Their 
 purchases were not judiciously made, and in a short time 
 the societies were loaded with unsold goods. They tried to 
 economize in the wrong direction, by lowering the salaries 
 of their managers ; and only too late did they find that 
 cheap management wasted much more than it saved. 
 
 § 429. A cooperative establishment has the advantage 
 of avoiding many expenses of advertising and of being 
 sure of a regular flow of business. Where the conditions 
 of sale and purchase are comparatively simple, as in co- 
 operative creameries and other enterprises which render 
 a restricted range of services, these advantages are great 
 enough to make the chance of success very considerable. 
 But for ordinary commercial purposes the indications are 
 that capitalistic enterprise does better than cooperation, 
 unless there is some specific reform in methods of purchase 
 or supply, like the abolition of the credit system, which the 
 cooperators are prepared to inaugurate. 
 
MUTUAL INSURANCE, 385 
 
 § 430. Some of these reforms are promised by the ad- 
 vocates of cooperative insurance. In the competition of 
 different insurance companies with one another, large 
 commissions are paid to agents for their services in secur- 
 ing business. These commissions represent a factitious 
 element in cost, due to the strife of rival companies, and 
 are wholly unprofitable to the public, except so far as 
 the activity of agents leads people to make a fuller use 
 of the advantages which insurance offers. Even this 
 modicum of good is probably neutralized by the evils of 
 over-insurance for which agents are often accountable. 
 People are induced to insure their lives at a higher rate 
 than they can properly afford, or to insure their houses 
 for a larger sum than the company can ever be compelled 
 to pay. When the amount of insurance can be thus arti- 
 ficially inflated there is a temptation to the agents of the 
 company to accept improper risks for the sake of the 
 commission involved, and to the parties insured to be 
 careless with regard to fires and other sources of loss. 
 It is claimed that a cooperative company can avoid 
 these dangers, and by a system of mutual watchfulness 
 can lessen risks instead of increasing them. 
 
 §431. The history of fire insurance in the United 
 States affords a conspicuous example of what can be 
 done in this way, though not one which has any direct 
 bearing on the relations between labor and capital. 
 About 1870 certain factories, which previously had to pay 
 very high rates of insurance, undertook to insure one 
 another through a cooperative organization which should 
 have in view, not only the adjustment of losses, but the 
 reduction of such losses to a minimum. Its members vol- 
 unteered to submit to certain rules of construction and 
 operation which should render the liability of fire as slight 
 as possible. Under the efficient guidance of its secretary, 
 Mr. Edward Atkinson, the first of these companies speed- 
 ily reduced the rate of insurance for its members to a 
 
 25 
 
386 COOP ERA TION. 
 
 small fraction of what it had been under the old system. 
 This saving represented a gain in public as well as in 
 private wealth. Anything which can reduce the number 
 of fires avoids at once the loss of property which the man- 
 ufacturer feels, and the loss of comfort which the work- 
 man suffers from interruption of business and the result- 
 ing irregularity of employment. Never was there a more 
 signal instance of the good possibilities of cooperation. 
 The old companies had been content to adjust risks. 
 The manufacturers* mutual companies succeeded, not 
 only in adjusting them at far less cost, but in reducing 
 them to a figure which a few years ago would have been 
 thought impossible.* 
 
 § 432. In life insurance, the friendly societies of Eng- 
 land and fraternal societies of the United States have 
 had a considerable measure of success in reducing expen- 
 ses of management, and have been able to give their 
 members a variety of forms of benefit which the joint- 
 stock companies could not have undertaken without 
 serious danger of abuse. Whether combined with trade 
 societies or not, they have afforded many indirect advan- 
 tages more or less separate from the main purpose of the 
 organization. As an offset to these benefits we must note 
 the disadvantage due to the inferior financial responsibil- 
 ity of many cooperative companies. In the early years 
 of any such organization the assessments are apt to be 
 made too low, and a corresponding burden is placed on 
 the survivors during its later history — a burden which 
 has in many instances proved too hard for the society 
 to carry. 
 
 § 433. Cooperative banking is perhaps even more im- 
 
 ^ The obvious advantage of combining fire insurance with fire prevention 
 has led to a demand that municipalities, which take charge of the latter, 
 should also assume the risks and profits of the former. But this does not 
 distribute the risks over a sufficiently large area. A fire like that of Chicago 
 a quarter of a century ago would bankrupt a municipality that undertook to 
 insure its citizens. 
 
COOPERATIVE BANKING, 387 
 
 portant than cooperative insurance. The essential feature 
 of a cooperative bank is that a body of men, many of 
 whom expect to become borrowers, should furnish the 
 capital and regulate the conditions of its lending and re- 
 payment. The largest experiment of this kind was made 
 in Germany, under the leadership of Schulze-Delitzsch. 
 His first cooperative bank was established in 1849. The 
 progress of the system was slow until i860, but much 
 more rapid after that date. In 1889 the German coop- 
 erative banking associations had 490,000 members, a cap- 
 ital of over $30,000,000, and deposits of twelve times that 
 amount. The underlying idea of the system of Schulze- 
 Delitzsch is that a body of laborers shall enable itself to 
 obtain credit by collecting a small capital in the hands of 
 the association, shall attract outside investors by the offer 
 of a fair rate of interest, and shall then loan funds to its 
 members after direct personal examination of the circum- 
 stances of the borrower. In the earlier associations, the 
 liability of the members was unlimited ; of late years this 
 feature has been changed. The educational effect of 
 these companies, both in stimulating workmen to save, 
 and in teaching them the conditions governing the con- 
 duct of business, has been incalculably good. Perhaps 
 the strongest tribute to their efficiency is furnished by 
 the opposition of the socialists, who see in the success 
 of plans like this the most insuperable barrier to the 
 acceptance of their doctrines among an intelligent and 
 powerful section of German workingmen. 
 
 § 434. In England and the United States cooperative 
 banking has been chiefly confined to a more restricted 
 field. It has dealt almost exclusively with loans intended 
 for building purposes. The first building society was or- 
 ganized in England in 1781 ; the first legal recognition of 
 such societies dates from 1836. There are now some 
 2,500 such companies, with aggregate assets of nearly 
 sixty million pounds sterling. The first building society 
 
388 COOP ERA TION. 
 
 in America was organized near Philadelphia, in 183 1. In 
 1890 there were over 5,000 such companies in the United 
 States, with members numbering more than a million, not 
 quite one third of whom are borrowers, and with assets of 
 perhaps $400,000,000. As these societies are commonly- 
 organized, the paid-up value of the shares is fixed at 
 $200 each, payable in instalments of $1 a month. If no 
 interest accrued, it would take 200 months for these 
 payments to amount to the face value of the share. But 
 as the subscribers are credited with the amount of interest 
 earned by their funds, they pay for their shares in about 
 two thirds of that time. The money thus obtained from 
 month to month is loaned to shareholders, who agree to use 
 it in building houses under the supervision of the officers of 
 the society. The amount which any man can borrow is 
 limited by the maturity value of the shares for which he has 
 subscribed. Thus, the man who has subscribed to five two- 
 hundred dollar shares may borrow as much as $1,000, if 
 the funds are on hand for the purpose. When, as 
 generally happens, the amount in the treasury is inade- 
 quate to meet the wants of all those who wish to borrow, 
 the loan is usually awarded to the man who will, directly 
 or indirectly, offer the highest interest. The board of 
 managers is charged with the duty of seeing that the 
 money is invested in a safe and secure manner. The 
 workman pays, besides interest, his monthly subscription 
 to his shares. If he keeps up these payments regularly, 
 he will in a few years find himself in the possession of 
 paid-up shares which will cancel the principal of the debt 
 when it becomes due and leave him owner of his house 
 without incumbrance. 
 
 §435. Great as are the advantages of these societies, 
 they are of quite a different character from those with 
 which they are popularly credited. They do not, as a 
 rule, enable a workman to get a home cheaper than he 
 could obtain it without them. The borrowers in these 
 
BUILDING SOCIETIES, 389 
 
 societies, in competing for loans, are tempted to offer un- 
 duly high premiums. The chief commercial profit of such 
 societies goes to the outside investors, who do not intend 
 to borrow. It will generally happen that the workman 
 who puts money in a savings bank until he has a sufficient 
 amount to pay part of the cost of a home, and then bor- 
 rows the remainder from the savings bank, with the view 
 of gradually paying the debt from year to year, gets his 
 house at less expense than he could through membership 
 in a building society. The cooperative society undoubt- 
 edly stimulates many workmen to save who otherwise 
 would not ; but this advantage is offset by the danger 
 that in case of sickness such compulsory saving, instead 
 of helping a man, will weigh him down by a burden too 
 heavy to bear. What these societies do for the public is, 
 first, to lead workmen to become holders of real estate 
 much sooner than they otherwise would do, and second, 
 to teach them the difficulties and the possibilities atten- 
 dant on the conduct of banking business. Both of these 
 things are of great public value. The man who owns real 
 estate becomes thereby a gainer in happiness and self- 
 respect. Even if it involves effort and self-denial, the 
 " magic of property " lightens the burdens and sacrifices 
 involved. And besides the moral gain to the real-estate 
 owners themselves, there is an equally important gain to 
 the community as a whole in having the ownership of 
 lands and houses widely distributed among its members. 
 It puts a larger number of citizens on the side of law and 
 order, in opposition to the destructive tendencies of 
 modern industrial life. It makes them acquainted with 
 business methods and with the responsibility of business 
 control, and thus lessens the danger of reckless financial 
 legislation and the possibility of any political warfare of 
 classes. It is in this educational influence that building 
 societies have their chief value. When this is absent, the 
 form of cooperative organization has no virtue. The so- 
 
390 COOPERA TION, J 
 
 called national associations, which simply provide a means 
 of investment and borrowing without direct personal con- 
 trol, are always a source of danger and often of serious 
 evil. The recent history of building societies in England, 
 as well as in the United States, has furnished conspicuous 
 examples of the abuse of cooperative forms of enterprise, 
 and emphasizes the necessity of direct control by the co- 
 operators themselves, as an essential condition for secur- 
 ing the benefits of the system. 
 
 § 436. By far the most important form of consumers' 
 cooperation is exemplified in government management of 
 industrial enterprises. This differs in two important par- 
 ticulars from the cooperative agencies already described. 
 In the first place the choice of managers of a government 
 business enterprise is connected with the general political 
 machinery of the country, and regulated by constitutional 
 law instead of by statutes of incorporation. In the second 
 place, these managers are likely to fall back on the taxing 
 powers of the government to make up any deficit which 
 may arise in the operations of a public business enter- 
 prise ; or in the converse case to devote any surplus above 
 expenses to the relief of tax burdens elsewhere. A 
 government enterprise is managed by people who repre- 
 sent, or are supposed to represent, the consumers ; but the 
 good or bad economy of its management does not neces- 
 sarily redound to the profit or loss of those who most 
 use it.^ 
 
 It is impossible within the limits of a book like this to 
 
 ^ It is sometime said that public business management is neither more nor 
 less than compulsory cooperation. But it must be noted that the compulsion 
 is exercised against the taxpayers in general, rather than against the con- 
 sumers of goods or services provided. Where is the compulsion applied in 
 the management of a government railroad ? Not in compelling people to 
 use the road, but in compelling taxpayers to make up any deficit which 
 arises in its operations. Of course the government may exercise an indirect 
 compulsion upon the users of railroads, if it prohibits the building of private 
 lines, and thus forces people to use its services or none at all ; but this is 
 an accidental rather than a universal feature of state railroad management. 
 
HISTORIC FUNCTIONS OF GOVERNMENT. 39 1 
 
 examine in detail the successes or failures of government 
 management of industry in the various lines where it has 
 been tried. But it seems both possible and desirable to 
 group together the general causes which have given force 
 to the demand for such management in some directions 
 and have limited its practical usefulness in others. 
 
 § 437. In the beginning of history, the government is 
 the power that controls the army. When tribes were in a 
 state of warfare with one another, defense against foreign 
 enemies was the matter of primary importance. No man 
 could let his private convenience stand in the way of 
 effective military operations. The discipline and subordi- 
 nation necessary to wage successful war were all-important ; 
 and all the powers necessary to maintain such discipline 
 were entrusted to the leaders of the army. 
 
 Somewhat later the military authorities undertook the 
 work of maintaining discipline in time of peace as well as 
 of war, and of defining and enforcing the rights of mem- 
 bers of the tribe against one another, no less than against 
 foreign enemies. This function was not accorded to them 
 without a struggle. The priests, under whose tutelage 
 the religious sanction for tribal customs had grown up, 
 tried to keep in their own hands the responsibility of up- 
 holding these customs and the physical power connected 
 with it. In some races they succeeded ; but among Euro- 
 pean peoples the military authorities took the work of 
 enforcing and defining laws out of the hands of the priests, 
 and made it a function of the state as distinct from the 
 church. As security from foreign enemies increased, this 
 law-making power became more and more important. 
 The government was less exclusively identified with the 
 army, and more occupied with the courts, the legislatures, 
 and the internal police. Its judicial and legislative func- 
 tions assumed a prominence at least as great as its 
 military function. 
 
 The growth of private property was almost coincident 
 
392 COOPERA TION. 
 
 with the development of these domestic functions of gov- 
 ernment. In fact the two things reinforced one another. 
 The production and accumulation of capital, to which 
 private property gave so vigorous an impulse, placed the 
 strong men of the community in a position where they 
 had less to gain by war and more by peace. It put them 
 on the side of internal tranquility. It thus made the 
 government more powerful ; and this in turn still further 
 increased the accumulations of capital. But along with 
 this mutual help, which strong domestic government and 
 strong property right rendered one another, there was an 
 element of mutual antagonism. The very fulfilment of 
 those functions which made the accumulation of capital 
 possible, rendered it impossible for the government to do 
 its work except at the expense of the capitalists. It was 
 no longer possible to support armies by booty, or courts 
 by fines and forfeitures. The expense of maintaining 
 order had to be paid by its friends instead of its enemies. 
 The growth of private property was followed by the 
 development of a system of taxation, which, in theory at 
 any rate, involved the power to destroy such property. 
 
 The existence of such a system of taxation, with the 
 machinery for collecting money in this way, allows the 
 government more freedom of industrial action than any 
 private individual can command. It can make up a de- 
 ficit by compulsory payments ; and this gives it a wider 
 range of power in deciding what services it will undertake 
 and what prices it will charge — a power which affords 
 almost unlimited opportunity for good or bad use, accord- 
 ing to the degree of skill and integrity with which it is 
 exercised. 
 
 § 438. Every extension of government activity into 
 new fields restricts private enterprise in two ways ; first 
 by limiting the field for investment of private capital, and 
 second, by possibly, if not probably, appropriating through 
 taxation a part of the returns from private enterprise in 
 
SPHERE OF GOVERNMENT ACTIVITY, 393 
 
 all other fields. The question whether a government 
 should manage an industry reduces itself to this: Are the 
 deficiencies or evils connected with private management 
 such that it is wise to give government officials the taxing 
 power which constitutes the distinctive feature of public 
 industrial management ? 
 
 § 439. In one class of cases there is no doubt whatever. 
 The expenses for the army, the courts, and the legislature, 
 with the administrative work which they involve, must be 
 defrayed in this way. There may be a question how large 
 an army and navy we should have, or how much legisla- 
 tion ; whether we should extend legislative activity to 
 cover a great many points of health and morals, or confine 
 it as far as possible to a few essential matters of public 
 security. But once having established an army or made 
 a law, we have to pay for it by taxation. We have to 
 meet the cost not only of soldiers and sailors, but of forts 
 and ships ; not only of congressmen and judges, but of 
 policemen, prisons, and other physical means necessary to 
 make their decisions operative. Every extension of legis- 
 lative power extends the scope of these expenditures. 
 Regulation of money almost necessarily involves public 
 mints; health ordinances involve public sanitation ; com- 
 pulsory education involves public schools. 'All of these 
 agencies may be partly supported by fees for the services 
 rendered ; but their compulsory character involves the 
 necessity of applying them in cases where the collection 
 of an adequate fee is impossible. 
 
 § 440. This last point leads us to the fundamental 
 characteristic of a second class of circumstances which 
 justify goverment enterprise. It will often happen that 
 an expenditure of m.oney promises a public good out of 
 all proportion to the amount which its promoter can col- 
 lect from the beneficiaries in case it proves successful. 
 Under such circumstances the government may take hold 
 of an industry, just because it cannot be made to pay by 
 
394 COOPER A TION, 
 
 ordinary commercial means. Roads, bridges, canals, 
 wharves, and lighthouses furnish conspicuous instances 
 of this sort. It is an absolute necessity for the public to 
 have lighthouses ; but it is, in ordinary cases, impossible 
 for the owner of a lighthouse to collect toll for its main- 
 tenance, either from the ships which are not wrecked or 
 from those which are. It is of the utmost importance 
 for the community to have good roads ; but the vexation 
 connected with the imposition of tolls for the use of the 
 highway, and the impossibility of maintaining a highway 
 system by such tolls, force the government to take this 
 matter into its own hands. 
 
 Irrigation works in desert lands are likely to furnish 
 another important example of this kind ; especially if it 
 be true that the storage and distribution of water pro- 
 duces a rainfall in districts previously arid, so that those 
 who pay nothing for the works can nevertheless get a 
 share in these benefits. An instance of a little different 
 character, but which comes un4er the same general head, 
 is furnished by forestry. The public need of forests for 
 the sake of securing a regular rainfall is one in which the 
 whole community has an interest, but which is not a 
 matter of personal profit to any one. Each man will, 
 therefore, often destroy his own forests for the sake of 
 the lumber, and trust to others to leave theirs for the 
 sake of the rainfall. In a case like this, government 
 interference has been abundantly justified. 
 
 § 441. In supplying these needs, the government serves 
 a public necessity. But there are two opposite causes 
 which often prevent it from doing its work judiciously. 
 Either the taxpayers know that they are paying for these 
 improvements, or they do not. If they know it, as in the 
 case of country roads, they will grudge every penny of 
 necessary expense, and will waste in horseflesh and 
 wagon-wheels many times the amount of capital which 
 would have sufficed to put the road system in proper 
 
MISTAKES IN PUBLIC EXPENDITURE, 395 
 
 shape. Seeing no pecuniary return for the money which 
 they spend, they will cause themselves great pecuniary 
 loss by their shortsighted economy. If, on the other 
 hand, the taxpayers do not see whose money is being 
 spent, as in the case of ship canals and other works of 
 national importance, they will look only at the question 
 of convenience, and will fail to see that somebody must 
 pay for this convenience by taxation. They will commit 
 the fallacy of confounding government property with 
 public wealth, and will ignore the fact that unwise ex- 
 penditures on government property lessen the public 
 wealth instead of increasing it. 
 
 The danger of this mistake is intensified by the fact that 
 so many people believe the expenditure of money to be 
 in itself a positive benefit, without considering the source 
 whence it is drawn ; and are ready to make appropria- 
 tions for objects of slight value, because they can see the 
 money which is spent and cannot see the losses involved 
 in collecting it.* The history of river and harbor improve- 
 ments has often been a public scandal. Some of them 
 are recklessly made, without the remotest prospect of 
 permanent benefit to any one. Others, which promise a 
 benefit, are begun without anything like a careful esti- 
 mate of the probable cost. Many an advocate of canal 
 projects claims that a canal is a cheaper means of trans- 
 portation than a railroad ; basing his argument on figures 
 which include interest and maintenance in the expense of 
 railroad transportation and exclude interest and main- 
 tenance from the cost of canal transportation. The com- 
 parison is made in this fashion because the government 
 habitually pays interest and maintenance on the canal, 
 
 * This danger is by no means confined to expenditures for industrial enter- 
 prises. It is exemplified in the demand for pensions of various forms 
 (compare § 75). In the United States there is a strong pressure toward 
 regarding military and naval pensions not as a means of support to those 
 disabled in the service of the government, but as a means of distributing 
 public money as widely as possible among private individuals. 
 
39^ COOPER A Tiojsr, 
 
 so that this is supposed to be no part of the expense of 
 the shipment. But it represents a cost to the public just 
 as much as if it were paid by private individuals, and 
 any legislation which ignores this element of cost is 
 blindly increasing public burdens. 
 
 § 442. A third class of cases brings us into much more 
 doubtful ground. There are many enterprises whose con- 
 trol by private individuals or corporations seems to give 
 those individuals or corporations an arbitrary power over 
 the industrial interests of the country; which forms a 
 menace to public wealth, and destroys whatever presump- 
 tion may exist in favor of private control of industry. 
 
 Let us see what constitutes the real basis of this 
 presumption. 
 
 Each consumer probably knows better than any one 
 else whether he wants an article enough to pay a specified 
 price for it. Each producer presumably knows better 
 than any one else whether he can do a thing cheaply 
 enough to meet the consumer's wants. Competition 
 allows any man to get an article if he is willing to pay the 
 the market price for it, and offers inducements to any man 
 to make an article if he can do it for less than the market 
 price. In so doing, it at once puts goods where they 
 are wanted, makes every producer do his best work, and 
 stimulates progress by giving every incentive for new 
 methods. Even if many mistakes are made in trying 
 these new methods, the gain to the community from 
 the permanent application of those that succeed out- 
 weighs the loss from the immediate cost of those that 
 fail. Finally, the rivalry of different producers causes 
 them to sell their products at low rates, and gives the 
 benefit of new methods to the consumers as a body 
 instead of allowing it to be appropriated by a few 
 capitalists. 
 
 But it is obvious that these advantages are largely, if 
 not wholly, dependent upon the existence of free compe- 
 
PUBLIC OWNERSHIP OF MONOPOLIES, 397 
 
 tition.* In the case of a monopolized industry, the chance 
 for experiments is less wide, the stimulus to producers' 
 energies less effective. Instead of putting prices so low 
 as to bring the product within reach of every consumer 
 who can pay the cost, a monopoly may use its power to 
 fix unfairly high rates, thus increasing its own profits but 
 lessening the sphere of its public service. This danger is 
 present to a noticeable degree in the case of waterworks, 
 of lighting, whether by gas or electricity, and in many of 
 the industries occupied with the conveyance either of 
 intelligence, of passengers, or of general traffic. It is hard 
 to avoid these dangers by legislative control of rates, 
 owing to the inherent difficulty of allowing anybody to 
 fix the charges for a service except those who risk their 
 own capital in so doing. If the government allows cor- 
 porations to make unduly high charges, it subjects the 
 public to the danger of extortion. If it insists on their 
 making charges which turn out to be unfairly low, it de- 
 prives the investors of the control and enjoyment of their 
 property. Why should it not meet the difficulty directly, 
 by owning and managing these enterprises, and making 
 changes in rates with a free hand, at its own risk ? 
 
 The answer to this question will depend partly on the 
 industry involved, and partly on the financial ability of 
 the government which seeks to take control. 
 
 § 443. The criteria laid down by Jevons'* to determine 
 when an industry can advantageously be managed by the 
 government, are as follows : 
 
 I. Where numberless widespread operations can only 
 be evenly connected, united, and coordinated in a single 
 all-extensive government system. 
 
 ' H. C. Adams says that the presumption in favor of private control is 
 lessened if not destroyed where the * ' law of increasing return " holds good. 
 But we have seen (§ 168, note) the danger involved in making too much of 
 this distinction. 
 
 ^ " Methods of Social Reform," p. 279. 
 
39^ COOPER A TION, 
 
 2. Where the operations possess an invariable routine- 
 like character. 
 
 3. Where they are performed under the public eye, or 
 for the service of individuals who will immediately detect 
 and expose any failure or laxity. 
 
 4. Where there is but little capital expenditure, so that 
 each year's revenue and expense account shall represent, 
 with sufficient accuracy, the real commercial conditions 
 of the development. 
 
 All this is good as far as it 'goes ; but it leaves the heart 
 of the difficulty untouched. Passing over the first of 
 these points, which really begs the whole question, we 
 have before us, not an indication of the conditions under 
 which a government can manage an industry with the 
 best advantage, but of those under which its management 
 is attended with the least danger. Jevons's principles are 
 restrictive and not positive. They show how far you can 
 trust the government without serious danger of financial 
 mismanagement. Assuming the existence of a political 
 or fiscal motive for extending the sphere of official action, 
 these criteria show in which direction such an extension 
 can be made with the least probability of loss and corrup- 
 tion.* Judged on this basis, waterworks form an excel- 
 lent field for municipal activity, gas works a more doubt- 
 ful one, and electricity in its various applications quite an 
 unsuitable one. For the national government, these con- 
 ditions indicate that the post-office is suitable as a field 
 of employment, the telegraph a little more doubtful, and 
 the railroad much more conspicuously so. Unfortunately, 
 these criteria as a rule apply best where the initial neces- 
 sity for government ownership is least. They indicate 
 that the government may properly own industries where 
 
 ^ Even on this restricted basis, a fifth criterion should be added to those 
 of Jevons : namely, that the public management has special advantages 
 where the government is itself a large consumer, as in the case of municipal 
 water supply, so that questions of price will be looked at by the financial 
 authorities from two points of view. 
 
A CHOICE OF EVILS. 399 
 
 It could easily enough regulate a private company, and 
 may not so properly control industries where it is difficult 
 to regulate a private company. With regard to the rela- 
 tive merits of the two systems, administrative ownership 
 or legislative control, in a really perplexing case like rail- 
 roads, Jevons's principles furnish us no help. Just where 
 the difficulties attendant upon private ownership are great- 
 est, these tests shut the door most hopelessly against 
 state purchase, and leave us no alternative whatsoever. 
 
 § 444. In an industry like the railroad, both private 
 ownership and state ownership, even under the best of 
 circurristances, are likely to be attended with a great deal 
 of dissatisfaction. Neither system is free from serious 
 abuses. The choice between the two is in some measure 
 a choice of evils. Under private ownership we have 
 rapid development of effective methods and processes, 
 and a high degree of industrial efficiency ; but side by 
 side with this we have great discriminations and fluctua- 
 tions in rates, which no system of legislation seems able 
 to keep within bounds. If the government owns all the 
 railroads of a country it will meet many of these difficul- 
 ties about rates. It will make them steady, and as a rule 
 low. To offset these advantages, it will give a service 
 which, to a country accustomed to the freer system 
 of private management, will seem seriously defective. 
 Germany furnishes a most conspicuous example of a well 
 managed state railroad system. The rates of the German 
 railroads are on the whole quite satisfactory. But the 
 amount of train service in proportion to the population, 
 and the quickness of the trains themselves, whether for 
 passengers or freight, are, according to English and 
 American standards, miserably inadequate. 
 
 § 445. On the whole, private ownership of monopolies 
 tends to rapid development and utilization of improve- 
 ments. With all the talent that has been put into the 
 public administration of industry it is a salient fact that 
 
400 COOPER A TTON. 
 
 the important inventions have been made in countries 
 enjoying private enterprise. The telegraph, the tele- 
 phone, the electric light, the railroad track, the locomo- 
 tive, the air brake, the block-signal system, were all 
 introduced by private companies. In most cases it took 
 government experts from ten to twenty-five years to dis- 
 cover them after they had been in successful use on pri- 
 vate lines. We also find that the efficiency and quantity 
 of service is generally higher than we see it under govern- 
 ment management. In spite of the ability of the Prussian 
 civil service the fact remains conspicuous that England 
 and America have more trains in proportion to the popula- 
 tion than Prussia, and that they run them faster.* 
 
 § 446. With regard to the relative effect of state and 
 private ownership in making prices high or low, no general 
 propositions can be maintained. The United States and 
 England are the two most conspicuous examples of 
 countries that have private railroads. The United States 
 has the lowest freight rates of any important commercial 
 country in the world. England has the highest. In 
 either case, if we go below the surface, we find reasons 
 for the conditions that prevail. The long hauls of cheap 
 freight give the American railroads an opportunity to 
 reduce rates, of which they have been quick to avail them- 
 selves. In England just the opposite conditions prevail, 
 and the opposite results naturally follow. On the other 
 hand, the high American passenger rates are fully ex- 
 plained by the small density of population and the high 
 average earning power, which make it worth while for 
 passengers to pay high rates in order to have trains run 
 when they want them. The same kind of explanation 
 accounts for most of the glaring differences in charge for 
 
 ' If the government protects private companies from competition these 
 advantages of private enterprise do not make themselves felt. The French 
 railroads, which enjoy a guaranteed monopoly, stand in about the same con- 
 dition as the state-owned roads of Germany, with regard both to train service 
 and train speeds, besides charging rather higher rates. 
 
TPFO OPPOSITE DANGERS, 4OI 
 
 telegraph service, lighting, and other objects of industrial 
 monopoly, which are adduced by extreme partisans either 
 of state or of private ownership as arguments for their 
 respective views. 
 
 § 447. Both the advantages and the dangers of govern- 
 ment management of industry depend largely upon the 
 form of the government itself; while the possibility of 
 securing the one and avoiding the other is largely depen- 
 dent upon the character of public men and methods. 
 
 In a country like Prussia, where the military element 
 of the government remains the dominant one, we may ex- 
 pect to find public enterprises managed with strict disci- 
 pline, good economy — at any rate in the narrower sense of 
 the word, — and freedom from glaring abuses. The chief 
 errors of such a government come from not responding 
 quickly to the needs of industrial progress. It is apt to 
 be slow in utilizing improvements or making changes of 
 method : while there is always a danger, which only the 
 best governments are able to avoid, that the monopoly 
 will be used to tax the public instead of to help it. 
 
 In a government where the legislative element is more 
 prominent, and especially in a democratic one, the case 
 is reversed. Such a government prides itself on respond- 
 ing to popular needs. Its legislators are chosen to give 
 expression to the public will, and too often pride them- 
 selves on their subserviency to the people. Under such 
 conditions we are likely to have reductions in rates to the 
 lowest limit which a regard for the budget will allow, and 
 activity in making obvious improvements and popular 
 changes of method. On the other hand we are in the 
 gravest danger of sacrificing discipline and economy, and 
 of making subserviency to the popular will a cloak to 
 cover abuses of trust and violations of commercial 
 honesty. 
 
 § 448. The chance of securing the advantages and 
 
 avoiding the evils of either form of government is better 
 26 
 
402 CObPERA TION. 
 
 in a municipality than in a nation. For the municipality- 
 is neither a military body nor in its main functions a legis- 
 lative body, but an administrative one ; and while the 
 character of the administration chosen is likely to reflect 
 in some measure the traditions of the central government, 
 there is no necessary connection between the two. More- 
 over, the responsibility for the success or failure of munici- 
 pal administration is less hopelessly obscure than is apt 
 to be the case with national administration. This being 
 the case, the chance for successful and economical control 
 of enterprises by municipalities is better than the chance 
 under national authorities. 
 
 § 449. If any government agency, local or national, is 
 to be entrusted with the management of an industrial 
 enterprise, a non-partisan civil service is absolutely essen- 
 tial for success. Even in so simple a case as the post 
 office, the abuses of patronage have been great, and only 
 the enforced monopoly of the government which shuts 
 out private competition in letter carriage prevents us 
 from seeing how great is the waste which arises from this 
 source. Much more must this danger make itself felt in 
 industries with large capital accounts. Only where the 
 traditions of the civil service are such that the best men of 
 the country seek and gain admission to it, independent 
 of party, can we hope that the advantages from govern- 
 ment management of these industries might outweigh the 
 evils. With the conditions as they exist in the United 
 States, political reasons compel us to reduce government 
 ownership of fixed capital to a minimum. Any exten- 
 sion of party patronage to a new, lucrative, and complex 
 field must involve serious dangers to the already inade- 
 quate powers of our Civil Service Commission. The 
 Italian authorities fifteen years ago, after the fullest in- 
 vestigation, came to a decision adverse to government 
 management of railroads ; and this decision was based 
 largely on the ground that politics would corrupt the 
 
INDUSTRY AND POLITICS, 403 
 
 railroad management and the railroad management would 
 corrupt politics. So long as an administration is to any 
 considerable degree swayed by partisan considerations 
 instead of industrial ones, every extension of government 
 activity to new fields must be regarded with grave appre- 
 hension. 
 
CHAPTER XIII. 
 
 PROTECTIVE LEGISLATION. 
 
 The Eight-Hour Movement — The Contract System — Prison Labor — Foreign 
 Immigration — Protective Tariffs — The Popular Argument — The De- 
 velopment of Infant Industries — Political and Military Questions 
 Involved. 
 
 John Rae : "Eight Hours for Work." London, 1894. 
 
 R. Mayo-Smith : " Emigration and Immigration : a Study in Social 
 Science." New York, 1890. 
 
 Leone Levi : " The History of Commerce and of the Economic Progress 
 of the British Nation, 1763-1878." London, 1880. 
 
 F. W. Taussig: "The Tariff History of the United States." 2d ed. 
 New York, 1892. 
 
 No student of the theory of protection should fail to read the fourth book 
 of Smith's Wealth of Nations. The more recent controversial literature on 
 the subject is almost as disappointing as that on bimetallism 
 
 § 450. It is a natural consequence of the popular doc- 
 trine of wages (§ 344) that its adherents try to make 
 use of legislative authority to diminish the apparent over- 
 supply of labor ; sometimes by forced reductions of hours, 
 sometimes by prohibiting the employment of certain 
 classes of laborers, sometimes by restricting the importa- 
 tion of foreign products with a view to the creation of new 
 fields for home industry. They see that the different 
 workmen in an industrial community compete with one 
 another ; they fail to see that they consume one another's 
 products. In consequence of this one-sided view, they 
 favor almost any policy that reduces the intensity of com- 
 petition among workmen as producers, even though it 
 
 404 
 
REDUCTION OF HOURS, 405 
 
 may ultimately reduce the amount of wealth that can be 
 divided among the workmen as consumers. 
 
 As a result of this fallacy, even the most wholesome 
 measures are defended on false grounds. There is a dis- 
 position to find the reason for prohibiting child labor, 
 not in its real effect on the health and morals of the com- 
 munity, but in its supposed effect in diminishing the 
 employment of adults ; to seek grounds for the restric- 
 tion of foreign immigration, not in the political dangers 
 attendant upon it, but in its industrial consequences in 
 taking away the bread from home labor ; to argue for 
 shorter hours of labor, not as a means of improving the 
 quality of the operatives, but as a means of giving work 
 to a larger number of hands. 
 
 § 451. The advocates of the eight-hour movement gen- 
 erally hold that a restriction on the quantity produced 
 by each individual laborer places the laborers as a class 
 in a better position to bargain with those who desire to 
 employ them. They believe, or at least imply, that a 
 diminution in the supply of labor by legislative enact- 
 ment tends to increase the competition of capitalists for 
 the laborers* services. They claim that enforced reduc- 
 tion of hours of work would create (i) a demand for the 
 labor of men who are now unemployed, and (2) an in- 
 crease in the price of work per hour, which would enable 
 those who were previously working ten hours to get the 
 old rate of wages for eight hours' work instead of ten. 
 
 § 452. This course of events is most improbable. The 
 proportion of the unemployed is not likely to be dimin- 
 ished by a forced reduction in the hours of labor. Among 
 the many causes of " unemployment," the two most im- 
 portant are the shiftlessness of individual laborers and 
 the fluctuations of commercial credit. The first of these 
 causes would not be affected by legislative reduction of 
 the hours of labor ; the second would, for the moment at 
 any rate, be adversely affected. The experience of France 
 
406 PROTECTIVE LEGISLATION:, 
 
 after the revolution of 1848, indicates that a sudden 
 change in conditions of employment, devised in the in- 
 terest of the laboring classes, may so far paralyze credit 
 as to increase the proportion of the idle rather than to 
 diminish it. 
 
 If the number of the unemployed remains approximately 
 the same and the product of the employed diminishes as 
 a result of the reduction of time, a loss in real wages is 
 apparently inevitable. The margin of profit in modern 
 industry is so narrow that any considerable gain made by 
 the laborers at the expense of the capitalists so far di- 
 minishes the investment of capital in the immediate 
 future as to hurt the laboring classes in the long run 
 more than it helps them for the moment. This would 
 be the obvious effect if one nation adopted the system 
 and its competitors did not. For this reason, many 
 advocates of the eight-hour movement are disposed to 
 insist that it should be made an international measure, 
 and that if any nation should refuse to take part in apply- 
 ing it, other nations should defend themselves against the 
 recalcitrant by imposing discriminating duties upon its 
 products. 
 
 This removal of international competition puts the dif- 
 ficulties of the eight-hour movement a little way out of 
 sight ; it does not by any means meet them. No inter- 
 national arrangements or protective tariffs will make one 
 loaf of bread serve the purpose of two. An eight-hour 
 law either applies to agriculture, or it does not. If it 
 applies to agriculture, it will make food products scarce. 
 Any one who is inclined to doubt this will soon be con- 
 vinced of its truth if he watches the actual operations of 
 farm life.' If food products are scarce, some people will 
 surely starve. If, on the other hand, the eight-hour law 
 does not apply to agriculture, the city laborers who have 
 
 ^ If an eight-hour day for farm work was once the -rule in England, as 
 Rogers thinks, it must have been accompanied by a great deal of overtime. 
 
EFFECT ON OUTPUT. 40/ 
 
 hoped to maintain a high price for manufactured pro- 
 ducts, or to give work to the unemployed by a restriction 
 in the output per capitUy will find themselves wofully 
 deceived. For if the attractions which now draw men 
 from the country to the city are supplemented by a 
 shortening of hours of labor which applies to the latter 
 and not to the former, we shall have more laborers com- 
 peting for the city work, and more supplies of manufac- 
 tures to exchange for food. We shall see a larger number 
 of laborers working at starvation rates which the strong 
 man is not allowed to better by working overtime. He 
 must see his children die because the law prohibits him 
 from earning the food they need. If this is to be the 
 result of the eight-hour movement it may well be termed 
 suicidal. 
 
 § 453. The really strong arguments for reduction of the 
 hours of labor are advanced by those who do not believe 
 that the product of labor will be greatly diminished by 
 such a policy. There is much that they can urge in sup- 
 port of this view. They can show that in times past the 
 gradual reduction of the working day, from twelve and 
 thirteen hours to ten or nine, has not caused the ex- 
 pected diminution of output. A shortening of the dura- 
 tion of labor has been accompanied by increased speed, 
 which very soon brings the per capita production up to 
 the old level. 
 
 Shortened hours combined with increased speed make 
 the conditions of employment more favorable for high 
 grade labor and less favorable for low grade labor. The 
 better laborer does not dislike the speed and enjoys the 
 time saved. Where one country or state has reduced the 
 hours of labor, while another has retained the longer 
 working day, there has been a noticeable differentiation 
 of the character of the employment in the two localities. 
 There was a time when, as a result of legislative enact- 
 ment, Massachusetts mills were running ten hours a day. 
 
408 PROTECTIVE LEGISLATION, 
 
 while Connecticut mills were running eleven hours. This 
 did not mean that mill hands in Connecticut earned higher 
 wages than those in Massachusetts, or made more pro- 
 ducts ; nor did it mean that Connecticut mill owners 
 earned larger dividends. The Massachusetts mills ran at 
 greater speed, employed a higher character of operatives, 
 produced on the whole a higher grade of goods, and 
 earned a fair rate of profit in so doing. The Connecticut 
 mills ran at lower rates of speed, and employed operatives 
 of somewhat lower grade than those of Massachusetts, at 
 no higher rates of wages to the laborer or profits to the 
 employer. 
 
 It may fairly be asked why the reduction of hours, if it 
 involves no loss of profit, may not be left to the voluntary 
 action of the employer. The answer is this: Industrial 
 history has proved that employers are not, as a rule, ready 
 to take the initiative in these reductions. The unen- 
 lightened members of the employing class are often able 
 to dictate the policy of the whole body in this matter. If 
 the employees were united in a universal strike in the 
 whole trade, for the sake of reduction of hours, they could 
 force a compliance with their demands ; but such a result 
 could only be accomplished at great sacrifice to the com- 
 munity as a whole, and in many trades a minority of un- 
 intelligent employees could defeat the change altogether. 
 Under these circumstances, recourse must sometimes be 
 had to legislative enactments. 
 
 § 454. For success in legislation of this kind it is 
 necessary that the prescribed reductions be moderate in 
 amount, keeping well within the limits of what the public 
 sentiment of the community will sustain. Otherwise, any 
 statute becomes a dead letter. The eight-hour law of the 
 United States is a monumental instance of failure. To be 
 successfully applied, a law reducing hours of labor must 
 be strictly mandatory and not permissive or optional. 
 The conditions under which overtime is to be allowed 
 
TRADE OPTION, 409 
 
 must be accurately defined ; and the provisions of the law 
 on this subject must be enforced, even in cases where its 
 enforcement involves hardship. It is fatal to the success 
 of an act if public sentiment justifies individuals in taking 
 the matter of exceptions into their own hands. The 
 Fabian Society of England, in its advocacy of the eight- 
 hour day, seems inclined to be satisfied with a law based 
 on the principle of trade option. Such a law would pro- 
 vide that where it is proved to the satisfaction of a Secre- 
 tary of State that the majority of persons employed in 
 any one trade favors a statutory reduction in the hours of 
 labor, this may be made the basis of an order for such 
 reduction. There seems no great reason to apprehend 
 much evil from the adoption of a policy of this kind, in a 
 country where workmen are at once so well organized and 
 so well educated as in England. The danger that a good 
 workman will voluntarily cause a reduction in his earn- 
 ings for the sake of shortening his working hours is not 
 very serious. But it must constantly be borne in mind 
 that reductions of hours, even more conspicuously perhaps 
 than other forms of labor legislation, bear heaviest, not 
 on the employer, not on the man who has money to 
 spend, but on the labor of those who cannot stand the 
 increased speed and are therefore forced to a choice 
 between a lower standard of comfort or an intensity of 
 strain which they cannot bear. 
 
 §455. The argument for restricting the employment of 
 certain classes of labor is obviously far stronger than that 
 for general restrictions on the labor supply as a whole. Pro- 
 hibition of child labor is unquestionably justified on public 
 grounds, because, if the children go to work in the factory 
 at too early an age they are deprived of the chance of health 
 and education which would enable them to make the most 
 of themselves. The community is not always better off 
 for the moment, from keeping them out of the mills ; but 
 it is far better off in the long run from having strong citi- 
 
4IO PROTECTIVE LEGISLATION, 
 
 zens instead of weak ones. The gain to the laborers from 
 such a policy is to be sought not in the momentary reduc- 
 tion of the labor supply, but in the ultimate increase 
 of that supply as the children grow to a more efficient 
 manhood. 
 
 § 456. It is very hard to tell at what age the prohibition 
 of child labor should cease. If a boy of thirteen or four- 
 teen is strong enough to earn his living, his gain from the 
 food and other comforts which he earns, is probably 
 greater than his loss from confinement at his labor. In 
 cases like this, the harm from keeping him out of work 
 is likely to outweigh the good. The same difficulty in 
 even more perplexing shape is involved in the regulation 
 of women's labor. There are many women who work for 
 lower wages than those which men in corresponding em- 
 ployments are willing to accept. Some of them live in 
 homes where they are supported by their parents, and 
 where any income which they may earn represents an 
 addition to the family income. Others have families 
 dependent upon them and are ready to kill themselves 
 rather than see their children starve. Each of these 
 classes contributes to the increase of the labor supply in 
 certain lines, and allows wages in those lines to fall below 
 the figure necessary to keep the laborer alive. Men will 
 not, as a rule, take these low wages. They are not 
 allowed to remain in dependence on their parents ; they 
 will not go as far as women in killing themselves for the 
 sake of their children. They have a standard of wages 
 which they insist on receiving ; in default of such wages 
 they will take to the road. Hence the decided difference 
 between the recognized minimum of wages for the two 
 sexes. ^ 
 
 As long as reckless marriage remains the rule, it is hard 
 
 ^ Smart ( " Studies in Economics " ) explains this difference on the theory 
 that men have been strong enough to secure industrial gains which modern 
 competition offers them, while women's wages reflect the industrial con- 
 ditions of a hundred years ago. 
 
WOMEN'S WAGES. 4II 
 
 to see an escape from this state of things. To forbid a 
 mother to work while her little children starve is out of 
 question. To have the taxpayers assume the support of 
 all such cases would result in placing new burdens upon 
 a number of workers who find it hard enough to maintain 
 themselves at present (compare § 59). The attempt to 
 raise women's wages, either by combination or by law, to a 
 figure equal to those of men, would apparently so dimin- 
 ish the demand for their labor as to leave many with 
 nothing to do. Nor could any reduction in the hours of 
 female labor make work enough to supply all the com- 
 petitors at remunerative rates. A certain amount of re- 
 striction on the labor of women, especially married women, 
 seems necessary on grounds of public health ; but the grow- 
 ing pressure to equalize the legal position of both sexes 
 is likely to reduce such special legislation to a minimum 
 rather than to allow it to expand into an important limita- 
 tion of the labor supply. 
 
 § 457. A more distinct case for public interference is 
 found in the low wages which prevail under the " sweat- 
 ing system." 
 
 An employer who desires to get his work done as 
 cheaply as possible, and at the same time to free himself 
 from the trouble of supervising it, will often make con- 
 tracts with his subordinates by which he furnishes them 
 whatever materials they may need, and pays them a stipu- 
 lated price for their product, after deducting the cost of 
 the materials used. Where this contract is made with the 
 workmen as a body, the system is a good one. It gives 
 them a stimulus to use the materials effectively and 
 economically. Where it is made with an individual 
 workman, or subcontractor, who hires his help at whatever 
 rates he can persuade them to accept, its benefit is more 
 doubtful. It is good for the employer and the subcon- 
 tractor; but the men themselves claim that the work is 
 harder and the pay more niggardly than when they are 
 
413 PROTECTIVE LEGISLATION, 
 
 hired by the capitalist directly. They complain that 
 when every penny saved in the workrooms goes to the 
 foreman — which is what the subcontract system accom- 
 plishes — his supervision is so intense and his bargaining 
 so close as to make the lot of those under him a hard one. 
 But as long as the labor is performed in the factory itself, 
 the system does not develop its worst features. These 
 are shown when the work is done outside, in isolated 
 shops or in tenements which some people are so unfortu- 
 nate as to call homes. This method of employment is 
 known as the sweating system. It is perhaps seen at its 
 worst in the ready-made clothing trade, where the length 
 of the hours, the shortness of the wages, and the unsani- 
 tary conditions of the employment combine to form an 
 appalling picture. 
 
 § 458. The evils of the sweating system, by which the 
 contractor makes money from the misery of those below 
 him, are made the ground of a severe indictment against 
 free competition. Yet the sweating system is really an 
 illustration of the evils which arise from the absence of 
 competition, not froni its presence. Put people in a 
 factory where there is a market rate of wages and they 
 obtain the benefit of the modern competitive process. 
 Leave them isolated and they become the victims of the 
 employer's shrewdness in bargaining. We hear much said 
 about the advantage of the capitalist in his competition 
 with the laborer. The capitalist does not compete with 
 the laborer. Laborer competes with laborer and capitalist 
 with capitalist. Where competition exists, the laborer 
 gets the benefit of a market rate made by different capi- 
 talists. Their strength is a source of benefit to him. It 
 is where competition does not exist, and bargaining takes 
 its place, that the relative weakness of the laborer makes 
 itself felt. The absence of competition in wages gives 
 rise to oppression as unjustifiable as that which arises 
 from the absence of competition in loans : and laws for 
 
THE SWEATING SYSTEM. 413 
 
 the protection of the laborer in these cases may have the 
 same justification as those for protecting the ignorant 
 borrower (§ 155). 
 
 The sweating system is in fact a remnant of the domes- 
 tic system of industry which prevailed until the develop- 
 ment of the steam engine concentrated so much of our 
 labor in factories. It represents a survival into modern 
 times of the evils incident to earlier conditions of em- 
 ployment ; evils which are doubtless increased by every 
 narrowing of the margin of general profits that gives 
 the contractor an excuse for correspondingly depressing 
 wages, and which are accentuated by the contrast in 
 prosperity between those who have gained the benefits 
 of competition and those who remain under the severer 
 bondage of the older methods. 
 
 § 459. The evils thus far described can probably best 
 be dealt with by the sanitary and educational authorities, 
 rather than by special labor legislation. The dangers to 
 public health in child labor, in unregulated female labor, 
 and in the worst form of contract labor, are so conspicuous 
 that proposals for legislative restriction can most effec- 
 tively be based on this ground. But there are other 
 forms of cheap labor where the evils, real or alleged, are 
 more distinctively economic. One of these is convict 
 labor. 
 
 In order to relieve the taxpayers of a'part of the burden 
 of supporting prisoners, it is in many places customary to 
 set those prisoners at work for private contractors. There 
 are three ways in which this is done. Either the convicts 
 are placed directly under the charge of a contractor at a 
 fixed rate per day, the contractor taking the responsibility 
 for the care of the prisoners and getting all the work he 
 can out of them {lease system) ; or labor within the prison 
 w^alls is placed at the disposal of the contractor, at a 
 fixed rate per day, the contractor having agents in the 
 prison to see that the work is properly carried on (contract 
 
414 PROTECTIVE LEGISLATION, 
 
 system) ; or the results of the labor are offered to the con- 
 tractor at a fixed price per unit of product, the supervision 
 being in the hands of the prison authorities {piece price 
 system). The first of these methods is undoubtedly the 
 worst for the criminals, as it gives all sorts of opportuni- 
 ties for abuse. The third is probably the best ; but the 
 difficulty of securing prison supervisors who have at once 
 the qualities of good manufacturers and good wardens is 
 so great that it prevails less frequently than the contract 
 system. The effect of the three systems on outside labor 
 is substantially the same. 
 
 § 460. Convict labor is not a very important matter in 
 actual bulk. The number of convicts set at work in the 
 United States in 1886 was only 45,000, and their output 
 per day was on an average less than half that of free 
 laborers. But the effect of this convict labor in de- 
 pressing wages may be much greater than that of a corre- 
 sponding amount of free labor. There are two reasons 
 for this. In the first place, convict labor is pauperized. 
 The community pays for its maintenance whether it is 
 efficient or not. If one free laborer competes with another 
 and his wages fall below the price necessary for his sup- 
 port, he ceases to be a competitor. He must die, migrate, 
 or find some other occupation ; and his removal enables 
 the more efficient laborer to command a higher price. 
 But the supply of* convict labor is subject to no such re- 
 strictions. If the convict, as is habitually the case, earns 
 too little for his own support, the deficiency is made up 
 at the taxpayer's expense and the competition continues 
 with unremitting vigor. It is a subsidized contest of 
 worse elements against better ones. And, in the second 
 place, this pauperized labor can be arbitrarily thrown from 
 one trade to another, while free labor cannot. An increase 
 in the supply of free labor in any particular line is usually 
 a gradual one. If free laborers come into a trade in larger 
 numbers than usual, we may be almost certain that this 
 
PRISON LABOR. 41$ 
 
 trade affords exceptional opportunities for earning money 
 and that the laborers already engaged in that trade enjoy 
 more than an average share of prosperity. But in the case 
 of convict labor we have no such certainty. The manu- 
 facturers may employ a large number of convict laborers 
 in a trade where the rate of wages offered no special in- 
 ducements to free labor and where those who are already 
 in the trade suffer severely from the additional supply. 
 
 § 461. Several remedies have been proposed for this 
 evil. There are some who advocate the total abolition of 
 prison labor. This would be extremely undesirable. It 
 would have a bad effect on the convicts themselves, be- 
 cause it would lead to an increase of idleness inside the 
 prison walls, and would not leave the prisoner with a 
 means of earning a living when he has completed his 
 sentence. It would thus make him a permanent burden 
 on society, and would increase the probability of his re- 
 lapsing into criminal habits from lack of any honest chance 
 of supporting himself. It would also have a bad effect on 
 the taxpayers. The additional expense of maintaining 
 the prison, due to the abolition of the contract system, 
 would cause a reduction in the amount of funds that 
 would otherwise be added to the capital of the com- 
 munity and that would become available for the support 
 of free labor in the year following. While the abolition 
 of the contract system might thus raise wages in the par- 
 ticular trade that had felt its influence adversely, it would 
 be almost certain to lower general wages by increasing the 
 expenses and lessening the receipts of the community as a 
 whole. 
 
 Others advocate the restriction of prison labor to work 
 which can be carried on by hand. The prisoner would 
 thus be unable to compete with machine labor, because 
 he would have less useful appliances at command. The 
 objections to this plan differ only in degree from those 
 which have been urged against abolition of prison labor. 
 
41 6 PROTECTIVE LEGISLATION, 
 
 It would not provide the prisoner with a means of liveli- 
 hood when he leaves the prison, because he would have 
 learned only antiquated methods of work which cannot 
 compete with those in use to-day. Nor would it give the 
 taxpayers as great a relief from burden as is obtained 
 under the existing system. It would therefore involve a 
 loss of capital to the community as a whole, which, though 
 not so great as that which we should suffer through entire 
 abolition of industrial labor in prisons, would nevertheless 
 be very considerable. 
 
 Others advocate the retention of prison labor, but pro- 
 pose doing away with the contractor altogether. They 
 would have the laborers supervised by the prison authorities, 
 as under the piece price system ; but instead of selling the 
 product to a contractor at a fixed rate they would put it 
 on the market at whatever price it could command. This 
 method, which is known as the public account system, 
 would intensify any evils which result from contract labor. 
 It would have an opposite effect from the one intended. 
 It would virtually pauperize the capital as well as the 
 labor employed. The state would sell the goods for 
 what it could get, whether the price covered the expense 
 of production or not, — a thing which the contractor can- 
 not continue to do for any considerable length of time. 
 Where the private contractor for prison labor loses 
 money through the low efficiency of prison labor, he ulti- 
 mately has to stop business ; but the state, working on 
 the public account system, would be subject to no such 
 restriction and might continue indefinitely to produce and 
 sell goods at a loss. 
 
 It is urged in favor of the public account system that 
 the profits now obtained by private contractors would 
 accrue to the state. But these profits are for the most 
 part illusory. Experience shows that employers of prison 
 labor are not conspicuously successful. Its apparent 
 cheapness when measured by the day, does not prove 
 
IMMIGRATION UNDER CONTRACT, 417 
 
 that its results are cheap when measured by the piece. 
 The prison laborer at fifty cents a day usually makes less 
 than one third as many products as the free laborer at a 
 dollar and a half. Only where prison labor is employed 
 in work to be used by the government itself, has the pub- 
 lic account system proved even moderately satisfactory. 
 
 The best means of guarding against the evils of convict 
 labor is to distribute it among different industries in such 
 a way that no one trade shall suffer unduly from a sudden 
 influx of prison competition. If this matter is attended 
 to, the loss to laborers in any particular trade from the 
 application of the contract or piece price system is rela- 
 tively slight. It is outweighed by the gain to the public 
 in utilizing men who would otherwise be idle, and in teach- 
 ing the means of earning an honest living to those who 
 would otherwise be forced to relapse into a criminal 
 career. 
 
 § 462. The case of immigration under contract bears 
 some analogy to that of prison labor. An employer may 
 readily import a large number of foreign laborers into a 
 trade where wages are not particularly high, but where 
 he sees an opportunity of utilizing more labor to advan- 
 tage. The fact that the employers and not the laborers 
 take the initiative in such contracts, makes this case differ- 
 ent from that of the ordinary migrations of labor from 
 place to place or trade to trade. It may be argued that 
 if the employer can profitably contract for foreign labor 
 of this kind, it proves that the country wants such labor. 
 But there are a considerable number of instances which 
 go to show that the country does not always want such 
 labor; that the private gain to the employer is not 
 attended by corresponding gain to the community as a 
 whole ; and that, to the laborers already working in the 
 trade, the sudden loss, against which they have not had 
 time to make provision, may prove a very serious one. 
 
 Advocates of unrestricted immigration say that this loss 
 27 
 
41 8 PROTECTIVE LEGISLATION. 
 
 is one of the incidents of industrial progress, and that the 
 laborers are subjected to precisely the same evils by the 
 sudden introduction of new machinery. But as a matter 
 of equity between different classes of the community the 
 cases of immigration and of machinery are not parallel. 
 In using new machinery, the employer takes far greater 
 risks of failure upon himself. If the experiment proves 
 unprofitable, he bears the whole loss. But in importing 
 foreign laborers under contract, his loss in case of ill-suc- 
 cess is not necessarily much greater than the price he has 
 paid for their passage. The community must bear the 
 burden of their subsequent support. On grounds of 
 economic expediency there is at least a fair case in favor 
 of legislation which shall restrict the right of the capitalist 
 to import contract labor. 
 
 § 463. In the case of immigration without contract, the 
 dangers are political and social rather than economic in 
 their character. The worst form of immigration is that 
 which has been '* assisted." The authorities in certain 
 parts of Europe, either from a wish to get rid of their 
 superfluous population, or in the hope of relieving them- 
 selves of the support of criminals, paupers, or insane per- 
 sons, have in times past sent their undesirable members 
 to foreign parts, finding it cheaper to spend a few dollars 
 outright in paying their steamship fare than to continue 
 supporting them at home. Every community has a right 
 to defend itself against immigration of this kind. Down 
 to the close of the last century this right was exercised 
 with the utmost vigilance. By the English Acts of Set- 
 tlement each parish was given protection against the dan- 
 ger of assisted migration from neighboring parishes, and 
 similar restrictions were applied with much greater sever- 
 ity in Continental Europe. The nineteenth century has 
 witnessed a reaction against this policy of repressing free 
 movements of population ; but the necessity for vigilance 
 in these matters has not wholly passed. While the growth 
 
INFLUX OF FOREIGN RACES. 419 
 
 of international comity may have lessened the danger of 
 an influx of foreign criminals, the development of cheap 
 transportation has increased the danger of an even greater 
 influx of foreign paupers. We have to deal with a large 
 number of immigrants who, though not assisted by foreign 
 governments, have been induced by false representations 
 of agents of the steamship companies to take tickets to 
 the United States, although they had no good prospect 
 of supporting themselves on this side of the water. The 
 laws of the United States against convict and pauper 
 labor seem amply justified by the facts, — far more clearly 
 so than the contract labor law. 
 
 § 464. To a popular government large foreign immigra- 
 tion, even when otherwise unobjectionable, is attended 
 with special evils which arise from the admission of im- 
 migrants to political power. When the Irish began to 
 emigrate in large numbers in the fifth decade of our 
 national existence, a great many good people thought 
 that the whole country would go over to Catholicism, 
 and that before the end of the nineteenth century the 
 Roman Pontificate and the Spanish Inquisition would 
 both have their headquarters in New York City. But the 
 Irish immigration has been gradually assimilated without 
 any revolution or any serious change of institutions. It 
 has doubtless increased the difficulties of municipal gov- 
 ernment in some of our large cities, but it has not ren- 
 dered it impossible for the country as a whole to remain 
 self-governing and free. Nor does it seem likely that the 
 existing immigration of races of lower grades than the 
 Irish is so large as to prevent our country from dealing 
 with them successfully. The ability of the United States 
 to assimilate foreign elements has proved far greater than 
 was anticipated by many observers. But this ability is 
 by no means unlimited. Every nation needs to have a 
 certain homogeneity of law and morals. It can assimilate 
 a certain number of immigrants who have not been 
 
420 PROTECTIVE LEGISLATION, 
 
 brought up in its own traditions ; but if the rate of such 
 immigration becomes too rapid there is danger that the 
 old national habits will be destroyed. The more alien 
 the thoughts and habits of the immigrant races, the more 
 serious is this danger. The agitation against Chinese 
 immigration, so far as it was justified at all, was justified 
 on this ground. 
 
 § 465. On purely economic grounds, the case in favor 
 of unrestricted immigration is much stronger than people 
 commonly suppose. Voluntary and unassisted immigra- 
 tion is generally of a pretty high grade. It may be falla- 
 cious to compute the value of an immigrant to the United 
 States by what it has cost to produce him at home or by 
 what it would have cost to produce and train him here ; 
 but there can be no doubt that the man who has saved 
 money enough and has shown enterprise enough to take 
 a journey of three or four thousand miles, has certain first- 
 rate qualities that are likely to make him a useful citizen 
 to the United States. Though the exhaustion of our 
 public land supply is diminishing the immediate and 
 visible need for such laborers, we still have enough un- 
 used land and unused opportunities to make every able- 
 bodied workman constitute an addition to our industrial 
 strength. 
 
 Even the immigrants of a lower class, when they are 
 not so weak or dependent as to constitute a political and 
 social menace to our national life, can render services 
 which are of great value to the community. By doing 
 the low-grade work they may diminish the chance for 
 Americans of low grade to maintain themselves ; but they 
 correspondingly increase the opportunities for Americans 
 of higher grade. If we get our poorest work done cheaply, 
 by men who are able to do it economically, all the rest of 
 the country has the benefit of the products of their labor 
 at less sacrifice than would otherwise be involved. It is 
 hardly fair to say that ** the competition that comes 
 
SOCIAL EFFECTS OF IMMIGRATION, 42 1 
 
 through immigration has the tendency to lower the 
 standard of living in this country," or that ** the outcome 
 of such competition will be to reduce our whole laboring 
 class to the standard of life of these newcomers." This 
 has certainly not been its outcome in the past. The re- 
 sult of the introduction of a number of low-grade laborers 
 has been not inaptly compared to the effect produced on 
 a pyramid by introducing a new layer at the bottom. 
 The pressure at this bottom layer becomes more intense 
 than ever before, but the general mass is raised instead of 
 being lowered. 
 
 With immigration and with the stimulus which it has 
 given to progress by compelling native workers to rise or 
 to die, the country as a whole has been rising. It is 
 doubtful whether it would have risen nearly as fast with- 
 out such a stimulus. The removal of a cause which has 
 done so much for our industrial progress in the past 
 might well lead to stagnation rather than to higher civili- 
 zation. Much of the opposition to immigration comes 
 from the men who stand in the way of such progress ; 
 men who are incapable of rising into the higher grades ; 
 men who, if they work at all, are fitted only for such work 
 as foreign immigrants do, and who fail to do that work 
 well. There may have been good reasons for putting a 
 stop to Chinese immigration ; but the average Chinese 
 immigrant, industrious and sober, was far more useful to 
 the community at the time and had far more possibilities 
 of serving the community in the future, than the average 
 persecutor who threw stones at him. 
 
 § 466. The movement to shutout foreign products by a 
 high tariff has generally proved stronger than the move- 
 ment to shut out foreign labor by laws regulating immi- 
 gration. In restricting immigration the superficial and 
 immediate interests of the capitalists have been opposed 
 to those of the laborers ; in restricting the importation of 
 the products of industry the interests of the two classes 
 
422 PROTECTIVE LEGISLATION, 
 
 have seemed to go hand in hand. If the legislature 
 threatens to prevent the importation of foreign laborers it 
 antagonizes the man who wishes to employ them. But 
 if it offers to prevent the importation of foreign pro- 
 ducts it gives the employer who has money to invest in 
 the production of similar goods an interest in behalf of 
 the proposed measure fully as great as that of the laborers. 
 Therefore many capitalists who have been inclined to op- 
 pose laws which restrict the movements of laborers, as 
 being violations of the principles of free government, have 
 been equally inclined to welcome laws which restrict the 
 importation of products, as part of a system of protection 
 to home industry (compare § 150). 
 
 § 467. It is beyond the scope of this book to give any- 
 thing like a history of the world's tariff policy. Down to 
 the end of the last century protective taxes were accepted 
 as a matter of course. The country was fortunate that 
 had custom houses on its national borders only, and did 
 not find district separated from district by barriers against 
 trade. The work of the physiocrats and of Adam Smith 
 paved the way for reform in this matter ; the French 
 Revolution and the Napoleonic wars, by uniting people 
 into larger political groups, helped to bring more liberal 
 ideas into play ; while the great English Free Trade 
 movement, effectively pressed by Cobden and his friends, 
 which culminated in the Sir Robert Peel's Corn Law of 
 1846, gave the world an example of radical departure from 
 a time-honored method of protective taxation. Napoleon 
 III. and his minister Chevalier made a still further pro- 
 gress in the same direction, by a system of reciprocity 
 treaties devised with the intention of guiding the com- 
 mercial world in the direction of freer trade. The United 
 States, which had oscillated between high and low duties, 
 seemed committed to the latter pohcy by the undoubted 
 success of the tariff of 1847 ^'^^ ^^ the Canadian recipro- 
 city treaty of 1854. But a general reaction set in when it 
 
TARIFF POLICY, 423 
 
 was least anticipated. Wars on both sides of the Atlantic 
 brought out feelings of national antagonism with unex- 
 pected force, and led to the adoption of a tariff policy which 
 reflected these feelings. It was first and most conspicu- 
 ously exemplified in the United States : where the war 
 duties of 1 86 1, 1862, and 1864, originally levied for pur- 
 poses of revenue, were allowed to stand after the restora- 
 tion of peace and the abolition of the corresponding 
 internal revenue taxes ; where the efforts at reduction in 
 1872 proved transient, and the acts of 1882 and 1891 only 
 emphasized the protective features of the tariff system. 
 It has been manifested both in France and Germany with 
 increasing force in the years since the war of 1870; nor 
 has any large power in Continental Europe been exempt 
 from its influence. The English colonies have felt the 
 effect of the same movement ; and even in England itself 
 under the guise of an agitation for ** fair trade," there 
 have been a few appeals for the renewal of protective 
 duties. 
 
 § 468. There are three distinct lines of argument for a 
 protective tariff. The first, which claims that protection 
 makes high wages by keeping money at home and by 
 directly creating an increased demand for labor, is popular 
 and superficial. The second, which urges the indirect 
 economic advantages of diversification of industry, is less' 
 popular but more substantial ; and the same may be said 
 of the third, which looks at protection as a military neces- 
 sity forced upon a nation by the rivalry or hostility of its 
 neighbors. 
 
 § 469. The popular argument for protection is a sur- 
 vival of the mercantile'theory of political economy. This 
 theory holds that a nation grows rich by making money, 
 — by having a large income and small expenses. The 
 exports of a nation correspond to the income of an indi- 
 vidual ; the imports of the nation correspond to the ex- 
 penses of an individual. The national wealth is therefore 
 
424 PROTECTIVE LEGISLATION. 
 
 promoted by an increase of exports and a diminution of 
 imports. Every excess of exports over imports repre- 
 sent an addition to the accumulated capital of the country. 
 A tariff laid for the purpose of preventing the import of 
 things which can be made at home is a means of increas- 
 ing this capital. Such a tariff, it is urged, is not only 
 beneficial to the community as a whole, but especially so 
 to the laborers. For money, which was formerly em- 
 ployed in buying goods from abroad, will, under the 
 operation of a protective tariff, be used to give employ- 
 ment to laborers at home. All such avoidance of foreign 
 expenditure means, therefore, an increase in the wealth of 
 the country and in the income of the laborers. 
 
 Carrying the same principle still further it is urged that 
 bounties should be given in those industries where an 
 effective tariff would make the price to the consumer too 
 high, — for instance, in the case of sugar, — or where it is 
 desired to stimulate our production for foreign trade as 
 well as for domestic trade. But there is more reluctance 
 to give bounties than to impose tariffs, because the tax 
 arising from a high tariff is, directly at any rate, a source 
 of revenue to the government ; while the payment of a 
 large bounty involves an expenditure which can be met 
 only by levying taxes whose burden is more obvious 
 than that of a tariff and therefore more unpopular.^ 
 
 § 470. This view of the effects of protection is a very 
 superficial one. In the great majority of cases it is im- 
 practicable for a nation to " make money " in this way. 
 It will pay for its imports by its exports and vice versa. 
 
 ^ The subject of bounties (and indeed the whole theory of protection) is 
 well treated by C. Gide, *' Principles of Political Economy," book ii., ch. vii. 
 For bounties to shipping see § 490. 
 
 A bounty brings the burden of supporting the favored industry upon the 
 shoulders of the whole body of taxpayers. It is therefore theoretically more 
 equitable than a protective tariff which taxes the consumers of certain articles 
 only. But all our methods of taxation are so bad in many of their workings 
 that this theoretical equity is not very well realized in practice. 
 
FUTILITY OF ACCUMULATING MONEY, 425 
 
 An attempt to diminish the imports and maintain or in- 
 crease the exports for any considerable period of years is 
 generally futile. The accumulation of money in one 
 country and its withdrawal from another will cause high 
 prices to prevail in the former country and low prices in 
 the latter. The former country thus becomes a good 
 market to sell in and a bad market to buy in. People 
 will ship more goods to such a country than they would if 
 the high prices did not prevail, and will take fewer goods 
 from it. They will withdraw gold from the place where 
 prices are high, for use in the place where prices are low. 
 The experience of four centuries has demonstrated the 
 futility of trying to interfere with this movement of specie. 
 Although the exportation of gold has often been pro- 
 hibited under the severest penalties, it has nevertheless 
 continued. Although statesmen have made every effort 
 to modify or prevent the operation of this automatic 
 movement, by which prices in different communities seek 
 their natural level, the results of their efforts have been 
 strikingly small. 
 
 §471. In the few cases where these efforts to accumu- 
 late money are in any degree successful, most of the 
 expected good proves illusory. Higher nominal wages 
 combined with higher prices leave the different classes of 
 the community in the same relative position that they 
 held before. The real demand for labor is not measured 
 by the accumulated supply of money, but by the com- 
 modities which the laborer can buy with the money he 
 receives. If every dollar in the United States were cut in 
 halves and each half were called a dollar, there would be a 
 larger nominal supply of money but no real increase in 
 wages. When an increase of money is the result of better 
 business methods, it is a good thing ; but when we seek 
 to reverse this process and obtain better business by put- 
 ting more money into circulation, we are simply playing 
 with figures. 
 
426 PROTECTIVE LEGISLATION, 
 
 So far as the increase of money is obtained at a sacrifice 
 of useful things which the money would buy, it may prove 
 a positive disadvantage to the laborer. If we succeed for 
 a few years in arbitrarily checking our imports, we may 
 find ourselves with more money anc^ less of certain other 
 things which would help our productive laborers more 
 than money does. In this respect, the mercantile system 
 of political economy may not inaptly be characterized as 
 a miserly system. It would make the policy of the nation 
 similar to that of a miser rather than that of a wise mer- 
 chant. The successful business man is not the one who 
 sells the most and spends the least, but the one who 
 spends his income on things which will permanently in- 
 crease his earning capacity in the future. The successful 
 nation is not the one which strives to get the most money, 
 but the one which invests most of its income in increased 
 productive resources, by purchasing things which other 
 nations are able to place at its disposal, that will either 
 increase the real wages of the laborer to-day or give better 
 chances for efficient exercise of labor in the immediate 
 future. 
 
 § 472. But it may be urged that countries like the 
 United States, which have borrowed large amounts of 
 capital, may profitably employ an excess of exports over 
 imports in paying their debts. A debtor should under- 
 take to sell more than he buys, and spend the difference, 
 not in extending his personal consumption, not in making 
 additional investments, but in cancelling past* obligations 
 and placing himself in a position of independence. This 
 is in a measure true. But the adoption of such a policy 
 by an individual indicates that his business has pretty 
 nearly reached the limit of its growth. Until this point 
 is attained, he will find it more profitable to use his sur- 
 plus income in widening the scope of his operations than 
 in paying his debts. The conspicuously successful leader 
 in commercial enterprise is not occupied with restricting 
 
THE BALANCE OF TRADE, 427 
 
 his liabilities, but with increasing his assets. As long as 
 he can borrow capital at a low rate and use it with large 
 profit, he will care less to diminish his obligations than to 
 enlarge his means of meeting them. The United States 
 is in a position of this kind. While it is a satisfaction to 
 pay our debts, it is a greater satisfaction to increase our 
 resources. The years which show the greatest excess of 
 exports over imports have not always been the years of 
 conspicuous industrial prosperity. 
 
 § 473. The evils resulting from an adverse balance of 
 trade, — i, e,, an excess of imports over exports — are much 
 exaggerated. As was clearly pointed out by Daniel 
 Webster, a slight adverse balance represents a normal 
 and healthful condition of commerce. If we ship goods 
 worth $1,000,000 at New York and sell them for $1,100,000 
 in London, we are in a position to bring back goods worth 
 $100,000 more than those we shipped. The possibility of 
 selling our goods at a profit is the best indication of de- 
 mand for the products of our labor. Of course it is con- 
 ceivable that we should bring back the $100,000 in specie. 
 But a very slight movement of this kind would cause a 
 redundance of money in New York and a scarcity in 
 London. The difference of price levels thus created 
 would make further exports difficult, and would diminish 
 instead of increasing the demand for the products of our 
 labor. There may be times when, owing to the precari- 
 ous condition of its currency, a nation needs specie more 
 than goods, and when imports of coin are of more conse- 
 quence to it than any other form of capital. But these 
 cases are exceptional. The history of the mercantile sys- 
 tem (§ 9), enforced as it was by the efforts of the ablest 
 European statesmen for two centuries, goes to show the 
 fatuity of trying to increase a country's supply of gold 
 by statutory restrictions either on the movement of the 
 metal or on that of the commodities for which it is ex- 
 changed. 
 
428 PROTECTIVE LEGISLATION, 
 
 A country which mines more gold than it needs for its 
 immediate use, purchases other forms of capital with the 
 surplus. This creates an apparent adverse balance of 
 trade — an import of goods and an export of gold ; — yet 
 gold mines are a source of industrial prosperity and 
 strength. Even when the United States has an adverse 
 balance greater than the product of its mines, it does not 
 necessarily mean that we are losing gold ; it may mean 
 that foreign countries are using their capital to develop 
 our natural advantages and are taking their pay in se- 
 curities. We are increasing our indebtedness ; but we are 
 yet more rapidly increasing our productive assets and our 
 effective employment of labor. 
 
 All payments to foreigners — freights, interest, invest- 
 ment, foreign travel — tend to make our balance of trade 
 look more favorable, because we are usually compelled to 
 export goods to meet them. All receipts from foreigners 
 from the same sources tend to make our balance look less 
 favorable, because foreigners generally cannot pay them in 
 gold without causing redundance and therefore ship 
 goods instead. Yet the payments on the whole represent 
 sources of weakness, and the receipts are all but universally 
 sources of strength. England habitually imports more 
 than she exports because other nations owe her so much 
 for interest and freight charges ; in other words, because 
 she has large invested capital and a large merchant marine. 
 
 § 474. Unless a country is in some very exceptional 
 financial position stoppage of imports means stoppage of 
 exports, because other nations cannot continue to buy its 
 goods unless they sell it their own goods in return. 
 The apparent widening of the home market and in- 
 crease of the demand for labor caused by a protective 
 tariff is accompanied by a narrowing of the foreign 
 market and a diminution in the production of goods for 
 export which was profitable under the old system. 
 What is called the creation of a new industry is gen- 
 
DIVERSION OF CAPITAL. 429 
 
 erally nothing but the diversion of capital and labor 
 from one industry to another. The exceptions to this 
 rule are more apparent than real. We see the opportunity 
 for profitable employment of foreign capital and immi- 
 gration of foreign labor in a new line ; we fail to see with 
 equal clearness the loss of some of the opportunities 
 which made foreign investment and foreign immigration 
 in old lines most profitable. If the imposition of a high 
 tariff is followed by prosperity in manufactures and ad- 
 versity in agriculture, everybody credits it with the former 
 results, while few look far enough below the surface to 
 hold it accountable for the latter. 
 
 § 475. This diversion of labor and capital is, presumably 
 at any rate, from a line where it is more efficient to one 
 where it is less so. If there is one line of industry where 
 an American can compete with the whole world without 
 the aid of a protective tariff, and can sell his goods in 
 foreign markets though he pays double the wages given 
 by his competitors, it shows that his natural advantages 
 are such that his labor is more than twice as efficient as 
 theirs. If there is another line where he cannot compete 
 with the foreigner because of the difference in American 
 wages, it shows that his natural advantages are less than 
 this difference. The man who exports goods must pro- 
 duce so much more than his foreign competitors that the 
 superior efficiency of each individual laborer covers not 
 merely the difference in wages, but the cost of transpor- 
 tation also ; while the man who is shut out from the home 
 market by his foreign competitor is employing labor 
 whose efficiency is so much less than the difference in 
 wages that the foreign producer can pay the cost of trans- 
 portation^ and continue to undersell him. 
 
 * The current argument, that protection produces economy by having 
 goods consumed near the point of production, is in large measure fallacious, 
 for if people import an article from a distance it shows that the difiference 
 in economy between the producers of an article in two countries more than 
 ■covers its cost of transportation. 
 
430 PROTECTIVE LEGISLATION, 
 
 % 476. The popular argument, that by admitting goods 
 free of duty we subject ourselves to the competition of 
 pauper labor, ignores the fact that the chief reason for 
 the difference between American and European wages 
 lies in the difference of efficiency of American and Euro- 
 pean workmen. The American gets higher wages than 
 the European competitor, because he does more work in 
 a day (§ 362). The cost per unit of product in the United 
 States, which is the thing that determines power of com- 
 petition, is low in some lines and high in others. In 
 general, it is lower than that of Europe in the unprotected 
 industries, and higher in those which are protected either 
 by a tariff or, as in the case of personal services, by the 
 impossibility of transportation. 
 
 If American locomotive works are competing with Eng- 
 lish locomotive works in neutral markets, it shows that 
 the labor cost per locomotive in the two countries is sub- 
 stantially the same ; for if the English labor cost were 
 higher, the American locomotive builders would drive 
 the Englishmen out of the market ; and conversely, if the 
 American labor cost were higher, the English builders 
 would drive out their American competitors. Therefore, 
 if the wages per day of the American workmen in these 
 lines are higher than those of the Englishmen, it follows 
 that their efficiency, as measured by amount of work 
 done, is also correspondingly higher. If American clock- 
 makers compete not only in neutral markets, but in Eng- 
 land itself, it shows that we have an advantage in efff- 
 ciency which more than makes up for any difference in 
 wages. Industries of this kind have nothing to fear from 
 pauper labor. What is apparently the dearest labor is 
 really the cheapest. This superior efficiency of the 
 American workman in these lines is the cause of the 
 high wages which he receives. 
 
 There are some forms of labor, like that which is em- 
 ployed in the building trades or like personal and profes- 
 
CAUSES OF HIGH WAGES. 43 1 
 
 sional services, whose results must be utilized on the spot. 
 Laborers in these lines will share in the high wages en- 
 joyed by workmen in those industries where we have 
 natural advantages, because if the wages in services or 
 building trades were low while those in exporting trades 
 were high, the workmen would nearly all desert the 
 former line of employment and gravitate toward the lat- 
 ter. The demand for services at home on the part of the 
 men who make goods for export, forces them to offer 
 sufficiently high wages to induce men to render those 
 services.* This result must ensue whether we have a 
 tariff or not. We cannot have our meat cooked in Paris, 
 our boots blacked in London, or our houses built in 
 Berlin, no matter how cheap these services may be in 
 foreign countries. The cook, the boot-black, and the 
 house-builder therefore share in the high wages due to 
 the efficiency of labor in lines for which we have a natu- 
 ral advantage. But there are other forms of industry, 
 like the manufacture of woollen cloth, where we have the 
 option of having the work done at home or abroad. In 
 the production of woollen cloth we have little or no ad- 
 vantage over our foreign competitors; much les's than 
 our advantage in some other lines of productive industry. 
 If we leave trade free, we shall export wheat and cotton, 
 metals and certain lines of manufactures for which we are 
 particularly skilled, and shall import woollen goods from 
 abroad. If we place a tariff on woollen manufactures 
 which prevents their importation, we shall divert a part 
 of our labor from wheat and cotton and mining and 
 specially profitable manufactures to a line of industry 
 wHere we have no especial advantage, and shall thereby 
 reduce the average efficiency of our labor. When we are 
 threatened with severe evils as a result of admitting the 
 
 * In a mining camp the cook will receive wages at least as high as the 
 average of miner's earnings, because if offered less than this, he will prefer 
 to seek for gold on his own account, instead of staying at home to cook. 
 
432 PROTECTIVE LEGISLATION, 
 
 pauper labor of Europe to compete in our own markets, we 
 must remember that the chief effect of such competition 
 will be to force our labor into lines where it is more pro- 
 ductive. We shall make it impossible for men to live in 
 some lines ; we shall make it more profitable to divert 
 their work to other lines. 
 
 § 477. It is sometimes said by protectionists that they 
 do not want us to diminish our imports as a whole ; they 
 want us to make all the things we can and use our money 
 in importing things we cannot get otherwise. But the 
 question of ability or inability to make a thing is one of 
 degree. If we try to make things for which we have 
 only moderate advantages, and in so doing divert labor 
 and capital from those where we have extraordinary ones, 
 we do not, in general, make money ; we lose more than 
 we gain. The attempt to do everything ourselves for the 
 sake of shutting out the competition of pauper labor from 
 abroad is in its results not unlike the attempt of a surgeon 
 to make money by shovelling his own snow. The surgeon 
 has a physical and mental education which enables him 
 to shovel snow with less expenditure of time and force 
 than the laborer who offers to do it for him. Why, then, 
 does he hire the laborer instead of doing the work him- 
 self ? Why does he say that he cannot afford to shovel 
 his own snow ? Because there is a line of industry open 
 to him in which he can make ten dollars an hour, and he 
 cannot afford to waste his strength in competing with 
 men who earn one dollar an hour. The diversion of force 
 to the unprofitable employment is a loss instead of a gain. 
 If an ordinance were passed compelling every surgeon to 
 shovel his own snow, he would gain one dollar and lose 
 ten. He would avoid the competition of pauper labor, 
 but at the expense of a large reduction in his aggregate 
 income. His high rate of pay is the result, not of legisla- 
 tive restrictions, but of a difference in industrial efficiency ; 
 an advantage w^iich he may forego if he chooses, for the 
 
EXHAUSTION OF THE SOIL, 433 
 
 sake of diversifying his employment, but at an economic 
 loss rather than an economic gain. 
 
 § 478. In the second group of arguments for a protec- 
 tive tariff, it is frankly admitted that the so-called creation 
 of new industries is really a diversion of labor and capital 
 from one employment to another ; but it is maintained 
 that the indirect advantages which may accrue from such 
 a policy are great enough to warrant any temporary sac- 
 rifice which it involves. Its advocates urge, in the first 
 place, that the apparent profit in the exercise of unpro- 
 tected industries is often not a real or permanent one. 
 An industry may apparently be very profitable, when 
 private individuals are being allowed to appropriate the 
 natural resources of the country and to weaken it by 
 sending those resources abroad for their own pecuniary 
 advantage. This is true conspicuously of mining and 
 timber cutting ; it is in somewhat less degree true of 
 food production. Systems of agriculture under which 
 the owners seek to get all that they can out of virgin soil, 
 exporting a large product for a few years without making 
 proper returns to the land in the form of manure, may 
 result in impoverishing the home country for the benefit 
 of foreign consumers. If by a well devised tariff a part of 
 the labor and capital thus used in agriculture is diverted 
 to manufacturing, the advocates of protection say that 
 it will result in supporting more people at home with 
 less exhaustion of the soil, and on a basis which, though 
 perhaps temporarily less remunerative, will be far more 
 profitable in the long run. 
 
 They urge that under these circumstances the tariff 
 may conceivably give increased employment to labor 
 from the outset. If a country is engaged in agriculture, 
 and in that alone, the differences in the character of the 
 land used will show themselves in the form of economic 
 rent. This is a surplus which goes to the landowners and 
 is not necessarily distributed among the laborers at all ; 
 
434 PROTECTIVE LEGISLATION, 
 
 especially if the landowner uses his income to import 
 foreign articles of luxury. If a change in tariff policy 
 causes less agricultural land to be used and makes indus- 
 try more diversified, there will be smaller differences 
 which can be appropriated as rent. Even where the 
 momentary efficiency of labor in earning a return for 
 Its employer is slightly diminished, it is quite conceiv- 
 able that the amount actually distributed to labor may 
 increase, and the social condition of the community be 
 benefited rather than injured. 
 
 § 479. If this is conceivable as a momentary result, it is 
 still more possible in the long run. The introduction of a 
 new industry is attended with great difficulties, which 
 make its returns during the first years quite uncertain. A 
 tariff arranged to protect an infant industry may be suf- 
 ficient to overcome this initial uncertainty which makes 
 it impossible for individuals to start such an enterprise ; 
 and may after a brief time provide the country not only 
 with profitable investments of capital in diversified lines, 
 but with useful employment for laborers whose skill would 
 otherwise have remained undeveloped. 
 
 Such investments, it is said, give a chance for the em- 
 ployment of high-grade labor, which would otherwise be 
 compelled to accept what it could earn in lower grades of 
 work where its special powers would be less perfectly 
 utilized. If a country like England has special industrial 
 advantages in the way of established connections and 
 large capital, it may force other nations to engage in less 
 complicated forms of labor which do not properly utiHze 
 their more intelligent members. This argument, which is 
 strongly urged by writers like List or Gunton, is the oppo- 
 site of the pauper labor argument. In this view, a country 
 needs protection, not from the weakest laborers of other 
 countries, who would crowd its own citizens up into 
 higher lines, but from the strongest laborers of other 
 countries, who would crowd them down into lower ones. 
 
DANGER OF MISTAKES, 435 
 
 § 480. On the theoretical merits of this argument for 
 protection, it is difficult and unnecessary to pronounce a 
 definite judgment. If we could assume that the legisla- 
 ture would be wise and incorruptible, we might hope that it 
 could frame a tariff which would be of positive benefit to 
 the community ; and it is altogether probable that it could 
 devise one which would produce more good and less evil 
 than any system of national taxation which is now in use. 
 But in actual practice we do not have to deal with 
 an all-wise and incorruptible legislature. The chance 
 for mistakes in the adjustment of industrial burdens, 
 whether made in good faith or otherwise, is extremely 
 great. The legislature sees the new industries which are 
 developed ; it fails to see the old ones which are handi- 
 capped. It may produce unforeseen losses which out- 
 weigh the expected gains. Our increase of manufacturing 
 in the years succeeding the Civil War is heralded as 
 a result of a high tariff, by many who overlook the 
 effects of that tariff as manifested in the accompanying 
 diminution in the ocean marine and ocean shipbuilding 
 industries. 
 
 § 481. The apparent prosperity which often attends the 
 first operation of a protective tariff increases the proba- 
 bility of these mistakes. The policy of shutting out foreign 
 goods means that the protected country duplicates the 
 plant by which they were made. The persons who were 
 saving money have, for the time being, a profitable 
 method of utilizing their surplus — and, incidentally, of 
 damaging the foreigner by so doing. But after a short 
 time this special chance for investment ceases. The 
 laborers employed in making machinery are thrown out 
 of work. The whole industrial world suffers from the 
 effects of a policy which has duplicated means of produc- 
 tion and restricted facilities of exchange. 
 
 § 482. Far from preventing exhaustion of the soil, actual 
 tariff legislation is apt to stimulate it. We have for many 
 
436 PROTECTIVE LEGISLATION, 
 
 years had a tariff on copper not justified by any difference 
 in its cost of production — for no mines in the world can 
 produce so cheaply as those of the Lake Superior region 
 — but acting as a bonus on the unnatural extension of 
 mining operations. American copper has habitually been 
 sold in London in competition with foreign copper, at a 
 price less than was paid by American consumers at home. 
 We have put a positive premium on the exhaustion of 
 American mines for the benefit of the foreign consumer. 
 Equally conspicuous is the case of lumber. Without any 
 good pretext in connection with the necessity of paying 
 high wages to American labor — for the labor that is 
 employed in the lumber business is very largely com- 
 posed of Canadians who come to this country temporarily 
 and return to their homes at the end of a season — we have 
 exhausted our northern forests at a rate which has proved 
 dangerous, not merely to the resources of the country as 
 timber land, but to the rainfall and other conditions con- 
 nected with public health. 
 
 § 483. Under these circumstances, the argument about 
 increasing the share of the national income that goes to 
 the laborer and diminishing the proportion that goes to 
 the landowner has no practical application. A duty like 
 that which was imposed on copper shows its results, not in 
 the increased proportion of wages paid in the copper 
 industry, but in the very high value of the shares of well 
 situated copper mines. A tariff which is accurately ad- 
 justed to counterbalance any difference in labor cost in 
 two countries may have the theoretical effect of increasing 
 the laborer's share at the expense of the landowner's ; a 
 tariff rate higher than this is likely to have the opposite 
 effect. The manufacturers in protected lines of industry 
 always protest against public attempts to ascertain their 
 labor cost per unit of product. This protest creates a 
 presumption that the tariff is higher than can be justified 
 on grounds of protection to labor alone. 
 
DELAY IN REDUCING DUTIES. 437 
 
 § 484. Protection to infant industries has unquestion- 
 ably proved successful in certain cases. But it is open to 
 doubt whether the number of instances of success has 
 been sufficient to justify the expense involved. The 
 period of industrial infancy, and the taxation connected 
 with it, almost always continues longer than was at first 
 anticipated. Very few industries have been in a position 
 to submit to a removal of a protective tariff within the 
 time originally contemplated. In many the rate of pro- 
 tection has tended to increase rather than to diminish. If 
 a duty is ** specific " (§ 507), i. e. based on the quantity of 
 a product imported rather than on its value\ the cheapen- 
 ing of the protected article through new processes of 
 manufacture makes the rate of protection constantly in- 
 crease. Even where successive tariff bills reduce the 
 specific duty per yard or per pound, we do not gener- 
 ally find any continuous reduction in the ratio between 
 the duty levied and the value of the article at the time 
 of passage of the different acts. The steel rail industry 
 of the United States is often cited as an instance of suc- 
 cessful protection and falling tariff rates ; but the actual 
 percentage of duty levied has on the whole increased. 
 The tariff rate per ton has fallen ; but the price of rails 
 has fallen still faster. Nor has this diminution in price 
 been the result, as some persons would have us believe, 
 of the development of industry in the United States 
 under the tariff itself. The prices have been habitually 
 much lower in England than in the United States ; and 
 in countries which manufacture no rails of their own they 
 have been quite as low as in England. What is claimed 
 as an effect of the protective tariff in cheapening prices 
 is usually only the natural result of modern improve- 
 ments in the arts, which we should have enjoyed quite 
 as fully without the tariff as with it.* 
 
 ^ The only convincing proof that protection has ceased to be a burden 
 upon the consumer of any particular article (in other words, that an industry 
 
438 PROTECTIVE LEGISLATION, 
 
 § 485. Advocates of protection to infant industries often 
 make the mistake of assuming that the foreigner is a single 
 person who can shift prices up and down at will ; that 
 he will charge high prices for articles which the home 
 producers do not make, but accept much lower ones 
 when the development of a protected industry has made 
 a nation independent of his power. But the competi- 
 tion of one foreigner with another prevents extortion- 
 ate rates and arbitrary shifting of prices, whether there be 
 any home production or not. Foreign trade is the hardest 
 field in which to exact monopoly prices, because it is open 
 to competition from the whole industrial world. The 
 home producer is on the whole far more likely to make 
 arbitrary prices than the foreigner, because the difficulty 
 of forming a pool which includes all the capital engaged 
 in a given line of business in any one country is far less 
 than the difficulty of doing the same thing for the whole 
 world. This point was illustrated by the history of the 
 steel rail traffic, where a strong combination was formed 
 that for ten years succeeded in keeping up the price of 
 steel rails in those countries which produced them. Dur- 
 ing a large part of this period Italy, which produced no 
 rails, obtained its supplies from Germany, at rates thirty 
 per cent lower than those which were exacted from 
 German purchasers. 
 
 § 486. Any good effect of a tariff in promoting the de- 
 velopment of higher grades of productive industry is off- 
 set by its bad effect in retarding the development of varied 
 consumption. It is a matter of prime importance for the 
 community in general, and the laborers in particular, to 
 have cheap goods placed within their reach. The educa- 
 tional effect of cheapness in increasing consumption and 
 diversifying the enjoyments of a community is very great. 
 A tariff which temporarily enhances prices for the sake of 
 
 has outgrown the stage of infancy) is furnished by a readiness to have the 
 tariff removed. 
 
POLITICAL DANGERS, 439 
 
 indirect effects on producers is liable to have an adverse 
 effect on consumers which outweighs the possible good 
 that it might otherwise afford.* 
 
 § 487. A tariff to protect infant industry, being avow- 
 edly temporary in its nature, is liable to be removed ; and 
 the doubt as to the time of this removal constitutes a 
 serious economic burden. The great majority of business 
 men agree that the worst evil in a tariff is uncertainty ; 
 that industry will adjust itself to almost any schedule of 
 duties, high or low, if it is continued long enough, but 
 that the possibility of a change in the future has a para- 
 lyzing effect on trade of every kind. Any tariff which is 
 temporary in its nature and variable in its amount is apt 
 to produce the spasmodic demand for labor and irregular 
 investment of capital in machinery, whose evils have been 
 clearly described in a previous chapter. It cannot be 
 expected that people will agree as to the time when an 
 industry should be left to stand alone. If there has been 
 an over-investment of capital in any industry it will suffer 
 severely when finally exposed to foreign competition. 
 The more completely the height of a tariff has been left 
 to the discretion of the manufacturers, the greater is the 
 danger of such over-investment, and of organized political 
 opposition to the removal of the duty when the pretext 
 for it has been outgrown. A system of taxation which 
 is arranged with a view to the needs of particular indus- 
 tries, rather than those of the treasury department, is 
 liable to be upset by a change of party, if the leaders of 
 the new legislature are not in touch with the business 
 men in industries or localities which have enjoyed protec- 
 tion. Here we have what is perhaps the most serious 
 evil connected with the protective system. It makes the 
 success or failure of business enterprise depend upon the 
 
 ' It is strange that Patten, who has so emphasized the importance of 
 diversified consumption, should have overlooked this point in his very 
 ingenious arguments on the "Economic Basis of Protection." 
 
440 PROTECTIVE LEGISLATION, 
 
 retention of a particular set of men in office. Whether it 
 actually produces corruption or not, it furnishes a power- 
 ful motive for subscription to campaign funds, and a 
 temptation to corrupt practices. The less the average 
 congressman understands the needs of business, the 
 greater is the danger that his vote may be shaped by 
 the results of improper influences, even when his own 
 personal character is above suspicion. With legislatures 
 as they are actually constituted and elections as they 
 are actually managed, the danger to popular government 
 as a whole, arising from this source, outweighs the good 
 which can be expected to result from the application of 
 protection for the sake of diversifying industry. If the 
 business men of the country were unenterprising and 
 short-sighted, while its statesmen were able to take a 
 wider and clearer view of the future, many of these the- 
 oretical arguments for protection would deserve careful 
 consideration. With matters as they stand, it seems 
 much the safer economic poHcy to adjust the tariff for 
 purposes of revenue. 
 
 § 488. The third group of arguments for protection is 
 based on military necessity. If there were no such thing 
 as war, and all countries could settle their disputes ami- 
 cably, many protectionists say they would at once be- 
 come free traders ; but as long as there is a possibility of 
 armed conflict which may exclude a nation from its outside 
 sources of supply, they believe it necessary to be prepared 
 for such an emergency. They adduce in confirmation of 
 their view instances like the American Civil War. The 
 North had already established manufactures ; the South 
 had to improvise them. This difference had a great.effect 
 on the issue of the conflict. Of still more importance in 
 the same connection was the disparity between the naval 
 forces of the North and South. The North had a reserve 
 of seamen trained in her merchant marine, and was able 
 to establish an effective blockade, which Southern steamers 
 
NA VIGA TION A CTS, 44 1 
 
 were sometimes able to elude but never really to break. 
 As long as the control of sea power exercises such decisive 
 influence on the results of warfare, it is claimed that every 
 nation which would preserve its independence must main- 
 tain not only diversified industries which will make it 
 independent of foreign supplies, but an effective navy, a 
 merchant marine, and a shipbuilding industry by which 
 the navy can be rapidly increased in an emergency. 
 
 So far as this argument is based on political grounds 
 rather than industrial ones, it hardly falls within the pur- 
 view of an economist to criticise it ; except perhaps by 
 the suggestion that a very small part of the proceeds of a 
 revenue tariff, placed directly at the disposal of the mili- 
 tary authorities, would do more to prepare a nation for 
 war than is accomplished by a protective tariff. But the 
 policy of protection to the foreign carrying trade is advo- 
 cated for its results in the commercial rivalry of nations 
 no less than in their trials of military strength ; and no 
 economic discussion of the subject is at all complete un- 
 less it deals with these claims. 
 
 § 489. Under the influence of the mercantile system of 
 political economy, the leading commercial nations tried to 
 protect their shipping by navigation acts^ which confined 
 the carrying trade between any two powers to the ships 
 belonging to those powers. Thus the trade between 
 England and France was open to English and French 
 ships, but not to Dutch ships. The application of these 
 laws caused great inconvenience, involving the ship- 
 owners in roundabout voyages, and often preventing 
 merchants from forwarding their cargoes as quickly and 
 cheaply as they might otherwise have done. Before the 
 middle of the present century, these laws were gradually 
 done away with ; though the United States still confines 
 its coasting trade to its own vessels. 
 
 All direct protection being thus abandoned, the carry- 
 ing trade of the world tended to fall into the hands of the 
 
442 PROTECTIVE LEGISLATION, 
 
 nations that could build and run ships most cheaply. 
 For a time, England and the United States were closely 
 matched in the race. As long as ships were built of wood 
 the United States had a slight advantage. But with the 
 substitution of iron or steel for wood and steam for sail, 
 the conditions were reversed ; and a protective policy 
 which enhanced the cost of shipbuilding materials tended 
 to increase the disadvantage under which American ship- 
 owners labored, compelled as they were by law to buy 
 their ships at home. They were thus handicapped on 
 either side, receiving no protection against foreign com- 
 petitors, and being compelled to buy vessels in a dearer 
 market in case they wished to run them under the Ameri- 
 can flag. As a result the ocean tonnage of America fell 
 rapidly behind, in spite of the increased amount of goods 
 to be carried ; and England became the unquestioned 
 leader in the world's merchant marine. A considerable 
 amount of American capital is invested in ships sailing 
 under the British flag, because of the economy which is 
 obtained in buying ships where they are cheapest. The 
 requirement that American ships should be built in home 
 yards, which was intended to protect the American ship- 
 builders, only resulted in driving the American flag from 
 the seas. 
 
 § 490. When navigation acts were abandoned, recourse 
 was had to subsidies as a means of encouraging the mer- 
 chant marine. It was inaugurated by Great Britain, 
 whose widely scattered colonial empire made it necessary 
 to maintain communication between the different ports 
 by the quickest possible method, and to utilize steam for 
 this purpose at the earliest possible moment. With this 
 end in view, large postal contracts were made, during the 
 years from 1837 to 1840, with the Peninsular and Orien- 
 tal Line, the Cunard Line, and the Royal Mail to the 
 West Indies. The system of profitable mail contracts was 
 gradually extended until the time came when the need 
 
SUBSIDIES TO SHIPPING. 443 
 
 for them was practically outgrown. The United States 
 adopted a similar policy a few years later (1848), but prac- 
 tically abandoned it just before the Civil War. Since 1880 
 there has been a tendency on the part of other nations to 
 extend the subsidy system more widely, and to make 
 payments, not for special services in carriage of mails, but 
 for the much less definite service of running steamers 
 under the National flag. France has gone further in this 
 matter than any other nation, having an elaborate system 
 of bounties both for construction and navigation. Italy 
 has adopted somewhat similar methods. Germany, 
 Austria and (since 1891) the United States, pay subsidies 
 in the. form of mail compensation, sometimes under 
 general laws and sometimes under special contracts — 
 perhaps the most important of the latter beings that be- 
 tween the United States and the International Navigation 
 Company for a transatlantic service. 
 
 These subsidized steamers are useful in providing a 
 reserve in case of war. The commercial success of the 
 policy is more. doubtful, whether we look at its effect on 
 the profit of the shipowners or upon the commerce of the 
 nation. French experience seems to indicate that the 
 system of bounties, by calling unnecessary ships into 
 operation, diminishes the regular earnings of the business 
 to a degree for which the government bounty furnishes 
 scant compensation ; while the old proverb that " trade 
 follows the flag " is hardly borne out by recent events. 
 It may have been true in old times that goods went 
 where ships most desired to take them ; but with modern 
 facilities of communication, the owners of the goods make 
 up their minds where they want them to go, and the 
 ships must take them there or nowhere. All things con- 
 sidered, it would be hard to show any commercial gains 
 from subsidies which compensate for the sums spent in 
 this way. 
 
 § 491. A popular form of the military argument for 
 
444 PROTECTIVE LEGISLATION, 
 
 protection rests in the fact that, by the adoption of re- 
 strictions upon trade, we do other nations injury. We 
 are told that free trade would be all very well if every na- 
 tion adopted it ; but as long as other people are imposing 
 tariffs against our goods, we must be prepared to strike 
 back. Those who hold this view in its milder shape are 
 content to regard a tariff as a diplomatic means of secur- 
 ing mutual concessions {reciprocity) — sometimes treating 
 these concession as steps toward a general policy of tariff 
 reduction the world over, which was the plan pursued by 
 the ministers of Napoleon III. ; sometimes bargaining for 
 them as special privileges not to be granted to the world 
 in general, which is the idea underlying the present reci- 
 procity treaties of the United States. But there are not 
 a few who go farther than this ; who regard injury to 
 other nations as gain to ourselves, and who say that they 
 advocate a high tariff for the United States because Eng- 
 land desires to have a low tariff. 
 
 § 492. When this view is accepted, a policy of tariff 
 warfare follows as a matter of course. There are times 
 when it seems as though a great many nations were car- 
 ried away with this spirit of commercial hostility. The 
 years since 1870 have afforded only too clear an illus- 
 tration of this spirit. But they certainly have not been 
 a period of prosperity for the nations concerned ; and it 
 is perhaps safe to regard the policy of these twenty-five 
 years as a set-back in the general current of economic 
 events rather than as an indication of the course of that 
 current. If we look at any long period of time we find 
 that national intercourse and friendliness are increasing 
 rather than diminishing. Increased travel and cheap- 
 ened transportation bring people together more power- 
 fully than armies or custom houses can keep them apart. 
 The legal disabilities of foreigners are being broken down 
 by international patent right and international copyright. 
 The world is on the whole learning that strangers are 
 
COLONIZA TION, 445 
 
 not enemies ; and that even in dealings between 
 strangers, each party is helped by the prosperity of the 
 other. It is undoubtedly true that a nation can hurt 
 foreigners by its tariff ; but there is not one whit of evi- 
 dence to show that it helps itself individually by legis- 
 lation devised with such a purpose, and every reason to 
 believe that the attitude of mutual hostility thus engen- 
 dered involves evil, commercially and politically, to all 
 the parties concerned. 
 
 § 493. Colonization as a measure of national protection 
 and a means of finding profitable employment for labor, 
 has had more importance in the past that it has at present. 
 The conspicuous advantages which it affords are, first, an 
 opportunity of employing labor on new land, and thus 
 relieving pressure of population on subsistence ; second, 
 a means of diversifying industry by taking advantage 
 of different climates and of a range of natural resources 
 not likely to be found within the limits of a single com- 
 pact territory. The older advocates of colonization laid 
 great stress on the second of these points. The English 
 authorities measured the value of a colony by its power 
 of producing things which England must otherwise im- 
 port. Virginia was highly prized because it could furnish 
 tobacco ; New England was rated lightly, because its pro- 
 ducts were so nearly the same as those of the mother 
 country. With the downfall of the mercantile system, 
 this argument has been less frequently urged. It is seen 
 that the prosperity of a colony and its utility to the 
 mother country are due to the general efificiency of its 
 labor rather than to the particular form in which that 
 labor is embodied. Colonies are now valued by states- 
 men as means of relieving the country of its surplus 
 population without weakening it to the degree which is 
 inevitable when emigrants seek refuge under a foreign 
 flag. But even when we look at them in this light, 
 colonies are by no means a source of unmixed strength. 
 
44^ PROTECTIVE LEGISLATION, 
 
 As long as they remain weak, they are apt to involve 
 expense to the home country ; when they grow strong 
 they are independent enough to repel the suggestion that 
 they should repay the bounty of earlier days, and to meet 
 any attempt to force such repayment by a declaration of 
 independence. It is on grounds of political rather than 
 of commercial or fiscal advantage that the modern states- 
 man must rest his defense of a policy of colonization. 
 
CHAPTER XIV. 
 
 GOVERNMENT REVENUE. 
 
 Its Different Forms — Principles of Taxation — Certainty the Primary Object 
 — Incidence of Taxation — Direct and Indirect Taxes — Property and 
 Income Taxes — Progressive Taxation — The Single Tax — Public Debts. 
 
 For American and English readers, the most available general work on 
 finance is probably C. F. Bastable's *' Public Finance." 2d ed. London, 
 1895. The able writings of Wells and of Seligman are unfortunately some- 
 what fragmentary. 
 
 The French and German literature on the subject is much fuller. It is 
 enough to refer to the writings of De Parieu and of Leroy-Beaulieu, or to 
 those of Cohn (translated by Veblen, Chicago, 1895), of Wagner, and of 
 the contributors to the second volume of Schoenberg's *' Handbuch." 
 
 § 494. The ordinary sources of revenue of modern 
 governments divide themselves into three groups : I. 
 Prices. 2. Fees and Assessments. 3. Taxes. 
 
 A price is a charge for special services which people are 
 not compelled to accept unless they choose. A fee or 
 assessment is a charge for special services which people 
 are compelled to accept whether they will or no. A tax 
 is not based on special services, but is a forced contribu- 
 tion to the general expenses of the government. 
 
 § 495. When the government revenue takes the form 
 of 2i price it is collected by processes like those of private 
 business. But the range of prices which the government 
 can charge is far wider than that which is open to a pri- 
 vate individual or corporation. It may use its position of 
 vantage to compel the payment of a higher price than an 
 individual can charge, as in the case of the tobacco and 
 
 447 
 
448 GOVERNMENT REVENUE, 
 
 salt monopolies of Continental Europe, or the rates of 
 letter postage in the United States. Or, on the other 
 hand, it may make use of its varied fiscal resources to 
 charge a much lower price than an individual would be 
 likely to do or could do without running into bankruptcy. 
 This is illustrated by the sales of public land in the United 
 States, or by the passenger rates of the various European 
 state railroads. Most of the arguments for government 
 ownership of industrial enterprises proceed on the assump- 
 tion that very low prices will result rather than very high 
 ones — an assumption which is not always borne out by 
 the facts/ When the government charges more than indi- 
 viduals could do, the payment exacted is known as a 
 monopoly price, and is treated by most writers on finance 
 as a tax on the consumer. When it charges approxi- 
 mately the same rate that a private individual would do, 
 whether it be under the stress of actual competition or 
 not, the payment is known as a quasi-private price. 
 When it charges less than a private individual would do, 
 the payment is called a public price. 
 
 § 496. The payment of a price to the government is to 
 a certain extent voluntary, since the purchaser has the 
 option of avoiding it by going without the service ren- 
 dered. When there is no such option, and the payments, 
 though based on special services rendered, are collected 
 by processes different from those which an individual 
 could adopt, it is called an assessment or ^.fee. The chief 
 difference between the two things is that an assessment is 
 levied once for all, to meet some extraordinary expense, 
 while fees are charged for services which are constantly 
 recurring in the ordinary course of relations between a gov- 
 ernment and its subjects. Assessments are levied on prop- 
 erty rather than on persons, and there is usually a more 
 careful attempt to make the price conform to benefits 
 rendered than can possibly be carried out in the case of 
 
 ^ Compare § 446. 
 
TAXA TION, 449 
 
 fees. A sewer is built by assessments ; lighthouse and 
 hospital service are supported by fees. It is the theory of 
 some writers that fees are based upon cost of service. But 
 license fees (which perhaps should be regarded as taxes) 
 are far in excess of specific cost of service — indeed there 
 is often a conspicuous absence of positive service ren- 
 dered ; while judicial fees are in many cases far below 
 the cost of maintaining the services which they help to 
 support. 
 
 § 497. Whatever part of the current expenses of gov- 
 •ernment cannot be covered by prices, fees or assessments 
 must in general be met by taxation} 
 
 Taxation is a system of forced contribution to meet the 
 general expenses of the government, whether national 
 or local. Taxes are distinguished from fees and assess- 
 ments in being a contribution for general services instead 
 of a more or less adequate return for special services. 
 They are distinguished from fines and confiscations in 
 being part of a regular system, publicly arranged as a 
 means of meeting the deficit which the government ac- 
 count or budget would otherwise show. 
 
 § 498. This idea of systematic taxation has been a 
 matter of gradual development. In the earlier stages of 
 political society the government tried to get as much as 
 
 ^ Seligman, in his extremely interesting treatment of the subject, prefers 
 a classification of the public revenues based, not on the methods of collec- 
 tion, but on the comparative importance of the public and private purpose 
 in the service rendered by the government. A quasi-privat^ price is charged 
 when the public purpose is of subordinate importance, and the special bene- 
 fit to the individual is the dominant consideration. A fee or a tax is 
 levied when the public purpose becomes the controlling or exclusive 
 consideration of the government in rendering the service while the benefit 
 to the individual assumes correspondingly less importance. But it will 
 be found on examination that Seligman's classification nearly coincides 
 with the one in the text. For if a charge is fixed on a basis of special 
 benefits rendered, it is safe to leave it to individuals to decide whether they 
 care enough for the service to pay for it ; while if the public purpose be- 
 comes the dominant or exclusive consideration, the basis and method of 
 collection must be correspondingly modified. 
 
450 GOVERNMENT REVENUE. 
 
 it could, without regard to system, while the subjects 
 were trying to pay as little as they could. As late as the 
 seventeenth century the great French financier, Colbert^ 
 defined taxation as " the art of so plucking the goose as 
 to secure the largest amount of feathers with the least 
 amount of squealing." It is an unfortunate truth that we 
 have not wholly outgrown the stage of political life which 
 gave this definition its force. But as popular government 
 has made progress, — or, more accurately, as we have 
 gradually come to rely on the consent of the people to 
 give force to legal enactments — we have learned to regard 
 taxes as a self-levied contribution which each man pays 
 according to his ability. Though this ideal is as yet very 
 far from being realized in practice, it has become a funda- 
 mental doctrine of political justice among the great mass 
 of civilized men. In fact, the positiveness with which 
 this ideal is asserted, coupled with some uncertainty as to 
 the form in which it would best be realized, and with 
 widespread ignorance as to the means by which it can be 
 best attained, forms at present an obstacle rather than an 
 aid to measures which would really make taxation more 
 equitable. 
 
 § 499. Adam Smith, in a passage frequently quoted,* 
 lays down four criteria of a good tax system : equity^ 
 certainty, convenience of time of payment, and avoidance 
 of unnecessary cost of collection, direct or indirect. If all 
 these things can be combined, the tax is obviously a good 
 one. But what if they cannot all be combined ? What 
 if the first two requirements (which are the most funda- 
 mental general principles, the third and fourth being 
 largely matters of administrative detail) be found to con- 
 flict with one another ? What shall we do if the pursuit 
 of equity demands sacrifice of certainty, and if all the 
 methods of taxation which promise a sure return seem to 
 leave some men untouched who can best afford to pay ? 
 
 ^ Wealth of I^ationSy Book V., chapter ii., part ii. 
 
ADAM SMITH'S PRINCIPLES, 45 1 
 
 By placing equity first, Smith gives countenance to the 
 popular view that we should make this not only our ideal 
 of taxation but our guiding principle in framing tax laws. 
 As an ideal it is undoubtedly right ; as a guiding princi- 
 ple, it will.be found to defeat the realization of that ideal. 
 
 § 500. It should be said in justification of Smith, that 
 the distinction between ideals and guiding principles in 
 taxation, which has since become so conspicuous, was in 
 his day only just beginning to take shape. In ancient 
 times certainty and equity went hand in hand. The men 
 who held property and enjoyed income had this prop- 
 erty and income in forms which rendered it easy of as- 
 sessment. Their wealth consisted chiefly of real estate. 
 Personal property was small in amount, and consisted 
 largely of visible and tangible objects like plate or jewels, 
 kept for display rather than for income. The persons 
 who could best pay taxes held the property whose value 
 could be ascertained. The attempts to levy taxes on 
 other people, though frequently made, were at once in- 
 effective and unjust. But from the time of Adam Smith 
 downward there has been an increasing divergence from 
 this state of things. The persons who are best able to 
 pay taxes are not now so situated that the assessors can 
 ascertain the exact measure of their ability. Invisible 
 forms of personal property, like stocks or notes, have 
 assumed a dominant importance. The attempt to secure 
 equal contributions by a general income tax, or a general 
 property tax, may result in exempting the dishonest and 
 burdening the honest, in making a tax system whose bur- 
 dens are wholly out of proportion to the financial results. 
 Under these conditions the tax legislator now has to 
 choose between making equality or certainty his primary 
 end, rather than to keep both in view as coordinate aims. 
 
 In the light of experience in modern industrial com- 
 munities there can scarcely be any doubt as to the 
 proper choice. Certainty is the fundamentally important 
 
452 GOVERNMENT REVENUE, 
 
 object, without which all attempts at equality prove illu- 
 sory.' With an uncertain tax no systematic improvement 
 can be hoped for. With a certain tax any evils which 
 exist at the outset tend to diminish as time goes on. 
 
 § 501. Uncertainty may result either from failure to 
 discover the objects which should be taxed ; or from 
 doubt as to their value ; or from the possibility of col- 
 lusion between the assessor and the person who should 
 pay the tax by which consent is given to an unduly low 
 valuation. 
 
 § 502. To avoid the first evil, taxes should be levied, 
 as far as possible, upon visible and tangible objects. In 
 general, things should be assessed, rather than persons. 
 The attempt to rely on personal disclosure as a means of 
 discovering taxable property results in discrimination of 
 the worst character. The property or income of widows 
 and orphans, which is in the hands of trustees whose 
 reports are matters of public knowledge, is taxed at its 
 full value ; so is that of a few exceptionally conscientious 
 men. The majority of men make some return of taxable 
 property, sufficient to satisfy their consciences ; but they 
 interpret all doubtful points in their own favor, so as to 
 make as few returns as possible. They take the law into 
 their own hands ; and, as an English essayist has said, the 
 law is such a fragile thing that when men take it into 
 
 ^ If people would carry out to its logical conclusion the modem theory 
 that taxes are a self-imposed burden, we might make equity our primary ob- 
 ject as well as our ultimate goal. Where public sentiment insists that peo- 
 ple shall make correct tax returns, and treats laxity in this respect as a 
 dereliction of public duty, the tax legislator has a comparatively free hand. 
 There are certain communities where this sentiment is so strong that the 
 principal of self assessment can be safely adopted, with the knowledge that 
 crooked tax returns will be as severely condernned by the individual con- 
 science as crooked voting. But with the increasing margin of doubt as to 
 what constitutes taxable income the difficulty of relying on such sentiment 
 becomes greater ; and in the absence of such a controlling motive no tax 
 law can be made effective, unless framed with the immediate purpose of 
 preventing evasion. 
 
MEANS OF ENSURING CERTAINTY. 453 
 
 their own hands it is sure to get broken. Finally, there 
 is a considerable class of men who have no conscience at 
 all in the matter, and who, in safe reliance on the cer- 
 tainty that their property will remain undiscovered, escape 
 taxation on everything which the law hopes to discover 
 by their declarations. 
 
 We cannot rely on the courts for much help in cor- 
 recting this injustice. They feel obliged to assume that 
 any law will be obeyed, even when it is notorious that 
 such is not the case. They can only consider theoretical 
 violations of equity ; they leave to the legislator the 
 avoidance of practical ones. 
 
 Nor is this an evil that tends to correct itself by time. 
 The success of the bad men in escaping taxation and the 
 impunity with which they defy the law, lowers the public 
 conscience year by year. When we have a tax law which 
 discriminates against honesty, the honesty and the law 
 both suffer in about equal measure. 
 
 § 503. Of the visible and tangible sources of taxation, 
 real estate is probably the most important. It can always 
 be seen ; it can never run away. In order to be sure of 
 taxing its owners, it is only necessary to apply the rule 
 of making no deductions on account of debt. Mortgaged 
 real estate should be assessed at its full value. This may 
 seem to bear hard on the debtor ; but it is really far more 
 equitable than the system of deductions. If such deduc- 
 tions are allowed, a large part of the money loaned on real 
 estate escapes taxation altogether ; while undue burdens 
 are put, first, on the holder of unmortgaged real estate 
 who has to pay a higher tax rate on account of the deduc- 
 tions made from the grand list, and, second, on the honest 
 minority of lenders ^ who pay a high tax rate on their in- 
 vestments, while most other investors make no adequate 
 return of property thus loaned. The holder of mortgaged 
 real estate gets comparatively little benefit from the de- 
 
 * Chiefly those whose property is held in trust. 
 
454 GOVERNMENT REVENUE, 
 
 duction, because the theory that such loans are taxable 
 against the lender drives enough honest investors out of 
 the mortgage loan market to keep the rate of interest 
 higher than it otherwise would be. The only real bene- 
 ficiary is the unscrupulous investor who profits by the 
 high interest rate and makes no tax return. 
 
 The chief obstacle to a change in system — apart from 
 the reluctance of legislators to abandon the old principle 
 of taxing persons instead of things — is found in the appar- 
 ent loss to communities of lenders, in allowing property 
 which their citizens own to be taxed in the place where it 
 is invested. But the actual amount collected in this way 
 is very small in proportion to the vexation involved. 
 
 Another objection urged against this plan is that real 
 estate, which is already overburdened, will suffer still 
 more, while personal property will be correspondingly 
 relieved. But the secondary result of relieving the lender 
 from taxation, owing to increased competition among 
 different lenders, will be a lowering of the rate of interest ; 
 and the holders of personal property will thus indirectly 
 pay a larger share of the taxes than they now do. If 
 such loans can be reached by this indirect method, one of 
 the largest items of personal property will be taxed ; and 
 a very large part of the remainder can be reached by taxes 
 on corporations. 
 
 § 504. In the assessment of corporate property, as in 
 that of real estate, no deduction should be allowed for in- 
 debtedness. If the attempt is made to tax the debt in 
 the hands of the holders, it will fail. The tax should 
 reach the whole property of the corporation without 
 reference to the question of its ownership. In that way, 
 and in that way only, will it be evenly distributed. If the 
 market price of the securities is used as a means of ascer- 
 taining the value of such property, bonds as well as stock 
 should be included in the estimate. It affords opportuni- 
 ties for evasion no less than for injustice if two railroads, 
 
STOPPAGE AT SOURCE, 455 
 
 physically alike, pay different rates of taxes because the 
 capital of the one was largely borrowed while that of the 
 6ther was subscribed. 
 
 § 505. The attempt to levy taxes on the thing where 
 the value originates, rather than on the person who re- 
 ceives the benefit of such value, is known as the policy of 
 stoppage at source. It is the most effective means which 
 has been devised for combining economy in collection 
 with efficiency in reaching those who ought to pay the 
 tax, honest and dishonest alike. Its effects are perhaps 
 even more clearly illustrated in income taxes than in 
 property taxes. It makes comparatively little difference 
 to an honest man whether he receives his full income and 
 deducts the amount necessary to pay the tax, or whether 
 he receives his income less the deductions and then pays 
 nothing. But to the dishonest man it makes a great 
 difference ; for in the former case he has a large chance 
 of avoiding payment, while in the latter case, his burdens 
 are forcibly made equal to those of the honest man — a 
 thing which results in benefit both to the exchequer and 
 to the public. The gain in certainty of collection from 
 stoppage at source is due to three causes. First, the man 
 who makes the payment has no personal interest in giving 
 the government less than its due. Second, the fact that 
 income is earned is usually much more observable at its 
 source, where the transactions that give rise to it are 
 matters of public observation, than at the point of its re- 
 ceipt, where its existence can only be surmised. Third, 
 so many of the payments of income are made by large 
 corporations to a number of shareholders or creditors, 
 that stoppage at source substitutes a single financial 
 transaction, easily and economically controlled, for a 
 whole series of individual transactions involved in col- 
 lecting the tax from the recipients, whose very number 
 tends to multiply both the uncertainty and the expense 
 of collection. 
 
456 GOVERNMENT REVENUE. 
 
 Of course the adoption of this principle interferes with 
 the possibility of laying progressive income taxes whereby 
 the rich pay a larger percentage than the poor ; but if, a5 
 generally happens, the effort to make the rich pay more 
 than their share by a complicated tax system, actually re- 
 sults in letting them pay less than their share, we need 
 not take great account of this objection, in the present 
 stage of industrial society. 
 
 § 506. The second source of uncertainty arises from 
 doubt as to the actual value of the property or transac- 
 tions assessed. 
 
 It is always very difficult to determine the actual net 
 earnings of a business. The gross earnings are compara- 
 tively easy to ascertain. The difficulty is to determine 
 what deductions should be made from them before we 
 reach what is available as net income. Take the case of a 
 railroad. It should obviously deduct the expenses of run- 
 ning trains, maintaining stations, equipment, and track, 
 and paying the salaries of its officers. But what consti- 
 tutes maintenance of track or equipment? Shall the 
 company simply aim to make ordinary repairs ? This will 
 cause the road to deteriorate from year to year as new 
 inventions arise, so that the income will really not be so 
 large as it appears. Or shall it try to pay for all improve- 
 ments out of earnings? This is going to the other ex- 
 treme, and will make it appear that a very prosperous road 
 has no net income at all. The conception of net income, 
 simple as it appears, is really very difficult to apply in 
 practice, and involves so much possible litigation that 
 many states prefer to substitute a low tax on the gross 
 earnings of corporations for a somewhat higher tax on 
 their net earnings. The latter would be the more equi- 
 table ; for a tax on gross earnings bears hard on a corpora- 
 tion which is doing large business at low rates and a small 
 margin of profit. But the superior certainty of the tax 
 on gross earnings outweighs its theoretical disadvantages. 
 
DOUBLE TAXATION, 45/ 
 
 In like manner there is a tendency among those charged 
 with customs administration to prefer specific duties, 
 based on the weight or measure of goods imported, to 
 ad valorem duties, calling for a percentage of their value. 
 Although the specific duty is the less equitable in theory, 
 and has the added disadvantage of becoming more and 
 more protective as time goes on (§ 484), the multiplication 
 of chances of fraud under the ad valorem system is apt 
 to turn the balance in favor of specific duties. 
 
 § 507. The third source of uncertainty arises from 
 danger of collusion between the assessors and those who 
 pay the taxes. This comes about chiefly where minor 
 civil divisions are asked to contribute to the general 
 government on the basis of their assessed valuation. For 
 local purposes it makes no difference to a town whether 
 its citizens pay a tax of one per cent, on a valuation of 
 $2,ooo,(X)0, or two per cent, on a valuation of $1,000,000. 
 But if they are asked to contribute to the general govern- 
 ment, the community with the low valuation will have an 
 advantage ; and the desire to secure such advantages will 
 lead the local authorities to a system of undervaluation 
 which may easily result in great irregularities. No board 
 of equalization can correct such an evil. For certainty 
 of valuation it is indispensable that the objects of national 
 and local taxation should be kept as far as possible separ- 
 ate from one another. 
 
 § 508. It is scarcely necessary to add that double taxa- 
 tion should be avoided, in the interest of certainty no 
 less than of economy and of equity. In the United 
 States the sentiment against double taxation is so strong 
 that each tax is made a pretext for evading the other. 
 In Europe, the objection to double taxation is not so 
 strongly felt and the evasion which results from its appli- 
 cation is probably less ; but in any event it can hardly be 
 other than a wasteful method. 
 
 § 509. A tax which meets the requirements of certainty 
 
458 GOVERNMENT REVENUE, 
 
 tends to become more equitable as time goes on. It may- 
 impose an unnecessary aggregate burden on the commu- 
 nity, which will continue from year to year ; but the ine- 
 quality of the burden will tend to reduce itself. For 
 capital will not be invested in lines or in places where the 
 rate of profit is much lower than the average ; and any 
 tax which lowers the rate of profit tends to diminish the 
 supply of products and thus to increase the price, putting 
 the burden largely upon the consumers instead of the 
 producers. 
 
 Let us a take a concrete illustration. Assume that 
 railroads were taxed at a higher rate than any other kind 
 of property. At first this would be an injustice to the 
 owners of railroads ; but as time went on fewer roads 
 would be built and the managers of those already existing 
 would charge higher prices on account of the demand for 
 transportation which they alone were able to meet. Part, 
 of the burden of the tax would thus be placed on the 
 consumers. Meantime the lessened demand for railroad 
 labor would tend to reduce either the number or the 
 wages of railroad employees; and the reduction in the 
 demand for coal and for iron consequent upon the di- 
 minished extent of railroad construction would transfer 
 part of the burden to those industries also. As this 
 shifting process extended itself year after year it would 
 include a wider circle of industries within its scope, and 
 it would not cease until the profits of railroad enterprise 
 which were at first reduced by the tax, finally adjusted 
 themselves to the same general level which prevailed in 
 other industries. 
 
 If the tax is not thus shifted by a change in the supply 
 of products, it shows that the capitalists were obtaining a 
 monopoly profit before the imposition of the tax ; and that 
 the apparent inequality due to the failure to shift such a 
 tax really puts the burdens where they belong — among 
 those who have a distinct surplus under the processes of 
 exchange or distribution. 
 
DIRECT AND INDIRECT TAXES, 459 
 
 § 5 10. If all taxes were continuous in their operation, we 
 might trust to this shifting process to make them equitable. 
 We might fairly assume that in the long run the men who 
 were able to pay the taxes would pay them, while those 
 who were unable to pay would be crowded out of an indus- 
 try. We could judge of the goodness or badness of a tax 
 by comparing the benefits derived from its proceeds with 
 the evils resulting from this crowding-out process. We 
 could set ourselves to work to devise a tax system which 
 should' raise the necessary revenue with a minimum of 
 industrial pressure. But the matter is not thus simple. 
 Taxes are not continuous in their operation. New 
 grounds of expenditure arise which necessitate either an 
 imposition of new taxes or an increase of old ones. 
 Changes in industrial method may intensify this need by 
 rendering the old taxes less productive ; or they may 
 operate in the reverse direction and produce a surplus 
 which gives ground for a well-founded claim for reduction 
 in tax rates. But whenever any tax is increased or reduced 
 a change of economic burdens is created, which it takes 
 time to adjust, and which may for months or years impose 
 upon certain individuals an undue share of contributions 
 to the public revenue, before the matter finally adjusts 
 itself in an equitable fashion. 
 
 § 511. It is in this connection that the distinction 
 between direct and indirect taxes becomes one of domi- 
 nant importance. 
 
 A direct tax, as ordinarily defined, is one which is 
 levied upon the person who is expected to pay it ; an in- 
 direct tax is one whose burden is presumably shifted upon 
 some one else. An income tax is generally of the former 
 class. The man against whom it is charged is expected 
 to pay it at his own loss. A customs duty belongs to the 
 latter class. The importer pays it to the government; 
 but it is expected that he will charge the greater part if 
 not the whole of it to the man who buys the article, so 
 
460 GOVERNMENT REVENUE. 
 
 that the tax will ultimately be paid by the consumer 
 instead of the importer. 
 
 There is no doubt that there is a real distinction 
 between these two kinds of taxes ; but there is a great 
 deal of doubt whether the distinction just drawn (which is 
 that of Smith and of Mill) correctly marks the line between 
 them. Some taxes which are undoubtedly direct are 
 shifted at once by legal authority ; for instance when 
 a tax on rents is, as a matter of administrative conven- 
 ience, collected from the man who pays the rent with the 
 understanding that he will deduct it from what he after- 
 ward hands over to the owner under previous contracts. 
 Again, nearly all taxes on income or on property are, as 
 we have seen, gradually shifted, even though the law 
 makes no provision for such a process ; and a sharp appli- 
 cation of Smith's definition would give the term " direct 
 tax '* a meaning very much narrower than that which it 
 has in current usage. 
 
 In view of this difficulty. Continental writers have gen- 
 erally preferred to define direct taxes as those which are 
 assessed on persons (or property) and indirect taxes as 
 those which are levied on acts. This is correct enough 
 in its practical applications. But it fails to indicate any 
 real distinction of principle ; and therefore, in a consider- 
 able number of cases which can be regarded in either light 
 {e.g, taxes on occupations) we cannot use the definition 
 as a criterion. We decide on unformulated grounds to 
 which class a tax belongs and interpret our definition 
 accordingly. 
 
 § 5 1 2. In order to find the real ground for the distinction, 
 we must consider the different ways in which taxes are 
 shifted. 
 
 I. In some cases the transfer is a perfectly simple one. 
 The person who pays the tax to the government deducts 
 the amount of that tax from payments which he would 
 otherwise have been compelled to pay to some one else. 
 
INCIDENCE OF TAXATION, 46 1 
 
 A corporation pays a tax, and correspondingly reduces the 
 amount which would otherwise have gone to the security- 
 holders. A man who occupies a house may be compelled 
 to pay a tax on its rental with the understanding that he 
 is to deduct this tax from the payment which he makes to 
 the owners. 
 
 2. Some taxes are transferred by commercial compe- 
 tition. A customs or excise duty is largely paid by the 
 consumers, not voluntarily, but because the dealers find it 
 impossible to furnish the goods at the price which pre- 
 vailed before the imposition of the duty ; and this reduc- 
 tion in current supplies produces competition among 
 buyers, until the price rises high enough to compensate 
 the importers for their expense under the new conditions 
 of trade. 
 
 3. Some taxes are transferred only by industrial com- 
 petition (§ 100), instead of commercial ; not by the com- 
 petition of buyers for a supply of products which the tax 
 suddenly reduces, but by the withdrawal of capital in- 
 vested in certain lines where the tax has borne heavily, 
 and a slow indirect readjustment of the relations of sup- 
 ply and demand. It is not always possible to distinguish 
 sharply from one another the effects of commercial and 
 industrial competition ; but there is a clear general line 
 of distinction between the quick adjustment under the 
 one process and the slow adjustments under the other. 
 
 § 513. With the third of these means of shifting taxes, 
 the distinction between direct and indirect taxation has 
 nothing to do. The terms direct and indirect apply to 
 immediate incidence, not to ultimate incidence. A tax 
 is said to be direct when its immediate burden is shifted 
 only by the first of these processes, and therefore falls 
 within the prevision of the legislator. It is said to be 
 indirect when its immediate burden is shifted by the sec- 
 ond of these processes, and cannot be at all accurately 
 foreseen by the legislator. To the former class belong 
 
4^2 GOVERNMENT REVENUE, 
 
 property, income, and inheritance taxes, no matter from 
 whom they may be first collected ; also poll taxes, and 
 franchise taxes in their various forms. The latter class is 
 exemplified by excise and customs duties. 
 
 § 514. Indirect taxes are not generally available for 
 local purposes. If a locality attempts to tax a certain 
 class of acts while neighboring localities do not, it is apt 
 to result in driving business from the place where it is 
 taxed to that where it is untaxed ; disturbing trade while 
 the process of adjustment is going on, and leaving com- 
 paratively little revenue after it is completed. There are 
 exceptions to this rule ; for instance the octroi^ or tax on 
 provisions entering the close walled towns of continental 
 Europe. But the general tendency as time goes on is to 
 leave the collection of indirect taxes more and more to 
 the central authorities. The local governments are thus 
 compelled to rely on direct taxation as the chief source 
 of their revenue. 
 
 The central government can use either form of taxation 
 it pleases. It will generally collect a large part of its 
 income by indirect taxes, using direct taxation to make 
 up any temporary or fluctuating deficit. It is in some 
 respects desirable to restrict direct national taxation to a 
 minimum ; for if the proceeds of a direct tax on the prop- 
 erty or income of one locality are used for purposes in 
 which other localities are exclusively interested, there is a 
 feeling of injustice which cannot come up in the same 
 form when each section uses its own taxes for its own 
 purposes. There are, however, certain forms of direct 
 taxation which cannot advantageously be levied by mu- 
 nicipal assessment. This is notably the case with taxes 
 on large corporations. The value of a railroad is by no 
 means the sum of the values of the separate pieces of 
 property in the different towns through which it runs. 
 It is much greater than this ; and it can only be properly 
 determined by being assessed as a unit. The taxation of 
 
INCOME AND PROPERTY TAXES, 463 
 
 corporations in America has mostly been in the hands of 
 the States ; but with the rapid growth of industrial con- 
 solidation, interstate tax problems are beginning to have 
 increasing importance. Even though the revenues from 
 this source continue to be used for State purposes, it 
 seems inevitable that their assessment and apportionment 
 should be under national control if we are to avoid the 
 double taxation and other evils which prevail in the 
 present system. 
 
 § 515. Most direct taxation is necessarily based upon 
 wealth, because the possession of wealth is the chief cri- 
 terion of a person's ability to bear an additional tax. 
 "But whether such ability is best judged by measuring 
 wealth as capital, and imposing a property tax, or by 
 measuring it as income, and taxing it accordingly, is a 
 question on which there is no unanimity. The bulk of 
 European judgment and practice favors the latter method ; 
 in America the former is in more general use. 
 
 The theoretical arguments as to the merits of the two 
 methods are rather inconclusive. At first sight, income 
 seems a fairer measure of ability than accumulations ; for 
 the receipt of income represents present productive 
 capacity, while the possession of savings does not. But 
 it must be remembered that a man who has a current 
 income of $10,000 and no savings is practically compelled 
 to lay aside a considerable proportion of it for the future ; 
 and a system which taxes him at the same rate as the 
 man who has the same income from invested capital 
 creates gross, inequaHty of burden. So conspicuous is 
 this fact that many of those who believe in taxing income 
 rather than property, would levy a lower rate upon per- 
 sonal earnings than upon income from investments. 
 
 There is an argument often urged in favor of an income 
 tax which, when carefully examined, appears unsound. 
 It is said to be essential for the community that taxes 
 should be paid out of current income rather than past 
 
464 GOVERNMENT REVENUE, 
 
 accumulations ; that a tax on property as distinct from 
 income is really a tax on accumulations and a discourage- 
 ment to saving. This argument depends for its force 
 on the assumption that a tax on income will be paid out 
 of income and a tax on property paid out of capital ; an 
 assumption for which there seems to be no warrant. For 
 capital and income are not separate things ; they are 
 different ways of measuring the same thing. Capital is 
 constantly being converted into income, and income into 
 capital. A tax is really paid out of capital when its 
 effect is to make the amount of accumulations at the 
 end of the year less than they otherwise would be ; it is 
 paid out of income, when the expenditures of the year 
 are reduced to meet the tax, so that the amount of 
 accumulation remains unimpaired.' If an income tax 
 bears heavily on the men who would otherwise make 
 savings, it is paid out of the nation's capital ; if a property 
 tax causes the property owner to reduce his current ex- 
 penses, it is paid out of income. There seems to be no 
 direct relation between the form in which taxes are 
 assessed and the choice of means adopted to pay them. 
 
 § 5 16. Apart from the possibility of progressive or com- 
 pensatory taxation, (§§ 517, 518) the theoretical advan- 
 tages and disadvantages of income and property taxes 
 are so closely balanced that the question between them 
 must be decided on the basis of certainty of assessment 
 and ease of collection. In the former respect the property 
 tax has perhaps a slight advantage. The measurement of 
 capital presents fewer theoretical difficulties than the 
 measurement of income ; for we have to make a number 
 of uncertain deductions in the latter case which are not 
 involved in the former. But practically our choice depends 
 on the preferences and habits of the people. If they are 
 accustomed to an income tax rather than a property tax 
 
 ' The desirableness of this condition is by no means so self-evident as some 
 people suppose. Compare § 161. 
 
PROGRESSIVE TAXATION, 465 
 
 we may expect better results to be reached on taxing in- 
 come. If they are more accustomed to the property tax 
 the case will be reversed. The experience of the United 
 States immediately after the war, contrasted with that 
 of most European states, shows how great may be the 
 difference in productiveness, in equity, and in popularity, 
 of similar taxes in different communities.' 
 
 § 517. It is a more important question whether we 
 should strive to have equality or progression in our direct 
 taxes ; whether we should tax each source of wealth in 
 proportion to its value or whether we should try to tax 
 the strong man at a relatively higher rate than the weak 
 man. The latter policy is urged on two grounds ; first, 
 because in all the early stages of their operation indirect 
 taxes, by raising the price of articles of consumption, 
 affect the poor, who spend their incomes, relatively more 
 than the rich, who have a large surplus which they do not 
 spend ; second and more important, because any increase 
 of direct taxes which may be needed to meet a current 
 emergency hurts the poor man, far more than it hurts the 
 rich man. If a man makes only enough to keep himself 
 and his family alive, the imposition of a tax will cause 
 some of them to starve. The process of adjustment by 
 which wages are raised to meet such a tax will only be 
 brought about after most acute suffering and irreparable 
 loss. 
 
 * The notorious evils in the working of the general property tax in the 
 
 United States have created some prejudice against this mode of assessment. 
 
 But the inequalities of this tax are less than those which the country suffered 
 
 Tinder the income tax ; and both are more conspicuously the result of want 
 
 of certainty than of want of equity. The evils were not due to the fact that 
 
 property was a bad basis of assessment, but to the fact that much property 
 
 which was nominally subject to assessment was not reached at all. If local 
 
 expenses were met by taxes on local real estate only, no deduction being 
 
 made for debts, and if state expenses were largely met by corporation taxes, 
 
 which the exemption of personal property from local assessment would make 
 
 possible and equitable, we should be likely to have a tax system which would 
 
 be efficient, elastic, and reasonably just. 
 30 
 
466 GOVERNMENT REVENUE, 
 
 These objections do not apply so directly to a tax 
 on property as to a tax on income. Even a small property 
 gives its owner a certain leeway when a new tax is im- 
 posed, and prevents him from starving as long as his 
 accumulations hold out. It may be a misfortune and an 
 injustice to deprive him of part of his savings; but it is 
 not, in most instances, a direct deprivation of all im- 
 mediate means of support. A property tax can therefore 
 be made general without immediate disaster ; while an 
 income tax practically involves the exemption of a mini- 
 mum* income necessary for the support of a family. 
 
 § 518. Any such exemption causes the large incomes 
 to be taxed at a higher rate than the smaller ones. Thus 
 if $1000 is exempt from taxation, and the excess above 
 that sum is taxed five per cent. 
 
 An income of $1000 pays $0 or o per cent 
 " 1500 25 If ** " 
 
 " 2000 50 2\ " " 
 
 " u u 2500 75 3 " " 
 
 " 30CX) 100 i\ " " 
 
 and so on with constantly increasing percentages. But 
 when we come to deal with really large incomes the 
 changes of rate due to this cause are very slight in 
 amount. Thus, an income of $50,000 in the case sup- 
 posed will pay at the rate of A^-^-^ per cent ; while an 
 income of double the amount will pay at the rate of 
 4j|- per cent. The difference between the two rates is 
 hardly noticeable in comparison with the difference in 
 wealth of the two individuals. Under these circum- 
 stances, all the more radical champions of progressive 
 taxation insist on an increasing rate as well as on the 
 exemption of a fixed minimum. The increasing rate is 
 used in several countries of continental Europe, and is 
 perhaps most conspicuously exemplified in Switzerland. 
 
 1 It depends upon the judgment of the legislature how high this minimum 
 shall be fixed. There is no well-recognized standard in fiscal usage. 
 
TAXATION OF MONOPOLIES. 467 
 
 There can be no reasonable doubt that a progressive tax, 
 if collected^ imposes the immediate burdens where they can 
 be borne with least hardship. But it seems equally cer- 
 tain that such a system increases the difficulty of collec- 
 tion. It makes it necessary to assess the tax against the 
 actual recipient of the income in such a way as to make 
 the principal of stoppage at source quite inapplicable. 
 In so far as the uncertainty from this cause makes itself 
 felt, the attempt to secure progression does a permanent 
 harm which outweighs any temporary good. For it 
 must be constantly kept in mind that the need for 
 equalization of burdens which progression aims to meet 
 is a transient one, which will in any event be gradually 
 met by the process of industrial competition ; while the 
 equalization that depends upon certainty is a permanent 
 matter, which will not adjust itself under any law, how- 
 ever well meant, that fails to secure such certainty. 
 
 § 519. An effort is often made to combine certainty of 
 collection with equality of immediate burden by exempt- 
 ing competitive gains and taxing monopolized advantages 
 — especially those of landed property. Some have gone 
 so far as to believe that a single tax, on this basis alone, 
 would afford the government its necessary revenue with 
 a minimum of hardship, and perhaps with a positive inci- 
 dental gain. 
 
 If we make use of the method employed in § 295 (Fig. 
 9) we shall see that a tax which is made proportionate 
 to the income from a given business usually puts severe 
 burdens on consumers and on laborers.* If, to the ex- 
 pense of production qy -\- yx (wages -|- interest,) there be 
 added a tax xt (Fig. 1 1), the quantity sold must gradually 
 fall until a new point of equilibrium between demand 
 
 ^ The effect here described is most immediate if the tax is placed on the 
 consumer (indirect taxation). It is much slower in the taxation of labor, 
 and probably slower still in the taxation of capital ; but the final adjustment 
 tends to be the same in all cases. 
 
468 
 
 GOVERNMENT REVENUE, 
 
 and suppy is established. At this point the price Op' 
 will cover wages + interest + taxes (^y -\-y'x' + x't' ). 
 
 p 
 
 
 ^'' 
 
 
 • 
 
 
 r 
 
 ^^ 
 
 -^ 
 
 
 ?' 
 
 The amount of government revenue will be represented 
 by the rectangle rx't'p\ The losses incident to the col- 
 lection of this revenue will be as follows : 
 
 1. The consumers have to go without a certain amount 
 of goods q'q. 
 
 2. A rise in price reduces the consumers* surplus from 
 the series of transactions from pxb (Fig. 9) to p't'b (Fig. 
 
 II). 
 
 3. The labor which produced the goods q'q is thrown 
 out of employment. 
 
 4. A fall in wages reduces the producers* surplus from 
 ayw (Fig. 9) to ay'w' (Fig. 1 1). 
 
 5. The field of investment of capital is reduced by the 
 amount of reduction of wages. 
 
 § 520. According to the advocates of the single tax 
 theory, most of this burden is an unnecessary imposition 
 on society, due to the taxation of competitive gains on the 
 same basis as monopolized gains. 
 
 We have seen (§319) that in many lines the expense of 
 production of the same article varies widely for different 
 competitors. Some of those who are engaged in its pro- 
 duction obtain a differential gain. If we can tax this gain 
 and not tax the men who fail to secure it, we shall avoid 
 
TAXES ON DIFFERENTIAL GAINS, 
 
 469 
 
 most of the evils described in the preceding section. The 
 quantity of goods produced will not be altered ; for the 
 tax will only affect those men who produce the goods at 
 a special advantage, and these will prefer to pay the tax 
 rather than abandon an exceptionally profitable business. 
 Therefore all the laborers will be employed at the old 
 wages, and all the consumers served at the old prices ; the 
 revenue of the government will be furnished by those 
 who can afford to pay taxes and who will not be led to 
 change their occupation by so doing. 
 
 This state of things may be roughly represented as fol- 
 lows (Fig. 12). With a demand curve bb' and a price Op 
 
 b 
 
 p 
 
 
 r/f. 12 
 
 c 
 
 
 ^^"^^>x^ 
 
 i3P 
 
 ■-.....____ 
 
 
 t>^ 
 
 
 
 Z-^-^^ 
 
 -^rS- 
 
 i 
 
 ^'^^ 
 
 
 
 c 
 
 
 ^ 
 
 ? <? 
 
 at which the supply equals the demand we shall find that 
 payments to laborers for producing different parts of the 
 supply vary from a maximum qy to a minimum 01, The 
 total profit to the capitalists who advance those wages 
 is lyxp. But of this profit there are deductions to be 
 made for interest varying from a maximum xy^ to a 
 minimum pc. The total amount chargeable as interest is 
 thus represented by pxyc. If we can tax the surplus 
 profit lye without touching wages or interest we shall 
 
 ^ It will of course often happen that the maximum interest charge does 
 not come on the same unit of product where we have the maximum wages. 
 To take proper account of this fact the figure would have to be made too 
 complicated for our present purposes. 
 
470 GOVERNMENT REVENUE. 
 
 obtain our revenue with the minimum of immediate bur- 
 dens on producers and consumers and the least disturb- 
 ance to the channels of trade.' 
 
 § 521. We have already seen (ch. ix.) that the differen- 
 tial gain of producers enjoying special advantages is 
 divided into two parts, rent and profits. The advocates 
 of a progressive income tax claim that in a rough way 
 they reach both of these things pretty effectively, since 
 the large fortunes are made up from one or the other of 
 these gains rather than from wages or interest. But the 
 advocates of a single tax object to the attempt to put rent 
 and profits on the same basis. They say that the sums 
 received as profits are really earned. They come to pio- 
 neers who have led the way in industrial progress. They 
 are instrumental in putting the control of industry into the 
 hands of men who are competent to take the lead. Rent 
 on the other hand they regard as a dead weight ; as an 
 appropriation of the products of present industry by those 
 who have laid hands on the results of past service or of 
 natural bounty ; sometimes even as a premium to those who 
 stand in the way of progress by keeping land out of use 
 until the growth of population has given it the increased 
 value. They draw a sharp distinction between the profits 
 resulting from the enterprise of the individual, to which 
 that individual may fairly lay claim, and the rent resulting 
 from the movements of population, which equitably be- 
 longs to the people. They propose either to make the 
 
 * This will serve to illustrate the important but not very clear proposition 
 often laid down, that rent is not an element in the price of products. Any- 
 thing that affects wages or interest tends at once to affect the supply at pre- 
 viously existing prices, and to cause a change in the adjustment of supply and 
 demand. A change in economic rent will not produce this result, because it 
 does not affect the marginal producers — those who are just ready to increase 
 or diminish the supply by entering or leaving a business. A remission of 
 English rents would not change the price of wheat materially, because it 
 would not increase either the amount of land cultivated or the amount raised 
 per acre. Rent is a result of variations in demand rather than a cause of 
 changes in supply. 
 
THE SINGLE TAX. 47 1 
 
 land common property and let this gain accrue to the 
 public (knd nationalization * ) or to leave the title in 
 private hands as at present, but tax economic rent to its 
 full amount in lieu of all other taxes (single tax theory). 
 The latter proposition, in its modern shape," owes its chief 
 importance to the popularity of the writings of Henry 
 George. 
 
 § 522. The first difficulty with the modern single-tax 
 theory arises from the fact that we cannot make any such 
 sharp distinction between rent and profits as it contem- 
 plates. They shade into one another by insensible grada- 
 tions. Though rent is more permanent than profits, we 
 •cannot regard it as enduring for all time, since land may 
 lose value as well as gain it. Though rent is chiefly due 
 to the growth of population rather than to the controlling 
 hand of an individual, we find that the man who goes 
 into land speculation without special skill in serving the 
 public (§ 322) is apt to lose rather than gain. The ma- 
 jority of gains in real estate speculation have been made 
 by men who have developed property at considerable 
 risk, instead of waiting for others to do it. Exceptions 
 there are, and numerous ones ; but the general rule holds 
 good that large returns on real estate have come to men 
 who used their capital rather than to those who kept it 
 idle. Nor has the proportion of failures been a small 
 •one. Superficial observers who see an assured fortune, 
 
 ' Land nationalization is more properly treated here than in chapter xii. 
 because its advocates generally propose to leave the actual improvement of 
 the land to private persons (at most, assisted by advances of government 
 ■credit) and to treat the land as a source of revenue and an instrument of social 
 policy rather than as a field of economic experiment by public authorities. 
 
 ^ The *' Impdt Unique" advocated by the physiocrats, while superficially 
 resembling George's proposed plan, differed from it radically in principle. 
 The physiocrats proposed to tax the surplus of food above what was neces- 
 sary for the maintenance of the laborer ; while George deals with a surplus 
 of market price above expense of production. The Ricardian idea of a dif- 
 ferential gain which is so prominent in the latter proposal had not made itself 
 ielt in the former^ 
 
4/2 GOVERNMENT REVENUE, 
 
 are apt to think that it was so assured from the outset^ 
 and to overlook the fact that the gains, which we see, are 
 survivals amid the wreck of less successful investments 
 which have been forgotten. 
 
 The single tax theory in its more pronounced forms 
 would deprive the man who has made successful invest- 
 ments in real estate of any surplus above the current rate 
 of interest. Would it guarantee him against losses? If 
 it did not do so, it would destroy the motives to invest 
 capital in projects of land improvement. The public could 
 not expect to play with the investor at the well known 
 game of "heads I win, tails you lose." If on the other 
 hand it gave such a guarantee it would find itself com- 
 pelled to make good an amount of loss so large as to do 
 away with the expected gains from the system. Losses 
 on real estate are large enough at present, when each man 
 acts at his own risk ; they would unquestionably be much 
 greater if this risk was shifted to- society as a whole. The 
 amount and the certainty of economic rent are both 
 habitually overestimated by the advocates of the single 
 tax theory. 
 
 § 523. The ethical and political difficulties which stand 
 in the way of the application of the single tax theory are 
 even more pronounced than the economic ones. It is not 
 a legal possibility to appropriate the whole unearned in- 
 crement by any speedy process and to overturn, without 
 compensation, a large number of recognized rights. The 
 existence of law depends on the continuity of its applica- 
 tion. The principle that private property must not be 
 taken without compensation is no mere accidental phrase 
 let fall by courts or constitution-makers. It is an axiom 
 of political science. If the progress of society renders 
 the abolition of an institution necessary, compensation 
 follows as a matter of course.^ A very gradual increase 
 
 ^ The apparent exception in the matter of slavery in the United States was 
 due to the fact that the slaveholders v^'ere in arms against the government. 
 
LAND NATIONALIZATION. 473 
 
 of taxes on economic rent to which the owners might find 
 time to adjust themselves, represents the utmost stretch 
 of possibility in this matter. Now if the fiscal success of 
 the single tax is questionable when applied to the whole 
 unearned increment, past as well as future, much more 
 must it be so if we leave the past undisturbed and deal 
 with the future only. 
 
 This is the critical weakness in land nationalization 
 plans like that with which John Stuart Mill's name was 
 identified. The advocates of this plan proposed that 
 England should buy out the landowners, and appropriate 
 the future gain in value. No fault could be found with 
 the equity of this proposal. But as a fiscal measure it 
 was radically defective. Leaving out of account the 
 inevitable losses due to a scheme of quasi-compulsory 
 purchase, the scheme must have ended in disaster because 
 the lands which it was proposed to buy have fallen in 
 value instead of rising. Nothing could more conspicu- 
 ously emphasize the fallacy of treating economic rent as 
 an assured source of increasing returns, than the fact that 
 Mill was led astray by it. He recognized that improve- 
 ments in the arts tended to lower rent ; but he assumed 
 that increase in population would more than counteract 
 any such tendency. The effect of modern methods of 
 transportation, which make the whole world compete 
 with the English wheat growers, lay outside the scope of 
 his calculation. 
 
 § 524. These arguments do not militate against reforms 
 in taxation which shall carry us in the general direction 
 indicated by the single-tax theory. Wagner, after an 
 investigation of the subject whose thoroughness is worthy 
 of the highest praise, whether we can accept his conclu- 
 sions or not, is inclined to look with favor on public ap- 
 propriation of future increments in the value of city real 
 
 The measure was recognized as one of confiscation, justified only by a state 
 of war. 
 
474 GOVERNMENT REVENUE. 
 
 estate as distinct from agricultural land. Without going 
 so faV as Wagner, most economists would be willing to 
 agree that more taxes should be assessed upon economic 
 rent and less upon improvements. The present prac- 
 tice of assessors in this matter is a good illustration of 
 the misapplication of the principle of taxation according 
 to ability. The holder of unimproved real estate gets 
 no apparent income from it ; he is therefore taxed on only 
 a small percentage of the market value of the property, 
 while the owner of improved land must pay a correspond- 
 ingly heavier tax. This puts a premium on the worst 
 sort of land speculation. The man who serves society is 
 burdened ; the man who stands in the way and tries to 
 profit by others' progress is encouraged and helped. 
 
 § 525. Other forms of direct taxation can be much 
 more briefly dealt with. 
 
 A poll tax is in frequent use ; but it is neither productive 
 nor equitable, and stands as a relic of past methods rather 
 than as a subject of present importance. 
 
 An inheritance tax has much to recommend it in the 
 fact that it takes property for the use of the state at the 
 time when individuals least feel its loss. It is also easy of 
 collection because all estates of deceased persons must 
 come under cognizance of the probate courts, independ- 
 ently of the question of taxation. It is usually so graded 
 as to increase with the remoteness of the heir or legatee 
 from the direct line of kinship with the deceased ; some- 
 times increasing also, notably in a recent French law, with 
 the size of the amounts received by each individual. The 
 chief objections to such a tax are the possibility of evading 
 it by donations before death, and the uncertainty of the 
 amount which it will produce in any given year, which 
 makes it unavailable as a calculable source of immediate 
 revenue. In spite of these objections, an increasing 
 amount of government income is being collected by this 
 method. 
 
INDIRECT TAXES, 475 
 
 Taxes on occupations should be counted among direct 
 taxes, though they approach closely to indirect taxes in 
 some of their characteristics.* They are less used in 
 England and in the United States than in other coun- 
 tries, because of the double taxation which is involved 
 when a man is taxed both on the value of his business or 
 profession and on the fact of exercising it. Of taxes on 
 occupations in the strict sense of the word, the one of 
 most importance in the United States is the fee charged 
 for licenses to sell liquor. In many communities this is 
 not managed primarily for revenue, but as a means of 
 restricting the number of those engaged in the business 
 by reducing the profits to which it gives rise. 
 
 Of greater importance from a fiscal point of view are 
 the various taxes on corporate franchise. The vast 
 amounts of personal property which can be reached in 
 this way and in no other, coupled with the good grounds 
 for special taxation furnished by the rights granted to 
 companies of various kinds, make this a field of great and 
 increasing importance for the tax legislator. A few of 
 the most important practical rules for such assessment 
 have been laid down in connection with the subject of 
 certainty in taxation. The attempt to enter into further 
 details would lead us beyond the scope of this book. 
 
 § 526. Indirect taxes may be divided into three groups: 
 £xcise charges^ export duties^ and import duties. 
 
 Excise or internal revenue charges, when fixed at small 
 amounts, are often hardly distinguishable from fees. 
 When they are large in amount, they constitute a tax on 
 the consumers of the article, so obvious as to be quite 
 unpopular. There is a tendency in the United States to 
 confine the imposition of excise dues to trades connected 
 
 * In some cases they are hardly distinguishable from fees. For instance, 
 the money collected by special taxes on shipping may be regarded as a com- 
 pensation to the government for the special services which it renders the 
 navigator in connection with harbors, lighthouses, and hydrography. 
 
476 GOVERNMENT REVENUE, 
 
 with the production of alcohol ; in the belief that a high 
 price of liquor and restriction in its use is likely to be of 
 advantage to the country. Nations which have a customs 
 tariff for revenue, and not for protection, often use excise 
 duties as a means of preventing the loss of revenue 
 that results from the establishment of a home industry 
 which diminishes the importation of articles on which the 
 tariff is imposed. 
 
 Export dues are unpopular because they put the home 
 producer at a disadvantage in international trade ; and 
 they are falling into disuse on this account.* For the 
 converse reason, taxes on imports are correspondingly 
 popular. The apparent advantage to home industry con- 
 nected with the imposition of such taxes, coupled with 
 the convenience of the national frontier as a place of tax 
 collection, tends to give import duties an over-prominent 
 place in modern fiscal systems. 
 
 § 527. For purposes of revenue, indirect taxes have 
 several disadvantages as compared with direct taxes. We 
 have already seen the difficulty of using them for local 
 purposes. Even when applied for national objects it is 
 hard to predict the amount which they will yield. The 
 process of shifting the tax is often accompanied by a con- 
 traction in the volume of business which makes the return 
 less than was anticipated. In years of depression when pro- 
 ductive taxes are most needed, this contraction often be- 
 comes disastrous. The loss of revenue from indirect taxes 
 in bad years is more conspicuous than in the case of direct 
 taxes and far less easy to remedy. For if the rate of 
 indirect taxation is raised to meet the emergency, the 
 result is sometimes just the opposite of what was in- 
 tended. The experience of the United States in taxing 
 distilled spirits shows that more revenue is often obtained 
 by a low rate than by a high one. The high rate at once 
 
 * For a similar reason countries with an extensive excise system usually 
 refund the tax on articles actually exported. 
 
FINES AND FORFEITURES, 477 
 
 checks consumption and stimulates evasion ; so that any 
 increase in the tax rate beyond a certain moderate figure 
 is more than counterbalanced by a diminution in the 
 amount that pays taxes. 
 
 In the case of high import duties a third cause often tends 
 to increase the loss of revenue still further. If the article 
 is one which can be produced in the home country, 
 domestic production tends to take the place of imports. 
 To avoid this loss, England adopts the principle of plac- 
 ing an excise on the home product substantially equal to 
 the import duty. Most countries, however, find the 
 protective feature a popular one. Some content them- 
 selves with the " incidental " protection afforded by a 
 tariff framed for revenue purposes. Others, instead of im- 
 posing the minimum rates which will secure the required 
 revenue by a low tax on large imports, adopt the maxi- 
 mum rates which will secure this result by a high tax on 
 small imports ; thus adopting a system of duties framed 
 for protection with incidental revenue. 
 
 § 528. Closely analogous to the restrictive taxes just 
 described are the fines'^ and forfeitures exacted from 
 criminals. In former times these constituted a very con- 
 siderable part of the revenue of powerful governments 
 which stretched their criminal jurisprudence to meet their 
 fiscal necessities. This matter has become much less im- 
 portant to-day. The criminal law is narrower in its scope. 
 The offense of high treason, which has been made the 
 pretext for enforcing most extensive forfeitures, is now 
 for obvious reasons much rarer than under the more 
 anarchic conditions of feudal times. Under the well- 
 grounded feeling that it is unjust to make a man's heirs 
 suffer for his misdoings, penalties are made to attach to 
 his person rather than to his estate. He may be com- 
 
 ^ Many of the mediaeval fines were unconnected with criminal law and 
 were theoretically fees for special services, e. g., those connected with the 
 estates of minors and females. 
 
478 GOVERNMENT REVENUE. 
 
 pelled to make good his damages to another individual ; 
 but a payment to the government as a punishment for a 
 crime is often felt to be one which bears too lightly on 
 the individual and too heavily on his family. 
 
 The revenue from confiscation of the property of ene- 
 mies has also ceased to have the importance which it did 
 in feudal times. When war was frequent, and the obliga- 
 tions of international law and justice were unrecognised, 
 such transactions were a source of much profit to the con- 
 queror. To-day such appropriation of private property 
 of enemies as a means of revenue is generally condemned ; 
 and even the demands for contributions from pubHc 
 authorities in a hostile nation are at least theoretically 
 based on the cost incurred by the victor in carrying on 
 the war. The very name " indemnity," which is so fre- 
 quently applied to such contributions, is an illustration of 
 this theory. 
 
 The revenue of governments from failure of property 
 to find an owner {escheat) is of trifling amount where free- 
 dom of testamentary bequest is a recognized principle of 
 law. That which comes from voluntary contributions is in. 
 modern states almost entirely predestined to special uses, 
 and need not be treated as a part of the ordinary revenue. 
 
 § 530. In a well-ordered budget, the taxes will generally 
 be so arranged that the current revenue of the govern- 
 ment is large enough to meet its current expenses. If 
 this is not accomplished, a deficit is carried over to subse- 
 quent years in some form oi public debt. 
 
 If the government simply leaves its bills unpaid, letting 
 the creditors get what security they can, the result is an 
 unfunded or floating debt. If the government pays these 
 bills by issuing formal obligations to pay interest (and 
 usually principal also) at dates distinctly specified, and 
 borrowing money on the basis of these obligations, the 
 debt is said to hQ funded. When these obligations set a 
 date for payment of the principal {maturity) they are 
 
PUBLrC DEBTS, 4/9 
 
 known as bonds. When the principal is paid by the 
 isssue of a new loan, whether at maturity or before it, 
 the operation is known as refunding. 
 
 § 531. A nation cannot permanently rely on loans to 
 meet any considerable part of the ordinary expenses of 
 the government. Creditors will not trust the agents of a 
 treasury which is managed in this way. They will either 
 demand payment in advance, as manufacturing firms 
 habitually do in making large sales to semi-civilized gov- 
 ernments, or they will insist on exercising so much control 
 over the fiscal machinery of the debtor government as to 
 deprive it of a good deal of its freedom in conducting 
 its own affairs. A government cannot compel foreign 
 customers to give it credit without security. It may ex- 
 ercise a pressure on domestic customers which shall tempo- 
 rarily force them to do this ; but the immediate effect of 
 this is a tax on such customers, thinly veiled under the 
 form of a loan. Such a tax, if persisted in, is almost cer- 
 tain to prove disastrous alike to the customers and to the 
 government. It is a discriminating and destructive tax 
 upon the very people on whom the government most 
 directly depends for its current supplies. 
 
 One of the commonest and at the same time most de- 
 structive forms of forced loan is an issue of irredeemable 
 currency. Any gain to the government on a few transac- 
 tions is offset by the greatly increased prices charged by 
 those who deal with it in all subsequent transactions. If 
 such currency is ultimately redeemed, its inflated volume 
 is a long and painful burden on the future taxpayers of 
 the nation ; if it is not redeemed, it carries the govern- 
 ment and many of the citizens into virtual bankruptcy. 
 
 § 532. There are apparently but two cases where re- 
 course to loans is necessary or desirable : i. In an extraor- 
 dinary emergency like war.^ 2. In the case of permanent 
 
 * The only other analogous cases would be those of flood or fire, where 
 present relief must be had at any cost. 
 
48o GOVERNMENT REVENUE, 
 
 productive investments, like state railroads or telegraphs, 
 which are made once for all, and offer the prospect of 
 national and fiscal advantages for a long series of years. 
 
 It is thought by some observers that a loan transfers 
 the cost of a war or an improvement from the present 
 to the future. This view is ridiculed by others who say 
 that the cost of a war is borne by the generation which 
 wages it, and that a loan simply shifts this cost from one 
 group of individuals to another. This misunderstanding 
 arises from the two different sources of the word cost. 
 The cost in the public sense is borne by the people who 
 carry on the war, not by their children. The destruction 
 of wealth is a destruction of present means of enjoyment; 
 the pain is present pain. But the individual cost or ex- 
 pense is shifted. The men who loan money to a govern- 
 ment enable a certain amount of wealth to be devoted to 
 destruction, just as much as if that money were extorted 
 from them by taxation. But they do not part with their 
 individual wealth or property. On the contrary, they 
 retain, in the form of a government bond or other obliga- 
 tion, the right to ample indemnification from the taxpayers 
 of the future. Wealth is destroyed, but property rights 
 and relations are conserved. 
 
 § 533. The great advantage of loans over taxes as 
 means of waging war is that they enable the government 
 to secure unequal contributions of capital from different 
 citizens. The guarantee of repayment does not lessen to 
 any material degree the aggregate amount of things 
 destroyed ; but the government can get those things with 
 far less ill-will, because each citizen does not suspect the 
 treasury of exacting an unfairly large share from him and 
 an unfairly small one from his neighbor. The promised 
 indemnity for the expense makes the cost more easily 
 borne. It becomes possible to secure the aid of foreign 
 capital which could not be obtained by taxation. In fact, 
 the apparent lightness of the burden of loans at the outset 
 
DANGERS OF EXCESSIVE BORROWING. 48 1 
 
 of a war as compared with that of taxes, constitutes one 
 •of the chief dangers of the system. The voluntary contri- 
 butions of the sanguine are exhausted at the beginning, 
 and the government is then compelled to have recourse, 
 under most unfavorable circumstances, to those who are 
 not so well-affected to the national cause. If it calls for 
 additional loans, they are negotiated at very high rates of 
 interest ; if new and burdensome taxes are imposed, they 
 have to be extorted from unwilling hands by a govern- 
 ment whose powers are already overstrained by the diffi- 
 culties of its situation. If a nation goes into a war with 
 its eyes open,* its statesmen will strive to impose the 
 maximum of taxation at the outset, and resort to loans 
 only as the power to bear new taxes becomes exhausted. 
 In this way it can command the maximum of capital, 
 both in the form of taxes on the unwilling, and of loans 
 from the willing ; while it can obtain the borrowed capital 
 at relatively low rates of interest, and thus lessen the 
 iDurden on the future taxpayer. 
 
 § 534. In the case of debts for industrial enterprises 
 Avhich do not promise a commercial return, the same rule 
 should be applied which has been given for war debts. 
 They should be reduced to a minimum ; the only differ- 
 •ence being that the extraordinary expenses which these 
 -enterprises involve should often be met by increase of 
 assessments rather than by increase of taxes. Sewers, 
 harbor improvements, highways, and other things which 
 •cannot pay for themselves commercially, L e.j for whose 
 use the community cannot charge a remunerative price, — 
 should in general be paid for by assessment or not built at 
 all. This may seem a hard rule ; in some cases it really is. 
 
 ' The policy of the United States Treasury at the opening of the Civil 
 War was the reverse of this. It was partly justified, though not wholly so, 
 by the fact that the North did not go into the war with its eyes open to the 
 cost, and would have refused to make sacrifices in 1861 which it was ready 
 to make two or three years later. 
 31 
 
482 GOVERNMENT REVENUE. 
 
 But the enormous number of mistakes made in borrowing 
 money for things which can not and do not pay for them- 
 selves shows how unsafe it is for government authorities 
 to judge whether the public necessity of such enterprises 
 warrants putting heavy burdens on the future taxpayer. 
 
 § 535. Equally bad are the results which arise from 
 borrowing money for enterprises whose commercial profit 
 is speculative. Loans in aid of railroads often promise a 
 return both in public convenience and in fiscal advantage, 
 when in point of fact the road is so tardily completed as 
 to furnish neither. In so conservative a state as Massa- 
 chusetts, a large part of the municipal subscriptions in 
 aid of railroad building have been given to railroads that 
 either were not built at all, or did not become available 
 for use until many years had elapsed. 
 
 § 536. The case of loans for industrial improvements 
 which promise a sure return is different, at least in theory. 
 Instead of raising as large a part of the expense as 
 possible by taxation it is enough if we keep the loan 
 within such limits that the investment is sure to pay 
 interest and make such slight annual contributions to the 
 payment of the principal as are warranted by the char- 
 acter of the business. If the original form of the capital 
 is liable to become antiquated in twenty years' time, its 
 cost and income should be so adjusted that the current 
 returns will extinguish the principal within twenty years. 
 The agency by which this gradual extinction of debt is 
 accomplished is known as a sinking fund} 
 
 § 537. The attempt to apply the sinking fund system 
 
 ^ The detailed working of various sinking fund systems, and the questions 
 involved in the sale or purchase of bonds above par, belong to a treatise on 
 finance rather than to one on general economics. As a rule, it appears to 
 be a wise provision for a government, as well as for a private corporation, to 
 insert in all its bonds a clause stipulating a right to redeem them before 
 maturity, at a price slightly in advance of their par value ; say at no. 
 This does not interfere with the readiness of the public to take the original 
 loan, and it often greatly facilitates the operation of repayment or refunding. 
 
PAYMENT OF PUBLIC DEBTS. 483 
 
 to war debts usually involves a good deal of juggling with 
 figures. Nor has it any natural basis in theory. There 
 is no definite time within which a war debt ought to be 
 repaid, because there is no definite date at which a nation 
 can expect another war. If bonds can be placed on the 
 market at a lower rate of interest when they contain a 
 sinking fund provision, such a clause may wisely be in- 
 serted.* But in general the only safe rule about a war 
 debt is to pay it off as fast as the resources of the country 
 will allow. The slight disturbance to individual investors 
 is more than made up by the reserve strength which free- 
 dom from debt gives the government. Had the United 
 States, in i86i,in addition to its other difificulties, labored 
 under an inherited burden of old war debts, it would have 
 been disastrously weakened. Even in the case of debts 
 for industrial improvement it would generally be better if 
 provision were made for paying them off more rapidly. 
 Very few improvements pay for themselves within the 
 time anticipated. For one case like the Erie Canal, 
 which did better than its promoters expected, we have 
 a hundred cases which fail to pay for themselves at all, 
 and which leave a burden of interest with no real increase 
 of the means of repayment. Witness the enormous in- 
 crease of municipal indebtedness in recent years, and of 
 the burdens connected with it ; burdens so great as to 
 lead to the enactment of arbitrary provisions limiting 
 the amount of debts which municipal authorities may 
 legally contract. 
 
 § 538. It must never be forgotten in matters of public 
 finance that the treasurers of our nations and municipali- 
 ties are dealing with government property and not with 
 
 * The use of terminable annuities by which a man gives a certain amount 
 of capital to the government in consideration of receiving a determinate 
 payment during his lifetime, combines the two advantages of attracting the 
 capital of a certain class of investors, who have no families to provide for, 
 and of providing for the gradual extinction of the obligations of the govern- 
 ment by the death of the annuitants. 
 
484 GOVERNMENT REVENUE. 
 
 public wealth. The fact that capital is in the hands of 
 public authorities does not necessarily make the national 
 wealth any greater than it would be if left in the hands of 
 individuals or corporations. Public authorities may do 
 some good things which private individuals cannot ; they 
 may also do some bad things which private individuals 
 can be prevented from doing. Unless fiscal checks are 
 rigidly applied and fiscal deficits made up by present 
 taxation rather than by promises for the future, the 
 danger of waste far outweighs the probability of good. 
 
INDEX. 
 
 The numbers refer to 
 
 pages. 
 
 Absentee ownership, of land, 130, 
 131 ; of railroads, 174 
 
 Abstinence, 268. See Saving. 
 
 Accidents, insurance against, 59-63; 
 liability for, 350 
 
 Accounts, income and capital, 5 ; 
 as form of credit, 234 ; deprecia- 
 tion, 292 
 
 Accumulation, 46, 96 ; motives for, 
 116 ; excessive, 147 ; increase of, 
 340, 341 
 
 Acworth, W. M., 151 
 
 Adams, C. F., 151 
 
 Adams, H. C, 397 
 
 Administrative functions of govern- 
 ment, 392-403 
 
 Ad valorem duties, 457 
 
 Advertising, 70, 384 
 
 Advisory commissions, 177 
 
 Agencies, irresponsibility, 155, 156 ; 
 expense, 385 
 
 Agricultural labor, early history of, 
 35 ; under English poor-law, 54 ; 
 advances to, 57-59 ; burdens on, 
 367, 368 ; hours of, 406, 407 
 
 Agriculture, development of, 127, 
 128 ; characteristics, 151, 152 
 
 Allotments, 58, 59 
 
 Altruism, 14 
 
 American Civil War, 37, 440, 481. 
 See United States 
 
 Anarchists, 355 
 
 Annuities, 483 
 
 Appreciation of gold, 210-214 
 
 Apprenticeship, statutes of, 368 
 
 Arbitrage, 105, 241 
 
 Arbitration of labor disputes, 357- 
 
 362 
 Aristotle, 21 
 
 Art of political economy, 2, 12 
 Ashley, W. J., abridgment of Smith, 
 
 10 ; on English Economic History, 
 
 35, 65, 121, 136 
 Assessment of taxes, 452-457 
 Assessments, 447-449, 481, 482 
 Associations of productive labor, 58 
 Assurance, contract of, 137 
 Atkinson, Edward, 40, 339, 341, 385 
 Attachment of wages, 122, 143 
 Australian gold, 209 
 Austria, workmen s insurance in, 62 
 Austrian school, 80, 93, 274 
 d'Avenel, French economic history, 
 
 34, 189 
 
 Bagehot, Walter, 232 
 
 Balance of trade, 427-429 
 
 Bank, Banking, 235-259 ; notes, 192, 
 
 247-259 ; checks, 193, 241-247 ; 
 
 cooperative, 386-390 
 Bank of England, 191, 252, 253, 257 
 Bank of France, 255 
 Bank of United States, 255 
 Bargaining, 72, 84 ; between labor 
 
 and capital, 366, 367 
 Barter, 71, 233 
 Bastable, C. F., 447 
 Bastiat, F., 15 ; on interest, 137 
 
 485 
 
486 
 
 INDEX, 
 
 Bentham, Jeremy, i6 
 
 Bill broker, 244 
 
 Bill of exchange, 239-244 
 
 Bimetallism, 208-224 
 
 Birth rate, 42, 43 
 
 Bland Act, 222 
 
 Boehm-Bawerk, E. v., on capital and 
 
 interest, 264, 269, 274 
 Bonar, J., on Malthus, 26 
 Borrowed capital, speculation on, 
 
 112 
 Bottomry, 280 
 Bounties, 135, 424 ; to shipping, 
 
 442, 443 
 Boycott, 359, 360 
 Brassage^ 187 
 Brassey, T., on wages, 303 
 Brentano, 352 
 Briggs collieries, 374 
 Budget, 449, 478 
 Building societies, 387-390 
 Bullion certificates, 191 
 Bureaus of information to labor, 59 
 Bye-products, 89 
 
 Cairnes, J. E., 64 ; on demand, 74, 
 
 79. 332 
 
 California, currency in civil war, 
 189 ; gold, 209, 219 
 
 Canada, banking in, 254 
 
 Canals, 394-396 
 
 Capital, contrasted with income, 5, 
 27 ; different meanings, 6, 7, 312, 
 313 ; origin of, 30 : as a preven- 
 tive check to population, 49, 50 ; 
 needed for legitimate speculation, 
 III ; merits and defects of sys- 
 tem, 1 18-120 ; investment of, 121- 
 150; fixed, 125, 151; combination 
 of, 151-179 ; money as, 181 ; and 
 interest, 264-281; effect on wages, 
 311-318 ; conflicts with labor, 336 
 -369 ; taxation of, 463-464 
 
 Capital account, 5 
 
 Capital goods, 7 
 
 Capitalization, 138 
 
 Carey, H. C, on rent, 293 
 
 Carrying trade, 441-443 
 
 Centralized banking, 251 
 
 Certainty in taxation, 451 
 
 Charity, 51-57 
 
 Cheap labor, 328-333 
 
 Checks to population, 41-51 
 
 Checks (bank), 193, 241-247 
 
 Chevalier, M., 422 
 
 Children, employment of, 345-349, 
 405, 409, 410 
 
 Chinese immigration, 420, 421 
 
 Circulation, 192-197, 296 
 
 Cities, growth of, 337, 407 ; death 
 rate, 347 ; taxation of real estate 
 in, 473, 474 
 
 Civil service reform, 402 
 
 Clark, J. B., on capital, 7 ; on im- 
 puted value, 274 
 
 Clearing house, 235-237, 257, 258 ; 
 railway, 158 
 
 Coal trade, 344 
 
 Cobden, Richard, 422 
 
 Cohn, G., on railroads, 151 ; on 
 finance, 447 
 
 Coin certificates, 191, 259 
 
 Coinage, 185 ; free, 1S6 
 
 Colbert, 450 
 
 Collectivism, 355 
 
 Colonization, 445, 446 
 
 Combination, 73, 85, 86, 90 ; of 
 speculators, 107, 108 ; of capital, 
 1 51-179 ; commercial and indus- 
 trial, 159 ; of labor, 352 ; laws 
 against, 352-354 ; international, 
 438 
 
 Comfort, standard of, 48 
 
 Commerce, 65, 427 
 
 Commercial competition, 87 
 
 Commercial paper, 243, 244 
 
 Commercial crises, 295-299. See 
 Crises. 
 
 Commissions of experts, 177, 362 
 
 Communists, 355 
 
INDEX. 
 
 487 
 
 Commutation, of labor dues, 35 ; of 
 
 profits, 269-271 
 Compensation, 149 
 Competition, 73-96 ; commercial and 
 
 industrial, 87 ; of capital, 117, 118, 
 
 264-266 ; in large industries, 152, 
 
 156, 161, 162; of laborers, 364- 
 
 368, 412 ; international, 430-432 ; 
 
 effect on incidence of taxes, 461, 
 
 467-469 
 Comte, Auguste, 18 
 Conciliation, 361, 362 
 Confiscation, 477 
 
 Conservatism, necessity for, 32, 33 
 Consolidation, 158, 159 
 Consumers' cooperation, 382-389 
 Consumers' surplus, 90, 91, 266 
 Consumption, 318-335 ; diversified, 
 
 66, 334 ; intelligent, 70, 335 ; 
 
 effect on demand, 79 ; affected by 
 
 tariff, 438, 439 
 Consumption loans, 270 
 Contract labor, 411 ; convict, 413- 
 
 417 ; foreign, 417, 418 
 Contracts, for future delivery, 108, 
 
 160 ; standard of, 181 
 Control of capital, 117, 269, 270 
 Convict labor, 413-417 
 Cooperation, 379-390 
 Copper syndicate, 85, 163, 164 
 Copper tariff, 436 
 Copyright, 134, 135 ; international, 
 
 444 
 Com rent, 182 
 Corners, 107, 160 
 Corporations, 143-146; taxation of, 
 
 454, 462, 475 
 Cossa, L., I 
 Cost, of labor, 302-304 ; of services, 
 
 305 
 Cost of production, 123, 86, 94 ; 
 
 difficulty of ascertaining, 169, 436; 
 
 of precious metals, 184, 211 
 Credit, 181, 232-263 ; advances to 
 
 laborers, 56, 58, 381, 382 
 
 Creditors, 206-213, 227-230 
 
 Criminal classes, 48, 51 
 
 Crisis, Crises, 214, 250, 252, 258, 
 
 295-299, 343-345 
 Currency, 193 ; and interest, 277, 
 
 278 
 Current expenses, 153, 154 
 Custom and prices, 65, 69, 70, 73, 
 
 83-85 ; and wages, 307, 331 
 Customs duties, 422-441, 457 
 
 Dabney, W. D., 151 
 
 Darwin, 18, 19 
 
 Death rate, 42, 43 
 
 Debasement, 188 
 
 Debtors, 206-213, 227-230 
 
 Debts, foreign, 426 ; in taxation, 
 
 453, 454 ; public, 478-484 
 Deduction, deductive methods, 23- 
 
 25 
 Degeneration, 22, 46 
 Demand, 74-80, 87 ; curve of, 77, 
 
 88, 326 ; reciprocal, 79, 332 ; for 
 
 labor, 308-320 
 Demonetization of silver, 217, 220, 
 
 221, 226 
 Density of population, 43, 45 
 Dependent classes, 51 
 Deposits, 244-248 
 
 Depreciation account, 170 ; depre- 
 ciation of money, 190, 210-214 ; 
 
 of capital, 292 
 Depression of trade, 295-299. See 
 
 Crisis 
 Desire and demand, 75, 79 
 Destruction of wealth, 31, 308-310 
 Deterioration, 80, 81 
 Differential gain, 285-291, 304, 468, 
 
 469 
 Differential rates, 157 
 Diminishing return, law of, 43, 154, 
 
 155 
 Direct expense, 173 
 Direct taxes, 459-475 
 Directors' responsibility, 178, 179 
 
488 
 
 INDEX. 
 
 Discount, 244, 246 ; of product by 
 
 capitalist, 274, 301 
 Discriminating rates, 155, 156, 159, 
 
 178 
 Disutility, 123- 
 
 Distribution. See Profits, Trans- 
 portation, Wages 
 Diversification of industry, 433 
 Dividends, limitation of, 166-168 
 Division of labor, 66, 350, 351 
 Division of traffic, 156-158 
 Dollar, 220, 221 
 Domestic economy, 44 ; domestic 
 
 system of industry, 357, 413 
 Domestic exchange, 237, 238 
 Domestication of animals, 27 
 Domination substituted for annihila- 
 tion, 20, 21, 31, 32 
 Donisthorpe, W., i 
 Doses of capital, 274, 275 
 Double taxation, 451 
 Drage, G. , on the unemployed, 26 
 Dunbar, C. F. , on banking, 232 
 Duration of labor power, 302 
 Duties on imports, 422-441, 457 
 Dynamic conceptions and problems, 
 5, 23, 24 
 
 Earnings, gross and net, 456 
 
 Economic history, 24 
 
 Economic man, 16 
 
 Economics, origin of, 2 ; general 
 
 history of, 8-18 ; use of term, 12, 
 
 13 ; methods, 23-25 
 Economist^ index numbers, 194 
 Economy of consumption, 328, 329 
 Education, 69, 334, 335 
 Eflfertz, O., 31 
 Efficiency and wages, 303, 328, 329, 
 
 365 
 Egoism, 14 
 
 Eight-hour movement, 405-409 
 Elasticity of currency, 245 
 Electricity, 170, 171 
 Ely, R. T., on labor, 336 
 
 Emancipation, 35-40 
 
 Emergency relief, 55, 56 
 
 Eminent domain, 149 
 
 Emotion in economics, 17, 49 
 
 Employers' liability, 350 
 
 Enclosures, 3 
 
 Engel's law, 325 
 
 England, poor relief in, 51, 53-55 % 
 speculation in, no; limited lia- 
 bility in, 145 ; directors' responsi- 
 bility in, 178, 179 ; mint, 186 ;: 
 Bank of, 191, 252, 253, 257 ; 
 factory legislation, 349, 350; labor 
 organization, 352-356 ; coopera- 
 tion, 383 ; tariff policy, 422, 423 ; 
 shipping, 441-443 ; colonial policy,, 
 445, 446 
 
 Equality, social, 41 
 
 Equality in taxation, 451, 465 
 
 Equalization of supply, 106 
 
 Equation of supply and demand^ 
 76, 265 ; of labor, 306 
 
 Escheat, 478 
 
 Ethical selection, 49 
 
 Ethics and economics, 18-25, 91-96, 
 120 
 
 Exchange, of goods and services, 70 
 -96 ; domestic and foreign, 237- 
 241 
 
 Excise, 475, 476 
 
 Exemptions from taxation, 46 5 > 
 466 
 
 Exhaustion of soil, 433, 436 
 
 Expenditure and wages, 308-310 
 
 Expense of production, 88 ^ 
 
 Export dues, 476 
 
 Exports, 424-427 
 
 Expropriation, 149 
 
 Fabian Society, i, 409 
 Factory acts, 17, 69, 349, 350 
 Factory insurance, 60-62, 385, 386 
 Factory system, 336-363 
 Falkner, R. P., 194 
 Familistere, 2^2 
 
INDEX. 
 
 489 
 
 Family property, 32 ; family respon- 
 sibility, 44-51 
 
 Famine, 39, 40, 46 
 
 Farrer, T. H., 151, 167 
 
 Farmers' Alliance, 262 
 
 Farms, value of, 293 
 
 Fawcett, H., on pauperism, 26 
 
 Fees, 121, 447-449 
 
 Feudal system, 29, 34, 64, 127 
 
 Final utility, 79 
 
 Fines, 477 
 
 Fire insurance, 99; cooperative, 385, 
 386 
 
 Fisher, Irving, 5 
 
 Fixed capital, 125, 152-155, 291- 
 
 295, 345 
 Food, as a measure of wealth, 9 ; 
 
 supply of, 43-45 • 
 Foreign exchange, 238-241 
 Foreign trade, 427-429, 441-443 
 Forests, 131, 394, 436 
 Forfeitures, 477 
 Fractional currency, 188 
 France, and the Malthusian theory, 
 
 50 ; railroad system of, 162, 168 ; 
 
 mint, 186 ; bimetallism in, 219, 
 
 220 ; Bank of, 254 ; assignats in, 
 
 262; courts of conciliation in, 362; 
 
 cooperation in, 379 ; tariff policy, 
 
 422, 423 ; shipping, 443 
 Franchise tax, 475 
 Free coinage, 186 ; of silver, 219- 
 
 221, 224-226 
 Free communities, 28, 29 
 Freedom, 22 
 Free labor, 37, 44 
 Free trade, 66, 422, 423, 431 
 Freights, ocean, 429 
 Friendly societies, 61, 386 
 Funding, 478 
 Futures, 108 
 
 Gain-sharing, 378 
 Gambling, 97, 98, T06-108 
 Gasworks, 154, 170 
 
 George, Henry, on Malthus 45 ; on 
 capital 113, 114, 137; on land 
 ownership, 150, 288,292 ; single- 
 tax theory, 468-473 
 
 Germany, workmen's insurance in, 
 60-62 ; usury laws of, 140 ; rail- 
 road advisory boards, 177 ; bank- 
 ing in, 254, 255 ; state railroad 
 management in, 4CK), 401 ; tariff 
 policy, 423 
 
 Giddings, F. H., on sociology, 26 
 
 Gide, C, 424 
 
 Gilbert's Act, 54 
 
 Gilds, 352, 367, 379 
 
 Gilman, N. P., 370 
 
 Goethe on human evolution, 22 
 
 Gold, stock of, 183 ; standard, 190 ; 
 scarcity of, 204, 224 
 
 "Gold and Silver Commission," 
 208 
 
 Gold speculation, 109 
 
 Goschen, G. J., 232 
 
 Government, management of indus- 
 try by, 390-403; historic functions 
 of, 391-393 ; revenue of, 447-484 
 
 Government insurance, 61 
 
 Government notes, 259-263 
 
 Great Britain. See England. 
 
 Gresham's Law, 189, 218 
 
 Ground rent, 287 
 
 Groups, as units of natural selection, 
 19-22 ; non-competing, 330-332 
 
 Gunton, G., 434 
 
 Hamilton, Alexander, 242 
 
 Hawley, F. B., 342 
 
 Health, public, 67 
 
 Hegel, influence of, 18 
 
 Heredity, 19 
 
 Historical method. Historical school, 
 
 23-25 
 Hobson, J. A., 336 
 Holyoake, G. J., 370 
 Home market, 428-430 
 Homes of operatives, 68, 347 
 
490 
 
 INDEX, 
 
 Hours of labor, 320-325 ; voluntary 
 reduction, 327 ; movements for 
 forced reduction, 343, 349, 403- 
 410 
 
 Housing of poor, 67, 68 
 
 Howell, G., on labor, 336 
 
 Human evolution distinguished from 
 animal, 21 
 
 Hunting stage, 26, 27, 45 
 
 Immigration, 330, 331, 405, 417- 
 422 
 
 Imports, 424-427 
 
 Imprisonment for debt, 143 
 
 Improvements, effect of, 4 ; public, 
 481-484 
 
 Imputed value, 274, 275 
 
 Incidence of taxation, 458-461 
 
 Income account, 6 
 
 Income contrasted with capital, 5, 
 340, 341 
 
 Income tax, 463-467 
 
 Increasing return, 154, 155 
 
 Index numbers, 193-195 
 
 Indirect taxes, 459-463, 477-479 
 
 Individual wealth, 3, 4 
 
 Individualism, 14, 17, 18, 22, 165 
 
 Industrial competition, 87 ; indus- 
 trial speculation, 11 2-1 20 
 
 Inequality of conditions, 41, 94, 329 
 
 Infanticide, 46 
 
 Infant industry, 433-440 
 
 Inflation, 190, 228-231 ; bank-note, 
 249, 250 
 
 Inheritance tax, 474 
 
 Insurance, 99, 100 ; of workmen, 
 60-63 ; and business profits, 288, 
 289 ; manufacturers', 349, 385 ; 
 cooperative, 385, 386 
 
 Intellectual morality, 49 
 
 Interest, 267-281; what it measures, 
 6 ; system of, 136-143 ; on short- 
 time paper, 200, 201 ; and cur- 
 rency, 212 
 
 Internal revenue, 475, 476 
 
 Interstate Commerce Commission, 
 177 ; Interstate Commerce Law, 
 178 
 
 Investment of capital, 1 21-150 
 
 Ireland, rents in, 131 
 
 Iron trade, 344 
 
 Irredeemable paper, 192, 229-231 
 
 Irregularity of employment, 302 
 
 Irrigation, 394 
 
 Italian railroad commission, 402 
 
 Jevons, W. S., on utility, 64, 80; 
 on money, 180 ; on labor, 332, 
 336, 360 ; on government owner- 
 ship of monopolies, 397-399 
 
 Joint cost, 89, 171-173 
 
 Joint-stock companies, 143-146 
 
 Judicial rent, 131 
 
 Keynes, J. N., i 
 
 Knies, K., 5 
 
 Knights of Labor, 355, 359, 360 
 
 Labor, origin of, 27, 28 ; of slaves, 
 28-30 ; relation to property, 30, 
 34; emancipation of, 35-40; right 
 to, 54 ; public employment for, 
 56-59 ; colonies, 58 ; division of, 
 66, 329-331, 350, 351 ; combina- 
 tion of, 160, 352 ; price of, 213 ; 
 remuneration of, 301-333; de- 
 mand for, 308-320 ; variation in 
 character, 326-333 ; and machin- 
 ery, 336-369; organization, 352- 
 369 ; legislation, 349, 350, 404- 
 440 
 
 Laborers, advances of state credit 
 to, 58, 381, 382 
 
 Labor-saving machinery, 338, 339 
 
 Laissez faire^ 12 
 
 Land, improvement, 57; tenure, 127- 
 133 ; speculation, 132 ; grants of 
 public, 135, 136 ; taxation, 453, 
 454, 471, 472 ; nationalization, 
 468-474 
 
INDEX. 
 
 491 
 
 Lassalle, F., 58, 381, 382 
 
 Latin Union, 219, 220 
 
 Laughlin, J. L., 180 
 
 Law, meaning of, 13 ; respect for, 
 
 33 
 
 Law of diminishing return, of popu- 
 lation, etc. See Diminishing re- 
 turn, Population, etc, 
 
 Leclaire, 373 
 
 Legal tender, 185, 262 
 
 Legislative fixing of rates, 84, 85, 
 168, 173-175 
 
 Legitimate speculation, 100-106, 120 
 
 Leisure, 321 
 
 Leroy-Beaulieu, 447 
 
 Levi, Leone, 404 
 
 Liability of employer, 350 
 
 Liberty, 11, 14, 22 
 
 Life insurance, 99, 138, 139, 386 
 
 Limited liability, 143-146 
 
 Liquor traffic, 67, 334, 335 
 
 List, F., 434 
 
 Living wage, 363-366 
 
 Loan associations, 387-390 
 
 Loans, 136-143, 269-274; industrial, 
 229, 230 ; of banks, 243, 244 ; 
 government, 478-484 
 
 Local banks, 250, 251 
 
 Local discrimination, 178 
 
 Local taxation, 462 
 
 Localization of poverty, 32, 49 
 
 London, a clearing house for inter- 
 national trade, 241 
 
 Longe, on wages, 316 
 
 Loria, on social evolution, 26 
 
 Losses on fixed capital, 288-299 
 
 Luxury, 333, 334 
 
 Machinery, over-production of, 147 ; 
 
 effect on interest, 279 ; effect on 
 
 labor, 336-369 
 MacCulloch on capital and wages, 
 
 313,315 
 MacLeod, H. D., 232, 242 
 Maintenance account, 174, 292 
 
 Malthus, Essay on Population, 41 
 
 Malthusian theory, 41-51 
 
 Man, struggle for existence in, 19- 
 
 23 
 
 Management, earnings of, 267, 26S 
 
 Manor, 64, 65 
 
 Manufacturers' insurance, 385, 386 
 
 Margin of cultivation, 305 
 
 Marginal utility, 79 ; marginal units 
 of labor and capital, 274, 275, 289 
 
 Margins, 107, no 
 
 Market, 74, 428-430 ; economy of 
 large, 127 
 
 Market price, 75-87 
 
 Marriage as preventive check to 
 population, 50 
 
 Marshall, Alfred, on price, 64 ; on 
 monopoly, 151 
 
 Marx, Karl, on capital, 7, 121 ; on 
 value, 95, 343; on profits, 288 ; on 
 hours of labor, 343 
 
 Massachusetts, limited liability in, 
 145 ; railroad commission, 177 ; 
 state bank-note issues, 255 ; fac- 
 tory legislation, 349, 350, 408 
 
 Matriarchate, 46 
 
 Mayo-Smith, R., on emigration, 404 
 
 Mechanics' lien, 122 
 
 Mediaeval Europe, economic changes 
 in, 34-36 ; labor in, 307 
 
 Medium of exchange, 181 
 
 Menger, C, on money, 182 ; on im- 
 puted value, 274, 332 
 
 Mercantile system, 8, 9, 423-426 
 
 Merchant marine, 441-445 
 
 Metallic money, 183 
 
 Metayers, 36, 131 
 
 Methods of enquiry, 23-25 
 
 Migration, 417-422 
 
 Military government, 401 
 
 Military necessity, 36 ; arguments 
 for protective tariff, 440 
 
 Mill, J. S., on liberty, 11 ; on joint 
 cost, 89 ; on money, 180 ; on 
 credit and prices, 246 ; on wages, 
 
492 
 
 INDEX. 
 
 316 ; on international demand, 
 332 ; on land nationalization, 473 
 
 Mining claims, 128, 129 
 
 Mint, 186 
 
 Money, 180-231 ; no measure of 
 public wealth, 3, 8, 9 ; character- 
 istics, 71 ; of account, iSi ; paper, 
 190 ; value of, 193 ; efforts to 
 economize, 232—234 ; accumula- 
 tion of, 425 
 
 Money lenders, 39 
 
 Monometallism, 211-224 
 
 Monopoly, 73, 84, 88 ; legislative 
 grants of, 133-135 ; of combined 
 capital, 159-164 ; effect on theory 
 of profits, 285 ; of labor, 367, 
 368 ; in hands of government, 
 396-403 ; effect on prices, 448 ; 
 taxation of, 467-474 
 
 Morley, John, on compromise, 11 
 
 Miihlhausen, operatives' dwellings 
 in, 68 
 
 Municipal insurance, 3S6 ; manage- 
 ment of industry, 402 
 
 Napoleon III., 422, 444 
 
 National banks of the United States, 
 
 256-257 
 National income, wealth, etc. See 
 
 Public income, wealth, etc. 
 Nationalists, 355 
 Nationalization of property, 5, 393- 
 
 403 
 
 Natural law, 13 
 
 Natural rights, 148 
 
 Natural selection, 19, 51 ; of capi» 
 talists, 115, 119, 361 
 
 Natural value, 148 
 
 Navigation acts, 441 
 
 Negative rent and profit, 288-298 
 
 Negro, 37, 38 
 
 Net profit, 267, 285-291, 456 
 
 Newcomb, S., on capital, 5 ; on in- 
 dustrial circulation, 296 
 
 New countries, profits in, 281-283 
 
 Newmarch, W., 232 
 
 New unionism, 355, 356 
 
 New York Clearing House, 237 ; 
 
 loan certificates, 257 
 New York State banking law, 255 
 Nicholson, J. S., 180 
 Nihilists, 355 
 Nitti, on Malthus, 48 
 Nominal wages, 123, 301, 302, 309- 
 
 311, 425 
 Non-competing groups, 330-333 
 Normal price, 87-91, 93 ; of gold, 
 
 202-206 
 
 Occupancy, 30 
 
 Occupations, choice of, 95, 330-332 ; 
 
 taxes on, 474, 475 
 Organization of labor, 352-369 
 Organized charities, 55, 56 
 Overcrowding, 68 
 Over-production, 294-296, 344, 345 
 
 439 
 Oyster-beds, property in, 129, 130 
 
 Pain of labor, 322, 323 
 
 Palgrave on prices, 194 
 
 Panics, 295-299. See Crises. 
 
 Paper money, 190, 229-231, 262, 263 
 
 de Parieu, E., 447 
 
 Partnership, 144 
 
 Pastoral stage, 26-28 
 
 Patents, 133, 134 
 
 Paternalism, 12 ; of employers, 372 
 
 Patten, S. N., on consumption, 70, 
 322, 323 ; on rent, 293 ; on pro- 
 tection, 439 
 
 Pauper, Pauperism, 48, 51-56 ; im- 
 migration, 418, 419 
 
 Peasants, 307 
 
 Peel, Robert, Bank Act, 252, 253, 
 257 ; corn law repeal, 422 
 
 Pensions, 62, 63, 395 
 
 Physiocrats, 9 
 
 Piece-work, Piece-wage, 301-304, 
 316, 317 
 
INDEX. 
 
 493 
 
 Place value, loo 
 
 Pleasure and pain, balance of, 322, 
 
 323 
 
 Political corruption and tariff, 440 
 
 Political economy, art of, 2, 12, 13 
 
 Political money, 230 
 
 Poll tax, 474 
 
 Pools, 156-158 
 
 Poor-law, English, 53-55 
 
 Poor relief, 53-58 
 
 Population, theory of, 41-51 ; move- 
 ments of, 57, 337, 407, 417-422 
 
 Possession and property, 30, 31 
 
 Poverty, 39-63, 330-335 
 
 Preventive checks to population, 42, 
 48-50 
 
 Price, 70, 72-96 ; general level of, 
 193-198, 246, 249; public, 447- 
 
 449 
 Prison labor, 413-417 
 Private wealth, 3, 4, 10, 11. See 
 
 Property 
 Producers' cooperation, 379-382 
 Producers' surplus, 90, 91 
 Production, cost of, 123 ; process 
 
 of 125-136 
 Professional charges, 84, 364, 365 
 Profits, 124, 264-300 ; justification 
 
 of, II, 288 ; in trade, 103-105 ; 
 
 limitation of, by law, 166-168 ; 
 
 net, 267, 285-291 ; fall in, 339-342 
 Profit-sharing, 373-378 
 Progress, effect on investments, 292, 
 
 293 
 Progressive taxation, 465, 466 
 Prohibition of liquor traffic, 67 
 Property, 2-4 ; origin of, 30-32 ; in 
 land, 127-133 ; corporate, 143- 
 146 ; limitations on, 148-150 ; gov- 
 ernment, 393-403 
 Property tax, 463-465 
 Protection, 135, 422-441, 477 
 Proudhon, P. J., 15 
 Prussian railroads, 400, 401 
 Public health, 67 
 
 Public income, 4-8 
 
 Public land policy, 135, 136, 448 
 
 Public policy and gambling, 98 
 
 Public property, 4 
 
 Public schools, 67, 334, 335 
 
 Public wealth, 2, 3, 7, 8 
 
 Public works, 56-58, 393-396, 481- 
 
 484 
 Publicity, 176-179, 348 
 
 Quantity-theory of money, 197, 246, 
 247 
 
 Rae, John, i, 40, 342 ; on hours of 
 labor, 404 
 
 Railroads, 154-158, 162, 171-179 ; 
 relations to labor, 357 ; govern- 
 ment ownership, 398-400 
 
 Rates, regulation of, 173-175 
 
 Real estate as public wealth, 3, 4 ; 
 as property, 127-133 ; losses on, 
 269-274 ; taxation, 453, 468-473 
 
 Real wages, 123, 301, 302, 309-311 
 
 Reciprocity, 444 
 
 Recoinage, 185 
 
 Redeemable paper, 191 
 
 Refunding, 477 
 
 Rent, in mediaeval history, 35 ; 
 economic, 88, 267, 285-291 ; and 
 tariff, 434, 436 ; taxation of, 468- 
 473 ; relation to price of products, 
 470 
 
 Rent charges, purchase of, 137 
 
 Reserves, 181, 198-201 ; of banks, 
 241-243, 249 
 
 Residual theory of wages, 317-320 
 
 Retail markets, 74 
 
 Revenue, public, 447-484 
 
 Ricardo, D., on money, 232 ; on 
 rent, 287 ; on wages, 315, 316 
 
 Ricca-Salemo on interest, 286 
 
 Risk, compensation for, 97-100 ; 
 bona Jide, III ; in productive in- 
 dustry, 113-116 ; relation to inter- 
 est, 279-283 
 
494 
 
 INDEX, 
 
 Roads, 394 
 
 Rochdale pioneers, 383 
 Rogers, J. E. Thorold, 406 
 Rome, economic conditions in, 33 
 Russia, emancipation in, 36-39 ; 
 usury in, 140 ; coinage of pla- 
 tinum in, 184 
 
 Safety-fund system, 255 
 Salaries, 121 
 
 Sanitary regulations, 67, 413 
 Saving, motives for, 138 ; excess of , 
 
 147 ; and taxation, 463, 464 
 Savings banks, 138, 139, 242 
 Schoenberg, " Handbuch," 447 
 Schoenhof, J., on wages, 303 
 Schloss, D. F., 370, 378, 382 
 Schulze-Delitzsch, 387 
 Schulze-Gaevernitz, 303, 336 
 Scotland, banking in, 253, 254 
 Security and interest, 279-2S3 
 Seigniorage, 187 
 Seligman, E. R., 447-449 
 Sensitive commodities, 327 
 Sentiment, in economics, 17, 18 ; 
 
 effect on prices, 73, 74 
 Serfdom, 29, 34 
 Services, included in wealth, 342 ; 
 
 price of, 431 
 Settlement, Acts of, 53, 418 
 Share rents, 35 
 Shaw. G. B., I 
 Shearman on taxation, 287 
 Sherman act, 222, 223 
 Shifting of taxes, 458-461 
 Shipping, 441-443 
 Short hours, 405-409 
 Short-time loans, 200, 201 
 Silver in United States, 190, 219- 
 
 233 ; certificates, 191 ; ratio to 
 
 gold, etc., 208-224 
 Single tax, 468-474 
 Sinking fund, 482, 483 
 Slavery, relation to public wealth, 
 
 3 ; history of, 27-39 ' 
 
 Sliding scale, 363, 364 
 Smart, W., 363, 410 
 Smith, Adam, general work, 10 ; on 
 corn rents, 182 ; on protection, 
 404 ; canons of taxation, 450, 451; 
 on direct taxes, 460 
 Social democrats, 355 
 Social standards, 48, 49, 69 
 Socialism, 16-18, 22, 165, 355, 387 
 Socialistic theory of value, 93-96 ; 
 
 of wages, 308 
 Soetbeer, A., 194 
 Southern States, slavery in, 37, 38, 
 
 64 
 Specialization, 350, 351 
 Specific duties, 437, 457 
 Speculation, 100-120, 123 ; in land, 
 132, 471, 472 ; effect of inflation 
 on, 231 
 Speculator, 80 
 Speed of work, 407, 408 
 Spencer, H., The Man versus The 
 
 State, 18 
 Standard of life, 48, 69, 305, 306 
 Standard of value, 205-223 
 Standard Oil Company, 160, 163 
 State, its relation to industry, 11, 12, 
 
 390-403 
 State credit, 58, 381, 382 
 Static conceptions and problems, 5, 
 
 23, 24 
 Statistics, science of, 13 
 Steel rails, 437 
 Stock watering, 168 
 Stoppage at source, 455 
 Street railroads, 173 
 Strikes, 352-357 
 Struggle for existence, 19-23 
 Subcontractor, 411-413 
 Suffolk system, 255 
 Subjective value, 91 
 Subsidiary coin, 188, 224 
 Subsidies, 135, 442, 443 
 Sumner, W. G., i 
 Sumptuary laws, 66 
 
INDEX, 
 
 495 
 
 - — Supply, 74, 87 
 
 Surplus value, Marx's theory, 343 
 Survival, 18-23 
 Sweating system, 411-413 
 Switzerland, taxation in, 466 
 Symmetallism, 225 
 
 Tabular standard, 207 
 
 Tariff, customs, 135, 422-441, 457 
 
 Taussig, F. W., on silver, 224 ; on 
 wages, 301 ; on tariff history, 404 
 
 Taxation, Taxes, 447-484 ; of unim- 
 proved land, 132 ; exemptions 
 from, 135, 453, 454, 465, 466 ; in 
 railroad rates, 173 
 
 Telegraph, 154, 170 
 
 Telephone, 170, 171 
 
 Tenant farms, 130, 131 
 
 Tenement houses, 67, 68 
 
 Thornton, on labor, 316 
 
 Time value, lor, 105 
 
 Time-wages, 302-304 
 
 Tolls, 172 
 
 Tooke, Thomas, 232 
 
 Total utility, 79 
 
 Towns, free, 34 
 
 Trade, ethics of, 10, 11, 94 
 
 Trade option, 409 
 
 Trades unions, 24, 352-369 
 
 Transportation, 104, 126, 154, 171- 
 179, 337, 338; canal, 394-39^; 
 railroad, 399-400 
 
 Treasury notes, 260-262 ; United 
 States, 222, 223 
 
 Truck, 122 
 
 Trust funds, taxation of, 452 
 
 Trusts, 158 
 
 — - Uu der-consumption, 147, 148 
 
 Unemployment, 405, 406 
 
 Unions of labor, 352-369 
 
 United States, conditions affecting 
 population, 45, 50 ; public land 
 grants, 135, 136 ; lack of directors' 
 responsibility in, 178, 179 ; Treas- 
 
 ury Department reports, 180 ; gold 
 contracts in, 182 ; mint, 186 ; 
 currency conditions, 190, 191 ; 
 Senate Committee on Wages and 
 Prices, 194 ; silver coinage in, 
 220-223 ; currency in Civil War, 
 228, 229 ; banks, 251 ; national 
 banking law, 243, 256, 257, 261, 
 262 ; railroad profits in, 28 1, 282 ; 
 labor movements in, 353-355 ; 
 cooperation in 380, 384 ; govern- 
 ment ownership of monopolies, 
 400-402 ; laws restricting immi- 
 gration, 419, 420 ; tariff policy, 
 422, 423, 435-438 ; shipping, 440, 
 442, 443 ; reciprocity, 444 ; land 
 policy, 448 ; war loans, 481 
 Usage as basis of right, 33 
 Usury, Usury laws, 139-143, 230 
 Utility^_28j._marginal, 79 ; of suc- 
 cessive portions of income, 97-99, 
 322 ; marginal, of gold, 198-205 
 
 Valuation of taxable property, 452- 
 
 457 
 Value, 91-96 ; imputed, 274, 275 
 Villeins, 29-34 
 Volume of business, 196 
 
 Wage-fund theory, 31 1-3 15 
 
 Wages, 1 21-124, 301-335 ; nominal, 
 
 231, 301, 302, 425 ; in commercial 
 
 crises, 298, 299 ; real, 301, 302 ; 
 
 and profits, 339-342 ; and tariff, 
 
 425-431 
 W^agner, A., on economic history, 
 
 26 ; on finance, 447 ; on city real 
 
 estate, 473 
 Walker, F. A., on paper money, 
 
 231 ; on prices, 246, 247 ; on 
 
 wages, 301, 316, 317 
 Walras, L., 79, 332 
 Wants, satiation of, 324 
 War, effect on institutions, 36 ; 
 
496 
 
 INDEX. 
 
 currency in, 261 ; and tariff, 440 ; 
 loans, 480-482 
 
 Waste, 123 
 
 Water in stock, 168 
 
 Waterworks, 154, 170 
 
 Wealth, different modes of measur- 
 ing, I-IO 
 
 •'Wealth of Nations," 10, 13 
 
 Webb, Sidney and Beatrice, 336, 
 
 363 
 Weber's law, 78, 324, 325 
 Webster, Daniel, on balance of 
 
 trade, 427 
 
 Weissmann on heredity, 19 
 
 Wells, D. A., 447 
 
 Wheat as basis of contracts, 182 
 
 White, H., on money 180 ; on clear- 
 ing-house loan certificates, 257 
 
 Wholesale markets, 74 
 
 Wieser, F. v., on value, 64 ; on 
 interest and wages, 274 
 
 Women's work, 345-349, 410, 411 
 
 Workhouse test, 53-55 
 
 Workingmen, condition of, 320-352. 
 See Labor. 
 
 Wright, C. D., 347, 348 
 
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